Full text of Federal Reserve Bank of New York Circulars : 6389. Interpretations of Regulation Z

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FEDERAL RESERVE BANK
OF N EW YORK
Circular N o. 6389
August 19, 1969

In terp retation s o f R egu lation Z
To AH State Member Banks, and Others Concerned,
in the Second Federal Reserve D istrict:

Printed below is an excerpt from the Federal Register of August 16, containing the
text of three interpretations by the Board of Governors of the Federal Reserve System of
provisions in its Truth in Lending Regulation Z.
Additional copies of this circular will be furnished upon request.
Alfred Hayes,
President.

Title 12— BANKS AND BANKING
Chapter II— Federal Reserve System
SU B C H A P T E R A — B O A R D O F G O V E R N O R S OF
THE FED ERA L RE SE R V E SY ST E M
[R e g . Z ]

PART 226— TRUTH IN LENDING
M isce llan e o u s Interpretations
§ 2 2 6 .4 0 4
in te r e s t
it o r .

P rem ium s for vendor’ s single
insurance required by cred­

(a) Under § 226.4(a) (6), charges or
premiums for Insurance, written in con­
nection with a credit transaction, against
loss of or damage to property may be ex­
cluded from the finance charge if the
creditor makes the disclosures required
under that subparagraph. Under § 226.4
(а )(7 ), a premium or other charge for
any other guarantee or insurance pro­
tecting the creditor against the custom­
er’s default or other credit loss is
included in the finance charge. The ques­
tion arises as to whether Vendor’s Sin­
gle Interest (V.S.I.) coverage, when re­
quired by the creditor to be written in
connection with a transaction, is insur­
ance of the type described in § 226.4(a)
(б) or in § 226.4(a) (7).
( b ) V.S.I. coverage is written only in
connection with a credit transaction and
indemnifies the creditor against, among
other perils, conversion, embezzlement,
and secretion of the collateral by the
customer; and amounts payable on ac­
count of loss are payable only to the
creditor; and the amount of any in­
demnity payable under the policy is
directly related to the amount of the
credit loss, in that such indemnity can
never exceed the amount of the unpaid
principal balance of the debt. The in­
surer has no liability under a V.S.I. pol­
icy unless, at the time the policy was
written, no payment was more than a




specified number of days past due, and
§ 226.811 Renewals o f notes by m ail.
a claim under the policy is not valid un­
(a) Under paragraph (j) of § 226.8,
less the customer has defaulted in pay­
renewals of notes with new maturity
ment. Additionally, many V.S.I. policies
dates constitute refinancings and are
Indemnify the creditor against expense
consequently new transactions. A com­
incurred in transporting the collateral
mon practice is for creditors to permit
to the creditor from the place of
renewal of such notes by mail. In many
repossession.
(c)
V.S.I. coverage is, therefore, in­ of such instances the creditor does not
know whether the customer will reduce
surance which protects the creditor
his original obligation by a payment on
against the customer’s default or other
principal or, if reduced, the amount of
credit loss, and when required by the
that reduction. The question arises as to
creditor to be written in connection with
what disclosures should be made by mail
any transaction, the premium therefore
to the customer in these circumstances.
is included in the finance charge under
(b) If the creditor knows the amount
§ 226.4(a) (7).
of the principal payment, all disclosures
should be made on the basis of the re­
(Interprets and applies 15 U.S.C. 1605)
sulting new amount financed. If, how­
§ 226.405 Property insurance written in
ever, the creditor does not know whether
connection -with a transaction— o b ­
the customer will reduce his original
tained fro m or through the creditor.
obligation, or if so, by how much, he
should disclose on the assumption that
(a) Footnote 4 to § 226.4(a) (6) speci­
there will be no reduction. In such cir­
fies that a policy of insurance against
cumstances he may make one or more
loss or damage to property or liability
additional disclosures based on one or
arising out of its use is not considered
more examples of graduated principal
to be “ written in connection with” a
reduction. For example, if a single pay­
transaction when it “ * * * was not pur­
ment note was for $1,000 at 8 percent
chased by the customer for the purpose
for 3 months, in addition to the other
of being used in connection with that
required disclosures, the creditor should
extension of credit.” Therefore, when­
disclose an amount financed of $1,000
ever such a policy is purchased by the
with a finance charge of $20, and may,
customer for the purpose of being used
in addition, disclose that with a principal
in connection with a specific extension
payment of $300 the amount financed
of credit, it is insurance “ written in con­
would be $700 with a finance charge of
nection with” that transaction.
(b) If such property insurance which
$14, and with a principal payment of
is written in connection with a transac­
$500 the amount financed would be $500
tion is required by the creditor and is
with a finance charge of $10.
obtainable from or through him, the cost
(Interprets and applies 15 U.S.C. 1639)
thereof for the term of the initial policy
or policies must be disclosed to the cus­
Dated at Washington, D.C., the 1st day
tomer, irrespective of whether the cus­
of August 1969.
tomer purchases or expects to purchase
By order of the Board of Governors.
such insurance from the creditor, in or­
der for the premium to be excluded from
[sea l]
K e n n e t h A. K e n y o n ,
the finance charge.
D epu ty S ecretary.
(Interprets and applies 15 U.S.C. 1605)

[P.R. Doc. 69-9671; Piled, Aug.
8:45 a.m.]

15, 1969-