Full text of Federal Reserve Bank of New York Circulars : 10346. Regulations B, E, and Z

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 10346
May 10, 1990

"I

REGULATIONS B, E, AND Z
Amendments to Official Staff Commentaries
To A ll Depository Institutions, and Others Concerned,
in the Second Federal Reserve D istrict:

The following is quoted from the text of a statement issued by the Board of Governors of the
Federal Reserve System announcing a revision, effective April 1, 1990, of its official staff
commentary to Regulation Z, “Truth in Lending”:
T h e Fed eral R eserv e B oard has published in final fo rm an o ffic ia l s ta ff com m en tary to R egu lation
Z , “Truth in L en d in g .” T h e revisions beco m e e ffe ctiv e A p ril 1, but com p lian ce is op tional until
O cto b e r 1, 1 9 9 0 .
T h e m a jo rity o f the revisions address the R egu lation Z am endm ents im plem enting the F a ir C red it
and C h arge Card D isclosu re A ct and the H om e E qu ity L o an C onsu m er P ro tectio n A ct. M o st o f the in ­
terpretations have been developed in response to requests by cred itors fo r additional guidance. S o m e
o f the issues d iscu ssed include tax refund anticipation loans, the p rice-lev el adjusted m o rtg age (a new
m o rtg age product), and open-end cred it ad vertisin g.

In addition, the Board also announced revisions of (a) the official staff commentary to Reg­
ulation B, “Equal Credit Opportunity,” to include recent statutory amendments on business credit
as well as interpretations about data collection, and (b) the official staff commentary to Regulation
E, “Electronic Fund Transfers,” to address questions on the revocation of authority for preauthorized
transfers. Both commentaries become effective April 1, 1990 (w ith ou t the deferred compliance op­
tion described above).
Enclosed — for depository institutions in the Second Federal Reserve District and others who
maintain sets of the regulations of the Board of Governors — is a copy of the changes, which have
been reprinted from the F ederal R e g ister of April 4, 5, and 9; copies will be furnished to others
upon request directed to the Circulars Division of this Bank (Tel. No. 212-720-5215 or 5216). Ques­
tions regarding these matters may be directed to our Compliance Examinations Department (Tel.
No. 212-720-5914).




E. G erald C orrigan ,

P resid en t.

Official Staff Commentary to
Regulations B, E, and Z

[Enc. Cir. No. 10346]







Rules and Regulations

Federal Register

Vol. 55, No. 65
Wednesday, April 4, 1990

Official Staff Commentary To Regulation B

FEDERAL RESERVE SYSTEM
12 C F R Part 202

[Reg. B; EC-1]
Equal Credit O pportunity; U pdate to
O fficial S taff Com m entary
AGENCY: Board of G overnors o f the
Fed eral R eserve System .
ACTION: Final official sta ff

interpretation.
The Board is publishing in
final form revisions to the official s ta ff
com m entary to Regulation B (Equal
Credit O pportunity). T he com m entary
applies and interprets the requirem ents
of Regulation B and is a substitu te for
individual sta ff interp retatio ns o f the
regulation. The rev isio n s include
interpretations o f the final rule
amending Regulation B to im plem ent
Equal Credit O pportunity A ct
am endm ents on bu sin ess credit as well
as in terp retations about d ata collection.
EFFECTIVE DATE: April 1, 1990.
su m m ary:

FOR FURTHER INFORMATION CONTACT:

In the D ivision o f C onsum er and
Com munity A ffairs, A drienne D. H u rt
S enior A ttorney, or Jan e A hrens, S ta ff
A ttorney, at (202) 452-2412; for the
hearing im paired
co n tact
E arn estin e Hill or D orothea Thom pson,
T elecom m u nications D ev ice for the D eaf
(TDD), at (202) 452-3544, B oard of
G overnors of the Fed eral R eserve
System , W ashington, DC 20551.

only,

SUPPLEMENTARY INFORMATION:
(1) G en eral
T h e Equal C redit O pportunity A ct
(E C O A ). 15 U .S.C . 1691-1691 f, m ak es it
unlaw ful for cred itors to d iscrim in ate in
any a sp e ct of a credit tran sactio n on the
b a s is of race, color, religion, national




origin, sex, m arital statu s, age, receipt o f
public a ssista n ce , or the e x e rc ise of
rights under the Consum er Credit
P rotection A ct. T h is statu te is
im plem ented by the B o ard 's Regulation
B (12 CFR part 202).
The B oard has published an o fficial
sta ff com m entary (12 C FR part 202
(Supp. I)) to interpret the regulation. The
com m entary provides guidance to
creditors in applying the regulation to
sp ecific tran sactio n s, and is updated
periodically to ad dress significant
questions that arise. This no tice
con tain s the fourth update.
(2) R evisions
M ost of the rev isio n s to the
com m entary interpret p rovisions of
Regulations B im plem enting
am endm ents to the EC O A con tain ed in
the W om en's B usin ess O w nership A ct
of 1988, Public Law No. 1 0 0 -5 3 3 ,1 0 2
Stat. 2689. (The regulatory am endm ents,
e ffectiv e April 1 ,1 9 9 0 , w ere published
on D ecem ber 7, 1989 at 54 FR 50482.)
T he other revisions to the com m entary
ad d ress qu estion s that h av e arisen
about d ata co llectio n , including one
related to am endm ents to the Home
M ortgage D isclosure A ct and R egulation

C.

Section 202.1—Authority, Scope, and
Purpose
1(a) A uthority and S co p e
T he definition o f “B o ard ,” previously
con tain ed in § 202.2(g), is now in the
com m entary to § 202.1.

Section 202J2—Definitions
2(g) B u sin ess Credit
In the D ecem ber 1989 am endm ents to
the regulation, the definition of b u sin ess
cred it w as m oved from § 202.3(d)(1) to
§ 202.2(g). A ccordingly, com m ent 3 (d )-l
has been red esign ated com m ent 2 (g )-l.

Section 202.3—Limited Exceptions for
Certain Classes of Transactions
3(d) G overnm ent Credit
In the D ecem ber 1989 am endm ents to
the regulation, § 202.3(e) w as
red esign ated § 202.3(d). A ccordingly,
com m ent 3(e)—1 on governm ental credit
has b een red esignated com m ent 3 (d )-l.

3

—Rules Concerning Taking

Section 202.5
o f A p p lica tio n s

5(b) G en eral R u les Concerning R equ ests
for Inform ation
Paragraph 5(b)(2)
Com m ent 5 (b )(2 )-l is added to clarify
that the term " s ta te law ,” as used in
§ 202.5(b)(2), includes the requirem ents
of any po litical subdivision thereof. For
exam ple, a cred ito r may request,
pursuant to a lo cal ord inance,
inform ation required for m onitoring
purposes that is o therw ise prohibited by
§ 202.5 (c) and (d). Com m ent 5(b )(2 }-2 is
added to clarify that a lend er su b ject to
the H ome M ortgage D isclosure A ct
(HM DA), but exem pt (b ecau se of its
a sse t size) from reporting data about
applican t c h a ra cteristics, may
voluntarily co lle ct and report the
inform ation in acco rd a n ce with the
requirem ents o f HM DA and Regulation
C w ithout violating the ECO A .

Section 202.9— N o tific a tio n s
9(a) N otification o f A ctio n T aken , EC O A
N otice, and S tatem en t o f S p e cific
R easo n s
P aragraph 9(a)(3)
S e ctio n 202.9(a)(3), added by the
D ecem ber 1989 am endm ents to the
regulation, co n tain s the rules for
providing n o tificatio n s on b u sin ess
cred it app licatio n s. C om m ents 9(a)(3)—1
through - 5 give cred ito rs gu idance in
com plying with this paragraph.

Section 202.10—F urnishing o f C re d it
In fo rm a tio n
Com m ent 10-1 is revised to clarify
that the section applies only to
con su m er credit. (The rule in this section
w as ad opted to ensure that m arried
w om en are not left w ithout credit
histo ries if they becom e divorced or
w idow ed. In the past, credit histo ries on
jo in t acco u n ts held by spouses w ere
typ ically reported only in the h u sban d 's
nam e.) T he sectio n does not apply to
sole proprietors or any other b u sin ess
credit applican ts.

Section 202.13—Information for
Monitoring Purposes
13(a) Inform ation To B e R equ ested
A cro ss referen ce to the com m entary
to § 202.5(b)(2) is added as com m ent
13(a)-7.

Federal Register / V o l. 55, Nc. 6 5 / W e d n e s d a y , A p r il 4, 1 9 9 0 / R u l e s a n d R e g u l a t i o n s

12472

List of Subjects in 12 CFR Part 202
Banks, Banking, Civil rights,
Consumer protection, Credit, Federal
Reserve System, Marital status
discrimination, Minority groups,
Penalties, Religious discrimination, Sex
discrimination, Women.
(3) Text of Revisions
Pursuant to authority granted in
section 703 of the Equal Credit
Opportunity Act (15 U.S.C 1691b), the
Board amends the official staff
commentary to Regulation B (12 CFR
part 202, Supp. I) as follows:
PART 202—[AMENDED]
1. The authority citation for part 202
continues to read as follows:
Authority:

15 U.S.C. 1691-169lf.

2. In § 202.1, comment l(a)-3 is added
to read as follows:
§ 202.1

*

*

Authority, scope, and purpose.

*

*

*

1(a) Authority and scope.
* * * * *
3. Board. The term “Board." as used in this
regulation, means the Board of Governors of
the Federal Reserve System.
*

*

*

*

*

3. In 1 202.2, comment 2(g)-l and a
heading are added to read as follows:
§ 202.2
*

*

Definitions.
*

*

*

2(g) Business credit.
1. Definition. The test for deciding whether
a transaction qualifies as business credit is
one of primary purpose. For example, an
open-end credit account used for both
personal and business purposes is not
business credit unless the primary purpose of
the account is business-related. A creditor
may rely on an applicant's statement of the
purpose for the credit requested.
* * * * *
4. In § 202.3, comment 3(e)-l and the
heading and comment 3(d)(3)—1 are
removed; comment 3(d)-l and the
heading are revised to read as follows:
§ 202.3 Limited exceptions for certain
classes of transactions
*

*

*

*

*

3(d) Government credit.
1. Credit to governments. The exception
relates to credit extended to (not by)
governmental entities. For example, credit




extended to a local government by a creditor
in the private sector is covered by this
exception, but credit extended to consumers
by a federal or state housing agency does not
qualify for special treatment under this
category.
*

*

*

*

*

5. In § 202.5, comments 5(b)(2)—1 and
5(b)(2)-2 and a heading are added to
read as follows:
§ 202.5 Ruies concerning taking of
applications.

*

*

*

*

*

5(b) General rules concerning requests for
information.

*

*

*

*

*

Paragraph 5(b)(2)
1. Local laws. Information that a creditor is
allowed to collect pursuant to a “state"
statute or regulation includes information
required by a local statute, regulation, or
ordinance.
2. Information required by Regulation C.
Regulation C generally requires creditors
covered by the Home Mortgage Disclosure
Act (HMDA) to collect and report
information about the race or national origin
and sex of applicants for home improvement
loans and home purchase loans, including
some types of loans not covered by § 202.13.
Certain creditors with assets under $30
million, though covered by HMDA, are not
required to collect and report these data: but
they may do so at their option under HMDA.
without violating the ECOA or Regulation B.
* * * * *
6. In § 202.9, comments 9(a)(3)—1
through 9(a)(3)-5 and a heading are
added to read as follows:
§202.9 Notifications.

*

*

*

*

*

9(a) Notification of action

taken, ECOA
notice, and statement of specific reasons.

*

*

*

*

*

Paragraph 9(a)(3)
1. Coverage. In determining the rules in this
paragraph that apply to a given business
credit application, a creditor may rely on the
applicant’s assertion about the revenue size
of the business. (Applications to start a
business are governed by the rules in
§ 202.9(a)(3)(i).) If an applicant applies for
credit as a sole proprietor, the revenues of the
sole proprietorship will determine which
rules in the paragraph govern the application.
However, if an applicant applies for business
purpose credit as an individual, the rules in
paragraph 9(a)(3)(i) apply unless the
application is for trade or similar credit.

4

2. Trade credit. The term “trade credit”
generally islimited to a financing
arrangement that involves a buyer and a
seller— such as a supplier who finances the
sale ofequipment, supplies, or inventory; it
does not apply to an extension ofcredit by a
bank or other financial institution forthe
financing ofsuch items.
3.Factoring. Factoring refers toa purchase
ofaccounts receivable, and thus isnot
subject to the act or regulation. Ifthere isa
credit extension incident to the factoring
arrangement, the notification rules in
§ 202.9(a)(3)(ii) apply as do other relevant
sections of the act and regulation.
4. Manner of compliance. In complying
with the notice provisions ofthe act and
regulation, creditors offering business credit
may follow the rules governing consumer
credit.Similarly, creditors may elect to treat
allbusiness credit the same (irrespective of
revenue size) by providing notice in
accordance with § 202.9(a)(3)(i).
5. Timing of notification. A creditor subject
to § 202.9(a)(3)(ii)(A) is required to notify a
business credit applicant, orally or in writing,
of action taken on an application within a
reasonable time of receiving a completed
application. Notice provided in accordance
with the timing requirements of § 202.9(a)(1)
is deemed reasonable in all instances.
*
*
*
*
*

7. In § 202.10, comment 10-1 is revised
to read as follows:

§ 202.10 Furnishing of credit information.
1. Scope. The requirements of § 202.10 for
designating and reporting credit information
apply only to consumer credit transactions.
Moreover, they apply only to creditors that
opt to furnish credit information to credit
bureaus or to other creditors: there is no
requirement that a creditor furnish credit
information on its accounts.
*
*
*
*
*

8. In § 202.13, comment 13(a)-7 is
added to read as follows:
§ 202.13 Information for monitoring
purposes.

*

13(a) Information to be requested.

*

7.

*

*

*

Data collection under Regulation C. See

comment

5(b)(2)—2.

*

*

*

*

*

Board of Governors of the Federal Reserve
System, March 29,1990.

William W. Wiles,
Secretary of the Board.

[FR Doc. 90-7706 Filed 4-3-90; 8:45 am]
BILUNG CODE 6210-01-M

12635

Rules and Regulations

Federal Register

Official Staff Commentary To Regulation E
FEDERAL RESERVE SYSTEM
12 CFR Part 205
!Reg. E; EFT-2]

Eiectronic Fund Transfers; Update to
Official Staff Commentary
AGENCY: Board o f G o v ern o rs o f the
Fed eral R eserve System .

ACTION: O fficial sta ff in terp retatio n .
su m m a r y :

The Board is publishing in
final form changes to the o fficial sta ff
com m entary to Regulation E (E lectronic
Fund T ran fers). The com m entary applies
and interprets the requirem ents of
Regulation E and is a substitu te for
individual s ta ff in terp retations o f the
regulation. T he rev ision ad d resses
question s that have arisen about the
requirem ents o f the regulation relating
to the rev o catio n of authority for
preauthorized transfers.

Thursday, April 5, 1990

s ta ff com m entary (Sup. II to 12 CFR part
205) to interpret the regulation. The
com m entary is designed to provide
guidance to fin an cial institutions and
others in applying the regulation to
sp ecific situ ations. T h e com mentary' is
updated period ically to ad dress
significant questions that arise. This
notice con tain s the eighth update, w hich
w as proposed for com m ent on
N ovem ber 1 5 ,1 9 8 9 . The rev isions are
e ffectiv e April 1 .1990.




1. T h e authority citatio n for part 205
con tin ues to read:
Authority: Pub. L. 95-603. 92 Slat. 3730 (15

U.S.C. 1693b).

2. Com m ent 10-19.5 Q is added to
(2)
D escription o f revisions. Follow ing read as follow's:
is a b rie f d escrip tion of the revision to
the com m entary.

Sectio n 205.19— P reau th orized T ran sfers

10-19.5 Q:

Q uestion 19-19.5

Preauthorized Debits— Revocation of
Authorization. A consumer authorizes a

Q uestion 10-1 9 .5 ad d resses the
situ ation where a consu m er revokes
authorization fo r preauthorized d ebits
initiated by a designated payeeoriginator. T he question clarifies that
when an account-holding financial
EFFECTIVE DATE: April 1. 1990.
institution is instructed by the consum er
FOR FURTHER INFORMATION CONTACT:
that an earlier authorization is not
C on tact M ary Jane S e e b a c h or Kurt
Sch um acher. S ta ff A ttorneys, D ivision of longer valid, it must blo ck future
paym ents to the p ayee-originator in
Consum er A ffairs, at (202) 452-3667 or
keeping with the consum er's
(202) 452-2412. F o r the hearing-im paired
instructions.
only, c o n ta ct E a m e stin e Hill or
D orothea Thom pson,
T h e title has been revised to m ake
T eleco m m u n icatio n s D ev ice for the
d e a r that this pertains only to the
D eaf, at (202) 452-3544. B oard of
rev ocation of authorization for all
G overnors o f the Fed eral R eserve
subsequ ent d ebits by a given payeeSystem . W ashington. DC 20551.
originator, and not to a con su m er’s order
SUPPLEMENTARY INFORMATION: (1)
to stop paym ent o f a p articular debit,
G eneral. T h e E lectro n ic Fund T ra n sfe r
w hich is d escribed in Q uestion 10-19.
A ct (15 U .S.C . 1693 et s e q .) governs any
tran sfer of funds that is e lectro n ically
initiated and that d ebits or cred its a
List o f S u b je c ts in 12 C FR Part 205
con su m er’s accoun t. This statu te is
im plem ented by the B o ard ’s Regulation
B anks. Banking. Consum er protection.
E (12 CFR part 205).
E iectro n ic fund tran sfers, Fed eral
T h e Board has published an official

(3)
T ext o f revisions. Pursuant to
authority granted in-section 904 o f the
E lectro n ic Fund T ra n sfe rs A ct, 15 U .S.C.
1693b , the Board am ends the official
s ta ff com m entary to Regulation E (12
CFR part 205. Supp. II) as follow s:

R eserve System . P en alties.

5

designated payee to originate electronic fund
transfers from the consumer’s account. The
consumer later revokes that authorization,
and instructs the account-holding financial
institution to block all subsequent debits
initiated by that payee-originator. Must the
financial institution comply with the
consumer's instructions, or may it wait for
the originator to cease the initiation of
automatic debits?
A: Since the financial institution has been
notified that the consumer’s authorization is
not longer valid, the institution must block all
future debits transmitted by that payeeoriginator. The financial institution may
confirm that the consmer has informed the
payee-originator of the revocation. The
institution may also require a copy of the
consumer's revocation.
Board of Governors of the Federal Reserve
System. March 29, 1990.
William YV. Wiles,
Secretary of the Board.

(FR Doc. 90-7707 Filed 4-4-90: 8x45 am)

BILLING CODE 6210-01-M

13103

Rules and Regulations

Federal Register
Vol. 55. No. 68

Official Staff Commentary To Regulation Z
FEDERAL RESERVE SYSTEM
12 C F R Part 226

[Reg. Z; TIL-1 J

Truth in Lending; Update to Official
Staff Commentary
Board of Governors of the
Federal Reserve System.
a c t io n : 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
Regulation Z and is a substitute for
individual staff interpretations. The
majority of the revisions address the
amendments to Regulation Z issued in
April 1939 to implement the Fair Credit
and Charge Card Disclosure Act of 1988
and the amendments to the regulation
issued in June 1989 to implement the
Home Equity Loan Consumer Protection
Act of 1988. The commentary
incorporates much of the guidance
provided when those regulatory changes
were adopted and addresses additional
questions that have been raised about
application of the new requirements as
well as several issues concerning other
parts of the regulation.
DATES: Effective April 1,1990, but
compliance optional until October 1,
1990.
sum m ary:

FOR FURTHER INFORMATION CONTACT:

The following attorneys in the Division
of Consumer and Community Affairs, at
(202) 452-3667 or (202) 452-2412.
Charge
Jane Ahrens, Adrienne Hurt,
John Wood.

FairCreditand
Actissues:

CardDisclosure

Home Equity Loan Consumer Protection
Act issues: Sharon Bowman, Michael
Bylsma, Leonard Chanin, Thomas
Noto.
Jane
Ahrens, Adrienne Hurt, John Wood.

Other open-end credit issues:




Monday. April 9. 1990

Closed-end credit issues: Michael

Bylsma. Kurt Schumacher, Mary Jane
Seebach.
For the hearing impaired only.
Telecommunications Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson, at (202) 452-3544. Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION: (1)

General.

The Truth in Lending Act (15
U.S.C. 1601
.) governs consumer
credit transactions and is implemented
by the Board's Regulation Z (12 CFR
part 226). Effective October 13,1981, an
official staff commentary (TIL-1, Supp. i
to 12 CFR part 226) was published to
interpret the regulation. The
commentary is designed to provide
guidance to creditors in applying the
regulation to specific transactions and is
updated periodically to address
significant questions that arise. There
have been eight general updates and one
limited update. This update reflects
material that was published for
comment at 54 FR 48253 (November 22,
1989). Creditors are free to rely on the
revised commentary as of April 1,1990.
although they need not follow the
revisions until October 1,1990. (2)
Within the last year the
Board adopted two major sets of
amendments to Regulation Z. The First
of these were amendments published in
the Federal Register on April 6, 1989 (54
FR 13855) to implement the Fair Credit
and Charge Card Disclosure Act of 1988,
Pub. L. No. 100-583, 102 Stat. 2960
(FCCCDA). (The Board also adopted
technical amendments to Regulation Z,
in further implementation of FCCCDA,
published on August 11,1989, 54 FR
32953.)
The second major set of amendments
to Regulation Z comprised amendments
published in the Federal Register on
June 9 , 1989 (54 FR 24670) to implement
the Home Equity Loan Consumer
Protection Act of 1988, Pub. L. No. 100709,102 Stat. 4725 (HELCPA). (See also
the correction notice published July 7,
198a 54 FR 28665.)
In addition to the issues arising with
regard to the FCCCDA and HELPCA,
additional revisions are made to other
provisions of Regulation Z. For example,
the commentary revisions discuss tax
refund anticipation loans: a possible
new mortgage product, the price-level
adjusted mortgage; and open-end credit
advertising.

et seq

Revisions.

6

The text of all of the revisions is
presented below in the order in which it
appears in the commentary. To facilitate
review, however, the descriptions of the
revisions are presented separately for
the credit and charge card provisions,
the home equity provisions, and the
other provisions.
Credit and Charge Card Provisions
The Final commentary to the
regulation incorporates much of the
supplementary information that
accompanied the amendments to
Regulation Z implementing the
FCCCDA. Additional interpretations
and interpretations included in the
proposed comments that have been
revised are noted below.

Section 226.5a—Credit and Charge Card
Applications and Solicitations
Comments 5 a -l and -2 have been
added, respectively, to provide general
guidance on the coverage of § 226.5a
and to explain that a card issuer may
establish procedures so that a single
disclosure statement complies with
§ § 226.5a and 226.6. (Proposed comment
5a(e)(2}-3 has been incorporated into
comment 5a-2.)
5a(a) General Rules
Comment 5a(a)(2)-3 has been revised
to emphasize that only the information
required or specifically permitted by this
section may be disclosed in the required
table: any other credit information must
appear outside of the table.
5a(b) Required Disclosures
Comment 5a(b)(l)-3 has been revised
to further clarify the timing rules for a
variable rate disclosure under
§ 226.5a(d)(2) in telephone applications
and solicitations: the rules correspond to
those under § 226.6(a)(2). Comment
5a(b)(6)-l has been revised to
emphasize that if a card issuer uses a
balance calculation method identified
in § 226.5a(g), only the name, and not a
description of the method, may be
included in the required table.
5a(c) Direct Mail Applications and
Solicitations
Comment 5a(c)-l explains which rules
govern applications and solicitations in
catalogs and other publications mailed
to consumers. Generally, the "take-one"
rules apply. Nevertheless, where a
primary purpose of a card issuer's

13104

Federal Register /

V ol.

55,

No.

68 /

M o n d a y , A p ril

9, 1990 /

mailing is to offer credit or charge card
accounts, (for example, where a card
issuer mails to a credit-based
prescreened list of addressees a catalog
containing an application or
solicitation,] the direct mail rules apply.
The comment also provides further
guidance on the use of a single
application form for both direct mailings
and “take-ones."
5a(g) Balance Computation Methods

applications for purposes of preemption
has been changed. Comments 28(d) -1
and -2 have been revised to explain that
a “dual purpose" application or
solicitation—that is, one used to open
either a card account for consumer
purposes or a card account for business
purposes—is subject only to the
requirements of the federal law.

Defined

Although much of the final
com m entary is self-exp lan ato ry ,
provisions that have been changed
significantly from the proposal are
highlighted below . In addition, there are
two areas that w ere d iscu ssed in the
proposal that are not ad d ressed in the
final com m entary: the rule relating to
delaying d etailed d isclo su res for the
repaym ent period o f a hom e equity plan,
and the provision allow ing a creditor to
suspend ad v an ces o f credit if the rate
cap is reached under the plan. The
Board published a no tice requesting
com m ent on w hether it should d elete or
rev ise the regulation relating to these
two issues on M arch 2 1 ,1 9 9 0 (55 FR
10465). Depending on the resolu tion of
these issues, the B oard may m ake
conform ing chang es to the com m entary

Comment 5a(g)-2 has been revised to
further explain the “two-cycle average
daily balance” method.
Section 226.9— S u b seq u en t D isclosure
R equ irem en ts

9(e) Disclosures Upon Renewal of Credit
or Charge Card
The 30-day timing rule stated in the
proposal has been changed in comment
9(e)—1 on the disclosure of a variable
rate in a renewal notice; the rule now
corresponds to the rule under
§ 226.6(a)(2). Comment 9(e)-6 has been
revised primarily to explain that a card
issuer must clearly disclose when a
cardholder may terminate an account to
avoid paying a renewal fee. Comments
9(e)—7 through -9 have been added to
provide general guidance on the timing
requirements under § 226.9(e).
(Interpretations in proposed comment
9(e)(1)—
1, which have been revised and
simplified, are now included in these
comments.) Comment 9(e)—
7 provides
that where card issuers give renewal
notices under § 226.9(e)(1), cardholders
must be given the lesser of 30 days or 1
full billing cycle to make a decision
about terminating the account; under
section 226.9(e)(2)(i), the cardholder has
30 days to make a decision. Comment
9(e)—
e states that notices are provided
when mailed or delivered. Comment
9(e)—
9 provides that in situations where
a cardholder terminates an account and
a renewal fee appears on a periodic
statement, the card issuer must promptly
reverse or withdraw the renewal fee.
The comment also emphasizes that once
a cardholder terminates an account, no
additional action by the cardholder to
terminate may be required.
9(e) Notification on Periodic Statements
Comment 9(e)(3)—
1 has been revised
to give further guidance where renewal
notices are combined with periodic
statements.

Section 226.28—Effect on State Laws

28(d) Special Rule for Credit and Charge
Cards
T he position in the proposal on the
treatm ent of "du al purpose"




H ome Equity Provisions

Section 226.5b—Requirements for Home
Equity Plans
T he com m entary to § 226.5b dealing
with gen eral cov erag e d iffers from the
proposed com m entary in sev eral
resp ects. First, com m ent 5 b -2 d iscu ssing
transition rules and ren ew als o f plans
entered into b efo re the e ffectiv e d ate of
the HELCPA has been added, at the
requ est o f sev eral com m enters. Second ,
as d iscu ssed above, in light o f the
B o ard 's proposed rev ision to the rule
relating to d elayed timing of providing
d etailed d isclo su res about any
repaym ent phase o f a plan, the proposed
com m entary provisions d iscu ssing that
issue have not b e e n retained pending
the B o ard ’s final actio n on the issue.
Third, ad ditional guidance and
e xam p les have b een added to com m ent
5b—4 to d iscu ss the lim ited
circu m stan ces w hen subpart C applies
to hom e equity plans.
5b(b) Tim e of D isclosu res
Com m ent 5 b (b )-2 includes ad dition al
guidance about gen eral purpose
ap p lications. It e xp lain s that the
d isclo su res and brochure need not
acco m p any gen eral purpose
ap p lications provided in resp o nse to a
con su m er’s inquiry only about credit
other than a hom e equity plan unless
prom otional m aterial about hom e equity
plans is included in the mailing.

7

R u le s a n d R e g u la tio n s
5b(c) D uties of Third Parties

Comment 5b(c)-l explains that the
creditor is not responsible for ensuring
that a third party complies with its
obligations under § 226.5b(c).
5b(d) Content of Disclosures
Com m ent 5b (d )-2 has been added to
d iscu ss the duty of creditors to respond
to requ ests from the consum er for
inform ation about the plan. The
su b stan ce o f this com m ent previously
w as in proposed com m ents 5b (d )(4 )(ii)-l
and 5b(d )(8)-2. Com m ent 5b (d )(4 )(i)-l
c la rifie s that fees im posed when a
consu m er voluntarily clo se s out an
acco u n t prior to its scheduled m aturity
need not be d isclo sed under that
section . Com m ent 5 b (d )(5 )(i)-l clarifies
how to d isclo se the length of a plan
w hen the length is indefinite. M ore
guidance is offered on the types of fees
that must be d isclo sed under § 226.5b(d)
(7) and (8), as w ell as m ore exam p les of
the type o f fees that need not be
d isclo sed . A num ber of com m enters
o b je cte d to proposed com m ent 5b(d)(8)—
1 that prem iums for property insurance
required by the cred ito r must be
d isclo sed in all c a se s . T h ese
com m enters argued, am ong other things,
that in m any c a s e s insuran ce already
w as being carried on the property and
that it w ould be difficult to provide an
a ccu ra te d isclosure in m ost c a se s
b e ca u se o f the m any facto rs involved in
pricing the insurance. In light o f these
co n sid eratio n s, com m ent 5 b (d )(8 )-l has
been revised to perm it cred itors to
d isclo se eith er the am ount o f the
premium or the fa ct that property
in su ran ce is required. Com m ent
5 b (d )(9 )-l h as been added to provide
guidance on w hen the d isclosure
con cern in g negative am ortization must
be m ade.
A dd itional guidance regarding the
h isto rical exam p le required under
§ 226.5b(d )(12)(xi) h as been included in
the final com m entary in response to
com m en ters’ suggestions. Com m ent
5 b (d )(1 2 )(x i)-l exp lain s that the
exam p le must b e updated as soon as
re a so n a b ly p o ssible afte r the latest
y e a r's ind ex valu e beco m es av ailab le
for c o n siste n cy with the rules for closed end a d ju sta b le -ra te m ortgages.
Com m ent 5b (d )(12)(x i)-3 includes
exam p les o f how to d isclo se plans with
draw and repaym ent periods o f varying
lengths in the h isto rical exam ple.
5b(f) Lim itations on Home Equity Plans
Com m ent 5b(f)(2)(ii)—1 clarifie s w hat
co n stitu tes failu re to m eet repaym ent
term s for purposes o f the cred ito r’s right
to term inate and a c ce le ra te . A
sig n ifican t num ber of com m enters

Federal Register / Vol.

objected to the proposed comment on
the grounds that the statute and
regulation provide that what constitutes
failure to make payments should be
determined by the agreement between
the parties. The final comment has been
revised accordingly. Creditors, of
course, must comply with any state laws
that address any right of the consumer
to a right to cure notice, or impose other
requirements.
Though cred itors are prohibited from
changing the margin after a plan is
opened, the referen ce to the margin as a
term that need not be d isclo sed has
been om itted from the com m ent 5 b (f)(3 )1 sin ce m argins must be provided to the
consum er upon request. Com m ent
5b(f)(3)-2 exp lain s in more d etail the
b a sis for allow ing cred itors to p ass on
in creases in property ta x e s and charges
for property and cred it insuran ce. The
Board does not b eliev e that it w as
intended that cred itors a b so rb bona fide
in cre ase s in such charges during the life
of the plan 9ince ta x e s are im posed by a
governm ent body and are beyond the
control of the creditor, and insuran ce
provides ben efits apart from the line or
is voluntary. Com m ent 5 b (f)(3 )(iii}-l h as
been revised by deleting the
requirem ent that an ad v an ce n o tice of
change in term s be provided w hen a
change is m ade pursuant to a w ritten
agreem ent b etw een the parties. U nder
such circu m stan ces, the agreem ent itse lf
serves as ad equ ate n otice. An exam p le
h a s also been added to illu strate the
relation ship betw een the gen eral
prohibition on un ilateral ch an g es and
the consu m er’s ability to agree in
writing to a contem poraneou s change.
Com m ent 5b(f)(3)(vi)-^* h a s been
revised to perm it a creditor to require
that a requ est for rein statem en t of
suspended credit privileges b e in
writing, a s long a s the con su m er is
notified of the requirem ent. Com m ent
5b (f)(3)(v i)-5 c la rifie s that a cred ito r
may require all obligors to requ est
rein statem en t w hen credit privileges
have been suspended upon the requ est
of one of them. Com m ent 5b(f)(3)(v i}-7
c la rifie s that a m aterial change in
fin an cial circu m stan ces e x ists w hen a
consum er files for bankruptcy. Proposed
com m ent 5b(f)(3)( vi)—10 h as not b e e n
incorporated in the final com m entary
sin ce the B o ard is currently taking
com m ent on a proposal that could d elete
o r rev ise § 226.5b(f}(3)(vi)(G ) of the
regulation.
5b(g) Refund of F ees
T h e referen ce to insu ran ce prem iums
in proposed com m ent 5 b (g )-l has been
d eleted in the final sin ce it is unlikely
that ad d ition al in su ran ce w ould have to
be pu rchased in m ost tran sactio n s.




55,

No.

68

/ Monday,

April 9, 1990 / Rules

Com m ent 5 b (g )-l h as also b een revised
to reflect the fact that if there is a
change in inform ation provided in
response to a request by the consum er
pursuant to § 226.5b(d), and the
consum er a s a result d ecid es to not
enter into the plan, the cred ito r must
refund all fe e s paid.

Section 226.6—Initial Disclosure
Statem ent

6(e) Home Equity Plan Inform ation
Com m ent 6(e)—1 cla rifie s that w hile
cred itors must d isclo se a list of the
con ditions that perm it them , for
exam ple, to term inate the plan, they
need not identify such conditions in the
con tract in a m anner other than is
generally required by the form at rules in
§ 226.5(a)(1). Som e com m enters
m isunderstood the proposal as imposing
a new form at rule for this d isclosure.
Com m ent 6 (e }-4 is rev ised to clarify
that, to the exten t the v ariab le ra te
inform ation in footnote 12 and the
annual p ercentage rate are the sam e for
the draw and an y repaym ent period, the
cred itor need not rep eat such
inform ation as long as the cred ito r
sta te s that the inform ation ap p lies to
both p h ases. Inform ation in the proposal
relatin g to d elayin g the tim ing o f giving
the more d etailed repaym ent d isclo su res
has not b e e n incorp orated in the final
com m entary. Pending final B oard actio n
on this issue, the com m entary m ay be
revised as approp riate.

Section 226.9—Subsequent Disclosure
R eq u irem en ts
9(c) Change in T erm s

Com m ent 9 ( c )( l} - 6 is rev ised to re fle ct
that a cred ito r need not provide ad v an ce
n o tice of ch an g es to the term s o f a home
equity plan if the change is m ade by
w ritten mutual agreem ent.
Proposed com m ent 9(c)(3)—1 has been
renum bered as 9(c)(3 )-2 . N ew com m ent
9 (c )(3 )-l has b e e n added to state that if
a creditor requires the consum er to
request rein statem en t of credit
privileges to be in writing, the cred ito r
must state that fact w hen notifying the
consum er of the suspension.

Section 226.15—Right of Rescission
15(a) C onsum er’s Right to R escin d
Com m ent 1 5 (a )(3 }-2 clarifie s that
failu re by a cred ito r to give any o f the
§ 226.5b d isclo su res does not prevent
the running of the rescissio n period, but
may result in civil liability or
ad m inistrativ e san ctio n s.

and Regulations

13105

Section 226.16 Advertising
16(d) A dd itional Requ irem ents for Home
Equity Plans
Com m ent 1 6 {d }-l is rev ised to provide
that a statem ent such as ‘Mow fe e s " does
not trigger the need to sta te ad dition al
inform ation. Com m ent 1 6 {d }-2 is revised
to track the d isclo su re rule in com m ent
5 b (d )(8 )-l with regard to property
insuran ce. Com m ent 16(d )-5 is revised
to clarify the relation of the hom e equity
advertising rules to the o ther open-end
ad vertising provisions. In p articular, it
points out that if the cred itor is required
to s ta te the annual p ercen tage rate
under § 226.16(d)— due to the use o f a
trigger term — the d isclo su res in
§ 226.16(b) also would be required to be
included in the ad vertisem ent.
O ther P rovision s o f R egu lation Z

Section 226.12—Special Credit Cord
Provisions
Com m ent 1 2 (a)(2}-9 provides
gu idance to m ultiple en tities that sh are
resp o n sibility fo r a card, such a s w here
a single card h a s been issued by a long­
d ista n ce teleph one com pany but both
that com pany and a lo cal teleph one
com pany p articip ate in m atters such as
auth orization and billing. The
com m entary c la rifie s that the entity that
issu ed the card m ay rep lace it on an
un so licited b asis if it term in ates the
existin g card , but that the other entity
m ay not issu e an u n so licited card .
(Thus, in this exam ple, the lo cal
com pany could not issu e a n ew card of
its ow n on an un so licited b a s is .)
In the proposed com m entary update,
com m ent w as requ ested on w hether the
com m entary should b e rev ised so as to
perm it an ad dition al credit card to be
issued on an u nsolicited b a s is by any o f
the e n titie s in the exam ple d escrib ed
abo v e, even if the original card w ere not
term inated. A few com m enters
supported such a revision. T h e Board
d o es not b eliev e that con v incing policy
reaso n s have been d em onstrated,
how ever, for altering its long-standing
“o n e-fo r-o n e" rule.

Section 226.16—Advertising
Com m ent 16(b)—7 is rev ised to give
further gu idance on term s that trigger
ad d ition al d isclo su res. F o r exam ple, the
com m ent exp lain s th at the p h rase
"sm a ll m onthly se rv ic e charg e on the
rem aining b a la n c e " triggers ad d ition al
d isclo su res b e ca u se the statem en t
d isclo ses how the am ount o f the fin an ce
charge w ill b e d eterm ined, not b ecau se
the statem en t uses the term “sm a ll" in
d escribin g that a m onthly service charge
will be asse sse d .

13106

Federal Register

/ V o l. 55.

Comment 16(b)-9 replaces a portion of
the proposed revision to comment 16(b)—
7, and discusses deferred billing and
deferred payment programs. The
comment clarifies that a statement
regarding when finance charges begin to
accrue is a triggering term, but that a
statement concerning the deferral of
billing or of payment, by itself, will not
trigger additional disclosures.
Sectio n 226.17— G en era l D isclosure
R equ irem en ts

17(c) Basis of Disclosures and Use of
Estimates
The proposed comments concerning
‘‘price level adjusted mortgages”
(PLAMs) are included in the final
commentary with minor revisions.
(PLAMs have been authorized to be
insured by the Department of Housing
and Urban Development in a
demonstration program.)
Comment 17(c)(1)—
17. which
introduces special rules for disclosures
about income tax refund anticipation
loans (RALs), is revised from the
proposal to clarify that the creditor must
ignore a demand feature and instead
base the disclosures on the estimated
date a refund will be delivered to the
consumer (such as by direct deposit into
the consumer’s account) only if.
pursuant to the legal obligation,
repayment of the loan is required at that
time. The final comment also makes
clear that a lender’s practice of
demanding payment w'hen the refund is
delivered does not determine what the
legal obligation requires; this issue must
be resolved according to applicable
state or other law. Some commenters
assumed that the proposed comment
would require RAL lenders in all cases
to base the disclosures upon the
estimated date a refund would be
delivered regardless of the terms of the
legal obligation. The comment (both as
proposed and revised) is more limited
due to the need for consistency with the
general requirement that the disclosures
reflect the terms of the legal obligation.

Section 226.19—Certain Residential
Mortgage Transactions

19(b) Certain Variable-Rate
Transactions
Comment 19(b)—
3 has been revised to
clarify that a creditor may not delay
providing disclosures in transactions
involving either a legal agent or any
other third party that is not an
"intermediary agent or broker.” The
factors provided to determine whether
or not a transaction involves an
"intermediary agent or broker" have
been revised to address commenters’
concern that the creditor’s knowledge



No.

6 8 / M o n d a y , A p r il 9. 1 9 9 0 / R u l e s a n d R e g u l a t i o n s

and control of the broker’s actions
should be determinative. Therefore, the
third factor describing the amount of
work completed by the broker has been
revised to reflect that such knowledge
would be based on prior dealings
between the creditor and broker and on
the creditor's requirements for accepting
applications. Comment 19(b)—
5 is
changed from the proposal to clarify that
certain disclosure provisions are
inapplicable to PLAMs or similar
mortgages only to the extent that they
relate to the addition of a margin,
changes in the interest rate, or interest
rate discounts: those provisions still
could apply in other respects.

Section 226.20—Subsequent Disclosure
Requirements

20(c) Variable-Rate Adjustments
Comment 20(c)—
2 is revised to state
that PLAMs or similar mortgages are not
subject to the requirements of that
section.
List of Subjects in 12 CFR Part 226

Advertising, Banks. Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Rate limitations, Truth in Lending.
(3)
Text of revisions. Pursuant to
authority granted in section 105 of the
Truth in Lending Act (15 U.S.C. 1604 as
amended), the Board amends the official
staff commentary to Regulation Z (12
CFR part 226 Supp. I) as follows:
PART 226—[AMENDED]

1. The authority citation for part 226
continues to read:
Authority: Truth in Lending Act, 15 U.S.C.
1604 and sec. 2 Pub. L. 100-583,102 Stat. 2960:
sec. 1204(c), Competitive Equality Banking
Act. Pub. L 100-86,101 Stat. 552.

it refers to credit cards other than charge
cards.
2. Comment 2(a)(20)-5 is amended by
adding parenthetical material before the
last sentence of the last paragraph of the
comment to read as follows:

2(a)(20) "Open-End Credit"
*

*

5.

*

*

Reusable line.

*

* * *

* * * (The rules in $ 226.5b(f), however,
limit the ability of a creditor to suspend
credit advances for home equity
plans.) * * *
*

*

*

*

*

3. Comment 2(a)(24)—
6 is added to
read as follows:

2(a)(24) "Residential Mortgage
Transaction ”
*

*

6.

*

*

*

Multiple purpose transactions. A

transaction meets the definition of this
section if any part of the loan proceeds will
be used to finance the acquisition or initial
construction of the consumer’s principal
dwelling. For example, a transaction to
finance the initial construction of the
consumer's principal dwelling is a residential
mortgage transaction even if a portion of the
funds will be disbursed directly to the
consumer or used to satisfy a loan for the
purchase of the land on which the dwelling
will be built.
Subpart B— Open-End Credit

Section 226.5 General Disclosure
Requirements
4. Comment 5(b)(1)—1 is amended by
adding two sentences after the second
sentence to read as follows:

5(b) Time of Disclosures
5(b)(1) Initial disclosures
1.
Disclosures before the first
transaction. * * * The prohibition on the

Section 226.2 Definitions and Rules of
Construction

payment of fees other than application or
refundable membership fees before initial
disclosures are provided does not apply to
home equity plans subject to $ 228.5b. See the
commentary to $ 226.5b(h) regarding the
collection of fees for home equity plans
covered by § 226.5b. * * *
*
*
*
*
*

1.
Comment 2(a)(15)-3 is added to
read as follows:

5. Comments 5 a -l through 5a(g)-2 and
headings are added to read as follows:

2. Supplement I to part 226 is amended
as follows:
Subpart A—General

2(a) Definitions
2(a)(15) "Credit Card"
*

*

*

*

Charge card.

*

3.
Generally, charge cards are
cards used in connection with an account on
which outstanding balances cannot be
carried from one billing cycle to another and
are payable when a periodic statement is
received. Under the regulation, a reference to
credit cards generally includes charge cards.
The term “charge card" is, however,
distinguished from "credit card” in §§ 226.5a,
226.9(e). 228.9(f). and 226.28(d), and
appendices G-10 through G-13. When the
term “credit card” is used in those provisions.

9

Section 226.5a Credit and Charge Card
Applications and Solicitations

General.

1.
Section 226.5a generally
requires that credit disclosures be contained
in application forms and preapproved
solicitations initiated by a card issuer to open
a credit or charge card account. (See the
commentary to § 226.5a(a)(3) and (e) for
exceptions: see also S 226.2(a)(15) and
accompanying commentary for the definition
of charge card.)
2.
The initial
disclosures required by 5 226.6 do not
substitute for the disclosures required by
§ 226.5a: however, a card issuer may

Combining disclosures.

Federal Register

/ Vol. 55, No. 68 / Monday, April 9, 1990 / Rules and Regulations

establish procedures so that a single
disclosure statement meets the requirements
of both sections. For example, if a card issuer
in complying with § 226.5a(e)(2) provides all
the applicable disclosures required under
| 226.6, in a form that the consumer may keep
and in accordance with the other format and
timing requirements for that section, the
issuer satisfies the initial disclosure
requirements under § 226.6 as well as the
disclosure requirements of § 226.5a(e)(2). Or
if. in complying with § 226.5a(c) or
§ 226.5a(d)(2), a card issuer provides an
integrated document that the consumer may
keep, and provides the § 226.5a disclosures
(in a tabular format) along with the
additional disclosures required under § 226.6
(presented outside of the table), the card
issuer satisfies the requirements of both
§§ 226.5a and 226.8.

5c(a) General Rules
5a(a)(2) Form of Disclosures
1. Prominent location. Certain of the

required disclosures provided on or with an
application or solicitation must be
prominently located—that is, readily
noticeable to the consumer. There are,
however, no requirements that the
disclosures be in any particular location or in
any particular type size or typeface.
2. Multiple accounts or varying terms. If a
tabular format is required to be used, card
issuers offering several types of accounts
may disclose the various terms for the
accounts in a single table or may provide a
separate table for each account. Similarly, if
rates or other terms vary from state to state,
card issuers may list the states and the
various disclosures in a single table or in
separate tables.
3. Additional information. The table
containing the disclosures required by
§ 226.5a should contain only the information
required or permitted by this section. (See the
commentary to 5 226.5a(b) for guidance on
information permitted in the table.) Other
credit information may be presented on or
with an application or solicitation, provided
such information appears outside the
required table.
4. Location of certain disclosures. A card
issuer has the option of disclosing any of the
fees in $ 226.5a(b) (8) through (10) in the
required table or outside the table.
5. Terminology. In general,
§ 226.5a(a)(2)(iv) requires that the
terminology used for the disclosures specified
in § 228.5a(b) be consistent with that used in
the disclosures under §§ 226.6 and 226.7. This
standard requires that the § 226.5a(b)
disclosures be close in meaning to those
under §§ 226.8 and 226.7; however, the
terminology used need not be identical. In
addition, § 226.5a(a)(2)(i) requires that the
headings, content, and format of the tabular
disclosures be substantially similar, but need
not be identical, to the tables in Appendix G.
A special rule applies to the grace period
disclosure, however: the term “grace period”
must be used, either in the heading or in the
text of the disclosure.
6.

Deletion of inapplicable disclosures.

Generally, disclosures need only be given as
applicable. Card issuers may, therefore,
delete inapplicable headings and their




13107

variable-rate disclosures in telephone
applications and solicitations subject to
§ 226.5a(d), the card issuer must provide an
annual percentage rate currently applicable
when oral disclosures are provided under
§ 226.5a(d)(l). For the alternate disclosures
under § 226.5a(d)(2), the card issuer must
provide the annual percentage rate in effect
at the time the disclosures are mailed or
delivered. A rate in effect also includes the
5a(a)(3) Exceptions
rate as of a specified date (which rate is then
1. Coverage. Certain exceptions to the
updated from time to time, for example, each
coverage of § 226.5a are stated in
calendar month) or an estimated rate
§ 226.5a(a)(3); in addition, the requirements of provided in accordance with § 226.5(c).
§ 226.5a do not apply to the following:
4. Variable-rate accounts—other
• Lines of credit accessed solely by
disclosures. In describing how the applicable
account numbers
rate will be determined, the card issuer must
• Addition of a credit or charge card to an
identify the index or formula and disclose
existing open-end plan
any margin or spread added to the index or
2. Noncoverage of “consumer initiated"
formula in setting the rate. The card issuer
requests. Applications provided to a
may disclose the margin or spread as a range
consumer upon request are not covered by
of the highest and lowest margins that may
§ 226.5a, even if the request is made in
be applicable to the account. A disclosure of
response to the card issuer’s invitation to
any applicable limitations on rate increases
apply for a card account. To illustrate, if a
or decreases may also be included in the
card issuer invites consumers to call a tolltable.
free number or to return a response card to
5. Introductory rates—discounted rates. If
obtain an application, the application sent in
the initial rate is temporary and is lower than
response to the consumer’s request need not
the rate that will apply after the temporary
contain the disclosures required under
rate expires, the card issuer must disclose the
§ 226.5a. Similarly, if the card issuer invites
annual percentage rate that would otherwise
consumers to call and make an oral
apply to the account. In a fixed-rate account,
application on the telephone, 5 226.5a does
the card issuer must disclose the rate that
not apply to the application made by the
consumer. If, however, the card issuer calls a will apply after the introductory rate expires.
In a variable-rate account, the card issuer
consumer or initiates a telephone discussion
must disclose a rate based on the index or
with a consumer about opening a card
formula applicable to the account in
account and contemporaneously takes an
accordance with the rules in § 226.5a('b)(l)(ii)
oral application, such applications are
subject to S 226.5a, specifically § 226.5a(d).
and comment 5a(b)(l)-3. An initial
3. General purpose applications. The
discounted rate may be provided in the table
requirements of this section do not apply to
along with the rate required to be disclosed if
general purpose applications unless the
the card issuer also discloses the time period
application, or material accompanying it.
during which the introductory rate will
indicates that it can be used to open a credit
remain in effect.
or charge card account.
6. Introductory rates—premium rates. If the
initial rate is temporary and is higher than
5a(a)(5) Certain Fees that Vary by State
the permanently applicable rate, the card
1. Manner of disclosing range. If the card issuer must disclose the initial rate. The
issuer discloses a range of fees instead of
issuer may disclose in the table the rate that
disclosing the amount of the fee imposed in
would otherwise apply if the issuer also
each state, the range may be stated as the
discloses the time period during which the
lowest authorized fee (zero, if there are one
initial rate will remain in effect.
or more states where no fee applies) to the
5a(b)(2)
Fees for Issuance or A vailability
highest authorized fee.
1.
Membership
fees. Membership fees for
5a(b) Required Disclosures
opening an account must be disclosed under
5a(b)(l) Annual Percentage Rate
this paragraph. A membership fee to join an
organization that provides a credit or charge
1. Periodic rate. The periodic rate,
card as a privilege of membership must be
expressed as such, may be disclosed in the
table in addition to the required disclosure of disclosed only if the card is issued
automatically upon membership. Such a fee
the corresponding annual percentage rate.
need not be disclosed if membership results
2. Variable-rate accounts — definition. For
merely in eligibility to apply for an account.
purposes of § 226.5a(b)(l), a variable-rate
2. Enhancements. Fees for optional services
account exists when rate changes are part of
in addition to basic membership privileges in
the plan and are tied to an index or formula.
a credit or charge card account (for example,
(See the commentary to § 226.6(a)(2) for
travel insurance or card registration services)
examples of variable-rate plans.)
need not be disclosed under this paragraph if
3. Variable-rate accounts—rates in effect.
the basic account may be opened without
For variable-rate disclosures in direct mail
paying such fees.
applications and solicitations subject to
3. One-time fees. Disclosure of non-periodic
§ 226.5a(c), and in applications and
fees is limited to fees related to opening the
solicitations made available to the general
account, such as one-time membership fees.
public subject to 9 228.5a(e), the rules
concerning accuracy of the annual percentage The following are examples of fees that
should not be disclosed in the table:
rate are stated in § 226.5a(b)(l)(ii). For
corresponding boxes in the table. For
example, if no transaction fee is imposed for
purchases, the disclosure form may contain
the heading "Transaction fee for purchases"
and a box showing "none,” or the heading
and box may be deleted from the table. There
is an exception for the grace period
disclosure, however: even if no grace period
exists, that fact must be stated.

10

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Federal Register / Vol. 55, No. 68 / Monday, April 9, 1990 / Rules and Regulations

• Fees for reissuing a lost or stolen card
• Statement reproduction fees
• Application fees described in
§ 226.4(c)(1)
4. Waived or reduced fees. If fees required
to be disclosed are waived or reduced for a
limited time, the introductory fees or the fact
of fee waivers may be provided in the table
in addition to the required fees if the card
issuer also discloses how long the fees or
waivers will remain in effect.
5. Fees stated as annual amount. Fees
imposed periodically must be stated as an
annual total. For example, if a fee is imposed
quarterly, the disclosures would state the
total amount of the fees for one year. (See,
however, the commentary to § 226.9(e) with
regard to disclosure of such fees in renewal
notices.)

5a(b)(4) Transection Charges
1.
Charges imposed by person other than
card issuer. Charges imposed by a third
party, such as a seller of goods, would not be
disclosed under this section; the third party
would be responsible for disclosing the
charge under § 226.9(d)(1).

5a(b)(5) Grace Period
1. How disclosure is made. The card issuer

may, but need not, refer to the beginning or
ending point of any grace period and briefly
state any conditions on the applicability of
the grace period. For example, the grace
period disclosure might read ‘‘30 days" or "30
days from the date of the periodic statement
(provided you have paid your previous
balance in full by the due date)."

5a(b)(6) Balance Computation Method
1. Form of disclosure. In cases where the

card issuer uses a balance calculation
method that is identified by name in the
regulation, the card issuer may only disclose
the name of the method in the table. In cases
where the card issuer uses a balance
computation method that is not identified by
name in the regulation, the disclosure in the
table should clearly explain the method in as
much detail as set forth in the descriptions of
balance methods in section 226.5a(g). The
explanation need not be as detailed as that
required for the disclosures under
§ 226.6(a)(3). (See the commentary to
§ 228.5a(g) for guidance on particular
methods.)
2. Determining the method. In determining
the appropriate balance computation method
for purchases for disclosure purposes, the
card issuer must assume that a purchase
balance will exist at the end of any grace
period. Thus, for example, if the average
daily balance method will include new
purchases or cover two billing cycles only if
purchase balances are not paid within the
grace period, the card issuer would disclose
the name of the average daily balance
method that includes new purchases or
covers two billing cycles, respectively. The
card issuer should not assume the existence
of a purchase balance, however, in making
other disclosures under $ 226.5a(b).

5a(b)(7) Statement on Charge Card
Payments
1. Applicability and content. The disclosure
that charges are payable upon receipt of the




periodic statement is applicable only to
charge card accounts. In making this
disclosure, the card issuer may make such
modifications as are necessary to more
accurately reflect the circumstances of
repayment under the account. For example,
the disclosure might read, "Charges are due
and payable upon receipt of the periodic
statement and must be paid no later than 15
days after receipt of such statement."

5a(b)(8j Cash Advance Fee
1. Applicability. The card issuer must
disclose only those fees it imposes for a cash
advance that are finance charges under
§ 226.4. For example, a charge for a cash
advance at an automated teller machine
(ATM) would be disclosed under
§ 226.5a(b)(8) if no similar charge is imposed
for ATM transactions not involving an
extension of credit. (See comment 4(a}-5 for a
description of such a fee.)

5a(b)(9) Late Payment Fee
1. Applicability. The disclosure of the fee
for a late payment includes only those fees
that will be imposed for actual, unanticipated
late payments. (See the commentary to
§ 226.4(c)(2) for additional guidance on late
payment fees.)

5a(b)(10) Over-the-Limit Fee
1. Applicability. The disclosure of fees for
exceeding a credit limit does not include fees
for other types of default or for services
related to exceeding the limit. For example,
no disclosure is required of fees for
reinstating credit privileges or fees for the
dishonor of checks on an account that, if
paid, would cause the credit limit to be
exceeded.

5a(c) Direct Mail Applications and
Solicitations
1. Accuracy. In general, disclosures in
direct mail applications and solicitations
must be accurate as of the time of mailing.
(An accurate variable annual percentage rate
is one in effect within 30 days before
mailing.)
2.
Applications or
solicitations contained in generally available
publications mailed to consumers (such as
subscription magazines) are subject to the
requirements applicable to "take-ones" in
§ 226.5a(e), rather than the direct mail
requirements of § 226.5a{c). However, if a
primary purpose of a card issuer's mailing is
to offer credit or charge card accounts— for
example, where a card issuer “prescreens" a
list of potential cardholders using credit
criteria, and then mails to the targeted group
its catalog containing an application or a
solicitation for a card account—the direct
mail rules apply. In addition, a card issuer
may use a single application form as a “takeone" (in racks in public locations, for
example) and for direct mailings, if the card
issuer complies with the requirements of
§ 226.5a(c) even when the form is used as a
"take-one”—that is, by providing current
information and presenting the required
disclosures in a tabular format—and
eliminates the information required under
§ 226.5a(e)(l) (ii) and (iii).

Mailed publications.

11

5a(d) Telephone Applications and
Solicitations
1. Coverage. This paragraph applies if:

• A telephone conversation between a
card issuer and consumer may result in the
issuance of a card as a consequence of an
issuer-initiated offer to open an account for
which the issuer does not require any
application (that is, a "preapproved"
telephone solicitation).
• The card issuer initiates the contact and
at the same time takes application
information over the telephone.
This paragraph does not apply to:
• Telephone applications initiated by the
consumer.
• Situations where no card will be
issued—because, for example, the consumer
indicates that he or she does not want the
card, or the card issuer decides either during
the telephone conversation or later not to
issue the card.

5a(e) Applications and Solicitations Made
Available to General Public
1. Coverage. Applications and solicitations

made available to the general public include
what are commonly referred to as "take-one"
applications typically found at counters in
banks and retail establishments, as well as
applications contained in catalogs, magazines
and other generally available publications. In
the case of credit unions, this paragraph
applies to applications and solicitations to
open card accounts made available to those
in the general field of membership.
2. Cross-selling. If a card issuer invites a
consumer to apply for a credit or charge card
(for example, where the issuer engages in
cross-selling), an application provided to the
consumer at the consumer’s request is not
considered an application made available to
the general public and therefore is not subject
to 5 220.5a(e). For example, the following are
not covered;

• A consumer applies in person for a car
loan at a financial institution and the loan
officer invites the consumer to apply for a
credit or charge card account; the consumer
accepts the invitation.
• An employee of a retail establishment, in
the course of processing a sales transaction
using a bank credit card, asks a customer if
he or she would like to apply for the retailer’s
credit or charge card; the customer responds

affirmatively.

Toll-free telephone number.

3.
If a card
issuer, in complying with any of the
disclosure options of § 228.5a(e), provides a
telephone number for consumers to call to
obtain credit information, the number must
be toll-free for nonlocal calls made from an
area code other than the one used in the card
issuer's dialing area. Alternatively, a card
issuer may provide any telephone number
that allows a consumer to call for information
and reverse the telephone charges.

5a(e)(l) Disclosure of Required Credit
Information
1. Date of printing. Disclosure of the month
and year fulfills the requirement to disclose
the date an application was printed.
2.
The disclosures
specified in S Z28.5a(e) (i), (ii), and (iii) may

Form of disclosures.

Federal Register / V o l. 55, N o. 68 / M o n d a y , A p ril 9, 1990 / R u l e s a n d R e g u l a t i o n s

appear either in or outside the table
containing the required credit disclosures.
5a(e)(2) Inclusion of Certain Initial
Disclosures

1. Accuracy of disclosures. The disclosures
required by § 226.5a(e)(2) generally must be
current as of the time they are made
available to the public. Disclosures are
considered to be made available at the time
they are placed in public locations (in the
case of "take-ones") or mailed to consumers
(in the case of publications).
2. Accuracy —exception. If a card issuer
discloses all the information required by
§ 228.5a(e)(l)(ii) on the application or
solicitation, the disclosures under
§ 226.5a(e)(2) need only be current as of the
date of printing. (A current variable annual
percentage rate would be one in effect within
30 days before printing.)
5a(e)(3) No Disclosure of Credit
Information

1. When disclosure option available. A
card issuer may use this option only if the
issuer does not include on or with the
application or solicitation any statement that
refers to the credit disclosures required by
§ 226.5a(b). Statements such as “no annual
fee," “low interest rate,” “favorable rates,”
and "low costs” are deemed to refer to the
required credit disclosures and. therefore,
may not be included on or with the
solicitation or application, if the card issuer
chooses to use this option.
5a(e)(4) Prompt Response to Requests for
Information

1. Prompt disclosure. Information is
promptly disclosed if it is given within 30
days of a consumer's request for information
but in no event later than delivery of the
credit or charge card.
2. Information disclosed. When a consumer
requests credit information, card issuers need
not provide all the required credit disclosures
in all instances. For example, if disclosures
have been provided in accordance with
§ 226.5a(e) (1) or (2) and a consumer calls or
writes a card issuer to obtain information
about changes in the disclosures, the issuer
need only provide the items of information
that have changed from those previously
disclosed on or with the application or
solicitation. If a consumer requests
information about particular items, the card
issuer need only provide the requested
information. If, however, the card issuer has
made disclosures in accordance with the
option in $ 226.5a(e)(3) and a consumer calls
or writes the card issuer requesting
information about costs, all the required
disclosure information must be given.
3. Manner of response. A card issuer’s
response to a consumer’s request for credit
information may be provided orally or in
writing, regardless of the manner in which
the consumer’s request is received by the
issuer. Furthermore, the card issuer may
provide the information listed in either
§ 226.5a(e) (1) or (2). Information provided in
writing need not be in a tabular format.




5a(f) Special Charge Card Rule—Card
Issuer and Person Extending Credit Not the
Same Person

1. Duties of charge card issuer. Although
the charge card issuer is not required to
disclose information about the underlying
open-end credit plan if the card issuer meets
the conditions set forth in § 226.5a(f), the card
issuer must disclose the information relating
to the charge card plan itself.
2. Duties of creditor maintaining open-end
plan. Section 226.5a does not impose
disclosure requirements on the creditor that
maintains the underlying open-end credit
plan. This is the case even though the
creditor offering the open-end credit plan
may be considered an agent of the charge
card issuer. (See comment 2(a)(7)—
1.)
3. Form of disclosures. The disclosures
required by $ 226.5a(f) may appear either in
or outside the table containing the required
credit disclosures in circumstances where a
tabular format is required.

13109

(See the commentary to § 226.3(a), which
discusses whether transactions are consumer
or business-purpose credit, for guidance on
whether a home equity plan is subject to
Regulation Z.)

2. Transition rules and renewals of
preexistinq plans. The requirements of this

section do not apply to home equity plans
entered into before November 7,1989. The
requirements of this section also do not apply
if the original consumer, on or after
November 7, 1989, renews a plan entered into
prior to that date (with or without changes to
the terms). If, on or after November 7, 1989, a
security interest in the consumer's dwelling is
added to a line of credit entered into before
that date, the substantive restrictions of this
section apply for the remainder of the plan,
but no new disclosures are required under
this section.
3. Disclosure of repayment phase—
applicability of requirements. Some plans
provide in the initial agreement for a period
during which no further draws may be taken
5a(g) Balance Computation Methods
and repayment of the amount borrowed is
Defined
made. All of the applicable disclosures in this
1. Daily balance method. Card issuers
section must be given for the repayment
using the daily balance method may disclose
phase. Thus, for example, a creditor must
it using the name “average daily balance
provide payment information about the
(including new purchases)" or “average daily repayment phase as well as about the draw
balance (excluding new purchases),” as
period, as required by § 226.5b(d)(5). If the
appropriate. Alternatively, such card issuers
rate that will apply during the repayment
may explain the method. (See comment 7(e)-5 phase is fixed at a known amount, the
for a discussion of the daily balance method.) creditor must provide an annual percentage
2. Two-cycle average daily balance
rate under § 226.5b(d)(6) for that phase. If,
methods. The "two-cycle average daily
however, a creditor uses an index to
balance" methods described in § 226.5a(g)(2)
determine the rate that will apply at the time
(i) and (ii) include those methods in which the of conversion to the repayment phase—even
average daily balances for two billing cycles
if the rate will thereafter be fixed—the
may be added together to compute the
creditor must provide the information in
finance charge. Such methods also include
§ 226.5b(d)(12), as applicable.
those in which a periodic rate is applied
4. Payment terms—applicability of closedseparately to the balance in each cycle, and
end provisions and substantive rules. All
the resulting finance charges are added
payment terms that are provided for in the
together. The method is a “two-cycle average initial agreement are subject to the
daily balance" even if the finance charge is
requirements of subpart B and not subpart C
based on both the current and prior cycle
of the regulation. Payment terms that are
balances only under certain circumstances,
subsequently added to the agreement may be
such as when purchases during a prior cycle
subject to subpart B or to subpart C,
were carried over into the current cycle and
depending on the circumstances. The
no finance charge was assessed during the
following examples apply these general rules
prior cycle. Furthermore, the method is a
to different situations:
“two-cycle average daily balance method” if
• If the initial agreement provides for a
the balances for both the current and prior
repayment phase or for other payment terms
cycles are average daily balances, even if
such as options permitting conversion of part
those balances are figured differently. For
or all of the balance to a fixed rate during the
example, the name "two-cycle average daily
draw period, these terms must be disclosed
balance (excluding new purchases)" should
pursuant to §§ 226.5b and 226.6, and not
be used to describe a method in which the
under subpart C. Furthermore, the creditor
finance charge for the current cycle, figured
must continue to provide periodic statements
on an average daily balance excluding new
under § 226.7 and comply with other
purchases, will be added to the finance
provisions of subpart B (such as the
charge for the prior cycle, figured on an
substantive requirements of § 226.5b(f))
average daily balance of only new purchases
throughout the plan, including the repayment
during that prior cycle.
phase.
6.
Comments 5 b -l through 5b(h)—3 and • If the consumer and the creditor enter
into an agreement during the draw period to
headings are added to read as follows:
repay all or part of the principal balance on
Section 226.5b Requirements for Home
different terms (for example, with a fixed rate
Equity Plans
of interest) and the amount of available
credit will be replenished as the principal
1. Coverage. This section applies to all
balance is repaid, the creditor must continue
open-end credit plans secured by the
to comply with subpart B. For example, the
consumer's "dwelling,” as defined in
creditor must continue to provide periodic
§ 226.2(a)(19), and is not limited to plans
secured by the consumer’s principal dwelling. statements and comply with the substantive

12

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Federal Register

/ Vol, 55, No. 68 / M onday, April 9, 1990 / Rules and Regulations

other. For example, if the consumer can only
requirements of § 226.5b(f) throughout the
plan.
obtain a particular payment option in
• If the consumer and creditor enter into
conjunction with a certain variable-rate
an agreement during the draw period to repay feature, this fact must be disclosed. A
all or part of the principal balance and the
creditor has the option of providing separate
amount of available credit will not be
disclosure forms for multiple options or
replenished as the principal balance is
variations in features. For example, a creditor
repaid, the creditor must give closed-end
that offers different payment options for the
credit disclosures pursuant to subpart C for
draw period may prepare separate disclosure
that new agreement. In such cases, subpart B, forms for the two payment options. A creditor
including the substantive rules, does not
using this alternative, however, must include
apply to the closed-end credit transaction,
a statement on each disclosure form that the
although it will continue to apply to any
consumer should ask about the creditor's
remaining open-end credit available under
other home equity programs. (This disclosure
the plan.
is required only for those programs available
5.
Spreader clause. When a creditor holds agenerally to the public. Thus, if the only other
mortgage or deed of trust on the consumer's
programs available are employee preferreddwelling and that mortgage or deed of trust
rate plans, for example, the creditor would
contains a "spreader clause” (also known as
not have to provide this statement.) A
a "dragnet” or cross-collateralization clause), creditor that receives a request for
subsequent occurrences such as the opening
information about other available programs
of an open-end plan are subject to the rules
must provide the additional disclosures as
applicable to home equity plans to the same
soon as reasonably possible.
degree as if a security interest were taken
directly to secure the plan, unless the creditor 5b(a)(2) Precedence of Certain Disclosures
effectively waives its security interest under
1. Precedence rule. The list of conditions
the spreader clause with respect to the
provided at the creditor's option under
subsequent open-end credit extensions.
§ 226.5b(d)(4)(iii) need not precede the other
disclosures.
5bfa) Form of Disclosures

5b (a)(1) General
1. Written disclosures. The disclosures

required under this section must be clear and
conspicuous and in writing, but need not be
in a form the consumer can keep. (See the
commentary to $ 226.6(e) for special rules
when disclosures required under $ 228.5b(d)
are given in a retainable form.)
2. Disclosure of annual percentage rate —
more conspicuous requirement As provided
in § 226.5(a)(2), when the term "annual
percentage rate” is required to be disclosed
with a number, it must be more conspicuous
than other required disclosures.
3. Segregation of disclosures. While most
of the disclosures must be grouped together
and segregated from all unrelated
information, the creditor is permitted to
include information that explains or expands
on the required disclosures, including, for
example:
• Any prepayment penalty
• How a substitute index may be chosen
• Actions the creditor may take short of
terminating and accelerating an outstanding
balance
• Renewal terms
• Rebate of fees
An example of information that does not
explain or expand on the required disclosures
and thus cannot be included is the creditor’s
underwriting criteria, although the creditor
could provide such information separately
from the required disclosures.
4.

Method of providing disclosures. A

creditor may provide a single disclosure form
for all of its home equity plans, as long as the
disclosure describes all aspects of the plans.
For example, if the creditor offers several
payment options, all such options must be
disclosed. (See. however, the commentary to
§ 226.5b(d)(5)(iii) and (d)(12) (x) and (xi) for
disclosure requirements relating to these
provisions.) If any aspects of a plan are
linked together, the creditor must disclose
clearly the relationship of the terms to each




5b(b) Time of Disclosures
1. Mail and telephone applications. If the

creditor sends applications through the mail,
the disclosures and a brochure must
accompany the application. If an application
is taken over the telephone, the disclosures
and brochure may be delivered or mailed
within three business days of taking the
application. If an application is mailed to the
consumer following a telephone request,
however, the creditor also must send the
disclosures and a brochure along with the
application.
2. General purpose applications. The
disclosures and a brochure need not be
provided when a general purpose application
is given to a consumer unless (1) the
application or materials accompanying it
indicate that it can be used to apply for a
home equity plan or (2) the application is
provided in response to a consumer’s specific
inquiry about a home equity plan. On the
other hand, if a general purpose application is
provided in response to a consumer's specific
inquiry only about credit other than a home
equity plan, the disclosures and brochure
need not be provided even if the application
indicates it can be used for a home equity
plan, unless it is accompanied by
promotional information about home equity
plans.
3. Publicly-available applications. Some
creditors make applications for home equity
plans, such as “take-ones,” available without
the need for a consumer to request them.
These applications must be accompanied by
the disclosures and a brochure, such as by
attaching the disclosures and brochure to the
application form.
4. Response cards. A creditor may solicit
consumers for its home equity plan by
mailing a "response card" which the
consumer returns to the creditor to indicate
interest in the plan. If the only action taken
by the creditor upon receipt of the response
card is to send the consumer an application
13

form or to telephone the consumer to discuss
the plan, the creditor need not send the
disclosures and brochure with the response
card.
5. Denial or withdrawal of application. In
situations where footnote 10a permits the
creditor a three-day delay in providing
disclosures and the brochure, if the creditor
determines within that period that an
application will not be approved, the creditor
need not provide the consumer with the
disclosures or brochure. Similarly, if the
consumer withdraws the application within
this three-day period, the creditor need not
provide the disclosures or brochure.
6. Intermediary agent or broker. In
determining whether or not an application
involves an "intermediary agent or broker"
as discussed in footnote 10a. creditors should
consult the provisions in comment 19(b)—
3.

5b(c) Duties of Third Parties
1.
Disclosure requirements. Although third

parties who give applications to consumers
for home equity plans must provide the
brochure required under § 226.5b(e) in all
cases, such persons need provide the
disclosures required under § 226.5b(d) only in
certain instances. A third party has no duty
to obtain disclosures about a creditor’s home
equity plan or to create a set of disclosures
based on what it knows about a creditor's
plan. If, however, a creditor provides the
third party with disclosures along with its
application form, the third party must give
the disclosures to the consumer with the
application form. The duties under this
section are those of the third party: the
creditor is not responsible for ensuring that a
third party complies with those obligations. If
an intermediary agent or broker takes an
application over the telephone or receives an
application contained in a magazine or other
publication, footnote 10a permits that person
to mail the disclosures and brochure within
three business days of receipt of the
application. (See the commentary to
§ 226.5b(h) about imposition of
nonrefundable fees.)

5b(d) Content of Disclosures
1. Disclosures given as applicable. The

disclosures required under this section need
be made only as applicable. Thus, for
example, if negative amortization cannot
occur in a home equity plan, a reference to it
need not be made.
2. Duty to respond to requests for
information. If the consumer, prior to the
opening of a plan, requests information as
suggested in the disclosures (such as the
current index value or margin), the creditor
must provide this information as soon as
reasonably possible after the request.

5b(d)(l) Retention of Information
1.
When disclosure not required. The

creditor need not disclose that the consumer
should make or otherwise retain a copy of the
disclosures if they are retainable—for
example, if the disclosures are not part of an
application that must be returned to the
creditor to apply for the plan.

Federal Register /

Vol. 55.

5b(d)(2) Conditions for Disclosed Terms
Paragraph 5b(d)(2)(i)
1. Guaranteed terms. The requirement that
the creditor disclose the time by which an
application must be submitted to obtain the
disclosed terms does not require the creditor
to guarantee any terms. If a creditor chooses
not to guarantee any terms, it must disclose
that all of the terms are subject to change
prior to opening the plan. The creditor also is
permitted to guarantee some terms and not
others, but must indicate which terms are
subject to change.
The
creditor may disclose either a specific date or
a time period for obtaining the disclosed
terms. If the creditor discloses a time period,
the consumer must be able to determine from
the disclosure the specific date by which an
application must be submitted to obtain any
guaranteed terms. For example, the
disclosure might read, “To obtain the
following terms, you must submit your
application within 60 days after the date
appearing on this disclosure,” provided the
disclosure form also shows the date.

2. Date for obtaining disclosed terms.

Paragraph 5b(d)(2)(ii)
1.
Relation to other provisions. Creditors
should consult the rules in § 226.5b(g)
regarding refund of fees.

5b(d)(4) Possible Actions by Creditor
Paragraph 5b(d)(4)(i)
1. Fees imposed upon termination. This
disclosure applies only to fees (such as
penalty or prepayment fees) that the creditor
imposes if it terminates the plan prior to
normal expiration. The disclosure does not
apply to fees that are imposed either when
the plan expires in accordance with the
agreement or if the consumer terminates the
plan prior to its scheduled maturity. In
addition, the disclosure does not apply to
fees associated with collection of the debt,
such as attorneys fees and court costs, or to
increases in the annual percentage rate
linked to the consumer’s failure to make
payments. The actual amount of the fee need
not be disclosed.
2.
If changes may occur pursuant to
§ 226.5b(f)(3)(i), a creditor must state that
certain changes will be implemented as
specified in the initial agreement.

Changes specified in the initial
agreement.

Paragraph 5b(d)(4)(iii)
1. Disclosure of conditions. In making this
disclosure, the creditor may provide a
highlighted copy of the document that
contains such information, such as the
contract or security agreement. The relevant
items must be distinguished from the other
information contained in the document. For
example, the creditor may provide a cover
sheet that specifically points out which
contract provisions contain the information,
or may mark the relevant items on the
document itself. As an alternative to
disclosing the conditions in this manner, the
creditor may simply describe the conditions
using the language in § 226.5b (f)(2) and
(f)(3)(vi) or language that is substantially
similar. In describing specified changes that
may be implemented during the plan, the




No.

68

/ Monday. April

9. 1990 / Rules

creditor may provide a disclosure such as
"Our agreement permits us to make certain
changes to the terms of the line at specified
times or upon the occurrence of specified
events."
2.
The list of conditions
under $ 226.5b(d)(4)(iii) may appear with the
segregated disclosures or apart from them. If
the creditor elects to provide the list of
conditions with the segregated disclosures,
the list need not comply with the precedence
rule in § 220.5b(a)(2).

Form of disclosure.

5b(d)(5) Payment Terms
Paragraph 5b(d)(5)(i)
1. Length of the plan. The combined length
of the draw period and any repayment period
need not be stated. If the length of the
repayment phase cannot be determined
because, for example, it depends on the
balance outstanding at the beginning of the
repayment period, the creditor must state that
the length is determined by the size of the
balance. If the length of the plan is indefinite
(for example, because there is no time limit
on the period during which the consumer can
take advances), the creditor must state that
fact.
2.
If, under the credit
agreement, a creditor retains the right to
review a line at the end of the specified draw
period and determine whether to renew or
extend the draw period of the plan, the
possibility of renewal or extension—
regardless of its likelihood— should be
ignored for purposes of the disclosures. For
example, if an agreement provides that the
draw period is five years and that the
creditor may renew the draw period for an
additional five years, the possibility of
renewal should be ignored and the draw
period should be considered five years. (See
the commentary accompanying $ 226.9(c)(1)
dealing with change in terms requirements.)

Renewal provisions.

Paragraph 5b(d)(5)(ii)
1. Determination of the minimum periodic
payment. This disclosure must reflect how
the minimum periodic payment is determined,
but need only describe the principal and
interest components of the payment. Other
charges that may be part of the payment (as
well as the balance computation method)
may, but need not, be described under this
provision.
2.
If the home equity plan
permits the consumer to repay all or part of
the balance during the draw period at a fixed
rate (rather than a variable rate) and over a
specified time period, this feature must be
disclosed. To illustrate, a variable-rate plan
may permit a consumer to elect during a tenyear draw period to repay all or a portion of
the balance over a three-year period at a
fixed rate. The creditor must disclose the
rules relating to this feature including the
period during which the option can be
selected, the length of time over which
repayment can occur, any fees imposed for
such a feature, and the specific rate or a
description of the index and margin that will
apply upon exercise of this choice. For
example, the index and margin disclosure
might state. "If you choose to convert any
portion of your balance to a fixed rate, the

Fixed rate and term payment options
during draw period.

14

and Regulations

13111

rate will be the highest prime rate published
in the "Wall Street Journal" that is in effect at
the date of conversion plus a margin." If the
fixed rate is to be determined according to an
index, it must be one that is outside the
creditor’s control and is publicly available in
accordance with § 226.5b(f)(l). The effect of
exercising the option should not be reflected
elsewhere in the disclosures, such as in the
historical example required in
§ 226.5b(d)(12)(xi).
3.
In programs where
the occurrence of a balloon payment is
possible, the creditor must disclose the
possibility of a balloon payment even if such
a payment is uncertain or unlikely. In such
cases, the disclosure might read, “Your
minimum payments may not be sufficient to
fully repay the principal that is outstanding
on your line. If they are not, you will be
required to pay the entire outstanding
balance in a single payment." In programs
where a balloon payment will occur, such as
programs with interest-only payments during
the draw period and no repayment period,
the disclosures must state that fact. For
example, the disclosure might read, "Your
minimum payments will not repay the
principal that is outstanding on your line. You
will be required to pay the entire outstanding
balance in a single payment.” In making this
disclosure, the creditor is not required to use
the term “balloon payment." The creditor
also is not required to disclose the amount of
the balloon payment. (See. however, the
requirement under 5 228.5b(d)(5)(iii).) The
balloon payment disclosure does not apply in
cases where repayment of the entire
outstanding balance would occur only as a
result of termination and acceleration. The
creditor also need not make a disclosure
about balloon payments if the final payment
could not be more than twice the amount of
other minimum payments under the plan.

Balloon payments.

Paragraph 5b(d)(5)(iii)
1. Minimum periodic payment example. In
disclosing the payment example, the creditor
may assume that the credit limit as well as
the outstanding balance is $10,000 if such an
assumption is relevant to calculating
payments. (If the creditor only offers lines of
credit for less than $10,000. the creditor may
assume an outstanding balance of $5,000
instead of $10,000 in making this disclosure.)
The example should reflect the payment
comprised only of principal and interest
Creditors may provide an additional example
reflecting other charges that may be included
in the payment, such as credit insurance
premiums. Creditors may assume that all
months have an equal number of days, that
payments are collected in whole cents, and
that payments will fall on a business day
even though they may be due on a non­
business day. For variable-rate plans, the
example must be based on the last rate in the
historical example required in
S 226.5b(d)(12)(xi). or a more recent rate. In
cases where the last rate shown in the
historical example is different from the index
value and margin (for example, due to a rate
cap), creditors should calculate the rate by
using the index value and margin. A
discounted rate may not be considered a

13112

Federal Register

/ V o l.

more recent rate in calculating this payment
example for either variable- or fixed-rate
plans.
2. Representative examples. In plans with
multiple payment options within the draw
period or within any repayment period, the
creditor may provide representative
examples as an alternative to providing
examples for each payment option. The
creditor may elect to provide representative
payment examples based on three categories
of payment options. The first category
consists of plans that permit minimum
payment of only accrued finance charges
("interest only” plans). The second category
includes plans in which a fixed percentage or
a fixed fraction of the outstanding balance or
credit limit (for example, 2%of the balance or
Vi8oth of the balance) is used to determine
the minimum payment. The third category
includes all other types of minimum payment
options, such as a specified dollar amount
plus any accrued finance charges. Creditors
may classify their minimum payment
arrangements within one of these three
categories even if other features exist, such
as varying lengths of a draw or repayment
period, required payment of past due
amounts, late charges, and minimum dollar
amounts. The creditor may use a single
example within each category to represent
the payment options in that category. For
example, if a creditor permits minimum
payments of 1%, 2%, 3%or 4%of the
outstanding balance, it may pick one of these
four options and provide the example
required under § 226.5b(d)(5)(iii) for that
option alone.
The example used to represent a category
must be an option commonly chosen by
consumers, or a typical or representative
example. (See the commentary to
§ 226.5b(d)(12) (x) and (xi) for a discussion of
the use of representative examples for
making those disclosures. Creditors using a
representative example within each category
must use the same example for purposes of
the disclosures under § 226.5b (d)(5)(iii) and
(d)(12) (x) and (xi).) Creditors may use
representative examples under § 226.5b(d)(5)
only with respect to the payment example
required under paragraph (d)(5)(iii). Creditors
must provide a full narrative description of
all payment options under § 226.5b(d)(5) (i)
and (ii).
3. Examples for draw and repayment
periods. Separate examples must be given for
the draw and repayment periods unless the
payments are determined the same way
during both periods. In setting forth payment
examples for any repayment period under
this section (and the historical example under
§ 220.5b(d)(12)(xi)), creditors should assume a
$10,000 advance is taken at the beginning of
the draw period and is reduced according to
the terms of the plan. Creditors should not
assume an additional advance is taken at any
time, including at the beginning of any
repayment period.
4. Reverse mortgages. Reverse mortgages,
also known as reverse annuity or home
equity conversion mortgages, in addition to
permitting the consumer to obtain advances,
may involve the disbursement of monthly
advances to the consumer for a fixed period
or until the occurrence of an event such as




55,

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the consumer's death. Repayment of the
reverse mortgage (generally a single payment
of principal and accrued interest) may be
required to be made at the end of the
disbursements or, for example, upon the
death of the consumer. In disclosing these
plans, creditors must apply the following
rules, as applicable:
• If the reverse mortgage has a specified
period for advances and disbursements but
repayment is due only upon occurrence of a
future event such as the death of the
consumer, the creditor must assume that
disbursements will be made until they are
scheduled to end. The creditor must assume
repayment will occur when disbursements
end (or within a period following the final
disbursement which is not longer than the
regular interval between disbursements).
This assumption should be used even though
repayment may occur before or after the
disbursements are scheduled to end. In such
cases, the creditor may include a statement
such as "The disclosures assume that you
will repay the line at the time the draw
period and our payments to you end. As
provided in your agreement, your repayment
may be rquired at a different time.” The
single payment should be considered the
"minimum periodic payment" and
consequently would not be treated as a
balloon payment. The example of the
minimum payment under § 226.5b(d)(5)(iii)
should assume a single $10,000 draw.
• If the reverse mortgage has neither a
specified period for advances or
disbursements nor a specified repayment
date and these terms will be determined
solely by reference to future events, including
the consumer’s death, the creditor may
assume that the draws and disbursements
will end upon the consumer’s death
(estimated by using actuarial tables, for
example) and that repayment will be required
at the same time (or within a period following
the date of the final disbursement which is
not longer than the regular interval for
disbursements). Alternatively, the creditor
may base the disclosures upon another future
event it estimates will be most likely to occur
first. (If terms will be determined by
reference to future events which do not
include the consumer’s death, the creditor
must base the disclosures upon the
occurrence of the event estimated to be most
likely to occur first.)
• In making the disclosures, the creditor
must assume that all draws and
disbursements and accrued interest will be
paid by the consumer. For example, if the
note has a non-recourse provision providing
that the consumer is not obligated for an
amount greater than the value of the house,
the creditor must nonetheless assume that the
full amount to be drawn or disbursed will be
repaid. In this case, however, the creditor
may include a statement such as "The
disclosures assume full repayment of the
amount advanced plus accrued interest,
although the amount you may be required to
pay is limited by your agreement."
• Some reverse mortgages provide that
some or all of the appreciation in the value of
the property will be shared between the
consumer and the creditor. The appreciation
feature must be disclosed in accordance with
S 226.5b(d)(12).

15

/ R u les a n d R e g u la tio n s
5b(d)(6)

Annual Percentage Rate

1. Preferred-rate plans. If a creditor offers a
preferential fixed-rate plan in which the rate
will increase a specified amount upon the
occurrence of a specified event, the creditor
must disclose the specific amount the rate
will increase.
5b(d)(7)

Fees Imposed by Creditor

1. Applicability. The fees referred to in
§ 226.5b(d)(7) include items such as
application fees, points, annual fees,
transaction fees, fees to obtain checks to
access the plan, and fees imposed for
converting to a repayment phase that is
provided for in the original agreement. This
disclosure includes any fees that are imposed
by the creditor to use or maintain the plan,
whether the fees are kept by the creditor or a
third party. For example, if a creditor requires
an annual credit report on the consumer and
requires the consumer to pay this fee to the
creditor or directly to the third party, the fee
must be specifically stated. Third party fees
to open the plan that are initially paid by the
consumer to the creditor may be included in
this disclosure or in the disclosure under
§ 226.5b(d)(8).
2. Manner of describing fees. Charges may
be stated as an estimated dollar amount for
each fee, or as a percentage of a typical or
representative amount of credit. The creditor
may provide a stepped fee schedule in which
a fee will increase a specified amount at a
specified date. (See the discussion contained
in the commentary to § 226,5b(f)(3)(i).)
3. Fees not required to be disclosed. Fees
that are not imposed to open, use, or maintain
a plan, such as fees for researching an
account, photocopying, paying late, stopping
payment, having a check returned, exceeding
the credit limit, or closing out an account do
not have to be disclosed under this section.
Credit report and appraisal fees imposed to
investigate whether a condition permitting a
freeze continues to exist—as discussed in the
commentary to § 226.5b(f)(3)(vi)—are not
required to be disclosed under this section or
§ 226.5b(d)(8).
4. Rebates of closing costs. If closing costs
are imposed they must be disclosed,
regardless of whether such costs may be
rebated later (for example, rebated to the
extent of any interest paid during the first
year of the plan).
5. Terms used in disclosure. Creditors need
not use the terms "finance charge" or "other
charge” in describing the fees imposed by the
creditor under this section or those imposed
by third parties under § 226.5b(d)(8).

$b(d)(8) Fees Imposed by Third Parties to
Open a Plan
1. Applicability. Section 226.5b(d)(8)

applies only to fees imposed by third parties
to open the plan. Thus, for example, this
section does not require disclosure of a fee
imposed by a government agency at the end
of a plan to release a security interest. Fees
to be disclosed include appraisal, credit
report, government agency, and attorneys
fees. In cases where property insurance is
required by the creditor, the creditor either
may disclose the amount of the premium or
may state that property insurance is required.

Federal Register / Vol. 55, No. 68 / Monday, April 9, 1990 / Rules and Regulations
For example, the disclosure might state. "You
must carry insurance on the property that
secures this plan.”
2.
In all
cases creditors must state the total of third
party fees as a single dollar amount or a
range. A creditor has two options with regard
to providing the more detailed information
about third party fees. Creditors may provide
a statement that the consumer may request
more specific cost information about third
party fees from the creditor. As an alternative
to including this statement, creditors may
provide an itemization of such fees (by type
and amount) with the early disclosures.
3.
A good faith
estimate of the amount of fees must be
provided. Creditors may provide, based on a
typical or representative amount of credit, a
range for such fees or state the dollar amount
of such fees. Fees may be expressed on a unit
cost basis, for example, $5 per $1,000 of
credit.
4.
Even if fees
imposed by third parties may be rebated,
they must be disclosed. (See the commentary
to § 226.5b(d)(7).)

Itemization of third party fees.

Manner of describing fees.

Rebates of third party fees.

5b(d)(9) Negative Amortization
1. Disclosure required. In transactions
where the minimum payment will not or may
not be sufficient to cover the interest that
accrues on the outstanding balance, the
creditor must disclose that negative
amortization will or may occur. This
disclosure is required whether or not the
unpaid interest is added to the outstanding
balance upon which interest is computed. A
disclosure is not required merely because a
loan calls for non-amortizing or partially
amortizing payments.

5b(d)(10) Transaction Requirements
1. Applicability. A limitation on automated
teller machine usage need not be disclosed
under this paragraph unless that is the only
means by which the consumer can obtain
funds.

5b(d)(12) Disclosures for Variable-Rate
Plans
1. Variable-rate provisions. Sample forms
in Appendix G-14 provide illustrative
guidance on the variable-rate rules.

Paragraph 5b(d)(12)(ix)
1. Periodic limitations on increases in
rates. The creditor must disclose any annual
limitations on increases in the annual
percentage rate. If the creditor bases its rate
limitation on 12 monthly billing cycles, such a
limitation should be treated as an annual cap.
Rate limitations imposed on less than an
annual basis must be stated in terms of a
specific amount of time. For example, if the
creditor imposes rate limitations on only a
semiannual basis, this must be expressed as
a rate limitation for a six-month time period.
If the creditor does not impose periodic
limitations (annual or shorter) on rate
increases, the fact that there are no annual
rate limitations must be stated.
2.
The maximum annual percentage rate
that may be imposed under each payment
option over the term of the plan (including the
draw period and any repayment period
provided for in the initial agreement) must be
provided. The creditor may disclose this rate
as a specific number (for example, 18%) or as
a specific amount above the initial rate. For
example, this disclosure might read, “The
maximum annual percentage rate that can
apply to your line will be 5 percentage points
above your initial rate." If the creditor states
the maximum rate as a specific amount
above the initial rate, the creditor must
include a statement that the consumer should
inquire about the rate limitations that are
currently available. If an initial discount is
not taken into account in applying maximum
rate limitations, that fact must be disclosed. If
separate overall limitations apply to rate
increases resulting from events such as the
exercise of a fixed-rate conversion option or
leaving the creditor’s employ, those
limitations also must be stated. Limitations
do not include legal limits in the nature of
usury or rate ceilings under state or federal
statutes or regulations.
3.
The creditor need
not disclose each periodic or maximum rate
limitation that is currently available. Instead,
the creditor may disclose the range of the
lowest and highest periodic and maximum
rate limitations that may be applicable to the
creditor’s home equity plans. Creditors using
this alternative must include a statement that
the consumer should inquire about the rate
limitations that are currently available.

Maximum limitations on increases in
rates.

Form of disclosures.

Paragraph 5b(d)(12)(iv)
1.
Determination of annual percentage rate.Paragraph 5b(d)(12)(x)
If the creditor adjusts its index through the
1. Maximum rate payment example. In
addition of a margin, the disclosure might
read, "Your annual percentage rate is based
on the index plus a margin." The creditor is
not required to disclose a specific value for
the margin.

Paragraph 5b(d)(12)(viii)
1. Preferred-rate provisions. This

paragraph requires disclosure of preferredrate provisions, where the rate will increase
upon the occurrence of some event, such as
the borrower-employee leaving the creditor's
employ or the consumer closing an existing
deposit account with the creditor.
2.
The commentary to § 226.5b(d)(5)(ii)
discusses the disclosure requirements for
options permitting the consumer to convert
from a variable rate to a fixed rate.

Provisions on conversion to fixed rates.




calculating the payment creditors should
assume the maximum rate is in effect. Any
discounted or premium initial rates or
periodic rate limitations should be ignored for
purposes of this disclosure. If a range Is used
to disclose the maximum cap under
$ 226.5b(d)(12)(ix), the highest rate in the
range must be used for the disclosure under
this paragraph. As an alternative to making
disclosures based on each payment option,
the creditor may choose a representative
example within the three categories of
payment options upon which to base this
disclosure. (See the commentary to
§ 226.5b(d)(5).) However, separate examples
must be provided for the draw period and for
any repayment period unless the payment is
determined the same way in both periods.

16

13113

Creditors should calculate the example for
the repayment period based on an assumed
$10,000 balance. (See the commentary to
S 226.5b(d)(5) for a discussion of the
circumstances in which a creditor may use a
lower outstanding balance.)
2.
In stating the date or time when the
maximum rate could be reached, creditors
should assume the rate increases as rapidly
as possible under the plan. In calculating the
date or time, creditors should factor in any
discounted or premium initial rates and
periodic rate limitations. This disclosure must
be provided for the draw phase and any
repayment phase. Creditors should assume
the index and margin shown in the last year
of the historical example (or a more recent
rate) is in effect at the beginning of each
phase.

Time the maximum rate could be
reached.

Paragraph 5b(d)(12)(xi)
1. Index movement Index values and
annual percentage rates must be shown for
the entire 15 years of the historical example
and must be based on the most recent 15
years. The example must be updated
annually to reflect the most recent 15 years of
index values as soon as reasonably possible
after the new index value becomes available.
If the values for an index have not been
available for 15 years, a creditor need only go
back as far as the values have been available
and may start the historical example at the
year for which values are first available.
2.
The historical
example must reflect the method of choosing
index values for the plan. For example, if an
average of index values is used in the plan,
averages must be used in the example, but if
an index value as of a particular date is used,
a single index value must be shown. The
creditor is required to assume one date (or
one period, if an average is used) within a
year on which to base the history of index
values. The creditor may choose to use index
values as of any date or period as long as the
index value as of this date or period is used
for each year in the example. Only one index
value per year need be shown, even if the
plan provides for adjustments to the annual
percentage rate or payment more than once
in a year. In such cases, the creditor can
assume that the index rate remained constant
for the full year for the purpose of calculating
the annual percentage rate and payment.
3.
A value for the
margin must be assumed in order to prepare
the example. A creditor may select a
representative margin that it has used with
the index during the six months preceding
preparation of the disclosures and state that
the margin is one that it has used recently.
The margin selected may be used until the
creditor annually updates the disclosure form
to reflect the most recent 15 years of index
values.
4.
In
reflecting any discounted or premium initial
rate, the creditor may select a discount or
premium that it has used during the six
months preceding preparation of the
disclosures, and should disclose that the
discount or premium is one that the creditor
has used recently. The discount or premium

Selection o f index values.

Selection of margin.

Amount of discount or premium.

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/ Vol. 55, No. 68 / M onday, April 9, 1990 / Rules and Regulations

should be reflected in the example for as long
as it is in effect. The creditor may assume
that a discount or premium that would have
been in effect for any part of a year was in
effect for the full year for purposes of
reflecting it in the historical example.
5. Rate limitations. Limitations on both
periodic and maximum rates must be
reflected in the historical example. If ranges
of rate limitations are provided under
§ 226.5b(d)(12)(ix), the highest rates provided
in those ranges must be used in the example.
Rate limitations that may apply more often
than annually should be treated as if they
were annual limitations. For example, if a
creditor imposes a 1%cap every six months,
this should be reflected in the example as if it
were a 2%annual cap.
6. Assumed advances. The creditor should
assume that the $10,000 balance is an
advance taken at the beginning of the first
billing cycle and is reduced according to the
terms of the plan, and that the consumer
takes no subsequent draws. As discussed in
the commentary to § 226.5b(d)(5), creditors
should not assume an additional advance is
taken at the beginning of any repayment
period. If applicable, the creditor may assume
the $10,000 is both the advance and the credit
limit. (See the commentary to § 226.5b(d)(5)
for a discussion of the circumstances in
which a creditor may use a lower outstanding
balance.)
7. Representative payment options. The
creditor need not provide an historical
example for all of its various payment
options, but may select a representative
payment option within each of the three
categories of payments upon which to base
its disclosure. (See the commentary to
§ 228.5b(d)(5).)
8. Payment information. The payment
figures in the historical example must reflect
all significant program terms. For example,
features such as rate and payment caps, a
discounted initial rate, negative amortization,
and rate carryover must be taken into
account in calculating the payment figures if
these would have applied to the plan. The
historical example should include payments
for as much of the length of the plan as would
occur during a 15-year period. For example:
• If the draw period is 10 years and the
repayment period is 15 years, the example
should illustrate the entire 10-year draw
period and the first 5 years of the repayment
period.
• If the length of the draw period is 15
years and there is a 15-year repayment
phase, the historical example must reflect the
payments for the 15-year draw period and
would not show any of the repayment period.
No additional historical example would be
required to reflect payments for the
repayment period.
• If the length of the plan is less than 15
years, payments in the historical example
need only be shown for the number of years
in the term. In such cases, however, the
creditor must show the index values, margin
and annual percentage rates and continue to
reflect all significant plan terms such as rate
limitations for the entire 15 years.
A creditor need show only a single payment
per year in the example, even though
payments may vary during a year. The



calculations should be based on the actual
payment computation formula, although the
creditor may assume that all months have an
equal number of days. The creditor may
assume that payments are made on the last
day of the billing cycle, the billing date or the
payment due date, but must be consistent in
the manner in which the period used to
illustrate payment information is selected.
Information about balloon payments and
remaining balance may, but need not, be
reflected in the example.
9. Disclosures for repayment period. The
historical example must reflect all features of
the repayment period, including the
appropriate index values, margin, rate
limitations, length of the repayment period,
and payments. For example, if different
indices are used during the draw and
repayment periods, the index values for that
portion of the 15 years that reflect the
repayment period must be the values for the
appropriate index.
10. Reverse mortgages. The historical
example for reverse mortgages should reflect
15 years of index values and annual
percentage rates, but the payment column
should be blank until the year that the single
payment will be made, assuming that
payment is estimated to occur within 15
years. (See the commentary to § 226.5b(d)(5)
for a discussion of reverse mortgages.)

5b(e) Brochure
1. Substitutes. A brochure is a suitable

substitute for the Board's home equity
brochure if it is, at a minimum, comparable to
the Board’s brochure in substance and
comprehensiveness. Creditors are permitted
to provide more detailed information than is
contained in the Board's brochure.
2. Effect of third party delivery of brochure.
If a creditor determines that a third party has
provided a consumer w'ith the required
brochure pursuant to § 226.5b(c), the creditor
need not give the consumer a second
brochure.

5b(f) Limitations on Home Equity Plans
1. Coverage. Section 226.5b(f) limits both

actions that may be taken and language that
may be included in contracts, and applies to
any assignee or holder as well as to the
original creditor. The limitations apply to the
draw period and any repayment period, and
to any renewal or modification of the original
agreement.

Paragraph 5b(f)(l)
1. External index. A creditor may change

the annual percentage rate for a plan only if
the change is based on an index outside the
creditor’s control. Thus, a creditor may not
make rate changes based on its own prime
rate or cost of funds and may not reserve a
contractual right to change rates at its
discretion. A creditor is permitted, however,
to use a published prime rate, such as that in
the Wall Street Journal, even if the bank’s
own prime rate is one of several rates used to
establish the published rate.
2. Publicly available. The index must be
available to the public. A publicly available
index need not be published in a newspaper,
but it must be one the consumer can
independently obtain (by telephone, for

17

example) and use to verify rates imposed
under the plan.
3. Provisions not prohibited. This
paragraph does not prohibit rate changes that
are specifically set forth in the agreement.
For example, stepped-rate plans, in which
specified rates are imposed for specified
periods, are permissible. In addition,
preferred-rate provisions, in which the rate
increases by a specified amount upon the
occurrence of a specified event, also are
permissible.

Paragraph 5b(f)(2)
1. Limitations on termination and
acceleration. In general, creditors are

prohibited from terminating and accelerating
payment of the outstanding balance before
the scheduled expiration of a plan. However,
creditors may take these actions in the three
circumstances specified in § 226.5b(f)(2).
Creditors are not permitted to specify in their
contracts any other events that allow
termination and acceleration beyond those
permitted by the regulation. Thus, for
example, an agreement may not provide that
the balance is payable on demand nor may it
provide that the account will be terminated
and the balance accelerated if the rate cap is
reached.
2. Other actions permitted. If an event
permitting termination and acceleration
occurs, a creditor may instead take actions
short of terminating and accelerating. For
example, a creditor could temporarily or
permanently suspend further advances,
reduce the credit limit, change the payment
terms, or require the consumer to pay a fee. A
creditor also may provide in its agreement
that a higher rate or higher fees will apply in
circumstances under which it would
otherwise be permitted to terminate the plan
and accelerate the balance. A creditor that
does not immediately terminate an account
and accelerate payment or take another
permitted action may take such action at a
later time, provided one of the conditions
permitting termination and acceleration
exists at that time.

Paragraph 5b(f)(2)(i)
1. Fraud or material misrepresentation. A

creditor may terminate a plan and accelerate
the balance if there has been fraud or
material misrepresentation by the consumer
in connection with the plan. This exception
includes fraud or misrepresentation at any
time, either during the application process or
during the draw period and any repayment
period. What constitutes fraud or
misrepresentation is determined by
applicable state law and may include acts of
omission as well as overt acts, as long as any
necessary intent on the part of the consumer
exists.

Paragraph 5b(f)(2)(ii)
1. Failure to meet repayment terms. A

creditor may terminate a plan and accelerate
the balance when the consumer fails to meet
the repayment terms provided for in the
agreement. However, a creditor may
terminate and accelerate under this provision
only if the consumer actually fails to make
payments. For example, a creditor may not
terminate and accelerate if the consumer, in

Federal Register

/ Vol. 55, No. 68 / Monday. April 9. 1990 / Rules and Regulations

error, sends a payment to the wrong location,
such as a branch rather than the main office
of the creditor. If a consumer files for or is
placed in bankruptcy, the creditor may
terminate and accelerate under this provision
if the consumer fails to meet the repayment
terms of the agreement. This section does not
override any state or other law that requires
a right-to-cure notice, or otherwise places a
duty on the creditor before it can terminate a
plan and accelerate the balance.

Paragraph 5b(f)(2)(iii)
1. Impairment of security. A creditor may
terminate a plan and accelerate the balance
if the consumer's action or inaction adversely
affects the creditor’s security for the plan, or
any right of the creditor in that security.
Action or inaction by third parties does not.
in itself, permit the creditor to terminate and
accelerate.
2.
A creditor may terminate and
accelerate, for example, if:
• The consumer transfers title to the
property or sells the property without the
permission of the creditor
• The consumer fails to maintain required
insurance on the dwelling
• The consumer fails to pay taxes on the
property
• The consumer permits the filing of a lien
senior to that held by the creditor
• The sole consumer obligated on the plan
dies
• The property is taken through eminent
domain
• A prior lienholder forecloses
By contrast, the filing of a judgment against
the consumer would permit termination and
acceleration only if the amount of the
judgment and collateral subject to the
judgment is such that the creditor's security is
adversely affected. If the consumer commits
waste or otherwise destructively uses or fails
to maintain the property such that the action
adversely affects the security, the plan may
be terminated and the balance accelerated.
Illegal use of the property by the consumer
would permit termination and acceleration if
it subjects the property to seizure. If one of
two consumers obligated on a plan dies the
creditor may terminate the plan and
accelerate the balance if the security is
adversely affected. If the consumer moves
out of the dwelling that secures the plan and
that action adversely affects the security, the
creditor may terminate a plan and accelerate
the balance.

Examples.

Paragraph 5b(f)(3)
1. Scope of provision. In general, a creditor
may not change the terms of a plan after it is
opened. For example, a creditor may not
increase any fee or impose a new fee once
the plan has been opened, even if the fee is
charged by a third party, such as a credit
reporting agency, for a service. The change of
terms prohibition applies to all features of a
plan, not only those required to be disclosed
under this section. For example, this
provision applies to charges imposed for late
payment, although this fee is not required to
be disclosed under { 228.5b(d)(7).
2.
There are three
charges not covered by this provision. A
creditor may pass on increases in taxes since

Charges not covered.




such charges are imposed by a governmental
body and are beyond the control of the
creditor. In addition, a creditor may pass on
increases in premiums for property insurance
that are excluded from the finance charge
under § 226.4(d)(2), since such insurance
provides a benefit to the consumer
independent of the use of the line and is often
maintained notwithstanding the line. A
creditor also may pass on increases in
premiums for credit insurance that are
excluded from the finance charge under
{ 226.4(d)(1). since the insurance is voluntary
and provides a benefit to the consumer.

Paragraph 5b(f)(3)(i)
1. Changes provided for in agreement. A

creditor may provide in the initial agreement
for specific changes to take place upon the
occurrence of specific events. Both the
triggering event and the resulting
modification must be stated with specificity.
For example, in home equity plans for
employees, the agreement could provide that
a specified higher rate or margin will apply if
the borrower’s employment with the creditor
ends. A contract could contain a stepped-rate
or stepped-fee schedule providing for
specified changes in the rate or the fees on
certain dates or after a specified period of
time. A creditor also may provide in the
initial agreement that it will be entitled to a
share of the appreciation in the value of the
property as long as the specific appreciation
share and the specific circumstances which
require the payment of it are set forth. A
contract may permit a consumer to switch
among minimum payment options during the
plan.
2. Prohibited provisions. A creditor may
not include a general provision in its
agreement permitting changes to any or all of
the terms of the plan. For example, creditors
may not include "boilerplate” language in the
agreement stating that they reserve the right
to change the fees imposed under the plan. In
addition, a creditor may not include any
"triggering events" or responses that the
regulation expressly addresses in a manner
different from that provided in the regulation.
For example, an agreement may not provide
that the margin in a variable-rate plan will
increase if there is a material change in the
consumer’s financial circumstances, because
the regulation specifies that temporarily
freezing the line or lowering the credit limit is
the permissible response to a material change
in the consumer’s financial circumstances.
Similarly a contract cannot contain a
provision allowing the creditor to freeze a
line due to an insignificant decline in
property value since the regulation allows
that response only for a significant decline.

Paragraph 5b(f)(3)(ii)
1. Substitution of index. A creditor may

change the index and margin used under the
plan if the original index becomes
unavailable, as long as historical fluctuations
in the original and replacement indices were
substantially similar, and as long as the
replacement index and margin will produce a
rate similar to the rate that was in effect at
the time the original index became
unavailable. If the replacement index is
newly established and therefore does not
18

1311o

have any rate history, it may be used if it
produces a rate substantially similar to the
rate in effect when the original index became
unavailable.

Paragraph 5b(f)(3)(iii)
1. Changes by written agreement. A

creditor may change the terms of a plan if the
consumer expressly agrees in writing to the
change at the time it is made. For example, a
consumer and a creditor could agree in
writing to change the repayment terms from
interest-only payments to payments that
reduce the principal balance. The provisions
of any such agreement are governed by the
limitations in § 226.5b(f). For example, a
mutual agreement could not provide for
future annual percentage rate changes based
on the movement of an index controlled by
the creditor or for termination and
acceleration under circumstances other than
those specified in the regulation. By contrast,
a consumer could agree to a new credit limit
for the plan, although the agreement could
not permit the creditor to later change the
credit limit except by a subsequent written
agreement or in the circumstances described
in § 226.5b(f)(3)(vi).
2. Written agreement. The change must be
agreed to in writing by the consumer.
Creditors are not permitted to assume
consent because the consumer uses an
account, even if use of an account would
otherwise constitute acceptance of a
proposed change under state law.

Paragraph 5b(f)(3)(iv)
1. Beneficial changes. After a plan is

opened, a creditor may make changes that
unequivocally benefit the consumer. Under
this provision, a creditor may offer more
options to consumers, as long as existing
options remain. For example, a creditor may
offer the consumer the option of making
lower monthly payments or could increase
the credit limit. Similarly, a creditor wishing
to extend the length of the plan on the same
terms may do so. Creditors are permitted to
temporarily reduce the rate or fees charged
during the plan (though a change in terms
notice may be required under $ 226.9(c) when
the rate or fees are returned to their original
level). Creditors also may offer an additional
means of access to the line, even if fees are
associated with using the device, provided
the consumer retains the ability to use prior
access devices on the original terms.

Paragraph 5b(f)(3)(v)
1. Insignificant changes. A creditor is

permitted to make insignificant changes after
a plan is opened. This rule accommodates
operational and similar problems, such as
changing the address of the creditor for
purposes of sending payments. It does not
permit a creditor to change a term such as a
fee charged for late payments.
2. Examples of insignificant changes.
Creditors may make minor changes to
features such as the billing cycle date, the
payment due date (as long as the consumer
does not have a diminished grace period if
one is provided), and the day of the month on
which index values are measured to
determine changes to the rate for variablerate plans. A creditor also may change its

13116

Federal Register

/ Vol. 55,

rounding practice in accordance with the
tolerance rules set forth in § 226.14 (for
example, stating an exact APR of 14.3313
percent as 14.3 percent, even if it had
previously been stated as 14.33 percent!. A
creditor may change the balance computation
method it uses only if the change produces an
insignificant difference in the finance charge
paid by the consumer. For example, a
creditor may switch from using the average
daily balance method (including new
transactions) to the daily balance method
(including new transactions).
Paragraph

5b(f)(3)(vi}

1. Suspension of credit or reduction o f
( redit limit A creditor may prohibit
additional extensions of credit or reduce the
credit limit in the circumstances specified in
the regulation. A creditormay not take these
actions under other circumstances, unless the
creditor would be permitted to terminate the
line and accelerate the balance as described
in § 226.5b{f)(2). The creditor's right to reduce
the credit limit does not permit reducing the
limit below the amount of the outstanding
balance if this would require the consumer to
make a higher payment.
2. Teirporary nature o f suspension o r
reduction. Creditors are permitted to prohibit
additional extensions of credit or reduce the
credit limit only while one of the designated
circumstances exists. When the circumstance
justifying the creditor’s aetion ceases to exist,
credit privileges must be reinstated, assuming
that no other circumstance permitting such
action exists at that time.
3. Imposition of fees. If not prohibited by
state law, a creditor may collect only bona
fide and reasonable appraisal and credit
report fees if such fees are actually incurred
in investigating whether the condition
permitting the freeze continues to exist. A
creditor may not in any circumstances,
impose a fee to reinstate a cretfct tine once
the condition has been determined not to
exist.
4. Reinstatement of credit privileges.
Creditors are responsible for ensuring that
credit privileges are restored as soon as
reasonably possible after the condition that
permitted the creditor's action ceases to
exist. One way a creditor can meet this
responsibility is to monitor the line on an
ongoing basis to determine when the
condition ceases to exist. The creditor must
investigate the condition frequently enough to
assure itself that the condition permitting the
freeze continues to exist. The frequency with
which ;he creditor must investigate to
determine whether a condition continue# to
exist depends upon the specific-condition
permitting the freeze. As an alternative to
such monitoring, the creditor may shift the
duty to the consumer to request
reinstatement of credit privileges by
providing a notice in accordance with
§ 226.9(c)(3). A creditor may require a
reinstatement request to be in writing if it
notifies the consumer of this requirement on
the notice provided under i 22fL9fe)f3J. Once
the consumer requests reinstatement, the
creditor must promptly investigate to
determine whether the condition allowing the
freeze continues to exist. Under this
alternative, the creditor has a duty to
investigate only upon the consumer s request.



No.

68 / M onday. April 9, 1990 / Rules

5. Suspension of credit privileges following
request by consumer. A creditor may honor a

and

Regulations

between the time the early disclosures are
provided to the consumer and the time the
specific request by a consumer to. suspend
plan is opened, and the consumer as a resuit
credit privileges. If the consumer later
decides to not enter into the pian. a creditor
requests that the creditor reinstate credit
must refund all fees paid by the consumer in
privileges, the creditor must do so provided
connection with the application. All fees,
no other circumstance justifying a suspension including credit report fees and appraisal
exists at that time. If two or more consumers
fees, must be refunded whether such fees are
are obligated under a plan and each has the
paid to the creditor or directly to third
ability to take advances, the agreement may
parties. A consumer is entitled to a refund of
permit any of the consumers to direct the
fees under these circumstances whether or
creditor not to make further advances. A
not terms are guaranteed by the creditor
creditor may require that all persons
§ 226.5b(d)(2)(i).
obligated under a plan request reinstatement. under
2. Variable-rate plans. The right to a refund
6. Significant decline defined. What
of fees does not apply to changes in the
constitutes a significant decline for purposes
annual percentage rate resulting from
of § 226.5b(f)(3)(vi)(A) will vary according to
fluctuations in the index value in a variableindividual circumstances. In any event, if the
rate plan. Also, if the maximum annual
value of the dwelling declines such that the
initial difference between the credit limit and percentage rate is expressed as an amount
over the initial rate, the right to refund of fees
the available equity (based on the property’s
would not apply to changes in the cap
appraised value for purposes of the plan) is
resulting from fluctuations in the index value.
reduced by fifty percent, this constitutes a
3. Changes in terms. If a term, such as the
significant decline in the value of the
maximum rate, is stated as a range in the
dwelling for purposes of | 226.5b(£)(3)(vi)(A).
For example, assume that a house with a first eariy disclosures, and the term ultimately
applicable to the plan falls within that range,
mortgage of $50,000 is appraised at $100,000
a change does not occur for purposes of this
and the credit limit is $30,000. The difference
between the credit limit and the available
A section. If, however, no range is used and the
equity is $20,000, half of which is $10,000. The term is changed (for example, a rate cap of 6
creditor could prohibit further advances or
rather than 5 percentage points over the
reduce the credit limit if the value of the
initial rate), the change would permit the
property declines from$100,000 to $90,003.
consumer to obtain a refund of fees. If a fee
This provision does not require a creditor to
imposed by the creditor is stated in the eariy
obtain an appraisal before suspending credit
disclosures as an estimate and the fee
privileges although a significant decline must
changes, the consumer could elect to not
occur before suspension can occur.
enter into the agreement and would be
7. Material change in financial
entitled to a refund of fees. Qn the other
circumstances. Two conditions must be met
hand, if fees imposed by third parties are
for § 22o.5b(f)(3)(vi)(B) to apply. First, there
disclosed as estimates and those fees change,
must be a "material change" in the
the consumer is not entitled to a refund of
consumer's financial circumstances, such as
fees paid in connection with the application.
a significant decrease in the consumer'3
Creditors must however, use the best
income. Second, as a result of this change,
information reasonably available in
the creditor must have a reasonable belief
providing disclosures about such fees.
that the consumer will be unable to fulfill the
4. Timing of refunds and relation to other
payment obligations of the plan. A creditor
provisions. The refund of fees must be made
may, but does not have to, rely on specific
as soon as reasonably possible after the
evidence (such as the failure to pay- other
creditor is notified that the consumer is not
debts) in concluding that the second part of
entering into the plan because of the changed
the test has been met. A creditor may
term, or that the consumer wants a refund of
prohibit further advances oe reduce the credit fees. The fact that an application fee may be
limit under this section if a consumer files for refunded to some applicants under this
or is placed in bankruptcy;
provision does not render such fees finance
8. Default of a material obligation
charges under § 226.4(c)(1) of the regulation.
Creditors may specify events that would
qualify as a default of a material obligation
5b(hJ Imposition o f Nonrefundable Fees
under § 226.5b(f)(3)(vi)(C). For example, a
1. Collection of fees after consumer
creditor may provide that default of a
receives disclosures. A fee may ba collected
material obligation, will exist if the consumer
after the consumer receives the disclosures
moves out of the dwelling or permits an
and brochure and before the expiration of
intervening lien to be filed that would take
three days, although the fee must be refunded
priority over future advances made by, the
if, within three days of receiving the required
creditor.
information, the consumer decides to not
9. Government limits on the annual
enter into the agreement. In such.acase. the
percentage rate. Under & 226.5bff)(3}(vi)(Il).a consumer
must be notified that the fee is
creditor may prohibit furtheradvances or
refundable for three days. The notice must be
reduce the credit limitif,forexample, a state
clear and-conspicuous and in writings and
usury law is.enacted which prohibits a
may be included with the disclosures
creditor from imposing the agreed-upon
required1under § 226.5b(d) or as an
annual percentage rate.
attachment to them. If disclosures'and*
5b(g) Refund o f Fees
brochure are mailed'to the consumer.,
1. Refund of fees required. If any disclosed' footnote lOd of the regulation, pravidea that a
nonrefundable fee may not be imposed until
term, including any termprovided upon'
request pursuant to § 226.5b(d), changes
six business days after the mailing.
19

Federal Register

/ Vol. 55, No. 68 / Monday. April 9, 1990 / Rules and Regulations

2. Collection of fees before consumer
receives disclosures. An application fee may
be collected before the consumer receives the
disclosures and brochure (for example, when
an application contained in a magazine is
mailed in with an application fee) provided
that it remains refundable until three
business days after the consumer receives the
§ 226.5b disclosures. No other fees except a
refundable membership fee may be collected
until after the consumer receives the
disclosures required under § 226.5b.
3.
A fee
collected before disclosures are provided
may become nonrefundable except that,
under § 226.5b(g), it must be refunded if the
consumer elects to not enter into the plan
because of a change in terms. (Of course, all
fees must be refunded if the consumer later
rescinds under § 226.15.)

Relation to other provisions.

Section 226.6 Initial Disclosure Statement
7, Com m ent 6(a)(2 )-2 is am ended by
adding a sen te n ce after the first
sen ten ce of the flush text follow ing the
third bulleted paragraph to read as
follow s:

6(a) Finance Charge
Paragraph 6(a)(2)
*

*

2.

*

*

*

*

Variable-rate disclosures —coverage.
♦

*

*

*

* * * (See the rule in $ 226.5b(f)(l) applicable
to home equity plans, however, which
prohibits "rate reservation" clauses.) * * *
*
*
*
*
*
8. Com m ents 6(e)—1 through 6(e)—4 and
a heading are added to read as follow s:

6(e) Home Equity Plan Information
1. Additional disclosures required. For

home equity plans, creditors must provide
several of the disclosures set forth in
§ 226.5b(d) along with the disclosures
required under § 226.6. Creditors also must
disclose a list of the conditions that permit
the creditor to terminate the plan, freeze or
reduce the credit limit, and implement
specified modifications to the original terms.
2.
The home equity
disclosures provided under this section must
be in a form the consumer can keep, and are
governed by § 226.5(a)(1). The segregation
standard set forth in § 226.5b(a) does not
apply to home equity disclosures provided
under $ 226.6.
3.
The payment example disclosure
in § 226.5b(d)(5)(iii) and the variable-rate
information in § 226.5b(d)(12) (viii), (x), (xi).
and (xii) need not be provided with the
disclosures under § 226.6 if:
• The disclosures under § 226.5b(d) were
provided in a form the consumer could keep;
and
• The disclosures of the payment example
under { 226.5b(d)(5)(iii), the maximum
payment example under $ 226.5b(d)(12)(x)
and the historical table under
226.5b(d)(12)(xi) included a representative
payment example for the category of
payment options the consumer has chosen.
For example, if a creditor offers three
payment options (one for each of the

Form of disclosures.

Disclosure of payment and variable-rate
examples.

5




categories described in the commentary to
5 226.5b(d)(5)). describes all three options in
its early disclosures, and provides all of the
disclosures in a retainable form, that creditor
need not provide the { 226.5b(d)(5)(iii) or
(d)(12) disclosures again when the account is
opened. If the creditor showed only one of
the three options in the early disclosures
(which would be the case with a separate
disclosure form rather than a combined form,
as discussed under S226.5b(a)), the
disclosures under § 226.5b(d)(5)(iii) and
(d)(12) (viii). (x). (xi) and (xii) must be given
to any consumer w'ho chooses one of the
other two options. If the { 226.5b(d)(5)(iii) and
(d)(12) disclosures are provided with the
second set of disclosures, they need not be
transaction-specific, but may be based on a
representative example of the category of
payment option chosen.
4. Disclosures for the repayment period.
The creditor must provide disclosures about
both the draw and repayment phases when
giving the disclosures under § 226.6.
Specifically, the creditor must make the
disclosures in § 226.6(e), state the
corresponding annual percentage rate (as
required in § 226.6(a)(2)) and provide the
variable-rate information required in footnote
12 for the repayment phase. To the extent the
corresponding annual percentage rate, the
information in footnote 12 and any other
required disclosures are the same for the
draw and repayment phase, the creditor need
not repeat such information, as long as the
disclosure clearly states that the information
applies to both phases.
* * * * *

13117

a creditor freezes a line or reduces a credit
line rather than terminating a plan and
accelerating the balance.
* * * * *
12.
Comments 9(e)-l through 9(e)(3)—2
and headings are added to read as
follows:

9(e) Disclosures Upon Renewal of Credit or
Charge Card
1. Coverage. This paragraph applies to

credit and charge card accounts of the type
subject to 226.5a. (See § 226.5a(a)(3) and the
accompanying commentary for discussion of
the types of accounts subject to § 226.5a.) The
disclosure requirements are triggered when a
card issuer imposes any annual or other
periodic fee on such an account, whether or
not the card issuer originally was required to
provide the application and solicitation
disclosures described in § 226.5a.
2. Form. The disclosures under this
paragraph must be clear and conspicuous,
but need not appear in a tabular format or in
a prominent location. The disclosures need
not be in a form the cardholder can retain.
3. Terms at renewal Renewal notices must
reflect the terms actually in effect at the time
of renewal. For example, a card issuer that
offers a preferential annual percentage rate
to employees during their employment must
send a renewal notice to employees
disclosing the lower rate actually charged to
employees (although the card issuer also may
show the rate charged to the general public).
4. Variable rate. If the card issuer cannot
determine the rate that will be in effect if the
cardholder chooses to renew a variable-rate
Section 226.9 Subsequent Disclosure
account, the card issuer may disclose the rate
Requirements
in effect at the time of mailing or delivery of
9. Comment 9(c)-l is amended by
the renewal notice. Alternatively, the card
issuer may use the rate as of a specified date
adding a sentence at the end to read as
(and then update the rate from time to time,
follows:
for example, each calendar month) or use an
9(c) Change in Terms
estimated rate under § 226.5(c).
5. Renewals more frequent than annual. If
1. "Changes" initially disclosed. * * ‘ The
a renewal fee is billed more often than
rules in $ 226.5b(f) relating to home equity
annually, the renewal notice should be
plans, however, limit the ability of a creditor
to change the terms of such plans.
provided each time the fee is billed. In this
instance, the fee need not be disclosed as an
10. Comment 9(c)(1)—6 is addd to read
annualized amount. Alternatively, the card
as follows:
issuer may provide the notice no less than
9(c)(1) Written Notice Required
once every twelve months if the notice
*
*
*
*
*
explains the amount and frequency of the fee
6. Home equity plcns. If a creditor renews that will be billed during the time period
covered by the disclosure, and also discloses
the draw period for a home equity plan on
the fee as an annualized amount. The notice
terms different from those of the original
under this alternative also must state the
plan, the requirements of § 226.9(c) apply to
such a change. When the terms are changed
consequences of a cardholder's decision to
pursuant to a written agreement as described terminate the account after the renewal
in S225.5b(f)(3)(iii), the advance notice
notice period has expired. For example, if a
requirement does not apply.
$2 fee is billed monthly but the notice is given
annually, the notice must inform the
11. Comments 9(c)(3)—1 and 9(c)(3)—2
cardholder that the monthly charge is 52. the
and a heading are added to read as
annualized fee is $24, and $2 will be billed to
follows:
the account each month for the coming year
9(c)(3) Notice for Home Equity Plans
unless the cardholder notifies the card issuer.
If the cardholder is obligated to pay an
1. Written request for reinstatement. If a
amount equal to the remaining unpaid
creditor requires the request for
monthly charges if the cardholder terminates
reinstatement of credit privileges to be in
the account during the coming year but after
writing, the notice under $ 226.9(c)(3) must
the first month, the notice must disclose that
state that fact.
fact
2. Notice not required. A creditor need not
8.
Terminating credit availability. Card
provide a notice under this paragraph if.
issuers have some flexibility in determining
pursuant to the commentary to § 226.5b(f)(2).
20

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the p rocedu res for how an d when an acco u n t
m ay be term inated. H ow ever, the ca rd issuer
must clearly disclose the time by w hich the
card holder must a c t to term inate the acco u n t
to avoid paying a ren ew al fee. S ta te and
other applicable law govern w h eth er the card
issuer may im pose requirem ents such as
specifying that the ca rd h o ld e r’s resp onse be
in writing or that the outstanding b alan ce be
repaid in full upon term ination.
7.

Timing of termination by cardholder.

W h en a card issuer provides notice under
§ 226.9(e)(1), a ca rd h o ld e r must be given at
least 30 days or one billing cy cle, w h ichever
is less, from the date the notiee is m ailed or
delivered to m ake a decision w h ether to
term inate an acco u n t. W h en notice is given
under § 226.9(e)(2). a card h o ld er has 30 days
from m ailing or delivery to decide to
term inate an acco u n t.
8.
A ren ew al notice is
deem ed to be provided when m ailed or
delivered. Sim ilarly, notice of term ination is
deem ed to be given when m ailed or
delivered.
9.
In a situation w here a
card h old er has provided tim ely no tice of
term ination a n d a ren ew al fee h a s been
billed to a card h old er's a cco u n t, the card
issuer must reverse or oth erw ise w ithd raw
the fee prom ptly. O n ce a card h old er h as
term inated an a cco u n t, no add itional action
by the card holder m ay be required.

Timing of notices.

Prompt reversal of renewal fee upon
termination.

9(e)(3) Notification on Periodic Statements
1. Combined disclosures. If a single
d isclosu re is used to com ply with both
§5 226.9(e) and 226.7, the periodic statem en t
must com ply with the rules in §§ 226.5a and
226.7. Fo r exam p le, the w ords "g ra c e period”
must be used and the nam e o f the b a la n ce
calcu lation m ethod must be identified (if
listed in § 226.5a(g)) to com ply with the
requirem ents o f § 226.5a. even though the use
of those term s would not otherw ise be
required for periodic statem en ts under
§ 226.7. A ca rd issuer m ay include som e o f
the ren ew al d isclosu res on a periodic
sta te m e n t and others on a s e p a ra te docum ent
so long as there is som e referen ce indicating
that they relate to one another. All ren ew al
d isclosu res must be provided to a card h old er
a t the sam e time.

§ 228.5a if cred it in su ran ce (typically life,
disability, and unem ploym ent in su ran ce) is
offered on th e outstanding b alan ce of such an
accoun t. (C redit c a rd a c co u n ts su b ject to
§ 226.9(f) are the sam e as those sub ject to
§ 226.9(e); see com m ent 9 ( e ) -l.) C harge c a rd
a cco u n ts are not covered by this paragraph.
In addition, the disclosu re requirem ents of
this p aragraph apply only w h ere the card
issuer initiates the change in insurance
providers. For exam p le, if the card issuer’3
curren t in su ran ce provider is m erged into or
acqu ired by an o th er com pany, these
disclosu res would not be required.
D isclosures also need not be given in c a s e s
w h ere card issuers pay for cred it in su ran ce
them selves and do not sep arately ch arge the
cardholder.
2.
The requirem ent to p ro v id e the
disclosu re arises w hen the c a rd issuer
chan ges the provider of in su ran ce, even if
there will be no in crease in the prem ium rate
charged the consu m er and no d e c re a se in
co v erag e under the insurance policy.
3.
If a su b stan tial d ecrease
in coverage will resu lt from the change in
providers, the c a rd issuer either must explain,
the d e cre a se or refer to an acco m p an yin g
copy of the policy or group certificate for
d etails of the new term s of coverage. (See the
com m en tary to A p pend ix G -13.)
4.
In a d d itio a
to stating that the card h old er m ay c a n c e l the
insurance, the c a rd issuer m ay exp lain the
effect the c a n c e lla tio n w ould have, on the
consu m er's cred it card p la n
5.
Al though the
card issuer is resp onsib le for the d isclosu res,
the in su ran ce provider or an o th er third p arty
m ay furnish the d isclo su res on the cardissuer's behalf.

No increase in rate or decrease in
coverage.

Form of notice.

Discontinuation of insurance.

Mailing by third party.

9(f)(3) Substantial Decrease in Coverage
1. Determination. W h eth er a sub stantial
d e cre a se in co v erag e will resu lt from the
chan ge in providers is determ ined by the tw op art test in § 226.9(f)(3): First, w h ether the
d e c re a se is in a sign ificant term o f coverage;
and second , w h eth er the d e c re a se might
reaso n ab ly be exp ected to affect a
card h old er’s decision to continue the
in su ran ce. If both conditions are met, the
d e cre a se m ust be disclosed in the notice.

14(b) Annual Percentage Rate for §§ 226.5a
and 226.5b Disclosures, for Initial
Disclosures and for Advertising Purposes
1 6 . C o m m e n t 1 4 ( b ) - l is a m e n d e d b y
r e v is in g th e f irs t s e n t e n c e to r e a d a s
f o llo w s :

1. Corresponding annual percentage rate
computation. Fo r purposes of § § 226.5a.
226.5b. 226.6 and 228.18. the annual
p ercentage rate is determ ined by multiplying
the periodic rate by the num ber of periods in
the year. * * *

Section 226.15 Right of Rescission
17. Com m ents to 15(a)(3) are am ended
by revising the fourth sen ten ce and by
adding tw o sen te n ce s at the end o f
com m ent 1.5(a)(3)—2; and by adding a
sen ten ce at the end o f com m ent
15(a)(3)—3 to read as follow s:

15(a) Consumer's Right to Rescind
Paragraph 15(a)(3)
*

*•

*-

*

*-

Material disclosures.

2.
* * * Failure to give
the other required initial disclosu res (such as
the billing rights statem en t) or the
inform ation required under section 226.5b.
does not prevent the running of the rescission
period, although that failure m ay result in
civil liability or adm in istrative san ctio n s. The
paym ent term s set forth in footnote 36 appiy
to any repaym ent ph ase set forth in the
agreem ent. Thus, the paym en t term s
describ ed in § 226.6(e)(2) for any repaym ent
p h ase as well as for the d raw period are
“m aterial d isclo su res.”

3. Material disclosures — variable-rate
program. * * * The d isclo su res listed in
footnote 12 to sectio n 226.6(a)(2) for any
repaym ent ph ase also are m aterial
d isclo su res for v ariab le-rate program s.
*
*
*
*
*

Section 226.16. Advertising
18. C om m ents to 16(b) are- am ended
by adding p aren th etical m aterial at the
end of com m ent 16(,b)-2 and by revising
the la st sen ten ce in com m ent 16(b)— to
re a d as follow s:

2. Preprinted notices on periodic
statements. A card" issuer m ay preprint the

Section 226.12 Special Credit Card
Provisions

16(b) Advertisement of Terms That Require
Additional Disclosures

required inform ation on its periodic
statem en ts. A card issu er th a t d oes so,
how ever, using the a d v a n ce n o tice option
under § 226.9(e)(1), must m ake d e a r on the
periodic statem en t w hen the preprinted
ren ew al d isclosu res a re app licab le. Fo r
exam p le, the ca rd issu er could include a
sp ecial notice (n ot preprinted) a t the
ap p ro p riate time that the renew al fee will be
bitted in the following billing cy cle, o r could
sh ew the renew al d a te a s a regular
(preprinted) entry on all periodic statem en ts.

14. Com m ent 1 2 (a )(2 )-9 is ad ded toread as follow s:

2. U se of positive term s. * * * (See.
how ever, the rules in § 226.16(d) relating to
ad v ertisem en ts for hom e equity plans.)
*
*
*
*
*

13.
Comments 9(f)—1 through 9(f)—5
and 9(f)(3)—1 and. headings are added to
read as follows:

9(f) Change in Credit Card Account
'nsurance Provider
1. Coverage. This paragraph, applies to
cred it c a r d a cco u n ts of the type sub ject to




12(a) Issuance of Credit Cards
Paragraph 12(a)(2)
*

*

*

*

*

Multiple entities.

9.
W h ere m ultiple entities
sh are resp onsibilities w ith resp ect to a cred it
card issued by on e o f them, the entity, that
issued the card m ay rep lace it on an
un solicited basis, if that entity term inates the
original card by voiding it in som e w ay, a9
d escrib ed in com m ent 12(a)(2)—7r. The oth er
entity or entities m ay n o t issue a c a rd on an
unsolicited basis in th ese circu m stan ces.

Section 226.14 Determination of Annual
Percentage Rate
15. T he heading to com m ents under
§ 226.14(b) is revised to read as follow s:

21

6. Discounted variable-rate plana —
disclosure of the annual percentage
rates. * * * The op tions listed in com m ent
1 6 (b )-5 m ay be used in disclosing-the current
in dexed rate.

*

*

*

*

*

19. Com m ent 1 6 (b )-7 is revised to read
as follow s:

Triggering terms.

7.
T h e following are
exam p les of term s that trigger add itional
d isclosu res:
• "Sm all m onthly serv ice ch arge on the
rem aining b alan ce, which d escrib es how the
am ount of a finance charge will be
determ ined.

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• “ 1 2 p e rc e n t A n n u al P ercen tag e R ate” or
"A $15 annual m em bership fee buys you
S2.000 in cre d it.” w hich describe required
disclosu res using positive num bers.

under § 226.16(d) to state the annual
p ercen tag e rate, the add itional disclosu res in
§ 226.16(b) must be provided in the
advertisem en t. W hile § 228.16(d) does not
require a statem en t of fees to use or m aintain
20. Comment 16(b)—9 is added to read
the plan (such as m em bership f e e 9 and
as follows:
tran sactio n ch arges), such fees must be
9.
D eferred billing and d eferred paym ent disclosed under § 228.16(b) (1) and (3).
6.
progra m s. S tatem en ts such as "C h arge it—
A d vertisem en ts for home equity plans are
you won't be billed until M ay" or "Y o u m ay
skip your January p ay m en t" are not in
governed solely by the requirem ents in
th em selves triggering terms, since the timing
§ 226.16, and not by the closed-end
advertising rules in § 226.24. Thus, if a
for initial billing or for m onthly paym en ts are
cred ito r states paym ent inform ation about
not term s required to be disclosed under
the repaym ent phase, this will trigger the
§ 226.6. H ow ever, a statem en t such as "N o
duty to provide add itional inform ation under
finance ch arge until M ay” or any other
§ 226.16. but not under § 226.24.
statem en t regarding when finance ch arges
begin to a ccru e is a triggering term, w hether
Subpart C—Closed-End Credit
appearing alone or in conjunction with a
description of a deferred billing or deferred
paym en t program such as the exam p les
*
*
*
*
*
above.

Inapplicability of closed-end rules.

Section 226.17—General Disclosure
Requirements

21. C om m ents 16(d)—1 through 16(d)—6
and a heading are added to read as
follow s:

16(d) Additional Requirements for Home
Equity Plans
1. Trigger terms. Negative as well as
affirmative references trigger the requirement
for additional information. For example, if a
creditor states "no annual fee," "no points,"
or "we waive closing costs" in an
advertisement, additional information must
be provided. (See comment 16{d)-4 regarding
the use of a phrase such as “no closing
costs ") Inclusion of a statement such as “low
fees,” however, would not trigger the need to
state additional information. References to
payment terms include references to the draw
period or any repayment period, to the length
of the plan, to how the minimum payments
are determined and to the timing of such
payments.
2.
Section
226.16(d)(l)(i) requires a disclosure of any
fees imposed by the creditor or a third party
to open the plan. In providing the fee
information required under this paragraph,
the corresponding rules for disclosure of this
information apply. For example, fees to open
the plan may be stated as a range. Similarly,
if property insurance is required to open the
plan, a creditor either may estimate the cost
of the insurance or provide a statement that
such insurance is required. (See the
commentary to § 226.5b(d)(7) and (8).)
3.
An
advertisement referring to deductibility for
tax purposes is not misleading if it includes a
statement such as "consult a tax advisor
regarding the deductibility of interest."
4.
Under
§ 226.16(d)(5), advertisements may not refer
to home equity plans as “free money” or use
other misleading terms. For example, an
advertisement could not state “no closing
costs" or “we waive closing costs" if
consumers may be required to pay any
closing costs, such as recordation fees.

Fees to open the plan.

Statements of tax deductibility.
Misleading terms prohibited.

5.

Relation to other sections.

Advertisements for home equity plans must
comply with all provisions in § 226.16, not
solely the rules in § 228.16(d). If an
advertisement contains information (such as
the payment terms) that triggers the duty




22. Com m ent 1 7 (b )-2 is am ended by
revising the first sen ten ce to read as
follow s:

17(b) Time of Disclosures
2. Converting open-end to closed-end
credit. E x ce p t for home equity plans subject
to § 226.5b in w hich the agreem en t provides
for a repaym ent phase, if an open-end cred it
acco u n t is con v erted to a closed-end
tra n sa ctio n under a w ritten agreem en t with
the consum er, the cred ito r m ust provide a set
of closed -en d cred it disclosu res before
consu m m ation of the closed -en d
tran sactio n . * * *

*

*

*

*

*

17(c) Basis of Disclosures and Use of
Estimates
23. Com m ents to 17(c)(1) are am ended
by adding flush text to follow the third
bulleted paragraph o f com m ent 17(c)(1)—
4; by adding a fourth bulleted paragraph
before the last paragraph o f com m ent
17(c)(1)—11; and by adding a new
com m ent 17(c)(1)—17, to read as follow s:

Paragraph 17(c)(1)
*

*

*

*

*

Consumer buydowns. * * *

4.
The rules regarding consumer buydowns
do not apply to transactions known as
"lender buydowns,” In lender buydowns, a
creditor pays an amount (either into an
account or to the party to whom the
obligation is sold) to reduce the consumer’s
payments or interest rate for all or a portion
of the credit term. Typically, these
transactions are structured as a buydown of
the interest rate during an initial period of the
transaction with a higher than usual rate for
the remainder of the term. The disclosures for
lender buydowns should be based on the
terms of the legal obligation between the
consumer and the creditor. (See comment
1 7 (c)(1 )—3 for the analogous rules concerning
third-party buydowns.)
*
*
*
*
*

Other variable-rate transactions,

11.
** *
• “Price level adjusted mortgages" or other
in dexed mortgages that have a fixed rate of
interest but provide for periodic adjustments

22

13119

to paym ents and the loan b alan ce to reflect
chan ges in an index m easuring prices or
inflation. D isclosures are to be b ased on the
fixed in terest rate.

*

*

*

*

*

Special rules for tax refund anticipation
loans. T a x refund loans, also known as
17.

refund an ticipation loans (R A Ls), are
tran sactio n s in which a cred itor will lend up
to the am ount of a consu m er's exp ected ta x
refund. R AL agreem en ts typically require
repaym ent upon dem and, but also m ay
provide th at repaym ent is required w hen the
refund is m ade. The agreem ents also
typically provide that if the am ount of the
refund is less than the paym ent due, the
consu m er must pay the difference.
R epaym ent often is m ade by a preauthorized
offset to a consu m er's acco u n t held with the
cred ito r w hen the refund has been dep osited
by electron ic transfer. C red itors m ay charge
fees for RALs in addition to fees for filing the
con su m er’s ta x return electron ically. In RAL
tran sactio n s sub ject to the regulation the
following sp ecial rules apply:
• If, under the term s of the legal obligation,
repaym ent of the loan is required when the
refund is receiv ed by the consu m er (such as
by deposit into the consu m er's acco u n t), the
disclo su res should be b ased on the cred ito r’s
estim ate of the time the refund will be
delivered even if the loan also contains a
dem and clau se. The p ractice of a cred itor to
dem and rep aym en t upon delivery of refunds
does not determ ine w h ether the legal
obligation requires that repaym ent be m ade
at that time: this determ ination must be m ade
acco rd in g to app licab le state or other law .
(See com m ent 17(c)(5)—1 for the rules
regarding d isclo su res if the loan is payable
solely on dem and or is p ay ab le either on
dem and or on an altern ate m aturity d ate.)
• If the consu m er is required to rep ay m ore
than the am ount borrow ed , the differen ce is a
finance ch arge unless exclu d ed under § 228.4.
In addition, to the exten t th at an y fees
ch arged in con n ection with the loan (such as
for filing the ta x return electron ically) e x c e e d
those fees for a com p arab le ca sh tran sactio n
(that is, filing the ta x return electron ically
w ithout a loan), the difference m ust be
included in the finan ce charge.

Section 226.19 Certain Residential
Mortgage Transactions
24. Comment 19(a)(1)—3 is amended by
adding parenthetical materials after the
third sentence to read as follows:
19(a)(1)
*
*

3.

Time o f Disclosure
*
*
*

Written application. * * * (See comment

19(b)—3 for guidance in determining whether
or not the transaction involves an
in term ed iary agent or broker.)

*

*

*

*

*

25. Comments to 19(b) are amended
by adding parenthetical information
after the second sentence in comment
19(b)—2; by redesignating comments
19(b)-3 and 19(bH4 to be comments
19(b)-4 and 19(b)-5, respectively; by
adding new comment 19{b)—3; in newly
redesignated comment 19(b)-5, in the

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second bulleted paragraph, the last
sen ten ce should appear as flush text
below that paragraph and by adding a
third bulleted paragraph preceding the
flush text to new ly red esign ated
com m ent 19(b)—5 to read as follow s:
19(b)
*

Certain Variable-Rate Transactions
*

*

*

*

2. Timing. * * * (See com m ent 19(b)—3 for
gu idan ce in determ ining w h ether or not the
tran sactio n involves an in term ed iary agent or
broker.) * * *

Intermediary agent or broker.

3.
In certain
transactions involving an "intermediary
agent or broker," a creditor may delay
providing disclosures. A creditor may not
delay providing disclosures in transactions
involving either a legal agent (as determined
by applicable law) or any other third party
that is not an "intermediary agent or broker."
In determining whether or not a transaction
involves an "intermediary agent or broker”
the following factors should be considered:
• The number of applications submitted by
the broker to the creditor as compared to the
total number of applications received by the
creditor. The greater the percentage of total
loan applications submitted by the broker in
any given period of time, the less likely it is
that the broker would be considered an
"intermediary agent or broker” of the creditor
during the next period.
• The number of applications submitted by
the broker to the creditor as compared to the
total number of applications received by the
broker. (This factor is applicable only if the
creditor has such information.) The greater
the percentage of total loan applications
received by the broker that is submitted to a
creditor in any given period of time, the less
likely it is that the broker would be
considered an "intermediary agent or broker”
of the creditor during the next period.
• The amount of work (such as document
preparation) the creditor expects to be done
by the broker on an application based on the
creditor’s prior dealings with the broker and
on the creditor’s requirements for accepting
applications. The more preparation that the
creditor expects the broker to do on anapplication, the less likely it is that the broker
would be considered an “intermediary agent
or broker" of the creditor.
An example of an "intermediary agent or
broker” is a broker who, customarily within a
brief time after receiving an application,
inquires about the credit terms of several
creditors with whom the broker does
business and submits the application to one
of them. The broker is responsible for only a
small percentage of the applications received
by that creditor. During the time the broker
has the application, it might request a credit
report and an appraisal.
*
*
*
*
*
5.
Examples of variable-rate
transactions. * * *

• "Price level adjusted mortgages" or other
indexed mortgages that have a fixed rate of
interest but provide for periodic adjustments
to payments and the loan balance to reflect
changes in an index measuring prices or
inflation. The disclosures under § 226.19(b)(1)
are not applicable to such loans, nor are the




Limitations on field of preemption.

2.
Preemption under the Fair Credit and Charge
Card Disclosure Act does not extend to state
laws applying to types of credit other than
open-end consumer credit and charge card
accounts. Thus, for example, a state law is
not preempted as it applies to disclosures in
credit and charge card applications and
solicitations solely for business-purpose
accounts. On the other hand, state credit
disclosure laws will not apply to a single
application or solicitation to open either an
account for consumer purposes or an account
26. Com m ent 2 0 (c )-2 is revised to read
for business purposes. Such "dual purpose"
as follow s:
applications and solicitations are treated as
"consumer credit or charge card applications
*
*
*
*
*
or solicitations" under this section and state
credit disclosure laws applicable to them are
2.
Section 226.20(c) does not
preempted. Preemption under this statute
apply to "shared-equity,” “shareddoes not extend to state laws applicable to
appreciation," or “price level adjusted” or
home equity plans; preemption
similar mortgages.
determinations in this area are based on the
*
*
*
*
*
Home Equity Loan Consumer Protection Act,
Subpart D— Miscellaneous
as implemented in $ 226.5b of the regulation.
3.
State laws relating
*
*
*
*
*
to disclosures concerning credit and charge
cards other than in applications, solicitations,
27. Com m ent 2 5 (a )-4 is added to read
or renewal notices are not preempted under
as follow s:
§ 226.28(d). In addition, state laws regulating
the terms of credit and charge card accounts
are not preempted, nor are laws preempted
that regulate the form or content of
4.
In home equity plans
information unrelated to the information
that are subject to the requirements of
required to be disclosed under § § 226.5a and
§ 226.5b, written procedures for compliance
226.9(e). Finally, state laws concerning the
with those requirements as well as a sample
enforcement of the requirements of § § 228.5a
disclosure form and contract for each home
and 226.9(e) and state laws prohibiting unfair
equity program represent adequate evidence
or deceptive acts or practices concerning
of compliance. (See comment 25(a)-2
credit and charge card applications,
pertaining to permissible methods of
solicitations and renewals are not preempted.
retaining the required disclosures.)
Examples of laws that are not preempted
include:
• A state law that requires card issuers to
28.
Comments 28(d)-l through 28(d)-3
offer a grace period or that prohibits certain
and a, heading are added to read as
fees in credit and charge card transactions.
follows:
• A state retail installment sales law or a
state plain language law, except to the extent
that it regulates the disclosure of credit
information in applications, solicitations and
1.
The standard that applies to
renewals of accounts of the type subject to
preemption of state laws as they affect
§§ 226.5a and 226.9(e).
transactions of the type subject to §§ 226.5a
• A state law requiring notice of a
and 226.9(e) differs from the preemption
consumer's rights under antidiscrimination or
standards generally applicable under the
similar laws or a state law requiring notice
Truth in Lending Act. The Fair Credit and
about credit information available from state
Charge Card Disclosure Act fully preempts
authorities.
state laws relating to the disclosure of credit
information in consumer credit or charge card
applications or solicitations. (For purposes of
29.
Comment 30-1 is amended by
this section, a single credit or charge card
application or solicitation that may be used
revising the text of the second bulleted
to open either an account for consumer
paragraph and the flush text preceding
purposes or an account for business purposes
the third bulleted paragraph is
is deemed to be a "consumer credit or charge
republished; by revising the first
card application or solicitation.") For
sentence in the fourth bulleted
example, a state law requiring disclosure of
paragraph; and by adding a sixth
credit terms in direct mail solicitations for
bulleted paragraph before the flush text
consumer credit card accounts is preempted.
which appears at the end of comment
A state law requiring disclosures in telephone
applications for consumer credit card
30-1 to read as follows:
accounts also is preempted, even if it applies
1. Scope o f coverage. * * * Examples of
to applications initiated by the consumer
credit obligations subject to this section
rather than the issuer, because the state law
include: * * *
relates to the disclosure of credit information
• Dwelling-secured open-end credit plans
in applications or solicitations within the
entered into before November 7,1989 (the
general field of preemption, that is. consumer
effective date of the home equity rules) that
credit and charge cards.
following provisions to the extent they relate
to the determination of the interest rate by
the addition of a margin, changes in the
interest rate, or interest rate discounts:
Section 226.19(b)(2) (i), (iii), (iv). (v), (vi), (vii),
(viii), (ix), and (xj. (See comments 20(c)-2 and
30-1 regarding the inapplicability of variablerate adjustment notices and interest rate
limitations to price level adjusted or similar
mortgages.)

Section 226.20 Subsequent Disclosure
Requirements

20(c) Variable-Rate Adjustments
Exceptions.

Section 226.25 Record Retention

Laws not preempted.

25(a) General Rule

Home equity plans.

Section 226.28 Effect on State Laws

28(d) Special Rule for Credit and Charge
Cards
General.

Section 226.30 Limitations on Rates

23

Federal Register

/ V ol. 55, N o. 6 8 / M o n d a y , A p ril 9, 1 9 9 0 / R u le s a n d R e g u la tio n s

are not considered variable-rate obligations
for purposes of disclosure under the
regulation but where the creditor reserves the
contractual right to increase the interest
rate—periodic rate and corresponding annual
percentage rate—during the term of the plan.
In contrast, credit obligations in which there
is no contractual right to increase the interest
rate during the term of the obligation are not
subject to this section. Examples include:

★

*

★

*

*

• Dwelling-secured fixed-rate closed-end
balloon-payment mortgage loans qnd
dwelling-secured fixed-rate open-end plans
with a stated term that the creditor may
renew at maturity. * * *

*

*

*

*

*

• “Price level adjusted mortgages" or other
indexed mortgages that have a fixed rate of
interest but provide for periodic adjustments
to payments and the loan balance to reflect
changes in an index measuring prices or
inflation.
30.
Com m ent 30-11 is am ended by
revising the fourth sen te n ce ; by
rem oving the fifth sen ten ce; and by
adding a new sen ten ce after the fourth
sen ten ce, to read as follow s:

11. Increasing the maximum interest rate —
general rule. * * * Furthermore, where an
open-end plan has a fixed maturity and a
creditor renews the plan at maturity, or
enters into a closed-end credit transaction, a
new maximum interest rate may be set at
that time. If the open-end plan provides for a
repayment phase, the maximum interest rate
cannot be increased when the repayment
phase begins unless the agreement provided
for such an increase. * * *
Appendix G— Open-End Model Forms and
Clauses




13121

31.
Com ents app. G -5 through app. G - to the general public. Model G-12 is a mod'
clause for the disclosure required under
7 are added to read as follow s:
§ 226.5a(f) when a charge card accesses an
5.
open-end plan offered by another creditor.
Models G-10(A) and G-10{B) illustrate the
7.
These
tabular format for providing the disclosures
model forms illustrate the disclosures
required under § 226.5a for applications and
required under § 226.9(f) when the card issuer
solicitations for credit cards other than
changes the entity providing insurance on £
charge cards. Model G-10(A) illustrates the
credit card account. Model G-13(A) contain,,
permissible inclusion in the tabular format of
the items set forth in § 228.9(f)(3) as examples
all of the disclosures. Model G-10(B) contains
of significant terms of coverage that may be
only the disclosures required to be included
affected by the change in insurance provider.
in the table, while the three additional
The card issuer may either list all of these
disclosures are shown outside of the table.
potential changes in coverage and place a
The two forms also illustrate two different
check mark by the applicable changes, or list
levels of detail in disclosing the grace period,
only the actual changes in coverage. Under
and different arrangements of the disclosures.
either approach, the card issuer must either
Model G-10(C) illustrates the tabular format
explain the changes or refer to an
disclosure for charge card applications and
accompanying copy of the policy or group
solicitations and reflects all of the disclosures
certificate for details of the new terms of
in the table. Disclosures may be arranged in
coverage. Model G—13(A) also illustrates the
an order different from that in model forms
permissible combination of the two notices
G-10 (A), (B), and (C); may be arranged
required by § 226.9(f)— the notice required for
vertically or horizontally; need not be
a planned change in provider and the notice
highlighted aside from being included in the
required once a change has occurred. This
table; and are not required to be in any
form may be modified for use in providing
particular type size. Various features from
only the disclosures required before the
different model forms may be combined; for
change if the card issuer chooses to send two
example, the shorter grace period disclosure
separate notices. Thus, for example, the
in model form G-10(B) may be used in any
references to the attached policy or
disclosure. While proper use of the model
certificate would not be required in a
forms will be deemed in compliance with the
separate notice prior to a change in the
regulation, card issuers are permitted to use
insurance provider since the policy or
headings and disclosures other than those in
certificate need not be provided at that time.
the forms (with an exception relating to the
Model G-13(B) illustrates the disclosures
use of "grace period") if they are clear and
required under § 226.9(f)(2) when the
concise and are substantially similar to the
insurance provider is changed.
headings and disclosures contained in model
Board of Governors of the Federal Reserve
forms. For further discussion of requirements
System, March 29.1990.
relating to form, see the commentary to
William W. Wiles,
§ 226.5a(a)(2).
6.
Model G - ll
contains clauses that illustrate the general
[FR Doc. 90-7708 Filed 4 4 -90; 2:32 pmj
disclosures required under § 228.5a(e) in
BILLING COO€ 6210-01 -M
applications and solicitations made available

Models G-IO(A) through G-IO(C).

Models G -ll and G-12.

24

Models G-13(A) and G-13(B).

Secretary of the Board.