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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 8 4 0 1
1
August 10, 1978
J
AMENDMENT TO AND INTERPRETATION OF REGULATION Z
Notice of Right of Rescission in Open End Credit Plans
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Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System announcing an exemption from the notice-of-rescission provisions of Regulation Z, "Truthin-Lending," for individual transactions under certain open end credit plans secured by a customer's
residence:
The Board of Governors of the Federal Reserve System today [fid y -?d,
amended its Regulation
Z — Truth in Lending— concerning the "cooling o ff" period for consumers who pledge their home as security
in open end credit arrangements.
Truth in Lending requires that where a home is used as collateral for a consumer loan the lender must
give notice that the borrower has a three-day period in which to cancel the deal.
Lenders have asked the Board how this notice should be given when they extend open end credit that is
secured by an interest in a consumer's home. Credit card and overdraft checking arrangements are examples of
open end credit.
The amendment exempts from the notice requirement of Regulation Z individual transactions under an
open end credit arrangement when the creditor and the seller are not the same or related persons. The exemption
applies, for example, to use of a bank credit card to purchase merchandise from a retail seller.
T o qualify for this exemption under arrangements where the creditor and seller are not the same person,
the amendment requires that customers must be notified of their right to cancel mortgage-secured open end
credit plans in four instances:
— W h en an open end credit plan is first opened,
— W henever the credit limit is increased,
— W henever the terms of the account are changed, and
— W henever a security interest in a home is added to an existing open end credit arrangement.
Customers must also be reminded annually that their homes have been pledged as security for such accounts.
W h en the creditor and seller of goods and services are the same or related persons (for example, in the
case of a revolving charge account established with a merchant under which the customer may only buy goods
or services from that merchant) Regulation Z specifies that notice of the right of rescission must be given
whenever a transaction occurs on an open end account secured by the customer's home.
The change in Regulation Z adopted by the Board is a modification of an amendment proposed by the
Board December 5, 1977.
Enclosed is a copy of the amendment to Regulation Z, together with a Board interpretation
of the amendment that contains sample notices that creditors may use to comply with certain
requirements of the amendment. Questions regarding this matter may be directed to our Consumer
Affairs Division (Tel. No. 212-791-5921).
PAUL
A.
V oLC K E R ,
Board of Governors of the Federal Reserve System
TRUTH IN LENDING
AMENDMENT TO AND INTERPRETATION OF REGULATION Z
[6 2 1 0 -0 !]
Tit!* 12— Bank* and Banking
CHARTER H— FEDERAL RESERVE
SYSTEM
SUtCMAfTEK A—AOAKD Of GOVEKMOXS Of
THE FtO€kAt KESEtVE SYSTEM
[Reg. Z; Docket No. R-0134]
PART 226— TRUTH !H LEMDtMC
Right of Ra*€iM!an
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule and interpreta
tion.
SUMMARY: The Board hereby adopts
an amendment to $ 226.9(g) of Regula
tion Z creating an exception to the re
scission provisions of the regulation
for individual transactions under cer
tain open end credit plans secured by
consumers' residences. The amend
ment applies only to open end transac
tions in which the creditor and the
seller are not the same or related per
sons. Concurrently, the Board is issu
ing an official Board interpretaton of
the amendment.
z provides that in the
case of any credit transaction in which
a security interest is retained or ac
quired in the principal residence of
the consumer, the consumer shall
have 3 business days from consumma
tion of the transaction in which to re
scind the transaction. The creditor is
required to disclose this right to the
consumer and may not disburse the
proceeds of the credit transaction,
except in escrow, during the 3-day
period.
The Board finds that requiring the
right of rescission, notice of that right,
and the 3-day cooling off period in
connection with each individual trans
action under certain types of open end
credit plans secured by consumers'
residences unduly complicates compli
ance with Regulation Z, hampers
creditors that desire to offer such
credit plans, and, thereby, may pre
vent consumers from utilizing the
equity in their homes to obtain open
R e g u la tio n
end credit. The amendment, which is
designed to remedy these problems,
exempts from the rescission provisions
of Regulation Z individual transac
tions on an open end credit account se
cured by the customer's residence if
the creditor provides an appropriate
disclosure, as specified in the amend
ment, upon the opening of such an ac
count. prior to any increase in the line
of credit associated with the account,
prior to a change in the terms of the
account, and at the time of an addi
tion of a security interest in the cus
tomer's residence to an existing open
end account. Additionally, a disclosure
must be provided at least annually re
minding customers of such accounts
that their homes stand as security for
their accounts.
The interpretation of the amend
ment. which is issued herewith, pro
vides sample disclosures which credi
tors may use to achieve compliance
with certain of the amendment's re
quirements.
EFFECTIVE DATE: August 3, 1978.
FOR FURTHER INFORMATION
CONTACT:
Glenn E. Loney, Section Chief, Divi
sion of Consumer Affairs, Board of
Governors of the Federal Reserve
System. Washington, D.C. 20551,
202-452-3867.
SUPPLEMENTARY INFORMATION:
Section 226.9(a) of Regulation Z pro
vides that a customer shall have the
right to rescind any credit transaction
in which a security interest is or will
be retained or acquired in any real
property which is used or is expected
to be used as the principal residence of
the customer. The right to rescind
continues for 3 business days from the
consummation of the transaction or
the delivery of all specified disclo
sures, whichever is later. Under
§ 226.9(b), whenever a customer has
the right to rescind a transaction, the
creditor must provide a disclosure of
that right in the form prescribed by
the regulation. Under § 226.9(c), the
creditor must delay its performance
(i.e., refrain from disbursing the pro
ceeds of the credit transaction) until
the rescission period has expired and
the creditor has satisfied itself that
the customer has not exercised the
right of rescission.
Several creditors that desired to
offer open end credit plans secured by
consumers' residences asserted that re
quiring the right of rescission, disclo
sure of that right, and the 3-day cool
ing off period in connection with each
individual transaction under an open
end account secured by the customer's
residence presented operational prob
lems which prevented the extension of
such credit. It was pointed out that in
connection with 3-party credit transac
tions under an open end plan (e g., use
of a cash advance check to obtain
goods or services from a party other
than the creditor of the open end ac
count), the customer decides when and
for what purpose to use the credit, and
the creditor can neither readily pro
vide disclosure of the right of rescis
sion nor effectively delay its perform
ance for the requisite 3 days. In an
effort to alleviate these difficulties
without depriving consumers of the
protection of their homes intended by
Congress when it created the right of
rescission, the Board proposed an
amendment to Regulation Z which it
now adopts, with modifications, in
final form.
As a result of comments received in
response to its proposal and based
upon its own analysis, the Board be
lieves that the amendment, including
the modifications discussed below, will
facilitate compliance with Regulation
Z by creditors that wish to offer open
end credit plans secured by consumers'
residences and will afford continued
protection for consumers who enter
into such plans. Perhaps most signifi
cantly, the Board feels that the
amendment will enable consumers to
utilize the equity in their homes to
obtain the convenience and flexibility
offered by open end credit which
might otherwise be unavailable to
them.
Under the amendment, individual
transactions on an open end credit ac
count secured by the customer's resi
dence are not subject to the right of
rescission if the creditor provides the
customer with the applicable disclo-
For Regulation Z to be complete, retain:
1) Regulation Z pamphlet, amended to March 23, 1977.
2) Amendments effective April 11, 1977, July 20, 1977, October 10, 1977, March 28,
1978, and April 21, 1978.
3) Amendment effective May 30, 1978 (date of publication in the FcJcra/
4) This slip sheet.
[E n c . C ir . N o . 8 4 0 1 ]
REPRINTED IN NEW YORK, FROM FEDERAL RECIETER, VOL. 43, NO. ISO
s u r e p r e s c r i b e d i n t h e A m e n d m e n t At
t h e t im e t h e d is c lo s u r e s r e q u ir e d b y
o f R e g u la t io n
A re r e q u i r e d
t o b e m A d e , p r i o r t o a n y t n c r e A s e in
t h e l i n e o f c r e d i t A s s o c iA t e d w i t h t h e
A c c o u n t, p r io r t o A c h a n g e in t e r m s
( w i t h i n t h e m e A n in g
o f th e
r e g u la tio n ) o f t h e a c c o u n t, a n d a t th e
t im e o f a n a d d it io n o f a s e c u r it y in t e r
e s t i n t h e c u s t o m e r 's r e s i d e n c e t o a n
e x is tin g o p e n e n d a c c o u n t . A d is c lo
su re r e m in d in g c u s to m e r s o f s u c h a c
c o u n ts th a t th e ir h o m e s s ta n d as s e c u
r ity f o r t h e ir a c c o u n t s m u s t a ls o b e
p r o v id e d a t le a s t a n n u a lly .
$ 226.7(3)
Z
§ 226.7(f)
The amendment as adopted by the
Board includes certain modifications
of the original proposal. The amend
ment applies only to open end credit
transactions in which the creditor of
the open end credit plan and the seller
of goods or services purchased by
means of the plan are not the same or
related persons. A change in the terms
of an open end account secured by the
customer's residence has been added
to the amendment as an occasion on
which a disclosure must be provided to
the customer. An annual disclosure re
minding customers of the security in
terest in their homes is also required.
The Board has restricted the appli
cability of the amendment to transac
tions on open end credit plans in
which the creditor and the seller are
not the same or related persons for
two reasons. First, the Board feels
that the operational problems atten
dant to providing the right of rescis
sion in connection with individual
transactions on an open end credit ac
count where the creditor and the
seller are not the same or related per
sons do not arise where the creditor is
also the seller. Second, the possibility
of undue influence by the creditor is
less in transactions in which the credi
tor and the seller are unrelated be
cause the customer chooses when and
for what purpose to use the open end
account and the seller obtains no in
terest in the customer's home.
The Board believes that a change in
the terms of an open end account,
within the meaning of § 226.7(f) of
Regulation Z, merits a notice remind
ing the customer that his or her resi
dence stands as security for the ac
count. As pointed out by the Federal
Reserve Bank of Cleveland, which sug
gested this modification of the amend
ment. if the notice is not required
prior to a change in terms, a customer
could find that his or her residence
stands as security for extensions of
credit, some of the terms of which
were imposed unilaterally by the
creditor.
Under the amendment as adopted, a
creditor may not change the terms of
a customer's open end account (within
the meaning of $ 226.7(f) of Regula
tion Z) without affording the custom
er an opportunity to refuse the change
in terms and repay any existing obliga
tion on the account under the existing
terms of the account. However, if the
customer refuses the change in terms,
the creditor need not extend any fur
ther credit on the account.
The Board is concerned that custom
ers of open end credit plans which are
subject to the amendment may, after a
period of time, lose sight of the fact
that their accounts are secured by
their homes. For this reason, the
Board has required that a disclosure
be provided annually to customers of
open end accounts which fall within
the amendment.
Several comments on the amend
ment as originally proposed suggested
that the disclosure of the right of re
scission prescribed by § 226.9(b) of
Regulation Z is inappropriate for some
of the occasions on which disclosure
would be required under the amend
ment and could cause confusion
among consumers. The amendment as
adopted, therefore, specifies that the
disclosure required by § 226.9(b) is to
be used in connection with the open
ing of an account and the addition of a
security interest in a consumer's resi
dence to an existing account. The
amendment also prescribes disclosures
to be furnished to a consumer prior to
an increase in the line of credit or a
change in the terms of the consumer's
account and at least once each calen
dar year to remind the consumer that
the consumer's home stands as securi
ty for the account.
Simultaneously with the adoption of
this amendment to Regulation Z, the
Board is issuing an official Board in
terpretation of the regulation.
$ 226.904, which provides sample dis
closures which creditors may use in
order to satisfy the requirements, as to
form and content, of §§ 226.9(g)(6) (iii)
and (iv) of the regulation as amended.
Finally, it should be noted that
when a disclosure under the amend
ment is furnished to a consumer prior
to an increase in the line of credit or a
change in the terms of the consumer's
account, the effect of the disclosure is
prospective only and the consumer is
not thereby entitled to void the credi
tor's security interest in the consum
er's residence insofar as it secures
prior extensions of credit on the ac
count. Similarly, the disclosure fur
nished to a consumer prior to the ad
dition of a security interest in the con
sumer's residence to a preexisting
open end account would not enable
the consumer to rescind prior transac
tions on the account. Likewise, the re
quired annual disclosure would not
enable consumers to rescind any prior
transactions or cancel any existing ob
ligation on their accounts or void any
security interest insofar as it secured
those existing obligations.
Therefore, pursuant to the authori
ty granted in 15 U.S.C { 1604 (1970):
The Board hereby amends { 226.9(g)
of Regulation Z, 12 CFR 226, as fol
lows:
AMENDMENT
§ 226.9 Right to rescind certain transac
tions.
(g) Exceptions to general rule. * * *
(6) Individual transactions under an
open end credit account: Provided,
(i) That the creditor and the seller
are not the same or related persons."'
(ii) That the creditor provides the
disclosure required by § 226.9(b) at the
time the disclosures required under
§ 226.7(a) are required to be made, or.
if the security interest is not retained
or acquired at the time the § 226.7(a)
disclosures are required to be made, at
the time the security interest is re
tained or acquired.
(iii) That the creditor does not
change the terms of a customer's ac
count within the meaning of § 226.7(f)
or increase the customer's line of
credit without affording the customer
the opportunity to refuse the change
in terms or the increase. If the cus
tomer refuses the change in terms, the
creditor need not extend any further
credit on the account; however, the
customer shall have the right to repay
any existing obligation on the account
under the then existing terms of the
account. At the time a disclosure of a
change in terms under § 226.7(f) is re
quired to be made or prior to an in
crease in the customer's line of credit,
the creditor shall provide the custom
er with two copies of a disclosure set
ting forth, as applicable: The fact that
the creditor intends to change the
terms or increase the line of credit of
the customer's account; the fact that
the account is secured by the custom
er's real property; and the fact that
the customer may refuse the change
in terms and repay any existing obliga
tion under the then existing terms of
the account, or refuse the increase in
the line of credit, by giving the credi
tor written notice within 3 business
days of the date of the disclosure.
(iv) That at least once each calendar
year the creditor furnishes to the cus
tomer a disclosure of the fact that the
customer's account is secured by the
customer's real property and that fail
ure to pay any outstanding balance in
accordance with the terms of the ac
count could result in the loss of the
customer's real property.
(v) That each disclosure provided
pursuant hereto is made on one side of
a statement separate from any other
documents, that the disclosure sets
forth the name of the creditor and, in
the case of the disclosures required by
paragraph (g)(6)(iii) of this section,
the creditor's address, the date on
"* For purposes of { 226.9(gX6) a person is
related to a creditor if that person would be
deemed related to the creditor under foot
note 9b to } 226.7(k).
which the disclosure is furnished to
the customer, the date by which the
customer should give notice of refusal
of the increase in the line of credit or
the change in terms of the account,
and the fact that one copy of the dis
closure can be used for that purpose.
[End of amendment.]
The Board hereby adopts the follow
ing official board interpretation of
regulation Z, 12 CFR Part 226:
IN T E R P R E T A T IO N
226.904—
S E C T IO N
FOR C E R T A IN
R I G H T OF R E S C IS S IO N
O P E N E N D C R E D IT A C
COU NTS
Section 226.9(g)(6) provides an ex
ception to the right of recission for in
dividual transactions on an open end
credit account provided, among other
things, that the disclosures required by
that section are made at the times spec
ified. The question arises as to what
disclosures will satisfy the require
ments of §§ 226.9(g)(6) (iii) and (iv).
The disclosures set forth below, if
accurate and when properly complet
ed, will satisfy the requirements, as to
form ?nd content, of the indicated sec
tions of the regulation. No specific
type size or style is required. If the
'real property on which the security in
terest may arise does not include a
dwelling, the creditor may substitute
such words as "the property you are
purchasing" for "your home" or "lot"
for "home" where these words appear
in the disclosure.
Section 226.9(g)(6)(iii) (increase in
line of credit).
NOTICE TO CUSTOMER REQUIRED BY FEDERAL
LAW
(Name of creditor)-----------------------------------Has approved an increase in the amount of
credit available to you on your open end ac
count secured by your home. Any additional
credit you use will also be secured by your
home. You have a right to refuse to accept
this increase. You may exercise this right
within three business days from (date dis
closure delivered to customer) by notifying
us at (address of creditor's place of business)
by mail or telegram sent not later than mid
night of (date). You may also use any other
form of written notice to refuse the increase
if it is delivered to the above address not
later than that time. This notice may be
used for that purpose by dating and signing
below.
I hereby refuse the increase in the credit
available on my account; (date) (customer's
signature).
Section 226.9(g)(H)(iii) (change in terms).
NOTICE TO CUSTOMER REQUIRED BY FEDERAL
LAW
(Name of creditor)-----------------------------------Intends to change the terms of your open
end credit account which is secured by your
home. You have a right to refuse to accept
this change in terms. If you refuse this
change in terms, we have the right to refuse
to extend any further credit on your open
end account and may require you to repay
any existing obligation on your accouht
under the present terms of the account.
You may exercise your right to refuse the
change in terms within three business days
of (date disclosure delivered to customer) by
notifying us at (address of creditor's place
of business) by mail or telegram sent not
later than midnight of (date). You may also
use any other form of written notice to
refuse the change in terms if it is delivered
to the above address not later than that
time. This notice may be used for that pur
pose by dating and signing below.
I hereby refuse the change in the terms of
my account: (date) (customer's signature).
Section 226.9(g)(6)(iv) (annual disclosure).
NOTICE TO CUSTOMER REQUIRED BY FEDERAL
LAW
This is to remind you that your open end
credit account with (name of creditor) is se
cured by a lien, mortgage, or other security
interest on your home. This means that
your failure to pay any outstanding balance
in accordance with the terms of the account
could result in the loss of your home.
By order of the Board of Governors.
July 26. 1978.
T H E O D O R E E . A L L IS O N ,
Secretary o/Bte Board.
[FR Doc. 78-21570 Filed 8-2-78; 8:45 am]
@FedFRASER