Full text of District Notices (Federal Reserve Bank of Dallas) : Revisions to the Staff Commentaries to Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending), Notice 1999-32

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Federal Reserve Bank
of Dallas

l l★K

ROBERT D. McTEER, JR.
PRESIDENT
AND CHIEF EXECUTIVE OFFICER

May 13, 1999

DALLAS, TEXAS
75265-5906

Notice 99-32
TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Revisions to the Staff Commentaries to
Regulation M (Consumer Leasing) and
Regulation Z (Truth in Lending)
DETAILS

The Board of Governors of the Federal Reserve System has published revisions to the Official Staff Commentary to Regulation M, which implements the Consumer Leasing Act. The commentary
applies and interprets the requirements of the regulation. The update provides guidance on disclosures for
lease renegotiations and extensions, official fees and taxes, multiple-item leases, and advertisements.
This rule became effective March 31, 1999. Compliance is optional until March 31, 2000.
Also, the Board has published revisions to the Official Staff Commentary to Regulation Z
(Truth in Lending). The commentary applies and interprets the requirements of the regulation. The
update addresses the prohibition against the issuance of unsolicited credit cards. It provides guidance on
calculating payment schedules involving private mortgage insurance. In addition, the update discusses
credit sale transactions where down payments include cash and property used as a trade-in.
In response to concerns about the uncertainty of computer readiness for the Year 2000 date
change, the effective date for mandatory compliance with the commentary update is March 31, 2000.
ATTACHMENTS
Copies of the Board’s notices as they appear on pages 16612–17, Vol. 64, No. 65 of the
Federal Register dated April 6, 1999, are attached.
MORE INFORMATION
For more information, please contact Eugene Coy at (214) 922-6201. For additional copies
of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

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.

16612

Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations

loan funds. Terms used in this subpart
are defined in § 1753.2.
*
*
*
*
*
29. Revise § 1753.77 to read as
follows:
§ 1753.77

Methods of minor construction.

Minor construction may be performed
by contract using RUS Contract Form
773, ‘‘Miscellaneous Construction Work
and Maintenance Services’’, by RUS
Contract Form 515, or by work order
construction. The rules for using Form
515 for minor construction are
contained in subpart F of this part.
30. Revise § 1753.80, paragraph (b) to
read as follows:
§ 1753.80

Minor construction procedure.

*
*
*
*
(b) RUS financing under Form 773
contracts dated in the same calendar
year is limited to the following amounts
for the following discrete categories of
minor construction. The date of the
Form 773 contract is the date the Form
773 contract is executed.
(1) For outside plant construction, the
limit is $500,000 or ten per cent (10%)
of the borrower’s previous calendar
year’s outside plant total construction,
whichever is greater.
(2) For central office equipment, the
limit is $500,000.
(3) For special equipment and
buildings, the limit is $250,000 in each
category.
*
*
*
*
*
Appendices A–F Removed
31. Remove Appendices A through F
to part 1753.
Dated: March 31, 1999.
Inga Smulkstys,
Deputy Under Secretary, Rural Development.
[FR Doc. 99–8380 Filed 4–5–99; 8:45 am]
BILLING CODE 3410–15–M

FEDERAL RESERVE SYSTEM
12 CFR Part 213
[Regulation M; Docket No. R–1028]

Consumer Leasing
Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
interpretation.
AGENCY:

SUMMARY: The Board is publishing
revisions to the official staff
commentary to Regulation M, which
implements the Consumer Leasing Act.
The commentary applies and interprets
the requirements of the regulation. The
update provides guidance on

disclosures for lease renegotiations and
extensions, official fees and taxes,
multiple-item leases, and
advertisements.
This rule is effective March 31,
1999. Compliance is optional until
March 31, 2000.
DATES:

FOR FURTHER INFORMATION CONTACT:
Kyung Cho-Miller or Obrea Poindexter,
Staff Attorneys, Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, at (202) 452–3667. For users of
Telecommunications Device for the Deaf
(TDD) only, Diane Jenkins at (202) 452–
3544.
SUPPLEMENTARY INFORMATION:

I. Background
The Consumer Leasing Act (CLA), 15
U.S.C. 1667–1667e, was enacted in 1976
as an amendment to the Truth in
Lending Act (TILA), 15 U.S.C. 1601 et
seq. The Board’s Regulation M (12 CFR
part 213) implements the act. The CLA
requires lessors to provide consumers
with uniform cost and other disclosures
about consumer lease transactions. The
act generally applies to consumer leases
of personal property in which the
contractual obligation does not exceed
$25,000 and has a term of more than
four months. An automobile lease is the
most common type of consumer lease
covered by the act.
The commentary (12 CFR Part 213
(Supp. I)) is a substitute for individual
written staff interpretations; it is
updated as necessary, but generally not
more frequently than annually, to
address significant questions that arise.
This is the first update since the January
1, 1998, effective date for complying
with the revised regulation. Except as
discussed below, the interpretations are
adopted as proposed, with some
technical edits to address concerns
raised by commenters. In response to
concerns about the uncertainty of
computer readiness for the Year 2000
date change, the effective date for
mandatory compliance with the
commentary update is March 31, 2000.
In December, the Board published
proposed amendments to the
commentary to Regulation M (63 FR
67434, December 7, 1998). The Board
received comments from leasing
industry representatives. Overall,
commenters generally supported the
proposed amendments, except for the
guidance on estimating official fees and
taxes.

II. Commentary Revisions
Section 213.3—General Disclosures
Requirements
3(d) Use of Estimates
As proposed, the example about
estimating official fees and taxes in
comment 3(d)(1)–1(i) is removed. A
cross reference to the commentary to
section 213.4(n), which provides
guidance on estimating official fees and
taxes, is added to comment 3(d)(1)–2.
Section 213.4—Content of Disclosures
4(c) Payment Schedule and Total
Amount of Periodic Payments
Comment 4(c)–1 is revised to clarify
that scheduled payments can occur at
both regular and irregular intervals. A
similar revision is also made in
comment 1 to appendix A.
4(f) Payment Calculation
Motor vehicle lease disclosures must
include a mathematical progression of
how periodic payments are derived.
Comment 4(f)–2 is added to address
lease transactions that involve multiple
items of leased property if one of the
items is not a motor vehicle under state
law.
4(n) Fees and Taxes
Lessors must disclose the total
amount payable by the lessee during the
lease term for official and license fees,
certificate of title fees, registration, and
taxes. Commenters supported the need
for guidance about this disclosure but
thought proposed comment 4(n)–2 did
not provide sufficient flexibility given
the difficulty in projecting future fees
and taxes on some lease transactions.
Fees and taxes may differ widely, state
by state and jurisdiction by jurisdiction.
In addition, some of the taxes and fees
being projected may involve amounts
that are billed directly to consumers and
not through the lessor. Comment 4(n)–
2 is revised to provide guidance and
flexibility in determining rates and fees.
Section 213.5—Renegotiations,
Extensions, and Assumptions
5(a) Renegotiations
A renegotiation occurs where a lease
is satisfied and replaced by a new lease.
Under Regulation M, a renegotiation
generally triggers new disclosures.
Several commenters requested further
guidance on how to properly complete
model forms where, by renegotiation,
the initial lease term is extended and
the consummation date remains
unchanged from the initial lease.
Comment 5(a)–1 is added to clarify that
disclosures should conform to the

Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations
lessee’s legal obligation and to include
guidance for using the model forms.
5(b) Extensions
Comment 5(b)–3 is added to provide
guidance on lease extensions, which
sometimes are consummated before the
end of the initial lease term. The
comment clarifies that disclosures
should be based on the lessee’s
obligation for the period of the
extension, whether the extension
agreement is consummated during the
initial lease term or afterwards. Any fees
required in connection with the
extension also must be reflected in the
new disclosures, regardless of when the
fees are paid.
Section 213.7—Advertising
7(d)(2) Additional Terms
Comment 7(d)(2)–1 is revised to
provide guidance for advertising
periodic lease payments affected by
third-party fees that vary by state or
locality, such as taxes or licenses.
Appendix A—Model Forms
Comment 1 to appendix A is revised
to provide additional examples of
permissible changes to the model forms.
List of Subjects in 12 CFR Part 213
Advertising, Federal Reserve System,
Reporting and recordkeeping
requirements, Truth in lending.
For the reasons set forth in the
preamble, the Board amends 12 CFR
Part 213 as follows:
PART 213—CONSUMER LEASING
(REGULATION M)
1. The authority citation for part 213
continues to read as follows:
Authority: 15 U.S.C. 1604; 1667f.

2. In Supplement I to Part 213, under
Section 213.3—General Disclosure
Requirements, under Paragraph 3(d)(1)
Standard, paragraph 1. is amended by
removing ‘‘For example:’’ from the last
line, paragraph 1.i. is removed, and
paragraph 2. is amended by adding a
new sentence to the end of the
paragraph.
The addition reads as follows:
Supplement I To Part 213—Official
Staff Commentary To Regulation M
*

Section 213.3—General Disclosure
Requirements
*

*
*
*
3(d)(1) Standard
*
*
*
*

*
*

2. Basis of Estimates. * * * See
commentary to § 213.4(n) for estimating
official fees and taxes.
*
*
*
*
*
3. In Supplement I to Part 213, under
Section 213.4—Content of Disclosures,
the following amendments are made:
a. Under 4(c) Payment Schedule and
Total Amount of Periodic Payments,
paragraph 1. is revised;
b. Under 4(f) Payment Calculation, a
new paragraph 2. is added; and
c. Under 4(n) Fees and Taxes, a new
paragraph 2. is added.
The additions and revisions read as
follows:
*
*
*
*
*
Section 213.4—Content of Disclosures
*

*
*
*
*
4(c) Payment Schedule and Total
Amount of Periodic Payments
1. Periodic payments. The phrase
‘‘number, amount, and due dates or
periods of payments’’ requires the
disclosure of all payments that are made
at regular or irregular intervals and
generally derived from rent, capitalized
or amortized amounts such as
depreciation, and other amounts that are
collected by the lessor at the same
interval(s), including, for example,
taxes, maintenance, and insurance
charges. Other periodic payments may,
but need not, be disclosed under
§ 213.4(c).
*
*
*
*
*
4(f) Payment Calculation
*
*
*
*
*
2. Multiple-items. If a lease
transaction involves multiple items of
leased property, one of which is not a
motor vehicle under state law, at their
option, lessors may include all items in
the disclosures required under
§ 213.4(f). See comment 3(a)–4 regarding
disclosure of multiple transactions.
*
*
*
*
*
4(n) Fees and Taxes
*
*
*
*
*
2. Estimates. In disclosing the total
amount of fees and taxes under
§ 213.4(n), lessors may need to base the
disclosure on estimated tax rates or
amounts and are afforded great
flexibility in doing so. Where a rate is
applied to the future value of leased
property, lessors have flexibility in
estimating that value, including, but not
limited to, using the mathematical
average of the agreed upon value and
the residual value or published
valuation guides; or a lessor could
prepare estimates using the agreed upon
value and disclose a reasonable estimate
of the total fees and taxes. Lessors may
include a statement that the actual total
of fees and taxes may be higher or lower

16613

depending on the tax rates in effect or
the value of the leased property at the
time a fee or tax is assessed.
*
*
*
*
*
4. In Supplement I to Part 213, under
Section 213.5—Renegotiations,
Extensions, and Assumptions, the
following amendments are made:
a. A new undesignated heading, 5(a)
Renegotiations, and paragraph 1. is
added; and
b. Under Paragraph 5(b) Extensions.,
a new paragraph 3. is added.
The additions read as follows:
*
*
*
*
*
Section 213.5—Renegotiations,
Extensions, and Assumptions
*

*
*
*
*
5(a) Renegotiations
1. Basis of disclosures. Lessors have
flexibility in making disclosures so long
as they reflect the legal obligation under
the renegotiated lease. For example,
assume that a 24-month lease is
replaced by a 36-month lease. The
initial lease began on January 1, 1998,
and was renegotiated and replaced on
July 1, 1998, so that the new lease term
ends on January 1, 2001.
i. If the renegotiated lease covers the
36-month period beginning January 1,
1998, the new disclosures would reflect
all payments made by the lessee on the
initial lease and all payments on the
renegotiated lease. In this example,
since the renegotiated lease covers a 36month period beginning January 1,
1998, the disclosures must reflect
payments made since that date. On the
model form, the ‘‘total of base periodic
payments’’ disclosed under § 213.4(f)(7)
should reflect periodic payments to be
made over the entire 36-month term.
Payments received since January 1,
1998, are added as a new line item
disclosed as ‘‘total of payments
received’’ and are subtracted from the
‘‘total of base periodic payments’’ in
calculating a new item disclosed as the
‘‘total of base periodic payments
remaining.’’ For example, if 6 monthly
payments of $300 were received since
January 1, 1998, the disclosure form
should include a ‘‘total of base periodic
payments’’ line from which $1,800 is
subtracted to arrive at the ‘‘total of base
periodic payments remaining.’’ The
remainder of the disclosures would not
change.
ii. If the renegotiated lease covers only
the remaining 30 months, from July 1,
1998, to January 1, 2001, the disclosures
would reflect only the charges incurred
in connection with the renegotiation
and the payments for the remaining
period.
*
*
*
*
*

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Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations

5(b) Extensions
*
*
*
*
3. Basis of disclosures. The
disclosures should be based on the
extension period, including any upfront
costs paid in connection with the
extension. For example, assume that
initially a lease ends on March 1, 1999.
In January 1999, agreement is reached to
extend the lease until October 1, 1999.
The disclosure would include any
extension fee paid in January and the
periodic payments for the seven-month
extension period beginning in March.
*
*
*
*
*
5. In Supplement I to Part 213, under
Section 213.7—Advertising, under
Paragraph 7(d)(2) Additional Terms.,
paragraph 1. is revised as follows:
*
*
*
*
*

Section 213.7—Advertising
*

*
*
*
*
7(d)(2) Additional Terms
1. Third-party fees that vary by state
or locality. The disclosure of a periodic
payment or total amount due at lease
signing or delivery may:
i. Exclude third-party fees, such as
taxes, licenses, and registration fees and
disclose that fact; or
ii. Provide a periodic payment or total
that includes third-party fees based on
a particular state or locality as long as
that fact and the fact that fees may vary
by state or locality are disclosed.
*
*
*
*
*
6. In Supplement I to Part 213, under
Appendix A—Model Forms, paragraph
1. is revised as follows:
*
*
*
*
*
Appendix A—Model Forms
*

1. Permissible changes. Although use of the
model forms is not required, lessors using
them properly will be deemed to be in
compliance with the regulation. Generally,
lessors may make certain changes in the
format or content of the forms and may delete
any disclosures that are inapplicable to a
transaction without losing the act’s
protection from liability. For example, the
model form based on monthly periodic
payments may be modified for singlepayment lease transactions or for quarterly or
other regular or irregular periodic payments.
The model form may also be modified to
reflect that a transaction is an extension. The
content, format, and headings for the
segregated disclosures must be substantially
similar to those contained in the model
forms; therefore, any changes should be
minimal. The changes to the model forms
should not be so extensive as to affect the
substance and the clarity of the disclosures.

By order of the Board of Governors of the
Federal Reserve System, acting through the

Secretary of the Board under delegated
authority, March 31, 1999.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 99–8412 Filed 4–5–99; 8:45 am]
BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R–1029]

Truth in Lending
Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
interpretation.
AGENCY:

The Board is publishing
revisions to the official staff
commentary to Regulation Z (Truth in
Lending). The commentary applies and
interprets the requirements of the
regulation. The update addresses the
prohibition against the issuance of
unsolicited credit cards. It provides
guidance on calculating payment
schedules involving private mortgage
insurance. In addition, the update
discusses credit sale transactions where
downpayments include cash and
property used as a trade-in, and adopts
several technical amendments.
DATES: This rule is effective March 31,
1999. Compliance is optional until
March 31, 2000.
FOR FURTHER INFORMATION CONTACT:
James H. Mann or Obrea O. Poindexter
(open-end credit), or Michael E. Hentrel
or Kathleen C. Ryan (closed-end credit),
Staff Attorneys; Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, at (202) 452–3667 or 452–2412;
for users of Telecommunications Device
for the Deaf (TDD) only, Diane Jenkins
at (202) 452–3544.
SUPPLEMENTARY INFORMATION:
SUMMARY:

I. Background
The purpose of the Truth in Lending
Act (TILA; 15 U.S.C. 1601 et seq.) is to
promote the informed use of consumer
credit by providing for disclosures about
its terms and cost. The act requires
creditors to disclose the cost of credit as
a dollar amount (the finance charge) and
as an annual percentage rate (APR).
Uniformity in creditors’ disclosures is
intended to assist consumers in
comparison shopping. TILA requires
additional disclosures for loans secured
by a consumer’s home and permits
consumers to rescind certain
transactions that involve their principal
dwelling. In addition, the act regulates

certain practices of creditors. The act is
implemented by the Board’s Regulation
Z (12 CFR Part 226). The Board’s official
staff commentary (12 CFR Part 226
(Supp. I)) interprets the regulation, and
provides guidance to creditors in
applying the regulation to specific
transactions. The commentary is a
substitute for individual staff
interpretations; it is updated
periodically to address significant
questions that arise.
In December, the Board published
proposed amendments to the
commentary to Regulation Z (63 FR
67436, December 7, 1998). The Board
received about 50 comments. Most of
the comments were from financial
institutions and other creditors; state
attorneys general and consumer
representatives also submitted
comments. Overall, commenters
generally supported the proposed
amendments. Views were mixed on
comments concerning multifunction
cards that are or may be used as credit
cards and credit sale transactions where
downpayments involve cash payments
and property used as a trade-in.
Except as discussed below, the
commentary is being adopted as
proposed; some technical suggestions or
concerns raised by commenters are
addressed. In response to concerns
about the uncertainty of computer
readiness for the Year 2000 date change,
the effective date for mandatory
compliance with the commentary
update is March 31, 2000.
II. Commentary Revisions
Subpart A—General
Section 226.2—Definitions and Rules of
Construction
2(a) Definitions
2(a)(15) Credit Card
Section 226.2(a)(15) defines a credit
card to include any card or credit device
that may be used from time to time to
obtain credit. Comment 2(a)(15)–2
provides examples of cards and devices
that are and are not credit cards. The
comment is revised to include a new
example of cards or devices that are
credit cards, addressing recent programs
where cards are marketed from the
outset with both credit and non-credit
features. (Two additional examples were
proposed. Some commenters suggested
technical changes to ensure consistency
in the new examples; the changes were
made by merging them.)
2(a)(18) Downpayment
Comment 2(a)(18)–3 provides
guidance on how a creditor discloses
the downpayment if a trade-in is

16614

Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations

Section 213.7—Advertising
*

By order of the Board of Governors of the
Federal Reserve System, acting through the

Secretary of the Board under delegated
authority, March 31, 1999.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 99–8412 Filed 4–5–99; 8:45 am]
BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R–1029]

Truth in Lending
Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
interpretation.
AGENCY:

Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations
involved in a credit sale transaction and
if the amount of an existing lien exceeds
the value of the trade-in. Under
Regulation Z, the term ‘‘downpayment’’
refers to an amount, including the value
of any property used as a trade-in, paid
to a seller to reduce the ‘‘cash price.’’ If
the amount of an existing lien exceeds
the value of the property being used as
a trade-in and no cash payment is
involved, creditors must disclose zero as
the downpayment and not a negative
number. The proposed comment also
added an example where the consumer
makes a cash payment. In that example,
creditors would apply the cash payment
to the excess lien amount rather than
reduce the price of the purchased item.
In response to commenters’ concerns,
the comment has been revised to
provide flexibility. At their option,
creditors may first apply the cash
payment to reduce the price of the
purchased item.
Many commenters opposed the
proposal. Some believed that applying
the cash payment to the excess lien
amount would be confusing to
consumers because the creditor’s
treatment of the cash payments might
not be readily apparent. They argued
that the comment should comport with
consumers’ general expectations—that
cash payments would be disclosed as
downpayments that reduce the cash
price.
Moreover, commenters stated that,
where cash payments are made in credit
sales involving a trade-in and a lien on
the property that exceeds the value of
the trade-in, many creditors currently
apply the cash payment to any excess
lien amount. These creditors disclose
the cash payment as a downpayment.
Many of these creditors, along with
consumer advocates and state Attorneys
General commenting on the issue,
believe disclosing a downpayment equal
to the cash payment is more helpful to
consumers. They express concern about
the potential for confusion under the
proposal when, for example, a cash
payment of $500 is applied to an excess
lien amount of $2,000 and the
downpayment is disclosed as $0, even
if the cash payment is disclosed
elsewhere in the itemization of the
amount financed. (See § 226.18(c).)
Some commenters also believed the
proposal potentially conflicts with some
state laws regarding the disclosure of
downpayments.
In response to comments received and
upon further analysis, the proposed
example has been revised. In disclosing
a downpayment where cash payments
are made in credit sales involving a
trade-in and a lien on the property that
exceeds the value of the trade-in,

creditors may, but need not, apply the
cash payment first to any excess lien
amount.
Subpart B—Open-end Credit
Section 226.12—Special Credit Card
Provisions
12(a) Issuance of Credit Cards
12(a)(1)
Section 226.12(a) prohibits creditors
from issuing credit cards except in
response to a consumer’s request or
application for the card or as a renewal
of, or substitute for, a previously
accepted credit card. The prohibition,
which parallels the statute, addresses
various concerns including the potential
for theft and fraud and the consumer
inconvenience of refuting claims of
liability. The law does not prohibit
creditors from issuing unsolicited cards
that have a non-credit purpose—such as
check-guarantee or purchase-price
discount cards—so long as they cannot
also be used to obtain credit. Consumers
may later be able to convert these cards
to credit cards if the issuer makes a
credit feature available and the
consumer requests the credit.
Comment 12(a)(1)–7 provides
guidance regarding a card that is issued
to and accepted by the consumer as a
non-credit device and that subsequently
is converted for use as a credit device
at the consumer’s request. The revisions
clarify the comment’s applicability to
recent programs where unsolicited cards
are marketed from the outset as both
stored-value cards and credit cards. The
Board proposed revisions to the
comment to reflect more clearly its
intended purpose.
Views were mixed on the proposal.
Commenters that opposed the revisions
cited a variety of reasons for their
position. Some believed the concerns
associated with the prohibition—theft,
fraud, and the inconvenience of refuting
claims of liability—were outdated, due
to advances in technology and industry
practice regarding fraud prevention, and
TILA’s $50 maximum potential loss for
consumers. Others believed the
proposal would inappropriately deter
the development of multifunction cards.
They discussed the convenience of such
cards and urged that any rule be crafted
narrowly so as to not affect the
continuing development of
multifunction cards. The prohibition is,
however statutory.
Comment 12(a)(1)–7 is revised in
accord with the proposal, with some
changes to address commenters’
concerns. The fundamental import of
the comment remains unchanged:
Multifunction cards connected with

16615

credit plans when they are issued are
credit cards, and they may not be sent
without the consumer’s prior request or
application. New examples have been
added to provide further guidance. The
comment makes clear that card issuers
do not violate the prohibition merely by
sending a card imprinted with
information that identifies the
consumer, so long as the issuer does not
propose to connect the card to a credit
plan at the time the card is issued.
To the extent that the interpretation of
the TILA rule previously may have been
unclear, the Board believes that liability
should not attach to a card issuer’s prior
reliance on comment 12(a)(1)–7 in
issuing multifunction cards that
included a credit feature.
Section 226.14—Determination of
Annual Percentage Rate
14(c) Annual Percentage Rate for
Periodic Statements
Comment 14(c)–10 addresses finance
charges that are imposed during the
current billing cycle but that relate to
account activity that occurred during a
prior billing cycle. The comment is
revised to refer expressly to currentcycle or prior-cycle debits and currentcycle or prior-cycle credits.
Subpart C—Closed-end Credit
Section 226.18—Content of Disclosures
18(g) Payment Schedule
The Homeowners Protection Act of
1998 limits the amount of private
mortgage insurance (PMI) consumers
can be required to purchase. Borrowers
may request cancellation of PMI under
some circumstances and lenders must
terminate PMI automatically when
certain conditions are met.
Comment 18(g)–5 is added in
response to creditors’ requests for
guidance on how the new statutory
requirements affect TILA disclosures.
PMI premiums are finance charges and
are figured into disclosures such as the
APR and payment schedule. TILA
disclosures are based on the legal
obligation between the parties, and the
comment provides that the payment
schedule disclosure should reflect all
components of the finance charge,
including PMI for the time period there
is a legal obligation to maintain the
insurance.
Commenters generally supported the
proposed guidance, although a few
believed the guidance was unnecessary
and others believed the guidance was
not detailed enough. In response to
comments received, the comment is
revised to clarify that creditors may rely
on assumptions used for variable-rate
transactions and discounted and

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Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations

premium variable-rate transactions in
calculating payment schedules that
involve PMI.
18(j) Total Sale Price
Comment 18(j)–2 provides the
formula for calculating the total sale
price in a credit sale transaction; it is
the sum of the cash price, certain other
amounts financed, and the finance
charge. In response to requests for
guidance, the commentary is revised to
address how the total sale price may be
affected by downpayments involving
both cash and property used as a tradein with a lien exceeding the value of the
trade-in. This guidance is provided in a
new comment 18(j)–3.
Under the proposal, creditors were to
calculate the downpayment by applying
cash payments first to reduce excess
lien amounts. In response to
commenters’ concerns about the Board’s
proposed approach to disclosing the
downpayment, the guidance has been
revised. See comment 2(a)(18)–3.
The flexibility provided to creditors
in disclosing a downpayment may result
in disclosures of a total sale price that
may differ among creditors. However,
key disclosures such as the amount
financed, finance charge, and APR
remain uniform and will not be affected
by the creditor’s approach in disclosing
the downpayment and total sale price.
Subpart E—Special Rules for Certain
Home Mortgage Transactions
Section 226.32—Requirements for
Certain Closed-end Home Mortgages
32(a) Coverage
32(a)(1)(ii)
Creditors must follow the rules in
§ 226.32 if the total points and fees
payable by the consumer at or before
loan closing exceed the greater of $400
or 8 percent of the total loan amount.
The Board is required to adjust the $400
amount each year. The adjusted amount
for 1999 ($441), published on December
8, 1998 (63 FR 67575) is added to
comment 32(a)(1)(ii)–2.
List of Subjects in 12 CFR Part 226
Advertising, Banks, banking,
Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting
and recordkeeping requirements, Truth
in lending.
For the reasons set forth in the
preamble, the Board amends 12 CFR
part 226 as follows:
PART 226—TRUTH IN LENDING
(REGULATION Z)
1. The authority citation for part 226
continues to read as follows:

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604
and 1637(c)(5).

2. In Supplement I to Part 226, under
Section 226.2—Definitions and Rules of
Construction, the following
amendments are made:
a. Under Paragraph 2(a)(15) Credit
card., paragraph 2. is revised; and
b. Under Paragraph 2(a)(18)
Downpayment., paragraph 3. is revised.
The revisions read as follows:
Supplement I to Part 226—Official Staff
Interpretations
*

Subpart A—General
*

Section 226.2—Definitions and Rules of
Construction
2(a) Definitions.
*

2(a)(15) Credit card.
*

*
*
*
*
2. Examples. i. Examples of credit
cards include:
A. A card that guarantees checks or
similar instruments, if the asset account
is also tied to an overdraft line or if the
instrument directly accesses a line of
credit.
B. A card that accesses both a credit
and an asset account (that is, a debitcredit card).
C. An identification card that permits
the consumer to defer payment on a
purchase.
D. An identification card indicating
loan approval that is presented to a
merchant or to a lender, whether or not
the consumer signs a separate
promissory note for each credit
extension.
E. A card or device that can be
activated upon receipt to access credit,
even if the card has a substantive use
other than credit, such as a purchaseprice discount card. Such a card or
device is a credit card notwithstanding
the fact that the recipient must first
contact the card issuer to access or
activate the credit feature.
ii. In contrast, a credit card does not
include, for example:
A. A check-guarantee or debit card
with no credit feature or agreement,
even if the creditor occasionally honors
an inadvertent overdraft.
B. 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.
*
*
*
*
*

2(a)(18) Downpayment.
*

*
*
*
*
3. Effect of existing liens. i. No cash
payment. In a credit sale, the
‘‘downpayment’’ may only be used to
reduce the cash price. For example,
when a trade-in is used as the
downpayment and the existing lien on
an automobile to be traded in exceeds
the value of the automobile, creditors
must disclose a zero on the
downpayment line rather than a
negative number. To illustrate, assume a
consumer 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 downpayment of $0,
not ¥$2,000.
ii. Cash payment. If the consumer
makes a cash payment, creditors may, at
their option, disclose the entire cash
payment as the downpayment, or apply
the cash payment first to any excess lien
amount and disclose any remaining
cash as the downpayment. In the above
example:
A. If the downpayment disclosed is
equal to the cash payment, the $2,000
deficit must be reflected as an
additional amount financed under
§ 226.18(b)(2).
B. If the consumer provides $1,500 in
cash (which does not extinguish the
$2,000 deficit), the creditor may
disclose a downpayment of $1,500 or of
$0.
C. If the consumer provides $3,000 in
cash, the creditor may disclose a
downpayment of $3,000 or of $1,000.
*
*
*
*
*
3. In Supplement I to Part 226, under
Section 226.12—Special Credit Card
Provisions, under Paragraph 12(a)(1),
paragraph 7. is revised to read as
follows:
*
*
*
*
*
Subpart B—Open-end Credit
*

Section 226.12—Special Credit Card
Provisions
*

*
*
*
*
12(a) Issuance of credit cards.
Paragraph 12(a)(1)
*
*
*
*
*
7. Issuance of non-credit cards. i.
General. Under § 226.12(a)(1), a credit
card cannot be issued except in
response to a request or an application.
(See comment 2(a)(15)–2 for examples
of cards or devices that are and are not
credit cards.) A non-credit card may be
sent on an unsolicited basis by an issuer
that does not propose to connect the
card to any credit plan; a credit feature

Federal Register / Vol. 64, No. 65 / Tuesday, April 6, 1999 / Rules and Regulations
may be added to a previously issued
non-credit card only upon the
consumer’s specific request.
ii. Examples. A purchase-price
discount card may be sent on an
unsolicited basis by an issuer that does
not propose to connect the card to any
credit plan. An issuer demonstrates that
it proposes to connect the card to a
credit plan by, for example, including
promotional materials about credit
features or account agreements and
disclosures required by § 226.6. The
issuer will violate the rule against
unsolicited issuance if, for example, at
the time the card is sent a credit plan
can be accessed by the card or the
recipient of the unsolicited card has
been preapproved for credit that the
recipient can access by contacting the
issuer and activating the card.
*
*
*
*
*
4. In Supplement I to Part 226,
Section 226.14—Determination of
Annual Percentage Rate, under
Paragraph 14(c) Annual percentage rate
for periodic statements., paragraph 10.ii.
is republished and paragraph 10.ii.B. is
revised to read as follows:
*
*
*
*
*
Section 226.14—Determination of
Annual Percentage Rate
*

*
*
*
*
14(c) Annual percentage rate for
periodic statements.
*
*
*
*
*
10. Prior-cycle adjustments.
*
*
*
*
*
ii. Finance charges relating to activity
in prior cycles should be reflected on
the periodic statement as follows:
*
*
*
*
*
B. If a finance charge that is posted to
the account relates to activity for which
a finance charge was debited or credited
to the account in a previous billing
cycle (for example, if the finance charge
relates to an adjustment such as the
resolution of a billing error dispute, or
an unintentional posting error, or a
payment by check that was later
returned unpaid for insufficient funds
or other reasons), the creditor shall at its
option:
1. Calculate the annual percentage
rate in accord with ii.A. of this
paragraph, or
2. Disclose the finance charge
adjustment on the periodic statement
and calculate the annual percentage rate
for the current billing cycle without
including the finance charge adjustment
in the numerator and balances
associated with the finance charge
adjustment in the denominator.
*
*
*
*
*

5. In Supplement I to Part 226, under
Section 226.18—Content of Disclosures,
the following amendments are made:
a. Under 18(g) Payment schedule., a
new paragraph 5. is added; and
b. Under 18(j) Total sale price., a new
paragraph 3. is added.
The additions read as follows:
*
*
*
*
*
Subpart C—Closed-end Credit
*

Section 226.18—Content of Disclosures
*

*
*
*
*
18(g) Payment schedule.
*
*
*
*
*
5. Mortgage insurance. The payment
schedule should reflect the consumer’s
mortgage insurance payments until the
date on which the creditor must
automatically terminate coverage under
applicable law, even though the
consumer may have a right to request
that the insurance be cancelled earlier.
(For assumptions in calculating a
payment schedule that includes
mortgage insurance that must be
automatically terminated, see comments
17(c)(1)–8 and 17(c)(1)–10.)
*
*
*
*
*
18(j) Total sale price.
*
*
*
*
*
3. Effect of existing liens. When a
credit sale transaction involves property
that is being used as a trade-in (an
automobile, for example) and that has a
lien exceeding the value of the trade-in,
the total sale price is affected by the
amount of any cash provided. (See
comment 2(a)(18)–3.) To illustrate,
assume a consumer finances the
purchase of an automobile with a cash
price of $20,000. Another vehicle used
as a trade-in has a value of $8,000 but
has an existing lien of $10,000, leaving
a $2,000 deficit that the consumer must
finance.
i. If the consumer pays $1,500 in cash,
the creditor may apply the cash first to
the lien, leaving a $500 deficit, and
reflect a downpayment of $0. The total
sale price would include the $20,000
cash price, an additional $500 financed
under § 226.18(b)(2), and the amount of
the finance charge. Alternatively, the
creditor may reflect a downpayment of
$1,500 and finance the $2,000 deficit. In
that case, the total sale price would
include the sum of the $20,000 cash
price, the $2,000 lien payoff amount as
an additional amount financed, and the
amount of the finance charge.
ii. If the consumer pays $3,000 in
cash, the creditor may apply the cash
first to extinguish the lien and reflect
the remainder as a downpayment of
$1,000. The total sale price would

16617

reflect the $20,000 cash price and the
amount of the finance charge. (The cash
payment extinguishes the trade-in
deficit and no charges are added under
§ 226.18(b)(2).) Alternatively, the
creditor may elect to reflect a
downpayment of $3,000 and finance the
$2,000 deficit. In that case, the total sale
price would include the sum of the
$20,000 cash price, the $2,000 lien
payoff amount as an additional amount
financed, and the amount of the finance
charge.
*
*
*
*
*
6. In Supplement I to Part 226,
Section 226.32—Requirements for
Certain Closed-end Home Mortgages,
under Paragraph 32(a)(1)(ii), paragraph
2.iv. is added to read as follows:
*
*
*
*
*
Subpart E—Special Rules For Certain
Home Mortgage Transactions
*

Section 226.32—Requirements for
Certain Closed-end Home Mortgages
*

*
*
*
*
32(a) Coverage.
*
*
*
*
*
Paragraph 32(a)(1)(ii).
*
*
*
*
*
2. Annual adjustment of $400
amount.
*
*
*
*
*
iv. For 1999, $441, reflecting a 1.4
percent increase in the CPI–U from June
1997 to June 1998, rounded to the
nearest whole dollar.
*
*
*
*
*
By order of the Board of Governors of the
Federal Reserve System, acting through the
Secretary of the Board under delegated
authority, March 31, 1999.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 99–8413 Filed 4–5–99; 8:45 am]
BILLING CODE 6210–01–P

FARM CREDIT ADMINISTRATION
12 CFR Parts 611 and 620
RIN 3052–AB79

Organization; Disclosure to
Shareholders; FCS Board
Compensation Limits
Farm Credit Administration.
Final rule.

AGENCY:
ACTION:

This final rule amends Farm
Credit Administration (FCA) regulations
on Farm Credit System (System or FCS)
bank director compensation. The
amendment removes the requirement
for FCS banks to obtain our prior
SUMMARY:

Full text of District Notices (Federal Reserve Bank of Dallas) : Revisions to the Staff Commentaries to Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending), Notice 1999-32

FRASER