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FEDERAL RESERVE BANK

OF NEW YORK
r Circular No. 7 1 8 9
L
July 20, 1973

~I
J

REGULATION Z
Amendments and Interpretation
To A ll State M em b er Banks, and O thers Concerned,
in th e Second Federal R eserve District:

F ollow in g is the text o f a statement issued July 3 by the Board of Governors of the Federal Reserve
System:
The Board of Governors of the Federal Reserve System today announced amendment of its Regulation Z,
Truth in Lending, primarily intended to encourage advertising of open end credit terms. The Board also
issued an interpretation specifying how oral inquiries about consumer credit rates should be answered.
The amendment reduces the amount of information a creditor must furnish in advertising open end
credit plans (including revolving retail credit accounts and bank card plans). In their advertising, creditors
are still required to include certain minimum Truth in Lending disclosures — the annual percentage rate,
any free-ride period, the method of determining finance charges and balances on which finance charges are
imposed. Advertising of the period of repayment (for instance, “up to 24 months to pay ) is added as a term
requiring the same minimum disclosures with respect to an open end plan, but advertising of “no down
payment” is eliminated as a specific term triggering such requirements.
The amendment would also require full disclosure in an advertisement when a down payment is adver­
tised in percentage terms, as well as in dollar amounts. The advertised term “ 10% down” (or alternatively,
“90% financing” ), for example, would require a creditor to include a full disclosure of typical terms in the
advertisement.
The interpretation specifies that answers to oral inquiries about the cost of consumer credit on an annual
basis must be in terms of “annual percentage rates”, and not in terms of add-on or discount rates.
The amendments were published for comment December 18, 1972. The Board acted after considering
comments received and the amendments as adopted incorporated several technical changes suggested.
In subm itting the amendments to the Federal Register, the Board o f Governors m ade the follow ing
additional statement:
1. The amendments will, in large part, simplify and clarify the advertising restrictions of the Regulation.
For example, the amount of information which must be included in an open end credit advertisement once a
specific “triggering” term is used has been reduced and the prohibition against use of the “add-on” or
“discount” rate in advertisements has been clarified. Among other changes, the amendments add the “period
of repayment” as a “triggering” term in open end credit which requires additional disclosures. The amend­
ments clarify the fact that the amount of downpayment, either in dollars or percentages, triggers full
disclosure.
2. These amendments are promulgated pursuant to § 105 of the Truth in Lending Act (15 U.S.C.
§ 1604). Notice of proposed rule making was published on December 29, 1972, (37 Fed. Reg. 28765). After
consideration of all relevant matter submitted by interested parties, the range of balances to which annual
percentage rates apply was reinserted in the information required to be shown under § 226.10(c) (4 ) once
the full advertisement of open end credit terms is triggered. A technical change was made to §226.2(u).
3. The amendments are designed to stimulate the competitive advertising of specific open end credit
terms within the constraints of the statute. They also harmonize the separate requirements for open and
closed end credit, where appropriate. The amendments make numerous technical changes to the existing
provisions.
4. Section 226.6(a) has been clarified to provide that the requirement that the “annual percentage
rate” and “finance charge” be shown more conspicuously than other terminology does not apply to advertising
since such a requirement may be cither impractical (e.g., in radio advertisements) or inequitable (where
a creditor wishes to emphasize a favorable term for competitive purposes). However, an addition has been
made to § 226.10(d) specifying that all required disclosures must be made “clearly and conspicuously.” This
requirement (which is already contained in § 226.10(c) with respect to open end credit) would prevent the
advertiser from burying the required disclosures with insufficient emphasis in the text of the advertisement.
5. The amendments simplify § 226.10(c) by deleting the present requirements of showing a number
of items in open end credit advertisements once a specific credit term is advertised. The deleted terms are the
periodic rates, the conditions under which other charges may be imposed, the method by which the other
charges will be determined, and the minimum periodic payment required. Such advertisements must still




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include the annual percentage rate(s), any free ride period, and the method of determining finance charges
and the balances on which they are imposed. “No downpayment” has been removed as a specific term which
triggers full disclosure since the term is implied in almost any statement about an open end credit plan
e.g., “charge it with your credit card.”
6. The "period of repayment” has been added to § 226.10(c) as one of the specific terms requiring full
disclosure. This harmonizes the requirements of open end credit with those presently applicable to closed end
credit regarding the “period of repayment.” For example, “up to 24 months to pay” would be a triggering
term regardless of whether the credit plan involved open or closed end credit.
7. Section 2 2 6 .10 (d )(1 ) clarifies the fact that any expression of the finance charge on an annual basis
in closed end credit must be solely as an “annual percentage rate” and not in conjunction with, for example,
the add-on rate. With regard to the use of oral quotations of add-on or discount rates in response to consumer
inquiries about the cost of credit, the Board has issued a concurrent interpretation (§226.101) indicating
that the annual percentage rate and not the add-on or discount rate should be used in such circumstances.
Under the amendment the simple interest component of the finance charge could be shown along with the
annual percentage rate. For example, the interest rate on a home mortgage could also be advertised where
points may result in a higher annual percentage rate. Likewise, where finance charges are computed based
upon the application of a periodic rate (for example by credit unions), that rate may be shown in conjunction
with the annual percentage rate — e.g., a monthly periodic rate. These additional rates could not, however,
be shown more conspicuously than the annual percentage rate.
8. Sections 226.10(c) and 226.10(d) (2 ) have been clarified to provide that advertisement of the amount
of the downpayment or other payment, either in dollars or percentages, will trigger the full disclosure
requirements (whether or not the cash price is also given). The requirement for closed end credit that the
amount of the downpayment must be given once full disclosure is otherwise triggered has been clarified to
refer only to credit sales. (§ 226.10(d) (2 ) ( i i ) ). However, statements as to downpayments remain “trigger­
ing” terms under § 226.10(c) and ( d ) ( 2 ) for loans as well as credit sales. Where, for example, full disclosure
is triggered by a lender’s statement such as “95% loans,” examples of typical extensions of credit may be
used pursuant to interpretation § 226.1001 “Advertising of Credit Terms in Other Than Open End Credit”
(issued 4 /2 2/6 9 ) to comply with the full disclosure requirements. Section 226.10(d) (2 ) (v ) has also been
modified to specify that the “deferred payment price” disclosure is required in a credit sale, while the “total
of payments” is required in a loan or other non-sale transaction.

Enclosed is a copy of the amendments referred to above. In addition, printed below is the text
of the interpretation. Additional copies of this circular and its enclosure will be furnished upon request.
A lfred H ayes,

President.
[Reg. Z]
PART 226 — TRUTH IN LENDING
Use of “ Annual Percentage Rate” in Oral Communications
The interpretation is designed to make it clear that
in responding to oral inquiries from consumers about
the cost of consumer credit, the creditor should quote
the cost in terms of the annual percentage rate and not
the add-on or discount rate.
§ 226.101 Use of “annual percentage rate” in oral
communications.
(a )
Under § 226.1(a) (2 ), a stated purpose of the
Truth in Lending Act and Regulation Z is to assure
that every customer who has need for consumer credit
is given meaningful information with respect to the
cost of that credit so that he may readily compare the
various credit terms available to him from different
sources and avoid the uninformed use of credit. Under
§ 226.6(a), a creditor is required to make disclosures
using certain prescribed terminology, including the
“annual percentage rate.” The question arises as to
the propriety of a creditor quoting annual rates other
than “annual percentage rate” in response to consumer
inquiries about the cost of credit, where such other
rates could not be used in an advertisement under the
proscriptions of § 226.10.




(b ) The Truth in Lending Act and Regulation Z
are intended to facilitate “shopping” between competi­
tive credit plans. If a customer inquires about the cost
of credit and the creditor responds by quoting an add­
on or discount rate, he may mislead the customer
since the use of such rates is prohibited in consumer
credit advertising and such rates are significantly lower
than the annual percentage rate which must be shown
on the creditor’s disclosure statement. The quotation
of these rates can frustrate the stated purpose of the
Act and prevent the customer from making an in­
formed use of credit.
( c ) In response to any oral inquiry by a customer
about the cost of credit, a creditor when quoting
annual rates should use only those rates permitted to
be used in advertisements under § 226.10. Irrespective
of the method used by the creditor to compute finance
charges, the annual rate of the creditor’s total finance
charges should be quoted only in terms of the “annual
percentage rate.”
(Interprets and applies 15 U.S.C. 1663 and 15 U.S.C. 1664)

Board of Governors of the Federal Reserve System
TRUTH IN LENDING
AM EN DM EN TS TO REG U LATIO N Z
Effective November 1, 1973, sections 226.2
(u ), 226.6(a), 226.10(c) and 226.10(d) of
Regulation Z are amended to read as follows:
SECTION 226.2 — DEFINITIONS
AND RULES OF CONSTRUCTION
<*
#
(u) “Periodic rate” means a percentage rate
of finance charge which is or may be imposed
by a creditor against a balance for a period.
(See also § 226.5(a) (3 ).) * * *
SECTION 226.6 — GENERAL
DISCLOSURE REQUIREMENTS
(a)
Disclosures; general rule. The dis­
closures required to be given by this Part
shall be made clearly, conspicuously, in
meaningful sequence, in accordance with the
further requirements of this section, and at
the time and in the terminology prescribed
in applicable sections. Except with respect to
the requirements of § 226.10, where the terms
“finance charge” and “annual percentage rate”
are required to be used, they shall be printed
more conspicuously than other terminology
required by this Part and all numerical
amounts and percentages shall be stated in
figures and shall be printed in not less than
the equivalent of 10 point type, .075 inch com­
puter type, or elite size typewritten numerals,
or shall be legibly handwritten. * * *
SECTION 226.10 — ADVERTISING
CREDIT TERMS
*
a
*
(c) Advertising of open end credit. No
advertisement to aid, promote, or assist di­
rectly or indirectly the extension of open end
credit may set forth any of the terms described
in paragraph (a) of §226.7, the Comparative
Index of Credit Cost, or that a specified down­
payment or periodic payment is required
(either in dollars or as a percentage), the
period of repayment or any of the following
items, unless it also clearly and conspicuously
sets forth all the following items in termin­
ology prescribed under paragraph (b ) of
§ 226.7:




(1) An explanation of the time period, if
any, within which any credit extended may
be paid without incurring a finance charge.
(2) The method of determining the balance
upon which a finance charge may be imposed.
(3) The method of determining the amount
of the finance charge, including the determi­
nation of any minimum, fixed, check service,
transaction, activity, or similar charge, which
may be imposed as a finance charge.
(4) Where one or more periodic rates may
be used to compute the finance charge, each
corresponding annual percentage rate deter­
mined by multiplying the periodic rate by
the number of periods in a year and, where
there is more than one corresponding annual
percentage rate, the range of balances to
which each is applicable.15
(d)
Advertising of credit other than open
end. No advertisement to aid, promote, or
assist directly or indirectly any credit sale
including the sale of residential real estate,
loan, or other extension of credit, other than
open end credit, subject to the provisions of
this Part, shall state
(1) The rate of the finance charge except
as an “annual percentage rate,” using that
term. No other rate of finance charge may be
stated, except that:
(i) where the total finance charge in­
cludes, as a component, interest computed
at a simple annual rate, the simple annual
rate may be stated in conjunction with, but
not more conspicuously than, the annual
percentage rate, or
(ii) where the finance charge is com­
puted solely by the application of a periodic
rate to an unpaid balance, the periodic rate
may be stated in conjunction with, but not
more conspicuously than, the annual per­
centage rate.
15. A creditor imposing minimum charges is not required to
adjust the disclosure of the range of balances to which each
rate would apply in order to reflect the range of the balances
below which the minimum charge applies. If a creditor does
not impose a finance charge when the outstanding balance is
less than a certain amount, the creditor is not required to
disclose that fact or the balance below which no such charge
will be imposed.

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P R I N T E D IN N E W Y O R K

(2)
That no downpayment is required, or
the amount of the downpayment or of any
instalment payment required (either in dollars
or as a percentage), the dollar amount of any
finance charge, the number of instalments or
the period of repayment, or that there is no
charge for credit, unless it also clearly and
conspicuously sets forth all of the following
items in terminology prescribed under § 226.8:

(iii) the number, amount, and due dates
or period of payments scheduled to repay
the indebtedness if the credit is extended.

(i) the cash price or the amount of the
loan, as applicable.

(v) except in the case of the sale of a
dwelling or a loan secured by a first lien on
a dwelling to purchase that dwelling, the
deferred payment price in a credit sale, or
the total of payments in a loan or other
extension of credit which is not a credit
sale, as applicable.

(ii) in a credit sale, the amount of the
downpayment required or that no down­
payment is required, as applicable.




(iv) the amount of the finance charge
expressed as an annual percentage rate.
The exemptions from disclosure of an an­
nual percentage rate permitted in para­
graph ( b ) ( 2 ) of §226.8 shall not apply to
this subdivision.