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Federal Reserve Bank of Dallas ROB E RT D. McTE ER, JR. PR ESIDENT DALLAS, TEXAS AND CHIEF EXECUTIVE OFFICER 75265-5906 June 12, 1998 Notice 98-44 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Revisions to the Official Staff Commentary to Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System has issued revisions to the Official Staff Commentary to Regulation Z (Truth in Lending). The commentary applies and interprets the requirements of Regulation Z. The update addresses increased rates for open-end plans triggered by events such as late payments or exceeding credit limits. It provides guidance on deferred payment transactions in open-end plans. It also addresses how creditors may determine whether credit is an open-end plan or a closed-end transaction. In addition, the update discusses issues such as the treatment of annuity costs in reverse mortgage transactions and transaction fees imposed on checking ac counts with overdraft protection. The final rule became effective March 31, 1998. Compliance is optional until Octo ber 1, 1998. ATTACHMENT A copy of the Board’s notice as it appears on pages 16669-78, Vol. 63, No. 65 of the Federal Register dated April 6, 1998, is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) -2- MORE INFORMATION For more information, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, 16669 Rules and Regulations Federal Register Vol. 63, No. 65 Monday, April 6, 1998 FEDERAL RESERVE SYSTEM 12CFR Part 226 [Regulation Z; Docket No. R -0992] Truth in Lending B oard of G overnors of the F ed eral Reserve System . ACTION: F in al rule; official staff in terp retatio n . AGENCY: SUMMARY: T he Board is p u b lish in g revision s to th e official staff com m en tary to R egulation Z (T ruth in Lending). T h e co m m entary ap p lies an d in terp re ts th e req u irem en ts of R egulation Z. T he u p d a te addresses in c re ase d rates for o p en -e n d p lan s triggered b y events su c h as late pay m en ts or exceeding cre d it lim its. It pro v id es g u id an ce o n d eferred p ay m en t tran sa ctio n s in o p en -e n d plans. It also addresses h o w creditors m ay d eterm in e w h e th e r cre d it is a n o p en -e n d p la n or a clo sed -en d tran saction. In ad d itio n , the u p d a te d iscu sses issues su c h as th e trea tm e n t of an n u ity costs in reverse m ortgage tran sa ctio n s an d tran saction fees im p o sed on checking accoun ts w ith overdraft protection . DATES: T his ru le is effective M arch 31, 1998. C om p lian ce is o p tio n al u n til O ctober 1, 1998. FOR FURTHER INFORMATION CONTACT: For S ub parts A a n d B (o pen-end credit}, Jane E. A h ren s, S en io r A ttorney, or O brea 0 . P o in dexter, Staff A ttorney; for S u bparts A, C, an d E (closed-end cred it a n d reverse m ortgages), Ms. A hrens or James A. M ichaels, S en ior A ttorney, or M ichael E. H entrel, Staff A ttorney; D ivision of C on su m er an d C om m un ity Affairs, B oard of G overnors of the F ederal Reserve System , at (202) 4 5 2 3667 or 45 2-2 412 ; for users of T elec o m m u n ic atio n s D evice for th e D eaf (TDD) only, D iane Jenkins at (202) 4 5 2 3544. SUPPLEMENTARY INFORMATION: I. Background T he p u rp o se of th e T ru th in L ending A ct (TILA; 15 U.S.C. 1601 et seq.) is to pro m ote th e in fo rm ed use of co n su m er cred it b y p ro v id in g for disclosures about its term s a n d cost. T he act requires creditors to disclose th e cost of cre d it as a d o llar am o u n t (the finance charge) an d as a n an n u a l percen tage rate (the APR). U niform ity in c re d ito rs’ d isclosures is in te n d e d to assist consum ers in 16670 Federal Register/Vol. 63, No. 6 5 /Monday, April 6, 1998/Rules and Regulations co m p ariso n sh opp ing . T he TILA requ ires a d d itio n a l disclosures for loans se cu red by a c o n s u m e r’s h o m e an d perm its consum ers to re sc in d certain tran sa ctio n s th a t inv olv e th e ir p rin c ip a l dw elling. T he act is im p le m e n te d b y the B o ard’s R egulation Z (12 CFR P art 226). T he B o ard’s official staff com m en tary (12 CFR P art 226 (Supp. I)) in terp re ts th e reg ulatio n, a n d pro v id es g u id an ce to creditors in ap p ly in g th e reg u latio n to specific transactio ns. T he co m m en tary is a su b stitu te for in d iv id u a l staff in terp retatio n s; it is u p d a te d p erio d ica lly to ad d ress significant qu estio n s th a t arise. In D ecem ber, th e B oard p u b lish e d p ro p o se d am en d m e n ts to th e com m en tary to R egulation Z (62 FR 64769, D ecem ber 9, 1997). T he Board receiv ed abo ut 110 com m ents. M ost of th e co m m ents w ere from fin an cial in stitu tio n s, reta il m e rc h an t associations, a n d o th er creditors. A bout a d o ze n co m m ents w ere receiv ed from state attorneys general or other agencies, a n d co n su m er rep resentativ es. O verall, co m m en ters generally s u p p o rte d the p ro p o se d am en d m en ts. V iew s w ere m ix ed on a few com m ents, a n d there w as b ro ad in d u stry o p p o sitio n to the co m m en t ad d ressin g th e d efin itio n of o p en -e n d credit. E xcept as d isc u sse d below , th e com m en tary is being a d o p ted as p rop osed; som e te ch n ic al suggestions or concerns raise d b y co m m en ters are a d dressed . C om pliance is o p tio n al u n til O ctober 1, 1998, th e effective date for m an d ato ry com pliance. II. Commentary R evisions S u b p a rt A — G eneral S ection 226.2—D efinitions an d Rules of C o nstruction 2(a) D efin itio n s 2(a)(2) A d v e rtise m e n t C om m ent 2 (a)(2 )-l is a d o p te d as p ro p o se d w ith m in o r revisio ns for clarification. T he co m m en t clarifies th at co m m u n ic atio n s p ro m oting n e w credit tran sa ctio n s or o p en -e n d cre d it plans, su c h as pro m o tio n s to sw itc h from a regular to a p rem iu m b a n k card, are advertisem ents, in c lu d in g p ro m o tions by on-line m essages su c h as on th e Internet. C o m m u nications encouraging a d d itio n a l or different u ses of an existing cre d it ac co u n t are not advertisem ents. 2(a)(18) D o w n p a y m e n t U n d er R egulation Z, th e term “ d o w n p a y m e n t” refers to a n am o u n t p a id to a seller to red u c e th e “ cash p ric e ” in a cre d it sale transaction. C om m ent 2(a)(18)-3 gives g u id an ce on h o w a cred itor discloses the d o w n p ay m e n t if a trad e -in is invo lv ed in th e sale a n d if th e am o u n t of an existing lien exceeds th e v alu e of the trade-in. T he co m m en t clarifies that creditors sh o u ld disclose the d o w n p ay m e n t as zero a n d n o t a negative am ount. T he com m en t ad d resses a cre d it sale a n d fin an ced d o w n p ay m e n t trea te d as a single tran saction ; it does n o t affect cre d ito rs’ ability to d isclo se th e m as tw o transactio ns. Som e com m en ters asked for further clarification about h o w to reflect costs associated w ith a “negative d o w n p a y m e n t,” illu strated in the com m en t b y a n autom ob ile w ith an existing lie n of $10,000 a n d a trade-in v alu e of $8,000; g u id an ce is p ro v id ed in a rev isio n to co m m en t § 226.18(c)-2. 2(a)(20) O p en -en d Credit T he pro p o sal ad d re ssed tw o stan d ard s for d eterm in in g w h e th e r cre d it is p ro p erly characterized as a n o p en -en d p la n or a clo sed -en d transaction. C om m ent 2(a)(20)-3 listed a n u m b e r of factors th a t creditors sh o u ld co nsid er w h e n d eterm in in g w h e th e r th ey “reaso n ab ly co n tem p late rep e ate d tra n sa c tio n s,” a n d co m m en t 2(a)(20)-5 p ro v id e d g u id an ce o n w h e th e r a credit lin e is “reu sa b le.” T he B oard received a substan tial n u m b e r of com m en ts regarding these pro p o sed revisions. M ost of the com m ents ad d ressin g th e issu e w ere from in d u stry represen tatives, a n d they o p p o se d th e proposal. M any in d u stry com m enters ackn o w led g ed th a t som e cre d it is im p ro p e rly ch aracterized as open-end ; how ever, they o p p o se d the pro p o sal on p ro ce d u ra l an d su bstantiv e grounds. P rocedurally , som e rec o m m e n d ed th a t the Board not add ress th e issue in th e com m entary. S ubstantively, co m m en ters ex pressed co n cern th a t th e factors a p p e are d to shift the focus from the cre d ito r’s p lan as a w h o le to an analysis of in d iv id u a l tran saction s. M ost com m enters b elieved that, as stated, th e p ro p o sed factors in co m m en t 2(a)(20)-3 w ere n o t relev an t to determ in in g w h e th e r a creditor can reaso nably co n tem p late rep eated tran saction s. T hey ex pressed co ncern th a t th e p ro p o sed in terp re tatio n co uld hav e h a d u n in te n d e d consequences, b ecau se in attem p tin g to ad d ress w h at can be v iew ed as a n arro w problem , the p ro p o sed in terp re tatio n c o u ld a p p ly to cre d it p ro d u cts th a t are legitim ately an d u n q u estio n a b ly o p en -e n d transactions. T ne Board believes th a t th e analysis of w h e th e r a cred itor reasonably con tem p lates rep eated transactio ns sh o u ld be b ased on th e cre d ito r’s p la n as a w hole; th e pro p o sal w as n o t m eant to shift th a t focus. W hile th e a p p lica tio n of th e factors as p ro p o sed c o u ld be v iew ed as overly broad, factors su c h as those articu la te d in th e p ro p o sal cou ld bear directly, d ep e n d in g o n th e facts a n d circum stan ces, on a d eterm in a tio n of w h e th e r cre d it can p ro p erly be characterized as open-end . A ssum e, for exam ple, th a t a cre d ito r establish es an op en -e n d credit p la n prim a rily for th e financing of a n in freq u en tly p u rc h a se d p ro d u c t or service, th a t th e cre d it lim its estab lish ed for m u c h of its custo m er base are close to the cost of th a t p ro d u c t or service, an d th a t th e cred itor has little h a rd in fo rm atio n of rep e ate d tran sa ctio n s by m u c h of its cu stom er base. R ead together, these assu m ed facts co u ld have d irec t relevance on th e issue of w h e th e r th e p la n com p orts w ith the C ongress’s in te n t th a t th e T ru th in L ending d isclo sures sh o u ld show consu m ers th e cost of th e credit tran sa ctio n for “ in fre q u en tly p u rc h a se d p ro d u c ts.” T he B oard recognizes th a t credit granting p ractices h av e ch anged significantly since th e TILA w as en acted in 1968. T here has b ee n a g radual shift to o p en -e n d cre d it p ro d u cts. T h ese p ro d u cts have beco m e co m m o n p lace in large m easu re becau se of th e op eration al co nvenien ce for creditors. T h ey also offer advantages of flexibility to consu m ers, w h o can d raw o n fun ds in c re m e n tally or finance p u rch a ses as n e e d e d an d can rep a y as th e ir circu m stan ces perm it. A t th e sam e tim e, th e B oard believes th a t concerns abou t som e tran sa ctio n s being m isch aracterized as o p en -e n d p lan s are legitim ate concerns. For exam ple, the B oard rec eiv e d from n o n in d u stry com m enters d o c u m en ta tio n of tran sactio n s being ch aracterized as o p en -e n d p la n s th a t in v o lv ed the financing of u se d autom ob iles an d the door-to-door cre d it sales of satellite dishes, w ate r trea tm e n t system s, an d ho m e im p ro v e m en t contracts. In seeking to ad d ress th e legitim ate concerns ex p ressed by in d u stry about the p ro p o se d in terp re tatio n of T ru th in L ending w h ile dealing effectively w ith p o te n tia l abuses, how ever, th e Board has fo u n d it difficult to establish a clear ru le th a t differentiates b etw e en sp u rio u s an d legitim ate o p en -e n d credit. The Board co n sid ered revising th e p ro p o sal b ased on th e com m ents received, to narro w th e b rea d th of th e factors articu la te d in th e proposal. T he Board ultim a tely d eterm in ed , how ever, th a t to do so w ith o u t th e b en efit of further p u b lic co m m en t co u ld u n n ec essarily raise u n ce rtain tie s for legitim ate openen d program s w h ile n o t reach in g the cred itor abuses. C onsequently, th e B oard has w ith d ra w n th e p ro p o sed Federal Register/Vol. 63, No. 6 5 /Monday, April 6, 1998/Rules and Regulations revision s to th e com m en tary at th is tim e, ex cep t w ith regard to a n objective analy sis w h ic h w as ad d re ssed by pro p o sed factor E. E ach c re d ito r’s cre d it p ro d u c t m ay differ b ased on th e ty p e of bu sin ess, th e n atu re or variety of p ro d u cts or services available for p u rch a se, a n d the cre d ito r’s rela tio n sh ip w ith its custom ers. E ven so, th e d eterm in a tio n of w h e th e r a cre d ito r ca n reaso nably co n tem p late rep e ate d tran sactio n s requires an objective analysis. A ccordingly, co m m en t 2(a)(20)-3 has b een revised to clarify th is in terp re tatio n by ad d in g a direct reference to th e n e e d for an objective analy sis in reachin g a d eterm in a tio n regarding rep e ate d transactions. 2(a)(24) R esid en tia l M ortgage T ransaction T he co m m en ts are a d o p te d as prop osed. C om m ent 2(a)(24)-5 is revised from th e existing co m m en t for clarity, w ith o u t sub stan tiv e change. C om m ent 2(a)(24)-7 clarifies th a t the d efin itio n of a resid e n tia l mortgage tran sa ctio n in c lu d e s a lo an for financing th e co n stru c tio n of a p rim a ry d w ellin g on la n d alread y o w n ed b y th e consum er. S ection 226.4—F in an ce Charge 4(a) D efinition 4(a)(2) S p ec ia l R ule: C losing A g e n t Charges C om m ent 4(a)(2)-2 is rev ise d to ad d ress charges to c o n d u c t a closing for a real estate-secu red transaction . T he a d d itio n is in te n d e d to reflect th e ru le for ex clu d in g closing costs from th e finance charge u n d e r § 226.4(c)(7); creditors m ay exclu de from th e finance charge a lu m p -su m settle m e n t or closing fee th a t in c lu d e s a charge for co n d u ctin g or atten d in g a closing if th e lu m p -su m fee is p rim a rily for services listed in § 226.4(c)(7). T he entire lu m p -su m m ay be ex c lu d e d from th e fin an ce charge even if it in c lu d e s in c id en tal costs for services th a t are o th erw ise co n sid ered finance charges. T he co m m en t clarifies th a t charges attrib u te d to c o n d u c tin g or atten d in g th e closing are fin an ce charges an d m ay n o t be ex c lu d e d from th e finance charge u n le ss th e charge is in c id en tal to th e lu m p -su m closing fee. 4(b) E xa m p le s o f F in a n ce Charges Paragraph 4(b)(2) C om m ent 4 (b )(2 )-l, a d o p te d as pro p o sed w ith m in o r rev isions, clarifies th a t a service charge on a checking or o th er tran sactio n ac co u n t w ith a credit feature is a fin an ce charge o n ly if th e charge exceeds th e charge for a sim ilar ac co u n t w ith o u t a credit feature. In the propo sal, a sen ten ce in th e existing com m en tary regarding p artic ip a tio n fees w as in a d v e rte n tly deleted; th e error has b e e n corrected. C om m enters req u e sted th a t the co m m en t clarify th a t charges ex cludable u n d e r § 226.4(c)(3)—charges im p o sed on a n ac co u n t in cases w h ere the in stitu tio n has n o t agreed in w ritin g to pay overdraft item s—are n o t req u ired to be in c lu d e d as finance charges u n d e r § 226.4(b)(2); clarifying language has b een added. 4(d) In su ra n ce In resp o n se to com m enters, com m en t 4 ( d ) - l h as b ee n revised to clarify th at for p u rp o ses of § 226.4(d), references to in su ran c e also in c lu d e debt can cellation coverage un le ss th e con text ind icates otherw ise. C om m ent 4 ( d ) - l l has b een ad o p ted as p ro p o sed w ith m in o r revision s for clarity. U n d er § 226.4(d), am o u n ts p aid for in su ra n c e or d eb t-cancellation coverage m ay be ex c lu d e d from the finance charge if th e cre d ito r discloses th e fee or p re m iu m for th e in itia l term of coverage, am ong o th e r conditions. C om m ent 4 ( d ) - l l clarifies th a t the initia l te rm is b ased on th e p e rio d th a t th e in su re r or creditor is in itia lly obligated to p ro v id e coverage. C om m ent 4(d )-1 2 clarifies th a t w h ere th e fee or p re m iu m for th e coverage is assessed p erio d ica lly an d th e co n su m er is u n d e r n o obligation to c o n tin u e m aking th e p aym ents, creditors h av e th e o p tio n of p ro v id in g disclosu res on th e basis of one year of coverage. C reditors also h av e th is o p tio n if th e in itia l te rm of th e in su ran c e is n o t clear. In resp o n se to requests for guidance, com m ents 4 (d )-4 an d 4(d )-1 2 have been revised to ad d ress d isclosu res for openen d p lan s w h ere th e am o u n ts of coverage a n d p erio d ic p rem iu m s are b ased on o u tstan d in g balances. C om m ent 4(d)—4 clarifies th a t creditors p ro v id in g disclosu res for open-end p la n s o n a u n it-co st basis m u st base the cost o n th e in itial term of coverage, un le ss one of th e optio ns in com m ent 4 (d )-1 2 is available. C om m ent 4(d)-12 pro v id es th a t its alternatives a p p ly to creditors offering cre d it in su ran c e or deb t can cellatio n coverage for o p en -en d p la n s or clo sed -en d tran saction s. In ad d itio n , th e co m m en t clarifies that creditors w ith o p en -en d p la n s m ay base th e ir cost d isclo sures o n p erio d s less th a n one year, in som e cases. S u b p a rt B— O p en -en d Credit Section 226.5a— C redit a n d Charge Card A p p lic atio n s a n d S olicitations 5a(b) R eq u ired D isclosures 5a(b)( 1) A n n u a l P ercentage R ate C om m ent 5 a(b )(l)-7 pro vides g u id a n ce on disclo sing p en a lty rates— 16671 an in crease in th e rate u p o n a specific even t su c h as th e c o n su m e r’s m aking a late p ay m e n t or exceeding th e credit lim it. T he p ro p o sal re q u ire d card issu ers to disclose th e in creased rate, along w ith th e c o n d itio n for increasing th e rate. T he co m m en t is a d o p te d w ith som e m odification . C om m enters expressed co n c ern th a t req u irin g p e n a lty rates along w ith th e co n d itio n for im posing su c h rates w o u ld increase th e len g th of th e d isclo sures req u ired by § 226.5a. T hey believe th e detail req u ired by th e p ro p o sal is in c o n sisten t w ith th e ab breviated in fo rm atio n otherw ise re q u ire d to be d isc lo se d for cred it card ap p lica tio n s an d solicitations. A lth o u g h info rm ation a b out p e n a lty rates m ay ad d to the disclo sure, th e B oard believes th a t the rate a n d th e sp ecified ev en t or events th at trigger a rate increase are im p o rta n t term s th a t assist co n su m ers in com paring cre d it offers an d decid in g w h e th e r to a p p ly for a credit card account. To ad d ress th e concerns, how ever, th e co m m en t is m o d ified to p e rm it issu ers usin g th e tab u lar form at to disclose th e rate a n d th e specified event or events th a t trigger a n in creased rate in th e table, or to disclose th e rate in th e table along w ith an asterisk th at refers to a n ex p lan a tio n of th e specified event or events d isc lo se d o u tsid e the table. C om m enters also ex pressed con cern th a t th e co m m en t w o u ld p rev e n t a riskb ased a p p ro a c h to in creasing the in itia l rate. C reditors often in crease rates to cover th e ex penses associated w ith acco unts th a t becom e d elin q u e n t or o th erw ise do n o t perform in accord w ith th e contract. M oreover, several com m enters sa id it w o u ld be im possible to disclose th e in creased rate at th e tim e of d isclo su re since a n u m b e r of factors u se d to determ in e w h e th e r a rate w ill increase are b ased on co nsum er behavior, w h ic h m ay be reflected in a credit score. U p on fu rth e r analysis a n d after co n sid eratio n of th e com m ents received, a m o d ifie d ap p ro a ch h as b een ado pted. If th e rate c a n n o t b e d eterm in e d at th e tim e of disclo sure, issu ers m ay in c lu d e a d escrip tio n of th e specified event or events th a t m ay re su lt in an increased rate. P ro vidin g o nly a general d escrip tio n of th e c o n d itio n , su c h as stating th a t th e rate w ill increase if th e co n su m er “ fails to rem a in in good sta n d in g ,” is n o t an adequate description. In ad d itio n , a sen ten ce has b ee n a d d e d to clarify th a t th e d isclosu re n e e d n o t b e as specific as th a t req u ired in § 226.6(a)(2). C reditors m ay list som e of th e co n sid eratio n s d escrib ed in the contract th a t are u se d to d eterm in e the rate w ith o u t p ro v id in g a d etailed 16672 Federal Register/Vol. 63, No. 65/M onday, April 6, 1998/Rules and Regulations ex p lan a tio n of all th e factors th a t the cre d ito r m ay take into co n sid eratio n w h e n increasing th e rate. 5a(b)(9) L a te-P a ym en t Fee a n d 5a(b)(10) O ver-the-Lim it Fee T he pro p o sal w o u ld have req u ired th a t th e la te-p aym ent an d th e over-thelim it disclosure, req u ired u n d e r § 226.5a co n tain a reference to th e APR d isclo su re re q u ire d u n d e r § 226.5a(b)(l), w h ere th e APR w ill increase d u e to a late p ay m e n t or exceeding th e cred it lim it. U po n fu rth er analysis a n d given th e tab u lar form at req u irem en ts of § 226.5a, th e lin k seem s un necessary. A ccordingly, th e p ro p o se d com m ents are w ith d raw n . S ection 226.6— Initial D isclosure Statem en t addresses th e tim ing of perio d ic statem ents for o p en -en d p lan s offering free-ride periods. In resp o n se to com m ents, language is a d d e d pro v id in g sam p le descrip tio n s for balan c e a n d finance charge am o u n ts d u ring th e deferral perio d, an d a d d itio n a l exam ples of h o w creditors m ay com ply w ith the tim ing req u irem en ts for perio d ic statem en ts for o p en -en d p la n s offering free-ride periods. T he com m en t also addresses p erio d ic rates th a t m ay be a p p lie d to the d eferred p ay m e n t purchase. S ection 226.14—D eterm in atio n of A n n u al P ercentage Rate 14(c) A n n u al P ercentage R a te fo r P eriodic S ta tem en ts C om m ents 14(c)-5 a n d 14(c)-10 are a d o p te d sub stan tially as proposed. C om m ent 14(c)—5 ad dresses th e 6(a) F in a n ce Charge ca lculation of th e APRs for 6(a)(2) A n n u a l P ercentage R ate m u ltifea tu re d p lan s th at charge tran sa ctio n fees in ad d itio n to p eriod ic C om m ent 6 ( a ) ( 2 ) - ll clarifies th a t if rates. In resp o n se to requ ests for th e APR w ill in crease u p o n a specific guidance, th e co m m en t clarifies th a t event or events (such as th e c o n su m e r’s creditors m ay sep arately c o n sid er each m aking a late p ay m e n t or exceeding the feature in calculating th e deno m inator. cre d it lim it), th e cre d ito r m u st in c lu d e M u ltifeatured p lan s are d efin ed to th e in c re ase d rate in th e disclosures in c lu d e p la n s w ith features su c h as re q u ire d u n d e r § 226.6(a)(2) w ith the pu rch ases, cash advances, or overdraft co n d itio n th a t w ill trigger th e increase. T his co m m en t is sim ilar to th e proposal; checking, or p la n s w ith groups of tran sa ctio n s w ith different pricing a few m od ificatio n s h av e b ee n m ade, in structures. Som e credito rs offer cash resp o n se to co m m en ts, along th e sam e ad v an ces w ith fees th a t vary if th e cash lin es as th e m o difications to co m m ent advance is ob tain ed by check, at a 5a(b)(l)—7. pro p rie ta ry ATM, or at a foreign S ection 226.7—P erio dic S tatem ent financial in stitu tio n . T hey treat each fee stru ctu re as a “ feature.” (See co m m en t Creditors ex ten d in g o p en -e n d cred it 7-1.) C reditors m ay disclose APRs offer a variety of p ay m en t p la n s th a t separately for each feature or m ay state p e rm it con su m ers to avoid finance a com p osite APR for th e w h o le plan. charges if th e p u rch a se b alan c e is p aid by a ce rtain date. F or exam ple, u n d e r A p p e n d ix F gives in stru c tio n s for calculating th e APR w h e n th e finance som e p la n s fin an ce charges are only charge in c lu d e s interest an d tran sactio n im p o sed if con su m ers do n o t p ay the fees. A p p e n d ix F requires creditors to p u rch a se b alan c e in full b y a specified in c lu d e in th e d en om in ator: (1) the date. In others, finance charges are balan ce subject to a tran sa ctio n fee, p lu s im p o se d o n th e p u rch a se balan ce, b u t (2) th e b alan ce subject to p erio d ic rates, co n su m ers receive rebates of any less th e am o u n t of th e balan ce subject finance charges attrib utab le to the p u rch a se if th e p u rch a se balan ce is p aid to a tran sa ctio n charge (but n o t less th a n zero). T he a p p e n d ix is silen t on in full by th e specified date. C om m ent 7 -3 gives g u id a n ce on th e calculatin g th e d en o m in ato r w h e n ty p e of deferred p ay m en t program separate features are involved. illu strated in th e first exam ple. In C om m ent 14(c)-5 clarifies th at resp o n se to co m m en ts, language is separate features m ay be co n sid ered in a d d e d to em p h asize th a t th e co m m en t calculatin g th e d eno m inato r. C om m ents ad d resses o n ly a p a rtic u la r ty p e of w ere m ix ed on w h e th e r “ featu re” deferred p ay m en t feature, a n d is n o t sh o u ld be d efin ed w ith m ore precision. in te n d e d to p re c lu d e cred itors from T he co m m en t does n o t attem p t to define offering other types. To ease “ fea tu re” for p u rp o ses of th e APR com plian ce, th ree cross-references to calcu lation , so long as th e cred itor has th e co m m en t are a d d e d to p ro vision s of a reaso nable basis for creating the § 226.7 ad d ressin g b alances to w h ic h distin ctio n . T here is no ev id en ce at this p erio d ic rates are a p p lied , th e am o u n t of tim e th a t fu rth er lim itatio n s on th e fin an ce charge, a n d free-ride o p eratio n al or pricin g co n sid eratio n s are periods; a sim ila r cross-reference is necessary to g u ard against d istin ctio n s a d d e d u n d e r § 226.5(b)(2), w h ic h am ong ac co u n t services th a t artificially low er th e APR on a c o n s u m e r’s p eriodic statem ent. A co m m en ter req u e sted th at A p p e n d ix F be a m e n d e d to in c lu d e an exam ple of th e g u id an ce p ro v id ed in co m m en t 14(c)-5. S u ch a n am en d m e n t w ill be co n sid ered in a fu ture ru lem aking a m en d in g R egulation Z or its ap p en d ices. T he p ro p o sal req u e sted co m m en t on w h e th e r a cre d ito r sh o u ld separately disclose th e b alances related to each feature u n d e r § 226.7(e), if features are trea te d separately for p u rp o ses of calcu lating th e d en o m in ato r in th e APR co m putatio n. T he co m m en tary is silen t o n a d d itio n a l sep arate b alance disclosu re req u irem en ts u n d e r 7(e). N early all com m en ters ad d ressin g the issu e w ere o p p o se d to an ad d itio n a l requ irem en t; th e y said it w o u ld be costly for creditors to reconfigure th e ir p erio d ic statem ents a n d confusing for consum ers to receive p erio d ic statem en ts sho w ing several balances. No separate balan ce req u irem en ts u n d e r § 226.7(e) relating to m u ltifea tu re d p lan s h av e b een added. C om m ent 14(c)-10 ad d resses th e trea tm e n t of fees im p o sed on tran sa ctio n s th a t occu r late in a billing cycle a n d are im p racticab le to p o st u n til th e follow ing b illin g cycle. T he co m m en t is rev ise d to p ro v id e broader gu id an ce for calculating th e A PR w h e n finance charges p o ste d in th e billing cycle in c lu d e charges relating to activity in p rio r cycles, su c h as ad ju stm en ts relatin g to error resolutio n. It is in te n d e d to p ro v id e u n ifo rm ity an d sim p lify co m p lian ce for th e v ariety of circu m stan ces u n d e r w h ic h ad ju stm ents m ay occur. T he co m m en t differs from th e p ro p o sal in tw o respects. C om m ent 14(c)-10 does n o t co n tain th e p ro p o sed req u irem en t to disclose a n APR equal to th e largest p erio d ic rate th a t m ay be im p o sed on th e ac co u n t w h e n ad ju stm en ts from p rio r cycles w o u ld p ro d u ce a negative APR in th e cu rren t cycle. C om m enters expressed con cern th a t th e req u irem en t, w h ic h cu rren tly ap p lies to creditors im p osing tran sa ctio n fees in a d d itio n to p erio d ic rate finance charges, w o u ld create costly program m ing changes for creditors th at im pose finance charges solely d u e to p erio d ic rates a n d are n o t req u ired to m ake th a t calculation. C reditors m u st disclose o n each p erio d ic statem ent any perio d ic rate th a t m ay b e a p p lie d durin g th e billing cycle a n d th e correspon ding APR. T he co rresp o n d in g APR ad eq u ately inform s consu m ers ab out the cost of cre d it u n d e r th e p la n in the occasional b illin g cycle th a t a co n su m er m ay receive a negative APR d u e to a finance charge adjustm en t. Federal Register/Vol. 63, No. 65/M onday, April 6, 1998/Rules and Regulations T he co m m en t in c lu d e s a n alternative d isclo su re w h e n a finance charge d eb ited to th e ac co u n t in th e cu rren t billin g cycle relates to activity for w h ic h a finance charge w as d eb ited to the ac co u n t in a p rev io u s b illin g cycle (for exam ple, if th e fin an ce charge relates to an ad ju stm e n t su c h as th e reso lu tio n of a billing error disp u te, or an u n in te n tio n a l po stin g error, or a p ay m e n t by ch eck th a t w as later re tu rn e d u n p a id for in su fficien t fun ds or o th er reasons). In resp o n se to concerns by com m enters, as an altern ativ e to th e general in terp re tatio n set forth in th e com m ent, th e com m en t perm its creditors to disclose th e finance charge a d ju stm e n t on th e p erio dic statem ent. C reditors id en tify in g th e ad ju stm e n t on th e p erio d ic statem ent w o u ld n o t in c lu d e th e finance charge ad ju stm e n t in th e n u m e ra to r or in b alan ces asso ciated w ith th e finance charge ad ju stm e n t in th e d en o m in ato r w h e n calculatin g th e a n n u a l percentage rate for th e c u rren t b illin g cycle . S u b p a rt C—C losed-end Credit Section 226.18—C ontent of D isclosures 18(c) Item iza tio n o f A m o u n t F in a n ced C om m ent 18(c)-2 is rev ise d in resp o n se to req u ests for g u id an ce by creditors offering cre d it sales w h e n d o w n p ay m e n ts invo lve a trad e -in an d an existing lie n th a t exceeds th e value of th e trade-in. (See co m m en t 2(a)(18)3, w h ere a co n su m er ow es $10,000 on a n existing au to m o b ile lo a n a n d th e trad e -in valu e of th e au to m o b ile is $8,000, leaving a $2,000 deficit.) T he am o u n t by w h ic h th e lien exceeds th e trad e -in valu e w o u ld be reflected in th e am o u n t financed. (See § 226.18(b).) A ssum in g th e cash price for th e n e w car w as $20,000, th e am o u n t fin an c ed w o u ld be $22,000 ($20,000 rep rese n tin g th e cash p rice p lu s $2,000 rep rese n tin g th e excess of th e lie n over th e trad e -in v alu e fin an c ed by th e creditor). T he reg u latio n p ro v id es great flexibility for disclosing th e item izatio n of am o u n t financed. C om m ent 18(c)2.iii. (n um bered to co m p ly w ith Federal Register p u b licatio n rules) is revised to clarify th a t an y am o u n ts fin an c ed b y th e cre d ito r a n d rep rese n tin g th e excess of th e lien over th e trad e -in valu e ($2,000 in th is exam ple) m u st a p p e a r in th e item izatio n of th e am o u n t financed. H ow ever, cred itors m ay also a d d oth er categories to exp lain , in th is exam ple, th e c o n su m e r’s trad e -in valu e of $8,000, th e c re d ito r’s payoff of th e existing lien of $10,000, a n d th e resu ltin g am o u n t of $2,000 in c lu d e d in th e am o u n t financed. 18(g) P a ym e n t S ch e d u le S ection 226.18(g) req u ires cred itors to disclose th e tim in g of paym ents. To m eet th is req uirem ent, creditors m ay list all of th e p ay m en t d u e dates. C reditors also h av e th e o p tio n of specifying the “p e rio d of p a y m e n ts” sc h e d u le d to rep a y th e obligation. C om m ent 18(g)-4 clarifies th e req u irem en ts for creditors choosing th is option. As a general rule, cred itors th a t do n o t disclose all of th e p ay m en t d u e dates m u st disclose th e p ay m e n t intervals, su c h as “m o n th ly ” or “b i-w eek ly ,” a n d th e ca le n d ar date th a t th e beginning p ay m e n t is due. F or exam ple, a credito r m ay disclose th a t p ay m en ts are due “ m o n th ly beg in n in g on July 1 ,1 9 9 8 .” T his info rm ation, w h e n co m b in ed w ith th e n u m b e r of p ay m en ts, is necessary to define th e rep a y m en t p erio d an d enable a co n su m er to d eterm in e all of the p ay m e n t d u e dates. Som e com m enters v ie w e d th e in c lu sio n o f a beg in n in g -p ay m en t date as a n e w re q u ire m e n t th a t is m ore ap p ro p riate for a regulatory revisio n th a n an in te rp re ta tio n in th e com m entary. T he B oard believ es th a t th e n e w co m m en t m erely in terp re ts an d clarifies th e existing re q u ire m e n t in § 226.18(g). T he staff is aw are that creditors co u ld reason ably have in te rp re te d th e statutory re q u ire m e n t for specifying th e “p e rio d of p a y m e n ts” in different w ays. B ecause of co n fu sio n in th is area, co m m en t 18(g)-4 h as been a d d e d to ex p lain cre d ito rs’ disclosure resp on sibilities. Several co m m enters p ro v id ed exam ples of tran sa ctio n s w h ere th e b eg in ning-p ay m ent date is u n k n o w n a n d d ifficu lt to d eterm in e at th e tim e disclosu res Eire m ade. For exam ple, a co n su m er m ay becom e obligated on a cre d it co n tract th at co n tem p lates the delay ed d isb u rse m en t of fu n d s based on a co n tin g en t event, su c h as th e co m p letio n of h o m e repairs. D isclosures m ay also acco m p an y loan checks th at are se n t by m ail, in w h ic h case th e in itial d isb u rse m en t a n d rep ay m en t dates are solely w ith in th e c o n s u m e r’s control. T h ese co m m en ters believe th at a narrativ e ex p lan a tio n of the events th a t w ill trigger th e first p ay m en t due date w o u ld be m ore h e lp fu l to consum ers th a n a n estim ated calen d ar date. C om m ent 18(g)-4 has b een revised to add ress th e se concerns. In su c h cases, th e credito r m ay u se an estim ated beg in n in g -p ay m en t date an d label the disclo su re as a n estim ate p u rsu a n t to § 226.17(c). A lternativ ely, th e disclosure m ay refer to th e o ccurrence of a p articu la r event, for exam ple, by disclosing th a t th e beginn ing p ay m en t is 16673 d u e “ 30 days after th e first loan d isb u rse m en t.” T his info rm atio n also m ay be in c lu d e d w ith a n estim ated date to ex p lain th e basis for th e cre d ito r’s estim ate. See C om m ent 17(a)(1)—5(iii). S u b p a rt E— S p ec ia l R u les fo r Certain H o m e M ortgage T ra nsactions S ection 226.32—R equirem ents for C ertain C losed-end H om e M ortgages 32(a) Coverage 32(a)(1)(H) C reditors m u st follow th e ru les in § 226.32 if th e total p o in ts an d fees pay ab le b y th e c o n su m er at or before loan closing exceed th e greater of $400 or 8 p e rc e n t of th e total lo an am ount. T he B oard is req u ired to ad ju st th e $400 am o u n t each year. T h e ad ju sted am o u n ts for 1997 ($424), p u b lish e d on D ecem ber 12, 1996 (61 FR 65317), an d 1998 ($435), p u b lish e d o n F ebru ary 9, 1998 (63 FR 6474), are a d d e d to co m m en t 32(a)(l)(ii)-2. S ection 226.33— R equirem ents for Reverse M ortgages 33(c) P rojected T otal Cost o f Credit 33(c)(1) C osts to C on su m er U n d er 226.33, th e d isc lo se d cost of a reverse m ortgage tran sa ctio n m u st co n tain all costs a n d charges p a id by th e con su m er, in c lu d in g th e cost of any an n u ity , w h e th e r th e a n n u ity p u rch a se is m a n d ato ry or v o lu n tary or w h e th e r it is m ade th ro u g h th e cre d ito r or a th ird party. C om m ent 33(c)(1)—2 pro v id es g u id an ce for d eterm in in g w h e n an an n u ity is p u rch a sed as p a rt of a reverse m ortgage tran saction . Som e com m enters req u e sted th a t th e B oard n arro w th e sta n d ard for in c lu d in g a n n u ity costs in th e total a n n u a l loan cost rate to an n u itie s p u rc h a se d “b y or th ro u g h ” th e creditor, expressing th e ir co n cern about accu rately disclosing th e im p act of any a n n u ity con su m ers m a y p urchase. T he B oard b eliev es th a t th e Congress in te n d e d a b ro ad ap p lic a tio n of th e term s “ costs an d charg es” w h e n ap p lie d to an n u ities. (60 FR 15468, M arch 24, 1995.) T hu s, th e co m m en t is a d o p ted as propo sed . C reditors m ay rely on in fo rm atio n p ro v id ed by th e co n su m er co n cern in g th e ir in te n t to p u rch a se an a n n u ity as a p art of th e transaction. List o f Subjects in 12 CFR Part 226 A dvertising, Banks, banking, C onsum er pro tectio n, C redit, F ederal Reserve System , Mortgages, Reporting a n d record keep ing requirem ents, T ru th in lending. For th e reaso ns set forth in the pream ble, th e Board am en d s 12 CFR P art 226 as follows: 1667 4 Federal Register/Vol. 63, No. 6 5 /Monday, April 6, 1998/Rules and Regulations PART 226—TRUTH IN LENDING (REGULATION Z) 1. T he a u th o rity citatio n for p art 226 co n tin u es to read as follows: Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5). 2. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.2— D efin itio n s a n d R u les o f C onstruction, th e follow ing am en d m e n ts are m ade: a. U n d er Paragraph 2(a)(2) A d ve rtisem en t., p ara g ra p h 1. is revised; b. U n d er Paragraph 2(a)(18) D o w n p a ym en t., a n e w parag rap h 3. is added; c. U n d er Paragraph 2(a)(20) O p en -en d credit., p arag rap h 3. is revised; a n d d. U n d er Paragraph (2)(a)(24) R esid en tia l m ortgage transaction., paragraph 5. is revised a n d a n ew p ara g ra p h 7. is add ed . T he ad d itio n s an d rev isio n s rea d as follows: SUPPLEMENT I— OFFICIAL STAFF INTERPRETATIONS * * * * * * * * * * * * * * * * * 3. Effect o f existing liens. In a credit sale, the “ dow npaym ent” may only be used to reduce the cash price. For example, w hen the existing lien on an automobile to be traded in exceeds the value of the automobile, creditors m ust disclose a zero on the dow npaym ent line rather than a negative number. To illustrate, assume a consum er owes $10,000 on an existing automobile loan and that the trade-in value of the automobile is only $8,000, leaving a $2,000 deficit. The creditor should disclose a dow npaym ent of $0, n o t -$2,000. * * * * * 2(a)(20) O pen-end credit. * Section 226.2—D efinitions and Rules o f Construction * 2(a)(18) D ownpaym ent. * Subpart A— General * B. Informational material, for example, interest rate and loan term memos, distributed only to business entities. C. Notices required by federal or state law, if the law m andates that specific inform ation be displayed and only the inform ation so m andated is included in the notice. D. News articles the use of w hich is controlled by the new s m edium. E. Market research or educational materials that do not solicit business. F. Com m unications about an existing credit account (for example, a prom otion encouraging additional or different uses of an existing credit card account). * * * * 3. Repeated transactions. U nder this criterion, the creditor m ust reasonably 2(a) D efinitions. contem plate repeated transactions. This (a)(2) A d ve rtisem en t. means that the credit plan m ust be usable 1. Coverage. O n ly com m ercial from tim e to time and the creditor m ust legitimately expect that there w ill be repeat m essages th a t p ro m o te co n su m er cred it business rather than a one-time credit tran sa ctio n s req u irin g d isclosures are extension. The creditor m ust expect repeated adv ertisem ents. M essages inviting, dealings w ith consum ers und er the credit offering, or o th erw ise an n o u n c in g plan as a w hole and need not believe a generally to p ro sp ectiv e custo m ers the consum er w ill reuse a particular feature of availability of cre d it transactions, the plan. The determ ination of w hether a w h e th e r in visual, oral, or p rin t m edia, creditor can reasonably contem plate repeated are covered by R egulation Z (12 CFR transactions requires an objective analysis. p art 226). Information that m uch of the creditor’s custom er base w ith accounts und er the plan i. Examples include: make repeated transactions over some period A. Messages in a new spaper, magazine, of tim e is relevant to the determination, leaflet, prom otional flyer, or catalog. particularly w hen the plan is opened B. A nnouncem ents on radio, television, or prim arily for the financing of infrequently public address system. purchased products or services. A standard C. On-line messages, such as on the based on reasonable belief by a creditor Internet. necessarily includes some margin for D. Direct m ail literature or other printed judgm ental error. The fact that particular m aterial on any exterior or interior sign. consum ers do not return for further credit E. Point-of-sale displays. extensions does not prevent a plan from F. Telephone solicitations. having been properly characterized as openG. Price tags that contain credit end. For example, if m uch of the customer information. base of a clothing store makes repeat H. Letters sent to customers as part of an purchases, the fact that some consum ers use organized solicitation of business. the plan only once w ould not affect the I. Messages on checking account characterization of the store’s plan as openstatem ents offering auto loans at a stated end credit. The criterion regarding repeated annual percentage rate. transactions is a question of fact to be J. Com m unications prom oting a new opendecided in the context of the creditor’s type end plan or closed-end transaction. of business and the creditor’s relationship ii. The term does n ot include: A. Direct personal contacts, such as follow- w ith its customers. For example: i. It w ould be more reasonable for a thrift up letters, cost estimates for individual consumers, or oral or w ritten com m unication institution chartered for the benefit of its members to contem plate repeated relating to the negotiation of a specific transactions w ith a m ember than for a seller transaction. of alum inum siding to make the same assum ption about its customers. ii. It w ould be more reasonable for a financial institution to make advances from a line of credit for the purchase of an automobile th an for an automobile dealer to sell a car under an open-end plan. * * * * * 2(a)(24) R esidential mortgage transaction. * * * * * 5. A cquisition, i. A residential mortgage transaction finances the acquisition of a consum er’s principal dwelling. The term does not include a transaction involving a consum er’s principal dw elling if the consum er h ad previously purchased and acquired some interest to the dwelling, even though the consum er h ad not acquired full legal title. ii. Examples of new transactions involving a previously acquired dw elling include the financing of a balloon paym ent due u nd er a land sale contract and an extension of credit m ade to a joint ow ner of property to buy out the other joint ow ner’s interest. In these instances, disclosures are n ot required under §226.18(q) or § 226.19(a) (assumability policies and early disclosures for residential mortgage transactions). However, the rescission rules of §§ 226.15 and 226.23 do apply to these new transactions. iii. In other cases, the disclosure and rescission rules do not apply. For example, w here a buyer enters into a w ritten agreement w ith the creditor holding the seller’s mortgage, allowing the buyer to assume the mortgage, if the buyer had previously purchased the property and agreed w ith the seller to make the mortgage paym ents, § 226.20(b) does not apply (assumptions involving residential mortgages). * * * * * 7. Construction on previously acquired vacant land. A residential mortgage transaction includes a loan to finance the construction of a consum er’s principal dwelling on a vacant lot previously acquired by the consumer. * * * * * 3. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.4— F inance Charge, th e follow ing am en d m e n ts are m ade: a. U n d er Paragraph 4(a)(2)., paragraph 2. is revised; b. U n d er Paragraph 4(b)(2)., paragraph 1. is revised; an d c. U n d e r Paragraph 4(d) In su ra n ce a n d d eb t cancella tio n coverage., p aragrap hs 1., 4., an d 11. are revised; p arag rap h 12. is red esig n ated as p arag rap h 13.; an d a n e w p arag rap h 12. is added. T he revisio ns an d ad d itio n s rea d as follows: * * * * * Section 226.4—Finance Charge 4(a) Definition. * * * * * 4(a)(2) Special rule: closing agent charges. * * * * * Federal Register/Vol. 63, No. 6 5 /M onday, April 6, 1998/Rules and Regulations 2. Required closing agent. If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the im position 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 un der § 226.4. For example, a fee that w ould be paid in a comparable cash transaction may be excluded under § 226.4(a). A charge for conducting or attending a closing is a finance charge and may be excluded only if the charge is included in and is incidental to a lum p-sum closing fee excluded under § 226.4(c)(7). of the total insurance prem ium involves a particular k ind of insurance plan. For example, a consum er w ith a current indebtedness of $8,000 is covered by a plan of credit life insurance coverage w ith a m axim um of $10,000. The consum er requests an additional $4,000 loan to be covered by the same insurance plan. Since the $4,000 loan exceeds, in part, the m axim um am ount 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. * * * * * 11. Initial term. i. The initial term of the insurance or debt cancellation coverage determ ines the period for w hich a prem ium * * * * * am ount or fee m ust be disclosed, unless one 4(b) Exam ples o f fina nce charges. of the options discussed u nd er comment * * * * * 4(d)-12 is available. For purposes of § 226.4(d), the initial term is the period for Paragraph 4(b)(2). 1. Checking account charges. A checking w hich the insurer or creditor is obligated to provide coverage, even though the consum er or transaction account charge im posed in may be allow ed to cancel the coverage or connection w ith a credit feature is a finance coverage may end due to nonpaym ent before charge un der § 226.4(b)(2) to the extent the that term expires. charge exceeds the charge for a similar 11. For example: account w ithout a credit feature. If a charge A. The initial term of a property insurance for an account w ith a credit feature does not policy on an automobile that is w ritten for exceed the charge for an account w ithout a one year is one year even though prem ium s credit feature, the charge is not a finance are paid m onthly and the term of the credit charge u nd er § 226.4(b)(2). To illustrate: transaction is four years. i. A $5 service charge is im posed on an B. The initial term of an insurance policy account w ith an overdraft line of credit is the full term of the credit transaction if the (where the institution has agreed in w riting consum er pays or finances a single prem ium to pay an overdraft), w hile a $3 service in advance. charge is im posed on an account w ithout a 12. Initial term; alternative, i. General. A credit feature; the $2 difference is a finance creditor has the option of providing cost charge. (If the difference is not related to disclosures on the basis of one year of account activity, however, it may be insurance or debt cancellation coverage excludable as a participation fee. See the instead of a longer initial term (provided the com mentary to § 226.4(c)(4).) prem ium or fee is clearly labeled as being for ii. A $5 service charge is im posed for each one year) if: item that results in an overdraft on an A. The initial term is indefinite or not account w ith an overdraft line of credit, clear; or w hile a $25 service charge is im posed for B. The consum er has agreed to pay a paying or returning each item on a similar prem ium or fee that is assessed periodically account w ithout a credit feature; the $5 but the consum er is under no obligation to charge is not a finance charge. continue the coverage after m aking the initial * * * * * payment. 4(d) Insurance a nd debt cancellation ii. O pen-end plans. For open-end plans, a coverage. creditor also has the option of providing unit1. General. Section 226.4(d) perm its cost disclosures on the basis of a period that insurance prem ium s and charges and debtis less than one year if the consum er has cancellation charges to be excluded from the agreed to pay a prem ium or fee that is finance charge. The required disclosures assessed periodically, for example monthly, m ust be made in writing. The rules on bu t the consum er is u nd er no obligation to location of insurance and debt-cancellation continue the coverage. disclosures for closed-end transactions are in iii. Examples. To illustrate: § 226.17(a). For purposes of § 226.4(d), all A. A credit life insurance policy providing references to insurance also include debt coverage for a 30-year mortgage loan has an cancellation coverage unless the context initial term of 30 years even though indicates otherwise. prem ium s are paid m onthly and the * * * * * consum er is not required to continue the 4. Unit-cost disclosures, i. O pen-end credit. coverage after m aking the initial payment. The creditor has the option of making The prem ium or fee for insurance or debt disclosures on the basis of coverage for onecancellation for the initial term of coverage year. may be disclosed on a unit-cost basis in * * * * * open-end credit transactions. The cost per u n it should be based on the initial term of 4. In S u p p le m e n t I to P art 226, u n d e r coverage, unless one of the options under S ectio n 226.5— G eneral D isclosure com m ent 4(d)-12 is available. R eq u irem ents, u n d e r P aragraph ii. Closed-end credit. One of the 5(b)(2)(H) a n e w parag rap h 4 is a d d e d as transactions for w h ich unit-cost disclosures follows: (such as 50 cents per year for each $100 of * * * * * the am ount financed) may be used in place 16675 Subpart B— O pen-End Credit * * * * * Section 226.5— General Disclosure Requirem ents * * * * * 5(b) Tim e o f disclosures. * * * * * Paragraph 5(b)(2)(H). * * * * * 4. D eferred p a y m e n t transactions. See co m m en t 7-3 (iv). * * * * * 5. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.5a— Credit a n d Charge Card A p p lic a tio n s a n d S o licita tio n s, u n d e r Paragraph 5 a (b)(l) A n n u a l P ercentage Rate, a n e w parag rap h 7 is a d d e d to read as follow s: * * * * * Section 226.5a— Credit and Charge Card A pplications and Solicitations * * * * * 5a(b) Required Disclosures. 5a(b)(l) A n n u a l Percentage Rate. * * * * * 7. Increased p en a lty rates. If the initial rate may increase u p on the occurrence of one or more specific events, such as a late paym ent or an extension of credit that exceeds the credit limit, the card issuer m ust disclose in the table the initial rate and the increased penalty rate that may apply. If the penalty rate is based on an index and an increased margin, the issuer m ust also disclose in the table the index and the margin. The issuer m ust also disclose the specific event or events that m ay result in im posing the increased rate, such as “ 22% APR, if 60 days late.” If the penalty rate cannot be determ ined at the tim e disclosures are given, the issuer m ust provide an explanation of the specific event or events that m ay result in im posing an increased rate. In describing the specific event or events that m ay result in an increased rate, issuers need no t be as detailed as for the disclosures required under § 226.6(a)(2). Alternatively, for issuers using a tabular format, the specific event or events may be located outside of the table if the conditions are noted w ith an asterisk or other m eans that direct the consum er to the explanation. At its option, the issuer may disclose the period for w hich the increased rate w ill rem ain in effect, such as “un til you make three tim ely paym ents.” The issuer need not disclose an increased rate that is im posed w hen credit privileges are perm anently terminated. * * * * * 6. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.6— In itia l D isclosure S ta tem en t, u n d e r Paragraph 6(a)(2), a n e w p arag rap h 11 is a d d e d to read as follows: * * * * * Section 226.6— Initial Disclosure Statem ent * * * * * 6(a) Finance charge. * * * * * 16676 Federal Register/Vol. 63, No. 65/M onday, April 6, 1998/Rules and Regulations does n ot pay the deferred paym ent balance by the due date, the creditor is not required to identify, on the periodic statem ent 11. Increased p en a lty rates. If the initial rate may increase upon the occurrence of one disclosing the finance charge for the deferred paym ent balance, periodic rates that have or more specific events, such as a late been disclosed in previous billing cycles paym ent or an extension of credit that betw een the date of purchase and the exceeds the credit limit, the creditor m ust paym ent due date. disclose the initial rate and the increased ii. Balances subject to periodic rates. penalty rate that may apply. If the penalty U nder § 226.7(e), creditors m ust disclose the rate is based on an index and an increased balances subject to periodic rates during a margin, the issuer m ust disclose the index billing cycle. The deferred paym ent balance and the margin. The creditor m ust also ($500 in this example) is not subject to a disclose the specific event or events that may periodic rate for billing cycles between the result in the increased rate, such as “ 22% date of purchase and the paym ent due date. APR, if 60 days late.” If the penalty rate Periodic statem ents sent for those billing cannot be determ ined at the time disclosures cycles should not include the deferred are given, the creditor m ust provide an paym ent balance in the balance disclosed explanation of the specific event or events un der § 226.7(e). At the creditor’s option, this that may result in the increased rate. At the am ount may be disclosed on periodic creditor’s option, the creditor may disclose statem ents provided it is identified by a term the period for w hich the increased rate will other than the term used to identify the rem ain in effect, such as “until you make balance disclosed under § 226.7(e) (such as three tim ely paym ents.” The creditor need “deferred paym ent balance”). During any not disclose an increased rate that is im posed billing cycle in w hich a periodic rate finance w hen credit privileges are perm anently charge on the deferred paym ent balance is terminated. debited to the account, the balance disclosed * * * * * under § 226.7(e) should include the deferred 7. In S u p p le m e n t I to P art 226, u n d e r paym ent balance for that billing cycle. iii. A m o u n t o f finan ce charge. U nder S ectio n 226.7— P eriodic S ta tem en t, th e § 226.7(f), creditors m ust disclose finance follow ing am en d m e n ts are m ade: charges im posed during a billing cycle. For a. U n d er in tro d u c to ry text, a n ew some deferred paym ent purchases, the parag rap h 3 is added; creditor may im pose a finance charge from b. U n d e r Paragraph 7(d) P eriodic the date of purchase if the deferred paym ent rates, a n e w p ara g ra p h 7 is added; balance ($500 in this example) is not paid in c. U n d er Paragraph 7(e) B a la n ce on full by the due date, but otherwise w ill not w h ich fin a n c e charge c o m p u te d , a n ew im pose finance charges for billing cycles p ara g ra p h 10 is added; betw een the date of purchase and the paym ent due date. Periodic statem ents for d. U n d er Paragraph 7(f) A m o u n t o f billing cycles preceding the paym ent due fin a n c e charge, a n e w p ara g ra p h 9 is date should not include in the finance charge added; an d disclosed under § 226.7(f) the am ounts a e. U n d er Paragraph 7(j) F ree-ride consum er may owe if the deferred paym ent perio d , a n e w p arag rap h 2 is added. balance is not paid in full by the paym ent T he ad d itio n s rea d as follows: due date. In this example, the February * * * * * periodic statem ent should not identify as finance charges interest attributable to the Section 226.7—Periodic Statem ent $500 January purchase. At the creditor’s * * * * * option, this am ount may be disclosed on 3. Deferred pa ym ent transactions. periodic statements provided it is identified Creditors offer a variety of paym ent plans for by a term other than “finance charge” (such purchases that perm it consum ers to avoid as “contingent finance charge” or “deferred finance charges if the purchase balance is finance charge”). The finance charge on a paid in full by a certain date. The following deferred paym ent balance should be reflected provides guidance for one type of deferred on the periodic statem ent under § 226.7(f) for paym ent plan where, for exam ple, no finance the billing cycle in w hich the finance charge charge is im posed on a $500 purchase made is debited to the account. in January if the $500 balance is paid by iv. Free-ride period. Assuming m onthly March 31. billing cycles ending at m onth-end and a i. Periodic rates. U nder § 226.7(d), free-ride period ending on the 25th of the creditors m ust disclose each periodic rate following m onth, here are four examples that may be used to com pute the finance illustrating how a creditor may com ply w ith charge. U nder some plans w ith a deferred the requirem ent to disclose the free-ride paym ent feature, if the deferred paym ent period applicable to a deferred paym ent balance is not paid by the paym ent due date, balance ($500 in this example) and w ith the finance charges attributable to periodic rates 14-day rule for m ailing or delivering periodic applicable to the billing cycles between the statem ents before im posing finance charges date of purchase an d the paym ent due date (see §226.5): (January through M arch in this example) may A. The creditor could include the $500 be im posed. Periodic rates that m ay apply to purchase on the periodic statem ent reflecting the deferred paym ent balance ($500 in this account activity for February and sent on example) if the balance is not paid in full by M arch 1 and identify M arch 31 as the the paym ent due date m ust appear on paym ent due date for the $500 purchase. periodic statem ents for the billing cycles (The creditor could also identify M arch 31 as betw een the date of purchase and the the paym ent due date for any other am ounts that w ould norm ally be due on M arch 25.) paym ent due date. However, if the consum er Paragraph 6(a)(2). * * * * * B. The creditor could include the $500 purchase on the periodic statem ent reflecting activity for M arch and sent on A pril 1 and identify A pril 25 as the paym ent due date for the $500 purchase, perm itting the consum er to avoid finance charges if the $500 is paid in full by April 25. C. The creditor could include the $500 purchase and its due date on each periodic statem ent sent during the deferred paym ent period (January, February, and March in this example). D. If the due date for the deferred paym ent balance is M arch 7 (instead of March 31), the creditor could include the $500 purchase and its due date on the periodic statem ent reflecting activity for January and sent on February 1, the m ost recent statem ent sent at least 14 days prior to the due date. * * * * * 7(d) Periodic rates. * * * * * 7. Deferred p a ym ent transactions. See com m ent 7-3 (i). 7(e) Balance on which finance charge com puted. * * * * * 10. Deferred p a ym ent transactions. See com m ent 7-3(ii). 7(f) A m o u n t o f fina nce charge. * * * * * 9. Deferred p a ym en t transactions. See com m ent 7 -3 (iii). * * * * * 7 (j) Free-ride period. * * * * * 2. Deferred p a ym en t transactions. See com m ent 7—3(iv). * * * * * 8. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.14— D eterm in a tio n o f A n n u a l P ercentage R ate, u n d e r Paragraph 14(c) A n n u a l p ercen ta g e rate fo r p erio d ic sta tem en ts., parag rap h 5. an d p arag rap h 10. are rev ise d to rea d as follows: * * * * * Section 226.14—D eterm ination o f A nn ual Percentage Rate * * * * * 14(c) A n nua l percentage rate fo r periodic statem ents. * * * * * 5. Transaction charges, i. Section 226.14(c)(3) transaction charges include, for example: A. A loan fee of $10 im posed on a particular advance. B. A charge of 3% of the am ount of each transaction. 11. The reference to avoiding duplication in the com putation requires that the am ounts of transactions on w hich transaction charges w ere im posed no t be included both in the am ount of total balances and in the “ other am ounts on w hich a finance charge was im posed” figure. In a m ultifeatured plan, creditors may consider each bona fide feature separately in the calculation of the denom inator. A creditor has considerable flexibility in defining features for open-end plans, as long as the creditor has a reasonable Federal Register/Vol. 63, No. 6 5 /Monday, April 6, 1998/Rules and Regulations basis for the distinctions. For further explanation and examples of how to determ ine the com ponents of this formula, see appendix F. * * * * * 10. Prior-cycle adjustm ents, i. The annual percentage rate reflects the finance charges im posed during the billing cycle. However, finance charges im posed during the billing cycle may relate to activity in a prior cycle. Examples of circum stances w hen this may occur are: A. A cash advance occurs on the last day of a billing cycle on an account that uses the transaction date to figure finance charges, and it is im practicable to post the transaction until the following cycle. B. An adjustm ent to the finance charge is m ade following the resolution of a billing error dispute. C. A consum er fails to pay the purchase balance un der a deferred paym ent feature by the paym ent due date, and finance charges are im posed from the date of purchase. 11. Finance charges relating to activity in prior cycles should be reflected on the periodic statem ent as follows: A. If a finance charge im posed in the current billing cycle is attributable to periodic rates applicable to prior billing cycles (such as w hen a deferred paym ent balance was not p aid in full by the paym ent due date and finance charges from the date of purchase are now being debited to the account, or w hen a cash advance occurs on the last day of a billing cycle on an account that uses the transaction date to figure finance charges and it is im practicable to post the transaction until the following cycle), and the creditor uses the quotient m ethod to calculate the annual percentage rate, the num erator w ould include the am ount of any transaction charges plus any other finance charges posted during the billing cycle. At the creditor’s option, balances relating to the finance charge adjustm ent may be included in the denom inator if perm itted by the legal obligation, if it w as im practicable to post the transaction in the previous cycle because of timing, or if the adjustm ent is covered by com m ent 14(c)10.11.B. B. If a finance charge debited to the account relates to activity for w hich a finance charge w as debited to the account in a previous billing cycle, for example, if the finance charge relates to an adjustm ent such as the resolution of a billing error dispute, or an unintentional posting error, or a paym ent by check that was later returned u np aid for insufficient funds or other reasons, the creditor shall at its option: 1. Calculate the annual percentage rate in accord w ith com m ent 14(c)10.11.A, or 2. Disclose the finance charge adjustm ent on the periodic statem ent and calculate the annual percentage rate for the current billing cycle w ithout including the finance charge adjustm ent in the num erator and balances associated w ith the finance charge adjustm ent in the denominator. a. U n d er Paragraph 18(c) Item iza tio n o f a m o u n t fin a n c e d ., p arag rap h 2. is revised; an d b. U n d er P aragraph 18(g) P a ym en t sch ed u le., the 18(g) h ead in g is revised, a n d a n ew parag rap h 4. is added. T he rev isions an d a d d itio n read as follows: * * * * * Supbart C -C losed-E n d Credit * * * * * Section 226.18— Content o f Disclosures * * * * * 18(c) Item ization o f am ount financed. * * * * * 2. A ddition al inform ation. Section 226.18(c) establishes only a m inim um standard for the m aterial to be included in the item ization of the am ount financed. Creditors have considerable flexibility in revising or supplem enting the inform ation listed in § 226.18(c) and show n in model form H—3, although no changes are required. The creditor may, for example, do one or m ore of the following: i. Include am ounts that reflect paym ents not part of the am ount financed. For example, escrow items and certain insurance prem ium s may be included, as discussed in the com mentary to § 226.18(g). ii. Organize the categories in any order. For example, the creditor may rearrange the terms in a m athem atical progression that depicts the arithm etic relationship of the terms. iii. A dd categories. For example, in a credit sale, the creditor may include the cash price and the dow npaym ent. If the credit sale involves a trade-in of the consum er’s car and an existing lien on that car exceeds the value of the trade-in am ount, the creditor may disclose the consum er’s trade-in value, the creditor’s payoff of the existing lien, and the resulting additional am ount financed. iv. Further itemize each category. For example, the am ount paid directly to the consum er may be subdivided into the am ount given by check and the am ount credited to the consum er’s savings account. v. Label categories w ith different language from that show n in § 226.18(c). For example, an am ount paid on the consum er’s account may be revised to specifically identify the account as “your auto loan w ith u s.” vi. Delete, leave blank, mark “N /A ” or otherwise not inapplicable categories in the itemization. For example, in a credit sale w ith no prepaid finance charges or am ounts paid to others, the am ount financed may consist of only the cash price less downpaym ent. In this case, the itemization may be com posed of only a single category and all other categories may be eliminated. * * * * * 18(g) P aym ent schedule. * * * * * 4. Tim ing o f paym ents, i. General rule. Section 226.18(g) requires creditors to * * * * * disclose the tim ing of paym ents. To m eet this 9. In S u p p lem en t I to P art 226, u n d e r requirem ent, creditors may list all of the S ectio n 226.18— C o n tent o f D isclosures, paym ent due dates. They also have the th e follow ing am en d m e n ts are m ade: option of specifying the “period of 16677 paym ents” scheduled to repay the obligation. As a general rule, creditors that choose this option m ust disclose the paym ent intervals or frequency, such as “m onthly”or “bi w eekly,” and the calendar date that the beginning paym ent is due. For example, a creditor may disclose that paym ents are due “m onthly beginning on July 1 ,1 9 98 .” This information, w hen com bined w ith the num ber of paym ents, is necessary to define the repaym ent period and enable a consum er to determ ine all of the paym ent due dates. ii. Exception. In a lim ited num ber of circumstances, the beginning-paym ent date is unknow n and difficult to determ ine at the tim e disclosures are made. For example, a consum er may become obligated on a credit contract that contem plates the delayed disbursem ent of funds based on a contingent event, such as the com pletion of home repairs. Disclosures may also accom pany loan checks that are sent by mail, in w hich case the initial disbursem ent and repaym ent dates are solely w ithin the consum er’s control. In such cases, if the beginningpaym ent date is unknow n the creditor may use an estim ated date and label the disclosure as an estimate pursuant to § 226.17(c). Alternatively, the disclosure may refer to the occurrence of a particular event, for example, by disclosing that the beginning paym ent is due “ 30 days after the first loan disbursem ent.” This inform ation also may be included w ith an estim ated date to explain the basis for the creditor’s estimate. See Comment 17 (a) (1)—5 (iii). * * * * * 10. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.32— R eq u irem en ts fo r Certain C losed-E nd H o m e M ortgages, u n d e r P aragraph 32(a)(1)(H), parag rap h 2. is rev ise d to read as follow s: * * * * * Subpart E— Special Rules for Certain Hom e M ortgage Transactions * * * * * Section 226.32— R equirem ents fo r Certain Closed-End H om e Mortgages 32(a) Coverage. * * * * * Paragraph 32(a)(1)(H). * * * * * 2. A n n u a l adjustm ent o f $400 am ount. A mortgage loan is covered by § 226.32 if the total points and fees payable by the consum er at or before loan consum m ation exceed the greater of $400 or 8 percent of the total loan amount. The $400 figure is adjusted annually by the Board; the adjusted figure becomes effective on January 1 of the following year. The Board w ill publish adjustm ents after the June figures become available each year. The adjustm ent for the upcom ing year w ill be included in any proposed commentary published in the fall, and incorporated into the commentary the following spring. The adjusted figures are: i. For 1996, $412, reflecting a 3.00 percent increase in the CPI-U from June 1994 to June 1995, rounded to the nearest w hole dollar. 11. For 1997, $424, reflecting a 2.9 percent increase in the CPI-U from June 1995 to June 1996, rounded to the nearest w hole dollar. 16678 Federal Register/Vol. 63, No. 6 5 /Monday, April 6, 1998/Rules and Regulations iii. For 1998, $435, reflecting a 2.5 percent increase in the CPI-U from June 1996 to June 1997, rounded to the nearest w hole dollar. * * * * * 11. In S u p p le m e n t I to P art 226, u n d e r S ectio n 226.33— R eq u irem en ts fo r R everse M ortgages, u n d e r Paragraph 33(c)(1) Costs to co n su m er, in paragraph 2., a n e w sen ten ce is a d d e d at th e en d of th e p arag rap h to read as follows: * * * * * Section 226.33— R equirem ents fo r Reverse Mortgages * * * * * 33(c) Projected total cost o f credit. Paragraph 33(c)(1) Costs to consum er. * * * * * 2. A n n u ity costs. * * * For example, this includes the costs of an annuity that a creditor offers, arranges, assists the consum er in purchasing, or that the creditor is aware the consum er is purchasing as a part of the transaction. * * * * * By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board u n der delegated authority, M arch 31, 1998. William W. Wiles, Secretary o f the Board. [FR Doc. 98-8829 Filed 4 -3 -9 8 ; 8:45 am] BILLING CODE 6210 -01 -P
@FedFRASER