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F ED ER A L R E S E R V E BANK OF N EW YORK rCircular No. 6 3 1 4~1 L April 3, 1969 J Interpretations of Regulation Z To All State Member Banks, and Others Concerned, in the Second Federal Reserve D istrict: The Board of Governors of the Federal Reserve System announced yesterday the approval of five interpretations of provisions in its Truth in Lending Regulation Z, which goes into effect on July 1. A copy of each interpretation is printed below. They will be published shortly in the Federal R egister and Federal R eserve Bulletin. Additional copies of this circular will be furnished upon request. A lfred H ayes, President. Use of Ranges or Brackets to Determine Periodic Rate of Finance Charge on Open End Accounts Section 226.5 (a )(1) of Regulation Z, in effect, gives a creditor the option in certain circumstances of stating ( 1 ) two or more separate annual percent age rates (e.g., the rate on a $700 balance might be stated as 18 per cent on balance to $500 and 12 per cent on balance over $500), or (2) a single annual percentage rate determined by the “ quotient method” resulting from applying the rates to a total balance (e.g., in the example above, an annual percentage rate of M)1/^ per cent on a $700 balance). Section 2 2 6 .5 (a )(2 ), which relates to the use of ranges or brackets to compute periodic finance charges, does not prevent a creditor who uses such brackets from exercising the options referred to in section 2 2 6 .5 (a )(1 ). Overstatement of Annual Percentage Rate Section 226.6(h) of Regulation Z provides that in certain circumstances the disclosure of an annual per centage rate which is greater than that required to be disclosed under the regulation does not in itself constitute a violation of the regulation. Under this section may a disclosure regarding an annual per centage rate (e.g., “ the annual percentage rate does not exceed 18 per cent” ) be preprinted on a contract or periodic statement and comply with disclosure re quirements when the actual rate will at times be lower (e.g., 15 per cent) for some transactions? Section 226.5 specifies the methods which shall be employed in determining annual percentage rates. Section 226.6(h) is not intended to provide an alter native to these requirements, but is merely to provide appropriate relief to a creditor who overstates acci dentally. Any disclosure of an annual percentage rate, whether preprinted or otherwise, which over states the annual percentage rate determined in ac cordance with section 226.5 other than through inad vertence does not comply with requirements. Transition Period — Using Existing Forms, Suitably Altered or Supplemented Section 226.6 (k) of Regulation Z provides that, in some circumstances, if a creditor has been unable to obtain needed new printed forms by July 1, 1969, he may use existing forms until new ones are obtained, but not later than December 31, 1969. In such in stances, the existing forms must be suitably altered or supplemented to make necessary disclosures clearly and conspicuously. The requirement that existing forms be supplemented is met by attachments or enclosures. Also, in some instances, creditors encounter un avoidable delays in obtaining necessary equipment or computer programs needed to utilize new printed forms. Such delays can produce problems comparable to those involved in delays in obtaining printed forms. In such a situation, a creditor, under section 226.6 (k ), may continue to use existing forms until the means of utilizing the new forms are available, but in no event later than December 31, 1969, and subject, of course, to the conditions applicable under section 226.6 (k) : namely, that the creditor must have taken bona fide steps prior to July 1 , 1969, to obtain the necessary equipment or computer pro grams, and the existing forms must be “ altered or supplemented as necessary to assure that all of the items of information the creditor is required to dis close are set forth clearly and conspicuously.” ( over) Disclosures in Transaction Involving Multiple Customers Section 226.6(e) states the general rule that, except in the case of a rescindable transaction under section 226.9, where there are multiple customers in a trans action, the creditor is only required to make dis closures to one of them. However, in determining which customer shall receive disclosures, the creditor may not select a customer who is secondarily liable, such as an endorser, comaker (when designated as surety), guarantor, or a similar party. This does not prohibit the creditor from also furnishing disclosures to such persons who are secondarily liable. Periodic Statements — Finance Charge Resulting From More Than One Periodic Rate Section 2 2 6.7 (b )(4 ) of Regulation Z requires that a periodic statement for open end credit show the amount of any finance charge, and that the statement also itemize and identify that portion of the finance charge that is due to application of one or more periodic rates and that portion due to any other charge such as minimum, fixed, check service, trans action, activity, or similar charge. This does not require the statement to state sep arately the portions of a finance charge due to application of two or more periodic rates. For exam ple, if a creditor charges l 1/^ per cent per month on the first $500 of a balance and 1 per cent per month on amounts over $500, the monthly charge on a $600 balance would he $8.50, which must be shown. How ever, it would not be necessary to itemize the two components ($7.50 and $1.00) of the $8.50 charge. Under section 2 2 6 .7 (b )(5 ), the periodic rates that may apply to the account, and the applicable range of balances, must of course be shown, but this could be preprinted.
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