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FED ER A L RESERVE BANK O F N EW YORK r Circular No. 8 0 9 9 T L April 26, 1977 J PROPOSED INTERPRETATION OF REGULATION Z Requirements Applicable to Credit Card Issuers That Bill on a Transaction-by-Transaction Basis T o A ll M e m b e r B a n k s, an d O th e r s C o n cern ed , in th e S e c o n d F e d e r a l R e s e r v e D i s t r i c t : Following is the text of a statement issued April 13 by the Board of Governors of the Federal Reserve System: The Board of Governors of the Federal Reserve System today proposed an interpretation of Regulation Z (Truth in Lending) affecting credit card issuers which bill customers in full on a transaction-by-transaction basis and impose no finance charges. The Board will receive comment through May 16, 1977. Most credit cards extend open-end credit, such as the credit available with a bank credit card, or a depart ment store card, and customers are billed, usually monthly, for their purchases. A balance may be left after the customer makes a payment. Certain credit card issuers, however, such as some automobile rental companies, require payment in full for each transaction, and send bills only when there has been a transaction. No finance charges are imposed. The proposal would permit such credit card issuers to continue sending bills to their customers on a transaction-by-transaction basis, and would not require them to send out periodic bills. The proposal would also require such card issuers to make only such disclosures, and conform only to other requirements of Regulation Z, that are consistent with and applicable to their billing systems. Printed below is an excerpt from the F e d e ra l R e g is te r of April 20, 1977, containing the text of the proposed interpretation and an explanatory notice by the Board of Governors re garding the proposal. Comments on the proposal should be submitted by May 16 and may be sent to our Consumer Affairs Division. P aul A. V olcker, President. [ 12 C FR Part 226 ] [Reg. Z; Docket No. R^-0094] A P P L IC A T IO N O F C E R T A IN R E Q U IR E M E N T S T O C R E D IT C A R D P L A N S IN V O L V IN G T R A N S A C T ! O N -B Y -T R A N S A C T IO N B IL L IN G A N D T H E IM P O S ITIO N O F N O F IN A N C E C H A R G E AGENCY: Board of Governors of th e Federal R eserve System . A C T IO N : Proposed rule. SUM M ARY: This proposed in terp reta tio n o f R egulation Z indicates th e provi sions applicable to certain tw o-p arty credit card plans in con n ection w ith w hich th e card issuers bill th eir cu stom ers in fu ll on a tra n sa ctio n -b y -tra n sa c tion basis, rather than on an accoun t basis u sing periodic statem en ts, and in con n ection w ith w hich no fin an ce charge is im posed. T hese credit card issuers are subject to th e A ct and R egu lation Z sim p ly because th e F air C redit B illin g Act am endm ents adjusted th e definition of “creditor” to Impose certain require m en ts upon a ll card issuers even though th o se requirem ents are generally ap pli cable only to open end creditors. T h e Board is directed to apply th o se require m en ts to such card issuers “to th e ex ten t appropriate.” T his proposed in terp reta tio n Is designed to in d icate w hich o f th e requirem ents are appropriate for such card issuers. DATE: C om m ents m ust be received on or before M ay 16,1977. ADDR ESS: Secretary, Board of G over nors of th e F ederal R eserve System , W ashington, D.C. 20551. All m aterial subm itted should include th e docket num ber Rr-0094. FOR FU RTH ER INFORM ATION CON TACT: D. Edwin Schm elzer, C hief, Fair Credit P ractices S ection, D ivision of Con sum er Affairs, Board of Governors of th e F ederal R eserve S ystem , W ash ington, D.C. 20551 (202-452-2412). SUPPLEM ENTARY INFORMATION: S ection 103(f) of th e Truth in Lending Act, as im plem ented by § 226.2 (s) and (x) of R egu lation Z, requires all credit card issuers to com ply w ith certain pro visions of th e A ct and R egulation Z even thou gh those provisions are generally applicable only to creditors of open end credit plans. There are certain tw o-party credit cards w hich are issued in con n ec tion w ith w hich no finance charge is im posed and billing for p aym ent in fu ll is accom plished on a tran sa ctio n -b y-tran saction basis, rather th an on an account basis u sing periodic statem en ts. This proposed interp retation is designed to indicate, as perm itted by section 103(f) of th e Act, th e B oard’s opinion regard ing w hich section s of th e regulation are applicable to such credit card programs. T he in terp retation would nerm it such card issuers to continue send ing bills in th e form of invoices or other statem ents to each custom er for each transaction in w hich th e card is used. It would not require th a t th e card issuer convert to FEDERAL REGISTER, V O L 42, N O . 76— WEDNESDAY, APRIL 20, 1977 using a periodic billin g sta te m e n t w hich involves th e m ain ten an ce of accounts for each custom er. T he in terp retation w ould require such card issuers, prior to th e first tra n sa c tion in w hich th e card is used, to d is close any charges (oth er th a n a fin an ce charge) w hich relate to th e deferral of paym ent by use of th e cards, such as a la te paym ent or delinquency charge (5 2 2 6 .7 (a ) (6 ) ) . T h e card issuer would be required to m ake disclosures regard ing any security in terest w hich m ay be retained (5 2 2 6 .7 (a ) (7 ) ) . T h e card is suer w ould also be required to provide th e sta tem en t o f rights and responsi bilities under th e F air Credit B illin g Act prior to th e first use of th e card (§ 226.7 ( a ) (9 )). T h e proposal would n o t require a d is closure regarding m inim um p aym ents (5 226.7(a) ( 8 ) ) . S ince th e only types of credit cards considered h erein are ones w hich require paym en t in fu ll for each tran saction a t the tim e of billing, th a t disclosure is, by definition, inapplicable. T h e proposal w ould n o t require such card issuers to disclose th e “previ ous b alan ce” (5 2 2 6 .7 (b )(1 )(D ), th e am oun ts of “paym en ts” and “cred its” (5 226.7(b) (1) ( i ll) ) . or th e closing d ate and “new b alance” (§ 226.7(b) (1) ( i x ) ) . T h ose disclosures relate m ainly to sy s tem s w hich periodically bill th eir cu s tom ers on an accoun t basis and do n ot appear to be germ ane to th e type of sy s tem under consideration in th is proposal. T h e requirem ents to provide an id en tification of each tra n sa ctio n (5 226.7 ( b ) (1) ( ii) ) and to provide an address for receipt of b illin g error inquiries (5 226.7(b) (1) ( x ) ) would be deem ed to apply to such system s. T h e proposal would perm it th e card issuer to com ply w ith those sections by p lacin g th e rele van t in form ation on th e invoice or other sta tem en t sen t to th e custom er for each transaction. T he proivsions requiring th e card is suer to send a periodic sta tem en t at least 14 days prior to th e end of a “free period” (5 226.7(b) (2 )) would be deem ed inapplicable to such cred it card system s sin ce there are no finan ce charges im posed under the credit card system s cov ered by this in terp retation and, co n se quently, no “free periods.” The proposal would perm it the card issuer to m ake use of th e excep tions from th e general requirem ent th a t all d isclo sures appear on th e fron t of th e periodic sta tem en t (§ 2 2 6 .7 (c )) . All references to a “periodic sta te m e n t” in § 226.7(c) would be read to in dicate th e invoice or other sta tem en t sen t to th e custom er for each transaction. T his proposal w ould require the card issuer to send the sta tem en t prescribed by § 226.7(a) (9) to each cu stom er on a sem ian n ual basis ( 5 2 2 6 .7 (d )). T he in terpretation would p erm it th e card is suer to com ply w ith th a t section by sen d ing the sta tem en t required by § 226.7 (a) (9) w ith in the tim e periods provided in 5 226.7(d ), or by sen d in g eith er the sta tem en t prescribed by 5 2 2 6 .7 (a )(9 ) or the sta tem en t prescribed by § 226.7 (d) (5) w ith every invoice or oth er b ill ing statem en t sen t to its custom ers. The tim ing of this disclosure would be com puted w ithout reference to billin g cycles and periodic statem en ts, w hich do n ot ex ist in such program s. Consequently, if th e card issuer decided to give th e sta te m en t sem ian n u ally in stead of w ith every invoice, th is proposal would perm it sen d ing th e sta te m e n t only to those cu stom ers who receive a tran saction invoice during th e ch osen m onths. T h is proposal would require th e card issuer to n o tify custom ers of ch an ges in term s (5 2 2 6 .7 (f)). However, sin ce th ere are no b illing cycles or periodic sta te m en ts used in such plans, th e tim e p e riod for n o tify in g custom ers of ch anges in th e term s of th e plan w ould be 15 days prior to th e d ate th e ch an ge is to be in stitu ted , rather th a n 15 days prior to th e first b illin g cycle in w hich the ch an ge is to take place. A dditionally, th e in terp retation would require ad van ce n otice only of those types of ch an ges in term s w hich, if undertaken by open end creditors generally, would require n otice to all custom ers prior to im position of th e ch an ge on the cu s tom ers’ accounts. T h e proposal would exem pt such card issuers from com plying w ith th e require m en ts w hich call for prom pt crediting of paym ents (5 2 2 6 .7 (g )), u nless th e plan includes th e possibility of th e im position of a specific charge for la te p a y m ent, delinquency, or d efault. T h e proposal would apply the provi sions regarding cred itin g and refun din g excess paym ents (5 2 2 6 .7 (h )) to such cred it plans. However, com pliance w ith those requirem ents m ay be achieved by such credit card issuers by accoun ting for th e am ount received in excess of th e required p aym ent by a credit m em oran dum or other reasonable m eans, rather th a n by crediting to an account. S ince n o periodic sta tem en t is required for such system s, this interp retation would require th e card issuer to n o tify th e custom er of th e existen ce of an excess p aym ent, unless a refund is se n t w ithin 5 business days of its receipt. T h e card issuer would be required to com ply w ith all relevan t portions of 5 226.13, ex cep t 5 226.13(k) w hich is in applicable to tw o-p arty credit card sy s tem s generally. T h e proposal would require the card issuer to com ply w ith th e error resolu tio n requirem ents of th e regulation (5 226.14). However, th e proposal would also provide th a t all references therein to a “periodic sta te m e n t” should be read to Indicate th e invoice or other billing sta te m e n t for th e relevant tran saction . All action s referenced in 5 226.14 w ith regard to correcting and ad ju sting a cu stom er’s accoun t would be perm itted to be taken by issuing a refund or new Invoice to th e custom er, or by other ap propriate m eans co n sisten t w ith th e pur poses of th e section. S in ce there are no accoun ts to be adjusted, and no periodic sta te m e n t upon w hich any su ch a d ju st m en ts ca n be reflected, th is ch an ge in th e regu lation ’s requirem ent w ith re sp ect to th is type of credit card is deem ed necessary to th e purposes of the A ct and regulation. To aid in th e consideration of this m aterial by th e Board, interested per sons are invited to subm it relevant data, views, com m ents, or argum ents. Any su ch m aterial should be subm itted in 2 w riting to th e Secretary, Board of G ov ernors of th e Federal R eserve System , W ashington, D.C. 20551 to be received n o t later th a n M ay 16, 1977. All m a te rials subm itted should include the docket num ber R-0094. Such inform a tio n w ill be m ade available for in spec tion and copying upon request, except as provided in 5 261.6(a) of th e B oard’s R ules R egarding A vailability of In fo r m ation (12 CFR 261.6(a) 5. P ursu ant to 15 U.S.C. 1602 (f; and 15 U.S.C. 1604, th e Board hereby publishes for com m ent th e follow ing proposed in terpretation of R egulation Z. § 2 2 6 .7 0 9 A p plication o f lim ited ro il iiireiiients to card issuers which bill custom ers on a transaction-hv-|ransaction basis. <a) It h as com e t o ‘the Board 's a tte n tion th a t certain credit cards are issued, th e card issuer and the seller being the sam e person or related persons, in con nection w ith w hich no finance charge is im posed and custom ers are billed in full for each use of th e card on a tran s actio n -b y -tra n sa ctio n basis by sending an invoice or other sta tem en t to the custom er. No cu m ulative account w hich reflects th e transactions by each cu s tom er during a period of tim e, such as a m onth, is m aintained. (b) S ection 103(f) of th e A ct requires all credit card Issuers to com ply with certain provisions even though thoee provisions are generally applicable only to creditors of open end credit plans and requires th e Board to apply th ese pro visions to all card Issuers “to th e exten t appropriate.” T h e question arises as to w hich of those provisions, as im ple m en ted by th is Part, appropriately apply to such card Issuers. (c) Such card issuers m ay bill cu s tom ers on a tran saction -b y-tran saction basis, and need n o t m aintain a cum ula tive accoun t for each custom er for which a periodic sta tem en t m ust be sent. (d) Prior to th e first use of th e credit card th e card issuer sh a ll provide th e custom er w ith a sta tem en t settin g forth th e disclosures required by 5 226.7(a) (9) and, as applicable, § 226.7(a) (6) and 5 226.7(a) (7 ). T he disclosure required by 5 2 2 6 .7 (a )(6 ) sh all be lim ited to those charges th a t are or m ay be im posed as a result of th e deferral of paym ent by use of th e card, such as la te paym ent or delinquency charges. Such card issuers need n ot provide th e disclosure required by § 226.7(a) (8 ). (e) T h e disclosures required by § 226.7 (b )(1 ) (i), (iii) and (ix) need not be given by such credit card issuers. T h e re quirem ents of 5 226.7(b) (1) (ii> and 5 226.7(b) (1) (x) are applicable to such card Issuers and com pliance m ay be achieved by placing th e required disclo sures on th e invoice or sta tem en t sen t to th e custom er for each tran saction. S ec tion 226.7(b) (2) does n o t apply to these credit card issuers. (f) T h e provisions of 5 226.7(c), in cluding th o se w hich perm it certain re quired disclosures to be m ade other than on th e fron t of a periodic statem ent, sh a ll apply. All references to the “peri odic sta te m e n t” in § 226.7(c> shall be read to in d icate th e invoice or other bill - ing d ocum ent sent to th e custom er tor each transaction. (g) T he provisions of § 226.7 1 d * sh all apply to such credit card Issuers. Com plian ce therew ith m ay be achieved <1) by m ailin g or delivering th e sta tem en t required by § 226.7(a) (9) to each cu s tom er w ho receives a tran saction invoice during a o n e-m on th period chosen by th e card issuer w hich m eets th e tim ing requirem ents of § 226.7(d) (2 ), (3>, and (4 ), or (2) by send in g eith er th e s ta te m en t prescribed by § 226.7(a) (9) or th e sta tem en t prescribed by § 226.7(d) (5) w ith each invoice sen t to a custom er. (h) T he provisions of § 226.7(f) apply to th ese credit card issuers, excep t th a t (1) n otice of th e ch an ge in term s shall be given a t least 15 days prior to the d ate upon w hich th e ch a n g e takes effect, rather than 15 days prior to th e b egin n ing d ate of the billing cycle in w hich it takes effect, and (2) th e card issuer need n o tify cardholders in advance of only th ose changes in term s w hich, if und er taken by creditors of open end credit days of its receipt by th e card issuer. p lans generally, would n ecessita te notice (k) T h e card issuer sh a ll com ply w ith to all custom ers prior to im posing the a ll th e provisions of § 226.13, including ch an ge on th eir accounts. § 226.13 (i) and (j) to th e ex ten t th at (i) T h e provisions of § 226.7(g) sh allthey are applicable to th e credit card apply to such credit card issuers if th e plan, excep t th a t § 226.13<k) is in credit card plan includes th e possible im applicable. position of a specific charge for la te p ay (l) The card issuer sh all com ply w ith m ent, d efault, or delinquency. O ther th e provisions of $ 226.14, as applicable. wise, they do n ot apply to such credit All references in § 226.14 to the “periodic card issuers. sta te m e n t” sh all be read to in dicate the (J) T h e provisions of § 226.7(h) sh all invoice or other sta tem en t for th e rel apply to su ch cred it card Issuers, excep t evan t transaction. All action s referenced th a t all requirem ents to cred it am ounts in § 226.14 w ith regard to correcting and to an account m ay be com plied w ith by ad ju sting a custom er’s account m ay be other reasonable m eans, su ch as by a taken by issuing a refund or a new in credit m em orandum . S in ce n o periodic voice, or by other appropriate m eans, sta tem en ts are provided or required for con sisten t w ith th e purposes of the th e cred it card system s su b ject to th is section. By order of th e Board of Governors of Interpretation, a n otice of excess p ay m en t should be se n t to th e custom er th e Federal R eserve System , April 11, w ith in a reasonable period of tim e fo l 1977. G r if f it h L. G arw o od . low ing its occurrence u nless a refund Deputy Secretary of the Board. of th e excess paym ent is m ailed or de livered to th e custom er w ith in 5 business I PR Doc.77-11349 Piled 4-19-77;8:45 am i 3
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