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F E D E R AL R E SE R V E BANK
OF N EW YORK
rCircular No. 3 7 5 5 1
L September 7, 1951 J

CONSUMER CREDIT
Interpretation o f Regulation W

To all Persons Concerned with R egulation W
in the Second Federal R eserve D istrict :

The Board of Governors has today issued a statement fo r publication September 10, 1951,
concerning the provisions of the Defense Production A ct amendments and o f Regulation W ,
Consumer Credit, which permit trade-ins to be counted fo r all or part o f the minimum down
payment required under the regulation. The statement, which is in the form o f an interpre­
tation o f the regulation, emphasizes that the new provisions o f the statute and the regulation
do not repeal the requirement that a down payment must be obtained. It stresses, also, that a
trade-in allowance cannot be counted against the down payment required under the regulation
except to the extent it reflects a bona fide trade-in or exchange o f property having a value that
bears a reasonable relationship to the amount credited.
The text o f the statement follow s:

CONSUMER CREDIT
Interpretation of Regulation W
ISSUED BY THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Since the amendment t Regulation W which was made following the amendment of the Defense
o
Production Act, and which became e f c i e July 3 , 1951, questions have been received concerning
fetv
1
trade-ins in connection with the instalment s l of l s e a t c e , particularly a t c e l s e in Groups
ae
itd rils
rils itd
B, C, and D of the Supplement to the regulation.
I should be noted that the new provisions of the statute and the regulation do not repeal the
t
requirement that a down payment must be obtained. Two provisions of the regulation are of s e i l
pca
importance h r . One i section 6 ( ) ( ) which requires that a trade-in be described in the Registrant’
ee
s
c 3
s
records and that the Registrant s t out “ the monetary value assigned thereto in good f t . The other
e
ai h ”
i section 80') (7) which requires that “any rebate or s l s discount” be deducted in calculating the
s
ae
“cash price” of the l s e a t c e and that the required down payment be determined on the b s s of
i t d ril,
ai
the “cash price ...net of any rebate or s l s discount.”
ae
The provisions of the statute and regulation, e
specially those quoted above, prohibit certain prac­
t c s which would attempt t use f c i i u trade-in allowances t evade the down payment requirements.
ie
o
ittos
o
This i true even though the regulation does not necessarily require that trade-in allowances counted
s
against down payments be limited t the actual market value of the trade-in or t the amount for which
o
o
the Registrant expects t be a t s l i. Some of the more important principles forbidding f c i i u
o
ble o e l t
ittos
trade-in allowances are indicated below.
1
.
I i evident that a transaction would involve a rebate or s l s discount rather than a tr de-in
t s
ae
a
where the Registrant in fact did not receive delivery and possession of the property for which a




( over)

s - a l d trade-in allowance was granted. In such a case an actual trade-in has not occurred, and l b ­
ocle
a el
ling the transaction as a “trade-in” w not change i s e s n i l c
ill
t s e t a haracteristic as a mere rebate or di ­
s
count. The Registrant has received nothing in part payment by virtue of the s - a l d trade-in and has
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merely reduced the price of the a t c e s l . Accordingly, the required down payment would have t
ril od
o
be obtained on the basis of the “cash price” of the a t c e net of such reduction.
ril
2 A transaction would similarly c n l c with the requirements of the regulation where there was
.
ofit
applied against the required down payment a s - a l d trade-in allowance in substantial amount for
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property having a value that was nominal or n g i i l , or that bore no reasonable relationship t the
elgbe
o
s - a l d allowance. Among transactions that would thus c n l c would be many made on the basis of
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ofit
a substantial uniform allowance for a ls - a l d trade-ins irrespective of their make, model, or condition.
l ocle
3 A trade-in could not be counted as a down payment t the extent that there had been any
.
o
o f e t n increase in the price of the a t c e being s l . The price to be used as a standard here would
fstig
ril
od
be the actual value at which the Registrant at the time i s l i g the same or l k a t c e with an a l c s
s eln
ie rils
l-ah
down payment or on a comparable b i ; that price might, of course, be lower than the “l s ” p i e
as s
it rc.
4 From the foregoing i may be noted that a trade-in allowance cannot be counted against the
.
t
down payment required under the regulation except t the extent that i r f e t a Iona fide trade-in or
o
t elcs
exchange of property. The regulation does not prevent a Registrant from giving rebates or discounts,
or from calling them anything he may like;but no matter what he may choose to c l them for h s own
al
i
purposes, they obviously cannot take the place of the down payment required by the regulation and
cannot excuse the Registrant from the requirement that he actually obtain the required down payment.
In other words, a Registrant i entirely free t give any trade-in allowances, r b t s or discounts that
s
o
eae,
he desires;but such allowances, r b e , or discounts cannot be used as a cloak t conceal evasions o
e at s
o
f
the down payment requirements of the regulation contrary t the principles here s o t
o
et u .
5 Under section 8 ( of the regulation the Registrant i required in any given case t keep such
.
a)
s
o
records as are relevant t establishing that h s treatment of an allowance as a trade-in or exchange i
o
i
n
payment or part payment of the required down payment i in conformity with the foregoing and with
s
the requirements of the regulation.
Additional copies o f this circular will be furnished upon request.




A xlan

S proul,

President.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102