Full text of Federal Reserve Bank of New York Circulars : 9080. Regulation Z - Truth in Lending

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FE D E R A L RESER VE BANK
O F N E W YORK

[

Circular No. 9 0 8 0
May 29, 1981

"]

J

REGULATION Z — TRUTH IN LENDING
Proposed Official Staff Commentary

To All Depository Institutions in the
Second Federal Reserve District:

Following is the text of a statem ent issued by the Board of Governors of the Federal
Reserve System:
The Federal Reserve Board’s staff is publishing for comment a proposed official staff
commentary following up and interpreting the Board’s simplified Regulation Z, which implements
the Truth in Lending Simplification and Reform Act.
Comment should be received by July 10, 1981.
The proposed commentary applies and interprets the requirements of Truth in Lending
with respect to open-end and closed-end consumer credit. The commentary will deal with the
substance of some 1,500 Board and staff interpretations that have been issued, at the request of
consumers and creditors, since the Act became effective over a decade ago. The commentary is
expected to replace all individual interpretations and to be the sole vehicle for interpreting
Regulation Z.
Compliance with the simplified regulation becomes mandatory April 1, 1982, a year after its
publication, but creditors may begin to comply with it immediately.
The Board believes that the attempt to issue highly specific interpretations in the past led to an
accumulation of interpretations that by their number and complexity complicated rather than
facilitated compliance. The proposed new commentary focuses on providing more general
guidance, together with illustrative examples.
Enclosed is a copy of the Board’s proposal. Comments thereon should be submitted by
July 10, 1981 and may be sent to our Consumer Affairs and Bank Regulations Department.




Anthony

M.

So lo m

on

,

President

General

FEDERAL RESERVE SYSTEM
12 CFR P a r t
[Reg.

226

Z; T I L - 1 ]

TRUTH IN LENDI NG
Proposed O f f i c i a l

AGENCY:

Board o f G o v ern o rs o f the Federal

AC TI ON:

Proposed o f f i c i a l

staff

S t a f f Commentary

R ese rve System.

in terp retation.

SUMMARY:
I n a c c o r d a n c e w i t h A p p e n d i x C t o 12 CFR P a r t 2 2 6 , t h e B o a r d ' s s t a f f
i s p u b l i s h i n g f o r comment a p r o p o s e d o f f i c i a l s t a f f commentary t o R e g u l a t i o n Z,
a s r e v i s e d e f f e c t i v e A p r i l 1, 1981 ( 46 FR 2 0 8 4 8 , A p r i l 7, 1 9 8 1 ) .
The commentary
a p p l i e s and i n t e r p r e t s t h e r e q u i r e m e n t s o f T r u t h i n L e n d i n g t o o p e n - e n d and
c l o s e d e n d c o n s u m e r c r e d i t , and i s i n t e n d e d t o s u b s t i t u t e f o r i n d i v i d u a l B o a r d
and s t a f f i n t e r p r e t a t i o n s o f t h e r e g u l a t i o n .
I n o r d e r t o make t h e f i n a l com­
m e n t a r y a v a i l a b l e a t t h e e a r l i e s t p o s s i b l e t i m e , commenter s must s u b m i t t h e i r
comments by J u l y 10, 1 9 8 1.
DATE:

Comments must be r e c e i v e d

on o r b e f o r e J u l y

10,

1981.

AD DR ES S:
Comments s h o u l d i n c l u d e a r e f e r e n c e t o T I L - 1 and s h o u l d be m a i l e d t o
the S e c r e t a r y , Board o f G o v e rn o rs o f the Federal R ese rve System, W a shing to n ,
D .C .
2 0 5 5 1 , o r d e l i v e r e d t o Room B - 2 2 2 3 , 2 0 t h and C o n s t i t u t i o n A v e n u e , N. W. ,
W a s h i n g t o n , D . C . , between 8 : 4 5 a.m. and 5 : 1 5 p.m.
To a i d i n t h e i r c o n s i d e r a t i o n ,
comments r e g a r d i n g e ac h s e c t i o n s h o u l d b e g i n on a s e p a r a t e page.
Comments may
be i n s p e c t e d i n Room B - 1 1 2 2 between 8 : 4 5 a.m. and 5 : 1 5 p.m.
FOR FURTHER INFORMATION:
Contact the f o l l o w in g a t t o r n e y s in the D i v i s i o n of
C on su m e r and Community A f f a i r s , B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e s e r v e
S y s t e m , W a s h i n g t o n , D .C.
20551, at (202) 4 52-3667 o r (202) 4 52-3867:
Subpart A

S u b p a r t B and
Ap p e n di c e s




Gerald Hurst
B et h Mor gan
Denise Rechter
R u t h Amberg
Jesse F ilk in s
Lynn G o l d f a d e n
Gerald Hurst
B a r b a r a R anagan
J o hn Wood

S u b p a r t C and
Appendi ces

B e th M or gan
Denise Rechter
Rugenia S i l v e r
S u s a n Wert han
C la ud ia Yarus
Steve Z e is e l

S u b p a r t D and
Appendices

Lynn G o l d f a d e n
S u s a n Werthan

General
- 2 -

SUPPLEMENTARY I NFORMATI ON:
E f f e c t i v e A p r i l 1, 1 9 8 1 , t h e B o a r d s u b s t a n t i a l l y
r e v i s e d R e g u l a t i o n Z, w h i c h i m p l e m e n t s t h e T r u t h i n L e n d i n g A c t ( 4 6 FR 2 0 8 4 8 ,
A p r i l 7, 1 9 8 1 ) .
The r e v i s i o n s r e f l e c t amendments made by t h e T r u t h i n L e n d i n g
S i m p l i f i c a t i o n and R e f or m A c t ( T i t l e V I o f t h e D e p o s i t o r y I n s t i t u t i o n s D e r e g u ­
l a t i o n and M o n e t a r y C o n t r o l A c t o f 1 9 8 0 , Pub. L. 9 6 - 2 2 1 ) .
C r e d i t o r s may b e g i n
com plying w ith the r e v is e d r e g u l a t i o n imm ediately.
C o m p l i a n c e d o es n o t become
m a n d a t o r y , h o w e v e r , u n t i l A p r i l 1, 1 98 2.
B e f o r e t h a t d a t e , c r e d i t o r s may
c o n t i n u e t o c o m p ly w i t h t h e r e g u l a t i o n as i t e x i s t e d p r i o r t o t h o s e amendments.
B o a r d and s t a f f i n t e r p r e t a t i o n s i s s u e d u n d e r t h e p r i o r r e g u l a t i o n w i l l r e m a i n
e f f e c t i v e u n t i l th a t date.
The B o a r d ' s D i v i s i o n o f C o n s u me r and Community A f f a i r s i s p u b l i s h i n g
a d r a f t commentar y on t h e r e v i s e d r e g u l a t i o n .
The f i n a l commentar y w i l l be
i s s u e d as an o f f i c i a l s t a f f i n t e r p r e t a t i o n , p r o v i d i n g c r e d i t o r s w i t h p r o t e c t i o n
under § 1 3 0 ( f ) o f the T ru th in Le n d in g Act.
Under t h a t s e c t i o n , c r e d i t o r s
a c t i n g i n c o n f o r m i t y w i t h an o f f i c i a l s t a f f i n t e r p r e t a t i o n h a v e no l i a b i l i t y
f o r v i o l a t i o n s a r i s i n g from t h o s e a c t i o n s .
The commentary w i l l s i g n i f i c a n t l y a l t e r t h e s t a f f ' s a p p r o a c h t o
p r o v i d i n g i n t e r p r e t a t i o n s o f the r e g u l a t i o n .
U n d er t h e p r i o r r e g u l a t i o n ,
s t a f f o p i n i o n s were i s s u e d i n r e s p o n s e t o i n d i v i d u a l i n q u i r i e s r e g a r d i n g
s p e c i f i c f a c t s i t u a t i o n s , and w er e n o r m a l l y l i m i t e d t o t h o s e f a c t s .
Subsequent
v a r i a t i o n s i n t h o s e f a c t s wer e s i m i l a r l y a d d r e s s e d i n i n d i v i d u a l r e s p o n s e s
t a i l o r e d to the v a r i a t i o n s .
M o r e t h a n 1 50 0 l e t t e r s i n t e r p r e t i n g and a p p l y i n g
t h e p r i o r r e g u l a t i o n were i s s u e d on t h i s b a s i s .
The commentar y i s e x p e c t e d t o r e p l a c e B o a r d and s t a f f i n t e r p r e t a t i o n s
as the s o l e v e h i c l e f o r i n t e r p r e t i n g the r e g u l a t i o n .
The commentar y w i l l ,
h o w e v e r , be more g e n e r a l t h a n t h e i n t e r p r e t a t i o n s i s s u e d u n d e r t h e p r i o r r e g u ­
lation.
U n l i k e t h e e a r l i e r i n t e r p r e t a t i o n s , t h e commentar y w i l l n o t a t t e m p t
t o a d d r e s s and r e s o l v e e v e r y q u e s t i o n r e g a r d i n g t h e a p p l i c a t i o n o f t h e r e g u ­
l a t io n to s p e c i f i c se ts of fa c t s .
Although o r i g i n a l l y designed to aid c r e d i t o r s
in c o m p ly in g , the l o n g s t a n d i n g p r a c t i c e o f t r y i n g t o respond in w r i t i n g to
each and e v e r y s p e c i a l c i r c u m s t a n c e h a s i n s t e a d c r e a t e d an e no r mo u s amount o f
regulatory m aterial.
The c u m u l a t i v e e f f e c t o f t h e i n t e r p r e t a t i o n s h a s been
t o c o m p l i c a t e , r a t h e r t h a n f a c i l i t a t e , c o m p l i a n c e by l a y e r i n g one s e t o f d i s t i n c ­
t i o n s on t o p o f a n o t h e r .
R a t h e r than r e s o l v i n g q u e s t i o n s , t h i s m a t e r i a l in
the a g g r e g a t e has s e rve d to g e n e ra te f u r t h e r q u e s t i o n s .
In th e p a s t , c r e d i t o r e x p o s u r e t o c i v i l l i a b i l i t y f o r t e c h n i c a l
v i o l a t i o n s o f t h e r e g u l a t i o n h a s a l s o c o n t r i b u t e d t o t h e demand f o r s t a f f
i n t e r p r e t a t i o n s t h a t so u g h t t o p r o v i d e c e r t a i n t y in a p p l y i n g the r e g u l a t i o n .
The r e d u c t i o n i n c i v i l l i a b i l i t y r e s u l t i n g fr om t h e 1980 s t a t u t o r y amendments
s h o u l d r e d u c e t h e p e r c e i v e d need f o r w r i t t e n r e s p o n s e s t o a v a r i e t y o f s p e c i f i c
questions.
The commentar y f o c u s e s on p r o v i d i n g g e n e r a l g u i d a n c e t o
in a p p l y i n g th e r e g u l a t i o n to s p e c i f i c s i t u a t i o n s .
That g u id a n c e
s e v e r a l form s.
The commentar y may l i s t e x a m p l e s t h a t c o mp ly w i t h
r e g u l a t o r y s t a n d a r d , d i s c u s s th e impact o f a r e g u l a t o r y p r o v i s i o n
t y p e o f p l a n o r t r a n s a c t i o n , or dr aw t o g e t h e r and e l a b o r a t e on a
o f r e g u la to ry requirem ents.




a s s is t creditors
may t a k e
a particular
on a p r e v a l e n t
r e l a t e d group

General
- 3 -

The commentary d o e s n o t p u r p o r t t o be e x h a u s t i v e .
It concentrates
on m a t e r i a l o f g e n e r a l a p p l i c a t i o n whose i n c l u s i o n w i l l , i n t h e s t a f f ' s v i e w ,
be u s e f u l t o t h e w i d e s t p o s s i b l e a u d i e n c e .
F o r e x a m p l e , t h e commentary p r o v i d e s
s e v e r a l i l l u s t r a t i o n s o f ways i n w h i c h c l o s e d - e n d c r e d i t d i s c l o s u r e s may be
s e g r e g a t e d in accordance w ith th e req u ire m en ts o f § 2 2 6 . 1 7 ( a ) .
The e x a m p l e s
c h o s e n a r e t h o s e t h a t a p p e a r most l i k e l y t o be u t i l i z e d by a number o f c r e d i t o r s ,
a l t h o u g h o t h e r m et ho ds may be e q u a l l y p e r m i s s i b l e .
S i m i l a r l y , t h e commentary
w i l l a d d re ss p re v a le n t c r e d i t t r a n s a c t i o n s , to the extent th a t they p resent
im p o rta n t q u e s t i o n s under th e r e g u l a t i o n .
I t w i l l n o t, however, attempt to
a d d r e s s e ac h c r e d i t p l a n ' s u n i q u e s e t o f f a c t s .
The commentar y i n s t e a d i d e n t i ­
f i e s several b a sic fa c to rs c h a r a c t e r iz in g that type of t ra n sa c tio n .
C reditors
must t h e n d e t e r m i n e w h e t h e r t h e d i s c u s s i o n a p p l i e s t o t h e i r own t r a n s a c t i o n s
given t h e ir p a r t ic u la r v a r ia t io n s .
The s t a f f e x p e c t s t o u p d a t e t h e commentary
on an a n n u a l b a s i s , o r more o f t e n a s t h e need a r i s e s .
Ea ch p a r a g r a p h i n t h e commentar y i s i d e n t i f i e d by s e c t i o n and i n
some c a s e s by s u b s e c t i o n .
F o r e x a m p l e , t h e comments f o r § 2 2 6 . 2 1 ( T r e a t m e n t
o f c r e d i t b a l a n c e s ) a r e d e s i g n a t e d a s comments 21-1 t h r o u g h 2 1 - 5 , w h i l e t h e comments f o r § 2 2 6 . 1 8 ( C o n t e n t o f d i s c l o s u r e s ) a r e f u r t h e r b r o k e n down and d e s i g ­
n a t e d a c c o r d i n g t o t h e p a r t i c u l a r s u b s e c t i o n a d d r e s s e d , s u c h a s comment 1 8 ( b )-1
and 1 8 ( r ) - l .
The f o l l o w i n g c r o s s - r e f e r e n c e s t o r e l a t e d m a t e r i a l a p p e a r a t t h e end
o f e ac h s e c t i o n o f t h e commentar y :
(1)
" S t a t u t e " - - t h o s e s e c t i o n s o f t he
T r u t h i n L e n d i n g A c t on w h i c h t h e r e g u l a t o r y p r o v i s i o n i s b a s e d ; ( 2 )
"Other
s e c t i o n s " - - d e f i n i t i o n s and o t h e r p r o v i s i o n s i n t h e r e g u l a t i o n r e l a t i n g t o
th a t s e c t io n ; (3) " P r e v io u s r e g u l a t i o n " - - p a r a l l e l p r o v i s i o n s in R e g u la t io n Z
as i t e x i s t e d b e f o r e A p r i l 1, 1 9 8 1 ; and ( 4 ) "1981 c h a n g e s . "
This la s t category
i s a b r i e f d e s c r i p t i o n o f t h e m a j o r c h a n g e s made by t h e 1981 r e v i s i o n s t o
R e g u l a t i o n Z.
The t e x t o f t h e commentary d o es n o t r e f e r t o t h e e a r l i e r r e g u l a ­
tion.
H ow ev er , a c o m p a r i s o n t o t h e p r i o r r e g u l a t i o n may i n some c a s e s be
h e l p f u l i n e x p l a i n i n g t h e amended p r o v i s i o n and may be o f i n t e r e s t t o some
u s e r s , and t h e p r o p o s e d commentary i n c o r p o r a t e s t h i s i n f o r m a t i o n , t o a l i m i t e d
e x te n t, in the c r o s s - r e f e r e n c e s .
The s t a f f p a r t i c u l a r l y s o l i c i t s comment on
w h e t h e r t h i s m a t e r i a l s h o u l d be r e t a i n e d .
Comment i s welcome b o t h on t h e s u b s t a n c e o f t h e m a t e r i a l and on t h e
format in which i t i s prese n te d.
Commenters a r e e n c o u r a g e d t o f o c u s on m a t e r i a l
o f p a r t i c u l a r i n t e r e s t t o them; t h e y need n o t a d d r e s s e v e r y p r o v i s i o n .
The
s t a f f w i l l c o n s i d e r f o r i n c l u s i o n i n t h e commentary any m a t e r i a l a p p r o p r i a t e
f o r a s t a f f i n t e r p r e t a t i o n o f t h i s s c o p e , b u t commenter s s h o u l d n o t e x p e c t t h e
commentary t o a n s w e r e v e r y q u e s t i o n o r remove e v e r y p o s s i b l e a m b i g u i t y from
the r e g u l a t i o n .
No comments t h a t h av e t h e e f f e c t o f r e v i s i n g o r e l i m i n a t i n g
any r e q u i r e m e n t s o f t h e r e g u l a t i o n i t s e l f w i l l be c o n s i d e r e d .
To e x p e d i t e
a n a l y s i s o f t h e comments, commenter s a r e r e q u e s t e d t o i d e n t i f y p o r t i o n s o f t h e
commentary a c c o r d i n g t o s e c t i o n and p a r a g r a p h number s and t o b e g i n d i s c u s s i o n
o f e ac h s e c t i o n on a s e p a r a t e pa ge.
Comments must be r e c e i v e d by F r i d a y , J u l y 10, 1 9 8 1 .
A fter considera­
t i o n o f t h e s e comments and p o s s i b l e r e v i s i o n o f t h e co mme nt ar y, o f f i c i a l s t a f f
i n t e r p r e t a t i o n T I L - 1 w i l l be p u b l i s h e d i n f i n a l f orm i n t h e F e d e r a l R e g i s t e r .




§ 226.1

O F F I C I A L ST AFF COMMENTARY - -

SUBPART A - Section
“

TIL-1

GENERAL

226.1

- - A u th o rity , purpose,
1i a b i 1i t i e s .

coverage,

organization,

p enalties

and

1.
Foreign a p p l i c a b i l i t y .
The r e g u l a t i o n a p p l i e s t o a l l p e r s o n s ( i n c l u d i n g
b r a n c h e s o f f o r e i g n banks l o c a t e d in the U n it e d S t a t e s ) t h a t extend consumer
c r e d i t t o r e s i d e n t s ( i n c l u d i n g r e s i d e n t a l i e n s ) o f any " s t a t e " a s d e f i n e d i n
§ 226.2.
The r e g u l a t i o n d o e s n o t a p p l y t o a f o r e i g n b r a n c h o f a U . S . bank
e x t e n d i n g c r e d i t t o a U.S. c i t i z e n r e s i d i n g or v i s i t i n g abroad or to a f o r e i g n
n a t i o n a l abroad.
I f an a c c o u n t i s l o c a t e d i n t h e U n i t e d S t a t e s and c r e d i t i s
e x t e n d e d t o a U . S . r e s i d e n t , t h e t r a n s a c t i o n i s s u b j e c t t o R e g u l a t i o n Z.
This
w i l l be t h e c a s e w h e t h e r o r n o t a p a r t i c u l a r a d v a n c e on t h e a c c o u n t t a k e s p l a c e
i n t h e U n i t e d S t a t e s and w h e t h e r o r n o t t h e e x t e n d e r o f c r e d i t i s c h a r t e r e d i n
the United S t a t e s o r a f o r e ig n co u n try.
Thus, a U.S. r e s i d e n t ' s use in Europe
o f a c r e d i t c a r d i s s u e d by a b ank i n t h e c o n s u m e r ' s home town i s c o v e r e d by
t h is regulation.
REFERENCES:
Statute:
Previous

§§ 102, 105.
regulation:

§ 226.1.

1981 c h a n g e s :
A p a r a g r a p h on c o v e r a g e h a s been added so t h a t t h e
r e a d e r w i l l u n d e r s t a n d f rom t h e s t a r t what i s s u b j e c t t o t h e r e g u l a t i o n .
A
p a r a g r a p h on o r g a n i z a t i o n e x p l a i n s t h e r e o r g a n i z a t i o n o f t h e r e g u l a t i o n i n t o
s u b p a r t s t h a t group t o g e t h e r the p r o v i s i o n s r e l a t i n g to ge neral m a t t e r s , openend c r e d i t , c l o s e d - e n d c r e d i t , and m i s c e l l a n e o u s r u l e s .
(The p r o v i s i o n s on
c o n s u m e r l e a s i n g have been i s s u e d by t h e B o a r d a s a s e p a r a t e r e g u l a t i o n ,
R e g u l a t i o n M, 12 CFR 2 1 3 . )

Section

226.2 - -

D efinition s

2(a)

D efinition s.

2(a)(2)

and r u l e s

of co nstruction.

Advertisem ent.

1.
Coverage.
Only commercial m essages are a d v e r t is e m e n t s .
Messages i n v i t i n g ,
o f f e r i n g , o r o t h e r w i s e a n n o u n c i n g g e n e r a l l y t o p r o s p e c t i v e c u s t o m e r s t he
a v a i l a b i l i t y o f c r e d i t t r a n s a c t i o n s , whether in v i s u a l , o r a l , o r p r i n t media,
a r e c o v e r e d by t h e r e g u l a t i o n .
Examples in c lu d e :




°

M essa ge s in a newspaper, m agazin e,
fly e r, or catalog.

°

A n n o u n c e m e n t s on r a d i o ,
system.

°

D ire c t m ail l i t e r a t u r e or other prin te d m aterial
e x te rio r or in t e r io r sign.

©

P o in t-o f-sa le d isp la ys.

te le vision,

le aflet,

promotional

or p u b lic

address

on any

§ 226.2
- A2

0

Telephone s o l i c i t a t i o n s .

°

Price tags that

o

L e tte rs sent to customers
of b u sin e ss.

°

M e s s a g e s on c h e c k i n g a c c o u n t s t a t e m e n t s
a s t a t e d annual p erce n ta ge ra te .

contain

credit

inform ation.

as p a r t o f an o r g a n i z e d

offering

solicitation

auto

loans

at

The t er m d o e s n o t i n c l u d e :
°

D i r e c t p e r s o n a l c o n t a c t s , s u c h as f o l l o w - u p l e t t e r s , c o s t
e s t i m a t e s f o r i n d i v i d u a l c o n s u m e r s , and o r a l o r w r i t t e n communi­
c a t i o n r e l a t i n g to the n e g o t i a t i o n o f a s p e c i f i c t r a n s a c t i o n .

o

Inform ational

°

N o t i c e s r e q u i r e d by s t a t e l a w , i f s t a t e la w m a nd a t e s t h a t a
s p e c i f i c n o t i c e be d i s p l a y e d and o n l y t h e i n f o r m a t i o n s o mandated
i s i n c lu d e d in the n o t i c e .

0

News a r t i c l e s

0

Market

m aterial

distributed

the use o f which

research m a te ria ls

that

is

only

controlled

do n ot s o l i c i t

2.
Persons covered.
A l l " p e r s o n s " must comply w i t h
i n § § 2 2 6 . 1 6 and 2 2 6 . 2 4 , n ot j u s t t h o s e t h a t s a t i s f y
graph ( a ) ( I 7 ) .
However, u n d e r § 145 o f t h e a c t , t h e
medium i n w h i c h an a d v e r t i s e m e n t a p p e a r s , o r t h r o u g h
are not s u b j e c t to c i v i l l i a b i l i t y .
2(a)(3)

to b u s in e s s

entitie s.

by t h e news med ia .
business.

t he a d v e r t i s i n g p r o v i s i o n s
the " c r e d i t o r " t e s t of p a r a ­
owner or p e r s o n n e l o f the
which i t i s d i s s e m i n a t e d ,

Arranger of c r e d i t .

1.
Coverage.
Th er e can be an a r r a n g e r o f c r e d i t o n l y i f t h e c r e d i t a r r a n g e d
i n v o l v e s a f i n a n c e c h a r g e o r i s p a y a b l e by w r i t t e n a g r e e m e n t i n more t h a n f o u r
i n s t a l l m e n t s and t h e p e r s o n a c t u a l l y e x t e n d i n g t h e c r e d i t i s someone who does
n o t meet t h e d e f i n i t i o n o f " c r e d i t o r , " s u c h as when an i n t e r m e d i a r y a r r a n g e s
a c r e d i t e x t e n s i o n from a n o n - p r o f e s s i o n a l l e n d e r .
F o r e x a m p l e , a c o n s u me r
p u r c h a s e s a h o u s e and f i n a n c e s 60 p e r c e n t t h r o u g h a bank an d, as a r r a n g e d by
t h e r e a l e s t a t e b r o k e r , 40 p e r c e n t t h r o u g h t he s e l l e r .
The c o n s u m e r s i g n s two
separate notes.
I n t h e f i r s t t r a n s a c t i o n t h e bank i s t h e c r e d i t o r ; t h e r e a l
e s t a t e agent i s not.
In the second t r a n s a c t i o n , a s s u m i n g t h a t the s e l l e r i s
n o t a c r e d i t o r , t h e r e a l e s t a t e a g e n t i s an a r r a n g e r o f c r e d i t and t h u s s u b j e c t
t o t he r e g u l a t i o n .
2.
Counting t r a n s a c t i o n s .
The d e f i n i t i o n u s e s t h e same n u m e r i c a l t e s t s - - 25
t r a n s a c t i o n s p e r y e a r o r 5 t r a n s a c t i o n s p e r y e a r when s e c u r e d by a d w e l l i n g
- - as t he d e f i n i t i o n o f " c r e d i t o r . "
T h i s t e s t i s m e a s u r e d by t h e number o f
c r e d i t e x t e n s i o n s a rra n g e d in the p r e c e d in g c a le n d a r y e a r .
Once t h e t e s t i s
s a t i s f i e d , a l l t r a n s a c t i o n s in the su c c e e d in g y e a r are covered.
I f the t e s t
was n o t s a t i s f i e d i n t h e p r e c e d i n g c a l e n d a r y e a r , th e n t h e c u r r e n t c a l e n d a r




226.2

- A3 -

y e a r i s the b a s i s f o r the t e s t .
I n s t a n c e s in which c r e d i t i s o f f e r e d but not
a c c e p t e d do n o t c o u n t t o w a r d s s a t i s f a c t i o n o f t h e n u m e r i c a l t e s t s .
( Se e t h e
d i s c u s s i o n u n d e r " c r e d i t o r " f o r i l l u s t r a t i o n s o f how t o c o u n t c r e d i t e x t e n s i o n s . )
3.
Trusts.
A t r u s t and i t s t r u s t e e a r e c o n s i d e r e d t h e same e n t i t y f o r p u r p o s e s
o f d e t e r m i n i n g w h e t h e r a t r a n s a c t i o n i s c o v e r e d by t h e r e g u l a t i o n .
Therefore,
a t r u s t e e i s n ot an a r r a n g e r o f c r e d i t a s t o l o a n s made on b e h a l f o f t h e t r u s t .
See t h e d i s c u s s i o n u n d e r " c r e d i t o r " f o r an e x p l a n a t i o n o f when a t r u s t i s a
c r e d i t o r f o r p u rpo se s o f the r e g u l a t i o n .
2(a)(4)

B illin g

cycle

or c y c l e .

1.
In tervals.
In open-end c r e d i t p l a n s , th e b i l l i n g c y c l e d e t e r m in e s the
i n t e r v a l s a t w h i c h p e r i o d i c d i s c l o s u r e s t a t e m e n t s must be s e n t ; t h e s e i n t e r v a l s
are a l s o used as m ea su rin g p o i n t s f o r o th e r c r e d i t o r d u t i e s .
T ypically,
b i l l i n g c y c l e s a r e m o n t h l y , b u t t h e y may be more o r l e s s f r e q u e n t ( b u t n o t
l e s s f r e q u e n t than q u a r t e r l y ) .
2.
C r e d i t o r s t h a t do n o t b i l l .
The t er m " c y c l e " i s i n t e r c n a n g e a b l e w i t h
" b i l l i n g c y c l e " f o r d e f i n i t i o n a l p u r p o s e s , s i n c e some c r e d i t o r s ' c y c l e s do n ot
i n v o l v e t h e s e n d i n g o f b i l l s i n t h e t r a d i t i o n a l s e n s e b ut o n l y s t a t e m e n t s o f
account a c t i v i t y .
T h i s i s commonly t h e c a s e w i t h f i n a n c i a l i n s t i t u t i o n s where
p e r i o d i c p a y m e n t s a r e made t h r o u g h p a y r o l l d e d u c t i o n o r t h r o u g h a u t o m a t i c
d e b it of the c o n su m e r's a s s e t account.
3.
E qua l c y c l e s .
A l t h o u g h p a r a g r a p h ( a ) ( 4 ) r e q u i r e s c y c l e s t o be " e q u a l , "
t h e r e i s a p e r m i s s i b l e v a r i a n c e t o a c c o u n t f o r w e e k e n d s , h o l i d a y s , and d i f f e r ­
e n c e s i n t h e number o f d a y s i n m o n t h s .
C y c l e s a r e c o n s i d e r e d e qu a l i f the
a c t u a l d a t e o f t h e s t a t e m e n t d o e s n o t v a r y by more t h a n f o u r d a y s from a f i x e d
" d a y " ( f o r e x a m p l e , t h e t h i r d T h u r s d a y o f each month) o r " d a t e " ( f o r e xa m pl e ,
t h e 1 5t h o f e ac h month) t h a t t h e c r e d i t o r r e g u l a r l y u s e s .
The r e q u i r e m e n t
t h a t c y c l e s be e qu a l a p p l i e s even i f a c r e d i t o r a p p l i e s a d a i l y p e r i o d i c r a t e
to determ ine the fin a n c e c h a rg e , s i n c e the requirem ent i s in te n d ed both to
f a c i l i t a t e a c c u r a t e d i s c l o s u r e o f t h e a nn u a l p e r c e n t a g e r a t e and t o a s s u r e
t h a t sta te m e n t s are sent r e g u l a r l y .
4.
Payment r e m i n d e r .
The s e n d i n g o f a r e g u l a r payment r e m i n d e r e s t a b l i s h e s
a c y c l e f o r w h i c h t h e c r e d i t o r m ust s end p e r i o d i c s t a t e m e n t s .
2(a)(6)

Business

day.

1.
Busin e ss function t e s t .
T h e r e i s no p r e c i s e t e s t f o r what c o n s t i t u t e s
" s u b s t a n t ia l ly a l l '1 of a c r e d i t o r 's business functions.
Factors that in d ic a te
t h a t t h e c r e d i t o r i s open f o r b u s i n e s s i n c l u d e t h e a v a i l a b i l i t y o f p e r s o n n e l
t o make l o a n d i s b u r s e m e n t s , t o a u t h o r i z e c r e d i t t r a n s a c t i o n s , o r t o h a n d l e
credit transaction in q u irie s.
F a c t o r s t h a t i n d i c a t e t h a t t h e c r e d i t o r i s not
f u l l y open f o r b u s i n e s s i n c l u d e t h e b a n k ' s c u s t o m e r s e r v i c e wi ndow s b e i n g open
o n l y f o r l i m i t e d p u r p o s e s , s u c h a s d e p o s i t s and w i t h d r a w a l s , b i l l p a y i n g , and
related se rvice s.
2.
R escission r u le .
A more p r e c i s e
and f e d e r a l l e g a l h o l i d a y s l i s t e d i n
of r e s c is s io n is involved.




r u l e ( a l l c a le n d a r days except Sundays
5 U . S . C . 6 1 0 3 ( a ) ) a p p l i e s when t h e r i g h t

§ 226.2
- A4 -

2(a)(7)

Card i s s u e r .

1.
Agent.
An “a g e n t " o f a c a r d i s s u e r i s c o n s i d e r e d a c a r d i s s u e r ; b u t as
a g e n c y r e l a t i o n s h i p s a r e t r a d i t i o n a l l y d e f i n e d by c o n t r a c t and by s t a t e law,
t h e r e g u l a t i o n d o es n o t d e f i n e " a g e n t . "
Merely p r o v id in g s e r v i c e s r e l a t i n g
to th e p r o d u c t io n o f c r e d i t c a r d s or data p r o c e s s i n g f o r o t h e r s , however,
d o e s n o t make one an a g e n t o f a c a r d i s s u e r .
In c o n t r a s t , a f i n a n c i a l i n s t i t u ­
t i o n may become an a g e n t o f a c a r d i s s u e r i f an a g r e e m e n t between t h e i n s t i t u ­
t i o n and t h e c a r d i s s u e r p r o v i d e s t h a t t h e c a r d h o l d e r may u s e a l i n e o f c r e d i t
w i t h t h e f i n a n c i a l i n s t i t u t i o n t o pay o b l i g a t i o n s i n c u r r e d by u s e o f a c r e d i t
card.
2(a)(8)

Cardholder.

1.
General r u le .
A c a r d h o l d e r i s a n a t u r a l p e r s o n a t whose r e q u e s t a c a r d i s
i s s u e d f o r c o n s u m e r c r e d i t p u r p o s e s o r who i s a c o - o b l i g o r o r g u a r a n t o r f o r
such a card i s s u e d to an o th e r.
The s e c o n d c a t e g o r y d o e s n o t i n c l u d e an emp lo ye e
who i s a c o - o b l i g o r o r g u a r a n t o r on a c a r d i s s u e d t o t h e e m p l o y e r f o r b u s i n e s s
p u r p o s e s , n o r d o es i t i n c l u d e a p e r s o n who i s m e r e l y t h e a u t h o r i z e d u s e r o f a
card is s u e d to another.
2.
Lim ited a p p lic a t io n of r e g u l a t i o n .
For the l i m i t e d p u rp o s e s o f th e s e c t i o n s
on i s s u a n c e o f c r e d i t c a r d s and l i a b i l i t y f o r u n a u t h o r i z e d u s e , a " c a r d h o l d e r "
i n c l u d e s any p e r s o n , i n c l u d i n g an o r g a n i z a t i o n , t o whom a c a r d i s i s s u e d f o r
any p u r p o s e — i n c l u d i n g a b u s i n e s s , a g r i c u l t u r a l , o r c o m m e r c i a l p u r p o s e .
3.

Issuance .

See t h e commentary t o § 2 2 6 . 1 2 ( a ) .

4.
Dual-purpose c a r d s .
Some c r e d i t o r s o f f e r d u a l - p u r p o s e c a r d s t h a t a r e f o r
b u s i n e s s as well as consumer p u r p o s e s .
When a c a r d i s i s s u e d t o an i n d i v i d u a l
f o r c o n s u m e r p u r p o s e s , t h e f a c t t h a t an o r g a n i z a t i o n h a s g u a r a n t e e d t o pay
t h e deb t d o e s n o t make i t b u s i n e s s c r e d i t .
On t h e o t h e r h a nd , when a c a r d i s
i s s u e d f o r b u s i n e s s p u r p o s e s , t h e f a c t t h a t an i n d i v i d u a l s o m e t i m e s u s e s i t
f o r c o n s u m e r p u r c h a s e s d o es n o t s u b j e c t t h e c a r d i s s u e r t o t h e p r o v i s i o n s on
p e r i o d i c s t a t e m e n t s , b i l l i n g e r r o r r e s o l u t i o n , and o t h e r p r o t e c t i o n s a f f o r d e d
to consumer c r e d i t .
Some c a r d i s s u e r s o f f e r d u a l - c a r d s y s t e m s - - t h a t i s , t h e y
i s s u e two c a r d s t o t h e same i n d i v i d u a l , one i n t e n d e d f o r b u s i n e s s u s e , t h e
o t h e r f o r consumer or p e rso n a l use.
With s u c h a s y s t e m , t h e same p e r s o n may
be a c a r d h o l d e r f o r g e n e r a l p u r p o s e s when u s i n g t h e c a r d i s s u e d f o r c o n s u m e r
u s e , and a c a r d h o l d e r o n l y f o r t h e l i m i t e d p u r p o s e s o f t h e r e s t r i c t i o n s on
i s s u a n c e and l i a b i l i t y when u s i n g t h e c a r d i s s u e d f o r b u s i n e s s p u r p o s e s .
2(a)(9)

Cash p r i c e .

1.
Components.
The c a s h p r i c e i s n o t a r e q u i r e d d i s c l o s u r e , b u t t h e amount
i s a s t a r t i n g p o i n t i n c o m p u t i n g t h e amount f i n a n c e d u n d e r § 2 2 6 . 1 8 ( b ) f o r
credit sales.
Any c h a r g e s imposed e q u a l l y i n c a s h and c r e d i t t r a n s a c t i o n s
may be i n c l u d e d i n t h e c a s h p r i c e , o r t h e y may be t r e a t e d a s " o t h e r amounts
f in a n c e d " under § 2 2 6 . 1 8 ( b ) ( 2 ) .
The c a s h p r i c e d o e s n o t i n c l u d e any p a r t o f
the f in a n c e ch a rge .




§ 226.2
- A5

2.
Service co n tra c ts.
" S e r v i c e c o n t r a c t s " in c lu d e c o n t r a c t s f o r the r e p a i r
o r t h e s e r v i c i n g o f g o o d s , s u c h a s m e c h a n i c a l br eakdown c o v e r a g e , even i f i t
i s c h a r a c t e r i z e d a s a f or m o f i n s u r a n c e u n d e r s t a t e law.
3.
Rebates.
C r e d i t o r s have c o m p l e t e f l e x i b i l i t y i n t h e way t h a t t h e y t r e a t
r e b a t e s f o r p u r p o s e s o f d i s c l o s u r e and c a l c u l a t i o n .
T h is i s t r u e whether the
r e b a t e i s g i v e n by a s e l l e r o r a m a n u f a c t u r e r .
C r e d i t o r s may make d i s c l o ­
s u r e s w i t h o u t t a k i n g t h e s e a mou nt s i n t o a c c o u n t , o r may r e f l e c t t h e r e b a t e i n
the d i s c l o s u r e s .
F o r e x a m p l e , when t h e s e l l e r and c o n s u m e r a g r e e t o a p p l y t h e
amount o f a r e b a t e t o t h e p r i c e o f t h e g o o d s , t h a t amount may be i n c l u d e d , at
t h e c r e d i t o r ' s o p t i o n , i n t h e downpayment d i s c l o s e d t o t h e c o n s u m e r .
2 ( a ) (10)

Closed-end c re d it.

1.
G eneral.
The c o v e r a g e o f t h i s t er m i s d e f i n e d by e x c l u s i o n .
That i s , i t
i n c l u d e s any c r e d i t a r r a n g e m e n t t h a t d o e s n o t f a l l w i t h i n t h e d e f i n i t i o n o f
"open-end c r e d i t . "
The d i s c l o s u r e r u l e s f o r c l o s e d - e n d c r e d i t a r e fo un d i n
S u b p a r t C.
2(a )(ll)

Consumer.

1.
Scope.
G u a r a n t o r s , e n d o r s e r s , and s u r e t i e s a r e n o t g e n e r a l l y c o n s u m e r s f o r
p u r p o s e s o f t h e r e g u l a t i o n , b u t t h e y may be e n t i t l e d t o r e s c i n d u n d e r c e r t a i n
ci rc u m sta n c e s.
2.
R escission r u le s .
F o r p u r p o s e s o f r e s c i s s i o n u n d e r § § 2 2 6 . 1 5 and 2 2 6 . 2 3 , a
c o n s u m e r i n c l u d e s a ny n a t u r a l p e r s o n whos e home i s s u b j e c t t o t h e r i s k o f l o s s
as a consequence o f the s e c u r i t y i n t e r e s t taken in a c r e d i t t r a n s a c t i o n .
Thus,
i f a s e c u r i t y i n t e r e s t i s t a k e n i n A ' s o w n e r s h i p i n t e r e s t i n " F a i r O a k s " and
F a i r Oak s i s A ' s p r i n c i p a l d w e l l i n g , A i s a c o n s u m e r f o r p u r p o s e s o f r e s c i s ­
s i o n , e ven i f A i s n o t l i a b l e , e i t h e r p r i m a r i l y o r s e c o n d a r i l y , on t h e u n d e r l y i n g
cre d it transaction.
3.
Land t r u s t s .
C r e d i t e x t e n d e d t o l a n d t r u s t s , a s d e s c r i b e d i n t h e commentary
t o § 2 2 6 . 3 , i s c o n s id e r e d consumer c r e d i t extended to a consumer f o r purpo se s
of t h is regulation.
2(a)(12)

C o n s u me r c r e d i t .

1.
"Prim arily" te s t.
T h e r e i s no p r e c i s e t e s t f o r what c o n s t i t u t e s c r e d i t
o f f e r e d o r e x t e n d e d f o r p e r s o n a l , f a m i l y , o r h o u s e h o l d p u r p o s e s , n o r f o r what
constitutes "p rim a rily ."
See, however, the d i s c u s s i o n o f b u s i n e s s p urposes in
t h e co mme nta ry t o § 2 2 6 . 3 .
2(a)(13)

Consummation.

1.
S t a t e law g o v e r n s .
When a c o n t r a c t u a l o b l i g a t i o n on t h e c o n s u m e r ' s p a r t i s
c r e a t e d i s a m a t t e r t o be d e t e r m i n e d u n d e r s t a t e l a w ; R e g u l a t i o n Z d o es n o t make
t h is determ ination.
C on su m m at i on d o e s n o t o c c u r m e r e l y b e c a u s e t h e c o n s u me r
h a s made some f i n a n c i a l i n v e s t m e n t i n t h e t r a n s a c t i o n ( f o r e x a m p l e , by p a y i n g
a n o n r e f u n d a b l e f e e ) u n l e s s , o f c o u r s e , s t a t e law h o l d s o t h e r w i s e .




A

§ 226.2
- A6 -

2.
C r e d i t v. s a l e .
C ons um mat i on d o e s n o t o c c u r when t h e c o n s u m e r becomes
c o n t r a c t u a l l y co mmi t te d t o a s a l e t r a n s a c t i o n , u n l e s s t h e c o n s u m e r a l s o becomes
l e g a l l y o b lig a t e d to accept a p a r t i c u l a r c r e d i t arrangement.
For example,
when a c o n s u m e r p a y s a n o n r e f u n d a b l e d e p o s i t t o p u r c h a s e an a u t o m o b i l e , a p u r ­
c h a s e c o n t r a c t may h a v e a r i s e n , b u t c o n s u m m a t i o n f o r p u r p o s e s o f t h e r e g u l a t i o n
d o e s n o t o c c u r u n l e s s t h e c o n s u m e r a l s o c o n t r a c t s f o r f i n a n c i n g at t h a t t i m e .
2 (a ) (14)

C re dit.

1.
Exclu sion s.
The f o l l o w i n g
o f the r e g u la t io n :

situ ations

are not c o n s id e r e d

credit

fo r purposes

°

Layaway p l a n s , u n l e s s t h e c o n s u m e r i s c o n t r a c t u a l l y o b l i g a t e d
to c o n tin u e making payments.
Wh et he r t h e c o n s u m e r i s s o o b l i g a t e d
i s a m a t t e r t o be d e t e r m i n e d u n d e r s t a t e law.
The f a c t t h a t t he
c o n s u m e r i s n o t e n t i t l e d t o a r e f u n d o f any amounts p a i d t o w a r d s
th e cash p r i c e o f th e m erchandise does not b r i n g la yaw ays w i t h i n
the d e f i n i t i o n .

°

T ax l i e n s , t a x a s s e s s m e n t s , and c o u r t j u d g m e n t s ( i n c l u d i n g t h e
r e a f f i r m a t i o n o f a debt d i s c h a r g e d in b a n k ru p tc y , i f approved
by a c o u r t ) .
H ow ev er , t h i r d - p a r t y f i n a n c i n g o f s u c h o b l i g a t i o n s
( f o r e x a m p l e , o b t a i n i n g a bank l o a n t o pay o f f a t a x l i e n ) i s
c r e d i t f o r p u rp o s e s o f th e r e g u l a t i o n .

0

I n s u r a n c e premium p l a n s t h a t i n v o l v e payment i n i n s t a l l m e n t s
w i t h each i n s t a l l m e n t r e p r e s e n t i n g t h e payment f o r i n s u r a n c e
cove rag e f o r a c e r t a i n f u t u r e p e r io d o f time.

0

Home i mpr o vement t r a n s a c t i o n s i n v o l v i n g p r o g r e s s pa ym en ts when
t h e c o n s u me r p a y s , a s t h e work p r o g r e s s e s , o n l y f o r work com­
p l e t e d w i t h no c o n t r a c t u a l o b l i g a t i o n t o c o n t i n u e p a y m e n t s .

o

" B o r r o w i n g " a g a i n s t t he a c c r u e d c a s h v a l u e o f an i n s u r a n c e p o l i c y
o r a p e n s i o n a c c o u n t , where t h e r e i s no i n d e p e n d e n t o b l i g a t i o n t o
repay.

0

The i s s u a n c e o f l e t t e r s o f c r e d i t
contracts.
However , t h e r e may be
the l e t t e r o f c r e d i t i s presented
e xercise d , i f there i s a deferra l
t h a t time.

°

Investment p la n s in which the p a r t y e x t e n d i n g c a p i t a l to the c o n ­
sumer r i s k s t he l o s s o f t h e c a p i t a l a d v a n c e d .
F o r e x a m p l e , an
a r r a n g e m e n t w i t h a home p u r c h a s e r i n w h i c h t h e i n v e s t o r p a y s a
p o r t i o n o f t h e downpayment and o f t h e p e r i o d i c m o r t g a g e payments
i n r e t u r n f o r an o w n e r s h i p i n t e r e s t i n t h e p r o p e r t y , and s h a r e s
i n any g a i n o r l o s s o f p r o p e r t y v a l u e .




and t h e e x e c u t i o n o f o p t i o n
an e x t e n s i o n o f c r e d i t when
f o r payment o r t h e o p t i o n
o f t h e payment o f a debt at

§ 226.2

- A7 -

2 ( a ) (15)

Credit

card.

1.
G eneral.
A c r e d i t c a r d m ust be u s a b l e " f r o m t i m e t o t i m e . "
This standard
c o n t e m p l a t e s r e p e a t e d u s e o f a s i n g l e d e v i c e and t h e r e f o r e t h e d e f i n i t i o n
e x c l u d e s c h e c k s , c o u p o n s , and s i m i l a r i n s t r u m e n t s u s a b l e o n l y once t o o b t a i n a
s in g le cre d it extension.
2.

Examples.

The f o l l o w i n g

are examples o f c r e d i t

cards:

°

A card that guarantees checks or s i m i l a r in stru m en ts,
a s s e t a c c o u n t i s a l s o t i e d t o an o v e r d r a f t l i n e .

o

A card t h a t a c c e s s e s both a c r e d i t
bined c r e d i t - d e b i t c a r d ) .

°

An i d e n t i f i c a t i o n
on a p u r c h a s e .

°

An i d e n t i f i c a t i o n c a r d i n d i c a t i n g l o a n a p p r o v a l t h a t i s p r e s e n t e d
to a merchant o r to the le n d e r , whether or not the consumer s i g n s
a s e p a r a t e p r o m i s s o r y n o t e f o r each c r e d i t e x t e n s i o n .

2(a)(16)

Credit

card

that

permits

and an a s s e t

if

account

the

(a com­

a c o n s u m e r t o d e f e r payment

sale .

1.
Special d i s c l o s u r e .
Whenever t h e s e l l e r i s a c r e d i t o r i n a t r a n s a c t i o n ,
t h e t r a n s a c t i o n i s a c r e d i t s a l e and t h e s p e c i a l c r e d i t s a l e d i s c l o s u r e s , s uch
as t h e " t o t a l s a l e p r i c e " u n d e r § 2 2 6 . 1 8 ( j ) , must be g i v e n .
T h i s a p p l i e s even
when t h e r e i s more t h a n one c r e d i t o r i n t h e t r a n s a c t i o n and t h e c r e d i t o r m a k i n g
the d i s c l o s u r e s i s not th e s e l l e r .
2.
Arranger of c r e d it .
I f the s e l l e r o f the p r o p e r t y or s e r v i c e s in v o lv e d i s
n o t a c r e d i t o r a s t o t h a t s a l e , e ven t h o u g h t h e s e l l e r may have a r r a n g e d f o r
f i n a n c i n g , the t r a n s a c t i o n i s not a c r e d i t s a l e .
T h u s , when a s e l l e r a s s i s t s
a c o n s u m e r i n o b t a i n i n g a d i r e c t l o a n fr om a f i n a n c i a l i n s t i t u t i o n t o whom
t h e c o n s u m e r ' s n o t e i s made p a y a b l e , t h e t r a n s a c t i o n i s a l o a n t r a n s a c t i o n and
o n ly the f i n a n c i a l i n s t i t u t i o n i s a c r e d i t o r .
3.
R efinancings.
When a c r e d i t s a l e i s r e f i n a n c e d w i t h i n t h e m e a n i n g o f § 2 2 6 . 2 0 , t h e r e f i n a n c i n g i s n o t a c r e d i t s a l e , u n l e s s a new s a l e o f g o o d s o r
s e r v i c e s is a ls o in vo lve d .
4.
Incidental s a le s .
Some l e n d e r s " s e l l " a p r o d u c t o r s e r v i c e - - s u c h a s c r e d i t ,
p r o p e r t y , o r h e a lt h i n s u r a n c e - - as p a r t o f a loan t r a n s a c t i o n .
S e c t i o n 226.4
c o n t a i n s t h e r u l e s on w h e t h e r c r e d i t l i f e o r p r o p e r t y i n s u r a n c e i s i n t h e
fin a n ce charge.
I f t h e i n s u r a n c e i s f i n a n c e d , i t may be d i s c l o s e d as a s e p a r a t e
c r e d i t s a l e t r a n s a c t i o n or d i s c l o s e d as p a rt o f the prim ary t r a n s a c t i o n ; i f
t h e l a t t e r a p p r o a c h i s t a k e n , e i t h e r l o a n o r c r e d i t s a l e d i s c l o s u r e s may be
made.
( S e e t h e commentary t o § 2 2 6 . 1 7 ( c ) f o r f u r t h e r d i s c u s s i o n o f t h i s p o i n t . )
2(a)(17)

C re d itor.

1.
General.
The d e f i n i t i o n s e t s o u t f i v e c r i t e r i a i n p a r a g r a p h s
t h r o u g h ( v ) ; i f any one o f them i s met, t h e p e r s o n i s a c r e d i t o r .




(a)(17)(i)

§ 226.2
- A8 -

2.
P r e r e q u i s i t e s . Paragraph ( a ) ( 1 7 ) ( i ) of t h i s d e f i n i t i o n co n ta in s a frequency
s t a n d a r d f o r d e t e r m i n i n g when a p e r s o n i s a c r e d i t o r .
Two c o n d i t i o n s must be
met i n o r d e r f o r a p a r t i c u l a r c r e d i t e x t e n s i o n t o be s u b j e c t t o t h e r e g u l a t i o n
and f o r t h e c r e d i t e x t e n s i o n t o be c o u n t e d t o w a r d s s a t i s f a c t i o n o f t h e n u m e r i c a l
tests.
First

t h e r e must be e i t h e r :

°

A w r i t t e n , r a t h e r t h a n an o r a l , a g r e e m e n t t o pay i n more t h a n 4
installm ents.
(A l e t t e r s e n t by t h e c r e d i t o r t h a t m e r e l y c o n f i r m s
an o r a l a g r e e m e n t d o e s n o t c o n s t i t u t e a w r i t t e n a g r e e m e n t f o r
purpo se s o f th e r e g u l a t i o n . )
<0 r ,

°

A f i n a n c e c h a r g e i m p o s ed f o r t h e c r e d i t . (The o b l i g a t i o n
t h e f i n a n c e c h a r g e need n o t be i n w r i t i n g . )

t o pay

S e c o n d , t h e o b l i g a t i o n m u st be p a y a b l e t o a p e r s o n who w o u l d be a
creditor.
T h u s , a s i n g l e payment o b l i g a t i o n w i t h o u t a f i n a n c e c h a r g e d o es n ot
count toward the numerical t e s t s , nor i s such a c r e d i t e x t e n s i o n s u b j e c t to
the d i s c l o s u r e req u ire m en ts o f th e r e g u l a t i o n .
The e x a m p l e s d i s c u s s e d bel ow
i l l u s t r a t e how t h e t e s t s a r e a p p l i e d .
T h e s e e x a m p l e s a s sum e t h a t c o n s u m e r
c r e d i t w i t h a f i n a n c e c h a r g e o r w r i t t e n a g r e e m e n t f o r more t h a n 4 i n s t a l l m e n t s
was e x t e n d e d i n t h e y e a r s i n q u e s t i o n and t h a t t h e p e r s o n d i d n o t e x t e n d s uc h
c r e d i t i n 1982.
3.
Counting t r a n s a c t io n s .
N o r m a l l y t h e number o f t r a n s a c t i o n s i s m ea s ur ed
' b y t h e p r e c e d i n g c a l e n d a r y e a r ; i f t h e r e q u i s i t e number i s met, t h e n t h e p e r s o n
i s a c r e d i t o r f o r a l l t r a n s a c t i o n s in the c u r r e n t y e a r .
H ow ev er , when a p e r s o n
d i d n o t meet t h e t e s t i n t h e p r e c e d i n g y e a r , t h e number o f t r a n s a c t i o n s i s
m e a su r ed by t h e c u r r e n t c a l e n d a r y e a r .
F o r e x a m p l e , i f a p e r s o n e x t e n d s c o n s um e r
c r e d i t 26 t i m e s i n 1 9 8 3 , i t i s a c r e d i t o r f o r p u r p o s e s o f t h e r e g u l a t i o n f o r
a l l e x t e n s i o n s o f c o n s u m e r c r e d i t i n 1984.
On t h e o t h e r h a nd , i f a b u s i n e s s
b e g i n s i n 198 3 and e x t e n d s c o n s u m e r c r e d i t 20 t i m e s , i t i s n o t a c r e d i t o r f o r
p u r p o s e s o f t h e r e g u l a t i o n i n 1983.
I f i t e x t e n d s c o n s u m e r c r e d i t 75 t i m e s i n
1 9 8 4 , h o w e v e r , i t becomes a c r e d i t o r f o r p u r p o s e s o f t h e r e g u l a t i o n (and must
b egin making d i s c l o s u r e s ) a f t e r the 25th e x t e n s i o n o f c r e d i t in t h a t y e a r.
4.
E f f e c t o f s a t i s f y i n g one t e s t .
Once one o f t h e n u m e r i c a l t e s t s i s s a t i s f i e d ,
the person i s a ls o a c r e d i t o r f o r the oth e r type o f c r e d i t .
For example, in
1 98 3 a p e r s o n e x t e n d s u n s e c u r e d c o n s u m e r c r e d i t more t h a n 25 t i m e s .
That
p erson i s a c r e d i t o r f o r a l l s u c c e e d in g c r e d i t e x t e n s i o n s , whether they i n v o l v e
c r e d i t s e c u r e d by a d w e l l i n g o r n o t .
5.
R e l a t i o n s h i p between c o n s u m e r c r e d i t i n g e n e r a l and c r e d i t s e c u r e d by a
dwel1i n g .
E x t e n s i o n s o f c r e d i t s e c u r e d by a d w e l l i n g a r e c o u n t e d t o w a r d s t h e
25-extensions test.
F o r e x a m p l e , i f i n 1983 a p e r s o n e x t e n d s u n s e c u r e d c o n s u m e r
c r e d i t 23 t i m e s and c o n s u m e r c r e d i t s e c u r e d by a d w e l l i n g t w i c e , i t becomes a
c r e d i t o r f o r the s u c c e e d in g e x t e n s i o n s o f c r e d i t , whether or not they are
s e c u r e d by a d w e l l i n g .
On t h e o t h e r h a n d , t h e e x t e n s i o n s o f c o n s u m e r c r e d i t
n o t s e c u r e d by a d w e l l i n g a r e n o t c o u n t e d t o w a r d s t h e number o f c r e d i t e x t e n s i o n s
s e c u r e d by a d w e l l i n g .
F o r e x a m p l e , i f i n 198 3 a p e r s o n e x t e n d s c r e d i t not
s e c u r e d by a d w e l l i n g 8 t i m e s and c r e d i t s e c u r e d by a d w e l l i n g 3 t i m e s , i t i s
not a c r e d i t o r .




§ 226.2
- A9 -

6.
Trusts.
I n t h e c a s e o f c r e d i t e x t e n d e d by t r u s t s , e ac h i n d i v i d u a l t r u s t
i s c o n s i d e r e d a s e p a ra te e n t i t y f o r p u rp o se s o f a p p l y i n g the " c r e d i t o r "
crite ria .
F o r e x a m p le , a bank i s t h e t r u s t e e f o r T r u s t A w h i c h makes 15 e x t e n ­
s i o n s o f c o n s u m e r c r e d i t a n n u a l l y , T r u s t B w h i c h makes 10 e x t e n s i o n s o f c r e d i t
a n n u a l l y , and T r u s t C w h i c h makes 30 e x t e n s i o n s o f c r e d i t a n n u a l l y .
Only T r u s t
C i s a c r e d i t o r f o r p u rp o s e s o f the r e g u l a t i o n .
The t r u s t e e i s c o n s i d e r e d t h e
same e n t i t y a s t h e t r u s t e x t e n d i n g t h e c r e d i t ; t h e r e f o r e , a t r u s t e e can n e v e r
be c o n s i d e r e d an " a r r a n g e r o f c r e d i t . "
7.
Arranger of c r e d it .
P a r a g r a p h ( a ) ( 1 7 ) ( i i ) p r o v i d e s t h a t a p e r s o n who i s
an a r r a n g e r o f c r e d i t i s deemed t o be a c r e d i t o r f o r p u r p o s e s o f t h e r e g u l a t i o n .
( S e e t h e commentar y t o t h a t d e f i n i t i o n f o r f u r t h e r g u i d a n c e . )
8.
Card i s s u e r s s u b je c t to S u b p a r t B .
P a r a g r a p h ( a ) ( 1 7 ) ( i v ) makes c e r t a i n c a r d
i s s u e r s c r e d i t o r s f o r p u rp o s e s o f the open-end c r e d i t p r o v i s i o n s o f the r e g u l a ­
tion.
T h i s i n c l u d e s , f o r e x a m p l e , t h e i s s u e r s o f s o - c a l l e d " t r a v e l and e n t e r ­
t a i n m e n t " c a r d s t h a t c o n t e m p l a t e r e p a y m e n t a t t h e f i r s t b i l l i n g and do n ot
impose a f i n a n c e ch a rge .
As a l l d i s c l o s u r e s a r e t o be made o n l y " a s a p p l i c a b l e , "
such card i s s u e r s would omit f i n a n c e c h a rg e d i s c l o s u r e s .
Other p r o v i s i o n s of
t h e r e g u l a t i o n r e g a r d i n g s u c h a r e a s as s c o p e , d e f i n i t i o n s , f i n a n c e c h a r g e s ,
S p a n i s h l a n g u a g e d i s c l o s u r e s , r e c o r d r e t e n t i o n , and u s e o f model f o r m s , a l s o
a p p ly to such card i s s u e r s .
9.
C a r d i s s u e r s s u b j e c t t o S u b p a r t s B and C .
Paragraph ( a ) ( 1 7 ) ( v ) in c lu d e s
card i s s u e r s e x t e n d in g c l o s e d - e n d c r e d i t in which t h e r e i s a f i n a n c e cha rge o r
an a g r e e m e n t t o r e p a y i n more t h a n f o u r i n s t a l l m e n t s .
T h e se c a r d i s s u e r s a r e
s u b j e c t t o t h e a p p r o p r i a t e p r o v i s i o n s o f S u b p a r t s B and C, as w e l l a s t o t he
general p r o v is io n s .
2(a)(18)

Dow np ay men t.

1.
A 1 1o c a t i o n .
I f a c o n s u m e r makes a lump- s um pa ym en t, p a r t i a l l y t o r e d u c e
t h e c a s h p r i c e and p a r t i a l l y t o pay p r e p a i d f i n a n c e c h a r g e s , o n l y t h e p o r t i o n
a t t r i b u t a b l e t o r e d u c i n g t h e c a s h p r i c e i s p a r t o f t h e downpayment.
2.
P i c k up p a y m e n t s .
C r e d i t o r s may t r e a t t h e d e f e r r e d p o r t i o n s o f t h e downp a ym en t, o f t e n r e f e r r e d t o a s " p i c k - u p p a y m e n t s , " i n a number o f way s.
For
e x a m p l e , when t h e p i c k - u p payment i s t r e a t e d a s p a r t o f t h e downpayment:
0

I t i s deducted
§ 226.18(b).

in a r r i v i n g

0

I t may, b u t need n o t ,
under § 2 2 6 . 1 8 ( g ) .

a t t h e amount f i n a n c e d u n d e r

be r e f l e c t e d

i n t h e payment s c h e d u l e

When t h e p i c k - u p payment d oes n o t meet t h e d e f i n i t i o n ( f o r e x a m p l e , i f
p a y a b l e a f t e r t h e s e c o n d s c h e d u l e d pa ym en t) o r i f t h e c r e d i t o r c h o o s e s
t r e a t i t a s p a r t o f t h e downpayment:




it is
not to

§ 226.2
- A10 -

°

I t must be i n c l u d e d

i n t h e amount f i n a n c e d .

o

I t m ust be shown i n

t h e payment

schedule.

W h i c h e v e r way t h e p i c k - u p payment i s t r e a t e d , t h e t o t a l o f p a y m e n t s u n d e r
§ 2 2 6 . 1 8 ( h ) must e qu a l t h e sum o f t h e p a ym e nt s d i s c l o s e d u n d e r § 2 2 6 . 1 8 ( g ) .
2(a)(19)

D w elling.

1.
Scope.
A d w e l l i n g need n o t be t h e c o n s u m e r ' s p r i n c i p a l r e s i d e n c e t o f i t
t h i s d e f i n i t i o n and t h u s c o u l d i n c l u d e a v a c a t i o n o r s e c o n d home.
Ho weve r,
f o r p u r p o s e s o f r e s c i s s i o n t h e d w e l l i n g must be t h e p r i n c i p a l r e s i d e n c e o f
t h e c o n s u m e r . ( S e e t h e commentar y t o § § 2 2 6 . 1 5 and 2 2 6 . 2 3 f o r f u r t h e r g u i d a n c e . )
2.
Use as a r e s i d e n c e .
M o b i l e homes, b o a t s , and t r a i l e r s a r e i n c l u d e d i n t h e
d e f i n i t i o n i f they are in f a c t used as r e s i d e n c e s , j u s t as are condominiums
and c o o p e r a t i v e s .
R e c r e a t i o n a l v e h i c l e s , c a m p e r s , and t h e l i k e n o t u s e d a s
r e s i d e n c e s are not d w e l l i n g s .
3.
Re l a t i o n t o e x e m p t i o n s .
Any t r a n s a c t i o n i n v o l v i n g a s e c u r i t y i n t e r e s t
a d w e l l i n g remains s u b j e c t to the r e g u l a t i o n d e s p i t e the ge neral exemption
§ 226 .3(b ) fo r c r e d it e x te n sio n s over $25,000.
2(a)(2Q)

in
in

O pe n - e n d c r e d i t .

1.
General.
T h is d e f i n i t i o n d e s c r i b e s the c h a r a c t e r i s t i c s o f open-end c r e d i t
( f o r w h i c h t h e a p p l i c a b l e d i s c l o s u r e and o t h e r r u l e s a r e c o n t a i n e d i n S u b p a r t B ) ,
a s d i s t i n c t f rom c l o s e d - e n d c r e d i t ( f o r w h i c h t h e p e r t i n e n t r u l e s a r e i n S u b p a r t
C).
O p e n - e n d c r e d i t i s c o n s u m e r c r e d i t t h a t i s e x t e n d e d u n d e r a p l a n and meets
a l l t h r e e c r i t e r i a se t f o r t h in the d e f i n i t i o n .
2.
Existence of a p la n .
The d e f i n i t i o n a s s u m e s t h a t t h e r e i s a " p l a n , " w h i c h
c o n n o t e s a c o n t r a c t u a l a r r a n g e m e n t between t h e c r e d i t o r and t h e c o n s u m e r .
Some c r e d i t o r s o f f e r p r o g r a m s c o n t a i n i n g a number o f d i f f e r e n t c r e d i t f e a t u r e s .
The c o n s u m e r i s deemed t o have a s i n g l e a c c o u n t w i t h t h e i n s t i t u t i o n t h a t
c o u l d be a c c e s s e d r e p e a t e d l y v i a a number o f s u b - a c c o u n t s e s t a b l i s h e d f o r t h e
d i f f e r e n t p r o g r a m f e a t u r e s and r a t e s t r u c t u r e s .
Some f e a t u r e s o f t h e p r o g r a m
m i g h t be u s e d r e p e a t e d l y ( f o r e x a m p l e , an o v e r d r a f t ) w h i l e o t h e r s m i g h t be
used i n f r e q u e n t l y (such as the p a rt of the c r e d i t l i n e a v a i l a b l e f o r secured
credit).
I f t h e p r o g r a m a s a w h o l e i s u n d e r p r e s c r i b e d t e r m s and o t h e r w i s e
mee ts t h e o p e n - e n d c r e d i t d e f i n i t i o n , s u c h a p r o g r a m w o u l d be c o n s i d e r e d a
s in g le , m u lti-fe a tu re d plan.
2.
Repeated t r a n s a c t i o n s .
U nder t h i s c r i t e r i o n , t h e c r e d i t o r must r e a s o n a b l y
contemplate repeated t r a n s a c t i o n s .
T h i s means t h a t t h e c r e d i t p l a n must be
u s a b l e f rom t i me t o t i me and t h e c r e d i t o r must have a l e g i t i m a t e e x p e c t a t i o n
of repeat b u s in e s s .
The d e f i n i t i o n t h e r e f o r e r e f l e c t s t h e v i e w s t a t e d i n t h e
l e g i s l a t i v e h i s t o r y t h a t c o n s u m e r s s h o u l d be g i v e n e s s e n t i a l c l o s e d - e n d c o s t
d i s c l o s u r e s , s u c h a s t h e f i n a n c e c h a r g e and t h e t o t a l o f p a y m e n t s , i f a c r e d i t o r
makes what i s l i k e l y t o be a o n e - t i m e c r e d i t e x t e n s i o n , f o r e x a m p l e , when t h e
i n i t i a l t r a n s a c t i o n i s t h e p u r c h a s e o f a home i m p r o v e m e n t , an a u t o m o b i l e , o r
an i t e m s o l d on a d o o r - t o - d o o r b a s i s .
The c r e d i t o r must e x p e c t r e p e a t e d d e a l i n g s




A

§ 226.2
- A ll

w i t h t h e c o n s u m e r u n d e r t h e c r e d i t p l a n a s a w h o l e , and need n o t b e l i e v e t h e
consumer w i l l re u s e a p a r t i c u l a r f e a t u r e o f the p la n .
A s t a n d a r d b a s e d on
" r e a s o n a b l e " b e l i e f by a c r e d i t o r n e c e s s a r i l y i n c l u d e s some m a r g i n f o r j u d g m e n t a l
error.
The f a c t t h a t a p a r t i c u l a r c o n s u m e r d o e s n o t r e t u r n f o r f u r t h e r c r e d i t
e x t e n s i o n s d o e s n o t p r e v e n t a p l a n f ro m h a v i n g been p r o p e r l y c h a r a c t e r i z e d a s
open-end.
T h i s c r i t e r i o n i s a q u e s t i o n o f f a c t t o be d e c i d e d i n t h e c o n t e x t
o f t h e c r e d i t o r ' s t y p e o f b u s i n e s s , and t h e c r e d i t o r ' s r e l a t i o n s h i p w i t h a
consumer.
F o r e x a mp l e :
o

I t w o u l d be more r e a s o n a b l e f o r a t h r i f t i n s t i t u t i o n c h a r t e r e d
f o r t h e b e n e f i t o f i t s members t o c o n t e m p l a t e r e p e a t e d t r a n s a c t i o n s
w i t h a member, t h a n f o r a s e l l e r o f a l u m i nu m s i d i n g t o make t h e
same a s s u m p t i o n a b o u t i t s c u s t o m e r s .

o

I t w o u l d be more r e a s o n a b l e f o r a bank t o make a d v a n c e s f ro m a
l i n e o f c r e d i t f o r t h e p u r c h a s e o f an a u t o m o b i l e t h a n f o r an
a u c o m o b i l e d e a l e r t o s e l l a c a r u n d e r an o p e n - e n d p l a n .

3.
F i n a n c e c h a r g e on o u t s t a n d i n g b a l a n c e .
The r e q u i r e m e n t t h a t a f i n a n c e
c h a r g e may be computed and i m p o s e d f ro m t i m e t o t i m e on t h e o u t s t a n d i n g b a l a n c e
means t h a t t h e r e i s n o t a t t h e o u t s e t a s p e c i f i c amount f i n a n c e d f o r w h i c h t h e
f i n a n c e c h a r g e , t o t a l o f p a y m e n t s , and payment s c h e d u l e can be c a l c u l a t e d .
A
p l a n d o e s n o t meet t h i s c r i t e r i o n i f p u r c h a s e s may be added fr om t i m e t o t i m e ,
and t h e b a l a n c e i s p a y a b l e e i t h e r i n f u l l o r i n i n s t a l l m e n t s , w i t h no p o s s i b i l i t y
of a p e r io d ic finance charge.
In such a c a s e , c l o s e d - e n d s e r i e s - o f - s a l e s d i s ­
c l o s u r e s u n d e r § 2 2 6 . 1 7 ( h ) may be a p p r o p r i a t e .
4.
Reusable l i n e .
The t o t a l amount o f c r e d i t t h a t may be e x t e n d e d d u r i n g t h e
e x i s t e n c e o f an o p e n - e n d p l a n i s u n l i m i t e d b e c a u s e a v a i l a b l e c r e d i t i s g e n e r a l l y
r e p l e n i s h e d as e a r l i e r advances are r e p a id .
A lin e of c re d it is s e lf - r e p le n is h in g
e ven t h o u g h t h e p l a n i t s e l f h a s a f i x e d e x p i r a t i o n d a t e , a s l o n g a s d u r i n g t he
p l a n ' s e x i s t e n c e t h e c o n s u m e r may u s e t h e l i n e , r e p a y , and r e u s e t h e c r e d i t
w i t h o u t s p e c i f i c a p p ro va l f o r each e x t e n s i o n (beyond v e r i f i c a t i o n o f c r e d i t
i n f o r m a t i o n s u c h a s t h e c o n s u m e r ' s c o n t i n u e d i nco me and employment s t a t u s ) .
T h i s c r i t e r i o n o f u n l i m i t e d c r e d i t d i s t i n g u i s h e s o p e n - e n d c r e d i t f ro m a s e r i e s
o f a d v a n c e s made p u r s u a n t t o a l o a n commitment.
F o r e x a m p le :
°

U n d e r a c l o s e d - e n d commitment a c r e d i t o r m i g h t a g r e e t o l e n d a
t o t a l o f $ 1 0 , 0 0 0 i n a s e r i e s o f a d v a n c e s as needed by t h e c o n s u m e r .
When a c o n s u m e r h a s b o r r o w e d t h e f u l l $ 1 0 , 0 0 0 , no more i s a d v a n c e d
u n d e r t h a t p a r t i c u l a r a g r e e m e n t , even i f t h e r e h a s been r epa yment
o f a p o r t i o n o f the debt.

T h i s c r i t e r i o n d o e s n o t mean t h a t t h e l i n e o f c r e d i t m ust a l w a y s be r e p l e n i s h e d
t o i t s o r i g i n a l amount.
A c r e d i t o r may r e d u c e t h e c r e d i t l i m i t o r r e f u s e t o
e x t e n d new c r e d i t i n a p a r t i c u l a r c a s e due t o c h a n g e s i n t h e economy, t h e
c r e d i t o r ' s f i n a n c i a l c o n d i t i o n , or in the c o n su m e r's c r e d i t w o r t h in e s s .
While
c o n s u m e r s s h o u l d have a r e a s o n a b l e e x p e c t a t i o n o f o b t a i n i n g c r e d i t a s l o n g a s
t h e y r em a in c u r r e n t and w i t h i n a n y p r e s e t c r e d i t l i m i t s , f u r t h e r e x t e n s i o n s o f
c r e d i t need n ot be an a b s o l u t e r i g h t i n o r d e r f o r t h e p l a n t o meet t h e r e p l e n ­
ish in g crite rion .




§ 226.2
- A12

5.
Open-end real e s t a t e m o r t g a g e s .
Some c r e d i t p l a n s c a l l f o r n e g o t i a t e d
advances under s o - c a l l e d open-end real e s t a t e m ortgages.
Each s u c h p l a n must
be i n d e p e n d e n t l y m ea s ur ed a g a i n s t t h e d e f i n i t i o n o f o p e n - e n d c r e d i t , r e g a r d l e s s
o f t h e t e r m i n o l o g y u sed i n t h e i n d u s t r y t o d e s c r i b e t h e p l a n .
The f a c t t h a t a
p a r t i c u l a r p l a n i s c a l l e d an " o p e n - e n d r e a l e s t a t e m o r t g a g e , " f o r e x a m p l e , d o es
not determ ine t h a t i t i s open-end c r e d i t under the r e g u l a t i o n .
2(a)(21)

Periodic

rate.

1.
B asis.
The r a t e may be s t a t e d a s a p e r c e n t a g e ( f o r e x a m p le , 1 - 1 / 2 % p e r
m o n t h ) , o r a s a d ec i m a l e q u i v a l e n t ( f o r e x a m p l e , . 0 1 5 m o n t h l y ) .
I t may be b a s e d
on any p o r t i o n o f a y e a r t h e c r e d i t o r c h o o s e s .
Some c r e d i t o r s u s e 1 /360 o f a
y e a r as t h e i r p e r io d .
A c r e d i t o r t h a t u s e s 1 /3 60 o f a y e a r a s a p e r i o d :
°

Would have t o a p p l y t h e r a t e t o
a nnu al p e r c e n t a g e r a t e w i t h t h e
in th e r e g u l a t i o n ( i . e . , w i t h i n
b a s e d on t h e a c t u a l 365 d a y s i n

the b a la n c e to d i s c l o s e the
degree o f accuracy required
1/8 o f 1 p e r c e n t a g e p o i n t
the y e a r ) .

O

May d i s c l o s e a 1 /3 60 r a t e a s a " d a i l y " p e r i o d i c r a t e , w i t h o u t
f u r t h e r e x p l a n a t i o n , i f i t i s in f a c t o n ly a p p l ie d 360 days per
year.
B u t i f i t a p p l i e s t h a t r a t e f o r 365 d a y s , t h e c r e d i t o r
w o u l d have t o n o t e t h a t f a c t an d, o f c o u r s e , d i s c l o s e t h e t r u e
annual perce n ta ge r a te .
2.
Transaction ch arge s.
A p e r i o d i c r a t e d o es n o t i n c l u d e i n i t i a l o n e - t i m e
t r a n s a c t i o n c h a r g e s , even i f t h e c h a r g e i s computed a s a p e r c e n t a g e o f t h e
t r a n s a c t i o n amount.
2(a)(22)
1.

Scope.

Person.

The d e f i n i t i o n
2(a)(23)

in clu d es

Prepaid finance

joint

ventures.

charge.

1.
General.
P r e p a i d f i n a n c e c h a r g e s must be t a k e n i n t o a c c o u n t u n d e r § 2 2 6 . 1 8 ( b )
i n c o m p u t i n g t h e d i s c l o s e d amount f i n a n c e d , and must be d i s c l o s e d i f t h e c o n s u me r
r e q u e s t s an i t e m i z a t i o n o f t h e amount f i n a n c e d .

2.

Examples.

Common e x a m p l e s o f p r e p a i d

°

B u y e r's

0
°

points.

finance charges

are:

°

F in d e r 's

fees.

S e rvice fees.

0

Loan g u a r a n t e e

Loan f e e s .

°

Credit

insurance.

investigation

fees.

However , i n o r d e r f o r t h e s e o r any o t h e r f i n a n c e c h a r g e s t o be c o n s i d e r e d p r e ­
p a i d , t h e y must e i t h e r be p a i d s e p a r a t e l y i n c a s h o r c h e c k o r w i t h h e l d f rom t h e
proceeds.




§ 226.2

- A13 -

3.
E>: c 1 u s i o n s .
" A d d - o n " and " d i s c o u n t " f i n a n c e c h a r g e s a r e n o t p r e p a i d
finaTTce c h a r g e s f o r p u r p o s e s o f t h i s r e g u l a t i o n .
Fin a nce c h a rg e s are not
" p r e p a i d " m erely because they a re precomputed, whether o r not a p o r t i o n o f the
c h a r g e w i l l be r e b a t e d t o t h e c o n s u m e r upon p r e p a y m e n t .
2(a)(24)

R esidential

m ortgage t r a n s a c t i o n .

1.
R e la tio n to other s e c t i o n s .
th e r e g u l a t i o n :

This

°

§ 226.4(c)(7)

°

§ 2 2 6 . 1 8 ( q ) - whether

o

§ 226.19 - sp e cia l

°

§ 226.23(f)

t er m i s

- exclusions

or

in

four p ro v isio n s

in

f ro m t h e f i n a n c e c h a r g e .

not the mortgage i s

tim ing

- exem ption

im portant

assumable,

rules.

f rom t h e r i g h t

of

rescission.

2.
Lien s t a t u s .
The d e f i n i t i o n i s n o t l i m i t e d t o f i r s t l i e n t r a n s a c t i o n s .
F o r e x a m p l e , a c o n s u m e r m i g h t a s su m e a p a i d - d o w n f i r s t m o r t g a g e and b o r r o w t h e
b a l a n c e o f t h e p u r c h a s e p r i c e f r om a c r e d i t o r who t a k e s a s e c o n d m o r t g a g e .
The s e c o n d m o r t g a g e t r a n s a c t i o n i s a " r e s i d e n t i a l m o r t g a g e t r a n s a c t i o n " i f
th e d w e l l i n g purchased i s the c o n s u m e r 's p r i n c i p a l re s id e n c e .
3.
Principal d w e lling.
A c o n s u m e r can o n l y have one p r i n c i p a l d w e l l i n g a t a
time"!
T h u s , a v a c a t i o n o r o t h e r s e c o n d home w o u l d n o t be a " p r i n c i p a l " d w e l l i n g
2 ( a ) (25)

Security

in te re st.

1.
Scope.
To f a l l w i t h i n t h i s d e f i n i t i o n , an i n t e r e s t i n p r o p e r t y t h a t s e c u r e s
p e r f o r m a n c e must be r e c o g n i z e d a s a s e c u r i t y i n t e r e s t u n d e r s t a t e o r f e d e r a l
law.
The r e g u l a t i o n d o e s n o t p r o v i d e s u c h a d e t e r m i n a t i o n .
Security in te re sts
in clu d e :

2.

°

UCC s e c u r i t y

0

R ea l

°

Deeds o f t r u s t .

Exclu sion s.
in te rests:

in te re sts.

e sta te mortgages.

The d e f i n i t i o n

of security

in te re st

o

Incidental

o

Interests

in a f t e r - a c q u i r e d

property.

o

In te re sts

that

by o p e r a t i o n

excludes three groups of

in te re sts.

arise

solely

o f law.

S i n c e t h e y a r e n o t s e c u r i t y i n t e r e s t s , t h e y may not be d i s c l o s e d w i t h the
d i s c l o s u r e s require d in clo se d -e n d c r e d it .
A c r e d i t o r i s n o t p r e c l u d e d , h owe ver
f rom p r e s e r v i n g t h e s e r i g h t s e l s e w h e r e i n t h e c o n t r a c t d o cu me nt s o r s e c u r i t y
a g r e e m e n t , or i n v o k i n g and e n f o r c i n g s u c h r i g h t s , i f i t i s o t h e r w i s e l a w f u l t o
do s o .



H H H H H 9

§ 226.2

- A14 -

3.
Incidental in t e r e s t s .
Incidental
s e c u r it y in t e r e s t s include:
°

Assignm ents o f

o

C o n d e m n at i o n p r o c e e d s .

°

Accessories.

°

Replacements.

interests

in

property that

are not

rents.

The n o t i o n o f an " i n c i d e n t a l i n t e r e s t " d o e s n ot e nc o mp a ss an e x p l i c i t s e c u r i t y
i n t e r e s t i n an i n s u r a n c e p o l i c y where t h a t p o l i c y i s t h e p r i m a r y c o l l a t e r a l f o r
t h e t r a n s a c t i o n - - f o r e x a m p l e , i n an i n s u r a n c e premium f i n a n c i n g t r a n s a c t i o n .
T h i s w o u l d be a d i s c l o s a b l e s e c u r i t y i n t e r e s t .
4.
O p e r a t i o n o f law.
I n t e r e s t s t h a t a r i s e s o l e l y by o p e r a t i o n o f law a r e
e x c l u d e d fr om t h e g e n e r a l d e f i n i t i o n .
H ow ever , i f a r e c o g n i z e d s e c u r i t y
i n t e r e s t b o t h a r i s e s by o p e r a t i o n o f law and i s p r o v i d e d by c o n t r a c t - - s u c h
a s a wage a s s i g n m e n t o r a r i g h t o f s e t o f f — t h e r e i s a d i s c l o s a b l e s e c u r i t y
in te re st.
5.
R e sc issio n rules.
S e c u r i t y i n t e r e s t s t h a t a r i s e s o l e l y by o p e r a t i o n o f law
are s e c u r i t y i n t e r e s t s f o r purposes of r e s c i s s i o n .
Examples o f such i n t e r e s t s
a r e m e c h a n i c s ' and m a t e r i a l m e n ' s l i e n s .
2(b)

Rules of c o n s t r u c t io n .

1.
Footnotes.
F o o tn o te s are used e x t e n s i v e l y in the r e g u l a t i o n to p ro v id e
s p e c i a l e x c e p t i o n s and more d e t a i l e d e x p l a n a t i o n s and e x a m p l e s .
Material
t h a t a p p e a r s i n a f o o t n o t e h a s t h e same l e g a l w e i g h t as m a t e r i a l i n t h e body
of the r e g u la t io n .

R EF ER EN CE S:
S t a t u t e : § 103.
Previous

regulation:

§§ 226.2,

226.8,

and 2 2 6 . 9 .

1981 c h a n g e s : T h i s s e c t i o n r e f l e c t s nu me ro us d e l e t i o n s f r om , and some
a d d i t i o n s to , the d e f i n i t i o n s in the p r e v i o u s r e g u l a t i o n .
Deleted are s e p a ra te
d e f i n i t i o n s f o r p e r i o d , c o m p ara tive in d ex o f c r e d i t c o s t , real p r o p e r t y , o r g a n i ­
z a t i o n , r e s i d e n c e , r e a l p r o p e r t y t r a n s a c t i o n ^ d i s c o u n t , and s u r c h a r g e .
The d e f i ­
n i t i o n s r e l a t i n g s p e c i f i c a l l y t o c o n s u m e r l e a s e s a r e now f o un d i n t h e s e p a r a t e
c o n s u m e r l e a s i n g r e g u l a t i o n , R e g u l a t i o n M.
S e v e r a l t e r m s a r e now d e f i n e d e l s e w h e r e i n t h e r e g u l a t i o n o r commentary
F o r e x a m p l e , " f i n a n c e c h a r g e " i s d e s c r i b e d and e x p l a i n e d i n § 2 2 6 . 4 , and " a g r i c u l
t u r a l p u r p o s e " i s d i s c u s s e d i n t h e commentary t o § 2 2 6 . 3 .
Some t e r m s , s uc h as
" u n a u t h o r i z e d u s e , " a r e now d e f i n e d a s p a r t o f t h e s u b s t a n t i v e s e c t i o n s t o w h i c h
they apply.
O t h e r t e r m s p r e v i o u s l y d e f i n e d , s u c h as " c u s t o m e r " and " o r g a n i z a t i o n




§ 226.2

- A15 -

a r e m er g ed i n t o new d e f i n i t i o n s .
T h i s s e c t i o n c o n t a i n s new d e f i n i t i o n s f o r
a r r a n g e r o f c r e d i t , b u s i n e s s d a y , c l o s e d - e n d c r e d i t , downpayment, r e s i d e n t i a l
m o r t g a g e t r a n s a c t i o n , p r e p a i d f i n a n c e c h a r g e , and c o n s u m e r .
The m a j o r c h a n g e s

in the d e f i n i t i o n s

are as f o l l o w s :

" A r r a n g e r o f c r e d i t " h a s a s i g n i f i c a n t l y d i f f e r e n t m e a n in g t h a n t h e
term " a r r a n g e f o r the e x t e n s i o n o f c r e d i t " under the p r e v i o u s r e g u l a t i o n .
The new d e f i n i t i o n r e f l e c t s t h e s t a t u t o r y amendment w h i c h l i m i t s " a r r a n g e r s "
t o t h o s e who r e g u l a r l y a r r a n g e c r e d i t e x t e n s i o n s f o r p e r s o n s who a r e n o t them­
selves c re dito rs.
" B i l l i n g c y c l e " l a r g e l y r e s t a t e s the p r i o r d e f i n i t i o n , but r e q u i r e s
c y c l e s t o be r e g u l a r , and a l l o w s t h e f o u r - d a y v a r i a n c e t o be m e a s u r e d f rom a
r e g u l a r day as well as date.
The d e f i n i t i o n a l s o i n c o r p o r a t e s an i n t e r p r e t a ­
t i o n t h a t c y c l e s may be no l o n g e r t h a n q u a r t e r l y .
"B u s in e s s day"
o n l y i n a f o o t n o t e to the
b ility.
The g e n e r a l r u l e
i s new, b u t t h e r u l e f o r
r e g u l a t i on.

charges

excludes

tural

i s new i n t h e s e n s e t h a t t h e t e r m p r e v i o u s l y a p p e a r e d
r e s c i s s i o n p r o v i s i o n , b u t i t i s now o f g e n e r a l a p p l i c a ­
t h a t i t i s a day when t h e c r e d i t o r i s open f o r b u s i n e s s
r e s c i s s i o n p u r p o s e s i s t h e same a s i n t h e p r e v i o u s

" C a s h p r i c e " now e x p l i c i t l y p e r m i t s i n c l u s i o n o f v a r i o u s
i m po sed e q u a l l y i n c a s h and c r e d i t t r a n s a c t i o n s .
"Consumer"
guarantors,

incidental

i s g e n e r a l l y n a rro w er than the p r e v i o u s d e f i n i t i o n .
s u r e t i e s , and e n d o r s e r s fr om t h e g e n e r a l d e f i n i t i o n .

"Consumer c r e d i t "
credit.

reflects

t h e new s t a t u t o r y

exemption

for

It

a gricu l­

" C o n s u m m a t i o n " i s a s i g n i f i c a n t d e p a r t u r e f rom l o n g s t a n d i n g i n t e r p r e ­
t a t i o n s o f the p r e v i o u s d e f i n i t i o n .
I t now f o c u s e s o n l y on t h e t i m e t h e c o n s u m e r
becomes c o n t r a c t u a l l y o b l i g a t e d , r a t h e r t h a n when t h e c o n s u m e r p a y s a n o n r e f u n d a b l e f e e o r s u f f e r s an e c o n o m i c p e n a l t y f o r f a i l i n g t o go f o r w a r d w i t h t h e c r e d i t
transaction.
" C r e d i t " g e n e r a l l y p a r a l l e l s the p r e v i o u s d e f i n i t i o n , but m o d if ie s
t h e p r e v i o u s i n t e r p r e t a t i o n s o f t h e d e f i n i t i o n by e x c l u d i n g more t r a n s a c t i o n s .
" C r e d i t o r " r e f l e c t s t h e s t a t u t o r y amendments t o t h e a c t t h a t were
in te n d e d p r i n c i p a l l y to e l i m i n a t e the problem o f m u l t i p l e c r e d i t o r s in a t r a n s ­
action.
The " r e g u l a r l y " s t a n d a r d i s s t i l l u s e d , b u t i t i s now d e f i n e d i n
term s o f the fre q u e n c y o f the t r a n s a c t i o n s .
The new d e f i n i t i o n a l s o r e q u i r e s
t h a t t h e r e be a w r i t t e n a g r e e m e n t t o pay i n more t h a n f o u r i n s t a l l m e n t s t o
t r i g g e r t h a t p a r t o f t h e d e f i n i t i o n , i f no f i n a n c e c h a r g e i s i m p o s e d .
Finally,
t h e o b l i g a t i o n must be i n i t i a l l y p a y a b l e t o a p e r s o n f o r t h a t p e r s o n t o be a
creditor.
" Do w n pa y me n t " i n c o r p o r a t e s
concerning "p ic k -u p payments."




the s u b s t a n c e o f a p r e v i o u s

in terpretation

226.3

- A16 -

" D w e l l i n g " r e f l e c t s t h e s t a t u t o r y amendment t h a t e x pa n de d t he s c op e
o f t h e d e f i n i t i o n t o i n c l u d e any r e s i d e n t i a l s t r u c t u r e , w h e t h e r o r n ot i t i s
r e a l p r o p e r t y u n d e r s t a t e law.
" O p e n - e n d c r e d i t " r e f l e c t s t h e amended s t a t u t o r y l a n g u a g e t h a t the
p l a n must be one u n d e r w h i c h t h e c r e d i t o r r e a s o n a b l y c o n t e m p l a t e s r e p e a t e d
transactions.
The new d e f i n i t i o n no l o n g e r r e q u i r e s t h e c o n s u m e r t o have t h e
p r i v i l e g e o f p a y in g e i t h e r in i n s t a l l m e n t s o r in f u l l .
" P e r i o d i c r a t e " c o m b i n e s t h e p r e v i o u s d e f i n i t i o n s o f " p e r i o d " and
" p e r i o d i c r a t e " w i t h c l a r i f i c a t i o n i n t h e commentary c o n c e r n i n g t r a n s a c t i o n
c h a r g e s and 3 6 0 - d a y y e a r f a c t o r s .
" S e c u r i t y i n t e r e s t " i s much n a r r o w e r t h a n t h e p r e v i o u s d e f i n i t i o n .
R e f l e c t i n g t h e l e g i s l a t i v e h i s t o r y o f t h e s i m p l i f i c a t i o n amendments, i n c i d e n t a l
i n t e r e s t s a r e e x p r e s s l y e x c l u d e d from t h e d e f i n i t i o n .
Except fo r purposes of
r e s c i s s i o n , i n t e r e s t s t h a t a r i s e s o l e l y by o p e r a t i o n o f la w a r e a l s o e x c l u d e d .

Section

226.3

--

3(a)

Exempt t r a n s a c t i o n s .
Business,

commercial,

agricultural

or o rg an ization al

cre dit.

1.
"P rim arily" t e s t .
No h a r d and f a s t r u l e i s p o s s i b l e i n a p p l y i n g t h e t e s t
o f w h e t h e r t h e c r e d i t i s " p r i m a r i l y " f o r one o f t h e p u r p o s e s s t a t e d i n p a r a g r a p h
(a)(1).
Each t r a n s a c t i o n must be l o o k e d a t and e v a l u a t e d a s a w ho l e t o d e t e r ­
mine w h e t h e r i t c o n s t i t u t e s c o n s u m e r c r e d i t r e q u i r i n g d i s c l o s u r e s .
The c r e d i t o r
i t s e l f i s n o r m a l l y i n t he b e s t p o s i t i o n t o make t h i s d e t e r m i n a t i o n .
I f some
q u e s t i o n e x i s t s as t o t h e p r i m a r y p u r p o s e f o r a c r e d i t e x t e n s i o n , t h e c r e d i t o r
i s , o f c o u r s e , f r e e t o make t h e d i s c l o s u r e s , and t h e f a c t t h a t d i s c l o s u r e s
a r e made u n d e r s u c h c i r c u m s t a n c e s i s n o t c o n t r o l l i n g on t h e q u e s t i o n o f w h e t h e r
t h e t r a n s a c t i o n was exempt.
2.
Factors.
In d e t e r m i n i n g w h e t h e r c r e d i t t o f i n a n c e an i n v e s t m e n t - - s u c h as
s e c u r i t i e s , a n t i q u e s , o r a r t - - i s p r i m a r i l y f o r b u s i n e s s or commercial p u rpo se s
( a s o p p o s e d t o a c o n s u m e r p u r p o s e ) , t h e f o l l o w i n g f a c t o r s s h o u l d be c o n s i d e r e d :
°

W he t he r t h e b o r r o w e r ' s p r i m a r y o c c u p a t i o n i s c l o s e l y r e l a t e d to
the in ve stm e n t.
The more c l o s e l y r e l a t e d , t h e more l i k e l y i t i s
t o be b u s i n e s s p u r p o s e .

°

The d e g r e e t o w h i c h t h e b o r r o w e r w i l l p e r s o n a l l y manage t h e
investment.
The more p e r s o n a l i n v o l v e m e n t t h e r e i s , t h e more
l i k e l y i t i s t o be b u s i n e s s p u r p o s e .

o

The r a t i o o f i n v e s t m e n t income t o t h e t o t a l
The h i g h e r t h e r a t i o , t h e more l i k e l y i t i s

°

The s i z e o f t h e t r a n s a c t i o n .
The l a r g e r t h e t r a n s a c t i o n ,
more l i k e l y i t i s t o be b u s i n e s s p u r p o s e .




income o f t h e c o n s u m e r .
t o be b u s i n e s s p u r p o s e .
the

T h i s l i s t i s in te n d ed to s u g g e s t th e ty p e s o f f a c t o r s t h a t a c r e d i t o r s h o u ld
c o n s i d e r , s i n c e e ac h t r a n s a c t i o n w i l l m e r i t an i n d i v i d u a l a n a l y s i s .
Some
e x a m p l e s o f what may be b u s i n e s s - p u r p o s e c r e d i t a r e :

Examples

°

A l o a n t o e x p a n d a b u s i n e s s , e ven i f i t i s
borrow e r's residence or personal property.

°

A loan to im prove a p r i n c i p a l
office.

°

A loan to a real

estate

s e c u r e d by t he

r e s i d e n c e by p u t t i n g

b r o k e r t o buy p r o p e r t y

o f what may be c o n s u m e r - p u r p o s e c r e d i t

for

in

a business

rental

purposes.

are:

°

C r e d i t e x t e n s i o n s by a company t o i t s
l o a n s are used f o r p e rs o n a l p u rp o s e s .

0

A loan

s e c u r e d by a m e c h a n i c ' s t o o l s

employees or a g e n ts

t o pay a c h i l d ' s

if

the

tuition.

3.
Non-owner-occupied ren tal p r o p e r t y .
C r e d i t extended to a c q u i r e , improve or
m a i n t a i n r e n t a l p r o p e r t y ( r e g a r d l e s s o f t h e number o f h o u s i n g u n i t s ) t h a t i s
n o t o w n e r - o c c u p i e d i s deemed t o be f o r b u s i n e s s p u r p o s e s .
This in c lu d e s, fo r
e x a m p l e , t h e a c q u i s i t i o n o f a s i n g l e - f a m i l y h o u s e t h a t w i l l be r e n t e d o u t to
another person.
I f t h e owner e x p e c t s t o o c c u p y t h e p r o p e r t y f o r any p o r t i o n
o f t h e c o m i n g y e a r , i t c a n n o t be c o n s i d e r e d n o n - o w n e r o c c u p i e d .
For example,
a b e a c h h o u s e t h a t t h e owner w i l l o c c u p y p a r t o f t h e n e x t y e a r and r e n t o u t t h e
r e s t o f t h e y e a r i s owner o c c u p i e d and t h e r e f o r e n o t s u b j e c t t o t h i s s p e c i a l
rule.
P a r a g r a p h 4 bel ow d i s c u s s e s o t h e r r u l e s r e l a t i n g t o r e n t a l p r o p e r t y .
4.
Owner-occupied re n ta l p r o p e r t y .
I f c r e d i t i s extended to a c q u i r e , improve
o r m a i n t a i n r e n t a l p r o p e r t y t h a t i s o r w i l l be o w n e r - o c c u p i e d w i t h i n t h e y e a r ,
d i f f e r e n t r u le s apply:
°

C r e d i t e x t e n d e d t o a c q u i r e s u c h p r o p e r t y i s deemed t o be f o r
b u s i n e s s p u r p o s e s i f i t c o n t a i n s more t h a n two h o u s i n g u n i t s .

°

C r e d i t extended f o r o t h e r than a c q u i s i t i o n - - f o r example, to
i m pr o ve o r m a i n t a i n t h e p r o p e r t y - - i s deemed t o be f o r b u s i n e s s
p u r p o s e s i f i t c o n t a i n s more t h a n f o u r h o u s i n g u n i t s .
This ru le
r e f l e c t s t h e s t a t u t o r y d e f i n i t i o n o f " d w e l l i n g " ( o ne t o f o u r
h o u s i n g u n i t s ) and p r e s e r v e s t h e r i g h t o f r e s c i s s i o n f o r c r e d i t
extended f o r p u rp o s e s o t h e r than a c q u i s i t i o n .

N e i t h e r o f t h e s e r u l e s means t h a t an e x t e n s i o n o f c r e d i t f o r p r o p e r t y c o n t a i n i n g
f e w e r t h a n t h e r e q u i s i t e number o f u n i t s i s n e c e s s a r i l y c o n s u m e r c r e d i t .
In
such c a s e s , the d e t e r m in a t io n o f whether i t i s b u s i n e s s or consumer c r e d i t s h o uld
be made by c o n s i d e r i n g t h e f a c t o r s l i s t e d i n p a r a g r a p h 2 a b o ve .
5.
A g ric u ltu ra l purpose.
An " a g r i c u l t u r a l p u r p o s e " i n c l u d e s t h e p l a n t i n g , p r o ­
p a g a tin g , n u rt u rin g , h a rv e s t in g , c a tc h in g , s t o r in g , e x h ib it in g , m arketing, t r a n s ­
p o r t i n g , p r o c e s s i n g , o r m a n u f a c t u r in g o f food, bev era ge s ( i n c l u d i n g a l c o h o l i c
b e v e ra ge s), flo w e rs, t r e e s , l i v e s t o c k , p o u lt r y , bees, w i l d l i f e , f i s h , or s h e l l f i s




§ 226.3
- A18 -

by a n a t u r a l p e r s o n e n g a g e d i n f a r m i n g , f i s h i n g , o r g r o w i n g c r o p s , f l o w e r s ,
t r e e s , l i v e s t o c k , p o u l t r y , bees o r w i l d l i f e .
The e x e m p t i o n a l s o a p p l i e s t o
a t r a n s a c t i o n i n v o l v i n g real p r o p e r t y t h a t i n c l u d e s a d w e l l i n g ( f o r example,
t h e p u r c h a s e o f a farm w i t h a h o m e s t e a d ) i f t h e t r a n s a c t i o n i s p r i m a r i l y f o r
a g r ic u lt u r a l purposes.
6.
O rganizational c r e d i t .
The e x e m p t i o n i n p a r a g r a p h ( a ) ( 2 ) f o r t r a n s a c t i o n s
in which the p r i n c i p a l borrow er i s not a n a t u r a l person a p p l i e s , f o r example,
t o l o a n s t o c o r p o r a t i o n s , p a r t n e r s h i p s , a s s o c i a t i o n s , c h u r c h e s , u n i o n s , and
fraternal organizations.
The e x e m p t i o n a p p l i e s r e g a r d l e s s o f t h e p u r p o s e o f
t h e c r e d i t e x t e n s i o n and r e g a r d l e s s o f t h e f a c t t h a t a n a t u r a l p e r s o n may
guarantee or p rovid e s e c u r i t y f o r the c r e d i t .
7.
Land t r u s t s .
C r e d i t e x t e n d e d t o a l a n d t r u s t i s c o n s i d e r e d t o be c r e d i t
e x t e n d e d t o a n a t u r a l p e r s o n r a t h e r t h a n c r e d i t e x t e n d e d t o an o r g a n i z a t i o n .
In some j u r i s d i c t i o n s , a f i n a n c i a l i n s t i t u t i o n f i n a n c i n g a r e s i d e n t i a l r e a l
e s t a t e t r a n s a c t i o n f o r a c o n s u m e r u s e s a l a n d t r u s t m ech an is m.
T i t l e to the
p r o p e r t y i s conveyed to the land t r u s t f o r which the f i n a n c i a l i n s t i t u t i o n
i t s e l f is trustee.
The u n d e r l y i n g i n s t a l l m e n t n o t e i s e x e c u t e d by t h e f i n a n c i a l
i n s t i t u t i o n i n i t s c a p a c i t y as t r u s t e e and payment i s s e c u r e d by a t r u s t deed,
r e f l e c t i n g t i t l e in the f i n a n c i a l i n s t i t u t i o n as t r u s t e e .
In some i n s t a n c e s ,
the consumer executes a p e rs o n a l gua ra ntee of th e in d e b t e d n e s s .
The n o t e
i n d i c a t e s t h a t i t i s p a yable o n ly out o f the p r o p e r t y s p e c i f i c a l l y d e s c r ib e d
i n t h e t r u s t deed and t h a t t h e t r u s t e e ha s no p e r s o n a l l i a b i l i t y on t h e n o t e .
These t r a n s a c t i o n s are s u b je c t to the r e g u l a t i o n s i n c e in s u b st a n c e ( i f not
f or m) c o n s u m e r c r e d i t i s b e i n g e x t e n d e d .
3(b)

C r e d i t o v e r $ 2 5 , 0 0 0 n o t s e c u r e d by r e a l

property or a d w e llin g .

1.
Coverage.
S i n c e a m o b i l e home i s d e f i n e d a s a " d w e l l i n g " i n § 2 2 6 . 2 ( a ) ( 1 9 ) ,
t h i s e x e m p t i o n d o es n o t a p p l y t o c r e d i t e x t e n s i o n s s e c u r e d by m o b i l e homes
( w h e t h e r o r n o t c o n s i d e r e d t o be r e a l p r o p e r t y ) even i f t h e c r e d i t e x c e e d s
$25,000.
A l o a n commitment i n e x c e s s o f $ 2 5 , 0 0 0 i s exempt even t h o u g h t h e
a mounts a c t u a l l y drawn may n e v e r a c t u a l l y r e a c h $ 2 5 , 0 0 0 .
An u n s e c u r e d l o a n
f o r o v e r $ 2 5 , 0 0 0 i s exempt, b u t i f i t i s l a t e r s e c u r e d by r e a l p r o p e r t y o r a
d w e l l i n g , t h e t r a n s a c t i o n t h e n becomes s u b j e c t t o t h e r e g u l a t i o n f o r p u r p o s e s
o f b o t h d i s c l o s u r e and t h e r i g h t o f r e s c i s s i o n .
3(c)
1.
Examples.
in clu d e :

Public

u tility

Public u t i l i t y

cre dit.
services

t h a t may be exempt u n d e r t h i s

p rovision

o

G a s, w a t e r , o r e l e c t r i c a l

o

Cable t e l e v i s i o n

0

L a y i n g a new s e w e r l i n e o r c i t y w a t e r l i n e o r i n s t a l l i n g c o n d u i t s ,
t e l e p h o n e p o l e s , o r m e t e r i n g e q u i pm e n t i n an a r e a n ot a l r e a d y
s e r v i c e d by t h e u t i l i t y .




services,

services.

§ 226.3
- A19 -

T h i s exemption does not a p p ly to e x t e n s i o n s o f c r e d i t :
o

To p u r c h a s e a p p l i a n c e s
g r i l l s , or telephones.

°

To f i n a n c e home i m p r o v e m e n t s
c o n d it io n in g systems.

3(d)

Se cu ritie s

such as gas or e l e c t r i c

o r commodities

ranges,

s u c h a s new h e a t i n g o r a i r

accounts.

1.
Coverage.
T h is exemption does not apply to a t r a n s a c t i o n w ith a s t a t e r e g i s t e r e d b r o k e r , o r t o a bank l o a n i n w h i c h t h e p r o c e e d s a r e u s e d t o p u r c h a s e
se curitie s.
3(e)

Home f u e l

budget p l a n s .

1.
D e fin ition .
U nder t y p i c a l home f u e l b u d g e t p l a n s , t h e f u e l d e a l e r g e n e r a l l y
e s t i m a t e s t h e t o t a l c o s t o f f u e l f o r t h e s e a s o n , b i l l s t h e c u s t o m e r f o r an
a v e r a g e m o n t h l y payment, and makes an a d j u s t m e n t i n t h e f i n a l payment f o r any
d i f f e r e n c e between t h e e s t i m a t e d and t h e a c t u a l c o s t o f t h e f u e l .
Fuel i s
d e l i v e r e d a s n eeded, no f i n a n c e c h a r g e i s a s s e s s e d , and t h e c u s t o m e r may w i t h ­
dr aw f r o m t h e p l a n at any t i m e .
U n d er t h e s e c i r c u m s t a n c e s , t h e a r r a n g e m e n t i s
exempt f ro m t h e r e g u l a t i o n , e ven i f a c h a r g e t o c o v e r t h e b i l l i n g c o s t s i s i m p os ed .

R EF ER EN CE S
Statute:

§§ 103(s)

Previous

regu lation :

and

(t),

104.

§ 226.3.

1981 c h a n g e s :
The b u s i n e s s c r e d i t e x e m p t i o n h a s been e xpan de d t o
include c re d it fo r a g r ic u lt u r a l purposes.
The r u l e o f B o a r d I n t e r p r e t a t i o n
§ 2 2 6 . 3 0 2 , c o n c e r n i n g c r e d i t r e l a t i n g t o s t r u c t u r e s c o n t a i n i n g more th a n f o u r
h o u s i n g u n i t s , h a s been m o d i f i e d and somewhat e x p a n d e d by p r o v i d i n g more e x c l u ­
s io n s fo r tra n sa c tio n s in v o lv in g rental property.
The e x e m p t i o n f o r t r a n s a c t i o n s a b o v e $ 2 5 , 0 0 0 s e c u r e d by r e a l e s t a t e
h a s been n a r r o w e d ; t r a n s a c t i o n s s e c u r e d by any d w e l l i n g ( eve n i f n o t c o n ­
s i d e r e d rea l p r o p e r t y ) are s u b j e c t to the r e g u l a t i o n .
The u t i l i t y c r e d i t e x e m p t i o n now c o v e r s t h e f i n a n c i n g o f t h e e x t e n s i o n
o f a u t i l i t y i n t o an a r e a n o t e a r l i e r s e r v e d by t h e u t i l i t y , i n a d d i t i o n t o t he
the f i n a n c i n g of s e r v i c e s .

registered




The s e c u r i t i e s c r e d i t e x e m p t i o n ha s been e x t e n d e d t o b r o k e r - d e a l e r s
w i t h t h e CFTC a s w e l l a s t h e SEC.
A new e x e m p t i o n h as

been c r e a t e d

for

home f u e l

budget p la n s .

§ 226.4
A20 -

Section

226.4--Finance c h a rge .

4(a)

D efinition .

1.
C harges in comparable cash t r a n s a c t i o n s .
C h a r g e s i mp os ed u n i f o r m l y i n
c a s h and c r e d i t t r a n s a c t i o n s a r e n o t f i n a n c e c h a r g e s .
In d e t e r m i n i n g w heth er
an i t e m i s a f i n a n c e c h a r g e , t h e c r e d i t o r s h o u l d compare t h e c r e d i t t r a n s a c t i o n
i n q u e s t i o n w i t h an a n a l o g o u s c a s h t r a n s a c t i o n .
For example, the f o l l o w i n g
item s are not fin a n c e c h a r g e s :
o

Taxes,
credit

o

D i s c o u n t s t h a t are a v a i l a b l e
as q u a n t i t y d i s c o u n t s .

o

D i s c o u n t s a v a i l a b l e to a p a r t i c u l a r group of consumers because
t h e y a r e members o f an o r g a n i z a t i o n o r have a c c o u n t s a t a p a r t i c u ­
lar financial in stitu tio n .
T h i s i s t h e c a s e even i f an i n d i v i d u a l
must pay c a s h t o o b t a i n t h e d i s c o u n t , p r o v i d e d t h a t c r e d i t c u s t o m e r s
who a r e members o f t h e g r o u p and d o n ' t q u a l i f y f o r t h e d i s c o u n t pay
no more t h a n t h e non-member c a s h c u s t o m e r s .

0

C harges f o r a s e r v i c e p o l i c y , auto c lu b membership, o r p o l i c y o f
i n s u r a n c e a g a i n s t l a t e n t d e f e c t s o f f e r e d t o b o t h c a s h and c r e d i t
c u s t o m e r s f o r t h e same p r i c e .

In c o n t r a s t ,

lice n se fees,
customers.

the f o l l o w i n g

items

or re g istra tio n

to cash

fees

p a i d by b o t h c a s h and

and c r e d i t

customers,

such

are fin a n ce ch a rge s:

o

I n s p e c t i o n and h a n d l i n g f e e s
s t r u c t io n loan proceeds.

f o r th e sta g e d d isb u rse m e n t o f c o n ­

°

Fees f o r p r e p a r i n g a T ruth

o

C harges f o r a r e q u ir e d maintenance
o n ly in a c r e d i t t r a n s a c t i o n .

in Lending d i s c l o s u r e

or

service

statement.

contract

i mpo sed

2.
C o s t s o f d o i n g b u s i n e s s . C h a r g e s a b s o r b e d by t h e c r e d i t o r a s a c o s t o f
d o i n g b u s i n e s s a r e n o t f i n a n c e c h a r g e s , even t h o u g h t h e c r e d i t o r t a k e s s u ch
c o s t s i n t o c o n s i d e r a t i o n i n d e t e r m i n i n g t h e i n t e r e s t r a t e s t o be c h a r g e d .
H ow e ve r, i f t he c r e d i t o r s e p a r a t e l y i m p o s e s a c h a r g e on t h e c o n s u m e r t o c o v e r
c e r t a in c o s t s , th at charge i s a fin a n c e charge.
3.
C h a r g e s by t h i r d p a r t i e s .
C h a r g e s imp os ed by someone o t h e r t h a n t h e c r e d i t o r
f o r s e r v i c e s t h a t a r e n o t r e q u i r e d by t h e c r e d i t o r a r e n o t f i n a n c e c h a r g e s .
An e xa mp le o f t h i s :
°




A f e e c h a r g e d by a l o a n b r o k e r t o a c o n s u m e r , p r o v i d e d t h e
c r e d i t o r does not r e q u i r e th e use o f a b ro k e r.

§ 226.4
- A21

4(b)

Examples o f f i n a n c e

charges.

1.
E xclu sion s.
C h a r g e s o r f e e s shown a s e x a m p l e s o f f i n a n c e c h a r g e s i n p a r a g r a p h ( b ) may be e x c l u d a b l e u n d e r p a r a g r a p h s ( c ) , ( d ) , o r ( e ) .
F o r e x a mp l e :
o

Premiums f o r c r e d i t l i f e i n s u r a n c e , shown as an e xa mp le o f a
f i n a n c e c h a r g e u n d e r p a r a g r a p h ( b ) ( 7 ) , may be e x c l u d e d i f t h e
r e q u i r e m e n t s o f p a r a g r a p h ( d ) ( 1 ) a r e met.

°

A p p r a i s a l f e e s i n c l u d e d u n d e r p a r a g r a p h ( b ) ( 4 ) may be e x c l u d e d f o r
real p r o p e r t y o r r e s i d e n t i a l m ortgage t r a n s a c t i o n s under parag rap h

(c)(7)2.
Checking
d i s c u s s e d in

account c h a r g e s .
The c h e c k i n g o r t r a n s a c t i o n a c c o u n t c h a r g e s
paragraph ( b ) ( 2 ) i n c l u d e , f o r example, th e f o l l o w i n g s i t u a t i o n s :

°

An a c c o u n t w i t h an o v e r d r a f t l i n e o f c r e d i t ha s a $ 4 . 5 0 s e r v i c e
c h a r g e p e r month w h i l e an a c c o u n t w i t h o u t a c r e d i t f e a t u r e has a
$2.50 s e r v i c e ch a rge ; the $2.00 d i f f e r e n c e i s a fin a n c e charge.

°

A s e r v i c e c h a r g e o f $ 5 . 0 0 f o r each i t e m t h a t t r i g g e r s an o v e r ­
d ra ft c r e d it lin e i s a finance charge.
However , a c h a r g e impos ed
u n i f o r m l y f o r a n y i t e m t h a t o v e r d r a w s a ch ec ki .n g a c c o u n t , r e g a r d ­
l e s s o f w h e t h e r t h e i t e m s a r e p a i d o r r e t u r n e d and w h e t h e r t h e
a c c o u n t ha s a c r e d i t f e a t u r e o r n o t , i s n o t a f i n a n c e c h a r g e .

3.
Assumption f e e s .
The a s s u m p t i o n f e e s m e n t i o n e d i n p a r a g r a p h ( b ) ( 3 ) a r e
f i n a n c e c h a r g e s o n l y when t h e a s s u m p t i o n o c c u r s and t h e f e e i s i m p o s ed on t h e
new b u y e r .
The a s s u m p t i o n f e e i s a f i n a n c e c h a r g e i n t h e new b u y e r ' s t r a n s a c t i o n .
4.
C redit lo ss insurance.
Common e x a m p l e s o f t h e i n s u r a n c e a g a i n s t c r e d i t
l o s s mentioned in p a rag rap h ( b ) ( 5 ) are mortgage g u a ra n t y in s u r a n c e , h o l d e r in
due c o u r s e i n s u r a n c e , and r e p o s s e s s i o n i n s u r a n c e .
Such premiums must be i n c l u d e d
in the f i n a n c e cha rge o n ly f o r the p e r i o d th a t the c r e d i t o r r e q u i r e s the i n s u r a n c e
t o be m a i n t a i n e d .
5.
E x i s t i n g insurance p o l i c y .
The i n s u r a n c e d i s c u s s e d i n p a r a g r a p h ( b ) ( 7 )
and ( 8 ) d o e s n o t i n c l u d e an i n s u r a n c e p o l i c y ( s u c h a s a w h o l e l i f e o r a u t o m o b i l e
c o l l i s i on i n s u r a n c e p o l i c y ) t h a t i s a l r e a d y owned by t h e c o n s u m e r and a s s i g n e d
t o o r o t h e r w i s e made p a y a b l e t o t h e c r e d i t o r t o s a t i s f y an i n s u r a n c e r e q u i r e m e n t ,
a s l o n g a s t h e i n s u r a n c e was n o t p u r c h a s e d f o r u s e i n t h a t c r e d i t e x t e n s i o n .
S u c h a p o l i c y i s n o t “w r i t t e n i n c o n n e c t i o n w i t h " t h e t r a n s a c t i o n s i n c e i t was
p r e v i o u s l y owned by t h e c o n s u m e r .
6.
Su b stitu tio n of l if e insurance.
The premium f o r a l i f e i n s u r a n c e p o l i c y
p u r c h a s e d by t h e c o n s u m e r and a s s i g n e d t o t h e c r e d i t o r t o s a t i s f y a c r e d i t
l i f e i n s u r a n c e r e q u i r e m e n t mu st be i n c l u d e d i n t h e f i n a n c e c h a r g e , b u t o n l y
t o t h e e x t e n t o f t h e c o s t o f t h e c r e d i t l i f e i n s u r a n c e i f p u r c h a s e d from t he
credi tor.




§ 226.4
- A22

7.
Non-credit l i f e or property in su ra n c e .
Fees f o r r e q u ir e d in s u r a n c e not o f
t h e t y p e s d e s c r i b e d i n p a r a g r a p h s ( b ) ( 7) and ( b ) ( 8 ) a r e f i n a n c e c h a r g e s and
are not e x c lu d a b le .
F o r e x a m p le :
°

The premium f o r a h o s p i t a l i z a t i o n i n s u r a n c e p o l i c y , i f
r e q u i r e d t o be p u r c h a s e d o n l y i n a c r e d i t t r a n s a c t i o n ,
charge.

8.
D i s c o u n t s f o r payment by o t h e r t h a n c r e d i t .
by o t h e r t h a n c r e d i t , a s m e n t i o n e d i n p a r a g r a p h
th e f o l l o w i n g s i t u a t i o n :
°

Certain

A s e lle r of tra c ts of
e ac h.
If a purchaser
p urchaser fin a n c e s the
The $ 1 , 0 0 0 d i f f e r e n c e
t r a c t s on c r e d i t .

d i s c o u n t s are e x c l u d a b l e
4(c)

it
is

is
a finance

D i s c o u n t s t o i n d u c e payment
( b ) ( 9 ) , i n c l u d e , f o r example,

land o f f e r s in d iv id u a l t r a c t s fo r $10,000
p a y s c a s h , t h e p r i c e i s $ 9 , 0 0 0 , b u t i f t he
t r a c t w ith th e s e l l e r the p r i c e i s $10,000.
i s a f i n a n c e c h a r g e f o r t h o s e who buy t h e

f rom t h e

Charges e xc lu d e d from the

f in a n c e c h a rge under p a ragraph
finance

(c)(8).

charge.

1.
Application fe e s.
An a p p l i c a t i o n f e e t h a t i s e x c l u d e d from t h e f i n a n c e
c h a r g e u n d e r p a r a g r a p h ( c ) ( 1) i s a c h a r g e t o r e c o v e r t h e c o s t s a s s o c i a t e d w i t h
processing ap p lica tio n s for c re d it.
I f an a p p l i c a t i o n f e e i s c h a r g e d o n l y t o
a p p l i c a n t s who r e c e i v e an e x t e n s i o n o f c r e d i t , t h e f e e i s a f i n a n c e c h a r g e .
2.
L a t e payment c h a r g e s .
L a t e payment c h a r g e s can q u a l i f y f o r t h e e x c l u s i o n
f rom t h e f i n a n c e c h a r g e u n d e r p a r a g r a p h ( c ) ( 2 ) w h e t h e r o r n ot t h e p e r s o n i m p o s i n g
t h e c h a r g e c o n t i n u e s t o e x t e n d c r e d i t on t h e a c c o u n t o r t o p r o v i d e p r o p e r t y o r
s e r v i c e s t o t h e co n s um e r.
In d e t e r m i n i n g w h e t h e r a c h a r g e i s f o r a c t u a l u n a n t i ­
c i p a t e d l a t e payment, f a c t o r s t o be c o n s i d e r e d i n c l u d e :
o

The t e r m s o f t he a c c o u n t .
F o r e x a m p l e , i s t h e co n su m e r
r e q u i r e d by t he a c c o u n t t e r m s t o pay t h e a c c o u n t b a l a n c e
i n f u l l each m o n t h ?
I f n o t , t h e c h a r g e may be a f i n a n c e
charge.

o

The p r a c t i c e s o f t h e c r e d i t o r i n h a n d l i n g t h e a c c o u n t s .
For
e x amp le , r e g a r d l e s s o f t h e t e r m s o f t h e a c c o u n t , d o e s t he c r e d i t o r
a l l o w c o n s u m e r s t o pay t h e a c c o u n t s o v e r a p e r i o d o f t i m e w i t h o u t
d ema nding payment i n f u l l o r t a k i n g o t h e r a c t i o n t o c o l l e c t ?
I f no e f f o r t i s made t o c o l l e c t t h e f u l l amount d u e , t h e c h a r g e
may be a f i n a n c e c h a r g e .

3.
P a r t i c i pation fees.
The p a r t i c i p a t i o n f e e s m e n t i o n e d i n p a r a g r a p h ( c ) ( 4 )
do n o t n e c e s s a r i l y have t o be f o r m a l m e m b e r sh i p f e e s , n o r a r e t h e y l i m i t e d t o
c re d it card p la n s.
The p r o v i s i o n a p p l i e s t o any c r e d i t p l a n where payment o f
a fee i s a c o n d i t i o n o f a c c e s s to the plan i t s e l f , but does not ap p ly to fees
i mp os ed s e p a r a t e l y on i n d i v i d u a l c l o s e d - e n d t r a n s a c t i o n s .
Minimum m o n t h l y
c h a r g e s o r o t h e r c h a r g e s b a s e d on c u r r e n t a c c o u n t a c t i v i t y a r e n ot e x c l u d e d
from t h e f i n a n c e c h a r g e by t h i s p r o v i s i o n .




§ 226.4'
- A23 -

4.
S e lle r 's points.
The s e l l e r ' s p o i n t s m e n t i o n e d i n p a r a g r a p h ( c ) ( 5 ) i n c l u d e
a n y c h a r g e s i mpo sed by a c r e d i t o r upon t h e s e l l e r o f p r o p e r t y f o r p r o v i d i n g
c r e d i t to th e buyer o f the p r o p e r t y .
T h e s e c h a r g e s a r e e x c l u d e d f rom t h e
f i n a n c e c h a r g e w h e t h e r o r n o t t h e y a r e p a s s e d on t o t h e b u y e r i n t h e form o f a
h igh e r s a le s price.
S e l l e r ' s p o i n t s a r e mos t o f t e n i n v o l v e d i n r e a l e s t a t e
t r a n s a c t i o n s g u a r a n t e e d o r i n s u r e d by g o v e r n m e n t a l a g e n c i e s .
B u y e r's points
( t h a t i s , p o i n t s c h a r g e d t o t h e b u y e r by t h e c r e d i t o r ) , h o w e v e r , a r e f i n a n c e
charges.
5.
Lost in t e r e s t .
C e r t a i n f e d e r a l and s t a t e l a w s mandate a p e r c e n t a g e d i f f e r ­
e n t i a l between t h e i n t e r e s t r a t e p a i d on a d e p o s i t and t h e r a t e c h a r g e d on a
l o a n s e c u r e d by t h a t d e p o s i t .
I f the c r e d i t o r reduces the i n t e r e s t rate paid
on t h e a c c o u n t o r t h e c e r t i f i c a t e o f d e p o s i t , t h e c o n s u m e r l o s e s some o f t he
i n t e r e s t t h a t w ou ld have been e a r n e d .
U nd er p a r a g r a p h ( c ) ( 6 ) , s u c h " l o s t
i n t e r e s t " need n o t be i n c l u d e d i n t h e f i n a n c e c h a r g e .
This ru le a p p lie s only
t o an i n t e r e s t r e d u c t i o n i m p o s ed b e c a u s e a r a t e d i f f e r e n t i a l i s r e q u i r e d by
law.
I f a bank o r o t h e r f i n a n c i a l i n s t i t u t i o n r e d u c e s t h e i n t e r e s t r a t e on a
s a v i n g s a c c o u n t o r s t o p s p a y i n g i n t e r e s t f o r t h e t er m o f a c r e d i t t r a n s a c t i o n
( i n c l u d i n g an o v e r d r a f t on a c h e c k i n g a c c o u n t ) , and t h a t a c t i o n i s n o t r e q u i r e d
by l a w , t h e i n t e r e s t l o s t i s a f i n a n c e c h a r g e .
6.
Real e s t a t e o r mortgage c h a r g e s .
The l i s t o f c h a r g e s c o n t a i n e d i n p a r a g r a p h
( c ) ( 7 ) a p p l y b o t h t o r e s i d e n t i a l m o r t g a g e t r a n s a c t i o n s and t o o t h e r t r a n s a c t i o n s
s e c u r e d by r e a l e s t a t e , i n c l u d i n g f o r e x a m p l e , t h e p u r c h a s e o f a m o b i l e home.
The f e e s a r e e x c l u d e d f rom t h e f i n a n c e c h a r g e even i f t h e s e r v i c e s f o r w hi ch
t h e f e e s a r e imp os ed a r e p e r f o r m e d by t h e c r e d i t o r ' s e m p l o y e e s r a t h e r t h a n
by a t h i r d p a r t y .
In a d d i t i o n , t h e c a t e g o r y o f c r e d i t r e p o r t fe e s i n c l u d e s
not o n l y th e r e p o r t i t s e l f , but a l s o v e r i f i c a t i o n o f in f o r m a t i o n in the r e p o r t .
I n a l l c a s e s , t h e c h a r g e s must be bona f i d e and r e a s o n a b l e .
A lternative

I

f o r Cash D i s c o u n t s

1/

7.
Cash d i s c o u n t s - c o v e r a g e .
The d i s c o u n t s m e n t i o n e d i n p a r a g r a p h ( c ) ( 8 )
a r e d i s c o u n t s o f f e r e d t o i n d u c e c o n s u m e r s t o pay f o r p r o p e r t y o r s e r v i c e s by
c a s h , c h e c k , o r o t h e r means n o t i n v o l v i n g t h e u s e o f a c r e d i t c a r d ( w h e t h e r
open-end or clo se d -e n d c r e d i t i s in v o lv e d ) .
The d i s c o u n t may n o t e x c e e d 5% o f
the r e g u l a r p r i c e o f the p r o p e r t y o r s e r v i c e b e in g s o l d .
The r e g u l a r p r i c e o f
t h e p r o p e r t y o r s e r v i c e i s 1) t h e t a g g e d o r p o s t e d p r i c e , i f o n l y one p r i c e i s
t a g g e d o r p o s t e d , o r 2) t h e p r i c e p a i d by c o n s u m e r s u s i n g a c r e d i t c a r d , i f no
p r i c e i s t a g g e d o r p o s t e d o r i f two p r i c e s a r e t a g g e d o r p o s t e d .
Payment by
a check or o t h e r n e g o t i a b l e in s t r u m e n t t h a t r e s u l t s in the d e b i t i n g o f a c o n s u ­
m e r ' s c r e d i t c a r d a c c o u n t d o e s n o t c o n s t i t u t e payment by u s e o f a c r e d i t c a r d

]_/

The p r o v i s i o n s on c a s h d i s c o u n t s a r e p r e s e n t e d i n t h e a l t e r n a t i v e b e c a u s e
o f the p o s s i b i l i t y o f s t a t u t o r y change.
A l t e r n a t i v e I r e f l e c t s § 1 5 7 ( b ) o f t he
a c t as i t was i n e f f e c t on May 1 5, 1981.
A l t e r n a t i v e I I r e f l e c t s § 167(b) as i t
w ou ld be amended by H . R . 3 1 3 2 , t h e " C a s h D i s c o u n t A c t . "




§ 226.4
- A24 -

f o r purposes of d eterm in in g the r e g u la r p ric e .
A t r a n s a c t i o n on a c r e d i t c a r d
p l a n u s i n g o n l y t h e c a r d o r a c c o u n t number, b u t n o t t h e c r e d i t c a r d i t s e l f ( f o r
e x a m p l e , o r d e r i n g t i c k e t s by t e l e p h o n e ) , i s c o n s i d e r e d a t r a n s a c t i o n i n v o l v i n g
t h e u se o f a c r e d i t c a r d .
8.
A v a i l a b i l i t y of d iscount.
The d i s c o u n t must be a v a i l a b l e
w h e t h e r o r n o t t h e y a r e c a r d h o l d e r s , and t h e a v a i l a b i l i t y o f
be d i s c l o s e d t o t h e c o n s u m e r b e f o r e payment f o r t h e p u r c h a s e
c h a n t m i g h t d i s c l o s e t h e a v a i l a b i l i t y i n any o f t h e f o l l o w i n g
°

By p o s t i n g a s i g n

at the e n t r a n c e s

o

By p o s t i n g

at c a s h

o

O r a l l y when t h e t r a n s a c t i o n i n v o l v e s t h e t e l e p h o n e , p r o v i d e d
t h e o r a l d i s c l o s u r e i s made p r i o r t o t h e t i m e t h e c o n s u m e r
p a y s by u s e o f a c r e d i t c a r d number.

a sign

registe rs

to

its

to consumers
t h e d i s c o u n t must
i s made.
A m e r­
ways:

store.

or other p o in ts

o f payment.

9.
Advertising a discount.
A d v e rt is e m e n t s or o t h e r s o l i c i t a t i o n s f o r the s a l e
o f p r o p e r t y or s e r v i c e s t h a t d i s c l o s e a p r i c e t h a t i s not a v a i l a b l e to consumers
u s i n g a c r e d i t c a r d must a l s o d i s c l o s e t h a t t h e s t a t e d p r i c e i s so l i m i t e d .
10.
L i m i t a t i o n o f d i s c o u n t to c r e d i t card t r a n s a c t i o n s .
A d iscount described
by t h i s p a r a g r a p h i s n o t a f i n a n c e c h a r g e i n a t r a n s a c t i o n i n v o l v i n g a c r e d i t
c a r d , b u t t h e p r o v i s i o n i s i n a p p l i c a b l e t o any o t h e r t y p e o f c r e d i t t r a n s a c t i o n .
For example, i f a cash d i s c o u n t i s u n a v a i l a b l e to consumers u s i n g c r e d i t th a t
d o e s n o t i n v o l v e t h e u se o f a c r e d i t c a r d , t h e d i s c o u n t i s a f i n a n c e c h a r g e as
to tho se t r a n s a c t i o n s .
11.
R e l a t i o n o f s t a t e laws to cash d i s c o u n t s .
A d i s c o u n t t h a t i s o f f e r e d in
accordance w ith § 167(b) o f the act i s not a f in a n c e ch a rge o r o t h e r cha rge
f o r c r e d i t u n d e r any s t a t e u s u r y o r d i s c l o s u r e law r e l a t i n g t o c r e d i t t r a n s ­
actions.
(See § 171(c) o f the a c t . )
12.
C as h d i s c o u n t as f i n a n c e c h a r g e .
Any d i s c o u n t t h a t f a i l s t o meet any
requirement set fo rth in § 167(b) i s a fin a n c e charge.
F o r e x a m p l e , i f t he
d i s c o u n t i s 7% o f t h e r e g u l a r p r i c e , t h e e n t i r e amount i s a f i n a n c e c h a r g e .
I f the s e l l e r o f f e r i n g the d i s c o u n t i s a person o t h e r than the card i s s u e r , i t
need o n l y co mp ly w i t h § 2 2 6 . 9 ( d ) , " F i n a n c e c h a r g e i mp os ed at t i m e o f t r a n s a c ­
tion."
I f t h e s e l l e r i s a l s o t h e c a r d i s s u e r , i t must c o mp ly w i t h a l l r e l e v a n t
re q u ire m e n ts o f the r e g u l a t i o n .

A lternative

II

f o r C as h D i s c o u n t s * /

7.
C as h d i s c o u n t s - - c o v e r a g e .
The d i s c o u n t s t h a t may be e x c l u d e d from t h e
f in a n c e charge under p a ragraph ( c ) ( 8 ) are d i s c o u n t s o f f e r e d to in duce consumers

]_/ The p r o v i s i o n s on c a s h d i s c o u n t s a r e p r e s e n t e d i n t h e a l t e r n a t i v e b e c a u s e
of the p o s s i b i l i t y o f s t a t u t o r y change.
A l t e r n a t i v e I r e f l e c t s § 167(b) o f
the a c t as i t was i n e f f e c t on May 15, 1981.
A l t e r n a t i v e I I r e f l e c t s § 167(b)
as i t w o u l d be amended by H. R. 3 1 3 2 , t h e " C a s h D i s c o u n t A c t . "




§ 226.4

- A25 -

t o pay f o r p r o p e r t y o r s e r v i c e s by c a s h , c h e c k , o r o t h e r means n o t i n v o l v i n g
t h e u s e o f e i t h e r an o p e n - e n d c r e d i t p l a n o r a c r e d i t c a r d ( w h e t h e r o p e n - e n d
o r c l o s e d - e n d c r e d i t i s e x t e n d e d on t h e c a r d ) .
The d i s c o u n t may be i n w h a t e v e r
amount t h e s e l l e r d e s i r e s , e i t h e r a s a p e r c e n t a g e o f t h e r e g u l a r p r i c e o f t h e
i t e m o r a d o l l a r amount.
8.
D e f i n i t io n of re g u la r p r i c e .
For p u rp o se s o f d e t e r m in in g whether the
p r i c e d i f f e r e n t i a l made by a s e l l e r i s a d i s c o u n t o r a s u r c h a r g e ( w h i c h i s
p r o h i b i t e d by § 1 6 7 ( a ) ( 2 ) o f t h e a c t ) , t h e r e g u l a r p r i c e i s d e f i n e d i n § 1 0 3 ( z )
o f th e act as f o l l o w s :
" [ T ] h e t er m ' r e g u l a r p r i c e ' means t h e t a g o r p o s t e d p r i c e
cha rge d f o r the p r o p e r t y o r s e r v i c e i f a s i n g l e p r i c e i s
ta gged o r p o ste d , o r the p r i c e charged f o r the p r o p e r t y or
s e r v i c e when payment i s made by u s e o f an o p e n - e n d c r e d i t p l a n
o r a c r e d i t c a r d i f e i t h e r ( 1 ) no p r i c e i s t a g g e d o r p o s t e d , o r
( 2 ) two p r i c e s a r e t a g g e d o r p o s t e d , one o f w h i c h i s c h a r g e d
when payment i s made by u s e o f an o p e n - e n d c r e d i t p l a n o r a
c r e d i t c a r d and t h e o t h e r when payment i s made by u s e o f c a s h ,
c h e c k , o r s i m i l a r means .
For purposes o f t h i s d e f i n i t i o n ,
payment by c h e c k , d r a f t , o r o t h e r n e g o t i a b l e i n s t r u m e n t w h i c h
may r e s u l t i n t h e d e b i t i n g o f an o p e n - e n d c r e d i t p l a n o r a
c r e d i t c a r d h o l d e r ' s o p e n - e n d a c c o u n t s h a l l n o t be c o n s i d e r e d
payment made by u s e o f t h e p l a n o r t h e a c c o u n t . "
9.
L im it a t io n of d iscount to c e rta in t r a n s a c t i o n s . A d iscou n t described
by t h i s p a r a g r a p h i s n o t a f i n a n c e c h a r g e i n a t r a n s a c t i o n i n v o l v i n g an o p en end c r e d i t p l a n o r a c r e d i t c a r d , b u t t h e p r o v i s i o n d o e s n o t a p p l y t o any o t h e r
type of c r e d it t r a n s a c t io n .
F o r example, i f a cash d i s c o u n t i s u n a v a i l a b l e
t o c o n s u m e r s p a y i n g by u s e o f a c l o s e d - e n d c r e d i t p l a n n o t i n v o l v i n g a c r e d i t
c a r d , t h e d i s c o u n t i s a f i n a n c e c h a r g e as t o t h o s e t r a n s a c t i o n s .
10.
R e l a t i o n o f s t a t e laws t o cash d i s c o u n t s .
A d i s c o u n t t h a t i s o f f e r e d in
a c c o rd an ce w ith § 167(b) o f the act i s not a f in a n c e charge or o t h e r charge
f o r c r e d i t u n d e r any s t a t e u s u r y o r d i s c l o s u r e law r e l a t i n g t o c r e d i t t r a n s ­
actions.
(See § 1 71 (c) o f the a c t . )
11.
Cash d i s c o u n t as fin a n c e c h a r g e .
Any d i s c o u n t f a i l i n g t o meet any
re q u ire m en t se t f o r t h in § 167(b) i s a f in a n c e c h a rge .
I f the s e l l e r i s a
p e r s o n o t h e r t h a n t h e c a r d i s s u e r , i t need o n l y c o m p l y w i t h § 2 2 6 . 9 ( d ) ,
" F i n a n c e c h a r g e i mpo sed a t t i m e o f t r a n s a c t i o n . " I f t h e s e l l e r i s a l s o t h e
c a r d i s s u e r , i t must c o m p l y w i t h a l l r e l e v a n t r e q u i r e m e n t s o f t h e r e g u l a t i o n .

4(d)

Insurance.

1.
Form and l o c a t i o n o f d i s c l o s u r e s .
A l l d i s c l o s u r e s r e q u i r e d by t h i s p a r a ­
g r a p h must be made i n w r i t i n g .
The r u l e s on l o c a t i o n o f i n s u r a n c e d i s c l o s u r e s
f o r c l o s e d - e n d t r a n s a c t i o n s are in § 2 26 .17.
2.
Required c r e d it l i f e in s u r a n c e .
Paragraph ( d )(1 ) perm its only v o lu n ta ry
c r e d i t l i f e , a c c i d e n t , h e a l t h , o r l o s s - o f - i n c o m e i n s u r a n c e t o be e x c l u d e d from
the f i n a n c e ch a rg e .
W h e t he r t h e i n s u r a n c e i s i n f a c t r e q u i r e d o r o p t i o n a l i s




§ 226.4
- A26 -

a factual question.
I f t h e i n s u r a n c e i s r e q u i r e d , t h e premiums must be i n c l u d e d
in the f in a n c e charge.
C r e d i t l i f e i n s u r a n c e i s c o n s i d e r e d t o be r e q u i r e d
even i f t h e c r e d i t o r a l s o g i v e s t h e c o n s u m e r t h e o p t i o n o f a s s i g n i n g an e x i s t i n g
l i f e in s u r a n c e p o l i c y ; i f the consumer p u rc h a se s the c r e d i t l i f e in s u r a n c e
from t h e c r e d i t o r , t h e premium must be t r e a t e d a s a f i n a n c e c h a r g e .
( See
parag rap h 5 to § 2 2 6 . 4 ( b ) , ab o ve.)
3.
Other ty p e s o f v o l u n t a r y i n s u r a n c e .
I n s u r a n c e i s not c r e d i t l i f e , a c c i d e n t ,
h e a l t h , o r l o s s - o f - i n c o m e in s u r a n c e i f the c r e d i t o r or the c r e d i t account of
the consumer i s not the b e n e f i c i a r y o f the i n s u r a n c e co verage.
I f such in s u r a n c e
i s n o t r e q u i r e d by t h e c r e d i t o r a s an i n c i d e n t t o o r a c o n d i t i o n o f c r e d i t ,
i t i s n o t c o v e r e d by t h e f i n a n c e c h a r g e p r o v i s i o n s o f § 2 2 6 . 4 .
4.
U nit-cost d isc lo su re s.
One o f t h e t r a n s a c t i o n s f o r w h i c h u n i t - c o s t d i s c l o ­
sure^s_T ^ J c l T 7 s ~ T 0 - cer rt i— p e r month on each $10 0 o f t h e o u t s t a n d i n g i n d e b t e d n e s s )
may be u s e d i n p l a c e o f t h e t o t a l i n s u r a n c e premium i n v o l v e s a p a r t i c u l a r k i n d
of in su ra n c e plan.
For example, a consumer w ith a c u r r e n t in d e b t e d n e ss o f
$ 8 , 0 0 0 i s c o v e r e d by a p l a n o f c r e d i t l i f e i n s u r a n c e c o v e r a g e w i t h a maximum
of $10,000.
The c o n s u m e r r e q u e s t s an a d d i t i o n a l $ 4 , 0 0 0 l o a n t o be c o v e r e d by
t h e same i n s u r a n c e p l a n .
S i n c e t h e $ 4 , 0 0 0 l o a n e x c e e d s , i n p a r t , t h e maximum
amount o f i n d e b t e d n e s s t h a t can be c o v e r e d by t h e p l a n , t h e c r e d i t o r may p r o p e r l y
g i v e t h e i n s u r a n c e c o s t d i s c l o s u r e s on t h e $ 4 , 0 0 0 l o a n on a u n i t - c o s t b a s i s .
5.
Property in su ran c e .
To e x c l u d e p r o p e r t y i n s u r a n c e premiums from t h e f i n a n c e
c h a r g e t h e c r e d i t o r must a l l o w t h e c o n s u m e r t o c h o o s e t h e i n s u r e r , and d i s c l o s e
that fact.
The premium must be d i s c l o s e d o n l y i f t h e c o n s u m e r e l e c t s t o p u r c h a s e
t h e i n s u r a n c e fr om t h e c r e d i t o r .
In s u c h a c a s e , t h e c r e d i t o r must a l s o d i s c l o s e
t he ter m o f t h e p r o p e r t y i n s u r a n c e c o v e r a g e i f i t i s l e s s t h a n t h e term o f t h e
o b i i g a t i on.
6.
Sing le in te re st insurance.
B l a n k e t and s p e c i f i c s i n g l e i n t e r e s t c o v e r a g e
a r e t r e a t e d t h e same f o r p u r p o s e s o f t h i s r e g u l a t i o n .
A charge f o r e i t h e r type
o f s i n g l e i n t e r e s t i n s u r a n c e may be e x c l u d e d from t h e f i n a n c e c h a r g e i f :
0

The i n s u r e r w a i v e s any r i g h t

of subrogation.

a

The o t h e r r e q u i r e m e n t s o f p a r a g r a p h ( d ) ( 2 ) a r e met.
This in c lu d e s,
of c o u r s e , g i v i n g the consumer the o p t io n o f o b t a i n i n g the in s u r a n c e
f rom a p e r s o n o f t h e c o n s u m e r ' s c h o i c e .
The r e q u i r e m e n t t h a t an
o p t i o n be g i v e n d o e s n o t r e q u i r e t h a t t h e r e q u i r e d i n s u r a n c e be
r e a d i l y a v a i l a b l e f rom o t h e r s o u r c e s .
Wh et he r a c o n s u m e r i s a b l e
t o p u r c h a s e r e q u i r e d p r o p e r t y i n s u r a n c e from someone o t h e r th an
t h e c r e d i t o r i s a f a c t u a l q u e s t i o n t h e c r e d i t o r need n ot a n s w e r
i n t he a f f i r m a t i v e i n o r d e r t o t a k e a d v a n t a g e o f t h e s e s p e c i a l
rules.

7.
S in g le in t e r e s t insurance d e f in e d .
" S i n g l e i n t e r e s t i n s u r a n c e , " as u s e d
in the r e g u l a t i o n , r e f e r s o n ly to the ty p e s o f coverage t r a d i t i o n a l l y i n c lu d e d
in t he term " v e n d o r ' s s i n g l e i n t e r e s t i n s u r a n c e , " t h a t i s , p r o t e c t i o n o f t a n g i ­
b l e p r o p e r t y a g a i n s t normal p r o p e r t y damage, c o n c e a l m e n t , c o n f i s c a t i o n , c o n v e r ­
s i o n , e m b e z z l e m e n t , and s k i p .
Some c o m p r e h e n s i v e i n s u r a n c e p o l i c i e s may i n c l u d e




§ 226.4

- A27 -

a v a r i e t y o f a d d i t i o n a l c o v e r a g e s , s u c h as r e p o s s e s s i o n i n s u r a n c e , h o l d e r i n due
c o u r s e i n s u r a n c e , and i n s t r u m e n t n o n - f i l i n g i n s u r a n c e .
T h e se t y p e s o f c o v e r a g e
do n o t c o n s t i t u t e s i n g l e i n t e r e s t i n s u r a n c e f o r p u r p o s e s o f t h e r e g u l a t i o n , and
pr emiums f o r them do n o t q u a l i f y f o r e x c l u s i o n f rom t h e f i n a n c e c h a r g e u n d e r
paragraph (d).
4(e)

Certain

se curity

in te re st

1.
Exam ples.
The c h a r g e s e x c l u d a b l e
(e )(1 ) include:

Only

charges.

f rom t h e f i n a n c e c h a r g e u n d e r p a r a g r a p h

o

Charges f o r f i l i n g or re c o rd in g s e c u r i t y agreements, mortgages,
c o n t i n u a t i o n s t a t e m e n t s , t e r m i n a t i o n s t a t e m e n t s , and s i m i l a r
d o c u m e nt s .

o

Tax s t a m p s .

o

Notary fees.

sums a c t u a l l y

paid to p u b l i c

o fficia ls

are e x c l u d a b l e

under t h i s

provision.

2.
Item ization.
The v a r i o u s c h a r g e s d e s c r i b e d i n p a r a g r a p h ( e ) ( 1 ) may be
t o t a l l e d and d i s c l o s e d as an a g g r e g a t e sum, o r t h e y may be i t e m i z e d a c c o r d i n g
t o t h e s p e c i f i c f e e s and t a x e s i m p o s e d .
3.
Notary f e e s .
In o r d e r
c o n d i t i o n s must be met:

for

a notary

f e e t o be e x c l u d e d ,

o

The document t o be n o t a r i z e d i s
continue a s e c u r it y in t e r e s t .

o

The document i s

°

A notary

o

The amount o f t h e

is

required

considered
fee

o f the

one u s ed to p e r f e c t ,

follow ing

release,

or

by law t o be n o t a r i z e d .

a public
is

all

official

under a p p l i c a b l e

set or authorized

law.

by law.

4.
N o n -filin g insurance.
I f t h e c r e d i t o r c o l l e c t s and s i m p l y r e t a i n s a fee as
a s o r t o f " s e l ^ - i n s u r a n c e " a g a i n s t n o n - f i l i n g i t may n o t be e x c l u d e d f rom t h e
f i n a n c e c h a r g e u n d e r p a r a g r a p h ( e ) ( 2 ) ; t h e e x c e p t i o n a p p l i e s o n l y where the
n o n - f i l i n g in su ran ce i s purchased.
I f t h e n o n - f i l i n g i n s u r a n c e premium e x c e e d s
t h e amount o f t h e f e e s e x c l u d a b l e f rom t h e f i n a n c e c h a r g e by p a r a g r a p h ( e ) ( 1 ) ,
o n ly the e xce ss i s a fin a n c e charge.

4(f)

Prohibited

offsets.

1.
E a r n i n g s on d e p o s i t s o r i n v e s t m e n t s .
The r u l e t h a t t he c r e d i t o r must d i s ­
r e g a r d any e a r n i n g s by t h e c o n s u m e r on d e p o s i t s o r i n v e s t m e n t s a p p l i e s w h e t h e r
o r n o t t he c r e d i t o r h a s a s e c u r i t y i n t e r e s t i n t h e p r o p e r t y .




§ 226.4
- A28 -

REFERENCES:
S t a t u te:
Previous

§ 106,

167(b),

regu lation :

171(c).

§ 226.4.

1981 c h a n g e s : W h i l e g e n e r a l l y c o n t i n u i n g t h e r u l e s u n d e r t h e p r i o r
r e g u l a t i o n , t h i s s e c t i o n r e f l e c t s amendments t o § 106 o f t h e a c t and makes
c e r t a i n o t h e r changes in the r u l e s f o r d e t e r m in in g the fin a n c e charge.
For
e x a m p l e , s u b p a r a g r a p h ( a ) i n c l u d e s t h e e x p r e s s l i m i t a t i o n f ro m t h e amended
a c t t h a t f i n a n c e c h a r g e s do n o t i n c l u d e c h a r g e s p a y a b l e i n c o m p a r a b l e c a s h
transactions.
W i th r e s p e c t t o v a r i o u s e x c l u s i o n s f r om t h e f i n a n c e c h a r g e :
a p p l i c a t i o n f e e s imp os ed on a l l a p p l i c a n t s a r e no l o n g e r f i n a n c e c h a r g e s ;
c o n t i n u i n g t o e x t e n d c r e d i t t o a c o n s u m e r i s no l o n g e r a c o n t r o l l i n g t e s t f o r
d e t e r m i n i n g w h e t h e r a l a t e payment c h a r g e i s bona f i d e ; s e l l e r ' s p o i n t s a r e
n o t t o be i n c l u d e d i n t h e f i n a n c e c h a r g e ; and t h e s p e c i a l e x c l u s i o n s f o r r e a l
e s t a t e t r a n s a c t i o n s ap p ly to a l l " r e s i d e n t i a l mortgage t r a n s a c t i o n s . "
S i m p l i f i e d r u l e s f o r e x c l u d i n g i n s u r a n c e from the f in a n c e cha rge
a l lo w u n i t - c o s t d i s c l o s u r e in c e r t a i n c l o s e d - e n d c r e d i t t r a n s a c t i o n s ;
p e r m i t i n i t i a l s a s w e l l as s i g n a t u r e s on t h e a u t h o r i z a t i o n ; p e r m i t any
c o n s u m e r t o a u t h o r i z e i n s u r a n c e f o r o t h e r c o n s u m e r s ; and d e l e t e t h e r e q u i r e ­
ment t h a t t h e a u t h o r i z a t i o n be d a t e d .




§ 226.5

SUBPART B —

OPEN-END C R E D I T

General .
T h i s s e c t i o n d e a l s w i t h o p e n - e n d c r e d i t a c c o u n t s - - s u c h as r e v o l v i n g
c r e d i t , c r e d i t c a r d a c c o u n t s , o v e r d r a f t and c a s h a d v a n c e l o a n s - - a n d t h e d i s c l o ­
sures required fo r these types of c r e d it .
(The t er m " o p e n - e n d c r e d i t " i s
defined in § 2 26.2.)
This se ctio n a lso o u tlin e s

Section

o

Special

o

The p r o c e d u r e s
accounts.

°

The r u l e s
accounts.

°

Rescission

°

The r u l e s

226.5 - 5(a)

rules

for credit

card a c c o u n ts .

t o be f o l l o w e d

if

f o r d e t e r m i n i n g annual

requirem ents

d isclosu re

occur

percentage

in

open-end c r e d i t

rates

f o r open-end

as t h e y a p p l y t o o p e n - e n d c r e d i t .

f o r open-end c r e d i t

General

errors

advertising.

requirem ents.

Form o f d i s c l o s u r e s .

1.
C l e a r and c o n s p i c u o u s .
U nd er t h e " c l e a r and c o n s p i c u o u s " s t a n d a r d i n p a r a ­
g r a p h ( a ) ( 1 ) , w h i c h r e q u i r e s t h a t d i s c l o s u r e s be i n a r e a s o n a b l y u n d e r s t a n d a b l e
and u s a b l e f or m , c r e d i t o r s
o

Need n o t s e g r e g a t e d i s c l o s u r e s f rom o t h e r m a t e r i a l
f o r c l o s e d - e n d d i s c l o s u r e s under § 2 2 6 . 1 7 ) .

(as

is

the case

o

May p l u r a l i z e t h e r e q u i r e d t e r m i n o l o g y
p e r c e n t a g e r a t e ) where a p p r o p r i a t e .

o

May add t o t h e r e q u i r e d d i s c l o s u r e s s u c h i t e m s as c o n t r a c t u a l
p r o v i s i o n s , e x p l a n a t i o n s o f c o n t r a c t t e r m s , s t a t e law d i s c l o s u r e s
t h a t a r e n o t i n c o n s i s t e n t u n d e r § 2 2 6 . 2 8 , t r a n s l a t i o n s , and
p r o m o t i o n a l m a t e r i a l , s o l o n g as t h e r e q u i r e d d i s c l o s u r e s rema in
c l e a r and c o n s p i c u o u s .

o

Need n o t p r e s e n t n u m e r i c a l a mounts o r p e r c e n t a g e s
o r i n a ny p a r t i c u l a r t y p e s i z e .

( f i n a n c e c h a r g e and a n n u a l

in

figures

2.
I n t e g r a t e d document.
C r e d i t o r s may make b o t h t h e i n i t i a l d i s c l o s u r e s
( § 2 2 6 . 6 ) and t h e p e r i o d i c s t a t e m e n t d i s c l o s u r e s ( § 2 2 6 . 7 ) on more t h a n one
p a g e , and u s e b o t h t h e f r o n t and t h e r e v e r s e s i d e s , s o l o n g as t h e d i s c l o s u r e s
a r e made t o g e t h e r and t h e p a g e s c o n s t i t u t e an i n t e g r a t e d document.
T h i s wo ul d
i n c l u d e , f o r e x a m p le :




o

M u l t i p l e pages t h a t c o v e r
or otherw ise attached.

related m aterial

and a r e

stapled

together

§ 226.5
- B2 -

o

A brochure t h a t c o n t a i n s in f o r m a t i o n about a range o f s e r v i c e s the
c r e d i t o r o f f e r s , s u c h as c r e d i t , c h e c k i n g a c c o u n t , and e l e c t r o n i c
fund t r a n s f e r f e a t u r e s .

An i n t e g r a t e d document w o u l d n o t i n c l u d e p a g e s t h a t a r e n o t a t t a c h e d , p a g e s
p r o v id e d t o the consumer at d i f f e r e n t t i m e s , o r pages i n t e r s p e r s e d w ith u n r e l a t e d
n o t i c e s , f l y e r s , or promotional m a t e r ia l.
3.
When d i s c l o s u r e s must be more c o n s p i c u o u s .
The f o l l o w i n g r u l e s a p p l y t o
t h e “more c o n s p i c u o u s 11 r e q u i r e m e n t i n p a r a g r a p h ( a ) ( 2 ) a b o u t t h e " f i n a n c e c h a r g e "
and " a n n u a l p e r c e n t a g e r a t e " :
o

" F i n a n c e c h a r g e " and a n n u a l p e r c e n t a g e r a t e " must be d i s c l o s e d
more c o n s p i c u o u s l y when r e q u i r e d t o be u s e d w i t h a number.
For
e x a m p l e , on t h e i n i t i a l d i s c l o s u r e s t a t e m e n t t h e c o r r e s p o n d i n g
a n n u a l p e r c e n t a g e r a t e d i s c l o s u r e u n d e r § 2 2 6 . 6 ( a ) ( 2 ) must
c o n f o r m t o t h e " mor e c o n s p i c u o u s " r u l e .

o

N e i t h e r t er m need be e m p h a s i z e d when u s e d a s p a r t o f g e n e r a l
in fo rm a tio n a l m a te ria l or in te x tu a l d e s c r i p t i o n s o f other terms,
a lt h o u g h emphasis i s p e r m i s s i b l e in such c a s e s .
F o r e x a mp l e ,
when t h e t e r m s a p p e a r a s p a r t o f t h e e x p l a n a t i o n s r e q u i r e d u n d e r
§ 2 2 6 . 6 ( a ) ( 3 ) and ( 4 ) , t h e y do n o t h ave t o be more c o n s p i c u o u s .

o

The p e r i o d i c s t a t e m e n t d i s c l o s u r e on t h e c o r r e s p o n d i n g a n nu a l
p e r c e n t a g e r a t e u n d e r § 2 2 6 . 7 ( d ) need n o t be "mor e c o n s p i c u o u s "
t h a t t h e a c t u a l APR d i s c l o s e d u n d e r § 2 2 6 . 7 ( g ) w i l l be more
c o n s p i c u o u s when t h e y d i f f e r .

so

4.
M a k i n g d i s c l o s u r e s more c o n s p i c u o u s .
The r e q u i r e m e n t i n p a r a g r a p h ( a ) ( 2 )
t h a t " f i n a n c e c h a r g e " and " a n n u a l p e r c e n t a g e r a t e " be s t a t e d more c o n s p i c u o u s l y
may be s a t i s f i e d by:
o

C ap italizin g
lower case.

t h e w o r d s when o t h e r d i s c l o s u r e s

°

P u t t i n g them i n

©

U nderlining

o

S e t t i n g them o f f w i t h

bold p r i n t

or a c o n t r a s t in g

are p r i n t e d

in

color.

them.
asterisks.

O n l y t h e w o r d s " f i n a n c e c h a r g e " and " a n n u a l p e r c e n t a g e r a t e " s h o u l d be a c c e n ­
tuated.
F o r e x a m p l e , i f t h e t e r m " t o t a l f i n a n c e c h a r g e " i s u s e d , orrly " f i n a n c e
c h a r g e " s h o u l d be e m p h a s i z e d .

5(b)

Tim ing of d i s c l o s u r e s .

1.
B efo re the f i r s t t r a n s a c t i o n .
The r u l e i n p a r a g r a p h ( b ) ( 1 ) t h a t t h e i n i t i a l
d i s c l o s u r e s t a t e m e n t must be f u r n i s h e d " b e f o r e t h e f i r s t t r a n s a c t i o n " r e q u i r e s




226.5
- B3 -

d e l i v e r y o f i n i t i a l d i s c l o s u r e s b e f o r e t h e c o n s u m e r makes t h e f i r s t p u r c h a s e ,
r e c e i v e s the f i r s t advance, o r pays a fee under the p la n .
In itia l d isclosures
a r e t i m e l y even i f an a d v a n c e o r m e m b e r s h i p f e e h a s a l r e a d y been p o s t e d t o t h e
c o n s u m e r ' s a c c o u n t s o l o n g a s t h e c o n s u m e r may, a f t e r r e c e i v i n g t h e d i s c l o s u r e s ,
r e j e c t t h e a c c o u n t and h a v e no f u r t h e r o b l i g a t i o n beyond r e t u r n i n g money o r
g o o d s p r o v i d e d by t h e c r e d i t o r .
An a p p l i c a t i o n f e e u n d e r § 2 2 6 . 4 ( c ) ( 1 ) d o e s
not t r i g g e r d i s c l o s u r e s .
2.
C o n v e r t i n g c l o s e d - e n d c r e d i t to open-end c r e d i t .
I f an e x i s t i n g c l o s e d - e n d
acco u n t i s c o n v e rt e d to open-end under a w r i t t e n agreement w ith th e consumer,
t h e i n i t i a l d i s c l o s u r e s u n d e r § 2 2 6 . 6 must be g i v e n b e f o r e t h e f i r s t t r a n s ­
a c t i o n u n d e r t h e o p e n - e n d a c c o u n t . " T r a n s a c t i o n " i n t h i s c o n t e x t may be a p u r ­
c h a s e o r payment by t h e c o n s u m e r o r a c a s h a d v a n c e t o t h e c o n s u m e r .
3.
C o n v e r t i n g open-end to c l o s e d - e n d c r e d i t .
I f open-end c r e d i t i s c o n v e rt e d
t o c l o s e d - e n d c r e d i t under a w r i t t e n agreement w ith the consumer ( f o r example,
i f th e c r e d i t o r d i s c o n t i n u e s i t s open-end p l a n , or a r r a n g e s f o r r e f i n a n c i n g
o r a w o r k - o u t a g r e e m e n t w i t h a d e f a u l t i n g c o n s u m e r ) , t h e c r e d i t o r must p r o v i d e
c l o s e d - e n d d i s c l o s u r e s on t h e amount f i n a n c e d , i t e m i z a t i o n o f t h e amount
f i n a n c e d , and f i n a n c e c h a r g e ( § 2 2 6 . 1 8 ( b ) , ( c ) , and ( d ) ) .
These d i s c l o s u r e s
must be made b e f o r e c o n s u m m a t i o n o f t h e c l o s e d - e n d a g r e e m e n t .
4.
T e rm in a t io n o f open-end c r e d i t p r i v i l e g e s .
When an o p e n - e n d p l a n i s t e r m i ­
nated w it h o u t b e in g c o n v e rte d to c l o s e d - e n d under a w r i t t e n agreem ent, the
c r e d i t o r must c o n t i n u e t o p r o v i d e p e r i o d i c s t a t e m e n t s t o t h o s e c o n s u m e r s e n t i t l e d
t o r e c e i v e them ( f o r e x a m p l e , w h i l e c o n s u m e r s a r e p a y i n g o f f o u t s t a n d i n g b a l a n c e s )
and m ust c o n t i n u e t o f o l l o w t h e e r r o r r e s o l u t i o n p r o c e d u r e s o f § 2 2 6 . 1 3 .
5.
Reopening term inated accou n t.
I f an a c c o u n t h a s been c l o s e d ( f o r e x a m p l e ,
d ue t o i n a c t i v i t y , c a n c e l l a t i o n , o r e x p i r a t i o n ) and t h e n i s r e o p e n e d , new i n i t i a l
d is c l o s u r e s are required.
6.
R e a c t i v i t a t i o n o f suspended a c c o u n t .
I f an a c c o u n t i s t e m p o r a r i l y s u s p e n d e d
( f o r e x a m p l e , b e c a u s e t h e c o n s u m e r h a s e x c e ed e d a c r e d i t l i m i t , o r b e c a u s e a
c r e d i t c a r d i s r e p o r t e d l o s t o r s t o l e n ) and t h e n i s r e a c t i v a t e d , no new i n i t i a l
d i s c l o s u r e s are n e c essa ry.
7.
the

P e r i o d i c s ta te m en ts not
follow ing cases:




require d.

Periodic

s t a t e m e n t s need n o t be s e n t

in

°

I f the c r e d i t o r u n i l a t e r a l l y a d j u s t s a d e b it
a u to m a tic a lly refunds a c r e d i t balance.

b a la n ce to zero or

o

I f a s t a t e m e n t was s e n t and r e t u r n e d as u n d e l i v e r a b l e .
I f the
c o n s u m e r l a t e r p r o v i d e s a new a d d r e s s , t h e c r e d i t o r must resume
sending statem ents.
When a new a d d r e s s i s p r o v i d e d , t h e o b l i ­
g a t i o n t o send a s t a t e m e n t a r i s e s i f t h e new a d d r e s s i s p r o v i d e d
w i t h i n a r e a s o n a b le time b e f o re s e n d in g the statem ent.
Receiving
t h e a d d r e s s a t l e a s t 2 0 d a y s b e f o r e t h e end o f a c y c l e w ou ld be a
r e a s o n a b l e amount o f t i m e t o p r e p a r e t h e s t a t e m e n t f o r t h a t c y c l e .
(See § 2 2 6 . 1 3 ( a ) ( 7 ) . )

§ 226.5
- B4 -

8.
14-day r u l e .
The 14 d a y - r u l e i n p a r a g r a p h ( b ) ( 2 ) ( H ) d o e s n o t a p p l y i f
c h a r g e s ( f o r e x a m p l e , t r a n s a c t i o n o r a c t i v i t y c h a r g e s ) a r e im p o se d r e g a r d l e s s
o f the t i m i n g o f a p e r i o d i c sta tem ent.
The 1 4 - d a y r u l e d o e s a p p l y :
°

I f current debits
i f the balance i s

r e t r o a c t i v e l y become s u b j e c t t o f i n a n c e
n o t p a i d i n f u l l by a s p e c i f i e d d a t e .

o

I f c h a rg e s o t h e r than f i n a n c e c h a r g e s w i l l accru e i f the consumer
d oes n ot make t i m e l y p a y m e n t s .
Such c h a r g e s in c l u d e :
-

L a t e payment c h a r g e s .

-

Charges f o r exceeding a c r e d i t

-

F ee s f o r v e n d o r ' s

single

charges

balance.

interest

insurance.

9.
14-da.y r u l e - - e x c e p t i o n s .
F o o t n o t e 4 d o e s n o t e x c u s e a c r e d i t o r f rom t h e
1 4 —d ay o b l i g a t i o n i f t h e f a i l u r e t o p r o v i d e a p e r i o d i c s t a t e m e n t r e s u l t s f rom
computer m a lf u n c t io n .

5(c)

B asis of d isc lo su re s

and u s e o f e s t i m a t e s .

1.
L e g a l o b l i g a t i o n . The l e g a l o b l i g a t i o n i s u s u a l l y
w r i t t e n agreement o f the p a r t i e s .
F o r e xa m pl e :

t h a t embo di ed i n t h e

o

I f t h e c o n t r a c t p r o v i d e s f o r payment o f a c e r t a i n amount by t h e
l a s t day o f e ac h m o n t h , b u t pa ym en ts a r e a c t u a l l y made b i w e e k l y
u n d e r a v o l u n t a r y p a y r o l l d e d u c t i o n p l a n , t h e m o n t h l y payment
t er m i s u n d o u b t e d l y t h e l e g a l l y e n f o r c e a b l e c o n t r a c t t e r m , and
t h e r e f o r e r e p r e s e n t s th e a p p r o p r i a t e b a s i s f o r d i s c l o s u r e s .

o

I f a c r e d i t o r - e m p l o y e r o f f e r s a p r e f e r e n t i a l e mp lo y e e r a t e , t h e
c o r r e c t p e r i o d i c r a t e / a n n u a l p e r c e n t a g e r a t e d i s c l o s u r e d ep en ds
on what i s l e g a l l y e n f o r c e a b l e .
I f the h i g h e r ra t e i s the
b i n d i n g c o n t r a c t t e r m , h o w e v e r , t h e c r e d i t o r may a d d i t i o n a l l y
i n d i c a t e any c o n c e s s i o n made i n t h a t ter m.

2.
Estim ates.
The " r e a s o n a b l y a v a i l a b l e " s t a n d a r d r e q u i r e s t h a t t h e c r e d i t o r ,
a c t i n g i n good f a i t h , e x e r c i s e due d i l i g e n c e i n o b t a i n i n g i n f o r m a t i o n .
In
u s i n g e s t i m a t e s , the c r e d i t o r i s not r e q u i r e d to d i s c l o s e the b a s i s f o r the
e s t i m a t e d f i g u r e s , b u t may i n c l u d e s u c h e x p l a n a t i o n s a s a d d i t i o n a l i n f o r m a t i o n .
I f t h e c r e d i t o r makes e s t i m a t e d d i s c l o s u r e s , r e d i s c l o s u r e i s n o t r e q u i r e d
e ven t h o u g h more a c c u r a t e i n f o r m a t i o n becomes a v a i l a b l e b e f o r e t h e f i r s t t r a n s ­
action.
F o r e x a m p l e , i n an o p e n - e n d p l a n t o be s e c u r e d by r e a l e s t a t e , t h e
c r e d i t o r may e s t i m a t e t h e a p p r a i s a l f e e s t o be c h a r g e d ; s u c h an e s t i m a t e m i g h t
r e a s o n a b l y be b a s e d on t h e p r e v a i l i n g m a r k e t r a t e s f o r s i m i l a r a p p r a i s a l s .
No
new d i s c l o s u r e i s n e c e s s a r y even i f t h e e x a c t a p p r a i s a l f e e i s d e t e r m i n a b l e
b e f o re the consumer r e c e i v e s the f i r s t advance under the p lan.




§ 226.5
- B5 -

5(d )
1.

M ultip le

creditors;

Providing d is c lo s u r e s .

m u ltip le consumers.

Under t h i s

p rovision:

o

C reditors

o

Ea ch c r e d i t o r i n t h e p l a n i s l e g a l l y r e s p o n s i b l e f o r s e e i n g t h a t
t h e d i s c l o s u r e s a r e p r o v i d e d , and any one o f them may be s u b j e c t
l ia b il it y for v io la tio n s.

o

must c h o o s e w h i c h o f them w i l l

A s i n g l e , com plete s e t o f d i s c l o s u r e s
t h a n p a r t i a l d i s c l o s u r e s f rom s e v e r a l

make t h e d i s c l o s u r e s .

must be p r o v i d e d ,
creditors.

to

rather

2.
Who must r e c e i v e d i s c l o s u r e s .
W h i l e t h e d i s c l o s u r e s may be made t o e i t h e r
o b l i g o r on a j o i n t a c c o u n t , t h e d i s c l o s u r e r e s p o n s i b i l i t i e s a r e n o t s a t i s f i e d
by d i s c l o s u r e s g i v e n o n l y t o an a u t h o r i z e d u s e r o r t o a s u r e t y o r g u a r a n t o r
for a p rin cip a l obligor.

5(e)
1.
Events
violations

Effect of

subsequent e v e n t s .

causing inaccuracies.
Inaccuracies
i f a t t r i b u t a b l e to events o c c u r r in g

in open-end d i s c l o s u r e s are not
a f t e r d i s c l o s u r e , such as:

o

The c o n s u m e r ' s f a i l u r e t o p e r f o r m h i s o r h e r o b l i g a t i o n t o keep
c o l l a t e r a l i n s u r e d , wher e t h e c r e d i t o r t h e n p r o v i d e s t h e c o v e r a g e
and c h a r g e s t h e c o n s u m e r f o r i t .

o

An a l t e r a t i o n i n
tion s for cre d it
period.

c e r t a i n te rm s, such as the r a t e s or c l a s s i f i c a ­
in s u r a n c e or the a v a i l a b i l i t y o f a f r e e - r i d e

A l t h o u g h s u c h c h a n g e s do n o t make t h e o r i g i n a l d i s c l o s u r e
may be r e q u i r e d by § 2 2 6 . 9 ( c ) t o p r o v i d e a new d i s c l o s u r e
term.
2.
Use o f i n s e r t s .
I n t h e c a s e o f a t er m c h a n g e ,
w i t h o u td a te d d i s c l o s u r e form s.
Any i n s e r t :

improper, the c r e d i t o r
f o r the changed

creditors

o

Should c l e a r l y

o

Need n o t be p h y s i c a l l y
statement.

attached or a f f ix e d

o

May be u s e d o n l y

until

th e

supply

(b),

and

(c);

r e f e r to th e d i s c l o s u r e

may u s e

provision

it

inserts

replaces.

to the b a s i c

of outdated

f or m s

is

d isclosure

exhausted.

REFERENCES:




Statute:

§§ 121(a),
163(a).

Previous regulation:
2 26 .7(a ), (b), (c).

§§ 226.6(a),

122(a)

(c),

and

(d),

(b);

(e),

124,

(f),

127(a)

(g),

and

and

(b);

§ 226.6
- B6 -

Other s e c t i o n s :

§§ 226.4,

226.6,

226.7,

226.8,

226.9,

and 2 2 6 . 1 4 .

1981 c h a n g e s :
T h i s s e c t i o n r e f l e c t s s e v e r a l amendments t o t h e a c t
and i n c o r p o r a t e s a number o f c h a n g e s made t o s i m p l i f y t h e r e g u l a t i o n .
Type
s i z e r e q u i r e m e n t s and a l l r e q u i r e d t e r m i n o l o g y e x c e p t " f i n a n c e c h a r g e " and
"annual percentage ra te " are d eleted.
D i s c l o s u r e s may be made on more t h a n
one page o f an i n t e g r a t e d s t a t e m e n t .
The t i m i n g r u l e f o r i n i t i a l d i s c l o s u r e s
h a s been r e v i s e d t o make c l e a r t h a t t h e y m u st p r e c e d e any t r a n s a c t i o n u n d e r
t h e p l a n , i n c l u d i n g pa ym en ts by t h e c o n s u m e r .
The r u l e f o r c r e d i t p l a n s
i n v o l v i n g m u l t i p l e c r e d i t o r s o r m u l t i p l e c o n s u m e r s h as been s i m p l i f i e d i n
a c c o r d a n c e w i t h t h e r e v i s e d s t a t u t e : o n l y one c r e d i t o r need make t h e d i s c l o ­
s u r e s , and t o o n l y one p r i m a r i l y l i a b l e c o n s u m e r .
Section 226.5(c) r e fle c t s
new r u l e s f o r t h e b a s i s o f d i s c l o s u r e s and u s e o f e s t i m a t e s .

Section

226.6 - 6(a)

In itia l

d isclosu re

statement.

Fin a nce c h a r g e .

1.
General.
The f i n a n c e c h a r g e d i s c l o s u r e must i n c l u d e t h e i n f o r m a t i o n s e t
out in p aragraphs ( a )( 1 ) through ( a ) ( 4 ) .
The m a t e r i a l r e q u i r e d by t h e s e p a r a ­
g r a p h s i s c l o s e l y r e l a t e d and p r o v i d e s one c o m p l e t e f i n a n c e c h a r g e d i s c l o s u r e .
F o r e x a m p l e , a s t a t e m e n t t h a t " t h e f i n a n c e c h a r g e b e g i n s on t h e d a t e o f e ac h
a d v a n c e " a d e q u a t e l y d i s c l o s e s t h a t t h e r e i s no f r e e - r i d e p e r i o d .
I n t h e same
f a s h i o n , a s t a t e m e n t t h a t " f i n a n c e c h a r g e s w i l l be i m p o s e d on any new p u r c h a s e s
o n l y i f t h e y a r e n o t p a i d i n f u l l w i t h i n 25 d a y s a f t e r t h e c l o s e o f t h e b i l l i n g
c y c l e " n e c e s s a r i l y d i s c l o s e s th a t th e re i s a fr e e p e riod in the in te rim .
Paragraph 6 ( a ) ( 1 ) .
1.
When f i n a n c e c h a r g e s a c c r u e .
C r e d i t o r s may p r o v i d e a g e n e r a l e x p l a n a t i o n
a b o u t f i n a n c e c h a r g e s b e g i n n i n g t o r u n and need n o t d i s c l o s e a s p e c i f i c d a t e .
F o r e x a m p l e , a c r e d i t o r may d i s c l o s e t h a t a c o n s u m e r h as 30 d a y s from t h e
c l o s i n g d a t e t o pay t h e new b a l a n c e b e f o r e f i n a n c e c h a r g e s w i l l a c c r u e on any
new p u r c h a s e s made on t h e a c c o u n t .
2.
Free p e r i o d s .
In d i s c l o s i n g w heth er o r not a f r e e - r i d e p e r i o d e x i s t s , a
c r e d i t o r need n o t u s e " f r e e p e r i o d , " " f r e e - r i d e p e r i o d , " o r any o t h e r p a r ­
t i c u l a r d e s c r i p t i v e p h r a s e o r t er m .
Paragraph

6(a)(2).

1.
V a ria b le rate program s.
I n a d d i t i o n t o d i s c l o s i n g t h e r a t e s i n e f f e c t at
t h e t i m e o f d i s c l o s u r e , F o o t n o t e 12 r e q u i r e s d i s c l o s u r e o f t h e c i r c u m s t a n c e s
u n d e r w h i c h a p e r i o d i c r a t e w o u l d i n c r e a s e i n a v a r i a b l e r a t e p ro g r a m.
T h i s r e f e r s t o any s p e c i f i c c o n t r a c t u a l c o n d i t i o n s , s u c h as t h e e x p i r a t i o n o f
c e r t a i n time p e r i o d s o r changes in a p a r t i c u l a r index.
Any l i m i t a t i o n s on r a t e
i n c r e a s e s , s u c h as t h e maximum i n c r e a s e p e r y e a r o r t h e maximum i n c r e a s e o v e r
t he d u r a t i o n o f t h e p l a n , must a l s o be d i s c l o s e d ( b u t a c r e d i t o r need n ot d i s ­
c l o s e g e n e r a l r a t e l i m i t a t i o n s i m p o s ed by la w, s u c h a s s t a t e u s u r y c e i l i n g s ) .
As t o t h e e f f e c t o f an i n c r e a s e , t h e c r e d i t o r w ou ld d i s c l o s e , f o r e x a m p l e , t h a t
t h e r a t e i n c r e a s e w ou ld r e s u l t i n h i g h e r m o n t h l y p a y m e n t s.




§ 225.6

'
- B7 -

Paragraph 6 ( a ) ( 3 ) .
1.
E x p la n a t io n o f balance com putation method.
Under p a rag rap h
hand p h r a s e s u c h a s " p r e v i o u s b a l a n c e m e t h o d " d o e s n o t s u f f i c e .
f o r model c l a u s e s . )

( a ) ( 3 ) , a short­
(See Appendix G - l

2.
A llo c a t i o n o f payments.
D i s c l o s u r e about the a l l o c a t i o n o f payments i s n ot
required.
F o r e x a m p l e , a c r e d i t o r need n o t d i s c l o s e t h a t p a y m e n t s a r e a p p l i e d
f i r s t t o f i n a n c e c h a r g e s , t h e n t o p u r c h a s e s , and t h e n t o c a s h a d v a n c e s , o r t h a t
p a y m e n t s a r e a p p l i e d t o l a t e c h a r g e s , o v e r d u e b a l a n c e s , and f i n a n c e c h a r g e s
b e f o r e b e i n g a p p l i e d to the p r i n c i p a l b a la n c e .
Paragraph 6 ( a ) ( 4 ) .
1.
Finance c h a r g e s .
D i s c l o s u r e i s r e q u i r e d o f any o t h e r t y p e o f f i n a n c e
c h a r g e ( o t h e r t h a n a p e r i o d i c r a t e ) t h a t may be i m p o s e d , s u c h a s minimum,
f i x e d , t r a n s a c t i o n , and a c t i v i t y c h a r g e s ; r e q u i r e d i n s u r a n c e ; a p p r a i s a l ,
i n v e s t i g a t i o n , o r c r e d i t r e p o r t f e e s ; or any o t h e r c h a r g e d e s c r i b e d i n t h e
f i n a n c e c h a r g e s e c t i o n (§ 2 2 6 .4 ).

6(b)

Other ch arge s.

1.
G eneral.
T h is paragraph
c h a r g e s ) t o be d i s c l o s e d .
2.

3.

Other c h a r g e s .

The f o l l o w i n g

sign ifica n t

charges

(that

are not

finance

a re examples o f o t h e r c h a r g e s :

o

L a t e payment and o v e r - t h e - c r e d i t - 1 i m i t

°

Fees f o r p r o v id in g documentary e vid en ce o f t r a n s a c t i o n s
under § 226.13 ( b i l l i n g e r r o r p r o c e d u re s).

o

C h a r g e s i m po s ed
(§ 2 2 6 . 4 ( c ) ) .

o

T a x e s and f i l i n g o r n o t a r y
ch a rge under § 2 2 6 .4 (e ).

o

T a x e s n o t imposed b u t f o r t h e c r e d i t
a r e i m p o s e d by g o v e r n m e n t a l a c t i o n .

o

F e e s f o r mem be rs hi p o r p a r t i c i p a t i o n i n a p a c k a g e o f s e r v i c e s
t h a t i n c l u d e s an o p e n - e n d c r e d i t f e a t u r e , u n l e s s t h e f e e i s
r e q u i r e d whether o r not the open-end c r e d i t f e a t u r e i s i n c l u d e d .
F o r e x a m p l e , a mem be rs hi p f e e t o j o i n a c r e d i t u n i o n w ou ld n o t
be an " o t h e r c h a r g e , " even i f m e m b e r s h i p was a c r i t e r i o n f o r
e l i g i b i l i t y in a p p l y in g f o r c r e d i t .

Exclusions.




requires

°

in c o n n e c t i o n

The f o l l o w i n g

are not

with

charges.

real

fees excluded

estate

transactions

f ro m t h e

plan,

requested

e ven i f

finance

the ta x e s

"other charges":

Fees c h a rge d f o r documentary
tax purposes.

evidence of

transactions

for

income

§ 226.6

- B8 -

o

Am ou nt s p a y a b l e by a c o n s u m e r f o r c o l l e c t i o n a c t i v i t y a f t e r
d e f a u l t ; a t t o r n e y ' s f e e s , w hether or not a u t o m a t i c a l l y imposed;
f o r e c l o s u r e c o s t s , s t a t u t o r y i n t e r e s t r a t e s , and r e i n s t a t e m e n t
or reissuance fees.

o

P rem iu ms f o r
for property

°

Application

6(c)

Se curity

voluntary
insurance

c r e d it l i f e or d i s a b i l i t y in su ra n c e , or
th a t are not p a rt o f the fin a n c e cnarge.

fees under § 2 2 6 . 4 ( c ) ( 1 ) .

in te re st.

1.
General.
D i s c l o s u r e i s not r e q u i r e d about th e t y p e o f s e c u r i t y i n t e r e s t
o r about the c r e d i t o r ' s r i g h t s w ith re sp e c t to t h a t c o l l a t e r a l .
In o t h e r
w o r d s , t h e c r e d i t o r need n o t e x p a n d on t h e t e r m " s e c u r i t y i n t e r e s t . "
Also,
s i n c e no s p e c i f i e d t e r m i n o l o g y i s r e q u i r e d , t h e c r e d i t o r may d e s i g n a t e i t s
i n t e r e s t by u s i n g , f o r e x a m p l e , " p l e d g e , " " l i e n , " o r " m o r t g a g e . "
2.
Id e n tifica tio n of property.
I d e n t i f i c a t i o n o f t h e c o l l a t e r a l by t y p e i s
s a t i s f i e d by s t a t i n g , f o r e x a m p l e , " m o t o r v e h i c l e " o r " h o u s e h o l d a p p l i a n c e s . "
3.
Spreader c la u s e .
The f a c t t h a t c o l l a t e r a l f o r p r e - e x i s t i n g l o a n s w i t h
th e i n s t i t u t i o n i s b e in g used to s e c u r e the p r e s e n t o b l i g a t i o n c o n s t i t u t e s
a s e c u r i t y i n t e r e s t and m u st be d i s c l o s e d .
A
s p e c if ic id e n t if ic a t io n of that
c o l l a t e r a l i s u n n e c e s s a r y b u t a r e m i n d e r o f t h e i n t e r e s t a r i s i n g f r om t h e
p r i o r indebtedness i s required.
The d i s c l o s u r e may be a c c o m p l i s h e d by
l a n g u a g e s u c h a s " c o l l a t e r a l s e c u r i n g o t h e r l o a n s w i t h u s may a l s o s e c u r e t h i s
loan."
A t t h e c r e d i t o r ' s o p t i o n , a more s p e c i f i c d e s c r i p t i o n o f t h » p r o p e r t y
i n v o l v e d may be g i v e n .
4.
Additional c o l l a t e r a l .
I f c o l l a t e r a l i s r e q u i r e d when a d v a n c e s r e a c h
a c e r t a i n a m ou nt , t h e c r e d i t o r s h o u l d d i s c l o s e t h e i n f o r m a t i o n a v a i l a b l e a t t h e
time o f th e i n i t i a l d i s c l o s u r e s .
F o r example, th e c r e d i t o r would d i s c l o s e t h a t
a s e c u r i t y i n t e r e s t w o u l d be t a k e n i n h o u s e h o l d g o o d s i f t h e c o n s u m e r ' s b a l a n c e
exceeded $ 1 , 0 0 0 .
I f t h e c r e d i t o r r e q u i r e s a d d i t i o n a l s e c u r i t y n o t c o v e r e d by
the i n i t i a l d i s c l o s u r e s , a c h a n g e -in - t e r m s n o t ic e under § 2 2 6 . 9 ( c ) i s n e c e s s a ry .

6(d)

Statement o f b i l l i n g

righ ts.

See co m me nt a ry t o A p p e n d i x G - 3 .

REFERENCES:
Statute:

§ 127(a).

Previous

regu latio n :

§ 226.7(a).

Other s e c t io n s :
$$ 2 2 6 . 2 .
and A p p e n d i x G.



226.5,

226.7,

226.9,

226.13,

226.14,

§ 226.7
- B9 -

1981 c h a n g e s :
The r u l e s f o r i n i t i a l o p e n - e n d d i s c l o s u r e s a r e c h a n g e d
i n s e v e r a l ways f rom t h e p r i o r r e g u l a t i o n .
Wher ea s t h e p r e v i o u s r e g u l a t i o n
r e q u i r e d a d i s c l o s u r e o n l y i f a f r e e - r i d e p e r i o d e x i s t s , t h e new r e g u l a t i o n
r e f l e c t s t h e amended s t a t u t e by r e q u i r i n g a p o s i t i v e s t a t e m e n t t h a t t h e r e i s
no f r e e p e r i o d i f t h a t i s t h e c a s e .
D i s c l o s u r e s o f the Com parative Index of
" C r e d i t C o s t and o f t h e minimum p e r i o d i c payment a r e e l i m i n a t e d .
Security
i n t e r e s t d i s c l o s u r e s a r e r e d u c e d s i m p l y t o an i n d i c a t i o n t h a t t h e r e i s a
s e c u r i t y i n t e r e s t and t h e p r o p e r t y i t c o v e r s .
" O t h e r c h a r g e s " no l o n g e r
i n c l u d e v o l u n t a r y c r e d i t l i f e or d i s a b i l i t y i n s u r a n c e o r r e q u i r e d p r o p e r t y
i n s u r a n c e p r em iu ms .
D i s c l o s u r e re q u ire m e n ts f o r v a r i a b l e ra t e programs are
now i n c o r p o r a t e d i n t h e r e g u l a t i o n , r e p l a c i n g B o a r d I n t e r p r e t a t i o n § 2 2 6 . 7 0 7
which p r o v id e d o p t i o n a l d i s c l o s u r e s .
B o a r d I n t e r p r e t a t i o n § 2 2 6 . 7 0 6 , on t h e
a l l o c a t i o n o f p a y m e n t s , i s i n c o r p o r a t e d i n t h e com me nt ar y .
The r e g u l a t i o n no
l o n g e r s p e c i f i e s t h e e x a c t l a n g u a g e t o be u s e d f o r t h e b i l l i n g r i g h t s n o t i c e ,
a l t h o u g h a model n o t i c e i s p r o v i d e d i n t h e r e g u l a t o r y a p p e n d i x .

Section

226.7 - -

Periodic

statements.

General.
1.
A b b r e v i a t i o n s o r s y m b o l s . A c r e d i t o r may u s e a b b r e v i a t i o n s o r s y m b o l s f o r
any r e q u i r e d d i s c l o s u r e s on t h e p e r i o d i c s t a t e m e n t , a s l o n g a s t h e y a r e
r e a d i l y u n d e r s t a n d a b l e , o r c o d e d , o r o t h e r w i s e e x p l a i n e d on t h e p e r i o d i c s t a t e ­
ment.
2.
Multi featured a c c o u n ts.
For a plan that in v o lv e s several d i f f e r e n t types
o f c r e d i t t r a n s a c t i o n s (such as p u r c h a s e s , l o a n s , ca sh a d v a n c e s , o r o v e r d r a f t
c h e c k i n g ) , r e q u ir e d d i s c l o s u r e s are as f o l l o w s :




°

The p r e v i o u s b a l a n c e ( § 2 2 6 . 7 ( a ) ) may be d i s c l o s e d e i t h e r a s an
a g g re g a t e b a la nce f o r the account o r as s e p a r a t e b a la n c e s f o r
e ac h t y p e o f t r a n s a c t i o n .
I f sepa ra te balances are d i s c l o s e d , a
t o t a l p re v io u s balance i s o p t io n a l.

o

I d e n t i f i c a t i o n o f t r a n s a c t i o n s ( § 2 2 6 . 7 ( b ) ) may be made by
c a t e g o r i z i n g t r a n s a c t i o n s , s u c h a s by g r o u p i n g t o g e t h e r
s a l e t r a n s a c t i o n s s e p a r a t e l y f rom c a s h a d v a n c e s .

°

A b a l a n c e on w h i c h t h e f i n a n c e c h a r g e was computed f rom a p e r i o d i c
r a t e ( § 2 2 6 . 7 ( e ) ) must be d i s c l o s e d f o r e ac h t y p e o f t r a n s a c t i o n
to which d i f f e r e n t p e r i o d i c r a t e s o r d i f f e r e n t b a la n c e com putatio n
methods are a p p l i e d .
A t o t a l b a l a n c e for t h e e n t i r e a c c o u n t i s
o p tio n al.

o

The t o t a l amount o f t h e f i n a n c e c h a r g e a t t r i b u t a b l e t o t h e a p p l i ­
c a t i o n o f p e r i o d i c r a t e s ( § 2 2 6 . 7 ( f ) ) must be d i s c l o s e d ; an
a d d i t i o n a l s e p a r a t e d i s l o s u r e f o r eac h t y p e o f t r a n s a c t i o n i s
o p tional.

o

The h i s t o r i c a l a n n u a l p e r c e n t a g e r a t e ( § 2 2 6 . 7 ( g ) ) may be
s e p a r a t e l y s t a t e d f o r e ac h t y p e o f t r a n s a c t i o n .
If separate
r a t e s are g i v e n , a co m p o site annual p e rc e n ta g e ra te f o r the e n t i r e
plan i s o p t io n a l.

§ 226.7

- BIO -

0

A new b a l a n c e ( § 2 2 6 . 7 ( 1 ) ) may be d i s c l o s e d f o r e ac h t y p e o f
t r a n s a c t i o n shown on t h e a c c o u n t .
I f s e p a r a t e new b a l a n c e s a r e
d i s c l o s e d , a t o t a l new b a l a n c e i s o p t i o n a l .

3.

Accrued fin a n c e ch a rg e s a l l o c a t e d from p a ym ents.
If instead of d e b itin g
a d d i n g f i n a n c e c h a r g e s t o an a c c o u n t d u r i n g a b i l l i n g c y c l e , t h e amount o f t h e
f i n a n c e c h a r g e t h a t has a c c r u e d s i n c e t h e l a s t payment i s a l l o c a t e d f rom each
new payment:

or

o

The p r e v i o u s b a l a n c e ( p a r a g r a p h ( a ) ) need n o t r e f l e c t
c h a r g e s a c c r u e d s i n c e t h e l a s t payment.

o

No d i s c l o s u r e i s r e q u i r e d o f f i n a n c e c h a r g e s
t h a t have a c c r u e d s i n c e t h e l a s t payment.

o

The new b a l a n c e ( p a r a g r a p h ( i ) )
a c c r u e d s i n c e t h e l a s t payment.

7(a)

Previous

(paragraph

need n o t r e f l e c t

( f ))

finance charges

balance.

1.
Credit b a la n c e s.
I f the p r e v i o u s b a la nce i s a c r e d i t
d i s c l o s e d i n s u c h a way so as t o i n f o r m t h e c o n s u m e r t h a t
r a t h e r than a d e b it ba la nce .

7(c)

finance

b a l a n c e , i t must be
i t i s a c r e d it balance,

Pa yme nts and c r e d i t s .

1.
Id en tification .
The p e r i o d i c s t a t e m e n t must d i s c l o s e each c r e d i t t o the
a c c o u n t d u r i n g t h e c y c l e , and t h e d i s c l o s u r e must i n c l u d e b o t h t h e amount and
c r e d i t i n g d a t e and w h a t e v e r a d d i t i o n a l i n f o r m a t i o n i s needed t o i d e n t i f y the
entry.
2.
Identi f i c a t i o n .
G e n e r a l l y s p e a k i n g , t h e c r e d i t o r need n ot d e s c r i b e each
c r e d i t by t y p e ( r e t u r n e d m e c h a n d i s e , r e b a t e o f f i n a n c e c h a r g e , e t c . ) .
But i f
a c r e d i t o r u ses the p e r i o d i c statement to n o t i f y the consumer o f a b i l l i n g
e r r o - c o r r e c t i o n u n d e r § 2 2 6 . 1 3 ( e ) ( 2 ) , t h e c r e d i t must be s p e c i f i c a l l y i d e n t i ­
f i e d as a r e s p o n s e t o t he b i l l i n g e r r o r .
3.
F o r m a t . A c r e d i t o r may l i s t t o g e t h e r ( f o r e x a m p l e , i n t h e
c r e d i t s ( p a y m e n t s , r e b a t e s , e t c . ) f o r t h e c r e d i t p o r t i o n o f an
( o v e r d r a f t p r o t e c t i o n ) w ith o th e r ty p e s o f c r e d i t s ( d e p o s i t s to
a c c o u n t ) a s l o n g as t h e e n t r i e s a r e i d e n t i f i e d so as t o i n f o r m
w h i c h t y p e o f c r e d i t e ac h e n t r y r e p r e s e n t s .

same c o l u m n )
account
the c h e cking
t h e c o n s u me r

4.
Date.
The c r e d i t i n g d a t e need n o t be d e s c r i b e d as " c r e d i t i n g d a t e , " e x c e p t
t h a t i f two o r more d a t e s a r e d i s c l o s e d f o r a s i n g l e e n t r y ( f o r e x a m p l e , t h e
p o s t i n g d a t e and t h e c r e d i t i n g d a t e ) t h e c r e d i t i n g d a t e must be i d e n t i f i e d .




§ 226.7
- B ll

7(d)

Periodic

rates.

1.
R a t e s r e q u i r e d t o be d i s c l o s e d .
Any p e r i o d i c r a t e t h a t may be u sed t o
c omput e f i n a n c e c h a r g e s and i t s c o r r e s p o n d i n g a n n u a l p e r c e n t a g e r a t e must be
d i s c l o s e d whether o r not i t i s a p p l i e d d u r i n g the b i l l i n g c y c le .
2.
R a t e s r e q u i r e d t o be d i s c l o s e d .
The d i s c l o s u r e s r e g a r d i n g t h e r a t e and
t y p e o f t r a n s a c t i o n r e l a t e o n l y t o r a t e s t h a t c o u l d have been imp os ed d u r i n g
the b i l l i n g c y c le .
For example:
o

I f a c r e d i t o r i s c h a n g i n g r a t e s e f f e c t i v e on t h e n e x t b i l l i n g
c y c l e , t h e r a t e s r e q u i r e d t o be d i s c l o s e d u n d e r p a r a g r a p h (d)
a r e o n l y t h o s e i n e f f e c t d u r i n g t h e b i l l i n g c y c l e r e f l e c t e d on
the statem ent.

o

I f t h e c o n s u m e r h a s an o v e r d r a f t l i n e t h a t m i g h t l a t e r be
e xpan de d upon t h e c o n s u m e r ' s r e q u e s t t o i n c l u d e s e c u r e d
a d v a n c e s , t h e d i s c l o s u r e s r e q u i r e d by t h i s s e c t i o n f o r t h e
s e c u r e d a d v a n c e f e a t u r e need n o t be g i v e n u n t i l s u c h t i m e as
t h e c o n s u m e r h a s r e q u e s t e d and r e c e i v e d a c c e s s t o t h e a d d i t i o n a l
fe a t u r e under the p la n .

3.
M u l t i p l e r a t e s - - same t r a n s a c t i o n .
I f two p e r i o d i c r a t e s a r e
t h e same b a l a n c e f o r t h e same t y p e o f t r a n s a c t i o n ( f o r e x a m p l e , i f
c h a r g e c o n s i s t s o f a m o n t h l y p e r i o d i c r a t e o f 1 . 5 % and a r e q u i r e d
i n s u r a n c e component c a l c u l a t e d a t . 1 % p e r month on t h e o u t s t a n d i n g
t h e c r e d i t o r may e i t h e r

a p p l i e d to
the fin a n c e
credit lif e
balance)

o

D i s c l o s e eac h p e r i o d i c r a t e , t h e r a n g e o f b a l a n c e s t o w h i c h
i s a p p l i c a b l e , and t h e c o r r e s p o n d ! n g a n n u a l p e r c e n t a g e r a t e
each p e r i o d i c r a t e , o r

it
for

°

D i s c l o s e one c o m p o s i t e p e r i o d i c r a t e ( t h a t i s , 1 . 6 % p e r month)
a l o n g w i t h t h e a p p l i c a b l e r a n g e o f b a l a n c e s and c o r r e s p o n d i n g
annual p e rc e n ta g e r a te .

4.
C o rre sp o n d in g APR.
In d i s c l o s i n g the annual p erce n ta ge ra te t h a t c o r r e s p o n d s
t o e a c h p e r i o d i c r a t e , t h e c r e d i t o r may u s e " c o r r e s p o n d i n g a n n u a l p e r c e n t a g e
r a t e , " "n om in al annual p e rc e n ta g e r a t e , " " c o r r e s p o n d i n g nominal annual p erce n ta ge
r a t e ," or s im ila r phrases.
5.
R a t e same a s h i s t o r i c a l A P R .
When t h e c o r r e s p o n d i n g r a t e i s t h e same as
t h e h i s t o r i c a l APR r e q u i r e d t o be d i s c l o s e d ( § 2 2 6 . 7 ( g ) ) , t h e c r e d i t o r need
d i s c l o s e o n l y one a n n u a l p e r c e n t a g e r a t e , b u t must u s e t h e p h r a s e " a n n u a l
percentage r a t e ."
6.
Ranges o f b a la nce s.
D i s c l o s u r e o f t h e r a n g e o f b a l a n c e s t o w h i c h each
p e r i o d i c rate a p p l i e s i s not re q u ire d in the case o f a s i n g l e rate a c c o u n t-f o r e x a m p l e , i f 1% p e r month i s a p p l i e d t o a l l o u t s t a n d i n g b a l a n c e s .




226.7
- B12 -

7(e )

B a l a n c e on w h i c h

f i n a n c e charge computed.

1.
L i m i t a t i o n to p e r i o d i c r a t e s .
T h i s r e q u i r e m e n t i s l i m i t e d t o b a l a n c e s on
w h i c h a p e r i o d i c r a t e was a p p l i e d , and d o e s n o t a p p l y t o b a l a n c e s on w h i c h
o t h e r k i n d s o f f i n a n c e c h a r g e s ( s u c h a s t r a n s a c t i o n c h a r g e s ) were i m po sed .
F o r e x a m p l e , i f a c o n s u me r o b t a i n s a $ 1 5 0 0 c a s h a d v a n c e s u b j e c t t o b o th a 1%
t r a n s a c t i o n f e e and a 1% m o n t h l y p e r i o d i c r a t e , t h e c r e d i t o r need o n l y d i s ­
c l o s e the b a la nce s u b je c t to the monthly ra te (which m ight i n c l u d e p o r t i o n s o f
e a r l i e r c a s h a d v a n c e s not p a i d o f f i n p r e v i o u s c y c l e s ) .
2.
S p lit rates.
F o r each t y p e o f c r e d i t t r a n s a c t i o n ( s u c h a s
o n l y one b a l a n c e amount need be d i s c l o s e d i f s p l i t r a t e s were
f e r e n t p o r t i o n s o f the bala nce .
For example, a c r e d i t o r c o u ld
b a l a n c e o f $ 7 0 0 even t h o u g h a p e r i o d i c r a t e o f 1 1/2% a p p l i e d
$ 5 0 0 , and a p e r i o d i c r a t e o f 1% t o t h e r e m a i n d e r .

purchases),
a p p lie d to d i f ­
d isclose a
to the f i r s t

3.
M o n t h l y r a t e on a v e r a g e d a i l y b a l a n c e .
I f a c r e d i t o r co mp ut es a f i n a n c e
c h a r g e on t h e a v e r a g e d a i l y b a l a n c e by a p p l i c a t i o n o f a m o n t h l y p e r i o d i c
ra te or r a t e s , the b a la nce i s a d e q u a te ly d i s c l o s e d i f the statem ent g i v e s the
amount o f t h e a v e r a g e d a i l y b a l a n c e or. w h i c h t h e f i n a n c e c h a r g e was c om put ed ,
and a l s o s t a t e s how t h e b a l a n c e i s d e t e r m i n e d .
4.
D aily periodic ra te .
I f t h e f i n a n c e c h a r g e i s computed on t h e b a l a n c e
e ac h da y by a p p l i c a t i o n o f one o r more d a i l y p e r i o d i c r a t e s , t h e b a l a n c e on
w h i c h t h e f i n a n c e c h a r g e was computed may be d i s c l o s e d i n any o f t h e f o l l o w i n g
ways:
o

<»




If
it

a s in g le d a i l y p e r io d ic rate i s
i s a p p l i c a b l e may be s t a t e d a s :

-

A b a l a n c e f o r e a c h da y i n t h e b i l l i n g

cycle.

-

A b a l a n c e f o r e ac h day i n t h e b i l l i n g
in the account changes.

c y c l e on w h i c h t h e b a l a n c e

-

The sum o f t h e d a i l y

-

The a v e r a g e d a i l y b a l a n c e d u r i n g t h e b i l l i n g c y c l e , i n w h i c h
case the c r e d i t o r s h a ll e x p la in that the average d a i l y balance
i s o r can be m u l t i p l i e d by t h e number o f d a y s i n t h e b i l l i n g
c y c l e and t h e p e r i o d i c r a t e a p p l i e d t o t h e p r o d u c t t o d e t e r m i n e
t h e amount o f t h e f i n a n c e c h a r g e .

balances

imposed,

the b a lance to which

d u r i n g the b i l l i n g

I f two o r more d a i l y p e r i o d i c r a t e s may be i m p o s e d ,
t o w h i c h t h e r a t e s a r e a p p l i c a b l e may be s t a t e d a s :
- A balance

f o r e ac h da y i n t h e b i l l i n g

- A b a l a n c e f o r each da y i n t h e b i l l i n g
b a la nce in the account changes.

cycle.

the b alances

cycle.
cycle

on w h i c h t h e

§ 226.7
- B13 -

- As two o r more a v e r a g e d a i l y b a l a n c e s , e ac h a p p l i c a b l e
t o t h e d a i l y p e r i o d i c r a t e s i m p o s e d , a s l o n g as t h e c r e d i t o r
e x p l a i n s t h a t t h e f i n a n c e c h a r g e i s o r may be d e t e r m i n e d by
( 1 ) m u l t i p l y i n g e ac h o f t h e a v e r a g e b a l a n c e s by t h e number o f
d a y s i n t h e b i l l i n g c y c l e , ( 2) m u l t i p l y i n g each o f t h e r e s u l t s
by t h e a p p l i c a b l e d a i l y p e r i o d i c r a t e , and ( 3 ) a d d i n g t h e s e
products together.
F o r e x a m p l e , i f t h e c r e d i t o r i m p o s e s one
d a i l y p e r i o d i c r a t e on b a l a n c e s o v e r $ 5 0 0 and a n o t h e r d a i l y
p e r i o d i c r a t e on b a l a n c e s o v e r $ 5 0 0 , t h e c r e d i t o r w o u ld show
a v e r a g e d a i l y b a l a n c e s o f $ 5 0 0 and $ 2 0 0 i n an a c c o u n t w h i c h had
a $700 b a la n c e f o r the e n t i r e b i l l i n g c y c l e .
5.
E x p l a n a t i o n o f b a la nce com putation method.
T h i s d i s c l o s u r e does not r e q u i r e
t h a t t h e c o n s u m e r be g i v e n i n f o r m a t i o n s u f f i c i e n t t o compute t h e b a l a n c e .
For
e x a m p l e , i f t h e b a l a n c e c o m p u t a t i o n method i n c l u d e s c u r r e n t p u r c h a s e s f rom t h e
d a t e t h e y a r e p o s t e d t o t h e a c c o u n t , t h e p o s t i n g d a t e need n o t be d i s c l o s e d .
( A l s o s ee commentary t o § 2 2 6 . 6 ( a ) ( 3 ) . )
6.
Non-deduction of c r e d i t s .
In e x p l a i n i n g t h e b a l a n c e m et ho d, t h e c r e d i t o r
need n o t s p e c i f i c a l l y i n c l u d e t h e d o l l a r amount o f c r e d i t s n o t d e d u c t e d i n
com puting the f i n a n c e c h a rge b a la n c e .
L i s t i n g the c r e d i t s (§ 2 2 5 . 7 ( c ) ) ,
t o g e t h e r w i t h an e x p l a n a t i o n o f w h i c h c r e d i t s w i l l n o t be d e d u c t e d i n d e t e r m i n ­
in g th e b a la n c e , i s s u f f i c i e n t .

7(f)

Amount o f f i n a n c e c h a r g e .

1.
Ite m izatio n .
The i t e m i z a t i o n o f t h e f i n a n c e c h a r g e must i n c l u d e t h e t o t a l
amount due t o t h e a p p l i c a t i o n o f p e r i o d i c r a t e s .
I f f i n a n c e c h a r g e s a r e imposed
t h a t a r e n o t due t o t h e a p p l i c a t i o n o f p e r i o d i c r a t e s , a t o t a l f i n a n c e c h a r g e
f o r the account i s o p t i o n a l .
2.
tem ization -- d iffe r e n t r a t e s .
W h et he r d i f f e r e n t r a t e s a r e a p p l i c a b l e t o
d i f f e r e n t typ e s o f t r a n s a c t i o n s or to d i f f e r e n t balance ra n g e s, the c r e d i t o r
need n o t i t e m i z e t h e f i n a n c e c h a r g e a t t r i b u t a b l e t o each r a t e .
F o r e x a m p le ,
i f a c r e d i t o r c h a r g e s 1 1 /2% p e r month on t h e f i r s t $ 5 0 0 o f a b a l a n c e and 1%
p e r month on a mounts o v e r $ 5 0 0 , i t i s n o t n e c e s s a r y t o i t e m i z e t h e two co m p o ne n t s
( $ 7 . 5 0 and $ 1 . 0 0 ) o f t h e $ 8 . 5 0 c h a r g e .
3.
F i n a n c e c h a r g e s n o t a dded t o a c c o u n t .
A f i n a n c e c h a r g e t h a t i s i mpo sed but
n o t i n c l u d e d i n t h e new b a l a n c e b e c a u s e i t i s p a y a b l e t o a t h i r d p a r t y ( s u c h a s
r e q u i r e d l i f e i n s u r a n c e ) must be shown on t h e s t a t e m e n t a s a f i n a n c e c h a r g e .
4.
F in a n c e c h a r g e s o t h e r than p e r i o d i c
§ 2 2 6 . 6 ( a ) ( 4 ) f o r examples.

7(g)
1.

Annual

percentage

See t h e commentary t o

rate.

R at e same a s c o r r e s p o n d i n g APR,




rates.

See commentary t o § 2 2 6 . 7 ( d ) .

§ 226.7

- B14 -

7(h)

Other c h a r g e s .

1.
Id en tification .
In i d e n t i f y i n g any n o n - f i n a n c e c h a r g e s a c t u a l l y impos ed
d u r in g tn e b i l l i n g c y c l e , the type i s a d e q u a te ly d e s c r i b e d as " l a t e c h a r g e " o r
" m e m b e r s h i p f e e , " f o r e x a m p l e . ( S e e commentary t o § 2 2 6 . 6 ( b ) f o r e x a m p l e s o f
other c h a r g e s . )
2.

Date.

The d a t e o f i m p o s i n g o r d e b i t i n g

3.
Format.
O t h e r c h a r g e s may be l i s t e d
r e q u i r e d by § 2 2 6 . 8 .
4.

Total.

D isclosure

7(i)
1.

Credit

C losing

balances.

7(j)

o f the t o t a l

these charges

w ith the t r a n s a c t i o n

of other charges

date o f b i l l i n g

need n o t be d i s c l o s e d .

cycle;

is

disclosures

optional.

new b a l a n c e .

See commentary t o § 2 2 6 . 7 ( a ) .

Free-ride

period.

1.
Wording.
A l t h o u g h t h e c r e d i t o r i s r e q u i r e d t o i n d i c a t e any p e r i o d t h e
c o n s u m e r may have w i t h o u t i n c u r r i n g a d d i t i o n a l f i n a n c e c h a r g e s , no s p e c i f i c
wording i s required.
F o r e x a m p l e , " To a v o i d a d d i t i o n a l f i n a n c e c h a r g e s , pay
t h e new b a l a n c e b e f o r e __________ " would s u f f i c e .

7(k)

Address

for notice of b i l l i n g

errors.

1.
Wording.
The p e r i o d i c s t a t e m e n t must c o n t a i n t h e a d d r e s s f o r c o n s u m e r s t o
u s e in a s s e r t i n g b i l l i n g e r r o r s u n d e r § 2 2 6 . 1 3 .
S i n c e a l l d i s c l o s u r e s must
be " c l e a r , " t he s t a t e m e n t s h o u l d i n d i c a t e t h e g e n e r a l p u r p o s e f o r t h e a d d r e s s ,
a l t h o u g h no e l a b o r a t e e x p l a n a t i o n o r p a r t i c u l a r w o r d i n g i s r e q u i r e d .
2.
T e l e p h o n e number.
A t e l e p h o n e number may be i n c l u d e d , b u t t h e a d d r e s s f o r
b i l l i n g e r r o r i n q u i r i e s , w h i c h i s t h e r e q u i r e d d i s c l o s u r e , must be c l e a r and
conspicuous.
One way t o a s s u r e t h a t t h e a d d r e s s i s s t i l l c l e a r and c o n s p i c u o u s
i s t o i n c l u d e a p r e c a u t i o n a r y i n s t r u c t i o n t h a t t e l e p h o n i n g w i l l n ot p r e s e r v e t h e
consum er's b i l l i n g e rr o r r i g h t s .

REFERENCES:
Statute:

§ 127(b).

Previous

regulation:

Other s e c t i o n s :
and A p p e n d i x G.

tion,

§

226.7(b)(1).

§§ 226.2,

226.4,

226. 5,

226.6,

226. 8,

226. 13,

1981 c h a n c e s : T h i s s e c t i o n g e n e r a l l y c o r r e s p o n d s t o t h e o l d
but w i t h t h e d e l e t i o n o f d i s c l o s u r e s o f t h e C o m p a r a t i v e I n d e x o f




226. 14,

regula­
Credit

§ 226.8
- B15 -

C os t and o f minimum c h a r g e s t h a t may be a p p l i c a b l e t o t h e a c c o u n t .
As p r o ­
v i d e d i n § 2 2 6 . 5 , no s p e c i f i e d t e r m i n o l o g y i s r e q u i r e d e x c e p t f o r t h e t e r m s
" f i n a n c e c h a r g e " and " a n n u a l p e r c e n t a g e r a t e . "
The r e q u i r e m e n t i n § 2 2 6 . 7 ( c )
o f the p r e v i o u s r e g u l a t i o n , as to l o c a t i o n o f d i s c l o s u r e s , i s d e le te d .
Th er e a r e s e v e r a l
d isclosu res.
D isclo su re of
the type of c r e d i t .
A short
on t h e p e r i o d i c s t a t e m e n t .
h ave been c l a r i f i e d .

changes or c l a r i f i c a t i o n s o f r u l e s fo r p a r t i c u l a r
c r e d i t s t o t h e a c c o u n t no l o n g e r have t o i n d i c a t e
d i s c l o s u r e f o r v a r i a b l e r a t e p l a n s must be i n c l u d e d
D i s c l o s u r e s r e l a t i n g to m u l t i f e a t u r e d a cco u n ts

F o r c r e d i t o r s t h a t d e d u c t a c c r u e d f i n a n c e c h a r g e s f rom pa yme nts b ut
do n o t add o r d e b i t them t o t h e a c c o u n t b a l a n c e , t h e commentary makes c l e a r
t h a t n e i t h e r the p r e v i o u s b a la n c e , the b a la n c e to which p e r i o d i c r a t e s are
a p p l i e d , o r t h e new b a l a n c e need r e f l e c t f i n a n c e c h a r g e s t h a t a c c r u e from t h e
l a s t payment t o t h e c l o s i n g d a t e o f t h e c y c l e .
The r e g u l a t i o n now s p e c i f i c a l l y r e q u i r e s on t h e p e r i o d i c s t a t e m e n t
d i s c l o s u r e o f " o t h e r c h a r g e s " ( n o n - f i n a n c e c h a r g e s r e l a t e d to the p la n ) th a t
a r e a c t u a l l y im p o se d d u r i n g t h e b i l l i n g c y c l e .
Board I n t e r p r e t a t i o n s § § 2 2 6 .7 0 1 , 2 2 6 .7 0 3 ,
i n c o r p o r a t e d , as well as p r i o r s t a f f i n t e r p r e t a t i o n s
the r a t e s a c t u a l l y a p p l i c a b l e d u r i n g the c y c l e .

Section

226.8 - -

Id entification

and 2 2 6 . 7 0 6 h a v e been
on t h e need t o d i s c l o s e

of tra n sa c tio n s.

General.
1.
Which r u l e s
§ 226.7(b)) for
b i l l i n g cycle.
v a r y , depending

apply.
T h i s s e c t i o n d e a l s w i t h t h e r e q u i r e m e n t ( i m p o s e d by
i d e n t i f i c a t i o n o f e ac h c r e d i t t r a n s a c t i o n made d u r i n g t h e
The r u l e s f o r i d e n t i f y i n g t r a n s a c t i o n s on p e r i o d i c s t a t e m e n t s
on w h e t h e r

o

The t r a n s a c t i o n i n v o l v e s s a l e
s a le c r e d i t (cash advance s).

o

A c op y o f t h e c r e d i t document r e f l e c t i n g t h e t r a n s a c t i o n
a c c o m p a n i e s t h e s t a t e m e n t ( t h i s i s t h e d i s t i n c t i o n between s o c a l l e d " c o u n t r y c l u b " and " d e s c r i p t i v e " b i l l i n g ) .

o

The c r e d i t o r

and s e l l e r

credit

are the

(purchases)

same o r r e l a t e d

or non­

persons.

2.
Sale c r e d i t .
S a l e c r e d i t r e f e r s t o a p u r c h a s e i n w h i c h t h e c o n s u me r u s e s
a c r e d i t c a r d o r o t h e r w i s e d i r e c t l y a c c e s s e s an o p e n - e n d l i n e o f c r e d i t t o
o b t a i n g o o d s o r s e r v i c e s fr om a m e r c h a n t , w h e t h e r o r n o t t h e m e r c h a n t i s t h e
card-issuer.
Examples:




°

Premiums f o r c r e d i t
another person.

o

The p u r c h a s e o f

i n s u r a n c e whether s o ld

funds-transfer

services

by t he c a r a

i s s u e r or

f rom an i n t e r m e d i a r y .

§ 226.8

- B16

3.
"N o n -sa le c r e d i t ."
Examples:

Non-sale c r e d it

refers

t o any f or m o f l o a n

credit

device"

o

O verdraft checking.

°

The u s e o f a " s u p p l e m e n t a l
or d r a f t .

°

M is c e lla n e o u s d e b it s to account
and s i m i l a r e n t r i e s .

in the

for m ispostings,

credit.

f orm o f a c h e c k

returned checks,

4.
D ebit card w ith o v e r d r a f t f e a t u r e .
When a c o n s u m e r u s e s a d e b i t c a r d w i t h
an o v e r d r a f t f e a t u r e t o p u r c h a s e g o o d s o r s e r v i c e s , and i n d o i n g so a c t i v a t e s
t h e o v e r d r a f t , t h e c r e d i t p o r t i o n o f s u c h a t r a n s a c t i o n may be v i ew e d as a
c a s h a d v a n c e and may be d i s c l o s e d a s n o n - s a l e c r e d i t , even t h o u g h a p u r c h a s e
i s involved.
5.
Actual copy.
An " a c t u a l c o p y " d o e s n o t i n c l u d e a s o - c a l l e d " f a c s i m i l e
d r a f t " in which the r e q u ir e d i n f o r m a t io n i s typed i n , as opposed to a
d u p lic a t e , carbon, or photocopy.
I f a f a c s i m i l e d r a f t i s used, th e c r e d i t o r
must comply w i t h t h e r u l e s a p p l i c a b l e when a co py o f t h e c r e d i t document i s
not fu rn is h e d .
6.

"Same o r

A person

related

p e rso n s."

T h i s term r e f e r s

o

Franchised

o

S e l l e r s who a s s i g n o r s e l l o p e n - e n d c u s t o m e r s a l e s a c c o u n t s t o a
c r e d i t o r o r a rra n g e f o r such c r e d i t under a pla n t h a t a llo w s the
customer to use the c r e d i t o n ly in t r a n s a c t i o n s w ith th a t s e l l e r .

is

not r e l a t e d

or lice n sed

sellers

to:

of a c r e d it o r 's

to th e c r e d i t o r merely

product or s e rv ic e .

because:

o

The p e r s o n and t h e c r e d i t o r have an a g r e e m e n t by w h i c h t h e
person i s a u t h o r i z e d to honor the c r e d i t o r ' s c r e d i t card under
the terms s p e c i f i e d in the agreement.

o

The p e r s o n and t h e c r e d i t o r have a c o r p o r a t e c o n n e c t i o n , s u c h
as s u b s i d i a r y - p a r e n t , i f t h a t c o n n e c t i o n i s n o t o b v i o u s f rom t h e
names t h e y u s e .
F o r e x a m p l e , wh er e XYZ c a r d - i s s u e r owns t h e
ABC h o t e l , t h e c a r d i s s u e r and t h e h o t e l a r e n o t " r e l a t e d . "

7.
T r a n s a c t i o n s r e s u l t i n g from p r o m o t i o n a l m a t e r i a l .
C r e d i t o r s may u s e
e i t h e r the " r e l a t e d " or " n o n - r e l a t e d " r u l e s in d e s c r i b i n g t r a n s a c t i o n s w ith
t h i r l - p a r t y s e l l e r s r e s u l t i n g from p r o m o t i o n a l m a t e r i a l m a i l e d by t h e c r e d i t o r .

8(a)

Sale c r e d i t .

1.
)ate - - d i s c l o s u r e o f o n l y one d a t e .
I f o n l y one d a t e i s d i s c l o s e d f o r a
t r a n 1 a c t i o n , t h e c r e d i t o r need n o t i d e n t i f y i t a s t h e " t r a n s a c t i o n d a t e . "
If
t h e « . r e d i t o r d i s c l o s e s more t h a n one d a t e , t h e c r e d i t o r must i d e n t i f y e ac h.




§ 226.8
- B17 -

2.
D a t e - - d i s c l o s u r e o f month and day o n l y .
The month and d ay i s s u f f i c i e n t
d i s c l o s u r e o f t h e d a t e on w h i c h t h e t r a n s a c t i o n t o o k p l a c e , u n l e s s t h e p o s t i n g
o f t h e t r a n s a c t i o n i s s o l o n g d e l a y e d t h a t t h e y e a r i s needed f o r a c l e a r
d i s c l o s u r e t o the consumer.
3.
When t r a n s a c t i o n " t a k e s p l a c e . 11 I f t h e t r a n s a c t i o n i s c o n d u c t e d by t h e
c o n s u m e r i n p e r s o n o r on t h e p h o n e , t h e t r a n s a c t i o n " t a k e s p l a c e " on t h e
c a l e n d a r d a t e t h e c o n s u m e r made t h e p u r c h a s e o r o r d e r , o r s e c u r e d t h e a d v a n c e .
F o r t r a n s a c t i o n s b i l l e d t o t h e a c c o u n t on an o n g o i n g b a s i s ( o t h e r t h a n i n s t a l l ­
m e n t s t o pay a p r e c om p u t e d a m o u n t ) , t h e t r a n s a c t i o n t a k e s p l a c e on t h e d a t e
t h e amount i s d e b i t e d t o t h e a c c o u n t .
T h i s m ight i n c l u d e , f o r example, monthly
i n s u r a n c e premiums and a u t o c l u b d u e s .
F o r m a i l o r d e r s , a c r e d i t o r may d i s c l o s e
e i t h e r th e i n v o i c e date o r the d e b i t i n g date as the t r a n s a c t i o n date.
4.
Tr a n s a c t i o n s not b i l l e d in f u l l .
I f s a l e t r a n s a c t i o n s are not b i l l e d in
f u l l on a ny s i n g l e s t a t e m e n t , b u t a r e b i l l e d p e r i o d i c a l l y i n p r e c o m p u t e d i n s t a l l ­
m e n t s , t h e f i r s t p e r i o d i c s t a t e m e n t r e f l e c t i n g t h e t r a n s a c t i o n may show t h e
f u l l amount o f t h e t r a n s a c t i o n t o g e t h e r w i t h t h e d a t e t h e t r a n s a c t i o n a c t u a l l y
t o o k p l a c e ; o r t h e amount o f t h e f i r s t i n s t a l l m e n t t h a t was d e b i t e d t o t h e
account.
In e i t h e r even t, su b se q u e n t p e r i o d i c s ta te m e n t s s h o u ld r e f l e c t
e a c h i n s t a l l m e n t du e, t o g e t h e r w i t h a ny o t h e r i d e n t i f y i n g i n f o r m a t i o n r e q u i r e d
by t h i s s e c t i o n ( s u c h a s t h e s e l l e r ' s name and a d d r e s s i n a t h r e e - p a r t y s i t u ­
a t i o n ) ; t h e d e b i t i n g d a t e may be u s e d a s t h e d a t e o f t h e t r a n s a c t i o n .
8(a)(1)
1.
the

Copy o f c r e d i t

document p r o v i d e d .

Format.
The i n f o r m a t i o n r e q u i r e d by t h i s s e c t i o n may a p p e a r e i t h e r on
s a l e d o c u m e n t s , o r on t h e p e r i o d i c s t a t e m e n t .
8(a)(2)

Copy o f c r e d i t d ocument n o t p r o v i d e d
same o r r e l a t e d p e r s o n s .

1.
Property i d e n t if ic a t io n .
The " b r i e f i d e n t i f i c a t i o n "
p l a t e s some d e s i g n a t i o n t h a t w i l l e n a b l e t h e c o n s u m e r t o
s t a t e m e n t w i t h t h e c o n s u m e r ' s own r e c o r d s .

--

creditor

and s e l l e r

r e q u i r e m e n t c o n te m ­
r e c o n c i l e the p e r i o d i c

o

I t r e q u i r e s r e a s o n a b le p r e c i s i o n but not it e m - b y - it e m d e s c r i p t i o n s .
For example, " m e r c h a n d i s e , " " m i s c e l l a n e o u s , " "se c o n d -h a n d g o o d s , "
o r "p ro m o tio n a l i t e m s " would not s u f f i c e .

°

A r e f e r e n c e to a department in a s a l e s e s t a b l i s h m e n t t h a t a c c u r a t e l y
co n veys the i d e n t i f i c a t i o n o f the ty p e s o f p r o p e r t y or s e r v i c e s
a v a i l a b l e in the department i s s u f f i c i e n t - - f o r example, " j e w e l r y , "
"sp o rtin g goods."

o

I d e n t i f i c a t i o n o f t h e t r a n s a c t i o n may be by a number o r symbol
i s r e l a t e d t o an i d e n t i f i c a t i o n l i s t p r i n t e d on t h e s t a t e m e n t .

that

2.
Small c r e d i t o r s .
Linder F o o t n o t e 1 8 , a f u r t h e r i d e n t i f i c a t i o n a l t e r n a t i v e
i s a v a i l a b l e to a c r e d i t o r w ith fewer than 15,000 a c c o u n ts .
The c r e d i t o r need
c o u n t o n l y i t s own a c c o u n t s , and n o t t h o s e s e r v i c e d by t h e same d a t a p r o c e s s o r
or o th e r shared s e r v i c e p r o v id e r .




§ 226.8
- B18 -

8(a)(3)

Copy o f c r e d i t document n o t p r o v i d e d
n o t same o r r e l a t e d p e r s o n s .

--

creditor

and s e l l e r

1.
S e l l e r ' s name.
The r e q u i r e m e n t c o n t e m p l a t e s t h a t t h e s e l l e r ' s name w i l l
a p p e a r on t h e p e r i o d i c s t a t e m e n t i n e s s e n t i a l l y t h e same f orm a s i t a p p e a r s on
t r a n s a c t i o n d o cu me nt s p r o v i d e d t o t h e c o n s u m e r a t t h e t i m e o f t h e s a l e .
The
name may a l s o be d i s c l o s e d a s :
o

A more c o m p l e t e s p e l l i n g o f a name t h a t was a l p h a b e t i c a l l y
v i a t e d on t h e c r e d i t document

abbre­

o

An a l p h a b e t i c a l a b b r e v i a t i o n o f t h e s e l l e r ' s name on t h e p e r i o d i c
s t a t e m e n t even i f t h e name a p p e a r s i n a more c o m p l e t e s p e l l i n g
on t h e s a l e s r e c e i p t .
Terms t h a t m e r e l y i n d i c a t e t h e f or m o f a
b u s i n e s s e n t i t y , s u c h a s " I n c . , " " C o . , " o r " L t d . , " may a l w a y s be
omitted.

2.
Location of t r a n s a c t io n .
The d i s c l o s u r e o f t h e l o c a t i o n where t h e t r a n s ­
a c t i o n t o o k p l a c e g e n e r a l l y r e q u i r e s an i n d i c a t i o n o f b o t h t h e c i t y , and t h e
state or fore ign country.
I f a c r e d i t o r has m u l t i p l e s t o r e s or branches w i t h i n
t h a t c i t y , t h e c r e d i t o r need n o t i d e n t i f y t h e s p e c i f i c b r a n c h a t w h i c h t h e
sa le occurred.
3.
No f i x e d l o c a t i o n .
When no m e a n i n g f u l a d d r e s s i s a v a i l a b l e
c o n s u m e r d i d n o t make t h e p u r c h a s e a t any f i x e d l o c a t i o n o f t h e
creditor

because the
s e l l e r , the

°

May o m i t t h e a d d r e s s .

o

May p r o v i d e some o t h e r i d e n t i f y i n g d e s i g n a t i o n , s u c h as " a b o a r d
p l a n e , " "ABC A i r w a y s F l i g h t 1 7 , " " c u s t o m e r ' s home," " t e l e p h o n e
o r d e r , " "mail o r d e r . "

8(b)

Nonsale c r e d i t .

1.
D at e o f t r a n s a c t i o n .
I f o n l y one d a t e i s d i s c l o s e d f o r a t r a n s a c t i o n , t h e
c r e d i t o r need n o t i d e n t i f y i t .
I f t h e c r e d i t o r d i s c l o s e s more t h a n one d a t e
( f o r e x a m p l e , t r a n s a c t i o n d a t e and d e b i t i n g d a t e ) t h e c r e d i t o r must i d e n t i f y
e a c h.
2.
Amount o f t r a n s a c t i o n .
I f c r e d i t i s e x t e n d e d u n d e r an o v e r d r a f t c h e c k i n g
a c c o u n t p l a n o r t h r o u g h a d e b i t c a r d w i t h an o v e r d r a f t f e a t u r e , t h e amount t o
be d i s c l o s e d i s t h a t o f t h e c r e d i t e x t e n s i o n , n o t t h e f a c e amount o f t h e c h e c k
o r t h e t o t a l amount o f t h e d e b i t / c r e d i t t r a n s a c t i o n .
3.
Amount - - d i s c l o s u r e on c u m u l a t i v e b a s i s .
I f c r e d i t i s e x t e n d e d u n d e r an
o v e r d r a f t c h e c k i n g a c c o u n t p l a n o r t h r o u g h a d e b i t c a r d w i t h an o v e r d r a f t
f e a t u r e , t h e c r e d i t o r may d i s c l o s e t h e amount o f t h e c r e d i t e x t e n s i o n s on a
c u m u l a t i v e d a i l y b a s i s , r a t h e r t h a n t h e amount a t t r i b u t a b l e t o e ac h c h e c k o r
e ac h u s e o f t h e d e b i t c a r d .




§ 226.9

- B19 4.
Id e n tific a tio n of transaction type .
The c r e d i t o r may i d e n t i f y
a c t i o n by d e s c r i b i n g t h e t y p e o f a d v a n c e i t r e p r e s e n t s , s u c h a s :
o

Cash advance.

°

L oan.

o

Overdraft

o

Any r e a d i l y u n d e r s t a n d a b l e t r a d e name f o r t h e c r e d i t

a trans­

loan.
program.

REFERENCES:
Statute:
Previous

§ 1 2 7 ( b ) (2).
regu lation :

Other s e c t i o n s :

§ 226.7(k ) .

§§ 226.2,

2 2 6 . 5 and 2 2 6 . 7 .

1981 c h a n g e s : M o s t o f t h e c h a n g e s a r e s t y l i s t i c and o r g a n i z a t i o n a l .
Much o f t h e s p e c i f i c d e t a i l on p e r m i s s i b l e ways t o i d e n t i f y t r a n s a c t i o n s has
been d e l e t e d f rom t h e r e g u l a t i o n i t s e l f and i s now r e f l e c t e d i n t h e commentar y .
F o o t n o t e s 16 and 18 i m pl em e nt t h e s t a t u t o r y amendment t o § 1 2 7 ( b ) ( 2 ) o f t h e
act.
F o r d e s c r i p t i v e b i l l i n g o f n o n s a l e t r a n s a c t i o n s , t h e r e g u l a t i o n now
p e r m it s use o f the d e b i t i n g date in a l l c a s e s .

Section

226.9

--

9(a)(1)
1.

General.

Subsequent d i s c l o s u r e
Annual

statement o f b i l l i n g

The c r e d i t o r may p r o v i d e t h i s

righ ts.

annual

By s e n d i n g i t i n one b i l l i n g p e r i o d p e r y e a r ( f o r e x a m p l e , J u l y )
t o each c o n s u m e r t h a t g e t s a p e r i o d i c s t a t e m e n t f o r t h a t p e r i o d ,
or

°

By s e n d i n g a c o p y t o a l l o f i t s a c c o u n t h o l d e r s sometime d u r i n g
t h e c a l e n d a r y e a r b u t n o t n e c e s s a r i l y a l l i n one b i l l i n g p e r i o d
( f o r e x a m p l e , s e n d i n g t h e a n n u a l n o t i c e i n c o n n e c t i o n w i t h r enewal
c a r d s o r when i m p o s i n g a n n u a l m e m b e r sh i p f e e s ) .

9(a)(2)

See commentar y t o A p p e n d i x G - 3 and i n t r o d u c t i o n

A lternative

°

to

summary s t a t e m e n t .

C h a n g i n g f ro m l o n g - f o r m t o s h o r t - f o r m n o t i c e




statement

o

2.
Su b stan tially sim ila r.
A p p e n d i c e s G and H.

1.

requirem ents.

and v i s a

versa.

I f a c r e d i t o r h a s been s e n d i n g t h e l o n g - f o r m a nn u a l s t a t e m e n t ,
s u b s e q u e n t l y d e c i d e s t o u s e t h e a l t e r n a t i v e summary s t a t e m e n t ,

and
the

§ 226.9
- 820 -

f i r s t summary s t a t e m e n t m ust be p r o v i d e d n o t l a t e r t h a n t h e t i m e
t h e n e x t l o n g - f o r m s t a t e m e n t w o u l d h a v e been r e q u i r e d .
0

I f a c r e d i t o r h a s been s e n d i n g t h e a l t e r n a t i v e summary w i t h each
p e r i o d i c s t a t e m e n t , and s u b s e q u e n t l y d e c i d e s t o f u r n i s h an a n n u a l
n o t i c e , t h e f i r s t one must be p r o v i d e d w i t h t h e n e x t p e r i o d i c
statement.
T h e r e a f t e r , the t i m i n g o f th e annual statem ent i s
g o v e r n e d by p a r a g r a p h 9 ( a ) ( 1 ) .

2.
Su b stan tially s im ila r .
A p p e n d i c e s G and H.
9(b)

See commentary t o A p p e n d i x G - 4 and i n t r o d u c t i o n

D isclosure s
features.

for

supplem ental

credit

devices

to

and a d d i t i o n a l

1.
C re d it device - - examples.
" C r e d i t d e v i c e " i n c l u d e s , f o r example, a b la n k
c h e c k , p a y e e - d e s i g n a t e d c h e c k , b l a n k d r a f t o r o r d e r , o r a u t h o r i z a t i o n f or m f o r
i s s u a n c e o f a check; i t does not i n c l u d e a check i s s u e d p a y a b le to a consumer
r e p r e s e n t i n g loan proceeds o r the d is b u rs e m e n t o f a cash advance.
2.
C r e d i t f e a t u r e - - examples.
A new c r e d i t " f e a t u r e " w o u l d i n c l u d e , f o r
e x a m p l e , t h e a d d i t i o n o f o v e r d r a f t c h e c k i n g t o an e x i s t i n g a c c o u n t ( a l t h o u g h
t h e r e g u l a r c h e c k s t h a t c o u l d t r i g g e r t h e o v e r d r a f t f e a t u r e a r e n o t them­
s e l v e s " d e v i c e s " ) o r the o p t i o n t o a c t i v a t e a C h r i s t m a s d e f e r r e d b i l l i n g
pi an.
3.
Same f i n a n c e c h a r g e t e r m s .
I f t h e new means o f a c c e s s i n g t h e a c c o u n t i s
p r o v i d e d on t h e same f i n a n c e c h a r g e t e r m s a s p r e v i o u s l y d i s c l o s e d , t h e c r e d i t o r
°

Need o n l y p r o v i d e a r e m i n d e r t h a t t h e new d e v i c e o r f e a t u r e i s
c o v e r e d by t h e e a r l i e r d i s c l o s u r e s .
( F o r example, in m a i l i n g
s p e c i a l checks t h a t d i r e c t l y a c c e s s the c r e d i t l i n e , the c r e d i t o r
m i g h t g i v e a d i s c l o s u r e s u c h a s " U s e t h i s as y o u w o u ld y o u r XYZ
c a r d t o o b t a i n a c a s h a d v a n c e f ro m o a r b a n k . " ) ; o r

0

May make t h e f i n a n c e c h a r g e d i s c l o s u r e s
are r e l e v a n t to the d e v ic e o r fe a t u r e .

f r om § 2 2 6 . 6 ( a )

that

4.
D if f e r e n t finance charge te rm s .
The c r e d i t o r may s a t i s f y t h e r e q u i r e m e n t
by s e n d i n g a c o m p l e t e s e t o f new i n i t i a l d i s c l o s u r e s r e f l e c t i n g t h e t e r m s o f
t h e added d e v i c e o r f e a t u r e .

9(c)

Change i n

term s.

1.
S t a t e law i s s u e s .
This p r o v is io n
w h i c n a r e c o n t r o l l e d by s t a t e law:

does not a d d re s s the f o l l o w i n q

issues,

0

Types o f changes

°

How c h a n g e d t e r m s a f f e c t e x i s t i n g b a l a n c e s , s uch a s when a
p e r i o d i c r a t e i s c h a n g e d and t h e c o n s u m e r d o es n o t pay o f f t h e
e n t i r e e x i s t i n g b a l a n c e b e f o r e t h e new r a t e t a k e s e f f e c t .




a c r e d i t o r may make.

§ 226.9
- B 21

2.
Change in b i l l i n g c y c l e .
Whenever a c r e d i t o r c h a n g e s a c o n s u m e r ' s b i l l i n g
c y c l e , i t must g i v e a c h a n g e i n t e r m s n o t i c e i f t h e c h a n g e a f f e c t s any o f t h e
i n i t i a l l y d i s c l o s e d t e r m s ; f o r e x a m p l e , t h e c r e d i t o r d i s c l o s e d a 25 day f r e e r i d e p e r i o d on p u r c h a s e s and t h e c o n s u m e r w i l l have f e w e r d a y s d u r i n g t h e b i l l i n g
c y c l e change.
9(c)(1)

W ritten

requiring

notice

1.
Changes
notice:

not

o

An

o

A change

©

The s u b s t i t u t i o n

o

A term ination

o

C h a n g e s a r i s i n g m e r e l y by o p e r a t i o n o f law; f o r e x a m p l e , i f t he
c r e d i t o r ' s s e c u r i t y i n t e r e s t in a c o n su m e r's ca r a u t o m a t ic a lly
e x t e n d s t o t h e p r o c e e d s when t h e c o n s u m e r s e l l s t h e c a r .

increase
in

notice .

required.

in

The f o l l o w i n g do n o t

the c o n su m e r's

credit

t h e name o f t h e c r e d i t
o f one i n s u r e r

or suspension

require

a change-in-term s

lim it.

card or c r e d it

card

plan.

fo r another.

of credit

p rivile ge s.

2.
A f f e c t e d c o n s u m e r s . C h a n g e - i n - t e r m s n o t i c e s need o n l y go t o t h o s e c o n s u ­
mers who may be a f f e c t e d by t h e c h a n g e .
For example, a change in th e p e r i o d i c
r a t e f o r c h e c k o v e r d r a f t c r e d i t need n o t be d i s c l o s e d t o c o n s u m e r s who do n o t
h ave t h a t f e a t u r e on t h e i r a c c o u n t s .
3.
Tim ing.
The r u l e t h a t t h e c h a n g e i n t e r m s n o t i c e be p r o v i d e d a t l e a s t 15
d a y s b e f o r e t h e c h a n g e t a k e s e f f e c t p e r m i t s m i d - c y c l e c h a n g e s when t h e r e i s
c l e a r l y no r e t r o a c t i v e e f f e c t , s u c h a s t h e i m p o s i t i o n o f a t r a n s a c t i o n f e e .
Any c h a n g e i n t h e b a l a n c e c o m p u t a t i o n m et h od , i n c o n t r a s t , w o u l d need t o be
d i s c l o s e d p r i o r t o t h e b i l l i n g c y c l e i n w h i c h t h e c h a n g e i s t o be i m p l e m e n t e d .
I.
Tim ing.
A d va n c e n o t i c e i s n o t n e c e s s a r y - - t h a t i s , a n o t i c e o f c h a n g e i n
t e r m s i s r e q u i r e d , b u t i t may be s e n t f e w e r t h a n 15 d a y s b e f o r e t h e e f f e c t i v e
d a t e o f t h e c h a n g e - - i n two c i r c u m s t a n c e s :
o

I f t h e r e i s an i n c r e a s e d p e r i o d i c r a t e or f i n a n c e c h a r g e
a t t r i b u t a b l e to the c o n s u m e r 's d e l in q u e n c y o r d e f a u l t ( f o r
example, i f the c r e d i t o r s u p p l i e s v e n d o r ' s s i n g l e i n t e r e s t
i n s u r a n c e c o v e ra g e because o f the c o n s u m e r 's f a i l u r e
t o m a i n t a i n c a s u a l t y i n s u r a n c e on t h e c o l l a t e r a l ) .

o

I f t h e c o n s u m e r a g r e e s t o t h e c h a n g e ( f o r e x a m p l e , an a g r e e d upon
a d d i t i o n or s u b s t i t u t i o n o f c o l l a t e r a l ) .
B ut a c o n s u m e r ' s u se o f
the a c c o u n t , which m ight imply acce pta nce o f i t s terms under
s t a t e l a w , i s n o t an " a g r e e m e n t " between t h e c o n s u m e r and t h e
c r e d it o r fo r purposes of t h is se c tio n .

5.
Form.
A c o m p l e t e new s e t o f t h e i n i t i a l d i s c l o s u r e s c o n t a i n i n g t h e c h a n g e d
ter m c o m p l i e s w i t h t h i s p r o v i s i o n i f t h e c h a n g e i s h i g h l i g h t e d i n some way on




§ 226.9
- B22 -

t h e d i s c l o s u r e s t a t e m e n t , o r i f t h e d i s c l o s u r e s t a t e m e n t i s a c c o m p a n i e d by
l e t t e r o r some o t h e r i n s e r t t h a t i n d i c a t e s o r d r a w s a t t e n t i o n t o t h e ter m
change.
9(c)(2)

N o t ic e not

a

required.

1.
S k i p f e a t u r e s . Where a c r e d i t p r o g r a m a l l o w s c o n s u m e r s t o s k i p o r r e d u c e
one o r more pa yme nts d u r i n g t h e y e a r , o r i n v o l v e s t e m p o r a r y r e d u c t i o n s i n
f in a n c e c h a rg e s (in e f f e c t , terms are changed t w ic e :
once by r e d u c t i o n o r
d e f e r r a l , and t h e n by r e s u m p t i o n o f t h e o r i g i n a l t e r m s - - f o r e x a m p l e , a mer­
c h a n t may a l l o w c o n s u m e r s t o s k i p t h e December payment t o e n c o u r a g e h o l i d a y
s h o p p i n g , o r a t e a c h e r ' s c r e d i t u n i o n may n o t r e q u i r e pa ym en ts d u r i n g summer
v a c a t i o n ) no c h a n g e i n t e r m s i s r e q u i r e d e i t h e r p r i o r t o t h e r e d u c t i o n o r upon
r e s u m p t i o n o f t h e h i g h e r r a t e s i f t h e s e f e a t u r e s a r e e x p l a i n e d on t h e i n i t i a l
d i s c l o s u r e s t a t e m e n t ( i n c l u d i n g an e x p l a n a t i o n o f t h e t e r m s upon r e s u m p t i o n ) .
O t h e r w i s e , t h e c r e d i t o r must g i v e n o t i c e p r i o r t o r e s u m i n g t h e o r i g i n a l s c h e d u l e
o r r a t e , even t h o u g h no n o t i c e i s r e q u i r e d p r i o r t o t h e r e d u c t i o n .

R EF ERENC ES:
Statute:
Previous

§ 127(a)(7).
regulation:

Other s e c t i o n s :

§ 226.7(d),

§§ 226.4,

226.5,

(e ), (f),
226.6,

and

(j).

226.7,

and A p p e n d i x G.

1981 c h a n g e s :
P a r a g r a p h ( a) r e f l e c t s t h e s t a t u t o r y c h a n g e t h a t now
r e q u i r e s t h e s t a t e m e n t o f b i l l i n g r i g h t s t o be p r o v i d e d o n l y o n c e a y e a r .
The
p r o v i s i o n a l s o c h a n g e s t h e p r i o r r e g u l a t i o n by p e r m i t t i n g t h e n o t i c e s t o be
s e n t , i n c e r t a i n c i r c u m s t a n c e s , a t s t a g g e r e d i n t e r v a l s r a t h e r t h a n a l l i n one
b i l l i n g period.
The v e r b a t i m t e x t o f t h e a n n u a l n o t i c e i s no l o n g e r r e q u i r e d ,
and c r e d i t o r s may u se any " s u b s t a n t i a l l y s i m i l a r " v e r s i o n .
The s u b s t a n c e o f
B o a r d I n t e r p r e t a t i o n § 2 2 6 . 7 0 8 h a s been i n c o r p o r a t e d i n t h e c ommenta ry .
Paragraph (b) c o r r e s p o n d s to § 2 2 6 . 7 ( j ) o f the p r i o r r e g u l a t i o n .
It
r e d u c e s t h e number and e x t e n t o f d i s c l o s u r e s when s u p p l e m e n t a l c r e d i t d e v i c e s
o r new c r e d i t f e a t u r e s a r e added t o an e x i s t i n g o p e n - e n d a c c o u n t .
Disclosures
a r e r e q u i r e d o n l y i f t h e new d e v i c e o r f e a t u r e i s added more t h a n 30 d a y s a f t e r
the i n i t i a l d i s c l o s u r e s , or i f the f i n a n c e charge terms d i f f e r .
P a ragraph (c) s u b s t a n t i a l l y changes the r u l e s under o ld § 2 2 6 . 7 ( f ) .
C h a n g e - i n - t e r m s d i s c l o s u r e s must now be made 15 d a y s b e f o r e t h e e f f e c t i v e d a t e
o f t h e c h a n g e , r a t h e r t h a n 15 d a y s b e f o r e t h e b i l l i n g c y c l e i n w h i c h t h e c h a n g e
w i ll take e f f e c t .
The k i n d s o f c h a n g e s t h a t w i l l t r i g g e r d i s c l o s u r e s a r e
reduced:
c h a n g e i n t e r m s n o t i c e s a r e no l o n g e r r e q u i r e d f o r c h a n g e s d e s c r i b e d
in § 2 2 6 . 9 ( c ) ( 2 ) .
B ut t h e p r o v i s i o n r e v e r s e s B o a r d I n t e r p r e t a t i o n § 2 2 6 . 7 0 5 ,
w h i c h i n d i c a t e d t h a t c e r t a i n c h a n g e s i n t h e b a l a n c e c o m p u t a t i o n method d i d
not r e q u i r e d i s c l o s u r e because they c o u ld r e s u l t in lowered f i n a n c e c h a r g e s ;
now, any c h a n g e i n t h e b a l a n c e c o m p u t a t i o n method r e q u i r e s d i s c l o s u r e .




§ 226.10
- 823 -

P a r a g r a p h ( d ) c o r r e s p o n d s t o p r i o r § 2 2 6 . 7 ( e ) , b ut no l o n g e r r e q u i r e s
t h e p o i n t - o f - s a l e m e r c h a n t t o d i s c l o s e t h e amount f i n a n c e d and a n n u a l p e r c e n t a g e
r a t e f i g u r e d in accordance w ith the c lo se d -e n d c r e d i t p r o v i s i o n s .
Furthermore,
t h i s d i s c l o s u r e may be made o r a l l y by t h e p e r s o n h o n o r i n g t h e c a r d .

Section

2 2 6 . 1 0 - - Pr omp t c r e d i t i n g
10(a)

General

of payments.

rule.

1.
C rediting date.
T h i s p a ra g ra p h does not r e q u i r e a c r e d i t o r to p o s t the
p ayme nt t o t h e c o n s u m e r ' s a c c o u n t on a p a r t i c u l a r d a t e .
The c r e d i t o r i s o n l y
r e q u i r e d , a s a g e n e r a l r u l e , t o c r e d i t t h e payment a s o f t h e d a t e o f r e c e i p t .
2.
No i m p a c t on f i n a n c e c h a r g e .
A c r e d i t o r need n o t c r e d i t a s o f t h e d a t e o f
r e c e i p t i f t h e f a i l u r e t o do s o d o e s n o t r e s u l t i n a d d i t i o n a l f i n a n c e o r o t h e r
charges.
For example:
°

I f a c r e d i t o r u s e s t h e a d j u s t e d b a l a n c e method o f c o m p u t i n g
f i n a n c e c h a r g e s , payment a t any t i m e b e f o r e t h e c l o s i n g d a t e h as
t h e same e f f e c t on t h e amount o f t h e f i n a n c e c h a r g e , and t h e
c r e d i t o r need n o t c r e d i t p a y m e n t s a s o f t h e d a t e o f r e c e i p t .
A payment w o u l d h a v e t o be c r e d i t e d t o t h e a c c o u n t , h o w e v e r ,
b e f o r e the c l o s i n g date o f the c y c l e so as to a v o id a d d i t i o n a l
ch a rge s in th a t or subsequent c y c le s .

3.
D at e o f r e c e i p t .
Payment i s r e c e i v e d when t h e payment i n s t r u m e n t o r o t h e r
means o f c o m p l e t i n g t h e payment r e a c h e s t h e c r e d i t o r .
For example:
°

Payment by c h e c k i s r e c e i v e d when t h e c r e d i t o r
the funds are c o l l e c t e d .

°

In a p a y r o l l d e d u c t i o n p la n in w hich t r a n s f e r s a re c r e d i t e d to
an a s s e t a c c o u n t f ro m w h i c h p a y m e n t s a r e t h e n made p e r i o d i c a l l y
t o an o p e n - e n d c r e d i t a c c o u n t , payment i s r e c e i v e d on t h e d a t e
when i t i s d e b i t e d t o t h e a s s e t a c c o u n t ( r a t h e r t h a n on t h e d a t e
o f t h e d e p o s i t ) , p r o v i d e d t h e p a y r o l l d e d u c t i o n method i s v o l u n ­
t a r y and t h e c o n s u m e r r e t a i n s u s e o f t h e f u n d s u n t i l t h e c o n ­
t r a c t u a l payment d a t e .

o

I f a c o n s u m e r e l e c t s t o h a v e payment made by a t h i r d - p a r t y p a y o r
s u c h a s a f i n a n c i a l i n s t i t u t i o n , t h r o u g h a p r e a u t h o r i z e d payment
o r t e l e p h o n e b i l l - p a y m e n t a r r a n g e m e n t , a payment i s r e c e i v e d
when t h e c r e d i t o r g e t s t h e t h i r d - p a r t y p a y o r ' s c h e c k o r o t h e r
t r a n s f e r medium, s u c h a s an e l e c t r o n i c f u n d t r a n s f e r .

4.
Im plied g u id e lin e s f o r payments.
(§ 2 2 6 . 1 0 ( b ) ) f o r making payments:




o

gets

In t h e a b s e n c e o f s p e c i f i e d

it,

n o t when

requirem ents

The " d a t e o f r e c e i p t " i s t h e d a t e t h a t payment i s made a t any
l o c a t i o n wh er e t h e c r e d i t o r c o n d u c t s b u s i n e s s , a s l o n g a s t h e
payment i s r e c e i v e d b e f o r e t h e c r e d i t o r ' s c l o s e o f b u s i n e s s .

§ 226,10
- B24 -

°

Payment may be by c a s h , money o r d e r , d r a f t ,
i n s t r u m e n t i n p r o p e r l y n e g o t i a b l e for m.

10(b)
1.

Specific

Payment r e q u i r e m e n t s .

requirem ents

or other s im ila r

fo r payments.

A c r e d i t o r might,

f o r e xa m pl e :

o

S e t a c u t - o f f h o u r f o r payment t o be r e c e i v e d , o r s e t d i f f e r e n t
h o u r s f o r payment by m a i l and p a y m e n t s made i n p e r s o n .

o

Sp e cify th a t only
m ail.

o

S p e c i f y t h a t payment i s

o

Specify

c h e c k s o r money o r d e r s

one p a r t i c u l a r

should

t o be made i n U . S .
address

for

be s e n t by

d ollars,

receiving

payments.

2.
Payment r e q u i r e m e n t s - - l i m i t a t i o n s .
R e q u i r e m e n t s mu st be r e a s o n a b l e ;
s h o u l d n o t be d i f f i c u l t f o r m os t c o n s u m e r s t o make c o n f o r m i n g p a y m e n t s :
o

it

I t w o u l d n o t be r e a s o n a b l e t o r e q u i r e t h a t a l l pa ym en ts be made
i n p e r s o n and i n c a s h between 10 a.m. and 11 a . m . , s i n c e t h i s w ou ld
r e q u i r e c o n s u m e r s t o t a k e t i m e o f f f ro m t h e i r own j o b s t o d e l i v e r
payments.

3.
Acceptance o f n on -conform ing paym ents.
I f a c r e d i t o r accepts a non-conform ing
payment ( f o r e x a m p l e , payment a t a b r a n c h o f f i c e , when i t had s p e c i f i e d t h a t p a y ­
ment be s e n t t o h e a d q u a r t e r s ) , f i n a n c e c h a r g e s may a c c r u e f o r t h e p e r i o d between
r e c e i p t and c r e d i t i n g o f p a y m e n t s .
10(c)

Adjustment o f a c c o u n t .

1.
C h a r g e s imp os ed i n e r r o r .
I f a c r e d i t o r ' s f a i l u r e t o c r e d i t a payment a s
r e q u i r e d r e s u l t s i n t h e i m p o s i t i o n o f any c h a r g e f o r t h a t c y c l e , t h e c r e d i t o r
must make a c o m p e n s a t i n g a d j u s t m e n t t o t h e c o n s u m e r ' s a c c o u n t d u r i n g t h e
fo llo w in g cycle.
F o r e x a m p l e , i f a l a t e payment c h a r g e i s e r r o n e o u s l y imp os ed
i n one c y c l e ( b e c a u s e payment was n o t t i m e l y c r e d i t e d ) , t h e n e x t p e r i o d i c s t a t e ­
ment s h o u l d r e f l e c t a c r e d i t i n t h e amount o f t h a t l a t e payment c h a r g e .
I f the
l a t e p o s t i n g a l s o r e s u l t e d in th e a c c r u a l o f a d d i t i o n a l f in a n c e c h a r g e s , they
t o o must be c r e d i t e d i n t h e s u b s e q u e n t c y c l e .

REFERENCES:
Statute:
Previous

§ 164.
re gulation:

Other sections:




§ 226.7(g).

§§ 226.2, 226.7.

§ 226.11
- B25 -

1981 c h a n g e s : The g e n e r a l r u l e s e t f o r t h i n t h i s p r o v i s i o n i s s u b ­
s t a n t i v e l y u n c h a n g e d f r om t h e p r i o r r e g u l a t i o n .
Much o f t h e e x p l a n a t o r y d e t a i l
h a s been d e l e t e d f rom t h e r e g u l a t i o n b ut i s r e f l e c t e d i n t h e co mme nt ar y.
U nd er
t h e p r i o r r e g u l a t i o n , t h e c r e d i t o r had t o c r e d i t n o n - c o n f o r m i n g p a ym e n t s p r o m p t l y ,
w i t h an o u t s i d e l i m i t o f f i v e d a y s .
The r e v i s e d r e g u l a t i o n s i m p l y a l l o w s f i v e
days i n which t o c r e d i t n o n -c o n f o r m in g payments.
The f i v e d a y s i n w h i c h t o
c r e d i t i s a v a i l a b l e w h e n e v e r t h e c r e d i t o r a c c e p t s payment t h a t d o e s n ot c o n f o r m
t o the c r e d i t o r ' s d i s c l o s e d s p e c i f i c a t i o n s , in c o n t r a s t to the p r i o r r e g u l a t i o n ,
w h i c h o n l y a l l o w e d d e f e r r e d c r e d i t i n g f o r p a y m e n t s made a t t h e w r o n g l o c a t i o n .

Section

226.11

--

Treatm ent o f c r e d i t

balances.

1.
Tim ing o f r e fu n d .
N o t h i n g i n t h i s s e c t i o n p r o h i b i t s a c r e d i t o r f rom
r e f u n d i n g c r e d i t b a la n c e s t o the c o n s u m e r 's account in l e s s than 6 months,
e ven i n t h e a b s e n c e o f a r e q u e s t .
2.
Amount o f r e f u n a .
The amount t h a t must be g i v e n t o t h e c o n s u m e r i s t h e
amount o f t h e c r e d i t b a l a n c e on t h e a c c o u n t at t h e t i m e t h e c r e d i t o r i s r e q u i r e d
t o make t h e r e f u n d .
The c r e d i t o r may t a k e i n t o c o n s i d e r a t i o n i n t e r v e n i n g p u r ­
c h a s e s o r o t h e r d e b i t s t o t h e c o n s u m e r ' s a c c o u n t ( i n c l u d i n g t h o s e t h a t have n o t
y e t been r e f l e c t e d on a p e r i o d i c s t a t e m e n t ) t h a t d e c r e a s e o r e l i m i n a t e t h e
c r e d i t balance.
3.
Good f a i t h e f f o r t t o r e f u n d .
I f any p a r t o f a c r e d i t b a l a n c e ha s r e m a i n e d
i n t h e a c c o u n t for more t h a n s i x m o n t h s , t h e c r e d i t o r must t a k e p o s i t i v e s t e p s
to r e t u r n i t to the consumer.
T h i s i n c l u d e s making attem pts to reach or t r a c e
t h e c o n s u m e r t h r o u g h t h e c o n s u m e r ' s l a s t known a d d r e s s o r t e l e p h o n e number, o r
both i f n e c e s s a r y .
The c r e d i t o r may u n d e r t a k e t o r e t u r n c r e d i t b a l a n c e s b e f o r e
s i x m o n t h s h a v e e x p i r e d , b u t s u c h an a t t e m p t d o e s n o t e x c u s e t h e c r e d i t o r f rom
t h e o b l i g a t i o n t o make a good f a i t h e f f o r t a f t e r s i x m ont h s.
5.
Unrefundable c r e d it b a la n c e s .
T h i s s e c t i o n i m p o s e s no f u r t h e r d u t i e s on
t h e c r e d i t o r i f a good f a i t h e f f o r t t o r e t u r n t h e b a l a n c e i s u n s u c c e s s f u l .
The u l t i m a t e d i s p o s i t i o n o f t h e u n r e f u n d a b l e c r e d i t b a l a n c e i s t o be d e t e r m i n e d
u n d e r o t h e r a p p l i c a b l e s t a t e or f e d e r a l law.

REFERENCES:
Statute:
Previous

§ 165.
regulation:

Other s e c t i o n s :

§ 226.7(h).

§ 226.7.

1981 c h a n g e s : The c r e d i t o r ' s d u t y t o r e f u n d c r e d i t b a l a n c e s u n d e r
th e o ld r e g u l a t i o n a p p l i e d o n l y t o " e x c e s s paym e n ts"; the r e v i s e d r e g u l a t i o n
r e f l e c t s t h e amended s t a t u t e and i m p o s e s d u t i e s on a c r e d i t o r w h a t e v e r t h e
s o u rc e o f the c r e d i t b a la n c e .
The r e v i s e d r e g u l a t i o n a l s o p e r m i t s t h e c r e d i t o r ,
in com puting the re fu n d , t o t a k e a ccount o f i n t e r v e n i n g d e b i t s , not j u s t the
d i f f e r e n c e between t h e p r e v i o u s b a l a n c e and t h e o v e r p a y m e n t ( a s p r o v i d e d i n




§ 226.12
- B26 -

the o ld r e g u l a t i o n ) .
The r e v i s e d r e g u l a t i o n g i v e s t h e c r e d i t o r 7 b u s i n e s s d a y s
i n w h i c h t o make t h e r e f u n d a f t e r r e c e i v i n g t h e c o n s u m e r ' s w r i t t e n r e q u e s t ,
w h e r e a s t h e o l d r e g u l a t i o n r e q u i r e d t h e c r e d i t o r t o make t h e r e f u n d " p r o m p t l y , "
w i t h an o u t s i d e l i m i t o f 5 b u s i n e s s d a y s .
T h i s p r o v i s i o n a l s o implements the
amended s t a t u t e by r e q u i r i n g a good f a i t h e f f o r t t o r e f u n d t h e c r e d i t b a l a n c e
a f t e r s i x months.

Section

226.12
12(a)

--

Special

credit

card p r o v i s i o n s .

Issuance of c re d it c a r d s .

1.
Scope.
The r u l e s i n t h i s p a r a g r a p h r e s t r i c t t h e i s s u a n c e o f u n s o l i c i t e d
c r e d i t c a r d s , w h e t h e r t h e c a r d i s i n t e n d e d f o r c o n s u m e r , b u s i n e s s , o r any o t h e r
purposes.
T h i s and t h e f o l l o w i n g p a r a g r a p h a r e t h e r e f o r e e x c e p t i o n s t o t h e
g e n e r a l r u l e ( s e e § § 2 26 .1 and 2 2 6 . 3 ) t h a t t h e r e g u l a t i o n a p p l i e s o n l y t o
consumer c r e d i t .
12(a)(1)

In itia l

issuance.

1.
E x p l i c i t r e q u e s t . A r e q u e s t o r a p p l i c a t i o n f o r a c a r d must be e x p l i c i t .
F o r e x a m p l e , a r e q u e s t f o r o v e r d r a f t p r i v i l e g e s on a c h e c k i n g a c c o u n t d o e s n ot
c o n s t i t u t e an a p p l i c a t i o n f o r a c r e d i t c a r d w i t h o v e r d r a f t c h e c k i n g f e a t u r e s .
2.
Ad d ition of c re d it fe a tu re s.
I f a c o n s u m e r ha s a n o n - c r e d i t c a r d , t h e
a d d i t i o n o f c r e d i t f e a t u r e s to the card ( f o r example, the g r a n t i n g o f o v e r d r a f t
p r i v i l e g e s on a c h e c k i n g a c c o u n t when t h e a c c o u n t h o l d e r a l r e a d y h a s a c he ck
guarantee card) c o n s t it u t e s issu a n c e of a c r e d it card.
3.
V a r i a n c e o f c a r d from r e q u e s t .
The r e q u e s t o r a p p l i c a t i o n
spond e x a c t l y to the card t h a t i s is s u e d .
For example,
o

The name o f t h e c a r d

r e q u e s t e d may be d i f f e r e n t

0

The c a r d may have d i f f e r e n t o r a d d i t i o n a l
r e f l e c t e d in the re q u e s t or a p p l i c a t i o n .

need n o t c o r r e ­

when i s s u e d .

features

from t h o s e

4.
P e r m i s s i b l e form o f r e q u e s t .
The r e q u e s t o r a p p l i c a t i o n may be o r a l ( i n
r e s p o n s e t o a t e l e p h o n e s o l i c i t a t i o n by a c a r d i s s u e r , f o r e x a m p l e ) o r w r i t t e n .
5.
Time o f i s s u a n c e .
A c r e d i t c a r d may be i s s u e d i n r e s p o n s e t o a r e q u e s t
made b e f o r e any c a r d s a r e r e a d y f o r i s s u a n c e ( f o r e x a m p l e , wher e a new p r o g r a m
i s e s t a b l i s h e d ) , even i f t h e r e i s some d e l a y i n i s s u a n c e .
6.
P e r s o n s t o whom c a r d s may be i s s u e d .
A c a r d i s s u e r may i s s u e a c r e d i t
c a r d t o t h e p e r s o n who r e q u e s t s i t , and t o an yo ne e l s e f o r whom t h a t p e r s o n
re q u e sts a card.
C a r d s may be s e n t t o c o n s u m e r A on A ' s r e q u e s t , and a l s o (on
A ' s r e q u e s t ) t o c o n s u m e r s B and C, who w i l l be a u t h o r i z e d u s e r s on A ' s a c c o u n t .




§ 226,12
- B27 -

7.
is

o

The a d d i t i o n a l c a r d s may be i m p r i n t e d
i n t h e names o f B and C.

o

No l i a b i l i t y f o r u n a u t h o r i z e d u s e , n o t even t h e $ 5 0 , may be imp os ed
on B o r C s i n c e t h e y a r e m e r e l y u s e r s and n o t " c a r d h o l d e r s " a s t h a t
t er m i s d e f i n e d i n § 2 2 6 . 2 and u s e d i n § 2 2 6 . 1 2 ( b ) ; o f c o u r s e ,
l i a b i l i t y may be im p o se d on A.

o

W h e t h e r B and C can be h e l d
a m a t t e r o f s t a t e la w.

liab le

in e i t h e r A ' s

name o r

on t h e a c c o u n t g e n e r a l l y

is

Issuance o f n o n -c re d it c a r d s .
The i s s u a n c e o f an u n s o l i c i t e d d e v i c e t h a t
n o t , b u t may become, a c r e d i t c a r d , i s n o t p r o h i b i t e d p r o v i d e d :

o

The d e v i c e h a s some s u b s t a n t i v e p u r p o s e o t h e r t h a n o b t a i n i n g
s u c h a s a c c e s s t o n o n - c r e d i t s e r v i c e s o f f e r e d by t h e i s s u e r ;

o

I t c a n n o t be u s e d a s a c r e d i t

o

A credit

capability

w ill

c a r d when i s s u e d ;

be added o n l y

on t h e

credit,

and

r e c ip ie n t 's

request.

F o r e x a m p l e , a c a r d i s s u e r c o u l d s e nd a c h e c k g u a r a n t e e c a r d on an u n s o l i c i t e d
b a s i s , b u t c o u l d n o t add a c r e d i t f e a t u r e t o t h a t c a r d w i t h o u t t h e c u s t o m e r ' s
s p e c i f i c request.
The r e - e n c o d i n g o f an EFT a c c e s s d e v i c e o r o t h e r e x i s t i n g
c a r d t h a t had no c r e d i t p r i v i l e g e s when i s s u e d w o u l d be a p p r o p r i a t e a f t e r t h e
c u sto m er has s p e c i f i c a l l y re q u e ste d a card w ith c r e d i t p r i v i l e g e s .
Sim ilarly,
t h e c a r d i s s u e r may add a c r e d i t f e a t u r e , f o r e x a m p l e , by r e p r o g r a m m i n g t h e
i s s u e r ' s c o m p u t e r p r o g r a m o r a u t o m at e d t e l l e r m a c h i n e s , o r by a s i m i l a r p r o gr a m
adjustm ent.
12(a)(2)

Renewal

and s u b s t i t u t i o n .

1.
Renewal.
"R e n ew a l" g e n e r a l l y co n te m p la te s th e r e g u l a r replacement o f
e x i s t i n g c a r d s f o r s e c u r i t y r e a s o n s o r t o i m p l e m e n t new t e c h n o l o g y o r s y s t e m s .
I t a l s o i n c l u d e s t h e r e - i s s u a n c e o f c a r d s t h a t h av e been s u s p e n d e d t e m p o r a r i l y ,
but does not i n c l u d e the r e a c t i v a t i o n o f a c l o s e d a ccount i f the p r i o r card
had e x p i r e d , been c a n c e l l e d , o r was o t h e r w i s e r e n d e r e d u n u s a b l e .
2.
S u b s t it u t io n - - examples.
" S u b s t i t u t i o n " encompasses th e repla cem ent o f
one c a r d w i t h a n o t h e r b e c a u s e t h e u n d e r l y i n g a c c o u n t r e l a t i o n s h i p ha s ch a n ge d
i n some way - - s u c h a s when t h e c a r d i s s u e r h a s :
°

C ha nged i t s

name.

o

C h a n ge d t h e name o f t h e c a r d .

°

Added new f e a t u r e s

to the acco u n t.

F o r e x a m p l e , t h e s u b s t i t u t e c a r d m i g h t be u s a b l e f o r o b t a i n i n g c a s h a d v a n c e s
t h r o u g h a u t o ma t ed t e l l e r m a c h i n e s , i n a d d i t i o n t o m a k i n g p u r c h a s e s and o b t a i n i n g
c a s h a d v a n c e s a t t e l l e r w in do w s a s c o u l d be done w i t h t h e o r i g i n a l c a r d .
(If
t h e s u b s t i t u t e c a r d c o n s t i t u t e s an a c c e s s d e v i c e , a s d e f i n e d i n R e g u l a t i o n E ,
t h a n t h e R e g u l a t i o n E i s s u a n c e r u l e s w ould h ave t o be f o l l o w e d . )




§ 226.12
- B28 -

3.
S u b s t it u t io n - - purchases of a c c o u n ts.
" S u b s t i t u t i o n " a l s o o c c u r s when a
new c a r d i s s u e r p u r c h a s e s t h e a c c o u n t s o f t h e o r i g i n a l i s s u e r and i s s u e s i t s
own c a r d t o r e p l a c e t h e o r i g i n a l one.
A p e r m i s s i b l e s u b s t i t u t i o n e x i s t s even
i f t h e o r i g i n a l i s s u e r r e t a i n s t h e e x i s t i n g r e c e i v a b l e s and t h e new c a r d i s s u e r
a c q u i r e s th e r i g h t o n l y to f u t u r e r e c e i v a b l e s , p r o v id e d use o f the o r i g i n a l
c a r d i s c u t o f f when u s e o f t h e new c a r d becomes p o s s i b l e .
4.
Replacement f o r n o n - c r e d i t c a rd p l a n . A c r e d i t c a rd t h a t r e p la c e s a
r e t a i l e r ' s open-end c r e d i t p la n not i n v o l v i n g a c r e d i t ca rd i s not c o n s id e r e d
a s u b s t i t u t e f o r t h e r e t a i l e r ' s pi an - - e ven i f t h e c o n s u m e r u s e d t h e r e t a i l e r ' s
plan.
The c r e d i t c a r d i t s e l f must meet t h e t e s t s f o r an " a c c e p t e d c r e d i t c a r d . "
I t c a n n o t be i s s u e d i n t h e s e c i r c u m s t a n c e s w i t h o u t a r e q u e s t o r a p p l i c a t i o n .
5.
P e r m i s s i b l e r e n e w a l s and s u b s t i t u t i o n s .
B o t h r e n e w a l s and s u b s t i t u t i o n s
o f c r e d i t c a r d s may be made on an u n s o l i c i t e d b a s i s r e g a r d l e s s o f w h e t h e r :
o

The c a r d i s

issued

by t h e same o r a s u c c e s s o r c a r d

issuer.

o

The c a r d h as c r e d i t o r o t h e r f e a t u r e s
from t h e o r i g i n a l c r e d i t c a r d .

°

Th e c a r d i s s u e r s u b s t i t u t e s a c a r d u s e r ' s name on t h e r enewa l
s u b s t i t u t e c a r d f o r t h e c a r d h o l d e r ' s name a p p e a r i n g on t h e
o r i g i n a l card.

t h e same as o r d i f f e r e n t

or

6.
One-for-one r u l e .
An a c c e p t e d c a r d may be r e p l a c e d by no more t h a n one
r enewal o r s u b s t i t u t e c a r d .
F o r e x a m p l e , a c a r d i s s u e r may n o t r e p l a c e a c r e d i t
c a r d p e r m i t t i n g p u r c h a s e s , i n - p e r s o n c a s h a d v a n c e s and ATM c a s h a d v a n c e s w i t h
two c a r d s , one f o r t h e p u r c h a s e s and c a s h a d v a n c e s and a n o t h e r f o r t h e ATM
transactions.
7.
One-for-one rule - - e x c e p tio n .
The r e g u l a t i o n d o e s n o t p r o h i b i t a c a r d
i s s u e r f ro m r e p l a c i n g a d e b i t / c r e d i t c a r d w i t h one c a r d t h a t c o u l d be u s e d f o r
c r e d i t p u r c h a s e s and c a s h a d v a n c e s and a n o t h e r c a r d w i t h o n l y d e b i t f u n c t i o n s
( o r d e b i t f u n c t i o n s p l u s an a s s o c i a t e d o v e r d r a f t c a p a b i l i t y ) .
8.
C o n t i n u i t y o f merchant b a s e .
To q u a l i f y a s a p e r m i s s i b l e renewal o r
s u b s t i t u t i o n , t h e new c a r d must be h o n o r e d by a t l e a s t one o f t h e p e r s o n s
honored the o r i g i n a l ca rd .
9.
Methods o f t e r m i n a t i n g re p la c e d c a r d .
r e t r i e v e th e o r i g i n a l c a rd , p r o v id e d :

The c a r d

issuer

that

need n o t p h y s i c a l l y

°

The i s s u e r i n c l u d e s w i t h t h e new c a r d a n o t i f i c a t i o n t h a t t h e
e x i s t i n g c a r d i s no l o n g e r v a l i d and s h o u l d be d e s t r o y e d i m m e d i ­
ately.

0

The o r i g i n a l

°

The o l d c a r d i s




card contained
voided

an e x p i r a t i o n

i n some o t h e r way.

date.

§ 226.12
- B29 -

10. I n c o m p l e t e r e p l a c e m e n t .
I f C a r d A i s one t y p e o f n a t i o n a l c r e d i t c a r d and
C a r d B i s a n o t h e r , r e p l a c e m e n t o f two C a r d As on an a c c o u n t by one C a r d A and
one C a r d 3 i s n o t p e r m i s s i b l e w i t h r e g a r d t o c a r d B w i t h o u t a r e q u e s t .

12(b)

Lia b ility

of cardholder

for unauthorized u se .

1.
M e a n i n g o f " c a r d h o l d e r . 11 F o r p u r p o s e s o f t h i s p r o v i s i o n , " c a r d h o l d e r "
i n c l u d e s any p e r s o n ( i n c l u d i n g o r g a n i z a t i o n s ) t o whom a c r e d i t c a r d i s i s s u e d
f o r any p u rp o s e , i n c l u d i n g b u s i n e s s .
When a c o r p o r a t i o n i s t h e c a r d h o l d e r ,
r e q u i r e d d i s c l o s u r e s s h o u l d be p r o v i d e d t o t h e c o r p o r a t i o n ( a s o p p o s e d t o an
employee u s e r ) .
12(b)(1)

Lim itation

on a m o u n t .

1.
Meaning o f " a u t h o r i t y . "
F o o t n o t e 22 d e f i n e s u n a u t h o r i z e d u s e i n t e r m s o f
w h e t h e r t h e u s e r h as " a c t u a l , i m p l i e d , o r a p p a r e n t a u t h o r i t y . "
W he t he r s u c h
a u t h o r i t y e x i s t s must be d e t e r m i n e d by r e f e r e n c e t o a p p l i c a b l e s t a t e law.
2.
L i a b i l i t y l i m i t s - - d o l l a r amounts.
As a g e n e r a l r u l e t h e c a r d h o l d e r ' s
l i a b i l i t y f o r a s e r i e s o f u n a u t h o r iz e d u s e s cannot exceed e i t h e r $50 o r the
va lu e o b t a i n e d thro u gh the u n a u t h o r i z e d use b efo re the card i s s u e r i s n o t i f i e d ,
whichever i s le s s .
12(b)(2)

Conditions

of l i a b i l i t y .

1.
D i s c l o s u r e o f l i a b i l i t y and means o f n o t i f y i n g i s s u e r .
This b asic
d i s c l o s u r e o f p o t e n t i a l l i a b i l i t y need n o t be g i v e n a t any p a r t i c u l a r t i m e o r
i n a ny p a r t i c u l a r f or m.
Some o f t h e w a y s i n w h i c h i t can be g i v e n :
o

On t h e c r e d i t

card

itse lf.

o

On p e r i o d i c

o

W i th t h e i n i t i a l

o

At any o t h e r t i m e p r e c e d i n g t h e u n a u t h o r i z e d u s e .

statem ents.
disclosures

under § 2 2 6 .6.

2.
Means o f i d e n t i f y i n g c a r d h o l d e r o r u s e r .
The i s s u e r must p r o v i d e some
method w h e r e b y t h e c a r d h o l d e r o r t h e a u t h o r i z e d u s e r can be i d e n t i f i e d .
This
c o u l d i n c l u d e , f o r e x amp le :




°

S i g n a t u r e on t h e c a r d

o

P h o t o g r a p h on t h e c a r d .

°

Finge rprint

°

Electronic

on t h e c a r d .
o r mechanical

confirm ation.

§ 226.12
- B30 -

3.
I d e n t i f i c a t i o n by m a g n e t i c s t r i p .
A m a g n e t i c s t r i p on t h e c a r d t h a t m e r e l y
v e r i f i e s t h e a c c o u n t s t a t u s i s n o t a p r o p e r means o f i d e n t i f i c a t i o n .
B ut i f
t h e m a g n e t i c s t r i p mu st be u s e d i n c o n j u n c t i o n w i t h a s e c r e t co d e o r t h e l i k e ,
a s u f f i c i e n t means o f i d e n t i f i c a t i o n e x i s t s .
N or i s t h e r e s u f f i c i e n t i d e n t i f i ­
c a t i o n where a " p o o l " o r g r o u p c a r d , i s s u e d t o a c o r p o r a t i o n and s i g n e d by a
c o r p o r a t e a g e n t , i s i n t e n d e d t o be u s e d by o t h e r e m p l o y e e s f o r whom t h e c a r d
p r o v i d e s no means o f i d e n t i f i c a t i o n .
4.
Separate i d e n t i f i c a t i o n o f each u s e r .
It i s not n e c e ssa ry under paragraph
( b ) ( 2 ) f o r e ac h c a r d i s s u e d f o r an a c c o u n t t o be e mb os se d o r s i g n e d i n t h e
name o f t h e i n d i v i d u a l t h a t w i l l u s e i t , o r t h a t e ac h u s e r be s e p a r a t e l y i d e n t i ­
fiab le .
Where, f o r e x a m p l e , s p o u s e A r e q u e s t s c a r d s f o r b o t h A and s p o u s e B
( m a k i n g B an a u t h o r i z e d u s e r ) , t h i s r e q u i r e m e n t i s s a t i s f i e d i f B ' s c a r d p e r m i t s
i d e n t i f i c a t i o n o f e i t h e r A o r B ( f o r e x a m p l e , by u s e o f a s e c r e t co de number
u n i q u e t o A and B ) .
5.
T r a n s a c t i o n s n o t i n v o l v i n g c a ir d.
A c a r d h o l d e r b e a r s no l i a b i l i t y u n d e r
t h i s s e c t i o n when t h e c a r d i t s e l f i s n o t p r e s e n t e d .
For example, m erch a n d ise
may be p u r c h a s e d by t e l e p h o n e , u s i n g a c r e d i t c a r d a c c o u n t number o n l y , by a
p e r s o n w i t h o u t a u t h o r i t y t o do s o .
The c a r d h o l d e r ' s a c c o u n t number may be
widely a v a ila b le .
S i n c e t h e i s s u e r h a s n o t p r o v i d e d a means t o i d e n t i f y t h e
u s e r u n d e r t h e s e c i r c u m s t a n c e s , t h e i s s u e r h a s n o t f u l f i l l e d one o f t h e c o n d i ­
t i o n s fo r imposing l i a b i l i t y .
6.
I s s u e r ' s o p t io n not t o c o m p ly .
A c a r d i s s u e r t h a t c h o o s e s n o t t o i mpo se
any l i a b i l i t y f o r u n a u t h o r i z e d u s e on c a r d h o l d e r s need n o t co mp ly w i t h t h e s e
n o t i c e and i d e n t i f i c a t i o n r e q u i r e m e n t s .
12(b)(3)

N otification

to card

issu e r.

1.
To whom n o t i c e must be p r o v i d e d .
N o t i c e g i v e n i n a normal b u s i n e s s m a n n e r - f o r e x a m p l e , by m a i l , t e l e p h o n e , o r p e r s o n a l v i s i t - - i s e f f e c t i v e even t h o u g h
i t i s n o t g i v e n t o , o r d o e s n o t r e a c h , some p a r t i c u l a r p e r s o n w i t h i n t h e i s s u e r ' s
organization.
N o t i c e a l s o may be e f f e c t i v e even t h o u g h i t i s n o t g i v e n t o
t h e p e r s o n , a d d r e s s , o r phone number d i s c l o s e d by t h e c a r d i s s u e r u n d e r
§ 2 2 6 . 1 2 ( b ) ( 2 ) (i i ).
2.
Who must p r o v i d e n o t i c e .
I t i s not e s s e n t i a l , under t h i s p r o v i s i o n , t h a t
n o t i c e o f l o s s , t h e f t , o r p o s s i b l e u n a u t h o r i z e d u s e be i n i t i a t e d by t h e c a r d ­
holder.
N o t i c e f rom an a u t h o r i z e d u s e r , a f a m i l y member, o r a n y o n e e l s e i s
s u f f i c i e n t s o l o n g a s i t g i v e s t h e " p e r t i n e n t i n f o r m a t i o n " w h i c h w o u ld i n c l u d e
t h e name o r c a r d number o f t h e c a r d h o l d e r and an i n d i c a t i o n t h a t u n a u t h o r i z e d
u s e h a s o r may h ave o c c u r r e d .
12(b)(5)

Business

use o f c r e d i t

cards.

1.
Agreement f o r h i g h e r 1 i a b i 1 i t y f o r b u s i n e s s use c a r d s .
A c a r d i s s u e r may n o t
r e l y on t h i s p r o v i s i o n i f t h e b u s i n e s s i s c l e a r l y n o t i n a p o s i t i o n t o p r o v i d e
10 o r more c a r d s t o e m p l o y e e s ( f o r e x a m p l e , i f t h e b u s i n e s s h a s o n l y 3 e m p l o y e e s ) .




§ 226.12
- B31 -

1 2 ( c ) R i g h t o f c a r d h o l d e r t o a s s e r t c l a i m s and d e f e n s e s
i ssuer.

a g a in s t card

1.
R e l a t i o n s h i p to § 2 2 6 . 1 3 .
T h i s c r e d i t c a r d " h o l d e r i n due c o u r s e " p r o v i s i o n
d e a ls w ith the c o n su m e r's r i g h t to a s s e r t a g a i n s t the card i s s u e r a cla im or
d e f e n s e c o n c e r n i n g p r o p e r t y o r s e r v i c e s p u r c h a s e d w i t h a c r e d i t c a r d , i f t he
m e r c h a n t h a s been u n w i l l i n g t o r e s o l v e t h e d i s p u t e .
Even t h o u g h c e r t a i n merchan
d i s e d i s p u t e s , s u c h a s n o n - d e l i v e r y o f g o o d s , may a l s o c o n s t i t u t e " b i l l i n g
e r r o r s " u n d e r § 2 2 6 . 1 3 , t h a t s e c t i o n o p e r a t e s i n d e p e n d e n t l y o f t h i s one.
A
c a r d h o l d e r whose a s s e r t e d b i l l i n g e r r o r i n v o l v e s u n d e l i v e r e d g o o d s may i n s t i t u t e
the e r r o r r e s o l u t i o n p ro c e d u r e s o f § 2 2 6 .1 3 ; but whether o r not th e c a r d h o l d e r
h a s done s o , t h e c a r d h o l d e r may a s s e r t c l a i m s o r d e f e n s e s u n d e r p a r a g r a p h ( c ) .
C o n v e r s e l y , a c o n s u m e r may pay a d i s p u t e d b a l a n c e and t h u s h ave no f u r t h e r
r i g h t t o a s s e r t c l a i m s and d e f e n s e s u n d e r t h i s s e c t i o n , b u t s t i l l may a s s e r t a
b i l l i n g e r r o r under § 226.13 i f n o t ic e o f th a t b i l l i n g e r r o r i s given in the
p r o p e r t i m e and manner.
An a s s e r t i o n t h a t a p a r t i c u l a r t r a n s a c t i o n r e s u l t e d
f ro m u n a u t h o r i z e d u s e o f t h e c a r d c o u l d a l s o be b o t h a " d e f e n s e " u n d e r t h i s
s e c t i o n and a b i l l i n g e r r o r u n d e r § 2 2 6 . 1 3 .
2.
S i t u a t i o n s e x c l u d e d and i n c l u d e d .
A c o n s u m e r may a s s e r t c l a i m s o r d e f e n s e s
u n d e r t h i s p r o v i s i o n o n l y when t h e g o o d s o r s e r v i c e s are " p u r c h a s e d w i t h t h e
credit card."
This could inclu d e:
o

But

it

Mail or telephone o r d e r s ,
card account.

if

the purchase i s

charged to the c r e d i t

would e x c lu d e :
o

A p u r c h a s e made w i t h

special

cash advance ch e c k s.

0

Use o f a c r e d i t c a r d t o o b t a i n a c a s h a d v a n c e , i f t h e c o n s u m e r
th e n u s e s t h e money t o p u r c h a s e g o o d s o r s e r v i c e s .
S uch a t r a n s ­
a c t i o n would not i n v o l v e " p r o p e r t y or s e r v i c e s p u rchased w it h the
credit card."

o

The p u r c h a s e o f g o o d s o r s e r v i c e s by u s e o f a c h e c k
o v e r d r a f t a c c o u n t and a c r e d i t c a r d u s e d s o l e l y f o r
o f th e consumer.

°

P u r c h a s e s made by u s e o f a c h e c k g u a r a n t e e c a r d
w ith a s p e c i a l cash advance check.

°

P u r c h a s e s e f f e c t e d by u s e o f e i t h e r a c h e c k g u a r a n t e e c a r d o r a
d e b i t c a r d when u s e d t o dr aw on o v e r d r a f t c r e d i t l i n e s ( s e e F o o t ­
note 24).

a c c e s s i n g an
id e ntification

in c o n j u n c t i o n

The d e b i t c a r d e x e m p t i o n u n d e r F o o t n o t e 24 a p p l i e s w h e t h e r t h e c a r d a c c e s s e s
an a s s e t a c c o u n t v i a p o i n t - o f - s a l e t e r m i n a l s , a u t o m a t e d t e l l e r m a c h i n e s , o r i n
any o t h e r way, and w h e t h e r t h e c a r d q u a l i f i e s a s an " a c c e s s d e v i c e " u n d e r
R e g u la tio n E or i s o n ly a paper-based d ebit card.
I f a c a r d s e r v e s b o t h a s an
o r d i n a r y c r e d i t c a r d and a l s o a s c h e c k g u a r a n t e e o r d e b i t c a r d , a t r a n s a c t i o n
w i l l be s u b j e c t t o t h i s r u l e on a s s e r t i n g c l a i m s and d e f e n s e s when u s e d a s an
o r d i n a r y c r e d i t c a r d , b u t n o t when u s e d as a c h e c k g u a r a n t e e o r d e b i t c a r d .




§ 226.12
- B32 -

12(c)(2)

Adverse c r e d i t

reports

p rohibited.

1.
Scope o f p r o h i b i t i o n .
A l t h o u g h an amount i n d i s p u t e may n o t be r e p o r t e d
as d e lin q u e n t u n t i l the m atter i s r e s o lv e d :
o

T h a t amount may be r e p o r t e d a s d i s p u t e d .

°

N o t h i n g i n t h i s p r o v i s i o n p r o h i b i t s t h e c a r d i s s u e r f rom u n d e r ­
t a k i n g i t s normal c o l l e c t i o n a c t i v i t i e s f o r d e l i n q u e n t a c c o u n t s .

o

T h i s p r o v i s i o n d o e s n o t r e q u i r e a c a r d i s s u e r t o c o r r e c t an a d v e r s e
c r e d i t r e p o r t i f the consumer does not a s s e r t a c la im or defense
u n t i l a f t e r t h e r e p o r t was made.

12(c)(3)

Lim itations.

1.
R e so lu tio n with merchant.
The c o n s u m e r must have t r i e d t o r e s o l v e t h e
d i s p u t e w ith th e merchant.
T h i s d o e s n o t r e q u i r e any s p e c i a l p r o c e d u r e s o r
c o r r e s p o n d e n c e between them, and i s a m a t t e r f o r f a c t u a l d e t e r m i n a t i o n i n each
case.
When t h e m e r c h a n t i s i n b a n k r u p t c y p r o c e e d i n g s , t h i s s e c t i o n d o e s n o t :
°

R e q u ire th e consumer to f i l e

a claim

in those proceedings.

o

R eq u ire the consumer to seek
of the goods i n v o l v e d .

satisfaction

fr om t h e m a n u f a c t u r e r

2.
Amount l i m i t a t i o n .
The $ 50 c r i t e r i o n r e f e r s t o t h e t o t a l amount o f c r e d i t
e x t e n d e d i n any s i n g l e t r a n s a c t i o n , even t h o u g h t h a t t o t a l may c o n s i s t o f
s e v e r a l i t e m s each o f w h i c h had a p r i c e u n d e r $ 5 0 , and even t h o u g h t h e d i s p u t e
r e l a t e s to on ly a part of the t r a n s a c t i o n .
3.
Geographic l i m i t a t i o n .
The q u e s t i o n o f wher e a t r a n s a c t i o n o c c u r s ( a s i n
t h e c a s e o f m a i l o r t e l e p h o n e o r d e r s , f o r e x a m p l e ) i s t o be d e t e r m i n e d u n d e r
s t a t e law.
4.
Merchant h o n o rin g c a r d .
The e x c e p t i o n s t o t h e amount and g e o g r a p h i c l i m i t a ­
t i o n s do n o t a p p l y where t h e m e r c h a n t m e r e l y h o n o r s , o r i n d i c a t e s t h r o u g h s i g n s
or a d v e r t i s i n g that i t honors, a p a r t i c u l a r c r e d i t card.
12(d)(1)

Offsets

by c a r d i s s u e r .

1.
" H o l d s " on a c c o u n t s .
" F r e e z i n g " o r p l a c i n g a h o l d on f u n d s i n a c a r d h o l d e r ' s
d e p o s i t a c c o u n t , w h i c h i s t h e f u n c t i o n a l e q u i v a l e n t o f an o f f s e t , w o u l d c o n t r a ­
vene t h i s r u l e , u n l e s s done i n t h e c o n t e x t o f one o f t h e s p e c i f i e d e x c e p t i o n s
to the o f f s e t p r o h i b i t i o n .
For example, i f the terms o f a s e c u r i t y i n t e r e s t
p e r m i t t e d a c a r d i s s u e r t o p l a c e a h o l d on t h e f u n d s s u b j e c t t o t h e s e c u r i t y
i n t e r e s t , the ho ld would not v i o l a t e the o f f s e t r u l e .
2.
T y p es o f i n d e b t e d n e s s ; o v e r d r a f t a c c o u n t s .
The p r o h i b i t i o n a p p l i e s t o any
i n d e b t e d n e s s a r i s i n g f rom c o n s u m e r c r e d i t t r a n s a c t i o n s , i n c l u d i n g a c c r u e d
f i n a n c e c h a r g e s and o t h e r c h a r g e s on t h e a c c o u n t .
I t would a l s o in c l u d e b a l ­
a n c e s a r i s i n g fr om t r a n s a c t i o n s n o t u s i n g t h e c r e d i t c a r d i t s e l f b ut t a k i n g




§ 226.12
- B33 -

place under p lan s th a t in v o lv e c r e d it cards.
For example, i f a consumer w r i t e s
a c h e c k t h a t a c c e s s e s an o v e r d r a f t l i n e o f c r e d i t , t h e r e s u l t i n g i n d e b t e d n e s s
i s subject to the p r o h ib it io n of o f f s e t s sin ce i t i s incurred through a c re d it
c a r d p l a n , e v e n t h o u g h t h e c o n s u m e r d i d n o t u s e an a s s o c i a t e d c he ck g u a r a n t e e
or debit card.
3.
When p r o h i b i t i o n a p p l i e s i n c a s e o f t e r m i n a t i o n o f a c c o u n t .
The p r o h i b i t i o n
a g a i n s t s e t - o f f a p p l i e s e v en a f t e r t h e c a r d i s s u e r t e r m i n a t e s t h e c a r d h o l d e r ' s
c r e d i t c a r d p r i v i l e g e s , i f t h e i n d e b t e d n e s s was i n c u r r e d p r i o r t o t e r m i n a t i o n .
I f t h e i n d e b t e d n e s s was i n c u r r e d a f t e r t e r m i n a t i o n , t h e p r o h i b i t i o n d o es n o t
apply.
4.
F u n d s i n t e n d e d as d e p o s i t s .
T h i s p r o v i s i o n a l s o would p r o h i b i t a card
i s s u e r ' s a p p l y i n g f u n d s t e n d e r e d by t h e c o n s u m e r a s a d e p o s i t a g a i n s t t h e c o n ­
s u m e r's c r e d i t card account.
12(d)(2)

Exceptions.

1.
Scope o f e x c e p t i o n s .
I n g e n e r a l , t h e c a r d i s s u e r may o b t a i n t h e c o n s u m e r ' s
d e p o s i t - a c c o u n t f u n d s o n l y by u s i n g p r o c e d u r e s e q u a l l y a v a i l a b l e t o o t h e r
creditors.
Note t h a t i f a c a r d i s s u e r o b t a i n s a j u d g m e n t a g a i n s t a c a r d h o l d e r ,
and i f t h e t e r m s o f t h e j u d g m e n t s o p e r m i t , t h e c r e d i t o r may s e t o f f t h e
in d e b te d n e ss a g a in s t the c a r d h o l d e r 's d e p o s it account.
12(d)(3)

A u t o m a t i c payment p l a n s .

1.
Scope o f e x c e p t io n ; a d d i t i o n a l e x c e p t i o n s .
This p r o v is io n permits plans
u n d e r w h i c h t h e c a r d i s s u e r may - - w i t h t h e c a r d h o l d e r ' s w r i t t e n , s i g n e d o r
i n i t i a l e d a u t h o r i z a t i o n — p e r i o d i c a l l y apply p o r t io n s o f a d e p o s it account
to the o u t s t a n d in g c r e d i t card in d eb ted n e ss.
T h i s p r o v i s i o n does not p r o h i b i t
o

D e b i t i n g on t h e c a r d h o l d e r ' s s p e c i f i c r e q u e s t r a t h e r t h a n
d e b i t i n g t h e c a r d h o l d e r ' s d e p o s i t a c c o u n t on an a u t o m a t i c
p e r i o d i c b a s i s ( f o r e x a m p l e , a c a r d h o l d e r m i g h t c h e c k a box on
th e c r e d i t ca rd b i l l s t u b , r e q u e s t i n g the i s s u e r to d e b i t the
c a r d h o l d e r ' s a c c o u n t t o pay t h a t b i l l ) .

o

A u t o m a t i c a l l y d e d u c t in g c h a rg e s f o r p a r t i c i p a t i o n in a program o f
b a n k i n g s e r v i c e s ( o n e a s p e c t o f w h i c h may be a c r e d i t c a r d p l a n ) .

12(e)

Prompt n o t i f i c a t i o n

of returns

and c r e d i t i n g

of

refunds.

1.
E x p l a n a t i o n o f p r o v i s i o n ; when t i m e p e r i o d s b e g i n t o r u n .
I f a merchant
( t h a t i s n o t i t s e l f t h e c a r d i s s u e r ) g e n e r a t e s a c r e d i t f o r a r e f u n d , i t must
s e nd a c r e d i t s t a t e m e n t t o t h e c a r d i s s u e r w i t h i n 7 b u s i n e s s d a y s a f t e r a c c e p t i n g
the re tu rn or f o r g i v i n g the debt.
The 7 - d a y p e r i o d o n l y b e g i n s t o r un when t h e
merchant " a c c e p t s " the r e t u r n o r " f o r g i v e s " the debt.
The t i m e o f a c c e p t a n c e o r
f o r g i v e n e s s must be d e t e r m i n e d u n d e r a p p l i c a b l e s t a t e law.
2.
Normal c h a n n e l s . " No r ma l c h a n n e l s " r e f e r s t o a ny n e t w o r k o r i n t e r c h a n g e
system used f o r the p r o c e s s i n g o f the o r i g i n a l c h a rg e s l i p s .




§ 226.13
- B34 -

REFERENCES
Statute:

§§ 103(1),

Previous

regu lation :

Other s e c t i o n s :

132,

133,

135,

162,

166,

167,

169,

170.

§ 226.13.

§ 226.13.

1981 c h a n g e s : The i s s u a n c e r u l e s ( p a r a g r a p h ( a ) ) a r e s u b s t a n t i a l l y
unchanged.
They make c l e a r t h a t c a r d s may be s e n t n o t o n l y t o t h e p e r s o n
m a k i n g t h e r e q u e s t b u t a l s o t o any o t h e r p e r s o n f o r whom a c a r d i s r e q u e s t e d ,
e x c e p t t h a t no l i a b i l i t y f o r u n a u t h o r i z e d u s e may be i m p o s ed on p e r s o n s who
are only a u th o rize d u s e rs .
The p r i n c i p a l d i f f e r e n c e s r e g a r d i n g c o n d i t i o n s o f l i a b i l i t y a r e a s
follow s:
t h e r e q u i r e m e n t t h a t t h e c a r d h o l d e r be g i v e n a p o s t a g e - p a i d , p r e ­
a d d r e s s e d c a r d o r e n v e l o p e f o r n o t i f i c a t i o n o f l o s s o r t h e f t h a s been d e l e t e d
( c o r r e s p o n d i n g t o an amendment t o t h e a c t ) ; t h e r e q u i r e d d i s c l o s u r e o f maximum
l i a b i l i t y and o f means o f n o t i f i c a t i o n h as been s i m p l i f i e d ; and t h e r e q u i r e d
p r o v i s i o n o f a means o f i d e n t i f i c a t i o n ha s been r e l a x e d i n t h a t t h e i s s u e r now
may p r o v i d e a means t o i d e n t i f y e i t h e r t h e c a r d h o l d e r o r t h e a u t h o r i z e d u s e r .
F i n a l l y , a n y o n e may p r o v i d e t h e n o t i f i c a t i o n t o a c a r d i s s u e r , r a t h e r t h a n
only the ca rd h o ld e r.
The o f f s e t s s e c t i o n i n c o r p o r a t e s t h e s t a f f p o s i t i o n on c o n s e n s u a l
s e c u r i t y i n t e r e s t s , w h i c h h a s been m o d i f i e d t o p r o v i d e t h a t t h e s e c u r i t y
i n t e r e s t need no l o n g e r be l i m i t e d t o an a g r e e d - u p o n amount.
The s e p a r a t e
p r o m p t n e s s s t a n d a r d , w h i c h u s e d t o a p p l y i n a d d i t i o n t o t h e 7 - b u s i n e s s - d a y and
3 - b u s i n e s s - d a y s t a n d a r d s , h a s been d e l e t e d f rom t h e p r o v i s i o n g o v e r n i n g prompt
n o t if ic a t io n of returns.
A s t a f f i n t e r p r e t a t i o n c o n c e r n in g the use o f c l e a r i n g
a c c o u n t s i s now i n c o r p o r a t e d i n t h e t e x t o f t h e r e g u l a t i o n .
Finally,
h a s been a dded.

Section

226.13 —

a cross

B illin g

r e f e r e n c e to R e g u l a t i o n

error

E,

Electronic

Fund T r a n s f e r ,

resolu tion .

General
1.
General p r o h i b i t i o n s .
F o o t n o t e 27 p r o h i b i t s a c r e d i t o r f rom r e s p o n d i n g
t o a c o n s u m e r ' s b i l l i n g e r r o r a l l e g a t i o n by a c c e l e r a t i n g t h e d e b t o r c l o s i n g
t h e a c c o u n t , and r e f l e c t s p r o t e c t i o n s a u t h o r i z e d by § 1 6 1 ( d ) o f t h e T r u t h i n
L e n d i n g A c t and § 701 o f t h e E q u a l C r e d i t O p p o r t u n i t y A c t .
T his footnote a ls o
a l e r t s c r e d i t o r s t h a t f a i l u r e t o c o mp ly w i t h t h e e r r o r r e s o l u t i o n p r o c e d u r e s
may r e s u l t i n t h e f o r f e i t u r e o f d i s p u t e d a mounts a s p r e s c r i b e d i n § 1 6 1 ( e ) o f
the a ct.
( Any f a i l u r e t o c o mp ly may a l s o be a v i o l a t i o n s u b j e c t t o t h e l i a b i l ­
i t y p r o v i s i o n s o f § 130 o f t h e a c t . )
2.
Charges fo r e rr o r r e s o lu t io n .
I f a b i l l i n g e r r o r o c c u r r e d , w h e t h e r as
a l l e g e d o r i n a d i f f e r e n t amount o r ma nn er , t h e c r e d i t o r may n o t im p o se a
c h a r g e f o r any a s p e c t o f t h e e r r o r r e s o l u t i o n p r o c e s s ( i n c l u d i n g any d o c u m e n t a ­
t i o n s u p p l i e d ) and must c r e d i t t h e c o n s u m e r ' s a c c o u n t i f s u c h a c h a r g e was




§ 226.13
- 335 -

a s s e s s e d pending r e s o l u t i o n .
The T r u t h i n L e n d i n g A c t d o e s n o t a d d r e s s w h e t h e r
a c r e d i t o r may i mp os e a c h a r g e f o r t h e i n v e s t i g a t i o n o f a b i l l i n g e r r o r i f no
e rro r occurred.

13(a)

D efinition

Paragraph

of b illin g

error.

13(a)(1).

1.
A c tu a l, im plied o r apparent a u t h o r it y .
Whether use o f a c r e d i t
a u t h o r i z e d i s d e t e r m i n e d by a p p l i c a b l e s t a t e law.
Paragraph
1.
are

card

is

13(a)(3).

General.
P a ragraph ( a ) ( 3 ) c o v e r s d i s p u t e s about goods o r s e r v i c e s
" n o t a c c e p t e d " o r “n o t d e l i v e r e d . . .
as a g r e e d . "
F o r e x amp le :

that

o

The a p p e a r a n c e on a p e r i o d i c s t a t e m e n t o f a p u r c h a s e , when t h e
c o n s u m e r had r e f u s e d t o t a k e d e l i v e r y o f g o o d s on g r o u n d s t h e y
d id not comply w ith the c o n t r a c t .

o

D elivery

o

D e l i v e r y o f the wrong q u a n t i t y ,

o

Late d e l i v e r y .

o

D e l i v e r y t o t h e w r on g l o c a t i o n .

of property or se rvice s

different

f rom t h a t

a g r e e d upon,

I t does not in c l u d e a d i s p u t e r e l a t i n g to the q u a l i t y o f p r o p e r t y o r s e r v i c e s
t h a t the consumer does a c ce pt.
W h e t h e r g o o d s o r s e r v i c e s have been a c c e p t e d
i s d e t e r m i n e d by s t a t e la w.
Paragraph

13(a)(5).

1.
Computational e r r o r s .
Paragraph ( a ) ( 5 ) c o v e rs p e r i o d i c statement e r r o r s that
a f f e c t t r a n s a c t i o n e n t r i e s o r o t h e r e n t r i e s such as the f in a n c e c h a r g e , payments,
o r l a t e payment c h a r g e s .
F o r p e r i o d i c s t a t e m e n t s t h a t a r e c om bi ned w i t h o t h e r
i n f o r m a t i o n , the e r r o r r e s o l u t i o n p ro c e d u re s are t r i g g e r e d o n ly i f the consumer
a s s e r t s a com p uta tio n a l b i l l i n g e r r o r in the c r e d i t - r e l a t e d p o r t i o n o f the
p e r io d ic statement.
For example:
o

I f a bank c o m b i n e s a p e r i o d i c s t a t e m e n t r e f l e c t i n g t h e c o n s u m e r ' s
c r e d i t c a rd t r a n s a c t i o n s w ith the c o n s u m e r 's monthly c h e c k in g
s ta te m e n t, a c o m p u t a tio n a l e r r o r in th e c h e c k i n g account p o r t i o n o f
t h e c om bi ned s t a t e m e n t i s n o t a b i l l i n g e r r o r u n d e r t h i s s e c t i o n .

Paragraph

13(a)(6).

1.
Requests fo r c l a r i f i c a t i o n - - b i l l i n g e r r o r s .
P a r a g r a p h ( a ) ( 5 ) i n c l u d e s as
b i l l i n g e r r o r s r e q u e s t s f o r " a d d i t i o n a l c l a r i f i c a t i o n " about c r e d i t e x t e n s i o n s
shown on t h e p e r i o d i c s t a t e m e n t .
T h i s w o u ld i n c l u d e r e q u e s t s f o r c o p i e s o f




§ 226.13
- B36 -

t r a n s a c t i o n d o cu me nt s o r for f u r t h e r i d e n t i f i c a t i o n o f t h e p a r t i c u l a r s o f a
t r a n s a c t i o n , when i t a p p e a r s t h a t t h e c o n s u m e r i s q u e s t i o n i n g t h e a c c u r a c y o f
i n f o r m a t i o n s u p p l i e d on t h e p e r i o d i c s t a t e m e n t .
See commentary t o § 2 2 6 . 1 3 ( b ) ( 3 ) .
A c r e d i t o r may a s k a b o u t t h e r e a s o n or p u r p o s e b e h i n d t h e c o n s u m e r ' s d o c u m e n t a t i o n
request.
2.
Requests fo r c l a r i f i c a t i o n - - n o t b i l l i n g e r r o r s .
No b i l l i n g e r r o r has
been a l l e g e d i f t h e c o n s u m e r m e r e l y r e q u e s t s c o p i e s o f d o cu m e n t s f o r p u r p o s e s
s u c h as
o

Tax p r e p a r a t i o n ,

o

Recordkeeping.

13(b)

B illin g

e rro r notice.

1.
W ithdrawal.
The c o n s u m e r ' s w i t h d r a w a l
n o t e 28 may be o r a l o r w r i t t e n .

of a b i l l i n g

e r r o r n o t ic e under F oot­

Paragraph 13(b) ( 1 ) .
1.
F a i l u r e t o send p e r i o d i c s t a t e m e n t - - t i m i n g .
I f t h e c r e d i t o r h as f a i l e d
t o s end a p e r i o d i c s t a t e m e n t u n d e r p a r a g r a p h ( a ) ( 7 ) , t h e 60 da y p e r i o d r u n s
f rom t h e t i m e t h e s t a t e m e n t s h o u l d have been s e n t .
Once t h e s t a t e m e n t i s
p r o v i d e d , t h e c o n s um e r h a s a n o t h e r 60 d a y s t o a s s e r t any b i l l i n g e r r o r s r e f l e c t e d
on i t .
2.
F a i l u r e to r e f l e c t c r e d i t — t i m i n g .
I f the p e r i o d i c statement f a i l s to
r e f l e c t a c r e d i t t o t h e a c c o u n t , t h e 60 da y p e r i o d r u n s f rom t r a n s m i t t a l o f
t h e s t a t e m e n t on w hi ch t h e c r e d i t i s e x p e c t e d t o a p p e a r .
F o r e x a mp l e , i f a
s e l l e r t e l l s a consumer l a t e in the J u l y c y c l e t h a t a c r e d i t i s b eing i s s u e d
t o t h e a c c o u n t , t h e co n su m e r m i g h t n o t e x p e c t t h e c r e d i t t o be r e f l e c t e d u n t i l
the September statement.
3.
Transm ittal.
T r a n s m i t t a l by t h e c r e d i t o r i n c l u d e s t h e p r a c t i c e , a t t he
c o n s u m e r ' s r e q u e s t , o f m a k i n g a p e r i o d i c s t a t e m e n t a v a i l a b l e f o r p i c k - u p at
the c r e d i t o r ' s o f f i c e .
Paragraph

13(b)(2).

1.
I d e n t i t y o f the consum er.
A lt h o u g h parag rap h ( b ) ( 2 ) r e q u i r e s th a t the
c o n s u m e r 's b i l l i n g e r r o r n o t i c e perm it th e c r e d i t o r to i d e n t i f y the consumer
and t h e a c c o u n t number, i t d o e s n o t r e q u i r e b o th name and a c c o u n t number t o
appear in the n o t i c e , m erely t h a t the i n f o r m a t io n s u p p l i e d enable the c r e d i t o r
t o i d e n t i f y t h e c o n s u m e r ' s name and a c c o u n t .
Paragraph

13(b)(3).

1.
Documentation r e q u e s t s .
R eq u e sts f o r documentation such as r e c e i p t s or
s a l e s s l i p s , u n a c c o m p a n i e d by an a l l e g a t i o n o f e r r o r o r a r e q u e s t f o r a d d i t i o n a l




§ 226.13
- B37 -

c l a r i f i c a t i o n under p a rag rap h
under paragraph ( b ) ( 3 ) .

13(c)

Time f o r

( a ) ( 6 ) , do n o t c o n s t i t u t e

resolution;

general

a b illin g

e rro r notice

procedures.

1.
T e m p o r a r y o r p r o v i s i o n a l c o r r e c t i o n s . A c r e d i t o r may make a t e m p o r a r y o r
p r o v i s i o n a l c o r r e c t i o n t o the c o n s u m e r 's account in r e s p o n s e to a b i l l i n g e r r o r
n o t i c e , but i s not excused from c o m p ly in g w ith the re m a in in g e r r o r r e s o l u t i o n
p r o c e d u r e s w i t h i n t h i s p a r a g r a p h ' s time l i m i t s .
2.
C o rre c tio n without i n v e s t i g a t i o n .
A c r e d i t o r i s fre e to c o rre c t a b i l l i n g
e r r o r i n t h e manner and amount a s s e r t e d by t h e c o n s u m e r w i t h o u t i n v e s t i g a t i o n
o r the d e te rm in a tio n n orm a lly re q u ire d .
The c r e d i t o r must c o m p l y , h o w e v e r ,
with a ll other a p p lic a b le p r o v is io n s .
I f a c r e d i t o r fo llo w s t h i s procedure,
no p r e s u m p t i o n i s c r e a t e d t h a t a b i l l i n g e r r o r o c c u r r e d .
Paragraph

13(c)(2).

1.
Time f o r r e s o l u t i o n .
The p h r a s e " tw o c o m p l e t e b i l l i n g c y c l e s " means two
a c t u a l b i l l i n g c y c l e s o c c u r r i n g s u b se q u en t t o r e c e i p t o f the b i l l i n g e r r o r
n o t i c e , n o t a m e a s u r e o f t i m e e q u a l i n g any two b i l l i n g c y c l e s .
For example,
i f a c r e d i t o r on a m o n t h l y b i l l i n g c y c l e r e c e i v e s a b i l l i n g e r r o r n o t i c e m i d ­
c y c l e , i t h a s t h e r e m a i n d e r o f t h a t c y c l e p l u s t h e n e x t two f u l l b i l l i n g c y c l e s
to r e s o lv e the e rro r.

13(d)

Rules

pending

resolution.

1.
D i s p u t e d amount.
The d i s p u t e d amount i s t h e s p e c i f i c d o l l a r amount a l l e g e d
by t h e c o n s u m e r a s a b i l l i n g e r r o r .
When t h e a l l e g a t i o n c o n c e r n s t h e d e s c r i p t i o n
o r i d e n t i f i c a t i o n o f t h e t r a n s a c t i o n ( s u c h as t h e d a t e o r t h e s e l l e r ' s name)
r a t h e r t h a n a d o l l a r amount, t h e d i s p u t e d amount i s t h e amount o f t h e t r a n s a c t i o n
or charge th at corresponds to the d isp u te d tr a n s a c t io n i d e n t i f i c a t i o n .
I f t he
c o n s u m e r a l l e g e s a f a i l u r e t o s e nd a p e r i o d i c s t a t e m e n t u n d e r p a r a g r a p h ( a ) ( 7 ) ,
t h e e n t i r e b a l a n c e o w i n g w o u l d be t h e d i s p u t e d amount.
2.
Prohibited c o lle c tio n a c t io n s .
D u r i n g the e r r o r r e s o l u t i o n p e r i o d , the
c r e d i t o r i s p r o h i b i t e d f r om t r y i n g t o c o l l e c t t h e d i s p u t e d amount f ro m t h e c o n ­
s ume r.
P r o h i b i t e d c o l l e c t i o n a c t i o n s i n c l u d e , f o r example, i n s t i t u t i n g c o u r t
a c t i o n , t a k i n g a l i e n , o r i n s t i t u t i n g attachment p r o c e e d in g s .
3.
R i g h t to w i t h h o l d payment.
W h i l e t h e c r e d i t o r must s t a t e on t h e p e r i o d i c
s t a t e m e n t t h a t payment o f any d i s p u t e d amount i s n o t r e q u i r e d p e n d i n g e r r o r
r e s o l u t i o n , t h i s d i s c l o s u r e need n o t a p p e a r i n any s p e c i f i c p l a c e on t h e s t a t e ­
ment and i t need n o t s t a t e t h e s p e c i f i c amount t h a t t h e c o n s u m e r may w i t h h o l d .
The c r e d i t o r may p r e p r i n t on i t s p e r i o d i c s t a t e m e n t f o r m s a s t a t e m e n t t h a t
payment o f any d i s p u t e d amount i s n o t r e q u i r e d p e n d i n g r e s o l u t i o n . 4
4.
I m p o s i t i o n o f a d d i t i o n a l c h a r g e s on u n d i s p u t e d a m o u n t s .
The c o n s u m e r ' s
w i t h h o l d i n g o f t h e d i s p u t e d amount f r om t h e t o t a l b i l l c a n n o t s u b j e c t t h e
u n d isp u te d p o r t io n to the im p o s it io n of a d d it io n a l fin a n ce or oth e r charges.




§ 226.13
- B38 -

F o r e x a m p l e , on an a c c o u n t w i t h a 3 0 - d a y f r e e - r i d e p e r i o d , a c o n s u m e r who
d i s p u t e d a $2 i t em o u t o f a t o t a l b i l l o f $ 3 0 0 and p a i d $ 2 9 8 w i t h i n t h e f r e e r i d e p e r i o d w o u l d n o t l o s e t h e f r e e r i d e a s t o t h e u n d i s p u t e d p o r t i o n , even i f
t h e c r e d i t o r d e t e r m i n e s l a t e r t h a t no b i l l i n g e r r o r o c c u r r e d .
Paragraph

13(d)(1).

1.
A u t o m a t i c payment p l a n s .
The c o v e r a g e o f t h i s p r o v i s i o n i s l i m i t e d
c a r d i s s u e r ' s i n t r a - i n s t i t u t i o n a l payment p l a n s .
I t does not a p p ly to:

to the

o

I n t e r - i n s t i t u t i o n a l payment p l a n s t h a t p e r m i t a c a r d h o l d e r t o
pay a u t o m a t i c a l l y any c r e d i t c a r d i n d e b t e d n e s s f ro m an a s s e t
a c c o u n t n o t h e l d by t h e c a r d i s s u e r r e c e i v i n g payment.

°

I n t r a - i n s t i t u t i o n a l a u t o m a t i c payment p l a n s o f f e r e d by f i n a n c i a l
i n s t i t u t i o n s th a t are not c r e d i t card i s s u e r s .

Paragraph

13(d)(2).

1.
Report of d is p u t e .
Although paragraph (d )(2 ) p r o h i b i t s a c r e d it o r or i t s
a g e n t f r om i s s u i n g an a d v e r s e c r e d i t r e p o r t b e c a u s e t h e c o n s u m e r f a i l s t o pay
t h e d i s p u t e d amount o r any r e l a t e d c h a r g e s , t h e c r e d i t o r may r e p o r t t h a t t h e
amount o r t h e a c c o u n t i s i n d i s p u t e .
A l s o , t h e c r e d i t o r may r e p o r t an a c c o u n t
a s d e l i n q u e n t i f u n d i s p u t e d a mo u nt s r e m a i n u n p a i d .
2.
"Person. 2
*11 D u r i n g t h e e r r o r r e s o l u t i o n p e r i o d , t h e c r e d i t o r i s p r o h i b i t e d
f r om m a k i n g an a d v e r s e c r e d i t r e p o r t t o a ny p e r s o n - - i n c l u d i n g e m p l o y e r s ,
i n s u r a n c e c o m p a n i e s , o t h e r c r e d i t o r s , and c r e d i t b u r e a u s .
3.
C r e d it o r 's agent.
W h e t he r an a g e n c y r e l a t i o n s h i p e x i s t s between a c r e d i t o r
and an i s s u e r o f an a d v e r s e c r e d i t r e p o r t i s d e t e r m i n e d by s t a t e law.

13(e)

Procedures

if

b illin g

e rro r occurred

as a s s e r t e d .

1.
Correction of e r r o r .
The p h r a s e " a s a p p l i c a b l e " i s u s e d i n p a r a g r a p h ( e ) ( 1 )
t o make c l e a r t h a t t h e n e c e s s a r y c o r r e c t i o n s v a r y w i t h t h e t y p e o f b i l l i n g
e rr o r th a t occurred.
F o r e x a m p l e , a m i s i d e n t i f i e d t r a n s a c t i o n i s c u r e d by
p r o p e r l y i d e n t i f y i n g t h e t r a n s a c t i o n and c r e d i t i n g r e l a t e d f i n a n c e and o t h e r
charges.
The c r e d i t o r d o e s n o t h a v e t o c a n c e l t h e amount o f t h e u n d e r l y i n g
o b l i g a t i o n i n c u r r e d by t h e c o n s u m e r .
2.
Form o f c o r r e c t i o n n o t i c e .
In a d d i t i o n to c o r r e c t i n g th e e r r o r , th e c r e d i ­
t o r i s r e q u ir e d under p a rag rap h ( e ) ( 2 ) t o p r o v i d e th e consumer w ith a c o r r e c t i o n
n o t i c e . T h i s w r i t t e n n o t i c e may t a k e a v a r i e t y o f f o r m s .
I t may be s e n t s e p a ­
r a t e l y , o r i t may be i n c l u d e d w i t h or on a p e r i o d i c s t a t e m e n t t h a t i s m a i l e d
w i t h i n th e time f o r r e s o l u t i o n .
S i n c e a l l d i s c l o s u r e s must be c l e a r and c o n ­
s p i c u o u s , t h e amount o f t h e b i l l i n g e r r o r must be s p e c i f i c a l l y i d e n t i f i e d when
the c r e d i t o r u se s the p e r i o d i c sta te m en t to s a t i s f y the c o r r e c t i o n n o t i c e
requirem ent.
I f a s e p a r a t e b i l l i n g e r r o r c o r r e c t i o n n o t i c e i s p r o v id e d , the
a c c o m p a n y i n g o r s u b s e q u e n t p e r i o d i c s t a t e m e n t r e f l e c t i n g t h e c o r r e c t e d amount
may s i m p l y i d e n t i f y i t a s " c r e d i t . "




§ 226.13
- B39 -

13(f)
1.

2.

D ifferent

Procedures

b illin g

if

error.

different

b illin g

A "d iffe ren t

e r r o r o r no b i l l i n g

b illin g

e rro r occurred.

e r r o r " w o u ld i n c l u d e :

o

D i f f e r e n c e s i n t h e amount o f an e r r o r ( f o r e x a m p l e , t h e c u s t o m e r
a s s e r t s a $ 5 5 . 0 0 e r r o r b u t t h e e r r o r was o n l y $ 5 3 . 0 0 ) .

°

D i f f e r e n c e s i n o t h e r p a r t i c u l a r s a s s e r t e d by t h e c o n s u m e r ( a s when
a consumer a s s e r t s t h a t a p a r t i c u l a r t r a n s a c t i o n never o c c u r r e d ,
b u t t h e c r e d i t o r d e t e r m i n e s t h a t o n l y t h e s e l l e r ' s name was d i s ­
c l o s e d i n c o r r e c t l y ).

C re d ito r's

explanation.

The w r i t t e n e x p l a n a t i o n

under p a ragraph

( f )(1 ) :

°

May be i n c l u d e d on o r w i t h a p e r i o d i c s t a t e m e n t t h a t i s m a i l e d
w it h in the time f o r r e s o l u t i o n .
I f the e x p la n a tio n i s provid ed
on a p e r i o d i c s t a t e m e n t , t h e g e n e r a l " c l e a r and c o n s p i c u o u s "
d i s c l o s u r e requirement co n tin u e s to apply.
F o r e x a mp l e , i f a
d i f f e r e n t b i l l i n g e r r o r o c c u r r e d , c r e d i t s o f any d i s p u t e d amount
o r r e l a t e d f i n a n c e o r o t h e r c h a r g e s r e f l e c t e d on a p e r i o d i c s t a t e ­
ment must be c l e a r l y i d e n t i f i e d a s c o r r e c t i o n s .

°

May be s e n t s e p a r a t e l y .
I f a separate e x p la na tio n i s provided,
the e n c lo s e d o r s u b se q u en t p e r i o d i c statem ent r e f l e c t i n g the c o r ­
r e c t e d amount may s i m p l y i d e n t i f y i t as a " c r e d i t . "

o

May be c o mb in e d w i t h t h e c r e d i t o r ' s n o t i c e t o t h e c o n s u m e r o f
amounts s t i l l o w i n g , w h i c h i s r e q u i r e d u n d e r p a r a g r a p h ( g ) ( 1 ) ,
p r o v id e d i t i s s e n t w i t h i n the time l i m i t f o r r e s o l u t i o n .

Paragraph 1 3 ( f ) ( 3 ) .
1.

Correction

13(g)

of error.

See commentar y t o p a r a g r a p h § 2 2 6 . 1 3 ( e ) .

C re d ito r's

Paragraph

righ ts

and d u t i e s

after

re so lu tio n .

13(g) ( 1 ) .

1.
W ritten n o t ic e .
P a r a g r a p h ( g ) ( 1 ) r e q u i r e s t h e c r e d i t o r t o s end a w r i t t e n
n o t i c e i n f o r m i n g t h e c o n s u m e r o f how much i s s t i l l due and when i t i s p a y a b l e .
Am ou nt s t h e c o n s u m e r s t i l l owes may i n c l u d e b o t h minimum p e r i o d i c pa ym en ts and
r e l a t e d f i n a n c e and o t h e r c h a r g e s t h a t a c c r u e d d u r i n g t h e r e s o l u t i o n p e r i o d .
See c om me nt ar y t o § 2 2 6 . 1 3 ( d ) . 2
2.
N o t i c e o f amount owed - - t i m i n g .
W h i l e i t need n o t s end t h e n o t i c e o f
amount owed w i t h i n t h e t i m e p e r i o d f o r r e s o l u t i o n , t h e c r e d i t o r i s u n d e r a d u t y
t o s e nd t h e n o t i c e p r o m p t l y a f t e r r e s o l u t i o n o f t h e a l l e g e d e r r o r .
The n o t i c e
may be s e n t :




§ 226.13
- B 40 -

o

Separately.

o

On o r w i t h a p e r i o d i c

o

Combined w i t h t h e b i l l i n g e r r o r e x p l a n a t i o n r e q u i r e d u n d e r p a r a ­
graph ( f ) ( 1 ) .
I f t h e c r e d i t o r c o m b i n e s t h e n o t i c e o f t h e amount
owed w i t h t h e e x p l a n a t i o n , t h e c o mb in e d n o t i c e must be p r o v i d e d
w i t h i n the time l i m i t f o r r e s o l u t i o n .

Paragraph

statement.

13(g)(3).

1.
Time f o r p a y m e n t .
P a r a g r a p h ( g ) ( 3 ) r e s t r i c t i o n s on t h e c r e d i t o r ' s a b i l i t y
t o r e p o r t t h e c o n s u m e r ' s a c c o u n t a s a e l v n q u e n t a r e c o n t i n g e n t on g i v i n g t h e
c o n s u m e r a d e q u a t e t i m e t o pay a f t e r t h e r e s o l u t i o n o f t h e b i l l i n g e r r o r .
If
the c r e d i t o r in i t s i n i t i a l d i s c l o s u r e s d i s c l o s e d a f r e e - r i d e period g r e a t e r
t h a n 10 d a y s , t h e c o n s u m e r c a n n o t be r e p o r t e d a s d e l i n q u e n t i f t h e r e q u i r e d
payment i s made a t any t i m e w i t h i n t h a t p e r i o d .
The c r e d i t o r u s e s t h e u s u a l
t r i g g e r i n g e v e n t t o t o l l t h e t i m e f o r payment.
I f no f r e e - r i d e p e r i o d i s
n o r m a l l y g i v e n , t h e n t h e c o n s u m e r h a s 10 d a y s t o pa y ( m e a s u r e d f rom r e c e i p t o f
t h e n o t i c e o f t h e amount owed) b e f o r e t h e c r e d i t o r may i s s u e an a d v e r s e c r e d i t
report.
Paragraph 1 3 ( g ) ( 4 ) .
1.
Credit re p o rtin g .
U nd er p a r a g r a p h s ( g ) ( 4 ) ( i ) and ( i i i ) t h e c r e d i t o r ' s
a d d i t i o n a l c r e d i t r e p o r t i n g r e s p o n s i b i l i t i e s must be a c c o m p l i s h e d p r o m p t l y .
The c r e d i t o r need n o t e s t a b l i s h c o s t l y p r o c e d u r e s t o f u l f i l l t h i s r e q u i r e m e n t .
F o r e x a m p l e , a c r e d i t o r t h a t r e p o r t s t o a c r e d i t b u r e a u on s c h e d u l e d m o n t h l y
u p d a t e s need n o t t r a n s m i t c o r r e c t i v e i n f o r m a t i o n i m m e d i a t e l y by an u n s c h e d u l e d
computer o r m agnetic tape.
I t may p r o v i d e t h e c r e d i t b u r e a u w i t h t h e c o r r e c t
i n f o r m a t i o n by l e t t e r o r o t h e r c o m m e r c i a l l y r e a s o n a b l e means.
The c r e d i t o r i s
not r e s p o n s i b l e f o r e n s u r i n g t h a t th e c r e d i t bureau c o r r e c t s i t s i n f o r m a t io n
im m ediately.
2.
Adverse report to c r e d i t bureau.
I f a c r e d i t o r made an a d v e r s e r e p o r t t o
a c r e d i t bureau t h a t d is s e m in a t e d the i n f o r m a t io n t o o t h e r c r e d i t o r s , the
c r e d i t o r need o n l y p r o v i d e t h e c o n s u m e r w i t h t h e name and a d d r e s s o f t h e c r e d i t
bureau.
13(i )

Relation

t o EFT A c t and R e g u l a t i o n

E.

1.
A p p l i c a t i o n to E F T / c re d it t r a n s a c t i o n s : T h i s p r o v i s i o n i s d e s ig n e d to ease
c o m p l i a n c e f o r f i n a n c i a l i n s t i t u t i o n s t h a t e x t e n d c r e d i t i n c i d e n t t o an e l e c ­
t r o n i c f u n d t r a n s f e r t h a t i s s u b j e c t t o t h e B o a r d ' s R e g u l a t i o n E.
Fo r example,
i f a c o n s u m e r w i t h d r a w s money a t an ATM m a c h i n e and a c t i v a t e s an o v e r d r a f t
c r e d i t f e a t u r e on t h e c h e c k i n g a c c o u n t
°




An e r r o r a s s e r t e d w i t h r e s p e c t t o t h e t r a n s a c t i o n i s s u b j e c t , f o r
e r r o r r e s o l u t i o n p u r p o s e s , t o th e a p p l i c a b l e R e g u l a t i o n E p r o v i ­
s i o n s ( s u c h a s t i m i n g and n o t i c e ) f o r t h e e n t i r e t r a n s a c t i o n .

§ 226.13
- B41 -

o

The c r e d i t o r need n o t p r o v i s i o n a l l y c r e d i t t h e c o n s u m e r ' s a c c o u n t ,
u n d e r § 2 0 5 . 1 1 ( c ) ( 2 ) ( i ) o f R e g u l a t i o n E, f o r any p o r t i o n o f t h e
unpaid e x te n sio n o f c r e d it .

o

The c r e d i t o r m u st c r e d i t t h e c o n s u m e r ' s a c c o u n t u n d e r § 2 0 5 . 1 1 ( e ) ,
w i t h any f i n a n c e c h a r g e s i n c u r r e d a s a r e s u l t o f t h e a l l e g e d e r r o r .

o

The p r o v i s i o n s o f § 2 2 6 . 1 3 ( d ) and ( g ) w o u l d c o n t i n u e t o a p p l y t o
the c r e d i t p o r t i o n o f the t r a n s a c t i o n .

REFERENCES:
Statute:
Previous

§§

161 and 162.

regulation:

Other s e c t i o n s :

§§ 226.2 ( j ) ,

§§ 226.6,

226.7,

226.2(cc),

and 2 2 6 . 1 4 .

and 2 2 6 . 8 .

1981 c h a n g e s :
T h is s e c t i o n r e f l e c t s a complete r e s t r u c t u r i n g o f
the e r r o r r e s o l u t io n p r o v i s i o n s .
The new o r g a n i z a t i o n o f t h e p r o v i s i o n s , f o r
example, a r r a n g e s the c r e d i t o r ' s r e s p o n s i b i l i t i e s in c h r o n o l o g i c a l sequence.
T h e r e a r e a l s o s e v e r a l s u b s t a n t i v e c h a n g e s f ro m t h e p r e v i o u s r e g u l a t i o n .
S e c t i o n 2 2 6 . 1 3 ( a ) ( 7 ) i m p l e m e n t s amended § 1 6 1 ( b ) o f t h e a c t , and p r o ­
v i d e s t h a t t h e c r e d i t o r ' s f a i l u r e t o s e nd a p e r i o d i c s t a t e m e n t t o t h e c o n s u m e r ' s
c u r r e n t a d d r e s s i s a b i l l i n g e r r o r , u n l e s s the c r e d i t o r re c e iv e d w r i t t e n n o t i c e
o f t h e a d d r e s s c h a n g e f e w e r t h a n 20 d a y s ( i n s t e a d o f 10 d a y s ) b e f o r e t h e end
of the b i l l i n g c y c l e .
S e v e r a l p r o v i s i o n s r e g a r d i n g the c r e d i t o r ' s d u t i e s a f t e r a b i l l i n g
e r r o r i s a l l e g e d h ave been r e v i s e d .
The o l d r e g u l a t i o n i m mu n iz e d a c r e d i t o r
f rom l i a b i l i t y f o r i n a d v e r t e n t l y t a k i n g c o l l e c t i o n a c t i o n o r m a k i n g an a d v e r s e
c r e d i t r e p o r t w i t h i n two d a y s a f t e r r e c e i v i n g a b i l l i n g e r r o r n o t i c e ; t h e s e
p r o v i s i o n s a r e d e l e t e d f r om t h e r e v i s e d r e g u l a t i o n .
The new r e g u l a t i o n a l s o
d e l e t e s r e q u i r e m e n t s a b o u t t h e l o c a t i o n o f d i s c l o s u r e s " on t h e f a c e " o f t h e
p e r i o d i c s t a t e m e n t f o r payment o f d i s p u t e d amounts and p e r m i t s a c r e d i t o r t o
p r e - p r i n t n o t i c e s on t h e p e r i o d i c s t a t e m e n t c o n c e r n i n g payment o f d i s p u t e d
amounts.
The r e v i s e d s e c t i o n c h a n g e s t h e o l d r u l e t h a t a c a r d i s s u e r must
p r e v e n t o r r e s t o r e an a u t o m a t i c d e b i t o f a d i s p u t e d amount i f i t r e c e i v e s a
b i l l i n g e r r o r n o t i c e w i t h i n 16 d a y s a f t e r t r a n s m i t t i n g t h e p e r i o d i c s t a t e m e n t
that r e f l e c t s the a lle g e d e rr o r .
U n d e r t h e new r e g u l a t i o n , t h e c a r d i s s u e r
mu st p r e v e n t an a u t o m a t i c d e b i t i f i t r e c e i v e s a b i l l i n g e r r o r n o t i c e up t o
t h r e e d a y s b e f o r e t h e s c h e d u l e d payment d a t e ( p r o v i d e d t h e n o t i c e i s r e c e i v e d
w i t h i n t h e 60 d a y s t h a t t h e c o n s u m e r h a s t o a s s e r t t h e e r r o r ) .

the

A f t e r r e s o l u t i o n , t h e new r e g u l a t i o n r e q u i r e s t h e c r e d i t o r t o a l l o w
g r e a t e r o f 10 d a y s o r t h e f r e e - p e r i o d p r e v i o u s l y d i s c l o s e d i n w h i c h t o pay




§ 226,14
- B42 -

p a r t s o f t h e d i s p u t e d amount s t i l l o w i n g .
The o l d r e g u l a t i o n r e q u i r e d a c r e d i ­
t o r t o g i v e t h e c o n s u m e r t h e g r e a t e r o f t h e c u s t o m a r y f r e e - r i d e p e r i o d o r ten
days.
The new r e g u l a t i o n
between t h e e r r o r r e s o l u t i o n
( E l e c t r o n i c Fund T r a n s f e r s ) .

a dd s a p r o v i s i o n a d d r e s s i n g t h e r e l a t i o n s h i p
p r o v i s i o n s o f R e g u l a t i o n Z and R e g u l a t i o n E

F o r m e r § 2 2 6 . 1 4 ( f ) , w h i c h i m p l e m e n te d t h e s t a t u t o r y f o r f e i t u r e
h a s been d e l e t e d .
A r e f e r e n c e t o t h e p e n a l t y i s i n F o o t n o t e 27.

Section

226.14 - 14(a)

Determ ination
General

o f a n nu a l

percentage

penalty,

rate.

ru le .

1.
Tolerance.
The t o l e r a n c e o f 1/8 o f one p e r c e n t a g e p o i n t a b ov e o r b e l ow t h e
APR a p p l i e s t o any r e q u i r e d d i s c l o s u r e o f t h e APR.
T h i s i n c l u d e s th e d i s c l o s u r e
in :
°

In itia l

statements.

°

Periodic

o

Change i n t e r m s n o t i c e s

°

Advertising

statem ents.
under § 2 2 6 . 9 ( c ) .

under § 226 .16 .

T h e r e i s no e x p l i c i t t o l e r a n c e f o r any p e r i o d i c r a t e a s s u c h , and a d i s c l o s e d
p e r i o d i c r a t e may v a r y f ro m p r e c i s e a c c u r a c y o n l y t o t h e e x t e n t t h a t i t s
a n n u a l i z e d e q u i v a l e n t i s w i t h i n t h e t o l e r a n c e p e r m i t t e d by t h i s s e c t i o n .
2.
Rounding.
The p r o v i s i o n d o e s n o t r e q u i r e t h a t t h e APR be c a l c u l a t e d t o any
p a r t i c u l a r number o f d e c i m a l p l a c e s ; r o u n d i n g i s p e r m i s s i b l e w i t h i n t h e 1/8 o f
one p e r c e n t t o l e r a n c e .
F o r e x a m p l e , an e x a c t APR o f 1 4 . 3 3 3 3 3 % may be s t a t e d as
1 4 . 3 3 % o r a s 1 4 . 3 % , o r even a s 14 1/4%; b u t i t c o u l d n o t be s t a t e d as 1 4 . 2 % o r
14%, s i n c e e i t h e r o f t h e s e v a r y by more t h a n t h e p e r m i t t e d t o l e r a n c e .
3.
Finance c h a rg e s.
The r e g u l a t i o n d o es n o t p r o h i b i t c r e d i t o r s f rom a s s e s s i n g
f i n a n c e c h a r g e s on b a l a n c e s t h a t i n c l u d e p r i o r , u n p a i d f i n a n c e c h a r g e s .
H ow ev er ,
s t a t e law may p r o h i b i t i m p o s i n g new f i n a n c e c h a r g e s on p r i o r , u n p a i d c h a r g e s .
14(b)

APR f o r

in itia l

disclosures,

ad vertisin g.

1.
Corresponding APR.
F o r i n i t i a l d i s c l o s u r e s ( u n d e r § 2 2 6 . 6 ) and f o r a d v e r t i s i n g ( u n d e r § 2 2 6 . 1 6 ) t h e APR i s d e t e r m i n e d by m u l t i p l y i n g t h e p e r i o d i c r a t e
by t h e number o f p e r i o d s i n t h e y e a r .
T h is computation r e f l e c t s the fa c t t h a t ,
i n s u c h d i s c l o s u r e s , t h e r a t e (known a s t h e c o r r e s p o n d i n g APR) i s p r o s p e c t i v e
and d o es n o t i n v o l v e any p a r t i c u l a r f i n a n c e c h a r g e o r p e r i o d i c b a l a n c e .




§ 226.14
- B43 -

14(c)

APR f o r p e r i o d i c

statem ents.

1.
T h i s p r o v i s i o n c l a r i f i e s t h a t , i n d i s c l o s i n g t h e c o r r e s p o n d i n g APR f o r each
p e r i o d i c r a t e ( u n d e r § 2 2 6 . 7 ( d ) ) , t h e APR i s c a l c u l a t e d by s i m p l y m u l t i p l y i n g
e a c h p e r i o d i c r a t e by t h e number o f p e r i o d s p e r y e a r .
This d is c lo s u r e i s lik e
t h a t p r o v i d e d on t h e i n i t i a l d i s c l o s u r e s t a t e m e n t .
The p e r i o d i c s t a t e m e n t a l s o
m u st r e f l e c t ( u n d e r § 2 2 6 . 7 ( g ) ) t h e a n n u a l i z e d e q u i v a l e n t o f t h e r a t e a c t u a l l y
a p p l i e d d u r i n g a p a r t i c u l a r c y c l e ( t h e h i s t o r i c a l r a t e ) ; t h i s r a t e may d i f f e r
f ro m t h e c o r r e s p o n d i n g APR b e c a u s e o f t h e i n c l u s i o n o f f i x e d , minimum, o r
tra n sa c tio n charges.
P a r a g r a p h s ( c ) ( 1 ) t h ro u g h ( c ) ( 4 ) s t a t e the com putatio n
r u l e s f o r the h i s t o r i c a l rate.
2.
Periodic ra te s.
P a r a g r a p h ( c ) ( r ) ~ a p p l i e s i f t h e o n l y f i n a n c e c h a r g e imposed
i s by a p p l i c a t i o n o f a p e r i o d i c r a t e t o a b a l a n c e .
The c r e d i t o r may compute
t h e APR e i t h e r
o

By m u l t i p l y i n g
year; or

°

By t h e

each p e r i o d i c

r a t e by t h e number o f p e r i o d s

in

t he

" q u o t i e n t " method.

T h i s method r e f e r s t o a c o m p o s i t e APR where d i f f e r e n t p e r i o d i c r a t e s a p p l y t o
d i f f e r e n t balances.
F o r e x a m p l e , a p a r t i c u l a r p l a n may i n v o l v e a p e r i o d i c
r a t e o f 1 1/2% on b a l a n c e s up t o $ 5 0 0 , and 1% on b a l a n c e s o v e r $ 5 0 0 .
I f , in
a g iv e n c y c l e , the consumer has a b a la n c e o f $800, the f i n a n c e cha rge would
c o n s i s t o f $ 7 .5 0 (500 x .015) p l u s $ 3 .0 0 (300 x . 0 1 ) , f o r a t o t a l f in a n c e
charge of $10.50.
The APR f o r t h i s p e r i o d may be d i s c l o s e d e i t h e r as 18% on
$ 5 0 0 and 12% on $ 3 0 0 , o r a s 1 5 . 7 5 % on a b a l a n c e o f $ 8 0 0 ( t h e q u o t i e n t o f $ 1 0 . 5 0
d i v i d e d by $ 8 0 0 , m u l t i p l i e d by 1 2 ) .
3.
C h a r g e s n ot b a s e d on p e r i o d i c r a t e s .
Paragraph ( c ) ( 2 ) a p p lie s
f i n a n c e c h a r g e imp os ed i n c l u d e s a c h a r g e n o t due t o t h e a p p l i c a t i o n
odic rate.
F o r e x a m p l e , i f a c r e d i t o r i m p o s e s a minimum $1 f i n a n c e
a l l b a l a n c e s b e l o w $ 5 0 , and t h e c o n s u m e r ' s b a l a n c e was $ 40 i n t h a t
t h e c r e d i t o r w o u l d d i s c l o s e an APR o f 30% ( 1 / 4 0 x 1 2 ) .

i f the
of a p e r i ­
c h a r g e on
period,

4.
No b a l a n c e .
F o o t n o t e 32 w o u l d a p p l y , f o r e x a m p l e , t o a p l a n i n w h i c h no
f r e e r i d e i s g i v e n f o r a d v a n c e s even i f payment i s made i n f u l l on a m o n t h l y
basis.
I f t h e c o n s u m e r p a y s t h e b a l a n c e on May 19 and h a s no t r a n s a c t i o n s
t h e r e a f t e r , t h e J un e s t a t e m e n t m i g h t r e f l e c t a f i n a n c e c h a r g e w i t h no b a l a n c e .
No APR can be d e t e r m i n e d , s o none need be d i s c l o s e d f o r t h e J u n e s t a t e m e n t .
5.
Transaction ch a rge s.
i n c l u d e , f o r example,

The t r a n s a c t i o n

charges

f e e i m p o s e d on a p a r t i c u l a r

noted in parag rap h

(c)(3)

o

A loan

advance.

°

A p o i n t - o f - s a l e d i s c o u n t f o r payment by c a s h r a t h e r t h a n c r e d i t
c a r d i f t h e d i s c o u n t i s a f i n a n c e c h a r g e and t h e c a r d i s s u e r i s
n o t e x c u s e d f r om d i s c l o s u r e u n d e r § 2 2 6 . 9 ( d ) ( 2 ) .

The r e f e r e n c e t o a v o i d i n g d u p l i c a t i o n i n t h e c o m p u t a t i o n r e q u i r e s t h a t t h e
a mou nt s o f t r a n s a c t i o n s on w h i c h t r a n s a c t i o n c h a r g e s were i m po s ed n o t be i n c l u d e d




§ 226.14
- B44 -

b o t h i n t h e amount o f t o t a l b a l a n c e s and i n t h e " o t h e r a mou nt s on w h i c h a
f i n a n c e c h a r g e was i m p o s e d " f i g u r e .
T o r f u r t h e r e x p l a n a t i o n and e x a m p l e s o f
how t o d e t e r m i n e t h e c o m p o n e n t s o f t h i s f o r m u l a , s ee A p p e n d i x F.
6.
Charges re late d to opening a c c o u n t.
F o o t n o t e 33 i s a p p l i c a b l e t o b o th p a r a ­
g r a p h s ( c ) ( 2 ) and ( c ) ( 3 ) ]
The c h a r g e s i n v o l v e d h e r e do n ot r e l a t e t o a s p e c i f i c
t r a n s a c t i o n o r a c t i v i t y on t h e a c c o u n t , b u t r e l a t e s o l e l y t o t h e o p e n i n g o f t h e
account.
I n c l u s i o n o f t h e s e c h a r g e s i n t h e APR c a l c u l a t i o n w o u l d r e s u l t i n
s i g n i f i c a n t d i s t o r t i o n s o f t h e APR and d e l i v e r y o f a p o s s i b l y m i s l e a d i n g d i s c l o ­
sure to consumers.
T h i s r u l e a p p l i e s even i f t h e l o a n f e e , p o i n t s o r s i m i l a r
c h a r g e s a r e b i l l e d on a s u b s e q u e n t p e r i o d i c s t a t e m e n t o r w i t h h e l d f r om t h e
p r o c e e d s o f t h e f i r s t a d v a n c e on t h e a c c o u n t .
7. S m a l l f i n a n c e c h a r g e s .
§ 2 2 6 . 1 4 ( c ) ( 4 ) g i v e s t h e c r e d i t o r an o p t i o n t o
p a r a g r a p h s ( c ) ( 2 ) and ( c ) ( 3 ) i f s m a l l ( 5 0 c e n t s o r l e s s ) minimum o r f i x e d f e e s
are in v o lv e d .
F o r e x a m p l e , w h i l e a m o n t h l y a c t i v i t y f e e o f 50 c e n t s on a
b a l a n c e o f $ 2 0 w o u l d p r o d u c e an APR o f 30% u n d e r t h e r u l e i n p a r a g r a p h ( c ) ( 2 ) ,
t h e c r e d i t o r may d i s c l o s e an APR o f 18% i f t h e p e r i o d i c r a t e g e n e r a l l y a p p l i c a b l e
t o a l l b a l a n c e s i s 1 1/2% p e r month.
T h i s o p t io n i s c o n s i s t e n t w ith the p r o v i ­
s i o n i n F o o t n o t e 11 t o § § 2 2 6 . 6 and 2 2 6 . 7 p e r m i t t i n g a c r e d i t o r t o d i s r e g a r d
t h e e f f e c t o f minimum c h a r g e s i n d i s c l o s i n g t h e r a n g e s o f b a l a n c e s t o w h i c h
p e r io d ic ra te s apply.

14(d)

C alculations

where d a i l y

periodic

rate a p p lie d .

1. Q u o t i e n t m e t h o d s .
T h i s p r o v i s i o n a d d r e s s e s u s e o f t h e q u o t i e n t method t o
d e t e r m i n e t h e a n nu a l p e r c e n t a g e r a t e , and a d a i l y p e r i o d i c r a t e ( s ) t o d e t e r m i n e
some o r a l l o f t h e f i n a n c e c h a r g e .
S i n c e t h e u s u a l q u o t i e n t f o r m u l a d o es n o t
work when a d a i l y r a t e i s b e i n g a p p l i e d t o a s e r i e s o f d a i l y b a l a n c e s , t h i s
p a r a g r a p h g i v e s t h e c r e d i t o r two a l t e r n a t i v e s .
E i t h e r form ula produces a c c u ­
r a t e APRs f o r p u r p o s e s o f t h i s r e g u l a t i o n .
REFERENCES:
Statute:
Previous

§ 107.
regulation:

§ 226.5(a).
*

Other s e c t i o n s :

§ § 2 2 6 . 6 and 2 2 6 . 7 .

1981 c h a n g e s : The p r o v i s i o n r e f l e c t s t h e s t a t u t o r y amendment i n c o r ­
p o r a t i n g a 1/8 o f one- p e r c e n t t o l e r a n c e f o r a n n u a l p e r c e n t a g e r a t e s .
The
p r o v i s i o n i n t h e p r i o r r e g u l a t i o n d e a l i n g w i t h f i n a n c e c h a r g e s impos ed on
s p e c i f i e d r a n g e s o r b r a c k e t s o f b a l a n c e s was d e l e t e d .
A new f o o t n o t e c l a r i f i e s
t h a t l o a n f e e s , p o i n t s , o r s i m i l a r c h a r g e s u n r e l a t e d t o any s p e c i f i c t r a n s a c t i o n
a r e n o t t o be computed i n t o t h e APR.
B o a r d I n t e r p r e t a t i o n s § § 2 2 6 . 5 0 1 and
226.506 are in co rp o rated .




§ 226.15
- B45 -

Section

1.

226,15 - -

Right of

15(a)

Consum er's

Coverage.

This

rescissio n .

section

righ t

to r e s c i n d .

applies

o

A security

interest

°

The s e c u r i t y

interest

o

The d w e l l i n g

is

to t r a n s a c t io n s

arises
is

in w hich:

f ro m t h e c r e d i t

taken

that co n su m e r's

in

transaction.

a co n su m e r's d w e llin g .

principal

place of residence.

2.
T r a n s a c t i o n s not c o v e r e d .
I f a c r e d i t e x t e n s i o n i s o t h e r w i s e exempt f rom
R e g u l a t i o n Z , i t d o e s n o t become s u b j e c t b e c a u s e o f t h e n a t u r e o f t h e c o l l a t e r a l
se c u rin g the c r e d it.
For example, th e r i g h t o f r e s c i s s i o n does not apply to a
b u s i n e s s p u r p o s e l o a n e ven t h o u g h t h e l o a n i s s e c u r e d by t h e c u s t o m e r ' s p r i n c i ­
pa l d w e l l i n g .
3.
T r a n s a c t i o n s g i v i n g r i s e to r i g h t .
U nder an o p e n - e n d c r e d i t p l a n s e c u r e d
by t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g , t h e g e n e r a l r u l e i s t h a t t h e r i g h t o f
r e s c i s s i o n a r i s e s w i t h each t r a n s a c t i o n on t h e a c c o u n t , i n c l u d i n g :
°

Each c r e d i t e x t e n s i o n .

o

Opening the a cco u n t.

°

Adding a s e c u r i t y i n t e r e s t
t o an e x i s t i n g a c c o u n t .

0

In c r e a s in g the d o l l a r
to secure the plan.

°

I n c r e a s i n g the c r e d i t l i m i t .
F o r e x a m p l e , a c o n s u m e r may open an
account w ith a $ 1 0 ,0 0 0 c r e d i t l i m i t , $ 5 ,0 0 0 o f which i s i n i t i a l l y
s e c u r e d by t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g .
The c o n s u m e r ha s
t h e r i g h t t o r e s c i n d upon o p e n i n g t h e a c c o u n t and ( e x c e p t as
n o t e d i n p a r a g r a p h ( a ) ( 1 ) ( i i )) w i t h e ac h e x t e n s i o n on t h e a c c o u n t .
L a t e r , i f the c r e d i t o r d e c id e s t h a t i t wants the c r e d i t l i n e
f u l l y s e c u r e d , and i n c r e a s e s t h e amount o f i t s i n t e r e s t i n t h e
c o n s u m e r ' s d w e l l i n g , t h e c o n s u m e r a g a i n ha s t h e r i g h t t o r e s c i n d .

in the c o n s u m e r 's

amount o f s e c u r i t y

p rincipal

taken

residence

in the d w e l l i n g

4.
Exceptions.
A lt h o u g h as a g e n e ra l r u l e the consumer has the r i g h t to
r e s c i n d w i t h e ac h t r a n s a c t i o n on t h e a c c o u n t , § 1 2 5 ( e ) o f t h e amended a c t
p r o v i d e s t h a t u n t i l M a r c h 3 1 , 1 9 8 5 , t h e c r e d i t o r need n o t p r o v i d e t h e r i g h t t o
r e s c i n d a t t h e t i m e o f e ac h i n d i v i d u a l c r e d i t e x t e n s i o n made u n d e r a s e c u r e d
o p e n - e n d c r e d i t p l a n , i f t h e e x t e n s i o n s a r e made i n a c c o r d a n c e w i t h a p r e v i o u s l y
e s t a b lis h e d c r e d it l i m i t fo r the plan.
A f t e r M a r c h 3 1, 1 9 8 5 , t h e c o n s um e r
w i l l h av e t h e r i g h t t o r e s c i n d eac h s u b s e q u e n t e x t e n s i o n made u n d e r an o p e n - e n d
c r e d i t p l a n s e c u r e d by t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g .
Extensions of c re d it
made p r i o r t o M ar c h 3 1 , 1 9 8 5 , w i l l n o t be a f f e c t e d by t h e s u b s e q u e n t r e s c i s s i o n
righ ts.




§ 226.15
- B46 -

5.
S e c u r i t y i n t e r e s t a r i s i n g f r om t r a n s a c t i o n .
The s e c u r i t y i n t e r e s t must be
r e t a in e d as p a rt o f the c r e d i t t r a n s a c t i o n , as in the f o l l o w i n g examples:
0

A s e c u r i t y i n t e r e s t i s a c q u i r e d by a c o n t r a c t o r who i s
extending the c r e d i t in the t r a n s a c t i o n .

also

A m e c h a n i c ' s l i e n o r m a t e r i a l m e n ' s l i e n r e t a i n e d by a s u b c o n t r a c t o r
o r s u p p l i e r o f a c o n t r a c t o r - c r e d i t o r even when t h e l a t t e r h as
w a i v e d i t s own s e c u r i t y i n t e r e s t i n t h e c o n s u m e r ' s home.
The s e c u r i t y i n t e r e s t
follow in g cases:

is

not

retained

as p a r t o f t h e c r e d i t t r a n s a c t i o n

in the

°

I f a m a t e r i a l m e n ' s o r m e c h a n i c ' s l i e n i s o b t a i n e d by a c o n t r a c t o r
who i s n o t a p a r t y t o t h e c r e d i t t r a n s a c t i o n b u t m e r e l y r e c e i v e s
the proceeds o f the c o n s u m e r 's cash advance.

o

I f a l l s e c u r i t y i n t e r e s t s t h a t may a r i s e
c r e d i t t r a n s a c t i o n are v a l i d l y waived.

o

I f t h e c r e d i t o r o b t a i n s a l i e n and c o m p l e t i o n bond t h a t h a s t h e
e f f e c t o f a u t o m a t i c a l l y s a t i s f y i n g a l l l i e n s a g a i n s t th e c o n s u m e r 's
d w e l l i n g as a r e s u l t o f the c r e d i t t r a n s a c t i o n .

in

c o n n e c t io n w ith the

A l t h o u g h l i e n s a r i s i n g by o p e r a t i o n o f la w a r e n o t c o n s i d e r e d s e c u r i t y i n t e r e s t s
f o r d i s c l o s u r e p u r p o s e s u n d e r § 2 2 6 . 2 , t h a t s e c t i o n s p e c i f i c a l l y i n c l u d e s them
in th e d e f i n i t i o n f o r p u rp o s e s o f the r i g h t o f r e s c i s s i o n .
T h u s , even t h o u g h
an i n t e r e s t i n t h e c o n s u m e r ' s d w e l l i n g i s n o t a r e q u i r e d d i s c l o s u r e u n d e r
§ 2 2 6 . 6 ( c ) - , i t may s t i l l g i v e r i s e t o t h e r i g h t o f r e s c i s s i o n .
6.
Consumer.
The r i g h t o f r e s c i s s i o n r u n s t o any c o n s u m e r whose p r i n c i p a l
d w e l l i n g i s s u b je c t to th e s e c u r i t y i n t e r e s t .
To be a " c o n s u m e r " w i t h i n t h e
m e a n i n g o f § 2 2 6 . 2 , t h a t p e r s o n need n o t be a s i g n a t o r y t o t h e c r e d i t a g r e e ­
ment, b u t must a t l e a s t h a v e an o w n e r s h i p i n t e r e s t i n t h e d w e l l i n g t h a t wo ul d
be e nc umbered by t h e c r e d i t o r ' s s e c u r i t y i n t e r e s t .
F o r e x a m p l e , i f one s p o u s e
e n t e r s i n t o a secured plan w i t h o u t the p a r t i c i p a t i o n o f the o t h e r sp o u se , the
l a t t e r i s a "consum er" i f the o w n e rsh ip i n t e r e s t s o f both sp o u se s are s u b j e c t
to the s e c u r i t y in t e r e s t .
7.
Principal d w e llin g.
A d w e l l i n g , a s d e f i n e d i n § 2 2 6 . 2 , can i n c l u d e s t r u c t u r e s t h a t a r e c l a s s i f i e d a s p e r s o n a l t y u n d e r s t a t e la w.
F o r example, a t r a n s ­
a c t i o n s e c u r e d by a m o b i l e home, t r a i l e r , o r h o u s e b o a t u s e d as t h e c o n s u m e r ' s
p r i n c i p a l d w e l l i n g may be r e s c i n d a b l e .
The s t r u c t u r e must be t h e c o n s u m e r ' s
p r i n c i p a l d w e l l i n g at the time o f th e c r e d i t t r a n s a c t i o n .
Thus, a t r a n s a c t io n
s e c u r e d by a s e c o n d home t h a t i s n o t c u r r e n t l y b e i n g u s e d as t h e c o n s u m e r ' s
p r i n c i p a l p l a c e o f r e s i d e n c e i s n o t r e s c i n d a b l e , e ven i f t h e c o n s u m e r i n t e n d s
t o r e t i r e t h e r e s omet ime i n t h e f u t u r e .
S i m i l a r l y , a v a c a t i o n home u s e d a s
c o l l a t e r a l - - i f i t i s n o t t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g - - d o e s n ot g i v e
r i s e to the r i g h t o f r e s c i s s i o n .
8.
Consum er's e x e r c is e o f r i g h t .
The c o n s u m e r ' s e x e r c i s e o f t h e r i g h t o f
r e s c i s s i o n must be i n w r i t i n g b u t need n o t be on t h e for m t h e c r e d i t o r g i v e s




§ 226.15
- B47 -

the consumer under parag rap h ( b ) .
t e l e g r a m , o r o t h e r m ea ns , t h e t i m e
p a r a g r a p h ( d ) ( 2 ) does not b eg in to
c r e d i t o r may d e s i g n a t e an a g e n t t o
a g e n t ' s name and a d d r e s s a p p e a r on
paragraph ( b ) .

W h e t h e r n o t i c e o f r e s c i s s i o n i s s e n t by m a i l ,
p e r i o d f o r the c r e d i t o r ' s perform ance under
r u n u n t i l t h e n o t i c e h a s been r e c e i v e d .
The
r e c e i v e t h e r e s c i s s i o n n o t i c e a s l o n g as t he
th e n o t i c e p r o v id e d t o th e consumer under

9.

R e scissio n period.
The p e r i o d w i t h i n w h i c h t h e c o n s u m e r must e x e r c i s e t h e
r i g h t t o r e s c i n d r u n s f o r t h r e e b u s i n e s s d a y s f ro m t h e l a s t o f t h e f o l l o w i n g
three events:
o

The t r a n s a c t i o n

that

gives

o

D elivery

of a l 1 m aterial

disclosures

o

D elivery

o f the

rescission

reguired

rise

to the r i g h t
that

are

of r e s c is s io n .
r e l e v a n t to the plan.

notice.

F o r e x a m p l e , i f an a c c o u n t i s opened on J un e 1 and t h e d i s c l o s u r e s and n o t i c e
w er e g i v e n on May 31, t h e r e s c i s s i o n p e r i o d e x p i r e s a t m i d n i g h t o f t h e t h i r d
b u s i n e s s d a y a f t e r J un e 1.
I f t h e d i s c l o s u r e s were g i v e n and t h e a c c o u n t opened
on J un e 1 and t h e r e s c i s s i o n n o t i c e g i v e n on J un e 3, t h e r e s c i s s i o n r i g h t e x p i r e s
a t m i d n i g h t o f t h e t h i r d b u s i n e s s d ay a f t e r J u n e 3.
The c o n s u m e r must have
placed the r e s c i s s i o n n o t ic e in the m a il, f i l e d i t f o r t e le g r a p h i c t r a n s m i s s i o n ,
or d e l i v e r e d i t to the c r e d i t o r ' s p la c e o f b u s i n e s s w i t h i n th a t time in o r d e r
to e x e r c i s e the r i g h t .
10.
M aterial d is c lo s u r e s .
The c r e d i t o r must p r o v i d e s u f f i c i e n t i n f o r m a t i o n t o
s a t i s f y th e re g u ire m e n t s o f § 2 2 5 .6 f o r the l i s t e d d i s c l o s u r e s .
A creditor
may s a t i s f y t h e r e g u i r e m e n t o f p r o v i d i n g t h e m a t e r i a l d i s c l o s u r e s by g i v i n g an
i n i t i a l d i s c l o s u r e statem ent t h a t co m p lie s w ith the r e g u l a t i o n .
F a i l u r e to
g i v e the o t h e r r e g u i r e d i n i t i a l d i s c l o s u r e s (such as the b i l l i n g r i g h t s s t a t e ­
ment) d o e s n o t p r e v e n t t h e r u n n i n g o f t h e r e s c i s s i o n p e r i o d , a l t h o u g h t h a t
f a i l u r e may r e s u l t i n c i v i l o r a d m i n i s t r a t i v e s a n c t i o n s .
11.
M a te ria l d is c l o s u r e s - - v a r ia b le rate program.
For a v a r i a b l e ra te program,
t h e m a t e r i a l d i s c l o s u r e s w o u l d a l s o i n c l u d e t h e r e g u i r e d i n f o r m a t i o n on t he
c i r c u m s t a n c e s u n d e r w h i c h a r a t e may i n c r e a s e , t h e l i m i t a t i o n s on t h e i n c r e a s e ,
and t h e e f f e c t o f an i n c r e a s e .
12.
Unexpired r i g h t o f r e s c i s s i o n .
When t h e c r e d i t o r has f a i l e d t o t a k e t h e
a c t i o n n e c e s s a r y t o s t a r t the t h r e e - d a y r e s c i s s i o n p e r i o d r u n n i n g , the r i g h t
t o r e s c i n d a u t o m a t i c a l l y l a p s e s on t h e o c c u r r e n c e o f t h e e a r l i e s t o f t h e
fo llo w in g three events:




°

Three y e a r s
r e s c i s s i on.

a f t e r th e t r a n s a c t i o n

°

Transfer of all

°

S a le o f the c o n s u m e r 's i n t e r e s t in the p r o p e r t y , i n c l u d i n g a t r a n s ­
a c t i o n i n w h i c h t h e c o n s u m e r s e l l s t h e d w e l l i n g and t a k e s back l e g a l
t i t l e t h r o u g h a p u r c h a s e money n o t e and m o r t g a g e .

o f th e c o n s u m e r 's

giving

rise

interest

to the

right

of

in the p r o p e r t y .

§ 226,15
- B48 -

A p a r t i a l t r a n s f e r o f t h e c o n s u m e r ' s i n t e r e s t , s u c h a s an i n t r a - f a m i l y t r a n s f e r
b e s t o w i n g c o - o w n e r s h i p on a s p o u s e , d o e s n o t t e r m i n a t e t h e r e s c i s s i o n r i g h t .
T r a n s f e r o f a l l the c o n s u m e r 's i n t e r e s t i n c l u d e s such t r a n s f e r s as beq u e sts
and g i f t s .
N e i t h e r a s a l e o f t h e p r o p e r t y n o r a t r a n s f e r need be v o l u n t a r y .
F o r e x a m p l e , a f o r e c l o s u r e s a l e w o u l d t e r m i n a t e an u n e x p i r e d r i g h t t o r e s c i n d .
A s p r o v i d e d i n § 1 25 o f t h e a c t , t h e t h r e e - y e a r t e r m i n a t i o n l i m i t may be e x t e n d e d
by an a d m i n i s t r a t i v e p r o c e e d i n g t o e n f o r c e t h e p r o v i s i o n s o f t h i s s e c t i o n .
13. J o i n t o w n e r s .
I f more t h a n one c o n s u m e r h a s t h e r i g h t t o r e s c i n d a t r a n s ­
a c t i o n , any one o f them may e x e r c i s e t h e r i g h t and c a n c e l t h e t r a n s a c t i o n on
behalf of a l l .
F o r e x a m p l e , i f a h u s b a n d and w i f e h av e t h e r i g h t t o r e s c i n d
a t r a n s a c t i o n , e i t h e r s p o u s e a c t i n g a l o n e may e x e r c i s e t h e r i g h t and bo th
s p o u s e s a r e bound by t h e r e s c i s s i o n .

15(b)
1.

Notice o f r i g h t to

Who r e c e i v e s n o t i c e .

rescind.

Each c o n s u m e r e n t i t l e d

o

Two c o p i e s o f t h e

o

The m a t e r i a l

rescission

to

r e s c i n d must be g i v e n :

notice,

disclosures.

I n a t r a n s a c t i o n i n v o l v i n g j o i n t o w n e r s , b o t h o f whom a r e e n t i t l e d t o r e s c i n d ,
b o t h must r e c e i v e t h e n o t i c e s and d i s c l o s u r e s .
For example, i f both sp ouses
a r e e n t i t l e d t o r e s c i n d a t r a n s a c t i o n , eac h must r e c e i v e two c o p i e s o f t h e
r e s c i s s i o n n o t i c e and one c op y o f t h e d i s c l o s u r e s .
I f an a g e n t i s - a c t i n g f o r
t h e c o n s u m e r , t h e c r e d i t o r need o n l y d e l i v e r t h e m a t e r i a l t o t h e a g e n t , so
l o n g a s s t a t e a g e n c y l a w p r e c l u d e s t h e c o n s u m e r f ro m a c t i n g on h i s o r h e r
own b e h a l f i n s u ch c i r c u m s t a n c e s .
I f s t a t e law d o e s n o t p r e v e n t c o n s u m e r s /
p r i n c i p a l s f rom a c t i n g on t h e i r own b e h a l f , t h e n t h e c r e d i t o r must d e l i v e r
t h e m a t e r i a l t o b o th t h e c o n s u m e r and t h e a g e n t .
2.
Format.
The i n f o r m a t i o n r e q u i r e d by t h e r e s c i s s i o n n o t i c e may be on a
n o t i c e t h a t i s p h y s i c a l l y s e p a r a t e d f ro m t h e m a t e r i a l d i s c l o s u r e s o r com bi ned
w ith th e m a t e r i a l d i s c l o s u r e s , as lo n g as th e in f o r m a t i o n i s s e t f o r t h in a
c l e a r and c o n s p i c u o u s manner.
The n o t i c e s i n A p p e n d i x G p r o v i d e m o d e l s t h a t
c r e d i t o r s may u s e i n g i v i n g n o t i c e , b u t t h e i r u s e i s n o t r e q u i r e d .
C reditors
may s u b s t i t u t e o t h e r f o r m s .
3.
Content.
The n o t i c e must i n c l u d e a l l o f t h e
graphs ( b )( 1 ) through ( b ) ( 5 ) .
The r e q u i r e m e n t i n
a c t i o n be i d e n t i f i e d may be met by p r o v i d i n g t h e
n o t i c e may i n c l u d e a d d i t i o n a l i n f o r m a t i o n r e l a t e d
such as:
°

A d escription

0

A s t a t e m e n t t h a t j o i n t o w n e r s may have t h e r i g h t
t h a t a r e s c i s s i o n by one i s e f f e c t i v e t o a l l .

0

The name and a d d r e s s o f an a g e n t o f t h e c r e d i t o r t o
of r e s c i s s i o n .




o f the p r o p e r t y

i n f o r m a t io n o u t l i n e d in p a r a ­
paragraph (b )( 5 ) th a t the t r a n s ­
date o f the t r a n s a c t i o n .
The
to the req u ire d in fo rm a t io n ,

subject

to the s e c u r i t y
to

in te rest.

rescind

and

receive notice

§ 226.15
- B49 -

4.
Time o f p r o v i d i n g n o t i c e .
The n o t i c e r e q u i r e d by p a r a g r a p h ( b ) need n o t
be g i v e n b e f o r e t h e e v e n t g i v i n g r i s e t o t h e r i g h t o f r e s c i s s i o n .
The c r e d i t o r
may d e l i v e r t h e n o t i c e a f t e r t h e e v e n t o c c u r s , b u t t h e r e s c i s s i o n p e r i o d w i l l
n o t b e g i n t o run u n t i l t h e n o t i c e i s g i v e n .
For example, i f the c r e d i t o r p r o ­
v i d e s t h e n o t i c e on May 15, b u t d i s c l o s u r e s were g i v e n and t h e c r e d i t l i m i t was
r a i s e d on May 10, t h e t h r e e - b u s i n e s s - d a y r e s c i s s i o n p e r i o d w i l l run f ro m May 15.
The c r e d i t o r must a l s o d e l a y p e r f o r m a n c e f o r a r e a s o n a b l e t i m e a f t e r t h a t
period.

15(c)

Delay o f c r e d i t o r ' s

perform ance.

1.
General.
D u r i n g t h e t h r e e - d a y r e s c i s s i o n p e r i o d and f o r a r e a s o n a b l e t i m e
t h e r e a f t e r , t h e c r e d i t o r may n o t , e i t h e r d i r e c t l y o r t h r o u g h a t h i r d p a r t y :
o

D i s b u r s e advances t o th e consumer.

o

Begin perform in g

°

D elive r m aterials

services

f o r the consumer.

to the consumer.

2.
Escrow.
The c r e d i t o r may d i s b u r s e a d v a n c e s d u r i n g t h e r e s c i s s i o n p e r i o d i n
a v a l i d escrow arrangement.
The c r e d i t o r may n o t , h o w e v e r , a p p o i n t t h e c o n s u m e r
a s " t r u s t e e " o r " e s c r o w a g e n t " and d i s t r i b u t e f u n d s t o t h e c o n s u m e r i n t h a t
c a p a c i t y d u r i n g the d e la y p e r i o d .
3.
P e r m i s s i b l e a c t i o n s . ' N o t h i n g i n t h i s p r o v i s i o n p r e v e n t s a c r e d i t o r f rom
t a k i n g o t h e r s t e p s d u r i n g the d e l a y , s h o r t o f b e g i n n i n g a c tu a l perform ance.
T h e s e a c t i o n s may i n c l u d e :
o

Preparation

o

Perfection

°

Accruing

o f the cash advance check.
o f the s e c u r i t y

interest.

finance charges during

the d e la y

period.

4.
P e r f o r m a n c e by t h i r d p a r t y .
The c r e d i t o r i s r e l i e v e d f rom l i a b i l i t y f o r
f a i l u r e t o d e l a y p e r f o r m a n c e i f a t h i r d p a r t y w i t h no k n o w l e d g e t h a t t h e r e s c i s ­
s i o n r i g h t h a s been a c t i v a t e d p r o v i d e s m a t e r i a l s o r s e r v i c e s , a s l o n g a s any
d e b t i n c u r r e d f o r m a t e r i a l s o r s e r v i c e s o b t a i n e d by t h e c o n s u m e r d u r i n g t he
r e s c i s s i o n p e r i o d i s n o t s e c u r e d by t h e s e c u r i t y i n t e r e s t i n t h e c o n s u m e r ' s
dw elling.
A t h i r d p a r t y m i g h t p r o v i d e m a t e r i a l s , f o r e x a m p l e , when t h e c o n s u m e r
makes a c r e d i t c a r d p u r c h a s e b e l o w a m e r c h a n t ' s f l o o r l i m i t and t h e c a r d i s s u e r
i s n o t c o n t a c t e d for a u t h o r i z a t i o n .
5.
D e l a y bey on d r e s c i s s i o n p e r i o d .
The c r e d i t o r must w a i t
" r e a s o n a b l y s a t i s f i e d ' * t h a t the consumer has not r e s c i n d e d .
r e a s o n a b l y a s s u r e i t s e l f by:




°

until it is
The c r e d i t o r may

W a i t i n g a r e a s o n a b l e number o f d a y s a f t e r e x p i r a t i o n o f t h e
r e s c i s s i o n p e rio d to a llo w f o r d e l i v e r y o f a m ailed n o tic e .

§ 226,15
- B50 -

o

O b t a i n i n g a w r i t t e n s t a t e m e n t fr om t h e c o n s u m e r t h a t t h e r i g h t
has n o t been e x e r c i s e d .

I f more t h a n one c o n s u m e r h a s t h e r i g h t t o r e s c i n d , t h e c r e d i t o r c a n n o t r e a s o n a b l y
r e l y on t h e a s s u r a n c e o f one c o n s u m e r o n l y , s i n c e o t h e r c o n s u m e r s may e x e r c i s e
the r i g h t .

15(d)

Effects

of re sc issio n .

1.
Termination of s e c u rit y i n t e r e s t .
Any s e c u r i t y i n t e r e s t g i v i n g r i s e t o t h e
r i g h t o f r e s c i s s i o n becomes v o i d when t h e c o n s u m e r e x e r c i s e s t h a t r i g h t .
The
r u le op era te s a u t o m a t ic a lly to negate the s e c u r i t y i n t e r e s t , r e g a r d le s s o f i t s
s t a t u s and w h e t h e r o r n o t i t was r e c o r d e d o r p e r f e c t e d .
Under paragraph ( d ) ( 2 ) ,
h o w e v e r , t h e c r e d i t o r must t a k e any a c t i o n n e c e s s a r y t o r e f l e c t t h e f a c t t h a t
t h e s e c u r i t y i n t e r e s t no l o n g e r e x i s t s .
2.
Extent of te rm in a t io n .
O n l y t h a t p o r t i o n o f t h e c r e d i t o r ' s s e c u r i t y ‘i n t e r e s t
r e l a t e d t o t h e r e s c i n d a b l e t r a n s a c t i o n becomes v o i d .
F o r e x a m p l e , upon r e s c i s s i o n
°

I f t h e c o n s u m e r ' s r i g h t t o r e s c i n d was a c t i v a t e d by t h e o p e n i n g o f
a p l a n , a ny s e c u r i t y i n t e r e s t i n t h e d w e l l i n g p r o v i d e d f o r i n t h e
plan i s void.

o

I f t h e r i g h t a r i s e s due t o an i n c r e a s e i n t h e c r e d i t l i m i t , t h e
i n t e r e s t i s v o i d as t o p u r c h a s e s and a d v a n c e s u n d e r t h e i n c r e a s e ,
b u t t h e s e c u r i t y i n t e r e s t up t o t h e o r i g i n a l c r e d i t l i m i t i s
unaffected.

o

I f t h e r i g h t a r i s e s w i t h each i n d i v i d u a l c r e d i t e x t e n s i o n , t h e n
t h e i n t e r e s t i s v o i d a s t o t h a t e x t e n s i o n , and o t h e r e x t e n s i o n s
are unaffected.

3.
R efunds to consum er.
The c o n s u m e r c a n n o t be r e q u i r e d t o pay any amount i n
t h e f o rm o f money o r p r o p e r t y e i t h e r t o t h e c r e d i t o r o r t o a t h i r d p a r t y as
part of the c r e d i t t r a n s a c t i o n .
Any a mounts o f t h i s n a t u r e a l r e a d y p a i d by
t h e c o n s u m e r must be r e f u n d e d .
Any amount i n c l u d e s f i n a n c e c h a r g e s a l r e a d y
a c c r u e d , a s w e l l as o t h e r c h a r g e s s u c h a s a p p l i c a t i o n and commitment f e e s o r
fe es f o r a t i t l e se arch o r a p p r a i s a l , whether p a id to the c r e d i t o r , p aid d i r e c t l y
t o a t h i r d p a r t y , o r p a s s e d on f rom t h e c r e d i t o r t o t h e t h i r d p a r t y .
The f a c t
t h a t t h e s e amounts may n o t r e p r e s e n t p r o f i t t o t h e c r e d i t o r i s i r r e l e v a n t .
For example:
°

I f the t r a n s a c t i o n
i s the o p ening o f the p la n , the c r e d i t o r
r e t u r n any m e m b e r sh i p o r a p p l i c a t i o n f e e p a i d .

°

I f th e t r a n s a c t i o n
i s the in c r e a s e in a c r e d i t l i m i t or the a d d i ­
t i o n o f a s e c u r i t y i n t e r e s t , t h e c r e d i t o r must
r e t u r n any f e e
imp os ed f o r a new c r e d i t r e p o r t o r f i l i n g f e e s .

°

I f t h e t r a n s a c t i o n i s a c r e d i t e x t e n s i o n , t h e c r e d i t o r s must
r e t u r n f e e s s u c h a s a p p l i c a t i o n , t i t l e , and a p p r a i s a l o r s u r v e y
f e e s , a s w e l l as any f i n a n c e c h a r g e s r e l a t e d t o t h e c r e d i t e x t e n ­
sion.




must

§ 226.15
- B 51 -

4. Amounts not refundable to a consumer. A creditor need not return money
given by the consumer to a third party outside of the credit transaction, such
as costs incurred for a building permit or for a zoning variance. Similarly,
the term "any amount" does not apply to money or property given by the creditor
to the consumer; those amounts must be tendered by the consumer to the creditor
under paragraph (d)(3).
5. Reflection of security interest termination. The creditor must take what­
ever steps are necessary to show the termination of the security interest. Such
steps include the cancellation of documents creating the interest, and the
filing of release or termination statements in the public records. In a trans­
action involving subcontractors or suppliers that also hold interests related
to the credit transaction, the creditor must insure that the termination of
their interests is also reflected. The 20-day period for the creditor's action
refers to the time within which the creditor must begin the process.
It does
not require all necessary steps to have been completed within that time, but
the creditor is responsible for seeing the process through to completion.

6 . Property exchange. Once the creditor has fulfilled its obligation under
paragraph (d)(2 ), the consumer must tender to the creditor any money or property
the creditor has already delivered to the consumer. At the consumer's option,
property may be tendered at the location of the property but money must be
tendered at the creditor's place of business.
o

A cash advance is considered money for purposes of this section
even if the creditor knows what the consumer intends to purchase
with the money.

o

In a three-party open-end plan (that is, if the creditor and
seller are not the same or related persons), extensions by the
creditor that are used by the consumer for purchases from third
party sellers are considered to be the same as cash advances for
purposes of tendering value to the creditor, even though the trans­
action is a purchase for other purposes under the regulation.
For example, if a consumer exercises the unexpired right to
rescind after using a three-party credit card for one year, the
consumer would tender the amount of the purchase price for the
items charged to the account, rather than tendering the items
themselves to the creditor.

7. Reasonable value. Rather than returning the property itself, the consumer
may offer the creditor its reasonable value, if returning the property would be
extremely burdensome to the consumer. For example, if building materials have
already been incorporated into the consumer's dwelling, the consumer may pay
their reasonable value instead.

8 . Modi fications.

The procedures outlined in paragraph (d)(2) and (d)(3) may
be modified by a court. This could apply, for example, to a situation where a
consumer is in bankruptcy proceedings and may be prohibited from returning
anything to the creditor, or any situation where the equities dictate that a
modification should be made.




§ 226.15
- B52 -

15(e)

Consumers waiver of right to rescind.

1. Need for waiver. To waive the right to rescind, the consumer must have a
bona fide personal financial emergency that must be met before the end of the
three-day period. While the consumer must initially determine whether a personal
financial emergency exists, the "bona fide" test requires creditors to assure
themselves that the reasons given for the waiver or modification are substantial
and credible. The existence of the consumer's waiver will not, of itself, auto­
matically insulate the creditor from liability for failing to provide the rescis­
sion right.
2. Procedure. To waive or modify the right to rescind, the consumer must give
a written statement that both specifically waives or modifies the right and
includes a brief description of the emergency. Each consumer entitled to
rescind must sign the waiver statement. Therefore, in a transaction involving
multiple consumers, such as a husband and wife using their home as collateral,
the waiver must bear the signatures of both spouses. However, depending on
state agency law, a waiver or modification may be executed by a duly apointed
agent acting under a valid power of attorney.
15(f)

Exempt transactions.

1. Residental mortgage transaction. Although residential mortgage trans­
act ions~w6TiTTl5<frdom^^
fide open-end credit plans (under which
repeated transactions must be reasonably contemplated), an advance on an openend plan could be for a downpayment for the purchase of a dwelling.
In such a
case, only that particular advance would be exempt from the rescission right
that is provided in this paragraph.
2. Bridge loans. A bridge loan to purchase another dwelling but secured by
the consumer's equity in the consumer's current principal dwelling is rescindable. For example, a homeowner may seek to purchase.a new home prior to the
sale of the current residence, and obtain an advance secured by the equity in
the current residence. In such a case, although the funds are used to acquire
a dwelling, the proceeds of that loan are not secured by that dwelling but by
the consumer's equity in the present residence.
3. State creditors. Cities and other political subdivisions of states acting
as creditors are not exempted from this section.
4. Spreader clause. When the creditor holds a mortgage or deed of trust on
the consumer's principal dwelling and that mortgage or deed of trust contains a
"spreader clause," subsequent credit extensions are subject to the right of
rescission. Such extensions are rescindable unless the creditor effectively
waives its security interest under the spreader clause with respect to the
subsequent transactions.
REFERENCES:
Statute:




§§ 113, 125, and 130.

§ 226.16
- B53 -

Previous regulation:
Other sections:

§ 226.9.

§§ 226.2, 226.23, 226.25, and Appendix G.

1981 changes: This section reflects the statutory amendments of 1980.
It provides for a limited right of rescission for a three-year trial period
when individual credit extensions are made in accordance with a previously
established credit limit for an open-end credit plan. The rescission right
arises only when a security interest is taken in property used as the consumer's
principal dwelling at the time the security interest is retained, rather than
also including property expected to be used as a consumer's principal dwelling
in the future. The rescission right applies to the consumer's principal dwelling
even if the dwelling is not characterized as real property under relevant state
law.
It does not apply to any "residential mortgage transaction," regardless of
the lien status of the security interest taken.
Under the property exchange provisions, the regulation extends from
10 to 20 days the time in which the creditor must return a consumer's money or
property and take necessary action to terminate the security interest.
It
also extends from 10 to 20 days the time the creditor has to take possession
of money or property tendered by the consumer. The regulation also reflects
the amended statute in providing that a court may modify exchange procedures
outlined in the regulation.
Section 226,16 -- Advertising.
1. Coverage. An advertisement includes any commercial message in any communi­
cation medium that promotes, directly or indirectly, any consumer credit
transaction. Responsibility for complying with the advertising rules is not
limited to creditors but includes any advertiser. Thus, brokers, merchants
and others who are not themselves extenders of credit are bound by these rules
when they advertise credit terms.
2. Media. These rules apply to advertisement of credit terms using any media
including radio and television advertisements. A promotional letter sent to
prospective customers may qualify as an advertisement; however, educational
material containing hypothetical transactions that could not reasonably be
construed as an offer of credit is not an advertisement. The media through
which advertisements are disseminated are not liable for violations of these
provi sions.
3. Clear and conspicuous standard. This section is subject to the general
"clear and conspicuous" standard for this subpart but prescribes no specific
rules for the format of the necessary disclosures. The credit terms need not
be printed in a certain type size nor need they appear in any particular place
in the advertisement.




16(a)

Actually available terms.

1. General Rule. To the extent an advertisement mentions "specific credit
terms" it may state only those terms that the creditor is actually prepared to
offer. For example, a creditor may not advertise a very low annual percentage
rate that will not in fact be available at any time. This provision is not
intended to inhibit the promotion of new credit programs, but to bar the adver­
tising of terms that are not and will not be available. Thus a creditor may
advertise terms that will be offered for only a limited time, or terms that
will become available at a future date.
2. Specific credit terms. The specific terms to
not limited to those that must be disclosed under
include specific components of a credit plan such
periodic payments, or points in a plan secured by
in an advertisement of a minimum periodic payment
16(b)

which this rule applies are
§§ 226.6 or 226.7, but would
as the minimum amount of
real estate. The disclosure
is not a triggering term.

Advertisement of terms that require additional disclosures.

1. Must state positive terms. An advertisement must state a credit term as
a positive number in order to trigger additional disclosures. For example,
"no annual membership fee" would not trigger the required additional disclosures.
2. Term may be implicit. This provision applies even if the triggering term
is not stated explicitly, but may be readily determined from the advertisement.
For example, a statement that "the equity in your home becomes spendable with
an XYZ line of credit" implicitly states that the creditor will take a security
interest in the consumer's home.
3. Membership fees. The requirement that any membership fee be disclosed
under this section does not extend to those situations where such a fee is
required for participation in the plan whether or not an open-end credit
feature is attached. See § 226.6(b) of this commentary for further discussion
of this point.
16(c)

Catalogs and multiple-page advertisements.

1. General rule. The multiple-page advertisements to which this section refers
are advertisements conssting of a series of sequentially numbered pages, for
example, a supplement to a newspaper. Thus, a mailing consisting of several
separate flyers or pieces of promotional material in a single envelope does
not constitute a single multiple-page advertisement for purposes of this para­
graph.
2. Cross-referencing credit terms. These forms of commercial messages will be
considered single advertisements (requiring a single set of credit cost disclo­
sures) if the advertisement contains a table, chart, or schedule clearly stating
sufficient information for the consumer to determine the disclosures required
under § 226.6. In addition to the table, chart or schedule, any mention of a
triggering term elsewhere in the catalog or multiple-page advertisement must
clearly refer to the specific page where the table, chart, or schedule begins.




§ 226.16
- B55 -

This rule permits creditors to put credit information together in one place in
a catalog or multiple-page advertisement, so long as that information reflects
the range of credit transactions actually offered. The rule applies only if
the catalog or multiple-page advertisement contains one or more of the disclo­
sures set forth in § 226.6. A list of different annual percentage rates appli­
cable to different balances, for example, would not trigger further disclosures
under paragraph (b) and so would not be covered by paragraph (c).
2. Representative examples of typical extensions of credit. A table or
schedule must reflect amounts of credit actually offered, up to and including
the higher-priced items. This does not mean the chart must make disclosures
for the single most expensive item the advertiser offers, but only that the
chart cannot be limited to information about less expensive sales when the
advertiser commonly offers a distinct level of more expensive goods or services.
The range of transactions shown in the table or schedule in a particular catalog
or multiple page advertisement need not exceed the range of transactions actually
offered in that advertisement.
REFERENCES:
Statute:

§§ 141, 143.

Previous regulation:
Other sections:

§ 226.10(a), (b), and (c).

§§ 226.2, 226.6.

1981 changes: The section substantially restates the prior regula­
tion, but reflects the statutory changes to § 143 of the act which reduce both
the triggering terms and the additional disclosures required by the use of
those terms. Membership or participation fees are included among the additional
disclosures required when a trigger term is used. The substance of Board Inter­
pretation § 226.1002, requiring disclosure of representative amounts of credit
in catalogs and multiple-page advertisements, has been incorporated in simplified
form in paragraph (c).




§ 226.17

- Cl SUBPART C —

CLOSED-END CREDIT

Section 226.17 -- General disclosure requirements.
17(a)

Form of disclosures.

1. Clear and conspicuous. This standard requires that disclosures be in a
reasonably understandable and usable form. For example, while the regulation
requires no particular mathematical progression or format, the disclosures
must be presented in a way that does not obscure the relationship of the terms
to each other. In addition, although no minimum type size is mandated, the
disclosures must be legible, whether typewritten, handwritten, or printed by
computer.
2. Segregation of disclosures. The disclosures may be grouped together and
segregated from other information in a variety of ways. For example, the
di sclosures:
°

May appear on a separate sheet of paper.

°

May be set off from other information on the contract document
by outlining them in a box.

°

May be separated from the contract provisions with bold print
dividing lines, a different color background, or a different
style of type.

3. Location. The segregated disclosures may appear on a separate disclosure
statement or on the front or back of another document, such as the contract or
note. They need not appear entirely on one page, and may begin on one page
and continue on the next.
4. Directly related. The segregated disclosures may not be accompanied by
any information that is not "directly related" to those disclosures. This
means that they may not include any information beyond that called for by
§ 226.18, even if the information elaborates on a required disclosure, such as:
°

A description of the type of security interest taken in the
transaction.

°

An explanation of the type of rebate method applied in the
event of prepayment.

°

Specific conditions for imposition of a prepayment penalty.

5. Permissible additions. Footnote 37 permits the following items to appear
with the segregated disclosures, even though not "directly related" to those
di sclosures:




§ 226.17
- C2 -

°

An acknowledgment of receipt.

o

The date of the transaction.

o

The consumer's name, address and account number.

6. Segregation exceptions. The itemization of the amount financed under
§ 226.18(c) must appear separate from the segregated disclosures.
It may
appear on a separate document or on the same document as the segregated disclo­
sures, so long as it is not included in the area reserved for those disclosures.
The following disclosures may appear with the other disclosures or elsewhere,
at the creditor's option:
°

The creditor's identity.

0

The variable rate example.

°

Credit life or property insurance premiums.

°

Certain security interest charges.

7. More conspicuous. The terms "finance charge" and "annual percentage
rate" must be shown more conspicuously only in relation to the other disclosures
required by § 226.18. For example, where the disclosures are included on the
contract document, those two terms need not be more conspicuous as compared to
the heading on the contract document or information required by state law. In
addition, those terms need not be made more conspicuous except as part of the
finance charge and annual percentage rate disclosures under §§ 226.18(d) and
(e). The terms need not be highlighted when used as part of other required
disclosures, such as a prepayment penalty under § 226.18(k ) or a required
deposit under § 226.18(r). The terms may be made more conspicuous in any way
that highlights them in relation to the other required disclosures.
For example, they may be:
o

Underlined.

o

Printed in a contrasting color.

©

Printed in larger type,

o

Set off with asterisks.

o

Printed in capital letters when other disclosures are printed
in capital and lower case.

8. Creditor's identity. An exception to the "more conspicuous" rule is made
for disclosure of the creditor's identity. Even though it is a required
disclosure, the creditor's name may be more prominently displayed than the
finance charge and annual percentage rate, so long as those two terms are more
conspicuous than the remaining disclosures.




226.17
- C3 -

17(b)

Time of disclosures,

1. Consummation. As a general rule, disclosures must be made before "consum­
mation" of the transaction, the time at which the consumer becomes contractually
liable on the credit obligation, as determined by applicable law. The payment
of a nonrefundable fee prior to that time does not constitute consummation
unless this legally obligates the consumer on the credit transaction. The
disclosures need not be given by any particular time before consummation,
except in certain mortgage transactions under § 226.19.
17(c)

Basis of disclosures and use of estimates.

1. Legal obligation. The creditor must base its disclosures on the terms of
the legal obligation between the parties. Normally, that obligation is reflected
in a single note or contract. In some cases, however, an agreement between
the creditor and a third party or between the consumer and a third party appears
to affect the terms of the obligation. For example, a consumer and a creditor
agree to a mortgage loan with an interest rate of 15%, which is reflected in
the note between the parties. In a separate agreement with the consumer, the
seller of the property agrees to subsidize the consumer's payments for the
first two years, giving the consumer an effective rate of 12% for that period.
The note between the creditor and consumer does not refer to or reflect the
seller agreement in any way and the consumer is legally bound to the 15% rate
for the entire term. In this case, the subsidy is not part of the legal obli­
gation between the consumer and the creditor; the disclosures must reflect the
15% rate only.
2. Obligation reflected in multiple documents. While the legal obligation is
normally embodied in a single note or contract, in rare circumstances the
parties may have agreed to two separate obligations that between them reflect
a single legal obligation. For example, in a mortgage transaction, the lender
and consumer agree to a note specifying a 14% interest rate. However, in a
separate document signed by both parties, the consumer agrees to pay four
points to the lender at consummation, in return for a reduction in the interest
rate to 12% for a portion of the mortgage term. If the "buy-down" agreement
forms part of a single legal obligation, overriding any conflicting provisions
in the note, it must be reflected in the disclosures given for the mortgage.
3. Modification of obligation. If the parties informally agree to a
modification of the legal obligation, the modification should not be reflected
in the disclosures unless it rises to the level of a change in the terms of
the legal obligation. For example, disclosures should reflect the schedule of
monthly payments specified in the written contract, even though payments are
actually made on a voluntary payroll deduction plan or an informal principal
reduction agreement. Similarly, a creditor whose written contract calls for
regular monthly payments may not reflect in its disclosures that it customarily
permits consumers to defer payments from time to time, such as over holiday
seasons or to reflect seasonal employment.
4. Basis for estimates. Disclosures may be estimated if the exact information is
unknown at the time disclosures are made. The estimates must be made on the
basis of the best information reasonably available at the time the disclosures




i

226.17

- C4 are made. The "reasonably available" standard requires that the creditor,
acting in good faith, exercise due diligence in obtaining information. For
example, the creditor must at a minimum utilize generally accepted calculation
tools, but need not invest in the most sophisticated computer program to make
a particular calculation. The creditor normally may rely on the consumer's
representations as to the time of consummation and the amount to be financed,
subject to factors in the creditor's control. The creditor may utilize estimates
in making disclosures even though the creditor knows that more precise information
will be available by the point of consummation. However, new disclosures may be
required under § 226.17(f) or § 226.19.
5. Labelling estimates. Estimates must be designated as such in the segregated
disclosures. Generally, only the particular disclosure for which the exact
information is unknown is labelled as an estimate. However, where several
disclosures are affected because of the unknown information, the creditor has
the option of labelling either every affected disclosure or only the disclosure
primarily affected. For example, when the finance charge is unknown because
the date of consummation is unknown, the finance charge is labelled as an
estimate. The creditor may also label as estimates the total of payments and
the payment schedule. No further explanation of the basis for the estimates
may be included with the segregated disclosures, although an explanation may
appear as additional information apart from the disclosures.
6. Minor variations. Paragraph (c)(3) allows creditors to disregard certain
factors in making disclosures. These factors produce very slight variations
in disclosed terms and taking account of those variations may create substantial
computation difficulties.
o

Creditors may ignore the effects of collecting payments in
whole cents. Since payments cannot be collected in fractional
cents, it is often difficult to amortize exactly an obligation
with equal payments; the amount of the last payment must often be
adjusted slightly to account for the rounding of the other payments
to whole cents.

°

Creditors may ignore the fact that payments scheduled for a day
they are not open must be made on a different day.

°

Creditors may base their disclosures on calculation tools that
assume that all months have an equal number of days, even if
their practice is to take account of the variations in months for
purposes of collecting interest.

o

Creditors may ignore the fact that leap years contain an extra
day.

7. Payment schedule irregularities. When one or more payments in a transaction
differ from the others because of a long or short first period, the variations
may be ignored in disclosing the payment schedule, finance charge, annual
percentage rate, and other terms. For example, a 36-month auto loan might be
consummated on June 8 with payments due on July 1 and the first of each suc­
ceeding month. The creditor may base its calculations on a payment schedule
that assumes 36 equal intervals and 36 equal installment payments, even though




§ 226.17
- C5 -

a precise computation would produce slightly different amounts on account of
the shorter first period. By contrast, in the same example, if the first
payment were not scheduled until August 1, the irregular first period would
exceed the limits in paragraph (c)(4); the creditor could not use the minor
irregularity rule and would have to take account of the long odd days in the
first period in calculating its disclosures.
8. Measuring odd periods. In determining whether a transaction may take
advantage of the rule in paragraph (c)(4), the creditor must measure the
variation against a regular period, which is the most common payment interval
in the transaction. In measuring the length of that period, the creditor
looks to the next regular period following the irregularity and, as a general
rule, measures it based on the actual number of days. In transactions involving
payment intervals of a month, semimonth, or multiple of a month, however, the
creditor may use either the actual number of days or an assumed 30-day month in
measuring the regular and irregular periods.
9. Demand disclosures. Disclosures for demand obligations are to be based
on an assumed one-year term, unless an alternate maturity date is stated in the
legal obligation. Whether an alternate maturity date is stated in the legal
obligation is determined by applicable law. An alternate maturity date is not
inferred from an informal principal reduction agreement or a similar understanding
between the parties. However, where the note itself specifies a principal
reduction schedule (for example, "payable on demand or $2,000 plus interest
quarterly"), an alternate maturity is stated and disclosures must
reflect that date.
10. Future event as maturity date. An obligation whose maturity date is
determined by a future event is not a demand obligation. For example, a loan
may be payable on the sale of property. Since no demand feature is contained
in the obligation, demand disclosures under § 226.18(i) are inapplicable.
The disclosures should be based on the creditor's estimate of the time at
which the specified event will occur.
11. Demand transactions. Most demand transactions contain a demand feature
which may be exercised at any point during the term, but certain transactions
convert to a demand feature only after a fixed period. For example, in states
prohibiting due-on-sale clauses, the Federal National Mortgage Association
(FNMA) requires mortgages that it purchases to include a call option rider
that may be exercised after seven years. These mortgages are generally written
as long-term obligations, but contain a demand feature which may only be exercised
within a thirty-day period at seven years. The disclosures for these transactions
should be based upon the legally agreed-upon maturity date. Thus, if a mortgage
containing the seven-year FNMA call option is written as a twenty-year obligation,
the disclosures should be based on the twenty-year term.
12. Balloon mortgages. Balloon payment mortgages, in which payments are based
on a long-term amortization schedule but with a final payment due after a
shorter term, are not demand obligations because no demand feature is provided
in the contract. For example, a mortgage with a term of five years and a
payment schedule based on twenty years would not be treated as a mortgage with
a demand feature, in the absence of any contractual demand provisions.




§ 226.17
- C6 -

13. Number of transactions. Paragraph (c)(6) provides flexibility for handling
transactions that have, or may have, multiple stages. For example:
o

When a creditor finances the credit sale of a radio and a
television on the same day, the creditor may disclose the
transactions as either one or two credit sale transactions.

o

When a creditor finances a loan along with a credit sale of
health insurance, the creditor may disclose in one of several
ways: a single credit sale transaction, a single loan transaction,
or a loan and a credit sale transaction.

o

The separate financing of a downpayment in a credit sale
transaction may but need not be disclosed as two transactions
(a credit sale and a separate loan for the downpayment).

14. Series of advances. Paragraph (cj(6)(i) deals with a series of advances
under an agreement to extend credit up to a certain amount. A creditor may
treat all of the advances as a single transaction or disclose each advance as
a separate transaction.
If these transactions are treated as one transaction
and the timing and amounts of advances are unknown, creditors must make disclo­
sures based on estimates, as provided in paragraph (c)(2).
15. Construction loans. Paragraph (c)(6) (i i) provides a flexible rule for
disclosure of construction loans that may be permanently financed. These
transactions have two distinct phases, similar to two separate transactions.
The construction loan may be for initial construction or subsequent con­
struction, such as rehabi1itation or remodelling. The construction period
usually involves several disbursements of funds at times and in amounts that
are unknown at the beginning of that period and the consumer generally pays
only accrued interest until construction is completed. Unless the obligation
is paid at that time, the loan then converts to permanent financing in which
the loan amount is amortized just as in a standard mortgage transaction.
Paragraph (c)(6)(ii) permits the creditor to give either one combined dis­
closure for both the construction financing and the permanent financing, or
a separate set of disclosures for the two phases. This rule is available
whether the consumer is initially obligated to accept construction financing
only or is obligated to both construction and permanent financing from the
outset.
If the consumer is obligated on both phases and the creditor chooses
to give two sets of disclosures, both sets must be given to the consumer
initially, because both transactions would be consummated at that time.
16. Multi pie-advance construction loans. Paragraphs (c)(6)(i) and (il) are
not mutually exclusive. For example, in a transaction that finances the con­
struction of a dwelling that may be permanently financed by the same creditor,
the construction phase may consist of a series of advances under an agreement
to extend credit up to a certain amount. In these cases, the creditor may
disclose the construction phase as either one or more than one transaction and
also disclose the permanent financing as a separate transaction.




226.17
- C7 -

17. Wrap-around financing. "Wrap-around" loans involve a creditor's "wrap­
ping" the outstanding balance on an existing loan and advancing additional
funds to a borrower. The borrower makes a single payment to the new creditor,
who makes the payments on the pre-existing loan to the original creditor.
Wrap-around loans are considered new transactions, with the disclosures made
as they would be for a refinancing.
17(d)

Multiple creditors; multiple consumers.

1. Multiple creditors. If a credit transaction involves more than one creditor,
the creditors must choose which of them will make the complete set of disclosures.
Regardless of the arrangement made between creditors, each creditor in the trans­
action is legally responsible for seeing that the disclosures are provided
and any one of them may be subject to liability for violations. When one of
the creditors is a seller, the creditor making the disclosures must make credit
sale disclosures, even though the disclosing creditor is not the seller. For
example, when an automobile dealer and a bank financing the sale of a car both
meet the creditor definition, the total sale price under § 226.18(j) must be
disclosed, even though the creditors have agreed that the non-seller bank will
make the disclosures.
2. Multiple consumers.
If a credit transaction involves more than one consu­
mer, the disclosures may be given to any consumer who is primarily liable on
the obligation. Thus, when two consumers are joint obligors on an obligation,
the disclosures may be given to either one of them. If one consumer is merely
a surety or guarantor, the disclosures must be given to the principal debtor.
In rescindable transactions, however, separate disclosures must be given to
each consumer who has the right to rescind under § 226.23. Whether deli­
very of disclosures to a consumer's attorney or other representative is
sufficient is a matter of applicable agency law.
17(e)

Effect of subsequent events.

1. Subsequent events. A disclosure that is made inaccurate because of an
event occurring arter the transaction is consummated is not in itself a violation
of the regulation. But the creditor may be required to give the consumer
updated disclosures, as outlined in §§ 226.17(f), 226.19 and 226.20.
17(f)

Early disclosures.

1. Change in rate. No redisclosure is required for changes that
the time disclosures are made and consummation, unless the annual
rate in the consummated transaction exceeds the limits prescribed
regulation (1/8 of 1 percentage point in regular transactions and
percentage point in irregular transactions). To illustrate:
0




occur between
percentage
in the
1/4 of 1

IT disclosures are delivered in a regular transaction on
July 1, the transaction is consummated on July 15, and the
actual APR varies by more than 1/8 of 1 percentage point
from the disclosed APR, then the creditor must either re­
disclose the changed terms or furnish a complete set of new
disclosures before consummation. This is true even if the
disclosures made on July 1 are based on estimates and marked
as such.

226.17
- C8 -

2. Variable rate. The addition of a variable rate feature to the credit terms,
after early disclosures are given, requires new disclosures.
3. Special rules. In certain residential mortgage transactions, the creditor
must redisclose if, between the delivery of the required early disclosures
and consummation, the annual percentage rate changes by more than a stated
tolerance. Where subsequent events occur after consummation, new disclosures
are required only if there is a refinancing or an assumption within the meaning
of § 226.20.
17(g)

Mail or telephone orders -- delay in disclosures.

1. Conditions for use. When the creditor receives a mail or telephone request
for credit, the creditor may delay making the disclosures until the first
payment is due if the following conditions are met:
o

The credit request is initiated without face-to-face
or direct telephone solicitation. (Creditors may, however,
use the special rule when credit requests are solicited by
mail.)

o

The creditor has supplied the specified credit information
about its credit terms either to the individual consumer or to
the public generally. That information may be distributed through
advertisements, catalogs, brochures, special mailers, or similar
means.

2. Insurance. The location requirements for the insurance disclosures under
§ 226.18(n) permit them to appear apart from the other disclosures. Therefore,
a creditor may mail an insurance authorization to the consumer and then prepare
the other disclosures to reflect whether or not the authorization is completed
by the consumer. Creditors may also disclose the insurance cost on a unit-cost
basis, if the transactions meet the requirements of paragraph (g).
17(h)

Series of sales -- delay in disclosures.

1. Applicabi1ity. The creditor may delay the disclosures for individual credit
sales in a series of such sales until the first payment is due on the current
sale, assuming the conditions in paragraphs (h)(1) and (h)(2) are met. If those
conditions are not met, the general timing rules in § 226.17(b) apply.
17(i)

Interim student credit extensions.

1. Definition. Student credit plans involve extensions of credit for education
purposes where the repayment amount and schedule are not known at the time
credit is advanced. Creditors in interim student credit extensions need not
disclose certain items at the time the credit is actually extended, but must
make complete disclosures (except for total sale price) at the time the creditor
and consumer agree upon the repayment schedule for the total obligation.
At that time, a new set of disclosures must be made of all applicable items
under § 226.13.




226.17
- C9 -

2. Basis of disclosures. The disclosures given at the time of execution of the
interim note should reflect two annual percentage rates, one for the interim
period and one for the repayment period. Interest subsidies, such as payments
made by either a state or the federal government on an interim loan, must be
excluded in computing the annual percentage rate on the interim obligation,
where the consumer has no contingent liability for payment of those amounts.
A loan guarantee fee that is paid separately by the student at the outset or
withheld from the proceeds of the loan is a prepaid finance charge. That sum
is deducted from the loan proceeds to determine the amount financed and included
in the calculation of the finance charge.
3. Loan vs. credit sale. The credit extended in these transactions may be in
the form of a loan or a sale of goods or services. When the student receives
the funds directly and may use them as the student sees fit for expenses related
to attendance at the institution, loan disclosures are appropriate. Where the
funds are credited to the student's account with the institution extending the
credit and the student receives goods anc services from that institution, the
transaction is a credit sale.
4. Consolidation. Consolidation of the interim loans through a renewal note
with a set repayment schedule is a refinancing within the meaning of § 226.20.
Any unearned portion of the finance charge must be reflected in the new finance
charge and is not added to the new amount financed.
REFERENCES:
Statute:

§§ 121, 122, 124, and 128.

Other sections:

§§ 226.2 and Appendix H.

Previous regulation:

§§ 226.6 and 226.8.

1981 changes: With a few exceptions, the disclosures must now appear
apart from all other information, and may not be interspersed with that infor­
mation. The disclosures must be based on the legal obligation between the
parties, rather than any side agreement. The assumed maturity period for
demand loans has been increased from six months to one year. Also, any alter­
nate maturity date must be stated in the legal obligation rather than inferred
from the documents. In multiple-advance transactions, a series of advances up
to a certain amount and construction loans that may be permanently financed
may be disclosed, at the creditor's option, as a single transaction or as
several transactions. Appendix D is applicable only to multiple advances for
the construction of a dwelling, whereas its predecessor, Board Interpretation
§ 226.813, could be used for all multiple advance transactions.
In the case
of disclosures made before the date of consummation, the creditor need not
provide updated disclosures at consummation unless the annual percentage rate
has changed beyond certain limits.




§ 226.18

- CIO Section 226.18 -- Content of disclosures.
General.
1. As applicable. The disclosures required by this section need be made only
as applicable. Any disclosure not relevant to a particular transaction may
be eliminated entirely. For example:
o

In a loan transaction, the creditor may delete any disclosure
of the total sale price.

o

In a credit sale requiring disclosure of the total sale price
under paragraph (j), the creditor may delete any reference to a
downpayment where no downpayment is involved.

Where the amounts of several numerical disclosures are the same, the "as
applicable" language also permits creditors to combine the terms, so long as
it is done in a clear and conspicuous manner. For example:
°

If in a particular transaction the amount financed equals the
total of payments, the creditor may disclose "amount financed/total
of payments," together with descriptive language, followed by a
single amount.

o

However, if the terms are separated on the disclosure statement
and separate space is provided for each amount, both disclosures
must be completed, even though the same amount is entered in each
space.

2. Appendix H. The format to be used in making these disclosures, as well as
acceptable modifications, is discussed in the commentary to Appendix H.
18(a)

Creditor.

i. Creditor identity. The creditor making the disclosures must be identified.
Use of the creditor s name is sufficient, but the creditor may at its option
include an address or telephone number. As noted in the commentary to § 226.17(d),
in transactions where there are multiple creditors, any one of them may make
the disclosures; the one doing so must be identified.
18(b)

Amount financed.

1. Amount financed. The net amount of credit extended must be disclosed
using the term "amount financed" and a descriptive explanation similar to the
phrase in the regulation. The descriptive explanation may be further revised
to reflect a variable rate feature.
2. Add-on or discount charges. Under paragraph (b), all finance charges must
be deducted from the amount of credit in calculating the amount financed.
If
the principal loan amount reflects finance charges that meet the definition of
a prepaid finance charge in § 226.2, those charges would be included in the
paragraph (b)(1) amount and deducted under paragraph (b)(3). However, if the
principal loan amount includes finance charges that do not meet the definition




§ 226,18

- Cll
of a prepaid finance charge (such as add-on or discount interest added to the
face amount of the obligation), the amount referred to in paragraph (b)(1)
must exclude those finance charges. The following examples illustrate the
application of paragraph (b) to these types of transactions. Each example
assumes a loan request of $1000 for one year, subject to a 6% precomputed
interest rate, with a $10 loan fee collected at consummation.
°

The creditor assesses add-on interest of $60 which is added to
the $1000 in loan proceeds for an obligation with a face amount of
$1060. The principal for purposes of paragraph (b)(1) is $1000;
no amounts are added under paragraph (b)(2), and the $10 loan fee
(a prepaid finance charge) is deducted under paragraph (b)(3).
The amount financed is $990.

0

The creditor assesses discount interest of $60 and distributes
$940 to the consumer, who is liable for an obligation with a face
amount of $1000. The principal under paragraph (b)(1) is $940,
which results in an amount financed of $930, after deduction of
the $10 prepaid finance charge under paragraph (b)(3).

0

The creditor assesses $60 in discount interest by increasing
the face amount of the obligation to $1060, with the consumer
receiving $1000. The principal under paragraph (b)(1) is thus
$1000 and the amount financed $990, after deducting the $10 prepaid
finance charge under paragraph (b)(3).

3. Downpayments. "Downpayment" includes any pick-up payment that meets the
§ 226.2 definition of downpayment. A creditor has the option of treating a
deferred downpayment as part of the downpayment if that deferred payment meets
the criteria set forth in the definition. Deferred downpayments that are not
treated as part of the downpayment (either because they do not meet the defini­
tion or because the creditor simply chooses not to treat them as downpayments)
are included in the amount financed. Deferred downpayments that meet the defi­
nition and that are treated as such are not part of the amount financed under
paragraph (b)(1).
4. Rebates and loan premiums. In a loan transaction, the creditor may offer a
premium in the form of cash or merchandise to prospective borrowers. Similarly,
in a credit sale transaction, a seller's or manufacturer's rebate may be offered
to purchasers of the creditor's goods or services. Amounts such as these need
not be reflected in the amount financed but they may, at the creditor's option,
be included in the Truth in Lending disclosures.
If the creditor chooses to
reflect them in the disclosures, rather than disregarding them, they may be
treated in any manner. To illustrate, if a consumer decides to apply a seller's
rebate to the price of the goods, the creditor may, for example, include the
amount in the downpayment disclosed as part of the total sale price, although
it need not reflect the rebate in the disclosures at all.
5. Adding other amounts. Paragraph (b)(2) refers to fees or other charges
that are not part of the finance charge, to the extent that the consumer decides
to finance them rather than pay them separately at consummation of the trans­
action. Typical examples are real estate settlement charges and premiums for




§ 226.18
- C12 -

voluntary credit life and disability insurance excluded from the finance charge
under § 226.4. Paragraph (b)(2) does not include any amounts already accounted
for under paragraph (b)(1), such as taxes, tag and title fees, or the costs of
accessories or service policies that the creditor includes in the cash price.
6. Prepaid finance charges. Paragraph (b)(3) requires the deduction of any
prepaid finance charge from the amount financed. This computational step
should not duplicate any subtraction accounted for under paragraph (b)(1).
18(c) Itemization of amount financed.
1. Creditor option. A written itemization of the amount financed must be
provided at the consumer's request. Creditors may provide a written itemization
of the amount financed as a matter of course, without awaiting a request from
the consumer.
If the creditor chooses not to provide an itemization as a
matter of course, the disclosures must include a statement of the consumer's
right to receive the itemization.
2. Categories. The categories described in paragraph (c) provide general
guidance for the information required oy that paragraph.
°

Each category may be further itemized.

o

Categories need not be labelled using the specific language in
paragraph (c).

o

Categories are not mutually exclusive. At the creditor's option,
an amount may be shown more than once in the itemization, so long
as properly identified. For example, a credit report fee may be
both a prepaid finance charge under paragraph (c)(l)(iv) and an
amount paid to a third person under paragraph (c)(l)(iii).

3. Amounts paid to consumer. Paragraph (c)(1) (i) encompasses funds given to
the consumer in the form of cash or a check, as well as funds placed in an
asset account.
It may include money in an interest-bearing account even if
that amount is considered a required deposit under paragraph (r). For example,
in a transaction with total loan proceeds of $500, the consumer receives a
check for $300 and $200 is required by the creditor to be put into an interestbearing account. Whether or not the $200 is a required deposit, it is part of
the amount financed. At the creditor's option, it may be broken out and labelled
in the itemization of the amount financed.
4. Amounts credited to consumer's account. Paragraph (c)(l)(ii) includes
amounts such as a credit sale balance with the creditor or an unpaid balance
on a prior loan with that creditor. The term "consumer's account" refers only
to a debt account and not to an asset account.
5. Amounts paid to others. Paragraph (c)(l)(iii) includes, for example, tag
and title fees; amounts paid to insurance companies for credit life and disa d i1ity insurance premiums; security interest fees, and amounts paid to credit
Dureaus, appraisers or public officials. Third parties must be identified by
name, except as footnote 40 provides. Under that footnote, public officials




§ 226.18
- C13 -

or government agencies, credit reporting agencies, appraisers and insurance
companies may be generically identified with phrases such as "credit
bureau" or "state agency."
6. Prepaid finance charge. Paragraph (c)(1)(iv) requires disclosure of prepaid
finance charges, as defined in § 226.2. The prepaid finance charges must be
shown as a total amount but may, at the creditor's option, also be further item­
ized and described. All amounts must be reflected in this total, even if
portions of the prepaid finance charge are also reflected elsewhere. For
example, if at consummation the creditor collects interim interest of $30 and a
credit report fee of $10, a total prepaid finance charge of $40 must be shown.
At the creditor's option, the credit report fee paid to a third party may also
be shown elsewhere as a paragraph (c)(l)(iii) amount. The creditor may also
further describe the two components of the prepaid finance charge, although no
itemization of this element is required by paragraph (c)(l)(iv).
7. Additional information. This paragraph establishes only a minimum standard
for the itemization of the amount financed. The creditor may include information
in the itemization reflecting payments that are not part of the amount financed.
For example, certain insurance premiums that are paid by the consumer to the
creditor may not be financed. At the creditor's option, more information may
be included in the itemization, such as additional categories or a mathematical
progression that depicts the arithmetic relationship of the terms. Appendix H
contains a model form for the itemization of the amount financed.
8. RESPA transactions. The Real Estate Settlement Procedures Act (RESPA)
requires creditors to provide good faith estimates of closing costs similar to
the amount financed itemization. Transactions subject to RESPA are exempt from
the requirements of paragraph (c), so long as the creditor complies with the
good faith estimates requirement of RESPA.
18(d)

Finance charge.

1. Disclosure required. The creditor must disclose the finance charge as a
dollar amount, using the term "finance charge," and must include a brief
description similar to that in paragraph (d). The creditor may further modify
the descriptor for variable rate transactions. The finance charge may be
shown on the disclosures only as a total amount; the elements of the finance
charge may not be itemized in the segregated disclosures.
2. Tolerance. A tolerance for the finance charge is provided in footnote 41.
The disclosed finance charge will be considered accurate if it is not more
than $5 above or below the exact finance charge in a transaction involving an
amount financed of $1,000 or less, or not more than $10 above or below the
exact finance charge where the amount financed exceeds $1,000.
18(e)

Annual percentage rate.

1. Disclosure required. The creditor must disclose the cost of the credit as
an annual rate, using the term "annual percentage rate," plus a brief descrip­
tive phrase comparable to that used in paragraph (e). For variable rate trans­
actions, the descriptor may be further modified. Under § 226.17(b), disclosures
of the annual percentage rate and finance charge must be more conspicuous than
the other required disclosures.



§ 226.18
- C14 -

2. Exception. Footnote 42 calls attention to an exception for certain
transactions involving maximum finance charges of $5 or $7.50 and amounts
financed up to, or over, $75, respectively. No annual percentage rate dis­
closure is required for these transactions.
18(f)

Variable rate.

1. Coverage. The requirements of this paragraph apply to all transactions in
which the credit contract allows the creditor to increase the rate originally
disclosed to the consumer during the term of the loan. The provisions, however,
do not apply to increases resulting from delinquency (including late payment),
default, assumption, acceleration or transfer of the collateral.
2. Basis for disclosures. For transactions subject to the requirements of
this paragraph, the disclosures must be given for the full term of the trans­
action and must be based on the rate in effect at the time of consummation.
3. Circumstances, 1imitations, effects. The "circumstances," referred to
in paragraph (f)(1), under which the rrte may increase would include identifi­
cation of any index to which the rate is tied, as well as any conditions or
events on which the increase is contingent. The "limitations" called for by
paragraph (f)(2) refer to any maximum imposed on the amount of an increase at
any time, as well as any maximum on the total increase over the life of the
transaction. They do not include legal limits in the nature of usury or
rate ceilings under state or federal statutes or regulations. Disclosure of
the effect of an increase under paragraph (f)(3) refers to an increase in the
number or amounts of payments or an increase in the final payment.
4. Hypothetical example. The hypothetical increase required in paragraph
(f)(4) must be given in all variable rate transactions. At the creditor's
option, the disclosed hypothetical may be either general or transactionspecific -- that is, the creditor may provide a standard example that represents
the general type of credit offered by the creditor or an example that directly
reflects the terms and conditions of the particular transaction. The model
forms in Appendix H provide examples of the disclosures required by this para­
graph.
5. Other variable rate regulations. Transactions in which the creditor is
required to comply with and has complied with variable rate regulations of
other federal agencies are exempt from the requirements of this paragraph.
Those regulations include the adjustaole mortgage loan instrument regulation
issued by the Federal Home Loan Bank Board (12 CFR Part 545.6-4(a )) and the
adjustable-rate mortgage regulation issued by the Comptroller of the Currency
(12 CFR Part 29).
6. Examples of variable rate mortgages.
constitute variable rate transactions:




o

The following mortgage transactions

Renegotiable rate mortgage instruments that involve a series
of short-term loans secured by a long-term mortgage, where
the lender is obligated to renew the short-term loans at
the consumer's option. At the time of renewal, the lender
has the option of increasing the interest rate. Disclosures

§ 226,18
- Cl5 -

must be given f o r the term of the mortgage with all disclosures
calculated on the basis of the rate in effect at the time of
consummation of the transaction.
°

"Shared equity" or "shared appreciation" mortgages that
bear a fixed rate of interest and contingent interest based
on the consumer's equity in the mortgaged property. The
contingent interest is payable in a lump sum at a specified
time. Disclosures must be based on the fixed interest rate;
the shared appreciation feature, including the conditions for
its imposition, the time at which it would be collected, and
the limitation on the creditor's share, must be described
under paragraph (f). (As discussed in § 226.2, other types of
shared-equity arrangements are not considered "credit" and are
not subject to Regulation Z.)

Graduated payment mortgages and step-rate mortgages are not considered
variable rate transactions.
18(g)

Payment schedule.

1. Amounts included in repayment schedule. For purposes of this paragraph,
the repayment schedule should reflect all components of the finance charge,
not merely the portion attributable to interest. The payments may include
amounts beyond the amount financed and finance charge. For example, the
disclosed payments may, at the creditor's option, reflect certain insurance
premiums where the premiums are not part of either the amount financed or the
finance charge, as well as real estate escrow amounts such as taxes added to
the payment in mortgage transactions.
2. Demand obligations. Under paragraph (g)(1), in demand obligations with no
alternate maturity date, the creditor has the option of disclosing only the
due dates or periods of scheduled interest payments in the first year. A
disclosure of "interest payable quarterly" or "interest due the first of each
month" would satisfy the requirements of paragraph (g)(1). Other disclo­
sures required by this paragraph need not be given for those transactions.
3. Abbreviated disclosure. Paragraph (g)(2) permits creditors to disclose an
abbreviated payment schedule where the amount of each regularly scheduled
payment (other than the first or last payment) includes an equal amount to be
applied on principal and a finance charge computed by application of a rate to
the decreasing unpaid balance. This option is also available where mortgage
guarantee insurance premiums, included in the finance charge, create variations
in the amount of the scheduled payments. The mortgage insurance premiums,
paid either monthly or annually, cause variations in the amount of the payments
scheduled, reflecting the annual decrease in the premium due. In the abbreviated
payment schedule, the creditor must disclose the dollar amount of the highest
and lowest payments and a reference to the variation in payments.
4. Combined payment schedule disclosures. Creditors may combine the paragraph
(g)(2) option with the genera) payment schedule requirements in transactions
where only a portion of the payment schedule meets the conditions of paragraph
(g)(2). For example, in a graduated payment mortgage where payments rise




§ 226.18
- Cl 6 -

sharply for five years and then decline over the next 25 years because of
decreasing mortgage insurance premiums, the first five years would be disclosed
under the general rule in paragraph (g) and the next 25 years according to
the abbreviated schedule in paragraph (g)(2).
5. Effect on other disclosures. Paragraph (g)(2) applies only to the payment
schedule disclosure. The actual amounts of payments must be taken into account
in calculating and disclosing the finance charge and the annual percentage rate.
6. Downpayment/pickup payments. As discussed in § 226.2, deferred downpayments
or "pick-up payments" that meet the conditions set forth in the definition of
downpayment may be treated as part of the downpayment. Even if treated as a
downpayment, that amount may nevertheless be disclosed as part of the payment
schedule, at the creditor's option.
18(h)

Total of payments.

1. Calculation of total of payments. The total of payments is the sum of the
payments disclosed under paragraph (c
For example, if the creditor disclosed
a deferred portion of the downpayment as part of the payment schedule, that
payment must be reflected in tne total disclosed under this paragraph.
2. Descriptor. The descriptive phrase required for the total of payments may
be revised to reflect a variable rate feature.
3. Exception. Footnote 44 permits creditors to omit disclosure of the
total of payments in single-payment transactions. This exception does not
apply to a transaction calling for a single payment of principal combined with
periodic payments of interest.

.

4
Demand obligations. In demand obligations with no alternate maturity date,
if the payment scnedule is disclosed under paragraph (g)(1), the creditor is
not required to disclose the total of payments.
18(i)

Demand feature.

1. Disclosure requirements.
In demand obligations where the disclosures are
based on an assumed maturity of one year under § 226.17(c)(5), that fact must
also be stated. The disclosure requirements of this provision apply not only
to transactions payable on demand from the outset but also to transactions
that are not payable on demand at the time of consummation but convert to a
demand status after a stated period.
2. Covered demand features. The type of demand feature triggering the dis­
closures required by paragraph (i) is intended to include only those demand
features contemplated by the parties as part of the agreement. For example,
this provision does not apply to transactions which convert to a demand status
as a result of the consumer's default.
3. Relationship to payment schedule disclosures. As provided in paragraph
(g)(1), in demand obligations with no alternate maturity date, the creditor




§ 226.18
- Cl 7 -

need only disclose the
payments for the first
maturity, however, the
term; the special rule

due dates or payment periods of any scheduled interest
year.
If the demand obligation states an alternate
disclosed payment schedule must reflect that stated
in paragraph (g)(1) is not available.

18(j ) Total sale price.
1. Pisclosure. In a credit sale transaction, the "total sale price" must be
disclosed using that term along with a descriptive explanation similar to the
one in the regulation. The figure to be disclosed is the sum of the cash
price, other charges calculated under paragraph (b)(2), and the finance charge
disclosed under paragraph (d). The reference to a downpayment may be eliminated
in transactions calling for no downpayment.
18(k)

Prepayment.

1. Pi sclosure. The disclosure requirements in paragraph (k ) apply to any
prepayment, whether voluntary or involuntary, as in the case of prepayments
resulting from acceleration. If a penalty or refund is possible for any type
of prepayment, even though not for all, a positive disclosure is required. Any
difference in rebate or penalty policy, depending on whether prepayment is
voluntary or not, may not be disclosed with the segregated disclosures.
2. Penalty. Paragraph (k)(1) includes only those transactions in which the
interest calculation takes account of each reduction in principal. In simple
interest transactions, the creditor must indicate either that prepayment is
subject to a penalty, or that it is not. The term "penalty" as used here
encompasses only those charges that are assessed strictly because of the
prepayment in full of the obligation, as an addition to all other amounts.
Items which are not penalties include:
°

Prepaid finance charges assessed at the outset of the
transaction, such as points in a mortgage loan.

0

Use of Rule of 78's method to determine rebate.

However, a minimum finance charge in a simple interest transaction is a penalty.
3. Rebate of finance charge. Paragraph (k)(2) applies to any finance charges
that do not involve the application of a rate to a declining balance.
It
includes not only typical precomputed finance charges such as add-on rates, but
also charges that take account of some but not all reductions in principal.
For example, certain mortgage insurance premiums are assessed on the basis of
an annual outstanding balance, although payments are made and principal reduced
monthly. Thus, they are calculated on the basis of a declining annual prinicpal
balance, but they do not take into account each monthly reduction in principal.
As in paragraph (k)(l), the creditor must indicate either that the consumer
may or may not receive a rebate of finance charge upon prepayment. No descrip­
tion of the method of computing earned or unearned finance charges is required
or permitted as part of the segregated disclosures under this section, although




m

*

§ 226.18

- C18 4. Rebate-penalty disclosure. Some transactions involve both a precomputed
finance charge and a finance charge computed by application of a rate to the
unpaid balance. In these cases, disclosures about both prepayment rebates and
penalties are required. Examples of this type of transaction are simple interest
student loans with loan guarantee insurance, and mortgages with mortgage guaran­
tee insurance.
If the insurance premiums are not computed strictly by application
of a rate to a declining balance, disclosures under paragraph (k)(2) are required
with regard to that portion of the obligation, while a prepayment penalty must
be disclosed for the simple interest portion under paragraph (k)(l).
18(1)

Late payment.

1. Definition. This paragraph refers only to charges added to individual
delinquent installments by a creditor who otherwise considers the transaction
ongoing on its original terms. Late payment charges do not include:
o

The right of acceleration.

o

Fees imposed for actual collection costs, such as repossession
charges or attorney's fees assessed prior to maturity.

o

Deferral and extension charges.

o

The continued accrual of simple interest at the contract rate
after the payment due date.

2. Alternative disclosure. Many state laws permit the assessing of late charges
on the basis of a percentage, not to exceed a certain dollar limit. This alter­
native approach may be used in complying with paragraph (1). For example, stating
that the charge in the event of a late payment is 5% of the late amount, not to
exceed $5.00, is sufficient.
18(m)

Security interest.

1. Purchase money transactions. The property covered by the security interest
must be identified.
If the collateral is the item purchased as part of, or
with the proceeds of, the credit transaction, paragraph (m) requires only a
general identification such as "the property purchased in this transaction."
Any transaction in which the credit is being used to purchase the collateral
is considered a purchase money transaction and the more abbreviated property
identification disclosure required for these types of transactions may be
used, whether the obligation is considered a loan or a credit sale.
2. Non-purchase money transactions. In non-purchase money transactions, the
property subject to the security interest must be identified by "item or
type." This disclosure is satisfied by a general disclosure of the category
of property subject to the security interest, such as "household goods," "motor
vehicles," or "securities." At the creditor's option, however, a more precise
identification of the goods may be provided.
3. Mixed collateral.
In some transactions in which the credit is used
to purchase collateral, the creditor may also take other property of the con­
sumer as security. A combination of the general identification of the property




§ 226.18
- Cl9 -

purchased in the transaction, and a more specific identification of the other
collateral should be provided.
4. After-acquired property. After-acquired property clauses are not security
interests and are not to be disclosed under paragraph (m).
5. Spreader clause. The fact that collateral for pre-existing credit with the
institution is being used to secure the present obligation constitutes a security
interest and must be disclosed. A specific identification of that collateral
is unnecessary but a reminder of the interest arising from the prior indebtedness
is required. The disclosure can be accomplished by language such as "collateral
securing other loans with us may also secure this loan." At the creditor's
option, a more specific description of the property involved may be given.
18(n)

Insurance.

1. Location. This disclosure is one of four terms in § 226.18 that may
appear apart from the other disclosures. It may appear with any other infor­
mation, including the amount financed itemization, any information prescribed
by state law, or other supplementary material. If this information is disclosed
with the other segregated disclosures, however, no additional explanatory
material may be included.
18(o )

Certain security interest charges.

1. Format. No special format is required for these disclosures; under
§ 226.4(e), taxes and fees paid to government officials with respect to a
security interest may be aggregated, or may be broken down by individual charge.
Like the disclosures called for in paragraphs (a), (f), and (n) of this section,
this disclosure is one of four which may appear, at the creditor's option,
apart from the other required transactional disclosures.
18 (p)

Contract reference.

1. Content. Creditors may substitute, for the phrase "appropriate contract
document," a reference to specific transaction documents in which the additional
information is found, such as "promissory note" or "retail installment sale
contract."
18(g)

Assumption policy.

1. Policy statement. Since a creditor's assumption policy may be based on a
variety of circumstances not determinable at the time the disclosure is
made, the creditor may use phrases such as "subject to conditions" or "under
certain circumstances" in complying with paragraph (q). The provision requires
only that the consumer be told whether or not a subsequent purchaser might
be allowed to assume the obligation on its original terms and does not contem­
plate any explanation of the criteria or conditions for assumabi1ity.
2. Original terms. "Original terms" for purposes of paragraph (q) would not
preclude the imposition of an assumption fee, but a modification of the basic
credit agreement, such as a change in the contract interest rate, would repre­
sent different terms.




§ 226.18
- C20 -

18(r)

Required deposit,

1. Definition. This provision requires creditors to inform consumers of the
presence of a required deposit and its potential effect on the cost of credit,
but eliminates the requirement that the deposit be included in calculation of
the annual percentage rate. The footnote to this paragraph sets forth
three types of deposits that need not be considered required deposits subject
to the disclosure. Use of the phrase "need not" permits creditors to include
the disclosure required by paragraph (r) even in cases where there is doubt
as to whether the deposit constitutes a "required deposit" within the meaning
of the paragraph.
2. Escrow accounts. The first exception is not limited to real estate trans­
actions, nor is it restricted to escrows for taxes and insurance. For example,
the escrow account may be for maintenance fees (such as condominium fees) or
for repairs, as in the case of completion escrows.
3. Savings accounts. The second exception is for deposits that earn at least
5 per cent per year. Where the consumer receives more than, nominal interest
on the deposit, that amount need not be viewed as a required deposit. This
exception applies whether the deposit is held by the creditor itself or by a
third party.
4. Morris Plan transactions. The third exception is for Morris Plan trans­
actions. This is a deposit balance that will be wholly applied toward satis­
faction of the consumer's obligation in the transaction.
5.

Examples.

The following situations need not be treated as required deposits

o

Requirement that a borrower be a customer or a member even if
there is a fee or a minimum balance involved.

o

Deposits that are immediately available to the consumer.

o

Required property insurance escrow on a mobile home transaction.

o

Refund of interest when the obligation is paid in full.

o

Escrow of condominium fees.

o

Funds deposited with the creditor to be disbursed (for example,
for construction) before the loan proceeds are advanced.

o

Escrow of loan proceeds to be released when the repairs are
completed.

This list is not intended to be all-inclusive but rather to give guidance in
determining whether a deposit is a required deposit for purposes of this para­
graph.
6. Certificate of deposit. "Loophole" accounts, where a portion of the funds
necessary for the purchase of a certificate of deposit is advanced to the con­
sumer by the issuing institution, are not required deposits. This assumes that




§ 226.19
- C21 -

the portion contributed by the consumer is subject to an interest rate of more
than 5 percent.
REFERENCES;
Statute:

§ 128.

Other sections:

§§ 226.2; 226.17, and Appendix H.

Previous regulation:

§§ 226.4 and 226.8.

1981 changes: Five of the required disclosures must be explained to
the consumer in a manner similar to the descriptive phrases shown in the regula­
tion. A written itemization of the amount financed need not be provided unless
the consumer requests it. The finance charge must be provided in all transac­
tions, including real estate transactions. The finance charge may not and must
not be itemized as part of the required disclosures. The disclosed finance
charge is considered accurate if it is within the $5 or $10 tolerance provided
according to the size of the transaction.
The variable rate hypothetical is required in all transactions and
may be either general or transaction-specific. The penalty and rebate disclo­
sures in the event of prepayment have been modified and combined. The require­
ment of an explanation of how the rebates or penalties are computed has been
eliminated. The late payment disclosure has also been narrowed to include
only late charges imposed before maturity, excluding deferral and extension
charges.
The information required in the security interest disclosure has
been decreased. The type of security interest is no longer required and the
property description requirement has been reduced.
Two disclosure requirements have been added. The disclosures must
refer to the contract documents for additional information not contained in
the body of the disclosure. The creditor must provide a general statement of
its assumption policy in a residential mortgage transaction.
The disclosure of the required deposit is limited to a statement
that the annual percentage rate does not reflect the required deposit. The
required deposit no longer is used in the computation of the annual percentage
rate.
Section

226.19 -- Certain residential mortgage transactions.
19(a)

Time of disclosure.

1. Coverage. This section requires early disclosure of credit terms in residen­
tial mortgage transactions that are also subject to the Real Estate Settlement
Procedures Act (RESPA) and its implementing Regulation X, administered by the
Department of Housing and Urban Development (HUD). To be covered by this sec­
tion, a transaction must be both a "residential mortgage transaction" under
§ 226.2 and a "federally related mortgage loan" under RESPA.



§ 226.19
- C22 -

2. Timing and use of estimates. Truth in Lending disclosures must be given
within three business days after the creditor's receipt of a consumer's written
application or by consummation, whichever is earlier. The three-day period for
disclosing credit terms coincides with the time period within which creditors
subject to RESPA must provide good faith estimates of settlement costs.
If a
creditor does not know the precise credit terms, the creditor must base the
disclosures on the best information reasonably available and indicate that the
disclosures are estimates under § 226.17(c)(2).
If all of the disclosures are
estimates, the creditor may include a statement to that effect, instead of
separately labelling each estimate. The creditor may provide on a separate
document or on the same document (but separate from the required disclosures)
explanatory material concerning the estimates and the contingencies that may
affect the actual terms.
3. Written appl ication. Creditors should look to RESPA and Regulation X
(including any interpretations issued by HUD) in deciding whether a "written
application" has been received. Depending on HUD interpretations, commit­
ting any information to writing may be enough to constitute a "written applica­
tion" -- for example, writing down information received by telephone from or
about an applicant. But, subject to HUD interpretations, a mere telephone or
other oral inquiries is not an application if the creditor puts nothing in
writing.
If a creditor uses written applications, the creditor receives an
application when it reaches the creditor in any of the ways applications are
normally transmitted -- by mail, hand-delivery, or through an intermediary
agent or broker.
4. Exceptions.
If the creditor knows within the three-day period that no
credit transaction will occur, the creditor need not make the disclosures
under this section. For example, if a consumer applies for a type or amount
of credit which the creditor does not offer, or if the consumer's application
cannot be approved, no purpose would be served by credit cost disclosures.
If,
however, the creditor fails to provide early disclosures and the transaction
is later consummated, the creditor will be in violation of this provision.
5. Itemization of amount financed. In many residential mortgage transactions,
the itemization of the amount financed required by § 226.18(c) will contain
items that also must be disclosed as part of the good faith estimates of settle­
ment costs required under RESPA. Typical settlement costs, such as origination
fees or points, would be disclosed under both RESPA and this regulation.
In
order to eliminate these duplicative disclosures, creditors furnishing the
RESPA good faith estimates need not give consumers an itemization of the amount
financed, either with the disclosures provided three days after application or
with the disclosures given at consummation or settlement.
19(b) Redisclosure required.
1. Conditions for redisclosure. Creditors must make new disclosures if the
annual percentage rate at consummation changes from that originally disclosed
by more than 1/8 of one percentage point in regular transactions or 1/4 of one
percentage point in irregular transactions, as defined in § 226.22. A creditor
must also redisclose if a variable rate feature is added to the credit terms
after the original disclosures have been made.




§ 226.20
- C23 -

2. Content of new disclosures. If redisclosure is required, the creditor may
provide a complete set of new disclosures, or may redisclose only the terms that
have changed. If the creditor chooses to disclose only the changed terms, all
the terms that have changed must be included in the new disclosures. For
example, a change in the annual percentage rate will almost always produce
changes in the finance charge, and often in the schedule of payments; these
changes would have to be disclosed.
If, in addition, changes have occurred in
any unrelated terms, such as the amount financed or prepayment penalty, these
would also have to be disclosed. However, no new disclosures are required if
the only changes involve terms other than the annual percentage rate or the
addition of a variable rate feature.
3. Timing. Redisclosures, when necessary, must be given before "consummation
or settlement," whichever is later. "Consummation" is defined in § 226.2,
and "settlement" is subject to any interpretations issued under RESPA and
Regulation X.
REFERENCES:
Statute:

§ 128(b)(2).

Other sections: §§ 226.2; 226.17 and 226.22.
Other regulatory provisions: Real Estate Settlement Procedures Act
(12 U.S.C. £602) and Regulation X (24 CFR § 3500.2(a) and 3500.5).
Previous regulation:

None.

1981 changes: This section is new, to implement the "early dis­
closure" amendment in § 128(b)(2) of the act.
Section 226.20 -- Subsequent disclosure requirements.
20(a)

Refinancings.

1. Definition. A "refinancing" is a new transaction requiring a complete new
set of disclosures. Whether a refinancing has occurred is determined by
reference to whether the original obligation has been satisfied or extinguished
and replaced by a new obligation, based on the parties' contract and applicable
law. The refinancing may involve the consolidation of several existing obliga­
tions, disbursement of new money to the consumer or on the consumer's behalf,
or the rescheduling of an existing payment obligation.
In any form, the new
obligation must completely replace the prior one. Thus, changes in the
terms of an existing obligation, such as the deferral of individual installments,
will not constitute a refinancing unless accomplished by the cancellation of
that obligation and the substitution of a new obligation. Linder the same
test, however, a substitution of agreements that meets the refinancing defini­
tion will require new disclosures, even if the substitution does not substantially
alter the prior credit terms.
2. Exceptions. A transaction is subject to this paragraph only if it meets
the general definition of a refinancing. Paragraph (a)(1) through (5) lists



§ 226.20
- C24 -

five events which are not to be considered refinancings, even though they may
otherwise meet the general definition.
3. Renewal.
In determining whether the original terms apply to a renewal
under paragraph (a)(1), the creditor may disregard the addition of accrued
unpaid interest to the principal balance and changes in the term of renewal
resulting from the factors listed in § 226.17(c)(3), such as the occurrence
of leap year or the varying number of days in months. This exception is avail­
able only if Truth in Lending disclosures were made on the earlier transaction.
4. Annual percentage rate reduction. Paragraph (a)(2) exempts a reduction
in the annual percentage rate with a corresponding change in the payment sche­
dule.
If the rate is subsequently increased, even though it remains below its
original level, new disclosures must then be made, if the increase is effected
in a way that meets the general refinancing definition.
5. Court agreements. The exception under paragraph (a)(3) includes, for
example, agreements approved by a court and reaffirmations of debts discharged
in bankruptcy.
6. Workout agreements. Paragraph (a)(4) excepts workout agreements other
than those in which the annual percentage rate is increased or additional
credit advanced beyond amounts already accrued plus insurance premiums.
7. Insurance renewal. Paragraph (a)(5) exempts the renewal of optional insur­
ance added to an existing credit transaction, assuming that appropriate Truth
in Lending disclosures were provided for the initial purchase of the insurance.
8. Variable rate. If a variable rate feature was properly disclosed under
the regulation, a rate change in accord with those disclosures is not a refi­
nancing. For example, a renegotiable rate mortgage that was disclosed as a
variaole rate transaction is not subject to new disclosure requirements when
the variable rate feature is invoked. However, if the variable rate feature
was not previously disclosed, a later change in the rate is considered a new
transaction subject to new disclosures.
9. Unearned finance charge. In a transaction involving precomputed finance
charges, the creditor must include in the finance charge on the refinanced ob­
ligation any unearned portion of the original finance charge that is not rebated
to the consumer or credited against the underlying obligation. For example,
in a transaction with an add-on finance charge, a creditor advances new money
to a consumer in a fashion that extinguishes the original obligation and replaces
it with a new one. The creditor neither refunds the unearned finance charges on
the original obligation to the consumer nor credits it to the remaining balance
on the old obligation. Under these circumstances, the unearned finance charge
must be included in the finance charge on the new obligation and reflected in
the annual percentage rate disclosed on refinancing.
20(b)

Assumptions.

1. General definition. An assumption as defined in this paragraph is a new
transaction and new disclosures must be made to the subsequent consumer. An




§ 226.20
- C25 -

assumption under the regulation requires the following three elements:
°

A residential mortgage transaction.

o

An express acceptance of the subsequent consumer by the creditor.

°

A written agreement.

2. Express agreement. "Expressly agrees" means that the creditor's agreement
must relate to the specific new debtor, and must unequivocally accept that
debtor as a primary obligor. The following events are not construed to be
express agreements between the creditor and the subsequent consumer:
o

Approval of creditworthiness.

°

Notification of a change in records.

°

Mailing the subsequent consumer a coupon book.

o

Acceptance of payments from the new consumer.

3. Retention of original consumer. The retention of the original consumer as
an obligor in some capacity does not prevent the change from constituting an
assumption under this provision, provided the new consumer becomes a primary
obligor. But the mere addition of a guarantor to an obligation for which the
original consumer remains primarily liable does not give rise to an assumption.
4. Status of parties. Paragraph (b) applies only if the previous debtor was a
consumer and the obligation is assumed by another consumer.
It does not apply,
for example, when an individual takes over the obligation of a corporation.
5. Assumption fee. The imposition of additional charges does not by itself
exclude a transaction from the assumption definition. For example, an assump­
tion fee may be charged and the assumption may remain subject to this paragraph.
6. Pisclosures. For transactions that are assumptions within this provision,
the creditor must make disclosures based on the "remaining obligation."
°

The amount financed is the remaining principal balance plus any
arrearages or other accrued charges from the original transaction.

°

If the finance charge is computed from time to time by application
of a percentage rate to an unpaid balance, in determining the
amount of the finance charge and the annual percentage rate to be
disclosed, the creditor should disregard any prepaid finance charges
paid by the original obligor, but must include in the finance
charge any prepaid finance charge, such as an assumption fee or
transfer fee, imposed in connection with the assumption.

0

If the creditor requires the assuming consumer to pay any charges
as a condition of the assumption, those sums are prepaid finance
charges as to that consumer.




§ 226.21
- C26 -

If a transaction involves add-on or discount finance charges, the creditor may
make abbreviated disclosures, as outlined in paragraph (b)(1) through (5).

REFERENCES:
Statute:

None.

Other sections:

§ 226.2.

Previous regulation:
226.311, 226.814, and 226.817.

§ 226.8(j), (k) and (1), Interpretation §§ 226.807,

1981 changes: Where the previous regulation treated virtually any
change of terms as a refinancing requiring new disclosures, this regulation
limits refinancings to transactions in which the entire original obligation is
extinguished and replaced by a new one. Redisclosure is no longer required
for deferrals or extensions.
The assumption provision retains the substance of the rule under
the previous regulation, but coverage is limited to residential mortgage trans­
actions.
Section 226.21 -- Treatment of credit balances.
1. Credit balance. A "credit balance" arises whenever the creditor receives
or holds funds in an account in excess of the total balance due from the con­
sumer on that account.
It may come about from overpayment by the consumer,
from the crediting of rebates of unearned finance charges or insurance premiums,
or from other amounts owed to or held for the consumer with respect to that
account, such as credits for returned merchandise. With respect to closed-end
credit, this could result from the debtor's paying off a loan by transmitting
funds in excess of the total balance owed on the account, and the early payoff
of a loan entitling the consumer to a rebate of insurance premiums and finance
charges.
2. Total balance due. The phrase "total balance due" refers to the total
outstanding balance. Thus, this provision does not apply where the consumer
has simply paid an amount in excess of the installment payment or the minimum
payment due for a given period.
3. Relation to other law. Whether the creditor in fact owes or holds sums
for the consumer must be determined under the contract between the parties or
by local law. For example, if a creditor has no obligation to rebate any por­
tion of precomputed finance charges on prepayment, the consumer's early payoff
may not create a credit balance with respect to those charges. Similarly,
nothing in this provision interferes with any rights the creditor may have
under the contract or under state law with respect to set-off, cross cnllaterization, or similar provisions. For example, a lender may be entitled by state
law to apply an overpayment on one account against a delinquent balance on
another account; those rights are not preempted by this provision.




§ 226.22
- C27 -

4. Time of refund. If a credit balance remains in the account for more than
six months, the creditor must make a good faith effort to return it to the
consumer. No request from the consumer is necessary to trigger this duty.
"Good faith effort" requires reasonable but not extraordinary effort; the pro­
vision contemplates that when the consumer's current location is not known
by the creditor, the minimum tracing requirement will include use of the con­
sumer's last known address and telephone number. Thus, a creditor would be
expected to try to reach the consumer by mail and by telephone before consid­
ering the consumer untraceable. The creditor may voluntarily refund the credit
balance before the six months have run, but if efforts to do so have been
unsuccessful, the creditor must still make the required good faith tracing
effort after six months.
5. Unclaimed balance. If the consumer cannot be traced, the disposition of
the credit balance remaining in the account after six months is a matter of
state or other applicable law. That law may require those sums to escheat to
the state, or may permit the creditor to retain them, or require some other
disposition. Nothing in this provision authorizes the creditor to treat any
credit balance (even one less than $1) as income or otherwise appropriate it.
REFERENCES:
Statute:

§ 165.

Other sections:

None.

Previous regulation:

None.

1981 changes: This section implements § 165 of the Act, which was
expanded by the 1980 statutory amendments to apply to closed-end as well as
open-end credit.
Section 226.22 -- Determination of the annual percentage rate.
22(a)

Accuracy of the annual percentage rate.

1. Calculation method. The regulation recognizes both the actuarial method
and the United States Rule Method (U.S. Rule) as measures of an exact annual
percentage rate. Both methods yield the same annual percentage rate when
payment intervals are equal. They differ in their treatment of unpaid accrued
interest.
2. Actuarial method. When no payment is made, or when the payment is
insufficient to pay the accumulated finance charge, the actuarial method
requires that the unpaid finance charge be added to the amount financed and
thereby capitalized. Interest is computed on interest since in succeeding
periods the interest rate is applied to the unpaid balance including the unpaid
finance charge. Appendix J provides instructions and examples for calculating
the annual percentage rate using the actuarial method.




§ 226.22
- C28 -

3.
U.S. Rule.
The U . S . R u l e p r o d u c e s no c o m p o u n d i n g o f i n t e r e s t i n t h a t any
u n p a i d a c c r u e d i n t e r e s t i s a c c u m u l a t e d s e p a r a t e l y and i s n o t added t o p r i n c i p a l .
In a d d i t i o n , u n d e r t h e U . S . R u l e , no i n t e r e s t c a l c u l a t i o n i s made u n t i l a
p ayme nt i s r e c e i v e d .
4.
Tolerances.
The a n n u a l p e r c e n t a g e r a t e must be d i s c l o s e d e i t h e r as an
e x a c t f i g u r e o r a s one w h i c h v a r i e s , i n e i t h e r d i r e c t i o n , by no more t h a n t h e
t o l e r a n c e s s e t f o r t h i n p a r a g r a p h s ( a ) ( 2 ) and ( 3 ) .
5.
Regular t r a n s a c t io n s .
U nd er p a r a g r a p h ( a ) ( 2 ) , an a n n u a l p e r c e n t a g e r a t e
f o r a r e g u l a r t r a n s a c t i o n i s c o n sid e re d a ccurate i f i t v a r i e s in e it h e r d i r e c ­
t i o n by n o t more t h a n 1 / 8 o f 1 p e r c e n t a g e p o i n t f rom t h e a c t u a l a n n u a l p e r c e n ­
tage rate.
F o r e x a m p l e , when t h e e x a c t a n n u a l p e r c e n t a g e r a t e i s d e t e r m i n e d
t o be 10 1/8%, a d i s c l o s e d a n n u a l p e r c e n t a g e r a t e f ro m 10% t o 10 1/4%, o r t h e
d e c i m a l e q u i v a l e n t , i s deemed t o co mp ly w i t h t h e r e g u l a t i o n .
6.

Irre g u la r tran saction s.
P a r a g r a p h ( a ) ( 3 ) p e r m i t s a 1/4 o f 1 p e r c e n t a g e
point tole rance for ir r e g u la r t ra n sa c tio n s.
T h i s t o l e r a n c e i s in tended f o r
more c o m p l e x t r a n s a c t i o n s t h a t do n o t c a l l f o r a s i n g l e a d v a n c e and a r e g u l a r
s e r i e s o f e q u a l pa ym en ts a t e qu a l i n t e r v a l s .
The 1/4 o f 1 p e r c e n t a g e p o i n t
t o l e r a n c e may be u s e d , f o r e x a m p l e , i n a c o n s t r u c t i o n l o a n where a d v a n c e s a r e
made a s c o n s t r u c t i o n p r o g r e s s e s , o r i n a t r a n s a c t i o n wher e pa yme nts v a r y t o
r e f l e c t t h e c o n s u m e r ' s s e a s o n a l i n co m e.
I t may a l s o be u s e d i n t r a n s a c t i o n s
w i t h g r a d u a t e d payment s c h e d u l e s wher e t h e c o n t r a c t co m mi t s t h e c o n s u m e r t o
s e v e r a l s e r i e s o f pa ym e n t s i n d i f f e r e n t a m o u n t s .
I t does not a p p ly , however,
t o l o a n s w i t h v a r i a b l e r a t e f e a t u r e s where t h e i n i t i a l d i s c l o s u r e s a r e b as ed
on a r e g u l a r a m o r t i z a t i o n s c h e d u l e o v e r t h e l i f e o f t h e l o a n , even t h o u g h
p a y m e n t s may l a t e r c h a n g e b e c a u s e o f t h e v a r i a b l e r a t e f e a t u r e .
7.
R e la tio n to § 2 2 6 . 1 7 ( c ) ( 4 ) .
Under § 2 2 6 . 1 7 ( c ) ( 4 ) , c r e d i t o r s may d i s r e g a r d
c e r t a i n i r r e g u l a r f i r s t p e r i o d s and any i r r e g u l a r p a ym e nt s r e s u l t i n g f rom t h o s e
periods.
T r a n s a c t i o n s i n w h i c h t h e o n l y i r r e g u l a r i t y i s an odd f i r s t p e r i o d
a r e n o t c o n s i d e r e d " i r r e g u l a r " f o r p u r p o s e s o f t h e 1/4 o f 1 p e r c e n t a g e p o i n t
tolerance.
I f t h e o n l y i r r e g u l a r i t i e s i n a payment s t r e a m c o n s i s t o f an odd
f i r s t p e r i o d and odd pa ym en ts f l o w i n g f rom t h a t p e r i o d , o f t h e t y p e d e s c r i b e d
i n § 2 2 6 . 1 7 ( c ) ( 4 ) , t h e t r a n s a c t i o n i s c o n s i d e r e d r e g u l a r and t h e a n nu a l p e r c e n ­
t a g e r a t e w i l l be m e a s u r e d a g a i n s t t h e 1 / 8 o f 1 p e r c e n t a g e p o i n t s t a n d a r d .
8.

B asis for c a lc u la tio n s.
When a t r a n s a c t i o n i n v o l v e s " s t e p r a t e s " o r " s p l i t
r a t e s " - - t h a t i s , d i f f e r e n t r a t e s a p p l i e d at d i f f e r e n t times or to d i f f e r e n t
p o r t i o n s o f the p r i n c i p a l b a la n c e - - a s i n g l e com p o site annual p e rc e n ta g e ra te
m ust be c a l c u l a t e d and d i s c l o s e d f o r t h e e n t i r e t r a n s a c t i o n .
Only the f in a n c e
c h a r g e i m po sed on t h e c o n s u m e r s h o u l d be t a k e n i n t o a c c o u n t i n c o m p u t i n g t he
annual p e rc e n ta g e r a t e .
Thus, i n t e r e s t charge s th a t are refunded f o r tim e ly
p a ym e n t , o r t h a t a r e p a i d by t h e g o v e r n m e n t on i n t e r i m s t u d e n t l o a n s , a r e n ot
t o be r e f l e c t e d i n t h e r a t e .
22(b)

Computation t o o l s .

1.
B oa rd t a b l e s .
V o l um e s I and I I o f t h e B o a r d ' s A n nu al P e r c e n t a g e R a t e T a b l e s
p r o v i d e a means o f c a l c u l a t i n g a n n u a l p e r c e n t a g e r a t e s f o r r e g u l a r and i r r e g u l a r
tra n sa c tio n s, respectively.
An a n n u a l p e r c e n t a g e r a t e computed i n a c c o r d a n c e




§ 226.22
- C29 -

w i t h t h e i n s t r u c t i o n s i n t h e t a b l e s i s deemed t o c o m p ly w i t h t h e r e g u l a t i o n ,
even w h er e u s e o f t h e t a b l e s p r o d u c e s a r a t e t h a t f a l l s o u t s i d e t h e g e n e r a l
standard of accuracy.
To i l l u s t r a t e :
°

Volume I may be u s e d f o r s i n g l e a d v a n c e t r a n s a c t i o n s w i t h com­
p l e t e l y r e g u l a r payment s c h e d u l e s o r w i t h payment s c h e d u l e s
t h a t a r e r e g u l a r s a v e f o r an odd f i r s t pa ym en t, odd f i r s t p e r i o d
o r odd f i n a l payment.
When u s e d f o r a t r a n s a c t i o n w i t h a l a r g e
f i n a l b a l l o o n p a ym e n t , Volume I may p r o d u c e a r a t e t h a t i s c o n ­
s i d e r a b l y h i g h e r than the e xact r a t e produced u s i n g a computer
p r o g r a m b a s e d d i r e c t l y on A p p e n d i x J.
H ow e ve r , t h e Volume I r a t e
- - p r o d u c e d u s i n g c e r t a i n a d j u s t m e n t s i n t h a t volume - - i s c o n ­
s i d e r e d t o be i n c o m p l i a n c e .

2.
Other c a l c u l a t i o n t o o l s .
C r e d i t o r s need n o t u s e t h e B o a r d t a b l e s i n c a l ­
c u l a t i n g t h e a nnu al p e r c e n t a g e r a t e s .
Any c o m p u t a t i o n t o o l s may be u s e d , so
lo n g as they produce annual p e rc e n ta g e r a t e s w i t h i n 1 / 8 or 1 / 4 o f 1 p erce n ta ge
p o i n t , as a p p l i c a b l e , o f the p r e c i s e a c t u a r i a l or U.S. R ule annual p ercentage
rate.
22(c)

Single

add-on

rate t r a n s a c t io n s .

1.
General r u l e .
C r e d i t o r s a p p l y i n g a s i n g l e add-on ra te to a l l t r a n s a c t i o n s
up t o 60 m ont h s i n l e n g t h may d i s c l o s e t h e same a n n u a l p e r c e n t a g e r a t e f o r a l l
t h o s e t r a n s a c t i o n s , a l t h o u g h t h e a c t u a l a n nu a l p e r c e n t a g e r a t e v a r i e s a c c o r d i n g
to th e l e n g t h o f the t r a n s a c t i o n .
C r e d i t o r s u t i l i z i n g t h i s p r o v i s i o n must show
the h i g h e s t o f tho se r a t e s .
o

E x a m p l e : An a d d - o n r a t e o f 10% c o n v e r t e d t o an a n n u a l p e r c e n t a g e
rate produces the f o l l o w i n g a ctu a l annual p erce n ta ge r a t e s at
v a r i o u s m a t u r i t i e s : a t t h r e e m o n t h s , 1 4 . 9 4 % ; a t 21 m o n t h s , 1 8 . 1 3 % ;
and a t 60 m o n t h s , 1 7 . 2 7 % .
The c r e d i t o r may d i s c l o s e an a n n u a l
percentage ra te o f 18.18% (the h i g h e s t annual p erce n ta ge r a t e )
f o r any t r a n s a c t i o n up t o f i v e y e a r s , even t h o u g h t h a t r a t e i s
p r e c i s e o n l y f o r a t r a n s a c t i o n o f 21 m o n t h s .

22(d)

C ertain

transactions

involving

ranges of b a la n c e s.

1.
General r u l e .
C re d ito rs a p p lyin g a fix ed d o l l a r finance
b a l a n c e s w i t h i n a s p e c i f i e d r a n g e o f b a l a n c e s may u n d e r s t a t e
c e n t a g e r a t e by up t o 8 % o f t h a t r a t e , by d i s c l o s i n g f o r a l l
a n n u a l p e r c e n t a g e r a t e computed on t h e median b a l a n c e w i t h i n
°




charge to a l l
the annual p e r ­
t h o s e b a la n c e s the
t h a t range.

Exam ple :
I f a f i n a n c e c h a r g e o f $9 a p p l i e s t o a l l b a l a n c e s
between $91 and $ 1 0 0 , an a n n u a l p e r c e n t a g e r a t e o f 10% ( t h e r a t e
on t h e median b a l a n c e ) may be d i s c l o s e d a s t h e a n n u a l p e r c e n t a g e
r a t e f o r a l l b a l a n c e s , even t h o u g h a $9 f i n a n c e c h a r g e a p p l i e d t o
t h e l o w e s t b a l a n c e ( $ 9 1 ) w o u l d a c t u a l l y p r o d u c e an a n n u a l p e r c e n ­
tage ra te o f 10.7%.

§ 226.23
- C30 -

REFERENCES:
Statute:

§ 107.

Other s e c t i o n s :
Previous

§ 226.17(c)(4).

regulation:

§ 226.5(b)

through

(e).

1981 c h a n g e s : The s e c t i o n now p r o v i d e s a l a r g e r t o l e r a n c e ( 1 / 4 o f
percentage p oin t) fo r i r r e g u l a r t ra n sa c tio n s.
I t a l s o e l i m i n a t e s , as o f
A p r i l 1, 1 9 8 2 , t h e s p e c i a l p r o t e c t i o n a g a i n s t l i a b i l i t y f o r c r e d i t o r s u s i n g
fa u lty calcu latio n tools.

Section

1.

226.23 - -

Right of

23(a)

Consum er's

Coverage.

This

1

rescissio n .

section

righ t

to r e s c i n d .

applies to tran saction s

o

A se curity

interest

o

The s e c u r i t y

interest

o

The d w e l l i n g

is

that

arises
is

in which:

from the c r e d i t

taken

c o n su m e r's

transaction.

in a c o n s u m e r 's
p rincipal

dw elling.

place of residence.

2.
T r a n s a c t i o n s not c o v e r e d .
I f a c r e d i t e x t e n s i o n i s o t h e r w i s e exempt from
R e g u l a t i o n Z, i t d o e s n o t become s u b j e c t t o t h e r e g u l a t i o n b e c a u s e o f t he
n a t u r e of the c o l l a t e r a l s e c u r i n g the c r e d i t .
For example, the r i g h t o f r e s ­
c i s s i o n d o e s n o t a p p l y t o a b u s i n e s s p u r p o s e l o a n , even t h o u g h t h e l o a n i s
s e c u r e d by t h e c u s t o m e r ' s p r i n c i p a l d w e l l i n g .
3.
S e c u r i t y i n t e r e s t a r i s i n g f r om t r a n s a c t i o n .
The s e c u r i t y i n t e r e s t must be
r e t a i n e d as p a r t o f the c r e d i t t r a n s a c t i o n , as in the f o l l o w i n g examples:
o

A s e c u r i t y i n t e r e s t i s a c q u i r e d by a c o n t r a c t o r who i s
e x t e n d in g the c r e d i t in the t r a n s a c t i o n .

o

A m e c h a n i c ' s o r m a t e r i a l m e n ' s l i e n i s r e t a i n e d by a s u b c o n ­
t r a c t o r o r s u p p l i e r o f t h e c o n t r a c t o r - c r e d i t o r , even where
t h e l a t t e r h a s w a i v e d i t s own s e c u r i t y i n t e r e s t i n t h e c o n ­
s u m e r ' s home.

The s e c u r i t y i n t e r e s t
follow ing cases:




is

not

retained

as p a r t o f the c r e d i t

also

transaction

i n t he

o

I f a m a t e r i a l m e n ' s o r m e c h a n i c ' s l i e n i s o b t a i n e d by a c o n t r a c t o r
who i s n o t a p a r t y t o t h e c r e d i t t r a n s a c t i o n b u t m e r e l y r e c e i v e s
t h e p r o c e e d s o f t h e c o n s u m e r ' s u n s e c u r e d bank l o a n .

©

I f a l l s e c u r i t y i n t e r e s t s t h a t may a r i s e
c r e d i t t r a n s a c t i o n a re v a l i d l y waived.

in connection with

the

§ 226.23
- C31 -

o

I f t h e c r e d i t o r o b t a i n s a l i e n and c o m p l e t i o n bond t h a t h a s t h e
e f f e c t o f a u t o m a t i c a l l y s a t i s f y i n g a l l l i e n s a g a i n s t the c o n ­
s u m e r 's d w e l l i n g as a r e s u l t o f the c r e d i t t r a n s c t i o n .

A l t h o u g h l i e n s a r i s i n g by o p e r a t i o n o f law a r e n o t c o n s i d e r e d s e c u r i t y
i n t e r e s t s fo r d is c lo s u r e purposes under § 226.2, that se c tio n s p e c i f i c a l l y
i n c l u d e s them i n t h e d e f i n i t i o n f o r p u r p o s e s o f t h e r i g h t o f r e s c i s s i o n .
T h u s , even t h o u g h an i n t e r e s t i n t h e c o n s u m e r ' s d w e l l i n g i s n o t a r e q u i r e d
d i s c l o s u r e u n d e r § 2 2 6 . 1 8 ( m ) , i t may s t i l l g i v e r i s e t o t h e r i g h t o f r e s c i s ­
sion.
4.
Consumer.
The r i g h t o f r e s c i s s i o n r u n s t o any c o n s u m e r whose p r i n c i p a l
d w e llin g i s su b je ct to the s e c u r i t y i n t e r e s t .
To be a " c o n s u m e r " w i t h i n t h e
m e a n i n g o f § 2 2 6 . 2 , t h a t p e r s o n need n o t be a s i g n a t o r y t o t h e c r e d i t a g r e e m e n t ,
b u t must a t l e a s t h a v e an o w n e r s h i p i n t e r e s t t h a t i s encumbered by t h e c r e d i t o r ' s
se curity inte rest.
F o r e x a m p l e , i f one s p o u s e s i g n s a c r e d i t c o n t r a c t w i t h o u t
the p a r t i c i p a t i o n o f the o t h e r sp o u se , the l a t t e r i s a "c o n su m e r" i f the owner­
s h i p i n t e r e s t s o f b o th s p o u s e s a r e s u b j e c t t o t h e s e c u r i t y i n t e r e s t .
5.
P rin cip al d w elling.
A d w e l l i n g , a s d e f i n e d i n § 2 2 6 . 2 , can i n c l u d e s t r u c ­
t u r e s t h a t a r e c l a s s i f i e d a s p e r s o n a l t y u n d e r s t a t e law.
For example, a t r a n s ­
a c t i o n s e c u r e d by a m o b i l e home, t r a i l e r o r h o u s e b o a t u s e d a s t h e c o n s u m e r ' s
p r i n c i p a l r e s i d e n c e may be r e s c i n d a b l e .
The s t r u c t u r e must be t h e c o n s u m e r ' s
p r i n c i p a l d w e l l i n g at the time o f the c r e d i t t r a n s a c t i o n .
Thus, a t r a n s a c t io n
s e c u r e d by a s e c o n d home t h a t i s n o t c u r r e n t l y b e i n g u s e d a s t h e c o n s u m e r ' s
p r i n c i p a l p l a c e o f r e s i d e n c e i s n o t r e s c i n d a b l e , e ven i f t h e c o n s u m e r i n t e n d s
t o r e t i r e t h e r e sometime i n t h e f u t u r e .
S i m i l a r l y , a v a c a t i o n home u s e d as
c o l l a t e r a l - - i f i t i s not th e c o n s u m e r 's p r i n c i p a l d w e l l i n g - - does not g i v e
r i s e to the r i g h t of r e s c i s s i o n .
6.

C onsum er's e x e r c ise o f r i g h t .
The c o n s u m e r ' s e x e r c i s e o f t h e r i g h t o f
r e s c i s s i o n must be i n w r i t i n g b u t need n o t be on t h e f orm t h e c r e d i t o r g i v e s
the consumer under p a rag rap h (b ).
Wh et he r n o t i c e o f r e s c i s s i o n i s s e n t by
m a i l , t e l e g r a m o r o t h e r mea ns , t h e t i m e p e r i o d f o r t h e c r e d i t o r ' s p e r f o r m a n c e
u n d e r p a r a g r a p h ( d ) ( 2 ) d o e s n o t b e g i n t o run u n t i l t h e n o t i c e ha s been r e c e i v e d .
The c r e d i t o r may d e s i g n a t e an a g e n t t o r e c e i v e t h e n o t i c e s o l o n g as t h e a g e n t ' s
name and a d d r e s s a p p e a r on t h e n o t i c e p r o v i d e d t o t h e c o n s u m e r u n d e r p a r a g r a p h

(b).
7.
R escission period.
The p e r i o d w i t h i n w h i c h t h e c o n s u m e r may e x e r c i s e
t h e r i g h t t o r e s c i n d r u n s f o r t h r e e b u s i n e s s d a y s fr om t h e l a s t o f t h e f o l l o w i n g
three events:
o

Co ns um mat io n o f t h e t r a n s a c t i o n .

°

Delivery

of a ll

o

Delivery

o f the r e q u i r e d

m aterial

d isclosures.
rescission

notice.

F o r e x a m p l e , i f a t r a n s a c t i o n i s consummated on J un e 1 and t h e d i s c l o s u r e s and
n o t i c e w er e g i v e n on May 31, t h e r e s c i s s i o n p e r i o d w i l l e x p i r e a t m i d n i g h t o f
t h e t h i r d b u s i n e s s da y a f t e r J un e 1.
I f t h e d i s c l o s u r e s were g i v e n and t h e




§ 226.23
- C32-

t r a n s a c t i o n consummated on J un e 1 and t h e r e s c i s s i o n n o t i c e g i v e n on J u n e 3,
t h e r e s c i s s i o n p e r i o d w i l l e x p i r e a t m i d n i g h t o f t h e t h i r d b u s i n e s s day a f t e r
J un e 3.
The c o n s u m e r must h ave p l a c e d t h e r e s c i s s i o n n o t i c e i n t h e m a i l ,
f i l e d i t f o r t e l e g r a p h i c t r a n s m i s s i o n , o r d e l i v e r e d i t to the c r e d i t o r ' s p la c e
o f b u s i n e s s w i t h i n t h a t time in o r d e r to e x e r c i s e the r i g h t .
8.
M aterial d is c lo s u r e s .
F o o t n o t e 48 l i s t s t h e m a t e r i a l d i s c l o s u r e s t h a t
must be p r o v i d e d b e f o r e t h e r e s c i s s i o n p e r i o d can b e g i n t o r u n .
F a i l u r e to
p r o v i d e i n f o r m a t io n r e g a r d i n g the annual p erce n ta ge ra te a l s o i n c l u d e s the
f a i l u r e t o in fo rm the consumer o f the e x i s t e n c e o f a v a r i a b l e ra te f e a t u r e .
F a i l u r e t o g i v e t h e o t h e r r e q u i r e d d i s c l o s u r e s d o e s n ot p r e v e n t t h e r u n n i n g o f
t h e r e s c i s s i o n p e r i o d , a l t h o u g h t h a t f a i l u r e may r e s u l t i n c i v i l o r a d m i n i s t r a t i v e
sanctions.

9.
Unexpired r i g h t o f r e s c i s s i o n .
Where t h e c r e d i t o r h a s f a i l e d t o t a k e t h e
a c t i o n n e c e s s a r y to s t a r t the t h r e e - d a y r e s c i s s i o n p e r io d r u n n in g , th e r i g h t
t o r e s c i n d a u t o m a t i c a l l y l a p s e s on t h e o c c u r r e n c e o f t h e e a r l i e s t o f t h e f o l ­
lowing three events:
°

Three y e a r s

a f t e r consummation o f the t r a n s a c t i o n .

°

Transfer of all

o

S a le o f th e c o n s u m e r 's i n t e r e s t in the p r o p e r t y , i n c l u d i n g a
t r a n s a c t i o n i n w h i c h t h e c o n s u m e r s e l l s t h e d w e l l i n g and t a k e s
back l e g a l t i t l e t h r o u g h a p u r c h a s e money n o t e and m o r t g a g e .

the con su m e r's

interest

in

the p r o p e r t y .

A p a r t i a l t r a n s f e r o f t h e c o n s u m e r ' s i n t e r e s t , s u c h as an i n t r a - f a m i l y t r a n s f e r
b e s t o w i n g c o - o w n e r s h i p on a s p o u s e , d o e s n o t t e r m i n a t e t h e r e s c i s s i o n r i g h t .
T r a n s f e r o f a l l t h e c o n s u m e r ' s i n t e r e s t i n c l u d e s s u c h t r a n s f e r s as b e q u e s t s
and g i f t s .
N e i t h e r a s a l e o f t h e p r o p e r t y n o r a t r a n s f e r need be v o l u n t a r y .
F o r e x a m p l e , a f o r e c l o s u r e s a l e w o u l d t e r m i n a t e an u n e x p i r e d r i g h t t o r e s c i n d .
A s p r o v i d e d i n § 125 o f t h e a c t , t h e t h r e e - y e a r t e r m i n a t i o n l i m i t may be e x t e n d e d
by an a d m i n i s t r a t i v e p r o c e e d i n g t o e n f o r c e t h e p r o v i s i o n s o f t h i s s e c t i o n .
10.
J o i n t o w n e r s . Where more t h a n one c o n s u m e r h a s t h e r i g h t t o r e s c i n d a
t r a n s a c t i o n , any one o f them may e x e r c i s e t h e r i g h t and c a n c e l t h e t r a n s a c t i o n
on b e h a l f o f a l l .
F o r e x a m p l e , i f a h u s b a n d and w i f e have t h e r i g h t t o r e s c i n d
a t r a n s a c t i o n , e i t h e r s p o u s e a c t i n g a l o n e may e x e r c i s e t h e r i g h t and bo th
s p o u s e s a r e bound by t h e r e s c i s s i o n .
11.
Addition of a se curity in t e r e s t .
Under f o o t n o t e 4 7 , t h e a d d i t i o n o f a
s e c u r it y in t e r e s t to a p r e - e x i s t i n g o b lig a t io n rescin d a b le .
The r i g h t o f
r e s c i s s i o n a p p l i e s o n l y t o t h e added s e c u r i t y i n t e r e s t , h o w e ve r, and n o t t o t h e
o rigin a l obligation.
I n t h o s e s i t u a t i o n s , o n l y t h e p a r a g r a p h ( b) n o t i c e need
be d e l i v e r e d , n o t new m a t e r i a l d i s c l o s u r e s ; t h e r e s c i s s i o n p e r i o d w i l l b e g i n t o
r un f r om t h e d e l i v e r y o f t h e n o t i c e .
23(b)
1.

Who r e c e i v e s




Notice of r i g h t
notice.

to r e s c i n d .

Each c o n s u m e r e n t i t l e d

to

r e s c i n d must be g i v e n :

226,23
- C33 -

°

Two c o p i e s

of the

°

The m a t e r i a l

rescission

notice.

d isclosu res.

I n a t r a n s a c t i o n i n v o l v i n g j o i n t o w n e r s , b o t h o f whom a r e e n t i t l e d t o r e s c i n d ,
b o t h must r e c e i v e t h e n o t i c e s and d i s c l o s u r e s .
F o r e x a m p l e , i f b o th s p o u s e s
a r e e n t i t l e d t o r e s c i n d a t r a n s a c t i o n , e a c h must r e c e i v e two c o p i e s o f t h e
r e s c i s s i o n n o t i c e and one co py o f t h e d i s c l o s u r e s .
I f an a g e n t i s a c t i n g f o r
t h e c o n s u m e r , t h e c r e d i t o r need o n l y d e l i v e r t h e m a t e r i a l t o t h e a g e n t , s o l o n g
as s t a t e a g e n c y l a w p r e c l u d e s t h e c o n s u m e r f rom a c t i n g on h i s o r h e r own b e h a l f
in such c ir c u m s t a n c e s .
I f s t a t e la w d o e s n o t p r e v e n t c o n s u m e r / p r i n c i p a l s from
a c t i n g on t h e i r own b e h a l f , t h e n t h e c r e d i t o r must d e l i v e r t h e m a t e r i a l t o bo th
t h e c o n s u m e r and t h e a g e n t .
2.
Format.
The n o t i c e must be on a s e p a r a t e p i e c e o f p a p e r .
No m i n ­
imum t y p e s i z e o r o t h e r t e c h n i c a l r e q u i r e m e n t s a r e im p o se d on t h e f or m , b u t t h e
m a t e r i a l must be p r e s e n t e d c l e a r l y and c o n s p i c u o u s l y .
The n o t i c e s i n A p p e n d i x H
p r o v i d e m o d e l s t h a t c r e d i t o r s may u s e i n g i v i n g t h e n o t i c e , b u t t h e i r u s e i s
not required.
C r e d i t o r s may s u b s t i t u t e o t h e r f o r m s .
3.
Content.
The n o t i c e must i n c l u d e a l l o f t h e i n f o r m a t i o n o u t l i n e d i n p a r a graph (b )( 1 ) through (5 ).
The r e q u i r e m e n t i n p a r a g r a p h ( b ) ( 5 ) t h a t t h e t r a n s ­
a c t i o n be i d e n t i f i e d may be met by p r o v i d i n g t h e d a t e o f t h e t r a n s a c t i o n .
The
n o t i c e may i n c l u d e a d d i t i o n a l i n f o r m a t i o n r e l a t e d t o t h e r e q u i r e d i n f o r m a t i o n ,
such as:
o

A description
in te rest.

o f the prop erty

s u b j e c t to the

security

o

A s t a t e m e n t t h a t j o i n t o w n e r s may h ave t h e r i g h t t o
r e s c i n d and t h a t a r e s c i s s i o n by one i s e f f e c t i v e f o r a l t .

°

The name and a d d r e s s o f an a g e n t o f t h e c r e d i t o r t o
receive notice of r e s c is s io n .

4.
Time o f p r o v i d i n g n o t i c e .
The n o t i c e r e q u i r e d by p a r a g r a p h ( b ) need n o t
be g i v e n b e f o r e c o n s u m m a t i o n o f t h e t r a n s a c t i o n .
The c r e d i t o r may d e l i v e r t h e
n o t i c e a f t e r t h e t r a n s a c t i o n i s c ons ummated, b u t t h e r e s c i s s i o n p e r i o d w i l l
n o t b e g i n t o run u n t i l t h e n o t i c e i s g i v e n .
For example, i f the c r e d i t o r
p r o v i d e s t h e n o t i c e on May 15, b u t d i s c l o s u r e s were g i v e n and t h e t r a n s a c t i o n
was consummated on May 10, t h e t h r e e - b u s i n e s s day r e s c i s s i o n p e r i o d w i l l run
fr om May 15.
The c r e d i t o r must a l s o d e l a y p e r f o r m a n c e f o r a r e a s o n a b l e t i m e
a ft e r that period.

23(c)

Delay

of c r e d i t o r 's

perform ance.

1.
General r u l e .
D u r i n g t h e t h r e e - d a y r e s c i s s i o n p e r i o d and f o r a r e a s o n a b l e
t i m e t h e r e a f t e r , t h e c r e d i t o r may n o t , e i t h e r d i r e c t l y o r t h r o u g h a t h i r d p a r t y :




§ 226.23

- C34 -

o

D isburse

loan

pro cee d s to th e consumer,

o

Begin

o

D e live r m aterials

perform ing

services

f o r the consumer,

to the consumer.

2.
Escrow.
The c r e d i t o r may d i s b u r s e l o a n p r o c e e d s d u r i n g t h e r e s c i s s i o n
p e r i o d in a v a l i d escro w arrangem ent.
The c r e d i t o r may n o t , h o w e v e r , a p p o i n t
t h e c o n s u m e r a s " t r u s t e e " o r " e s c r o w a g e n t " and d i s t r i b u t e f u n d s t o t h e c o n ­
s um er i n t h a t c a p a c i t y d u r i n g t h e d e l a y p e r i o d .
3.
P erm issible a c t io n s .
N o t h i n g i n p a r a g r a p h ( c ) p r e v e n t s t h e c r e d i t o r from
t a k i n g o t h e r s t e p s d u r i n g the d e l a y , s h o r t o f b e g i n n i n g a c tu a l perform ance.
T h e s e s t e p s may i n c l u d e :

o

Preparation

o f the loan check.

°

Perfection

o

Preparations
th ird party.

o

Accruing

o f the s e c u r i t y

interest.

for d isco u n tin g

or a s s ig n in g

finance charges d u rin g

the d e la y

the c o n t r a c t

to a

period.

4.

D e l a y b ey on d r e s c i s s i o n p e r i o d .
The c r e d i t o r must w a i t u n t i l i t i s
" r e a s o n a b l y s a t i s f i e d " t h a t the consumer has not r e s c i n d e d .
The c r e d i t o r may
r e a s o n a b l y a s s u r e i t s e l f by:
o

W a i t i n g a r e a s o n a b le p e r i o d a f t e r e x p i r a t i o n o f the
p e r i o d to a llo w f o r d e l i v e r y o f a m a iled n o t i c e .

o

O b ta in in g a w r it t e n statement
h as n o t been e x e r c i s e d .

from t h e c o n s u m e r t h a t

rescission

the r i g h t

When more t h a n one c o n s u m e r h a s t h e r i g h t t o r e s c i n d , t h e c r e d i t o r c a n n o t r e a ­
s o n a b l y r e l y on t h e a s s u r a n c e o f one c o n s u m e r o n l y , s i n c e o t h e r c o n s u m e r s may
e x e r c i s e the r i g h t .
23(d)

Effects

of r e s c is s io n .

1.
Term ination of s e c u rit y i n t e r e s t .
Any s e c u r i t y i n t e r e s t g i v i n g r i s e t o
t h e r i g h t o f r e s c i s s i o n becomes v o i d when t h e c o n s u m e r e x e r c i s e s t h a t r i g h t .
The r u l e o p e r a t e s a u t o m a t i c a l l y t o n e g a t e t h e s e c u r i t y i n t e r e s t , r e g a r d l e s s
o f i t s s t a t u s and w h e t h e r o r n o t i t was r e c o r d e d o r p e r f e c t e d .
U nder p a r a g r a p h ( d ) ( 2 ) , h o w e v e r , t h e c r e d i t o r must t a k e any a c t i o n n e c e s s a r y t o r e f l e c t
t h e f a c t t h a t t h e s e c u r i t y i n t e r e s t no l o n g e r e x i s t s .

2.
Refunds to co nsum er.
The c o n s u m e r c a n n o t be r e q u i r e d t o pay any amount i n
t h e f orm o f money o r p r o p e r t y e i t h e r t o t h e c r e d i t o r o r t o a t h i r d p a r t y a s
p a r t o f t h e c r e d i t t r a n s a c t i o n . Any a mo u nt s o f t h i s n a t u r e a l r e a d y p a i d by t h e
c o n s u m e r must be r e f u n d e d .
" A ny a m o u n t " i n c l u d e s f i n a n c e c h a r g e s a l r e a d y
a c c r u e d , a s w e l l a s o t h e r c h a r g e s s u c h a s a p p l i c a t i o n and commitment f e e s or




§ 226.23
- C35 -

fees f o r a t i t l e se a rc h o r a p p r a i s a l , whether p a id to th e c r e d i t o r , p a id d i r e c t l y
t o a t h i r d p a r t y , o r p a s s e d on f r om t h e c r e d i t o r t o t h e t h i r d p a r t y .
The f a c t
t h a t t h e s e a mounts may n o t r e p r e s e n t p r o f i t t o t h e c r e d i t o r i s i r r e l e v a n t .
3.
Amounts n o t r e f u n d a b l e t o c o n s u m e r .
C r e d i t o r s need n o t r e t u r n any money
g i v e n by t h e c o n s u m e r t o a t h i r d p a r t y o u t s i d e o f t h e c r e d i t t r a n s a c t i o n , s u c h
as c o s t s i n c u r r e d f o r a b u i l d i n g p e r m i t o r f o r a z o n i n g v a r i a n c e .
Sim ilarly,
t he t e r m " a n y a mou nt" d o e s n o t a p p l y t o any money o r p r o p e r t y g i v e n by t he
c r e d i t o r t o t h e c o n s u m e r ; t h o s e amounts must be t e n d e r e d by t h e c o n s u m e r t o
the c r e d i t o r under paragraph ( d ) ( 3 ) .
4.
R efle ction of se c u rity in te re st te rm in atio n .
The c r e d i t o r must t a k e w h a t e v e r
s t e p s a r e n e c e s s a r y t o show t h e t e r m i n a t i o n o f t h e s e c u r i t y i n t e r e s t .
S uch s t e p s
i n c l u d e t h e c a n c e l l a t i o n o f d o c u m e n t s c r e a t i n g t h e i n t e r e s t , and t h e f i l i n g o f
re le a se or te rm in a t io n statem ents in the p u b lic record.
In a t r a n s a c t i o n
i n v o l v i n g s u b c o n t r a c t o r s o r s u p p l i e r s t h a t a l s o h o l d i n t e r e s t s r e l a t e d t o t he
c r e d i t t r a n s a c t i o n , t h e c r e d i t o r m ust i n s u r e t h a t t h e t e r m i n a t i o n o f t h e i r
in te re st s is also reflected.
The 2 0 - d a y p e r i o d f o r t h e c r e d i t o r ' s a c t i o n r e f e r s
t o t h e t i m e w i t h i n w h i c h t h e c r e d i t o r must b e g i n t h e p r o c e s s .
I t d o es not
r e q u i r e a l l n e c e s s a r y s t e p s t o h ave been c o m p l e t e d w i t h i n t h a t t i m e , b u t t h e
c r e d i t o r i s r e s p o n s i b l e f o r s e e in g the p r o c e s s t h ro u g h to c o m p letio n .
5.
Property exchange.
Once t h e c r e d i t o r ha s f u l f i l l e d i t s o b l i g a t i o n s u n d e r
p a r a g r a p h ( d ) ( 2 ), t h e c o n s u m e r must t e n d e r t o t h e c r e d i t o r any p r o p e r t y o r
money t h e c r e d i t o r h as a l r e a d y d e l i v e r e d t o t h e c o n s u m e r .
At t h e c o n s u m e r ' s
o p t i o n , p r o p e r t y may be t e n d e r e d a t t h e l o c a t i o n o f t h e p r o p e r t y .
F o r e x a m p le ,
i f l u m b e r or f i x t u r e s have been d e l i v e r e d t o t h e c o n s u m e r ' s home, t h e co ns ume r
may t e n d e r them t o t h e c r e d i t o r by m a k i n g them a v a i l a b l e f o r p i c k - u p at the
home, r a t h e r t h a n p h y s i c a l l y r e t u r n i n g them t o t h e c r e d i t o r ' s p r e m i s e s .
But
money a l r e a d y g i v e n t o t h e c o n s u m e r must be t e n d e r e d a t t h e c r e d i t o r ' s p l a c e
of b u s in e s s .
6 . Reasonable v a lu e .
R ath er than r e t u r n i n g the p r o p e r t y i t s e l f , the consumer
may o f f e r t h e c r e d i t o r i t s r e a s o n a b l e v a l u e , i f r e t u r n i n g t h e p r o p e r t y w o u l d be
e x t r e m e l y b ur dens ome t o t h e c o n s u m e r .
F o r e x a m p l e , i f b u i l d i n g m a t e r i a l s have
a l r e a d y been i n c o r p o r a t e d i n t o t h e c o n s u m e r ' s d w e l l i n g , t h e c o n s u m e r may pay
t h e i r reasonable value in ste a d .

7.
M od ifications.
The p r o c e d u r e s o u t l i n e d i n p a r a g r a p h ( d ) ( 2 ) and ( 3 ) may be
m o d i f i e d by a c o u r t . T h i s c o u l d a p p l y , f o r e x a m p l e , t o a s i t u a t i o n where a
c o n s u m e r i s i n b a n k r u p t c y p r o c e e d i n g s and may be p r o h i b i t e d f rom r e t u r n i n g
a n y t h i n g t o t h e c r e d i t o r o r i n a ny s i t u a t i o n wher e t h e e q u i t i e s d i c t a t e t h a t a
m o d i f i c a t i o n s h o u l d be made.
23(e)

C onsum er's w aiver o f r i g h t

to r e s c i n d .

1.
Need f o r w a i v e r .
To w a i v e t h e r i g h t t o r e s c i n d , t h e c o n s u m e r must
bona f i d e p e r s o n a l f i n a n c i a l e m e r g e n c y t h a t must be met b e f o r e t h e end
three-day period.
W h i l e t h e c o n s u m e r must i n i t i a l l y d e t e r m i n e w h e t h e r
nal f i n a n c i a l eme rg en cy e x i s t s , t h e " b o n a f i d e " t e s t r e q u i r e s c r e d i t o r s
a s s u r e the m se lve s t h a t the re a s o n s g iv e n f o r the w a iv e r or m o d i f i c a t i o n
s u b s t a n t i a l and c r e d i b l e .
The e x i s t e n c e o f t h e c o n s u m e r ' s w a i v e r w i l l
i t s e l f , a u t o m a t i c a l l y i n s u l a t e t h e c r e d i t o r f rom l i a b i l i t y f o r f a i l i n g
vide the r e s c i s s i o n r i g h t .



have a
o f the
a perso­
to
are
not, of
to p r o ­

§ 226.23
- C36 -

2.
Procedure.
To w a i v e o r m o d i f y t h e r i g h t t o r e s c i n d , t h e c o n s u m e r m ust g i v e
a w r i t t e n s t a t e m e n t t h a t b o t h s p e c i f i c a l l y w a i v e s o r m o d i f i e s t he r i g h t and
i n c l u d e s a b r i e f d e s c r i p t i o n o f the emergency.
Ea ch c o n s u m e r e n t i t l e d t o
r e s c i n d m ust s i g n t h e w a i v e r s t a t e m e n t .
Th e re fo re , in a t r a n s a c t io n i n v o l v i n g
m u l t i p l e c o n s u m e r s , s u c h a s a h u s b a n d and w i f e u s i n g t h e i r home a s c o l l a t e r a l ,
t h e w a i v e r must b e a r t h e s i g n a t u r e s o f b o th s p o u s e s .
However , d e p e n d i n g on
s t a t e a g e n c y l a w, a w a i v e r o r m o d i f i c a t i o n may be e x e c u t e d by a d u l y a p p o i n t e d
a g e n t a c t i n g u n d e r a v a l i d po we r o f a t t o r n e y .
23(f)

Exempt t r a n s a c t i o n s .

1.
R e s i d e n t i a l mortgage t r a n s a c t i o n .
Any t r a n s a c t i o n t o c o n s t r u c t o r a c q u i r e
a p r i n c i p a l d w e l l i n g , w h e t h e r co n s id e re _ d r e a l o r p e r s o n a l p r o p e r t y , i s exempt.
F o r e x a m p l e , a c r e d i t t r a n s a c t i o n t o a c q u i r e a m o b i l e home o r h o u s e b o a t t o be
u s e d a s t h e c o n s u m e r ' s home w o u l d n o t be r e s c i n d a b l e .

2.
Lien s t a t u s .
The l i e n s t a t u s o f t h e m o r t g a g e i s i r r e l e v a n t f o r p u r p o s e s o f
t h e e x e m p t i o n i n p a r a g r a p h ( f ) ( 1 ) ; t h e f a c t t h a t a l o a n ha s j u n i o r l i e n s t a t u s
d o e s n o t by i t s e l f p r e c l u d e a p p l i c a t i o n o f t h i s e x e m p t i o n .
For example, a
home b u y e r may a ss ume t h e e x i s t i n g f i r s t m o r t g a g e and c r e a t e a s e c o n d m o r t g a g e
to f i n a n c e the b a la n c e o f th e p u rc h a se p r i c e .
S uc h a t r a n s a c t i o n w ould n ot be
re s c i ndable.
3.
Combined-purpose t r a n s a c t i o n .
A l o a n t o a c q u i r e a d w e l l i n g and make
i m p r o v e m e n t s t o t h a t d w e l l i n g i s exempt i f t r e a t e d a s one t r a n s a c t i o n .
I f , on
t h e o t h e r h a nd , t h e l o a n f o r t h e a c q u i s i t i o n o f t h e d w e l l i n g and t h e s u b s e q u e n t
a d v a n c e s f o r i m p r o v e m e n t s a r e t r e a t e d a s more t h a n one t r a n s a c t i o n , t h e n o n l y
t h e t r a n s a c t i o n f i n a n c i n g t h e a c q u i s i t i o n o f t h e d w e l l i n g i s exempt.
4.
Bridge lo a n s.
A b r i d g e l o a n t o p u r c h a s e a n o t h e r d w e l l i n g b u t s e c u r e d by
the e q u i t y in the c o n s u m e r 's c u r r e n t p r i n c i p a l d w e l l i n g i s r e s c i n d a b l e .
For
e x a m p l e , a homeowner may s e e k t o p u r c h a s e a new home p r i o r t o t h e s a l e o f t he
c u r r e n t r e s i d e n c e , and o b t a i n s a l o a n s e c u r e d by t h e e q u i t y .
In suc h a c a s e ,
a lt h o u g h th e loan i s used to a c q u i r e a d w e l l i n g , the proceeds o f t h a t loan are
n o t s e c u r e d by t h a t d w e l l i n g b u t by t h e c o n s u m e r ' s e q u i t y i n t h e p r e s e n t r e s i ­
d en ce .
5.
New a d v a n c e s .
The e x e m p t i o n i n p a r a g r a p h ( f ) ( 2 ) a p p l i e s o n l y t o r e f i n a n c i n g s
o r c o n s o l i d a t i o n s by t h e o r i g i n a l c r e d i t o r .
I f the t r a n s a c t i o n i n v o l v e s the
a d v a n c e o f new money, t h e n o n l y t h e amount o f t h e new money i s r e s c i n d a b l e .
F o r e x a m p l e , i f t h e sum o f t h e o u t s t a n d i n g p r i n c i p a l b a l a n c e p l u s t h e e a r n e d
f i n a n c e c h a r g e i s $ 1 , 0 0 0 and t h e new amount f i n a n c e d i s $ 1 , 0 0 0 , t h e n t h e r e f i ­
n a n c i n g w o u l d be exempt.
On t h e o t h e r h a n d , i f t h e new amount f i n a n c e d e x c e e d s
$ 1 , 0 0 0 , t h e n t h e amount i n e x c e s s o f t h a t $ 1 , 0 0 0 w o u l d be r e s c i n d a b l e .
A
model r e s c i s s i o n n o t i c e a p p l i c a b l e t o t r a n s a c t i o n s i n v o l v i n g new money a p p e a r s
i n A p p e n d i x H.
6.

State c r e d i t o r s .
C i t i e s and o t h e r p o l i t i c a l
as c r e d i t o r s a r e n o t exempted f rom t h i s s e c t i o n .

subdivisions

of

states

acting

7.
M u ltip le advances.
J u s t a s new d i s c l o s u r e s need n o t be made f o r s u b s e q u e n t
a d v a n c e s when t r e a t e d a s one t r a n s a c t i o n , no new r e s c i s s i o n r i g h t s a r i s e so
l o n g as t he a p p r o p r i a t e n o t i c e and d i s c l o s u r e s a r e g i v e n a t t h e o u t s e t o f t he




§ 226.24
- C37 -

transaction.
F o r e x a m p l e , t h e c r e d i t o r e x t e n d s c r e d i t f o r home i m p r o v e m e n t s
s e c u r e d by t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g , w i t h a d v a n c e s made as r e p a i r s
progress.
As p e r m i t t e d by § 2 2 6 . 1 7 ( c ) ( 6 ) , t h e c r e d i t o r makes a s i n g l e s e t o f
d i s c l o s u r e s at the b e g i n n i n g o f the c o n s t r u c t i o n p e r i o d , r a t h e r than s e p a r a t e
d i s c l o s u r e s f o r eac h a d v a n c e .
The r i g h t o f r e s c i s s i o n d o e s n o t a r i s e w i t h
each a d v a n c e .
However, i f t h e a d v a n c e s a r e t r e a t e d a s s e p a r a t e t r a n s a c t i o n s ,
t h e r i g h t o f r e s c i s s i o n a p p l i e s t o eac h a d v a n c e .
8.
Spreader c l a u s e s .
When t h e c r e d i t o r h o l d s a m o r t g a g e o r deed o f t r u s t on
t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g and t h a t m o r t g a g e o r deed o f t r u s t c o n t a i n s
a " s p r e a d e r c l a u s e , " s u b s e q u e n t l o a n s made a r e s e p a r a t e t r a n s a c t i o n s and a r e
s u b je c t to the r i g h t o f r e s c i s s i o n .
Such l o a n s a r e r e s c i n d a b l e u n l e s s t h e
c r e d i t o r e f f e c t i v e l y w aives i t s s e c u r i t y i n t e r e s t under the s p re a d e r c l a u s e
w ith r e s p e c t to the subsequent t r a n s a c t i o n s .

REFERENCES:
Statute:

§ § 1 13 ,

Other s e c t io n s :

1 25 ,

130.

§ 2 2 6 . 2 and A p p e n d i x H.

1981 c h a n g e s : The r i g h t t o r e s c i n d a p p l i e s n o t o n l y t o r e a l p r o p e r t y
u s ed a s t h e c o n s u m e r ' s p r i n c i p a l d w e l l i n g , b u t t o p e r s o n a l p r o p e r t y as w e l l .
The r e g u l a t i o n p r o v i d e s no s p e c i f i c t e x t o r f o r m a t f o r t h e n o t i c e o f t h e r i g h t
to r e s c i n d .
When a c o n s u m e r e x e r c i s e s t h e r i g h t t o r e s c i n d t h e c r e d i t o r now has
t o r e t u r n a c o n s u m e r ' s money o r p r o p e r t y and t a k e t h e n e c e s s a r y a c t i o n
to te rm in a t e the s e c u r i t y i n t e r e s t .
The c r e d i t o r h a s 20 d a y s t o t a k e p o s s e s s i o n
o f t h e money o r p r o p e r t y a f t e r t h e c o n s u m e r ' s t e n d e r b e f o r e t h e c o n s u m e r may
keep i t w i t h o u t f u r t h e r o b l i g a t i o n .
20 days

The l i e n s t a t u s o f t h e
r e s i d e n t i a l mortgage t r a n s a c t i o n
l o a n s f rom t h e r i g h t t o r e s c i n d
r ig h t to re scin d i f necessary to

Section

226.24

mortgage i s i r r e l e v a n t f o r p u rpo se s o f the
exemption.
The e x e m p t i o n f o r a g r i c u l t u r a l
ha s been o m i t t e d .
The c o n s u m e r may w a i v e t h e
meet a bona f i d e p e r s o n a l f i n a n c i a l e m e r g e n c y .

-- A d v e rtisin g .

General.
1.
Coverage.
An a d v e r t i s e m e n t i n c l u d e s any c o m m e r c i a l m e s s a g e i n any commun i c a t i o n medium t h a t p r o m o t e s , d i r e c t l y o r i n d i r e c t l y , a c o n s u m e r c r e d i t t r a n s ­
action.
R e s p o n s i b i l i t y f o r c o m p ly in g w ith the a d v e r t i s i n g r u l e s i s not l i m i t e d
t o c r e d i t o r s b u t i n c l u d e s any a d v e r t i s e r .
T h is would i n c l u d e , f o r example, a
b r o k e r o r s e l l e r o f r e a l e s t a t e whose a d v e r t i s e m e n t s s t a t e c r e d i t t e r m s t h a t
may be a r r a n g e d w i t h t h i r d - p a r t y c r e d i t o r s .
2.
M edia.
T h e s e r u l e s a p p l y t o a d v e r t i s e m e n t o f c r e d i t t e r m s u s i n g any medium,
i n c l u d i n g r a d i o and t e l e v i s i o n a d v e r t i s e m e n t s .
A p r o m o t i o n a l l e t t e r s e n t to
p r o s p e c t i v e c u s t o m e r s may q u a l i f y a s an a d v e r t i s e m e n t ; h o w e ve r, e d u c a t i o n a l




§ 226.24
- C38 -

m a t e r i a l c o n t a i n i n g h y p o t h e t i c a l t r a n s a c t i o n s t h a t c o u l d n o t r e a s o n a b l y be
c o n s t r u e d a s an o f f e r o f c r e d i t i s n o t an a d v e r t i s e m e n t .
The media t h r o u g h
which a d v e r t is e m e n t s are d i s s e m i n a t e d a re not l i a b l e f o r v i o l a t i o n s o f th e s e
provi si o n s .
3.

C l e a r and c o n s p i c u o u s s t a n d a r d .
T h i s s e c t i o n i s s u b j e c t to the general
" c l e a r and c o n s p i c u o u s " s t a n d a r d f o r t h i s s u b p a r t b u t p r e s c r i b e s no s p e c i f i c
r u l e s f o r the form at o f the n e c e s s a r y d i s c l o s u r e s .
The c r e d i t t e rm s need n o t
be p r i n t e d i n a c e r t a i n t y p e s i z e n o r need t h e y a p p e a r i n any p a r t i c u l a r p l a c e
in the a d v e r t is e m e n t .
F o r e x a m p l e , a m e r c h a n d i s e t a g t h a t i s an a d v e r t i s e m e n t
under th e r e g u l a t i o n c o m p lie s w it h t h i s s e c t i o n i f the n e c e s s a r y c r e d i t terms
a r e on b o t h s i d e s o f t h e t a g , s o l o n g as eac h s i d e i s a c c e s s i b l e t o t h e
consumer.
24(a)

Actually

available

term s.

1.
General r u l e .
To t h e e x t e n t t h a t an a d v e r t i s e m e n t m e n t i o n s s p e c i f i c c r e d i t
t e r m s , i t may s t a t e o n l y t h o s e t e r m s t h a t t h e c r e d i t o r i s a c t u a l l y p r e p a r e d
to o ffe r.
F o r e x a m p l e , a c r e d i t o r may n o t a d v e r t i s e a v e r y low a n n u a l p e r c e n t a g e
r a t e t h a t w i l l n o t i n f a c t be a v a i l a b l e a t any t i m e .
T h i s p r o v i s i o n i s n ot
i n t e n d e d t o i n h i b i t t h e p r o m o t i o n o f new c r e d i t p r o g r a m s , b u t t o b a r t h e a d v e r ­
t i s i n g o f t e r m s t h a t a r e n o t and w i l l n o t be a v a i l a b l e .
T h u s , a c r e d i t o r may
a d v e r t i s e t e r m s t h a t w i l l be o f f e r e d f o r o n l y a l i m i t e d p e r i o d , o r t e r m s t h a t
w i l l become a v a i l a b l e a t a f u t u r e d a t e .

24(b)

Advertisement of

rate of finance c h a rge .

1.

Annual p erce n ta ge r a t e .
A d v e r t i s e d r a t e s must be s t a t e d i n t e rm s o f an
"annual p e rc e n ta g e r a t e , " as d e f in e d in § 226.22.
Even t h o u g h s t a t e o r l o c a l
law p e r m i t s t h e u s e o f a d d - o n , d i s c o u n t , t i m e - p r i c e d i f f e r e n t i a l , o r o t h e r
m e t h o d s o f s t a t i n g r a t e s , a d v e r t i s e m e n t s must s t a t e them a s a n n u a l p e r c e n t a g e
rates.
U n l i k e the t r a n s a c t i o n a l d i s c l o s u r e o f the annual p erce n ta ge ra te in
§ 2 2 6 . 1 8 ( e ) , t h e a d v e r t i s e d a n n u a l p e r c e n t a g e r a t e need n o t i n c l u d e a d e s c r i p ­
t i v e e x p l a n a t i o n o f t h e t e rm .
The a d v e r t i s e m e n t must s t a t e t h a t t h e r a t e i s
s u b j e c t to i n c r e a s e a f t e r consummation i f t h a t i s th e c a s e , but the a d v e r t i s e ­
ment need n o t d e s c r i b e t h e r a t e i n c r e a s e , i t s l i m i t s , o r how i t w ou ld a f f e c t
t h e payment s c h e d u l e .
As i n § 2 2 6 . 1 8 ( f ) , r e l a t i n g t o d i s c l o s u r e o f a v a r i a b l e
r a t e , th e ra te i n c r e a s e d i s c l o s u r e req uirem ent in t h i s p r o v i s i o n does not
a p p l y t o a n y r a t e i n c r e a s e due t o d e l i n q u e n c y ( i n c l u d i n g l a t e p a y m e n t ) , d e f a u l t ,
a c c e le ra tio n , assum ption, or t r a n s f e r of c o l l a t e r a l .
2.
Simple or p e r io d ic r a t e s .
The a d v e r t i s e m e n t may n o t s i m u l t a n e o u s l y s t a t e
any o t h e r r a t e , e x c e p t t h a t a s i m p l e a n n u a l r a t e o r p e r i o d i c r a t e a p p l i c a b l e
t o an u n p a i d b a l a n c e may a p p e a r a l o n g w i t h ( b u t n o t more c o n s p i c u o u s l y t h a n )
the annual p e rc e n ta g e r a t e .
F o r example:

o

I n an a d v e r t i s e m e n t f o r r e a l e s t a t e , a s i m p l e i n t e r e s t r a t e may
be shown i n t h e same t y p e s i z e as t h e a n n u a l p e r c e n t a g e r a t e f o r
the a d v e r t is e d c r e d i t .

3.
Legal o b l i g a t i o n .
As i n § 2 2 6 . 1 7 ( c ) , r e l a t i n g t o t h e b a s i s o f t r a n s a c t i o n a l
d i s c l o s u r e s , a d v e r t i s e d r a t e s m ust be b a s e d on t h e l e g a l o b l i g a t i o n between t h e
parties.




§ 226.24
- C39 -

o

I n some c a s e s , an a g r e e m e n t between t h e c r e d i t o r and a t h i r d p a r t y
may a f f e c t t h e t e r m s o f t h e o b l i g a t i o n .
F o r e x a m p l e , a b u i l d e r may
a g r e e t o buy t h e c o n s u m e r ' s i n t e r e s t r a t e down f ro m 15% t o 12% f o r
t h e f i r s t t h r e e y e a r s o f a 3 0 - y e a r m o r t g a g e ter m.
I f t h e " b uy - d o wn
a gr e em e n t between t h e b u i l d e r and c r e d i t o r i s n o t r e f l e c t e d i n
t h e n o t e w h i c h e s t a b l i s h e s t h e l e g a l o b l i g a t i o n between t h e c o n ­
sumer and t h e c r e d i t o r , t h e a d v e r t i s e d a n n u a l p e r c e n t a g e r a t e
and s i m p l e i n t e r e s t r a t e must be d e t e r m i n e d and d i s c l o s e d w i t h o u t
r e g a r d t o t h e i n t e r e s t s u b s i d y p r o v i d e d by t h e " b u y - d o w n " a g r e em e n t
I f , h o w e v e r , t h e l e g a l o b l i g a t i o n between t h e b u y e r and t h e c r e d i ­
t o r i n c o r p o r a t e s t h e " b u y - d o w n " a g r e e m e n t between t h e c r e d i t o r
and t h e b u i l d e r , t h e s u b s i d y may be r e f l e c t e d i n t h e a d v e r t i s e d
a n n u a l p e r c e n t a g e r a t e and t h e a d v e r t i s e m e n t may i n d i c a t e t h a t
the s u b s i d y produces a 12 % s im p le i n t e r e s t ra te f o r the f i r s t
t h r e e y e a r s , p r o v i d e d t h e a d v e r t i s e m e n t a l s o i n d i c a t e s t he
sim p le i n t e r e s t ra te a p p l i c a b l e to the b a la n c e o f the 3 0 - y e a r
term.

o

W h i l e t h e l e g a l o b l i g a t i o n i s n o r m a l l y embodied i n a s i n g l e n o t e
o r c o n t r a c t , i n r a r e i n s t a n c e s , t h e p a r t i e s may have a g r e e d t o two
s e p a r a t e d o c u m e n t s t h a t between them r e f l e c t a s i n g l e l e g a l o b l i ­
gation.
F o r e x a m p l e , i n a m o r t g a g e t r a n s a c t i o n , t h e l e n d e r and
c o n s u m e r a g r e e t o a n o t e s p e c i f y i n g a 14% i n t e r e s t r a t e .
However ,
i n a s e p a r a t e document s i g n e d by b o t h p a r t i e s , t h e c o n s u m e r
a g r e e s t o pay f o u r p o i n t s t o t h e l e n d e r a t c o n s u m m a t i o n , i n r e t u r n
f o r a r e d u c t io n in the i n t e r e s t ra te to 12% f o r a p o r t io n o f the
m o r t g a g e term.
When a c r e d i t o r ' s p r o m o t i o n a l p r o g r a m e n v i s i o n s
s uch a t r a n s a c t i o n , i f t h e " b u y - d o w n " a gr e em e n t i s t o f orm a
p a r t o f a s i n g l e l e g a l o b l i g a t i o n , o v e r r i d i n g any c o n f l i c t i n g
p r o v i s i o n s i n t h e n o t e , i t must be r e f l e c t e d i n t h e a d v e r t i s e d
a n nu a l p e r c e n t a g e r a t e .
The c r e d i t o r may a d v e r t i s e t h e r e d u c e d
s i m p l e i n t e r e s t r a t e as w e l l , p r o v i d e d t h e a d v e r t i s e m e n t s hows
t h e l i m i t e d t er m t o w h i c h t h e r ed u c e d r a t e a p p l i e s and s t a t e s t h e
s i m p l e i n t e r e s t r a t e a p p l i c a b l e t o t h e b a l a n c e o f t h e term.

24(c)

A d v e rtise m e n t o f terms th a t t r i g g e r a d d i t i o n a l

d isclo su re s.

1.
General r u l e .
Under p a r a g r a p h ( c ) ( 1 ) , w h e n e v e r c e r t a i n t r i g g e r i n g t e r m s
appear in c r e d i t a d v e r t is e m e n t s , the a d d i t i o n a l c r e d i t terms enumerated in
p a r a g r a p h ( c ) ( 2 ) must a l s o a p p e a r .
T h e s e p r o v i s i o n s a p p l y even i f t h e t r i g ­
g e r i n g t er m i s n o t s t a t e d e x p l i c i t l y , b u t may be r e a d i l y d e t e r m i n e d fr om t h e
advertisem ent.
F o r e x a m p le , an a d v e r t i s e m e n t may s t a t e " 8 0 % f i n a n c i n g a v a i l ­
a b l e , " w h i c h i s i n f a c t i n d i c a t i n g t h a t a 2 0 % downpayment i s r e q u i r e d .
2.
Do w np ay me nt .
The d o l l a r amount o f a downpayment o r a s t a t e m e n t o f t h e
downpayment a s a p e r c e n t a g e o f t h e p r i c e r e q u i r e s f u r t h e r i n f o r m a t i o n .
By
v i r t u e o f t h e d e f i n i t i o n o f " d o w n p a y m e n t " i n § 2 2 6 . 2 , t h i s t r i g g e r i n g t er m
i s lim ite d to c r e d it sa le t r a n s a c t io n s .
I t i n c l u d e s such s ta te m en ts as:
°

"Only

0

"As




5% d o w n . "

low a s $ 1 0 0 d o w n . "

§ 226.24
- C40 -

o

"Total

move-in c o s t s

o f $800."

T h i s p r o v i s i o n a p p l i e s o n l y i f a downpayment i s a c t u a l l y r e q u i r e d ; s t a t e m e n t s
s u c h a s " n o d o wn pa ym en t" o r " n o t r a d e - i n r e q u i r e d " do n o t t r i g g e r t he a d d i t i o n a l
d i s c l o s u r e s under t h i s p a ra g ra p h .
3.

Payment p e r i o d .
The number o f p a ym e nt s r e q u i r e d o r t h e t o t a l
repayment i n c 1udes such s ta te m e n t s as:
o

" 4 8 - m o n t h payment t e r m s . "

o

" T h ir t y - y e a r m ortgage."

o

" R e p a y m e nt

in

a s many a s t h i r t y - s i x

monthly

period of

installm ents."

B u t i t d o e s n o t i n c l u d e s u c h s t a t e m e n t s a s " p a y w e e k l y , " " m o n t h l y payment
t e r m s a r r a n g e d , " o r " t a k e y e a r s t o r e p a y , " s i n c e t h e s e s t a t e m e n t s do n o t i n d i c a t e
a t i m e p e r i o d o v e r w h i c h a l o a n may be f i n a n c e d .
4.

Payment a m o u n t .

The d o l l a r

amount o f any payment

includes

statements

such

as:
o

"Payable

in

installm ents

o

"525 w e e kly."

o

" $ 1 , 2 0 0 balance payable

of $103."

in

t en e qu al

installm ents."

I n t h e l a s t e x a m p l e , t h e amount o f eac h payment i s r e a d i l y d e t e r m i n a b l e , even
though not e x p l i c i t l y s t a t e d .
B ut s t a t e m e n t s s u c h a s " m o n t n l y pa ym en ts t o
s u i t y o u r n e e d s" o r " r e g u l a r monthly payments" are not covered.
5.
Finance c h a rge .
The d o l l a r
i t i n c l u d e s s ta te m en ts such as:

amount o f t h e

o

"$500 t o t a l

cost of c re d it."

o

"$2 monthly

carrying

o

"$50,000 m ortgages,

finance

c h a r g e o r any p o r t i o n

of

charge."
two p o i n t s

t o t he b o r r o w e r . "

I

I n t h e l a s t e x a m p l e , t h e $ 1 , 0 0 0 p r e p a i d f i n a n c e c h a r g e can be r e a d i l y d e t e r m i n e d
f r om t h e i n f o r m a t i o n g i v e n .
Statem ents o f the annual p e rc e n ta g e r a t e or s t a t e ­
m e n t s t h a t t h e r e i s no p a r t i c u l a r c h a r g e f o r c r e d i t ( s u c h a s " n o c l o s i n g c o s t s " )
are not t r i g g e r i n g terms under t h i s p a ra g ra p h .
5.
D i s c l o s u r e o f downpayment.
U nd er p a r a g r a p h ( c ) ( 2 ) (i ) , t h e t o t a l downpayment
a s a d o l l a r amount o r p e r c e n t a g e must be s hown, b u t t h e word " d ow n p ay m en t "
need n o t be u s e d i n m a k i n g t h i s d i s c l o s u r e .
For example, "10% cash re q u ir e d
f rom b u y e r " o r " c r e d i t t e r m s r e q u i r e minimum $ 1 0 0 t r a d e - i n " w ould s u f f i c e .

7.
D i s c l o s u r e o f r e pa y m en t t e r m s . W h i l e t h e p h r a s e " t e r m s o f r e p a y m e n t "
g e n e r a l l y ha s t h e same m e a n i n g a s t h e " p ay m en t s c h e d u l e " r e q u i r e d t o be d i s c l o s e d




§ 226.24
- C41 -

under § 2 2 6 . 1 8 ( g ) , paragraph ( c ) ( 2 ) ( i i ) p r o v i d e s g r e a t e r f l e x i b i l i t y to c r e d i t o r s
in making t h i s d i s c l o s u r e f o r a d v e r t i s i n g p u rp o s e s .
Repayment t e r m s may be
e x p r e s s e d i n a v a r i e t y o f way s i n a d d i t i o n t o an e x a c t r ep ay men t s c h e d u l e ;
t h i s i s p a r t i c u l a r l y t r u e f o r a d v e r t i s e m e n t s t h a t do n o t c o n t e m p l a t e a s i n g l e
sp e c ific transaction.
F o r e x a m p le :
o

A c r e d i t o r may u s e a u n i t - c o s t a p p r o a c h i n m a k i n g t h e r e q u i r e d
d i s c l o s u r e , s u c h as " 4 8 m o n t h l y p a y m e n t s o f $ 2 7 . 8 3 p e r $ 1 , 0 0 0
borrowed."

°

I n an a d v e r t i s e m e n t f o r c r e d i t s e c u r e d by a d w e l l i n g , when any
s e r i e s o f pa ym en ts v a r i e s b e c a u s e o f a g r a d u a t e d payment f e a t u r e
o r b e c a u s e o f t h e i n c l u s i o n o f m o r t g a g e i n s u r a n c e p r em i u m s , a
c r e d i t o r may s t a t e t h e number and t i m i n g o f p a y m e n t s , t h e amounts
o f t h e l a r g e s t and s m a l l e s t o f t h o s e p a y m e n t s , and t h e f a c t t h a t
o t h e r payments w i l l v a r y between t h o s e a m o u n t s .

8.

Annual percentage r a t e .
U nder p a r a g r a p h ( c ) ( 2 ) ( i i i ) , a s u n d e r p a r a g r a p h
( b ) , t h e a d v e r t i s e m e n t must a l s o s t a t e , i f a p p l i c a b l e , t h a t t h e a n n u a l p e r c e n ­
ta g e ra t e i s s u b je c t to i n c r e a s e a f t e r consummation.
9.
Use o f e x a m p l e s .
F o o t n o t e 49 a u t h o r i z e s t h e u s e o f i l l u s t r a t i v e c r e d i t
t r a n s a c t i o n s t o make t h e n e c e s s a r y d i s c l o s u r e s u n d e r p a r a g r a p h ( c ) ( 2 ) .
That
i s , wh er e a r a n g e o f p o s s i b l e c o m b i n a t i o n s o f c r e d i t t e r m s i s o f f e r e d , t h e
a d v e r t i s e m e n t may u s e e x a m p l e s o f t y p i c a l t r a n s a c t i o n s , s o l o n g as each e xa mple
c o n t a i n s a l l o f t h e a p p l i c a b l e t e r m s r e q u i r e d by p a r a g r a p h ( c ) .
The e x a m p l e s
must be l a b e l l e d a s s u c h and must r e f l e c t r e p r e s e n t a t i v e c r e d i t t e rm s
t h a t a r e made a v a i l a b l e by t h e c r e d i t o r t o p r e s e n t and p r o s p e c t i v e c u s t o m e r s .
24(d)

Catalogs

and m u l t i p l e - p a g e a d v e r t i s e m e n t s .

1.
General r u l e .
The m u l t i p l e - p a g e a d v e r t i s e m e n t s t o w h i c h t h i s s e c t i o n r e f e r s
are a d v e r t is e m e n t s c o n s i s t i n g o f a p a g in a te d s e r i e s o f pages - - f o r example, a
supplement to a newspaper.
A m a ilin g c o n s is t in g of several separate f ly e r s
o r p ie c e s o f prom otional m a t e r i a l in a s i n g l e enve lo p e does not c o n s t i t u t e a
s i n g l e m u ltip le -p a g e advertisem ent fo r purposes of paragraph (d).

2.
C ro ss-re fere n cin g credit term s.
T hes e f o r m s o f c o m m e r c ia l m e s s a g e s w i l l
be c o n s i d e r e d s i n g l e a d v e r t i s e m e n t s ( r e q u i r i n g a s i n g l e s e t o f c r e d i t c o s t
d i s c l o s u r e s ) i f they co n ta in a t a b le , c h a rt, or schedule c l e a r l y s t a t i n g
s u f f i c i e n t in f o r m a t io n f o r the consumer to determ in e the d i s c l o s u r e s r e q u ir e d
under p a ra g ra p h ( c ) ( 2 ) .
I n a d d i t i o n t o t h e t a b l e , c h a r t o r s c h e d u l e , any
m e n t i o n o f t h e t r i g g e r i n g t er m e l s e w h e r e i n t h e c a t a l o g o r m u l t i p l e - p a g e a d v e r t i s e ­
ment must c l e a r l y r e f e r t o t h e s p e c i f i c page where t h e t a b l e , c h a r t , o r s c h e d u l e
begins.
T h i s r u l e p e r m i t s c r e d i t o r s t o p u t c r e d i t i n f o r m a t i o n t o g e t h e r i n one
p la c e in a c a t a l o g o r m u l t i p l e - p a g e a d v e r t i s e m e n t , so lo ng as t h a t in f o r m a t i o n
r e f l e c t s th e range o f c r e d i t t r a n s a c t i o n s a c t u a l l y o f f e r e d .
The r u l e a p p l i e s
o n l y i f t h e c a t a l o g o r m u l t i p l e - p a g e a d v e r t i s e m e n t c o n t a i n s one o r more o f t h e
t r i g g e r i n g t e r m s from p a r a g r a p h ( c ) ( 1 ) .
A l i s t o f d i f f e r e n t annual p e rc e n ta g e
r a t e s a p p l i c a b l e to d i f f e r e n t b a l a n c e s , f o r example, does not t r i g g e r f u r t h e r
d i s c l o s u r e s u n d e r p a r a g r a p h ( c ) ( 2 ) and s o i s n o t c o v e r e d by p a r a g r a p h ( d ) .




§ 226.24
- C42 -

3.
R e p r e s e n t a t i v e examples.
The t a b l e o r s c h e d u l e must s t a t e a l l t h e n e c e s s a r y
i n f o r m a t i o n f o r a r e p r e s e n t a t i v e s a m p l i n g o f amounts o f c r e d i t .
T h i s must
r e f l e c t a m o u n ts o f c r e d i t t h e c r e d i t o r a c t u a l l y o f f e r s , up t o and i n c l u d i n g
the h i g h e r - p r i c e d it em s.
T h i s d o e s n o t mean t h a t t h e c h a r t must make t h e
d i s c l o s u r e s f o r t h e s i n g l e mos t e x p e n s i v e i t e m t h e s e l l e r o f f e r s , b ut o n l y
t h a t t h e c h a r t c a n n o t be l i m i t e d t o i n f o r m a t i o n a b o u t l e s s e x p e n s i v e s a l e s
when t h e s e l l e r commonly o f f e r s a d i s t i n c t l e v e l o f more e x p e n s i v e g o o d s o r
services.
The r a n g e o f t r a n s a c t i o n s shown i n t h e t a b l e o r s c h e d u l e i n a p a r t i ­
c u l a r c a t a l o g o r m u l t i p l e - p a g e a d v e r t i s e m e n t need n o t e x c e e d t h e r a n g e o f t r a n s ­
a c t io n s a c t u a lly offered in th a t advertisem ent.

REFERENCES:
Statute:

§ § 141,

Other s e c t i o n s :
Previous

1 42 ,

1 44 ,

§§ 226.2;

regulation:

and 145.
226.4,

§ 226.10(a),

and 2 2 6 . 2 2 .
(b),

(d).

1981 c h a n g e s :
T h i s s e c t i o n r e t a i n s t h e a d v e r t i s i n g r u l e s i n a for m
v e r y s i m i l a r to the p r e v i o u s r e g u l a t i o n , but w ith c e r t a i n changes to r e f l e c t
t h e 1 98 0 s t a t u t o r y amendments.
F o r e x a m p l e , i f t r i g g e r i n g t e r m s a p p e a r i n any
a d v e r t i s e m e n t , t h e a d d i t i o n a l d i s c l o s u r e s r e q u i r e d no l o n g e r i n c l u d e t h e c a s h
price.
The s p e c i a l r u l e f o r FHA § 2 3 5 f i n a n c i n g h a s been e l i m i n a t e d , a s w e l l
a s t h e r u l e f o r a d v e r t i s i n g c r e d i t p a y a b l e i n more t h a n f o u r i n s t a l l m e n t s w i t h
no i d e n t i f i e d f i n a n c e c h a r g e .
Board I n t e r p r e t a t i o n § 2 2 6 .10 0 2, r e q u i r i n g
d i s c l o s u r e o f r e p r e s e n t a t i v e a mo u nt s o f c r e d i t i n c a t a l o g s and m u l t i p l e - p a g e
a d v e r t i s e m e n t s , ha s been i n c o r p o r a t e d i n s i m p l i f i e d f orm i n p a r a g r a p h ( d ) .

rate

is




U n l i k e the p r e v i o u s r e g u l a t i o n , i f the a d v e r t i s e d annual
s u b j e c t t o i n c r e a s e , t h a t f a c t must now be d i s c l o s e d .

percentage

§ 226.25

SUBPART D —

Section

MI SCELLANEOUS

2 26 .25 - - Record r e t e n t i o n .
25(a)

General

rule.

1.
Evidence of required a c t i o n s .
C r e d i t o r s must r e t a i n e v i d e n c e t h a t t h e y
p e r f o r m e d r e q u i r e d a c t i o n s a s w e l l a s made t h e r e q u i r e d d i s c l o s u r e s .
This
i n c l u d e s , f o r example, e v id e n c e t h a t th e c r e d i t o r p r o p e r l y handled a d verse
c r e d i t r e p o r t s i n c o n n e c t i o n w i t h a m o u nt s s u b j e c t t o a b i l l i n g d i s p u t e u n d e r
§ 2 2 6 . 1 3 , and t h e r e f u n d i n g o f c r e d i t b a l a n c e s u n d e r § § 2 2 6 . 1 1 and 2 2 6 . 2 1 .
2.
M e t h o ds o f r e t a i n i n g e v i d e n c e .
Adequate e v id en ce o f com pliance does not
re q u ire actual paper c o p ie s of d i s c l o s u r e statements or othe r b u s in e s s re c o rd s.
The e v i d e n c e may be r e t a i n e d on m i c r o f i l m , m i c r o f i c h e , o r by any o t h e r method
d e s ig n e d to reproduce re c o rd s a c c u r a t e l y ( i n c l u d i n g computer pro gra m s).
The
c r e d i t o r need r e t a i n o n l y enough i n f o r m a t i o n t o r e c o n s t r u c t t h e r e q u i r e d d i s ­
c lo s u re s or other records.
T h u s , f o r e x a m p l e , c r e d i t o r s need n o t r e t a i n each
o p e n - e n d p e r i o d i c s t a t e m e n t , s o l o n g as t h e i n f o r m a t i o n can be r e t r i e v e d .

REFERENCES:
S t a t u t e : § 105.
Previous

regulation:

§ 226.6 (i).

1981 c h a n g e s : The r e v i s e d r e g u l a t i o n s u b s t i t u t e s t h e u n i f o r m t w o - y e a r
r e c o r d - r e t e n t i o n r u i e in p la c e o f the p r e v i o u s requirem ent th a t c e r t a i n c r e d i t o r s
r e t a i n r e c o r d s t h r o u g h a t l e a s t one c o m p l i a n c e e x a m i n a t i o n .

Section

2 2 6 . 2 6 - - Use o f a n n u a l

percentage

rate

in o ra l

d isclosures.

1.
A pplication of r u le s .
The r e s t r i c t i o n s o f t h i s s e c t i o n a p p l y o n l y i f t h e
c r e d i t o r ch o o se s to respond o r a l l y to a c o n s u m e r 's r e q u e s t f o r c r e d i t c o s t
inform ation.
Nothing in the p r o v i s i o n r e q u i r e s c r e d i t o r s to s u p p ly ra t e i n f o r ­
mation o r a l l y .
I f a c r e d i t o r v o l u n t e e r s i n f o r m a t i o n by m a k i n g o r a l s o l i c i ­
t a t i o n s ( i n c l u d i n g ra te i n f o r m a t i o n ) t h a t are d i r e c t e d g e n e r a l l y to p r o s p e c t i v e
c u s t o m e r s , a s t h r o u g h a t e l e p h o n e s o l i c i t a t i o n , t h o s e c o m m u n i c a t i o n s may be
a d v e r t i s e m e n t s s u b j e c t t o t h e r u l e s i n § § 2 2 6 . 1 6 and 2 2 6 . 2 4 .
26(a)

O pe n - e n d c r e d i t .

1.
I n f o r m a t i o n t h a t may be g i v e n .
C r e d i t o r s may s t a t e p e r i o d i c r a t e s i n
a d d i t i o n t o t h e r e q u i r e d APR, b u t t h e y need n o t do s o .
I f t h e APR i s unknown
b e c a u s e t r a n s a c t i o n c h a r g e s , l o a n f e e s , o r s i m i l a r f i n a n c e c h a r g e s may be
i m p o s e d , t h e c r e d i t o r s h o u l d g i v e t h e c o r r e s p o n d i n g APR ( t h a t i s , t h e p e r i o d i c
r a t e m u l t i p l i e d by t h e number o f p e r i o d s i n a y e a r , a s d e s c r i b e d i n § 2 2 6 . 6 ( a )
(2)).
The c r e d i t o r may, b u t need n o t , a l s o g i v e t h e c o n s u m e r i n f o r m a t i o n a b o u t
other finance charges or other charges.




§ 226.27
- D2 -

26(b)

Closed-end c re d it.

1.
I n f o r m a t i o n t h a t may be g i v e n .
C r e d i t o r s are fre e to s t a t e o th e r annual or
p e r i o d i c r a t e s t h a t a r e a p p l i e d t o an u n p a i d b a l a n c e , a l o n g w i t h t h e r e q u i r e d APR.
T h i s r u l e p e r m i t s d i s c l o s u r e o f a s i m p l e i n t e r e s t r a t e , f o r e x a m p l e , b u t n o t an
add-on, d is c o u n t, o r s i m i l a r rate.
I f t h e c r e d i t o r c a n n o t g i v e a p r e c i s e APR
i n i t s o r a l r e s p o n s e b e c a u s e o f v a r i a b l e s i n t h e t r a n s a c t i o n , i t must g i v e t h e
APR f o r a c o m p a r a b l e h y p o t h e t i c a l t r a n s a c t i o n ; i n t h i s c a s e , o t h e r c o s t
i n f o r m a t i o n may, b u t need n o t , be g i v e n .
F o r e x a m p le , a c r e d i t o r may be u n a b l e
t o s t a t e a p r e c i s e APR f o r a m o r t g a g e l o a n w i t h o u t k n o w i n g t h e e x a c t amount t o
be f i n a n c e d , t h e amounts o f l o a n f e e s o r m o r t g a g e i n s u r a n c e p r em iu ms , o r s i m i l a r
factors.
In t h i s s i t u a t i o n , t h e c r e d i t o r s h o u l d s t a t e an APR t h a t r e f l e c t s a
s t a n d a r d t r a n s a c t i o n ; i t may a l s o p r o v i d e i n f o r m a t i o n , s u c h a s t h e c o n t r a c t
i n t e r e s t r a t e and p o i n t s , a b o u t t h e c o n s u m e r ' s s p e c i f i c c a s e .

R E FE RE NC ES :
Statute:
Previous

§ 146.
regulation:

Other s e c t i o n s :

Board

Interpretation

§ 226.2 d e f i n i t i o n

§ 226.101.

of periodic

rate.

1981 c h a n g e s : T h i s s e c t i o n i m p l e m e n t s amended § 146 o f t h e a c t ,
w h i c h added a p r o v i s i o n d e a l i n g w i t h o r a l d i s c l o s u r e s , and a l s o i n c o r p o r a t e s
Board I n t e r p r e t a t i o n § 226.101.

Section

226.27 - -

Spanish

language d i s c l o s u r e s .

1.

Perm issible u se s.
I f f o r e i g n l a n g u a g e d i s c l o s u r e s a r e r e q u i r e d by s t a t e ,
f e d e r a l , o r l o c a l l a w , o t h e r t h a n i n P u e r t o R i c o , t h e y a r e n o t i n c o n s i s t e n t p er
se w i t h d i s c l o s u r e s u n d e r t h i s r e g u l a t i o n and may be p r o v i d e d as a d d i t i o n a l
inform ation.
I f t h e f o r e i g n l a n g u a g e d i s c l o s u r e s a r e n o t r e q u i r e d , b ut a
c r e d i t o r w i s h e s , f o r example, to g i v e S p a n is h t r a n s l a t i o n s o f E n g l i s h d i s c l o s u r e s
t o S p a n i s h - s p e a k i n g c o n s u m e r s , t h i s a l s o may be g i v e n a s a d d i t i o n a l i n f o r m a t i o n .
I n b o t h c a s e s , t h e E n g l i s h l a n g u a g e d i s c l o s u r e s must be c l e a r and c o n s p i c u o u s ,
and t h e c l o s e d - e n d d i s c l o s u r e s i n E n g l i s h must be p r o p e r l y s e g r e g a t e d in
accordance with § 2 2 6 .1 7 (a )(1 ).

REFERENCES:
Statute:
Previous

None.
regulation:

D e finition s:

§ 226.6(a).

§ 226.2 d e f in it io n s

of c re d ito r,

t i sement.




1981 changes:

No substantive change.

consumer,

and a d v e r -

§ 226.28

- D3 -

Section

226.28 - 28(a)

Effect

on s t a t e

law s.

Incon sisten t d is c lo s u re

requirem ents.

1.
General.
Th e r e a r e t h r e e s e t s o f p r e e m p t i o n c r i t e r i a :
one a p p l i e s t o t h e
g e n e r a l d i s c l o s u r e and a d v e r t i s i n g r u l e s o f t h e r e g u l a t i o n , and two a p p l y t o
the c r e d i t b i l l i n g p r o v i s i o n s .
The r e g u l a t i o n a l s o p r o v i d e s f o r B o a r d d e t e r m i ­
n a t i o n s of preemption.
2.
R u l e s f o r c h a p t e r s 1, 2 , and 3 .
The s t a n d a r d u n d e r w h i c h s t a t e l a w s t h a t
co ve r the ty p e s o f re q u ire m e n ts in c h a p t e r s 1 (G eneral p r o v i s i o n s ) , 2 ( C r e d i t
t r a n s a c t i o n s ) , and 3 ( C r e d i t i n g a d v e r t i s i n g ) o f t h e a c t a r e j u d g e d i n c o n s i s t e n t ,
and t h e r e f o r e p r e e m p t e d , i s c o n t r a d i c t i o n o f t h e f e d e r a l law.
Examples o f
l a w s t h a t w o u l d be pr ee mp ted a r e :
°

A s t a t e law t h a t r e q u i r e s u s e o f t h e t e r m " f i n a n c e c h a r g e , " b u t
d e f i n e s t h e t er m t o i n c l u d e f e e s t h a t t h e f e d e r a l law e x c l u d e s ,
o r t o e x c l u d e f e e s t h e f e d e r a l law i n c l u d e s .

°

A s t a t e law t h a t r e q u i r e s a l a b e l s u c h a s " n o m i n a l a nnu al
i n t e r e s t r a t e " t o be b a s e d f o r what t h e f e d e r a l law c a l l s
the "annual p e rc e n ta g e r a t e . "

3.
Laws n o t c o n t r a d i c t o r y .
G e n e r a l l y , s t a t e la w r e q u i r e m e n t s t h a t c a l l f o r
t h e d i s c l o s u r e o f i t e m s o f i n f o r m a t i o n n o t c o v e r e d by t h e f e d e r a l l a w , o r t h a t
r e q u i r e more d e t a i l e d d i s c l o s u r e s , w i l l n o t c o n t r a d i c t t h e f e d e r a l r e q u i r e m e n t s .
E x a m p l e s o f l a w s t h a t a r e n o t p re e m p te d i n c l u d e :
°

A s t a t e la w t h a t r e q u i r e s d i s c l o s u r e o f t h e minimum p e r i o d i c
payment f o r o p e n - e n d c r e d i t , even t h o u g h n o t r e q u i r e d by
§ 226.7.

°

A s t a t e law t h a t r e q u i r e s c o n t r a c t s t o c o n t a i n w a r n i n g s
s uc h a s :
"Read t h i s c o n t r a c t b e f o re you s i g n .
Do n o t s i g n
i f any s p a c e s a r e l e f t b l a n k .
You a r e e n t i t l e d t o a c o p y o f
th is contract."

S i m i l a r l y , a s t a t e law r e q u i r i n g i t e m i z a t i o n o f t h e amount f i n a n c e d w o u l d n o t
a u t o m a t i c a l l y c o n t r a d i c t the p e r m i s s i v e i t e m i z a t i o n under § 2 2 6 . 1 8 ( c ) ; but a
s t a t e law w o u l d be i n c o n s i s t e n t i f i t r e q u i r e d t h e i t e m i z a t i o n t o a p p e a r w i t h
t h e d i s c l o s u r e o f t h e amount f i n a n c e d i n t h e s e g r e g a t e d c l o s e d - e n d c r e d i t
di s c l o s u r e s .
4.
C re d ito r's o p tio n s.
B e f o r e t h e B o a r d makes a d e t e r m i n a t i o n a b o u t a spec ifi c
s t a t e law, a c r e d i t o r has c e r t a i n o p t i o n s .
Sin c e the p r o h i b i t i o n a g a i n s t g i v i n g
t h e s t a t e d i s c l o s u r e s d o e s n o t a p p l y u n t i l t h e B o a r d makes i t s d e t e r m i n a t i o n ,
t h e c r e d i t o r may c h o o s e t o g i v e s t a t e d i s c l o s u r e s u n t i l t h e B o a r d f o r m a l l y
d e t e rm in e s th a t the s t a t e law i s i n c o n s i s t e n t .
(The B o a r d w i l l p r o v i d e s u f f i ­
c i e n t t i m e f o r c r e d i t o r s t o r e v i s e f o r m s and p r o c e d u r e s a s n e c e s s a r y t o conform
to i t s d eterm inations.)




°

Under t h i s a p p r o a c h , a s i n a l l
must be c l e a r and c o n s p i c u o u s ,

c a s e s , the fe d e ra l d i s c l o s u r e s
and t h e c l o s e d - e n d d i s c l o s u r e s

§ 226.28
- D4 -

mu st be p r o p e r l y
§ 226.17(a)(1).
o

grouped t o g e t h e r in

accordance with

T h i s a b i l i t y t o g i v e s t a t e d i s c l o s u r e s r e l i e v e s any u n c e r t a i n t y
t h a t a c r e d i t o r m ight have p r i o r t o Board d e t e r m i n a t i o n s of
in consistency.

A 1 t e r n a t i v e l y , t h e c r e d i t o r may a p p l y t h e p r e e m p t i o n s t a n d a r d s t o a s t a t e l a w,
c o n c l u d e t h a t i t i s i n c o n s i s t e n t , and c h o o s e n o t t o g i v e t h e s t a t e - r e q u i r e d
disclosures.
Ho weve r, n o t h i n g i n t h i s p r o v i s i o n p r o v i d e s a c r e d i t o r w i t h any
i m m u n i t y f o r v i o l a t i o n s o f s t a t e l a w i f t h e c r e d i t o r c h o o s e s n o t t o make s t a t e
d i s c l o s u r e s and t h e B o a r d l a t e r d e t e r m i n e s t h a t t h e s t a t e l a w i s n o t p ree mp ted .
5.
R u l e s f o r c o r r e c t i o n o f b i l l i n g e r r o r s and r e g u l a t i o n o f c r e d i t r e p o r t s .
The p r e e m p t i o n c r i t e r i a f o r t h e f a i r c r e d i t b i l l i n g p r o v i s i o n s s e t f o r t h i n
p a r a g r a p h ( a ) ( 2 ) h a v e two p a r t s .
W i t h r e s p e c t t o t h e r u l e s on c o r r e c t i o n o f
b i l l i n g e r r o r s and on r e g u l a t i o n o f c r e d i t r e p o r t s ( § 2 2 6 . 1 3 o f t h e r e g u l a t i o n ) ,
p a r a g r a p h ( a ) ( 2 ) ( i ) p r o v i d e s t h a t a s t a t e law i s i n c o n s i s t e n t and p r ee mp ted i f
i t s r e q u i r e m e n t s a r e d i f f e r e n t f ro m t h e f e d e r a l l aw .
An e x c e p t i o n i s made,
h o w e v e r , f o r s t a t e l a w s t h a t a l l o w t h e c o n s u m e r t o i n q u i r e a b o u t an o p e n - e n d
c r e d i t a c c o u n t and r e q u i r e t h e c r e d i t o r t o r e s p o n d t o s u c h i n q u i r i e s bey ond
t h e t i m e l i m i t s i n t h e f e d e r a l law.
S u c h a s t a t e l a w i s n o t p r ee mp ted w i t h
r e s p e c t to the e x t r a time p e r i o d .
For example, R e g u l a t i o n Z r e q u i r e s the
c o n s u m e r t o s u b m i t a w r i t t e n n o t i c e o f b i l l i n g e r r o r w i t h i n 60 d a y s a f t e r
t r a n s m i t t a l o f the p e r i o d i c statem ent show in g the a l l e g e d e r r o r .
If a state
law a l l o w s a c o n s u m e r a l o n g e r p e r i o d , s u c h as 90 d a y s a f t e r r e c e i p t o f t h e
p e r i o d i c s t a t e m e n t , t h e s t a t e la w r e m a i n s i n e f f e c t t o p r o v i d e t h e e x t r a 30
days.
Any s t a t e law d i s c l o s u r e s c o n c e r n i n g t h i s e x t e n d e d s t a t e t i m e l i m i t
m ust r e f l e c t t h e q u a l i f i c a t i o n s and f o r m a t s p e c i f i e d i n s u b p a r a g r a p h ( a ) ( 2 ) ( i ) .

Examples

o f l a w s t h a t w o u l d be pr ee mp ted i n c l u d e :

o

A s t a t e law t h a t h a s a n a r r o w e r o r b r o a d e r d e f i n i t i o n
" b i 1 1 ing e r r o r . "

o

A s t a t e law t h a t
steps to re so lv e

o

A s t a t e law t h a t p r o v i d e s d i f f e r e n t t i m i n g r u l e s f o r e r r o r
r e s o l u t i o n ( s u b j e c t t o th e e x c e p t io n d i s c u s s e d a bove).

requires
errors.

of

th e c r e d i t o r t o ta ke d i f f e r e n t

6.
Rules fo r other f a i r c r e d it b i l l i n g p r o v i s i o n s .
The s e c o n d p a r t o f t he
c r i t e r i a r e l a t e to the o t h e r r u l e s im plem enting c h a p t e r 4 of th e act (a d d re s s e d
i n § § 2 2 6 . 4 ( c ) ( 8 ) , 226. 5 ( b ) ( 2 ) ( i i ) , 2 2 6 . 6 ( d ) , 2 2 6 . 7 ( k ) , 2 2 6 . 9 ( a ) , 226 . 10, 226. 1 1 ,
226 . 1 2 ( b ) ( 4 ) and ( c ) t h r o u g h ( f ) , 2 26 . 13, and 2 2 6 . 2 1 ) .
Paragraph ( a ) ( 2 ) ( i i )
p r o v i d e s t h a t t h e t e s t o f i n c o n s i s t e n c y i s w h e t h e r t h e c r e d i t o r can comply w i t h
s t a t e law w i t h o u t v i o l a t i n g f e d e r a l law.
For example:




°

I f a s t a t e law a l l o w s a c a rd i s s u e r t o o f f s e t a c o n s u m e r 's c r e d i t
c a r d i n d e b t e d n e s s a g a i n s t f u n d s h e l d by t h e c a r d i s s u e r , t h a t
s t a t e law w o u l d be p r e e m p t e d , s i n c e § 2 2 6 . 1 2 ( d ) o f t h i s r e g u l a t i o n
p r o h i b i t s such a c t i o n .

§ 226.29
- D5 -

°

A s t a t e r e q u i r e m e n t t h a t p e r i o d i c s t a t e m e n t s be s e n t more
t h a n 14 d a y s b e f o r e t h e end o f a f r e e - r i d e p e r i o d w o u ld n o t
w ould n o t be p r ee m p t e d .

o

A s t a t e law t h a t p e r m i t s c o n s u m e r s t o a s s e r t c l a i m s and d e f e n s e s
a g a i n s t a c a r d i s s u e r w i t h o u t r e g a r d t o t h e $ 5 0 and 1 0 0 - m i l e
l i m i t a t i o n s o f § 2 2 6 . 1 2 ( c ) ( 3 ) ( i i ) w o u l d n o t be p r ee m pt ed .

In the l a s t
th e f e d e ra l

two c a s e s ,
law.

com pliance w ith

state

la w w o u l d i n v o l v e

no v i o l a t i o n

of

7.
Who may r e q u e s t a c h a p t e r 4 d e t e r m i n a t i o n .
U nd er p a r a g r a p h ( a ) ( 2 ) ( i i i ) ,
o n l y s t a t e s ( t h r o u g h t h e i r a u t h o r i z e d o f f i c i a l s ) may a s k f o r d e t e r m i n a t i o n s on
i n c o n s i s t e n c y w ith r e s p e c t to the f a i r c r e d i t b i l l i n g p r o v i s i o n s .
28(b)

Equivalent

d isclosure

requirem ents.

1.
G eneral.
A s t a t e d i s c l o s u r e may be s u b s t i t u t e d f o r t h e f e d e r a l o n l y a f t e r
t h e B o a r d h a s made a f i n d i n g o f s u b s t a n t i a l s i m i l a r i t y .
T h u s , a c r e d i t o r may
n o t . u n i l a t e r a l l y c h o o s e t o make a s t a t e d i s c l o s u r e i n p l a c e o f a f e d e r a l
d i s c l o s u r e , even i f i t b e l i e v e s t h a t t h e s t a t e d i s c l o s u r e i s s u b s t a n t i a l l y
sim ilar.
S i n c e t h i s r u l e d o e s n o t e x t e n d t o any r e q u i r e m e n t r e l a t i n g t o t h e
f i n a n c e c h a r g e o r APR, no s t a t e p r o v i s i o n on c o m p u t a t i o n , d e s c r i p t i o n , o r
d i s c l o s u r e o f t h e s e t e r m s may be s u b s t i t u t e d for t h e f e d e r a l d i s c l o s u r e .

REFERENCES:
Statute:
Previous

§ § 111,

171(a)

regu lation :

and

(c).

§ 226.6(b)

and

(c).

1981 c h a n g e s : S t a t u t o r y c h a n g e s t o § 111 o f t h e a c t a r e i m p l e m e n te d
i n p a r a g r a p h s ( a ) ( 1 ) and ( b ) o f t h i s p r o v i s i o n .
The t e s t f o r p r e e m p t i o n o f
s t a t e l a w s r e l a t i n g t o d i s c l o s u r e and a d v e r t i s i n g i s now w h e t h e r t h e s t a t e law
" c o n t r a d i c t s " the f e d e r a l , r a t h e r than whether s t a t e re q u ire m e n ts are " d i f f e r e n t . "
The new r e g u l a t i o n c o n t a i n s no c o u n t e r p a r t
placement o f i n c o n s i s t e n t d i s c l o s u r e s .

Section

226.29 - 29(a)

to p r e v i o u s § 2 2 6 . 6 ( c )

on

State exem ptions.
General

ru le .

1.
Classes e l i g i b l e .
The s t a t e d e t e r m i n e s t h e c l a s s e s
e x e m p t i o n and makes i t s a p p l i c a t i o n f o r t h o s e c l a s s e s .
example, a l l open-end c r e d i t t r a n s a c t i o n s ; a l l open-end
t r a n s a c t i o n s ; o r a l l t r a n s a c t i o n s wher e t h e c r e d i t o r i s

of tra n sa c tio n s for i t s
C l a s s e s m i g h t be, f o r
and c l o s e d - e n d
a ba nk .

2.
Substantial s i m i l a r i t y .
The s u b s t a n t i a l l y s i m i l a r s t a n d a r d r e q u i r e s t h a t
s t a t e s t a t u t o r y o r r e g u l a t o r y p r o v i s i o n s and s t a t e i n t e r p r e t a t i o n s o f t h o s e




§ 226.29
- D6 -

p r o v i s i o n s must be g e n e r a l l y t h e . s a m e a s t h e f e d e r a l a c t and R e g u l a t i o n Z.
T h i s i n c l u d e s the requ ire m en t t h a t s t a t e p r o v i s i o n s f o r reimbursement to co n ­
s u m e r s f o r o v e r c h a r g e s m ust be a t l e a s t e q u i v a l e n t t o t h o s e r e q u i r e d i n § 108
o f the act.
A s t a t e w i l l be e l i g i b l e f o r an e x e m p t i o n even i f i t s law c o v e r s
c l a s s e s o f t r a n s a c t i o n s n o t c o v e r e d by t h e f e d e r a l law.
F o r example, i f a
s t a t e ' s law c o v e r s a g r i c u l t u r a l c r e d i t , t h i s w i l l n o t p r e v e n t t h e 8 o a r d f rom
g r a n t i n g an e x e m p t i o n f o r c o n s u m e r c r e d i t , e ven t h o u g h a g r i c u l t u r a l c r e d i t i s
n o t c o v e r e d by t h e f e d e r a l la w.
3.
Adequate e n fo rc e m e n t.
The s t a n d a r d r e q u i r i n g a d e q u a t e p r o v i s i o n f o r
e n f o r c e m e n t g e n e r a l l y means t h a t a p p r o p r i a t e s t a t e o f f i c i a l s a r e a u t h o r i z e d t o
e n f o r c e t h e s t a t e law t h r o u g h p r o c e d u r e s and s a n c t i o n s c o m p a r a b l e t o t h o s e
a v a i l a b l e to fe d e ra l enforc em ent a g e n c i e s .
F u r t h e r m o r e , s t a t e law must make
adequate p r o v i s i o n f o r enforcem ent o f - t h e reimbursement r u l e s .
29(b)

C ivil

lia b ility .

1.
Not e l i g i b l e f o r e x e m p t i o n .
The p r o v i s i o n t h a t an e x e m p t i o n may n o t e x t e n d
t o § § 130 and 131 a s s u r e s t h a t c o n s u m e r s r e t a i n a c c e s s t o b o t h f e d e r a l and s t a t e
c o u r t s i n s e e k i n g damages o r c i v i l p e n a l t i e s f o r v i o l a t i o n s , w h i l e c r e d i t o r s r e t a i n
the d e f e n s e s s p e c i f i e d in t h o s e s e c t i o n s .

REFERENCES:
Statute:
Previous

§ § 123,

171(b).

re gulation:

§ 226.12.

1981 c h a n g e s :
The p r o c e d u r e s t h a t s t a t e s must f o l l o w t o s e ek exemp­
t i o n s a r e now l o c a t e d i n an a p p e n d i x .
Exem ptions under the o ld r e g u l a t i o n
w i l l be a u t o m a t i c a l l y r e v o k e d on A p r i l 1, 1 9 8 2 , when c o m p l i a n c e w i t h t h e new
r e g u l a t i o n i s mandatory.




Appendix
- Appl -

APPENDIX A —

EFFECT ON STATE LAWS

1.
Who may make r e q u e s t s .
T h i s appendix s e t s f o r t h the p ro c e d u re s f o r p r e ­
emption d e t e r m in a t io n s .
As d i s c u s s e d i n § 2 2 6 . 2 8 , w h i c h c o n t a i n s t h e s t a n d a r d s
f o r p r e e m p t i o n , a r e q u e s t f o r a d e t e r m i n a t i o n o f w h e t h e r a s t a t e law i s i n c o n ­
s i s t e n t w i t h t h e r e q u i r e m e n t s o f c h a p t e r s 1, 2, o r 3 may be made by a c r e d i t o r ,
s t a t e , o r any i n t e r e s t e d p a r t y .
Ho weve r, o n l y s t a t e s may r e q u e s t d e t e r m i n a t i o n s
i n c o n n e c t i o n w i t h t h e f a i r c r e d i t b i l l i n g p r o v i s i o n s o f c h a p t e r 4.

REF ERE NC ES:
Statute:
Previous

§ § 1 11 ,

171(a).

regu lation :

§§ 226.6(b),

226.70

( S u p p l e m e n t V, S e c t i o n

II).

1981 c h a n g e s : The p r o c e d u r e s i n t h i s a p p e n d i x were l a r g e l y a d a p t e d
f r o m S u p p l e m e n t V o f t h e c u r r e n t r e g u l a t i o n ( § 2 2 6 . 7 0 ) , w i t h c h a n g e s made t o
s t r e a m l i n e the p ro ce d u re s.

APPENDIX B —

STATE EXEMPTIONS

1.
General.
T h i s a p p e n d i x s e t s f o r t h t he p r o c e d u r e s f o r e x e m p t i o n a p p l i ­
cations^
The e x e m p t i o n s t a n d a r d s a r e f o u n d i n § 2 2 6 . 2 9 and a r e d i s c u s s e d
i n t h e commentary t o t h a t s e c t i o n .

REFERENCES:
Statute:

§ § 123 ,

171(b).

Previous r e g u la t io n :
§ § 2 2 6 . 1 2 , 22&-.-50 ( S u p p l e m e n t
( S u p p l e m e n t I V ) , and 2 2 6 . 7 0 ( S u p p l e m e n t V, S e c t i o n I ) .

II),

1981 c h a n g e s : The p r o c e d u r e s s e t f o r t h i n t h i s s e c t i o n
c o m b i n a t i o n and s t r e a m l i n i n g o f t h e p r o c e d u r e s s e t f o r t h i n t h e s e

APPENDIX C —

I SSUANCE OF STAFF

226.60

represent a
supplements.

I N TE RP RE TAT ION S

1.
General.
T h i s commentary i s m e n t i o n e d a s t h e p r i m a r y v e h i c l e f o r i s s u i n g
o f f ic ia l s t a ff inte rp retation s.
I n most c i r c u m s t a n c e s , i n t e r p r e t a t i o n s w i l l
n o t be i s s u e d s e p a r a t e l y f rom t h e commentary.

REF ERE NC ES:
Statute:




§ § 1 05 ,

130(f).

Appendix
- App2 -

Previous

regu lation :

§ 226.1(d).

1981 c h a n g e s : T h i s p r o v i s i o n r e f l e c t s t h e B o a r d ' s i n t e n t i o n
t o u s e t h i s commentar y a s t h e p r i m a r y v e h i c l e f o r i n t e r p r e t i n g t h e r e g ­
u l a t i o n r a t h e r than i s s u a n c e o f i n d i v i d u a l i n t e r p r e t i v e l e t t e r s .

APPENDIX D —

M U LT IP L E ADVANCE CONSTRUCTION LOANS

1.
General r u l e .
A p p e n d i x D p r o v i d e s a s p e c i a l p r o c e d u r e t h a t c r e d i t o r s may
u s e , a t t h e i r o p t i o n , t o e s t i m a t e and d i s c l o s e t h e t e r m s o f m u l t i p l e a d v a n c e
c o n s t r u c t i o n l o a n s when t h e a m ou nt s and t i m i n g o f a d v a n c e s a r e unknown a t
consummation o f th e t r a n s a c t i o n .
T h i s app en d ix r e f l e c t s the approach taken in
§ 2 2 6 . 1 7 ( c ) ( 6 ) ( i i ) , w h i c h p e r m i t s c r e d i t o r s t o p r o v i d e s e p a r a t e o r c ombined
d i s c l o s u r e s f o r t h e c o n s t r u c t i o n p e r i o d and f o r t h e per ma nen t f i n a n c i n g , i f
a n y ; i . e . , t h e c o n s t r u c t i o n p h a s e and t h e p er m a nen t p h a s e may be t r e a t e d as
one t r a n s a c t i o n o r more t h a n one t r a n s a c t i o n .

REFERENCES:
Statute:

None.

Other s e c t i o n s :
Previous

loans

§ § 2 2 6 . 1 7 and 2 2 6 . 2 2 .

regulation:

Interpretation

§ 226.813.

1981 c h a n g e s : The u s e o f A p p e n d i x D i s
fo r co n stru ctio n purposes.

APPENDIX E —

RULES FOR CARD

BASTS

Statute:
Previous

lim ited

to m u l t i p l e - a d v a n c e

I S S U E R S THAT B I L L ON A T R A N S A C T I O N- B Y - T R AN S A C T I O N

None.
regu lation :

Other s e c t i o n s :

Inte rpre tation

§§ 226.6 through

§ 226.709.

226.13,

and 2 2 6 . 1 5 .

1981 c h a n g e s :
The r u l e s i n t h i s a p p e n d i x have been s t r e a m l i n e d
and c l a r i f i e d t o i n d i c a t e how c e r t a i n c a r d i s s u e r s t h a t b i l l on a t r a n s a c t i o n
b a s i s may c o mp ly w i t h t h e r e q u i r e m e n t s o f S u b p a r t B.

APPENDIX F —

ANNUAL PERCENTAGE RATE COMPUTATIONS FOR C E R T A I N OPEN-END C RE D IT
p LAN$-

-

REFERENCES:




Statute:

None.

Appendix
- App3 -

Previous

regulation:

Other s e c t i o n s :

§ 2 2 6 . 5 ( a ) ( 3 ) ( i i ),

footnote

5(a).

§ 226.14.

1981 c h a n g e s : T h i s a p p e n d i x i n c o r p o r a t e s a s i x t h e xa mp le i n w hi ch
t h e t r a n s a c t i o n amount e x c e e d s t h e amount o f t h e b a l a n c e s u b j e c t t o t h e
p e rio d ic rate.

A P P E N D I C E S G AND H - OPEN-END AND C LOSED-END MODEL FORMS AND CLAUSES
1.
Perm issible changes.
A l t h o u g h u s e o f t h e model f o r m s i s n o t r e q u i r e d ,
c r e d i t o r s u s i n g them p r o p e r l y w i l l be deemed t o be i n c o m p l i a n c e w i t h t he
regulation.
C r e d i t o r s may make c e r t a i n c h a n g e s i n t h e f o r m a t o r c o n t e n t o f
t h e f o r m s and may d e l e t e any d i s c l o s u r e s t h a t a r e i n a p p l i c a b l e t o a t r a n s a c t i o n
o r a p l a n w i t h o u t l o s i n g t h e a c t ' s p r o t e c t i o n fr om l i a b i l i t y .
H ow e ve r , r e v i s e d
f o r m s must be s u b s t a n t i a l l y s i m i l a r t o t h e model f or m s i n o r d e r t o i n s u l a t e
c re d ito rs against c i v i l l i a b i l i t y .
The r e a r r a n g e m e n t o f t h e model f o r m s may
n o t be s o e x t e n s i v e a s t o a f f e c t t h e s u b s t a n c e , c l a r i t y , o r m e a n i n g f u l s e qu e n c e
o f th e form s.
C r e d i t o r s making r e v i s i o n s w ith t h a t e f f e c t w i l l l o s e t h e i r
p r o t e c t i o n f r om c i v i l l i a b i l i t y .
Examples of a c c e p t a b le changes under the
s u b s t a n t ia l l y s im ila r standard include:
o

U s in g the f i r s t p e rs o n , in s t e a d o f the second
p e rso n , in r e f e r r i n g to the borrow er.

°

Using

°

R e a r r a n g in g the sequence o f the d i s c l o s u r e s .

o

Not u s i n g b o l d t y p e

°

Incorporating ce rta in

°

D e l e t i n g i n a p p l i c a b l e d i s c l o s u r e s by w h i t i n g o u t , f i l l i n g
in "N/A" (not a p p l i c a b l e ) or " 0 " , c r o s s i n g out, l e a v i n g
b l a n k s , c h e c k i n g a box f o r a p p l i c a b l e i t e m s , o r c i r c l i n g
a p p l i c a b l e items.
( T h i s s h o u ld permit use o f m u l t i - p u r p o s e
standard form s.)

=

S u b s t i t u t i n g a p p r o p r i a t e r e f e r e n c e s , s u c h as " b a n k , "
" w e , " o r a s p e c i f i c name, f o r " c r e d i t o r " i n t h e i n i t i a l
open-end d i s c l o s u r e s .

o

U s in g a v e r t i c a l , r a t h e r than a h o r i z o n t a l ,
the boxes in the c l o s e d - e n d d i s c l o s u r e s .

"borrower"

and " c r e d i t o r "

in ste a d of pronouns.

f o r headings.
state

"plain

E nglish"

requirem ents.

format

for

A P P E N D I X G - QPEN-END MODEL FORMS AND CLAUSES
1.
Model G - l .
The model d i s c l o s u r e s i n G - l ( d i f f e r e n t b a l a n c e c o m p u t a t i o n
m e t h o d s ) may be u s e d i n b o t h t h e i n i t i a l d i s c l o s u r e s u n d e r § 2 2 6 . 6 and t he




Appendix
- App4 -

p e r i o d i c d i s c l o s u r e s under § 226.7.
A s i s c l e a r f r om t h e m o d e l s g i v e n , " s h o r t ­
h a n d " d e s c r i p t i o n s o f t h e b a l a n c e c o m p u t a t i o n met ho ds a r e n o t s u f f i c i e n t .
The p h r a s e " a p o r t i o n o f " t h e f i n a n c e c h a r g e s h o u l d be i n c l u d e d i f t h e t o t a l
f i n a n c e c h a r g e i n c l u d e s o t h e r a m o u n t s , s u c h as t r a n s a c t i o n c h a r g e s , t h a t a r e
n o t due t o t h e a p p l i c a t i o n o f a p e r i o d i c r a t e .
In a d d i t i o n , i f u npaid f in a n c e
c h a r g e s a r e s u b t r a c t e d i n c a l c u l a t i n g t h e b a l a n c e , t h a t f a c t must be s t a t e d s o
t h a t t h e d i s c l o s u r e o f t h e c o m p u t a t i o n method i s a c c u r a t e .
O n l y Model G - l ( b )
c o n t a i n s a f i n a l se nten ce a p p e a r in g in b r a c k e t s which r e f l e c t s the t o t a l d o l l a r
amount o f p a y m e n t s and c r e d i t s r e c e i v e d d u r i n g t h e b i l l i n g c y c l e .
The o t h e r
m o d e l s do n o t c o n t a i n t h i s l a n g u a g e b e c a u s e t h e y r e f l e c t p l a n s i n w h i c h pa yme nts
and c r e d i t s r e c e i v e d d u r i n g t h e b i l l i n g c y c l e a r e s u b t r a c t e d .
I f t h i s i s not
t h e c a s e , h o w e v e r , t h e l a n g u a g e r e l a t i n g t o pa ym en ts and c r e d i t s s h o u l d be
c h a n g e d , and t h e d i s c l o s u r e o f t h e d o l l a r amount s h o u l d be added.
2.
Model G - 2 .
T h i s model
o f a c r e d i t card.

c o n t a in s the n o t ic e of l i a b i l i t y

f o r u n a u t h o r i z e d u se

3.

M o d e l s G-3 and G - A .
T h e s e s e t o u t m o d el s f o r t h e l o n g f or m b i l l i n g e r r o r
r i g h t s s t a t e m e n t ( f o r u s e w i t h t h e i n i t i a l d i s c l o s u r e s and a s an a n n u a l d i s ­
c l o s u r e ) and t h e a l t e r n a t i v e b i l l i n g e r r o r r i g h t s s t a t e m e n t ( f o r u s e w i t h
eac h p e r i o d i c s t a t e m e n t ) , r e s p e c t i v e l y .
C r e d i t o r s must p r o v i d e t h e b i l l i n g
e r r o r r i g h t s s t a t e m e n t s i n a f or m s u b s t a n t i a l l y s i m i l a r t o t h e m o d e l s i n o r d e r
to comply w ith the r e g u l a t i o n .
The m o d e l s may, h o w e v e r , be m o d i f i e d by d e l e t i n g
i n a p p l i c a b l e i n f o r m a t i o n , such as:
o

The p a r a g r a p h c o n c e r n i n g s t o p p i n g a d e b i t i n r e l a t i o n t o a
d i s p u t e d a mount, i f t h e c r e d i t o r d o e s n o t have t h e a b i l i t y t o
d e b it a u t o m a t ic a lly the c o n su m e r's s a v in g s or c he cking account
f o r payment.

o

The r i g h t s s t a t e d i n t h e s p e c i a l r u l e
and any l i m i t a t i o n s on t h o s e r i g h t s .

These n o t i c e s a l s o c o n t a i n
e x a m p l e , t h e c r e d i t o r may:

optional

language that

for credit

card purchases

c r e d i t o r s may u s e .

For

o

I n c l u d e a statem ent to the e f f e c t t h a t n o t i c e o f a b i l l i n g
e r r o r must be s u b m i t t e d on s o m e t h i n g o t h e r t h a n t h e payment
t i c k e t o r o t h e r m a t e r i a l accompanying the p e r i o d i c d i s c l o s u r e s .

o

I n s e r t i t s a d d r e s s o r r e f e r to the a d d re s s
e l s e w h e r e on t h e b i l l .

•

that

appears

A d d i t i o n a l i n f o r m a t i o n may be i n c l u d e d on t h e n o t i c e as l o n g as i t d o e s n ot
d e t r a c t f r om t h e r e q u i r e d d i s c l o s u r e s .
For in sta n c e , in form ation concerning
t h e r e p o r t i n g o f e r r o r s i n c o n n e c t i o n w i t h a c h e c k i n g a c c o u n t may be i n c l u d e d
on a c o m b i n e d s t a t e m e n t .
4.
M o d e l s G-5 t h r o u g h G - 9 .
These models set out n o t i c e s o f the r i g h t to
r e s c i n d t h a t w o u l d be u s e d a t d i f f e r e n t t i m e s i n an o p e n - e n d p l a n .
The l a s t
p a r a g r a p h o f e a c h o f t h e r e s c i s s i o n model f o r m s c o n t a i n s a b l a n k f o r t h e d a t e




Appendix
- App5 -

by w h i c h t h e c o n s u m e r ' s n o t i c e o f c a n c e l l a t i o n must be s e n t o r d e l i v e r e d .
A
p a r e n t h e t i c a l i s i n c lu d e d to a d d re s s the s i t u a t i o n in which the c o n s u m e r 's
r i g h t t o r e s c i n d t h e t r a n s a c t i o n e x i s t s bey ond t h r e e b u s i n e s s d a y s f o l l o w i n g
t h e d a t e o f t h e t r a n s a c t i o n , f o r e x a m p l e , where t h e n o t i c e o r m a t e r i a l d i s c l o ­
s u r e s a r e d e l i v e r e d l a t e o r where t h e d a t e o f t h e t r a n s a c t i o n i n ( 1 ) o f t h e
n o t i c e i s an e s t i m a t e .
The l a n g u a g e o f t h e p a r e n t h e t i c a l i s n o t o p t i o n a l .

A P P E N D I X H - CLOSED-END MODEL FORMS AND CLAUSES
1.
M o d e l s H-1 and H - 2 .
C r e d i t o r s may make s e v e r a l t y p e s o f c h a n g e s t o c l o s e d end model f or m s H - l [ c r e d i t s a l e ) and H- 2 ( l o a n ) and s t i l l be deemed t o be i n
c o m p l i a n c e w i t h t h e r e g u l a t i o n , p r o v i d e d t h a t t h e r e q u i r e d d i s c l o s u r e s a r e made
c l e a r l y and c o n s p i c u o u s l y .
P e r m i s s i b l e changes i n c l u d e th e a d d i t i o n o f the
i n f o r m a t i o n p e r m i t t e d by § 2 2 6 . 1 7 :
o

The c r e d i t o r ' s a d d r e s s o r

t e l e p h o n e number.

°

The c o n s u m e r ' s name.

o

The c o n s u m e r ' s a d d r e s s .

a

The c o n s u m e r ' s a c c o u n t number.

°

The d a t e o f t h e t r a n s a c t i o n .

o

An a c kn o w l e d g m e n t o f

The c r e d i t o r may a l s o d e l e t e

receipt.

inap p licable

d isclosures,

such as:

°

The i t e m i z a t i o n
t h r o u g h H- 1 5 ) .

o f t h e amount f i n a n c e d o p t i o n

°

The c r e d i t l i f e
H - l 1 and H - l 2 ) .

and d i s a b i l i t y

0

The p r o p e r t y i n s u r a n c e
H - l 2 , and H - l 4)

0

The " f i l i n g f e e s " and " n o n - f i l i n g
S a m p l e s H - l 1 and H - l 2 ) .

o

The pr ep a ym e n t p e n a l t y and r e b a t e d i s c l o s u r e s
and H - l 4 ) .

( S e e S a m p l e s H -1 2

insurance d is c lo s u r e s

disclosures

(See Samples

(See Samples H-10 th ro u g h

insurance"

d isclosu res

(See

(See Samples

H- 12

♦

Other p e r m is s ib l e




changes

include:

°

C o m b i n i n g r e q u i r e d t e r m s where s e v e r a l n u m e r i c a l d i s c l o s u r e s
a r e t h e same, f o r i n s t a n c e , i f t h e " t o t a l o f p a y m e n t s " e q u a l s
the " t o t a l s a l e p r i c e " .

°

R e a r r a n g in g the sequence o r l o c a t i o n
i n s t a n c e , by p l a c i n g t h e d e s c r i p t i v e

o f the d i s c l o s u r e s - - f o r
p h ra s e s o u t s i d e the boxes

Appendix
- App6 -

c o n t a i n i n g t h e c o r r e s p o n d i n g d i s c l o s u r e s , o r by g r o u p i n g t h e
d e s c r i p t o r s t o g e t h e r as a g l o s s a r y o f terms in a s e p a r a t e s e c t i o n
o f the " f e d e r a l b o x ".
o

By c h a n g i n g t h e o r d e r o f t h e d i s c l o s u r e s i n t h e b o x e s ,
t h e a n n u a l p e r c e n t a g e r a t e and f i n a n c e c h a r g e b o x e s .

©

Using b ra cke ts,
di s c l o s u r e s .

o

U s i n g a l i n e f o r th e consumer to i n i t i a l , r a t h e r than a c h e c k ­
b o x, t o i n d i c a t e an e l e c t i o n t o r e c e i v e an i t e m i z a t i o n o f t h e
amount f i n a n c e d .

o

Adding or d e l e t i n g

°

U s i n g a s y m b o l , s u c h as an a s t e r i s k ,
i n s t e a d o f an " e " .

o

Adding a s ig n a t u r e
joint p o licie s.

o

Separately

°

R e v i s i n g the l a t e c h a rg e d i s c l o s u r e to r e f l e c t th e f a c t th a t
t he l e s s e r o f two c h a r g e s may be i m p o s e d o r t h a t c h a r g e s a r e
s u b j e c t t o maximum l i m i t .

in ste a d of checkboxes, to

captions

line

item izing

indicate

in cluding

alternative

for d isclo su re s.

to the

th e f i l i n g

fo r estim ated d i s c l o s u r e s ,

insurance d is c lo s u r e s

to

reflect

fees.

2.
Model H - 3 .
C r e d i t o r s h av e c o n s i d e r a b l e f l e x i b i l i t y i n f i l l i n g o u t Model H- 3
( i t e m i z a t i o n o f t h e amount f i n a n c e d ) s i n c e t h e c a t e g o r i e s l i s t e d a r e n o t m u t u a l l y
e xclusive.
Any p r e p a i d f i n a n c e c h a r g e h o w e v er , mu st be l i s t e d i n t h a t c a t e g o r y
a l t h o u g h i t a l s o may be l i s t e d a s a f e e p a i d t o t h i r d p a r t i e s i f a p p l i c a b l e .
I n t h e c a t e g o r y o f " amo un t p a i d t o y o u d i r e c t l y " , c r e d i t o r s may i n c l u d e c h e c k s
t h a t a r e p a y a b l e j o i n t l y t o a c o n s u m e r and a t h i r d p a r t y .
Appropriate r e v is io n s
may be made t o t h i s f orm w i t h o u t l o s s o f p r o t e c t i o n fr om c i v i l l i a b i l i t y f o r
p r o p e r u s e o f t h e model f o r m s .
F o r e x a m p l e , c r e d i t o r s may:
o

R e a rra n g e the sequence o f the d i s c l o s u r e s .

o

P r e s e n t the d i s c l o s u r e s in a mathematical p r o g r e s s i o n - - f o r
e xa mp le by s h o w i n g t h e sum o f t h e " amo un t p a i d t o y o u " , "amount
p a i d on y o u r a c c o u n t " and a mou nt s p a i d t o o t h e r s a s a s u b t o t a l ,
from which i s s u b t r a c t e d the p re p a id f in a n c e c h a rg e , to reach the
amount f i n a n c e d .

o

Include a d d itio n a l

o

I d e n t i f y c e r t a i n t h i r d p a r t y payees ( p u b l i c o f f i c i a l s , government
a g e n c i e s , c r e d i t b u r e a u s , a g e n c i e s , a p p r a i s e r s , and i n s u r a n c e
c o m p a n i e s ) by n ame s , r a t h e r t h a n i n g e n e r i c o r o t h e r g e n e r a l
term s.

categories,

s u c h as c a s h

price

and downpayment.

3.
Model H - 4 . T h i s model c o n t a i n s t h e v a r i a b l e r a t e model c l a u s e s
in te n d e d to g i v e c r e d i t o r s c o n s i d e r a b l e f l e x i b i l i t y in s t r u c t u r i n g




and i s
variable

Appendix
- App7 -

rate d is c l o s u r e s to f i t in d iv id u a l p lan s.
C l a u s e s a r e shown f o r h y p o t h e ­
t i c a l e x a m p l e s b a s e d on t h e s p e c i f i c amount o f t h e t r a n s a c t i o n and b a s e d on a
r e p r e s e n t a t i v e amount.
C r e d i t o r s may p r e p r i n t t h e v a r i a b l e r a t e d i s c l o s u r e s
b a s e d on a r e p r e s e n t a t i v e amount f o r s i m i l a r t y p e s o f t r a n s a c t i o n s , i n s t e a d o f
c o n s t r u c t i n g an i n d i v i d u a l i z e d e xa mp le f o r eac h t r a n s a c t i o n .
In both r e p r e ­
s e n t a t i v e e x a m p l e s and t r a n s a c t i o n - s p e c i f i c e x a m p l e s , c r e d i t o r s may r e f e r
e i t h e r t o t h e i n c r e m e n t a l c h a n g e i n r a t e , payment a mount, o r number o f p a y ­
m e n t s , o r t o t h e r e s u l t i n g r a t e , payment amount, o r number o f p a y m e n t s .
For
e x a m p l e , c r e d i t o r s may s t a t e t h a t t h e r a t e w i l l i n c r e a s e by 2 %, w i t h a c o r r e ­
s p o n d i n g $ 1 5 0 i n c r e a s e i n t h e p ayment, o r c r e d i t o r s may s t a t e t h a t t h e r a t e
w i l l i n c r e a s e t o 16%, w i t h a c o r r e s p o n d i n g payment o f $ 50 .
4.

Model H - 5 .

This

c o n t a i n s t h e demand f e a t u r e c l a u s e .

5.

Model H - 6 .

This

c o n t a in s the assum ption c la u s e .

6.

Model H - 7 .

This

c o n t a i n s th e r e q u ir e d d e p o s i t c l a u s e .

7.
M o d e l s H - 8 and H - 9 .
These models c o n t a i n the r e s c i s s i o n n o t i c e s f o r a
t y p i c a l c l o s e d - e n d t r a n s a c t i o n and a r e f i n a n c i n g , r e s p e c t i v e l y .
The l a s t
p a r a g r a p h o f each model f or m c o n t a i n s a b l a n k f o r t h e d a t e by w h i c h t h e c o n ­
s u m e r ' s n o t i c e o f c a n c e l l a t i o n mu st be s e n t o r d e l i v e r e d .
A p arenthetical is
in c l u d e d to a d d re s s the s i t u a t i o n in which th e c o n s u m e r 's r i g h t to r e s c i n d the
t r a n s a c t i o n e x i s t s bey on d t h r e e b u s i n e s s d a y s f o l l o w i n g t h e d a t e o f t h e t r a n s ­
a c t i o n , f o r e x a m p l e , wher e t h e n o t i c e o r m a t e r i a l d i s c l o s u r e s a r e d e l i v e r e d
l a t e o r wher e t h e d a t e o f t h e t r a n s a c t i o n i n ( 1 ) o f t h e n o t i c e i s an e s t i m a t e .
The l a n g u a g e o f t h e p a r e n t h e t i c a l i s n o t o p t i o n a l .
8.
Sample H - 1 0 .
T h i s s a m p l e i l l u s t r a t e s an a u t o m o b i l e c r e d i t s a l e .
The c a s h
p r i c e i s $ 7 , $ 0 0 w i t h a downpayment o f $ 1 , 5 0 0 .
T h e r e i s an 8 % a d d - o n i n t e r e s t
r a t e and a t er m o f 3 y e a r s , w i t h 36 e q u a l m o n t h l y p a y m e n t s .
The c r e d i t l i f e
i n s u r a n c e premium and t h e f i l i n g f e e s a r e f i n a n c e d by t h e c r e d i t o r .
There i s
a $25 c r e d i t r e p o r t f e e p a i d by t h e c o n s u m e r b e f o r e c o n s u m m a t i o n , w h i c h i s
a prepaid fin a n ce charge.

9.
Sample H - l l .
T h i s s a mp l e i l l u s t r a t e s an i n s t a l l m e n t l o a n .
The amount o f
the loan i s $5,000.
T h e r e i s a 12% s i m p l e i n t e r e s t r a t e and a t e r m o f 2 y e a r s .
The d a t e o f t h e t r a n s a c t i o n i s e x p e c t e d t o be A p r i l 15, 1 9 8 1 , w i t h t h e f i r s t
payment due on J un e 1, 1 98 1.
The f i r s t payment amount i s l a b e l l e d a s an e s t i m a t e
s i n c e the t r a n s a c t i o n date i s u n c e r t a i n .
The odd d a y s ' i n t e r e s t ( $ 2 6 . 6 7 ) i s
c o l l e c t e d w i t h t h e f i r s t payment.
The r e m a i n i n g 23 m o n t h l y p a ym e nt s a r e e q u a l .
10.
Sample H - 1 2 .
T h i s s a m p l e i l l u s t r a t e s a r e f i n a n c i n g and c o n s o l i d a t i o n
loan.
The amount o f t h e l o a n i s $ 5 , 0 0 0 .
T h e r e i s a 15% s i m p l e i n t e r e s t r a t e
and a t er m o f 3 y e a r s .
The d a t e o f t h e t r a n s a c t i o n i s A p r i l 1, 1 9 8 1 , w i t h t h e
f i r s t payment due on May 1, 1 9 8 1.
The f i r s t 35 m o n t h l y p a y m e n t s a r e e q u a l ,
w i t h an odd f i n a l payment.
The c r e d i t d i s a b i l i t y i n s u r a n c e premium i s f i n a n c e d .
In c a l c u l a t i n g t h e a n n u a l p e r c e n t a g e r a t e , t h e U . S . r u l e h as been u s e d .
S i n c e an i t e m i z a t i o n o f t h e amount f i n a n c e d i s i n c l u d e d w i t h t h e d i s c l o s u r e s ,
t h e s t a t e m e n t r e g a r d i n g t h e c o n s u m e r ' s o p t i o n t o r e c e i v e an i t e m i z a t i o n i s
deleted.




Appendix
- App8 -

11.
Samples H-13 th ro u gh H - 1 5 .
These samples i l l u s t r a t e v a r i o u s m ortgage
tran saction s.
They assume t h a t t h e m o r t g a g e s a r e s u b j e c t t o t h e R ea l E s t a t e
S e t t le m e n t P ro c e d u re s Act (R ESPA).
A s a r e s u l t , no o p t i o n r e g a r d i n g t h e
i t e m i z a t i o n o f t h e amount f i n a n c e d h a s been i n c l u d e d i n t h e s a m p l e s , b e c a u s e
p r o v i d i n g t h e good f a i t h e s t i m a t e s o f s e t t l e m e n t c o s t s r e q u i r e d by R ES PA s a t i s f i e s
T r u t h i n L e n d i n g ' s amount f i n a n c e d i t e m i z a t i o n r e q u i r e m e n t .
( S e e f o o t n o t e 39
to § 2 2 6 .1 8 (c ).)
12. S a m p le H - 1 3 .
T h i s s a m p l e i l l u s t r a t e s a m o r t g a g e w i t h a demand f e a t u r e .
The l o a n amount i s $ 4 4 , 9 0 0 , p a y a b l e i n 360 m o n t h l y i n s t a l l m e n t s a t a s i m p l e
i n t e r e s t ra t e o f 14.75%.
The f i f t e e n d a y s o f i n t e r i m i n t e r e s t ( $ 2 9 4 . 3 4 ) i s
c o l l e c t e d as a p r e p a id f i n a n c e c h a rge at the time o f consummation o f the loan
( A p r i l 1 5, 1 9 8 1 ) .
In c a l c u l a t i n g the d i s c l o s u r e amounts, the m inor i r r e g u l a r i ­
t i e s p r o v i s i o n i n § 2 2 6 . 1 7 ( c ) ( 4 ) h a s been u s e d .
The p r o p e r t y i n s u r a n c e premiums
a r e n o t i n c l u d e d i n t h e payment s c h e d u l e .
T h i s d i s c l o s u r e s t a t e m e n t c o u l d be
u s e d f o r n o t e s w i t h t h e s e v e n - y e a r c a l l o p t i o n r e q u i r e d by t h e F e d e r a l N a t i o n a l
M o r t g a g e A s s o c i a t i o n (FNMA) i n s t a t e s where d u e - o n - s a l e c l a u s e s a r e p r o h i b i t e d .
13.
Sample H - 1 4 .
T h is sample i l l u s t r a t e s a v a r i a b l e ra te m ortgage.
The l o a n
amount i s $ 4 4 , 9 0 0 , p a y a b l e i n 3 60 m o n t h l y i n s t a l l m e n t s a t an i n i t i a l i n t e r e s t
ra t e o f 14.75%.
A l l payment p e r i o d s a r e r e g u l a r .
Two p o i n t s ( $ 8 9 8 ) have been
i m p o s e d and i n c l u d e d i n t h e p r e p a i d f i n a n c e c h a r g e .
The n o t e p r o v i d e s t h a t
t h e i n t e r e s t r a t e may v a r y w i t h t h e l e n d e r ' s p r i m e r a t e , w i t h a maximum p e r m i s ­
s i b l e i n c r e a s e o f 5% o v e r t h e t er m o f t h e m o r t g a g e .
The i n t e r e s t r a t e may not
v a r y more f r e q u e n t l y t h a n o n ce a y e a r , and may n o t i n c r e a s e by more t h a n 1%
annually.
R a t e f l u c t u a t i o n s w i l l be r e f l e c t e d i n t h e m o n t h l y payment amount.
14.
Sample H - 1 5 .
T h i s s a m p l e i l l u s t r a t e s a g r a d u a t e d payment m o r t g a g e w i t h a
f i v e - y e a r g r a d u a t i o n p e r i o d and a 7 1/2 p e r c e n t y e a r l y i n c r e a s e i n p a y m e nt s.
The l o a n amount i s $ 4 4 , 9 0 0 , p a y a b l e i n 360 m o n t h l y i n s t a l l m e n t s a t a s i m p l e
i n t e r e s t r a t e o f 14.75%.
Two p o i n t s ( $ 8 9 8 ) , a s w e l l a s an i n i t i a l m o r t g a g e
g u a r a n t e e i n s u r a n c e premium o f $ 2 2 5 . 0 0 , a r e i n c l u d e d i n t h e p r e p a i d f i n a n c e
charge.
The m o r t g a g e g u a r a n t e e i n s u r a n c e premiums a r e c a l c u l a t e d on t h e b a s i s
o f 1/4 o f 1% o f t h e o u t s t a n d i n g p r i n c i p a l b a l a n c e u n d e r an a n n u a l r e d u c t i o n
plan.
The a b b r e v i a t e d d i s c l o s u r e p e r m i t t e d u n d e r § 2 2 6 . 1 8 ( g ) ( 2 ) i s u s e d f o r
t h e payment s c h e d u l e f o r y e a r s 6 t h r o u g h 30.
The p r e p a y m e n t d i s c l o s u r e r e f e r s
t o b o t h p e n a l t i e s and r e b a t e s b e c a u s e i n f o r m a t i o n a b o u t p e n a l t i e s i s r e q u i r e d
f o r t h e s i m p l e i n t e r e s t p o r t i o n o f t h e o b l i g a t i o n and i n f o r m a t i o n a b o u t r e b a t e s
i s r e q u i r e d f o r the m ortgage i n s u r a n c e p o r t i o n o f the o b l i g a t i o n .

REFERENCES:
Statute:

th e o ld

APPENDIX




§ § 105,

1981 c h a n g e s :
regulation.

I --

130.

The model

f o r m s and c l a u s e s

FEDERAL ENFORCEMENT A G E N C I E S .

Statute:

§ 108.

have no c o u n t e r p a r t

in

Appendix
- App9 -

APPENDIX J - -

ANNUAL PERCENTAGE RATE COMPUTATIONS FOR C LOSED-END C R E D I T
TRANSACTIONS

1.
Use o f A p p e n d i x J .
A p p e n d i x J s e t s f o r t h t h e a c t u a r i a l e q u a t i o n s and i n s t r u c
t i o n s f o r c a l c u l a t i n g th e annual p e rce n ta ge ra t e in c l o s e d - e n d c r e d i t t r a n s ­
actions.
W h i l e t h e f o r m u l a s c o n t a i n e d i n t h i s a p p e n d i x may be d i r e c t l y a p p l i e d
t o c a l c u l a t e t h e a n n u a l p e r c e n t a g e r a t e f o r an i n d i v i d u a l t r a n s a c t i o n , t h e y may
a l s o be u t i l i z e d t o p r o g r a m c a l c u l a t o r s and c o m p u t e r s t o p e r f o r m t h e c a l c u l a t i o n s
2.
R e l a t i o n to Board t a b l e s .
The B o a r d ' s An nu al P e r c e n t a g e R a t e T a b l e s a l s o
p r o v i d e c r e d i t o r s w ith a c a l c u l a t i o n to o l which a p p l i e s the t e c h n i c a l in f o r m a ­
t i o n in Appendix J.
An a n n u a l p e r c e n t a g e r a t e computed i n a c c o r d a n c e w i t h t h e
i n s t r u c t i o n s i n t h e t a b l e s i s deemed t o co mp ly w i t h t h e r e g u l a t i o n .
Volume I
o f t h e t a b l e s may be u se d f o r c r e d i t t r a n s a c t i o n s i n v o l v i n g e qu a l payment
a mou nt s and p e r i o d s , a s w e l l a s f o r t r a n s a c t i o n s i n v o l v i n g any o f t h e f o l l o w i n g
irre gu la rtie s:
odd f i r s t p e r i o d , odd f i r s t payment and odd l a s t payment.
Volume I I o f t h e t a b l e s may be u s e d f o r t r a n s a c t i o n s w h i c h i n v o l v e any t y p e o f
irre gu laritie s.
T h e se t a b l e s may be o b t a i n e d fr om a n y F e d e r a l R e s e r v e Bank o r
f ro m t h e B o a r d i n W a s h i n g t o n , D . C . 2 0 5 5 1 , upon r e q u e s t .

REFERENCES:
Statute:

§ 107.

Other s e c t i o n s :
Previous

§ 226.22.

regulation:

§ 226.40

(Supplement

I).

1981 c h a n g e s :
P a r a g r a p h ( b ) ( 2 ) h a s been r e v i s e d t o c l a r i f y t h a t t h e
term o f the t r a n s a c t i o n never b e g in s e a r l i e r than consummation o f the t r a n s ­
action.
P a r a g r a p h ( b ) ( 5 ) ( v i ) h a s been r e v i s e d t o p e r m i t c r e d i t o r s i n a l l c a s e s
where t h e t r a n s a c t i o n term e q u a l s a w h o l e number o f m o n t h s , t o u s e e i t h e r t h e
12- mo nth method o f t h e 3 6 5 - d a y method t o compute t h e number o f u n i t - p e r i o d s p e r
year.

Board o f G o v ern o rs o f the F ederal

R e s e r v e S y s t e m , May 2 0 ,

1 98 1.

______ ( s i g n e d ) James McAf ee _______
James McAf ee
A s s i s t a n t S e c r e t a r y o f the Board
[SEAL]