Full text of Federal Reserve Bank of New York Circulars : 7712. Truth in Lending

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FEDERAL RESERVE BANK
OF N E W YORK

L

Circular No. 7 7 1 2 "I
September 18, 1975 J

TRUTH IN LENDING
Amendments to Regulation Z to Implement the Fair Credit Billing Act
To All Member Banks, and Others Concerned,
in the Second Federal Reserve District:

O n S ep tem b er 15, 1975, the B o a rd o f G o v e rn o rs of th e F e d e ra l R eserv e S y stem a n n o u n c ed
the ad o p tio n of sev eral a m en d m en ts to its R e g u la tio n Z— T r u th in L e n d in g — to im plem ent th e
new F a ir C re d it B illin g A ct. T h e se am en d m en ts to R e g u la tio n Z becom e effective on O c to b e r 28,
1975, the d a te th a t th e new A c t goes in to effect.
F o llo w in g is the te x t o f the B o a rd ’s s ta te m e n t:
The Board of Governors of the Federal Reserve System today issued regulations to implement the Fair
Credit Billing Act, effective October 28, the date the new Act goes into effect.
The Act is a new part of the T ruth in Lending Act and the Regulations published today amend Regu­
lation Z, which implements the T ruth in Lending law. The new Act directs the Federal Reserve to issue
the regulatory rules for F air Credit Billing. These are to be enforced by the same Federal agencies that
enforce the T ruth in Lending Act.
The chief purpose of the Fair Credit Billing Act and of the new Federal Reserve Regulation is to help
consumers resolve credit billing disputes promptly and fairly. The Act prohibits certain practices deemed un­
fair to consumers using credit cards or other open-end credit accounts and certain practices between credit
card issuers and retail merchants deemed to be anticompetitive.
The rules implementing the Fair Credit Billing Act (F C B A ) published today follow extensive con­
sultation with consumer groups, creditors and the public at large. The Board published proposed FCBA
regulations on April 30, and received comment on its proposals through June 20. On June 17 the Board
published for comment proposed rules under a related but separate section of Public Law 93-495, which
provides for minimum disclosure requirements for transactions reflected on periodic billing statements received
by a customer using any type of open-end credit account. On July 30, the Board published revisions of its
draft rules and on August 5 held hearings on the proposals. Comment was received through August 18.
The F air Credit Billing amendments to Regulation Z as adopted by the Board include the following
provisions (with principal changes from the most recent proposals noted) :

1.

Definitions:

Creditor— Credit card issuers, whether or not a finance charge is imposed. Also, for some purposes—
set forth in the Regulation—persons who honor credit cards.
Open-end accounts—Chiefly, credit extended by the use of a credit card.
Billing error—Amounts charged due to unauthorized use of the customer’s credit card; amounts ques­
tioned by the custom er; amounts charged for property or services not accepted by the customer, or wrongly
delivered; failure to credit payments already m ade; accounting errors, including errors in computing finance
charges; imposition of finance or other charges for late payment when a customer is not billed at his cur­
rent address, if notification of change of address was given at least 1 0 days before the end of the billing period.
Proper written notification of error—W ritten notice to the creditor, at an address he specifies, within 60
days of the billing, that enables the creditor to identify the customer, indicates the customer’s belief that the
billing contains an error and the amount involved, and gives reasons for believing it is an error.
2.

Billing error resolution:

A billing error is any of six specified categories of acts or omissions by the creditor. To trigger the resolu­
tion procedure the customer must send a proper written notification of a billing error.




Upon receipt of proper written notification, the creditor must acknowledge the inquiry within 30 days
and resolve the dispute in two billing cycles, or no more than 90 days. During the resolution process, the
customer need not pay any amount in dispute, or any minimum payments on amounts in dispute. The creditor
may not collect any disputed amount or any finance charges on it. The customer’s account may not be closed
because he fails to pay an amount he believes to be incorrect. The creditor may not report adversely on the
customer’s credit standing with regard to amounts in dispute nor threaten to make such a report until the
creditor has complied with his responsibilities under the error resolution procedure. Failure to comply subjects
the creditor to a forfeiture of the disputed amount, up to $50, regardless of whether an error has been made.
j . Rights of the cardholder to assert claims:
The credit card holder may withhold payment, and assert legal claims against the card issuer with respect
to shoddy or defective merchandise or services purchased with a credit card (with certain exceptions and
limitations) following an unsuccessful attempt to resolve the problem with the merchant.
4.

Discounts for payments in cash:

M erchants may offer their customers a discount of up to 5 per cent for using cash in lieu of using a
credit card. This does not constitute a finance charge. Credit card issuers must notify merchants using their
card, by November 28, 1975, that any previous agreement between them barring discounts for cash is no
longer valid. Simultaneously with publication of its FCBA rules the Board is sending a letter to the Chair­
man, and ranking minority members, of the House and Senate banking committees, and their sub-committees
on consumer affairs, asking for clarification whether the provisons of the Act regarding discounts for the use
of cash apply also to so-called surcharges when credit cards are used. In its proposals of July 30, the Board
suggested the possibility of treating surcharges of up to 5 per cent when credit cards were used in the same
manner as discounts are treated.
5.

Notification of rights:

New customers must be notified of their rights under the FCBA by use of a notice set forth in the Regula­
tion. In general, the notice must be mailed to active accounts in the first full billing cycle after October 28,
1975. A t the customer’s request, or when a billing error is alleged, the customer must be supplied with the
full notice of rights.
W ith the following exception, the notification form must also be sent to all customers semiannually. The
Regulation provides that a short form of notification of rights (set forth in the Regulation) may be mailed
out monthly in lieu of the longer semiannual form.
6.

Notification of balance and avoidance of finance charges:

Customers with either a credit or debit balance m ust receive a periodic statement of their account. W here
there is a provision for a period during which payment may be made without incurring a finance charge, the
statement must be mailed or delivered to the customer, with some exceptions, at least 14 days before the
end of such a “free ride” period.
7 . Prompt crediting of payments:
The creditor must specify at least one location where payments will be credited as of the date of receipt.
However, during a one-year transition period (to October 28, 1976) crediting may be delayed by as much as
five days. Crediting need not take place as of the date of receipt if this does not result in a finance charge.
The creditor may notify account holders that at other locations crediting may be delayed by up to five days.
A djustm ent for any finance charges caused by not crediting an account on the date of receipt must take place
in the next billing.
8.

Transition periods:

Transition periods—not previously specified in the Board’s proposals—have been provided in the Regula­
tion aimed at avoiding errors and confusion in billings due to difficulties in changing over from forms now in
use and in making technical changes, such as computer programming and computations required to imple­
ment the FCBA. Transition provisions cover new disclosure requirements specified in the Regulation, including
showing dates of payments, indication of credit balances and specification of the address to which billing error
complaints are to be sent.
p. Phase-in of identification of transaction requirements:
F urther new transition periods have been provided in order to avoid confusion and error during the largescale reprogramming of computers that must take place to implement provisions of the Act for identifying trans­
actions on bills sent to credit card customers. Until July 1, 1976, creditors may continue to identify transac­
tions as they do currently. In no case may compliance with all such requirements be completed later than
October 28, 1977.




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The main elements of full compliance are:
—Creditors who bill “descriptively” (that is, who send only a statement of account, without copies of the
sales voucher made at the time of the transaction) must provide a transaction date. In addition, for two-party
creditors (for instance, a transaction with a departm ent store where the department store’s credit card is
used) there must be a description of the goods or services purchased. For three-party transactions (where
a third party’s credit card is used) the name of the m erchant and the address where the transaction took place
must be given.
10 .

Time for payments after resolution of a billing error:

A period free from finance charges must be provided for payment after resolution of a billing error dis­
pute (if the creditor normally gives a “free ride” period for payment without finance charges) when the
creditor was in error. Earlier drafts of the proposed Regulation would have required such a period free of
finance charges after resolution of a billing dispute even when the creditor did not make an error or did not
normally offer a period for payment free of finance charges.

11.

Inconsistent State laws:

The Regulation as adopted provides that any State credit billing law that differs from the error resolution
procedure and credit reporting prohibitions of the F C B A and its implementing Regulation are inconsistent,
and, thereby, preempted. As an exception, the Regulation permits customers to make use of any time period
for making an inquiry concerning a billing error provided by State law that is longer than the inquiry period
provided by the Act and the Regulation.
The Regulation declares State law not to be inconsistent, and therefore not preempted, if the creditor
can comply without violating the other sections of the Federal law.
The Regulation establishes limitations on notifications to consumers by creditors of State law provisions,
and sets up a procedure through which a State may ask the Board for a determination that its law gives
greater protection to consumers than does the Federal law, or is otherwise not inconsistent.
12. The merchant must give the card issuer prom pt notification (in not over seven business days) of
a refund due to the customer on either merchandise or services. Such amounts are to be credited to the
customer’s account within three business days.
13. Credit card issuers who hold deposits made by a customer may not use those deposits to offset the
debt of the customer to the card issuer without a court order or by way of remedies constitutionally available
to all creditors generally.
14. Credit card issuers may not require merchants or other persons honoring their cards to open deposit
accounts with them, or to procure any services from the credit card issuer not essential to the operation of
the credit card plan.
15. The Regulation prevents bank credit card issuers from automatically collecting credit card payments
from a customer’s deposit account, even though there is an agreement with the customer for such automatic
collection, when some or all of the items on a periodic statement are disputed by the customer.
16. A customer’s account may not be closed or restricted during resolution of a dispute over an alleged
error before the card issuer has fulfilled all its responsibilities under the procedures for resolving errors, solely
because the customer fails to pay the amount in dispute.
17. The credit card issuer may recapture minimum payments not made during an error resolution pro­
cedure if it is determined in the end that the customer owes some or all of the disputed amount, but the card
issuer may not declare the whole debt due. Earlier drafts of the Regulation would have required adjustm ent
of finance charges during the dispute period, whether or not the dispute is ultimately resolved in the cus­
tomer’s favor.
18. The Regulation provides a procedure for the treatment of delinquency credit reports, and threats
by creditors to make adverse reports to third parties, with respect to disputed amounts shown on a billing
statement. The Regulation prohibits such reports and threats during the resolution of disputes, and makes
other requirements. Failure by creditors to comply m ay result in a forfeiture penalty.

A copy of the amendments to Regulation Z will be sent to you shortly. Any questions reg ard ­
ing these amendments should be directed to our Bank Regulations Department.




P a u l

A.

V o lc k e r ,

President.
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