Full text of Federal Reserve Bank of New York Circulars : 9163. Regulation Z - Truth in Lending

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9163 T
October 19, 1981

REGULATION Z — TRUTH IN LENDING
Official Staff Commentary

To AH Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:

The Board o f Governors o f the Federal Reserve System has issued an official staff commentary on its
Regulation Z, “ Truth in L en d in g,” which is designed to consolidate and replace all individual interpreta
tions o f the regulation. The follow in g is quoted from the text o f a statement issued by the Board o f
Governors announcing the commentary:
The commentary applies the requirements of Truth in Lending with respect to both open-end
and closed- end consumer credit. It deals 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 and with certain recent developments in consumer credit financing. 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 guidance with wide application
together with illustrative examples.
In its final form the staff commentary on Regulation Z provides rules for applying the disclosure
requirements of Truth in Lending to a number of recent developments in the field of consumer credit
financing. These include developments involving “ creative” mortgage financing.
Creative mortgage financing
‘ ‘Buydowns’’ o f mortgage interest rates (where the seller, borrower or both reduce the rate for the
first few years of the mortgage by means of a lump sum payment to the lender at the outset):
— Where the seller makes the payment, the staff commentary takes the position that the disclosures
by the lender should be at the higher rate (unless the credit contract actually reflects the lower
rate, in which case the disclosures are to be based on the composite rate).
— Where the consumer makes the buydown payment, the commentary takes the position that this
amount is part of the finance charge and disclosures must show the effects on the rate of the
buydown, including a composite rate during the buydown period and the higher rate thereafter.
— Where the consumer and a third party share in the buydown payment the consumer’s portion is
to be included in the finance charge and disclosures must reflect the effects of the consumer’s
payment, while the third party’s portion has no effect on disclosures unless the contract reflects
the lower rate.

(OVER)

"Wraparound” mortgages (where a creditor “ wraps" an additional advance around the outstand
ing balance on an existing loan and charges interest on the entire face amount of the new mortgage, with
the consumer making a single payment to the new creditor and the new creditor makes payments on the
existing loan):
The staff commentary treats a wraparound mortgage — whether it has the same maturity as the
pre-existing loan or a shorter maturity with a balloon payment at the end — as a single-advance
transaction, with the amount financed combining the pre-existing loan and the new advance.
The notice concerning the commentary explains its general purposes and intent, notes that the Board
will submit for public comment a proposed amendment to Regulation Z dealing with the definition of
arranger of credit covering real estate brokers who arrange credit, and lists the principal subjects dealt
with by the commentary.
Enclosed is a copy o f a summary o f the official staff com m entary. The com plete text o f the
commentary — which is enclosed for member banks in this District — has been published in the
October 9, 1981 issue o f the Federal Register. It will be sent to other depository institutions when printed
copies becom e available.

nthony

M. S o l o m o n ,

President.

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Reg. Z; TIL-1]
TRUTH IN LENDING
Official Staff Commentary
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Official staff interpretation.

SUMMARY: In accordance with Appendix C to 12 CFR Part 226, the staff of the
Federal Reserve Board is publishing a final official staff commentary to
Regulation Z, as revised effective April 1 , 1981. A proposed version of the
commentary was published in the Federal Register on May 27, 1981 (46 FR 28560).
The commentary applies and interprets the requirements of the revised
Regulation Z to open-end and closed-end consumer credit and is intended to
substitute for individual Board and staff interpretations of the regulation.
Good faith compliance with the commentary affords protection from civil lia
bility under § 130(f) of the act.
EFFECTIVE DATE:

October 13, 1981.

FOR FURTHER INFORMATION CONTACT: The following attorneys in the Division of
Consumer and Community Affairs, Board of Governors of the Federal Reserve
System, Washington, D.C. 20551, at (202) 452-3667 or (202) 452-3867:
Subpart A

Ruth Amberg
Gerald Hurst
Steven Zeisel

Subpart B and
Appendices

Ruth Amberg
Jesse Fi1kins
Lynn Goldfaden
Gerald Hurst
Barbara Ranagan
John Wood

Subpart C and
Appendices

Rugenia Silver
Susan Werthan
Claudia Yarus
Steven Zeisel

Subpart D and
Appendices

Lynn Goldfaden
Rugenia Silver

SUPPLEMENTARY INFORMATION: (1) Introduction. Effective April 1, 1981, the
Board substantially revised Regulation Z, which implements the Truth in Lending
Act (46 FR 20848, April 7, 1981). The revisions reflect amendments made by the
Truth in Lending Simplification and Reform Act (Title VI of the Depository
Institutions Deregulation and Monetary Control Act of 1980, Pub. L. 96-221).
Creditors may begin complying with the revised regulation immediately, but
compliance does not become mandatory until April 1, 1982. Before that date,
creditors may continue to comply with the regulation as it existed prior to
those amendments ("previous Regulation Z"). Board and staff interpretations
issued under previous Regulation Z will remain effective until April 1, 1982,
but only insofar as they interpret the previous regulation.

The commentary modifies the staff's approach to providing interpre
tations of Regulation Z. Under the previous regulation, individual staff
opinions were issued in response to inquiries about specific fact situations
and were normally limited to those facts. Over time, more than 1,500 separate
opinions were issued. While this commentary provides specific guidance and
examples, it employs language of somewhat more general application for use by
the widest possible audience. The commentary attempts to provide sufficient
guidance without overburdening the industry with excessive detail and multiple
research sources. Periodic updates will address new questions and provide a
vehicle for any additional staff interpretations. In this way, every question
appropriate for commentary treatment will be addressed within a reasonable
time.
Many previous opinion letters have been adopted, in substance, as
interpretations of the revised regulation and are reflected in the commentary.
Many others have not been adopted because they have been rendered invalid by
regulatory changes or, if they are still valid, because they are inappropriate
for inclusion in an official commentary. Therefore, previous staff opinion
letters, whether official or unofficial, can provide no certain guidance in
complying with the revised regulation. They were issued as interpretations of
previous Regulation Z only and are entirely superseded by this commentary for
purposes of interpreting the revised Regulation Z. Of course, they may still be
utilized by courts and administrative agencies in determining liability for vio
lations of the previous regulation.
A proposed version of the commentary was published in the Federal
Register on May 27, 1981 (46 FR 28560) and elicited over 200 responses from
consumer, industry, and government representatives. Numerous changes to the
substance of the proposal were requested; many have been adopted in the final
commentary. Since some responses reflected confusion about the meaning of
certain provisions, those provisions have been revised and clarified. In
addition, many minor editorial and structural changes suggested by commenters
have been incorporated.
Because of substantive and editorial changes, some sections of the
commentary were restructured, and comments were added or deleted as necessary.
As a result, the location of a comment may differ from its original location in
the proposal. In general, the staff, has attempted to place comments in the
single most appropriate and useful place, providing cross-references where
necessary.
One significant change from the proposal that deserves special mention
involves the definition of an arranger of credit. The proposed commentary
interpreted the definition to cover real estate brokers involved in sellerfinanced transactions. The Board has determined, however, that the signifi
cance of the definition warrants further public comment. Therefore, the Board
will be publishing in the Federal Register a notice of proposed rulemaking to
amend the revised regulation"^ TTTe proposed amendment to § 226.2(a)(3), if
adopted, would clarify the definition of "arranger of credit," particularly in
regard to the treatment of real estate brokers who arrange sales involving
seller financing.

3
Some other provisions in the commentary that significantly differ
from the proposal are listed below. The list is not exhaustive; it is intended
merely to give examples of the types of changes that have been made.

INTRODUCTION
o

An introduction has been added to the commentary to cover
information of general applicability and rules of transi
tion from the previous regulation.

SUBPART A (GENERAL)
o

Comment 2(a)(3)-2 describes the content of disclosures made
by an arranger of credit.

Comment 2(a)(14)-1 identifies several types of transactions
that are not considered credit for purposes of the regula
tion.

Comment 2(a)(16)-5 permits student credit transactions to
be treated as either loans or credit sales.

Comment 2(a)(1 7)(i)-2 clarifies that assignees of consumer
contracts are not creditors.

Comment 2(a)(22)-2 explains that an attorney and his or
her client are considered the same person for purposes
of the regulation.

Comments 2(a)(24)-3 and -4 clarify the meaning of "resi
dential mortgage transaction."

Comments 2(a)(25)-l and -4 further explain the definition
of "security interest."

Comment 3(a)-2 expands the list of factors to consider in
determining the purpose of a credit extension and modifies
the examples of business- and consumer-purpose credit.

Comment 3(a)-3 expands the definition of non-owner-occupied
rental property.

Comments 3(a)-5 and 3(b)-3 explain when the refinancing of
previously exempt transactions are subject to the regula
tion.

Comment 3(b)-2 describes how the exemption for credit over
$25,000 applies to open-end credit.

4
o

Comment 4(a)-2 specifically excludes from the finance charge
assignment discounts that are not separately imposed on the
consumer.

Comment 4(a)-3 excludes from the finance charge taxes imposed
on a credit obligation that are payable by the consumer.

Comment 4(a)-4 explains when a consumer's forfeiture of
interest constitutes a finance charge.

Comments 4(b)(7) and (8)-l and -2 describe what constitutes
insurance "written in connection with" the credit transaction.

Comment 4(b)(9)-2 describes the exception for cash discounts
found in § 167(b) of the act.

Comment 4(c)(1)-1 clarifies the treatment of application fees.

Comments 4(d)-2 and -3 explain insurance disclosure responsi
ble ities.

Comment 4(d)-7 clarifies how a creditor may obtain authori
zation when a number of insurance options are available and
who may sign an insurance authorization.

SUBPART B (OPEN-END CREDIT)

Comments 5(a)(1)-1 and -2 clarify the format requirements
for initial disclosures and periodic statements.

Comment 5(b)(2)(ii)-3 clarifies that a creditor may permit
(but not require) consumers to call for their periodic
statements.

Comments 6(a)(2)-2 through -9 provide guidelines on disclo
sure requirements for variable rate plans.

Comment 7-1 deals with multifeatured plans.

Comments 7(d)-1 and -2 provide further examples of what
periodic rates must be disclosed.

Comment 7(f)-l modifies the rule on disclosures of the total
finance charge due to the application of periodic rates.

Comment 8(a)-3 gives additional options for "transaction
dates" in mail or telephone orders.

Comment 9(a)(2)-! modifies the timing requirements when a
creditor changes from a long-form to a short-form notice
and vice versa.

__________

Comment 9(c)(l)-5 clarifies that a copy of the security
agreement that describes the collateral added to or substi
tuted on an account may be used as a notice of the changed
term.

Comment 9(d )-1 has been added to cross-reference the statu
tory ban on credit card surcharges.

Comment 11-1 permits a creditor to fulfill its obligations
by making a good faith effort to refund any credit balance
prior to the passage of 6 months.

Comment 11(b)-1 clarifies that a creditor need not honor
standing orders requesting refunds of any credit balance
on the consumer's account.

Comment 15(a)-5 and -6 clarify the meaning of "principal
dwelling" as it relates to the right of rescission.

SUBPART C (CLOSED-END CREDIT)
0

Comment 17(a)(1)-5 provides an expanded list of material
considered directly related to required disclosures.

Comments 17(c)(1)-3, -4 and -5 provide a more complete
discussion of "buydowns."

Comments 17(c)(l)-6 and -7 detail the treatment of "wrap
around" financing.

Comment 17(c)(2)-2 permits a general statement that most
or all disclosures are estimates, where applicable.

Comment 17(c)(6)-5 explains the treatment of "points" in
multiple-advance construction loans.

Comment 17(i)-4 is a new comment discussing the treatment
of loan origination fees on student credit extensions.

Comment 18(c)-2 provides further guidance on varying the
disclosure of the itemization of the amount financed.

Comment 18(f)(l)-l clarifies the treatment of an index to
which a variable rate transaction may be tied.

Comment 18(j )-1 clarifies that the total sale price disclo
sure may be modified for a variable rate transaction.

Comment 19(a)-4 explains the appropriate treatment of loan
applications that cannot be approved on their original
terms.

- 6 -

Comment 19(b)-2 permits a creditor to highlight the changed
terms when giving a complete set of new disclosures.

Comment 20(b)-6 is a new comment explaining changes in terms
that do and do not destroy the existing obligation for pur
poses of assumptions.

Comments 23(a)(l)-3 and -4 clarify the meaning of "principal
dwelling" as it relates to the right of rescission.

Comment 24(b)-3 explains the correct treatment of "buydowns"
in advertising.

SUBPART D (MISCELLANEOUS)
o

Comment 26(b)-1 permits oral disclosure of other charges in
closed-end credit when the annual percentage rate cannot be
precisely determined.

Comment 27-1 clarifies the treatment of Spanish-language
disclosures in Puerto Rico.

★

[NOTE: The complete text of the commentary can be obtained from any Federal
Reserve Bank or from the Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, Washington, D.C. 20551.]

Friday
O ctober 9, 1981

Part IV

Federal Reserve
System
Truth in Lending; O fficial Staff
C om m entary

50288

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

FEDERAL RESERVE SYSTEM
12CFR Part 226

[Reg. Z; TIL-1]
Truth in Lending; Official Staff
Commentary

Board of Governors of the
Federal Reserve System.
a c t i o n : Official staff interpretation.
AGENCY:

In accordance with Appendix
C to 12 CFR Part 226, the staff of the
Federal Reserve Board is publishing a
final official staff commentary to
Regulation Z, as revised effective April
1, 1981. A proposed version of the
commentary was published in the
Federal Register on May 27,1981 (46 FR
28560). The commentary applies and
interprets the requirements of the
revised Regulation Z to open-end and
closed-end consumer credit and is
intended to substitute for individual
Board and staff interpretations of the
regulation. Good faith compliance with
the commentary affords protection from
civil liability under section 130(f) of the
act.
EFFECTIVE DATE: October 13,1981.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

The following attorneys in the Division
of Consumer and Community Affaiirs,
Board of Governors of the Federal
Reserve System, Washington, D.C.
20551, at (202) 452-3667 or (202) 4523867:
Subpart A:
Ruth Amberg, Gerald Hurst, Steven
Zeisel
Subpart B and-Appendices:
Ruth Amberg, Jesse Filkins, Lynn
Goldfaden, Gerald Hurst, Barbara
Ranagan, John Wood
Subpart C and Appendices:
Rugenia Silver, Susan Werthan,
Claudia Yarus, Steven Zeisel
Subpart D and Appendices:
Lynn Goldfaden, Rugenia Silver
SUPPLEMENTARY INFORMATION: (1)

Introduction. Effective April 1,1981, the
Board substantially revised Regulation
Z, which implements the Truth in
Lending Act (46 FR 20848, April 7,1981).
The revisions reflect amendments made
by the Truth in Lending Simplification
and Reform Act (Title VI of the
Depository Institutions Deregulation and
Monetary Control Act of 1980, Pub. L.
96-221). Creditors may begin complying
with the revised regulation immediately,
but compliance does not become
mandatory until April 1,1982. Before
that date, creditors may continue to
comply with the regulation as it existed
prior to those amendments ("previous
Regulation Z"). Board and staff

interpretations issued under previous
Regulation Z will remain effective until
April 1,1982, but only insofar as they
interpret the previous regulation.
The commentary modifies the staffs
approach to providing interpretations of
Regulation Z. Under the previous
regulation, individual staff opinions
were issued in response to inquiries
about specific fact situations and were
normally limited to those facts. Over
time, more than 1,500 separate opinions
were issued. While this commentary
provides specific guidance and
examples, it employs language of
somewhat more general application for
use by the widest possible audience.
The commentary attempts to provide
sufficient guidance without
overburdening the industry with
excessive detail and multiple research
sources. Periodic updates will address
new questions and provide a vehicle for
any additional staff interpretations. In
this way, every question appropriate for
commentary treatment will be
addressed within a reasonable time.
Many previous opinion letters have
been adopted, in substance, as
interpretations of the revised regulation
and are reflected in the commentary.
Many others have not been adopted
because they have been rendered
invalid by regulatory changes or, if they
are still valid, because they are
inappropriate for inclusion in an official
commentary. Therefore, previous staff
opinion letters, whether official or
unofficial, can provide no certain
guidance in complying with the revised
regulation. They were issued as
interpretations of previous Regulation Z
only and are entirely superseded by this
commentary for purposes of interpreting
the revised Regulation Z. Of course, they
may still be utilized by courts and
administrative agencies in determining
liability for violations of the previous
regulation.
A proposed version of the
commentary was published in the
Federal Register on May 27,1981 (46 FR
28560) and elicited over 200 responses
from consumer, industry, and
government representatives. Numerous
changes to the substance of the proposal
were requested; many have been
adopted in the final commentary. Since
some responses reflected confusion
about the meaning of certain provisions,
those provisions have been revised and
clarified. In addition, many minor
editorial and ^structural changes
suggested by commenters have been
incorporated.
Because of substantive and editorial
changes, some sections of the
commentary were restructured, and
comments were added or deleted as

necessary. As a result, the location of a
comment may differ from its original
location in the proposal. In general, the
staff has attempted to place comments
in the single most appropriate and useful
place, providing cross-references where
necessary.
One significant change from the
proposal that deserves special mention
involves the definition of an arranger of
credit. The proposed commentary
interpreted the definition to cover real
estate brokers involved in sellerfinanced transactions. The Board has
determined, however, that the
significance of the definition warrants
further public comment. Therefore, the
Board will be publishing in the Federal
Register a notice of proposed
rulemaking to amend the revised
regulation. The proposed amendment to
§ 226.2(a)(3), if adopted, would clarify
the definition of “arranger of credit,”
particularly in regard to the treatment of
real estate brokers who arrange sales
involving seller financing.
Some other provisions in the
commentary that significantly differ
from the proposal are listed below. The
list is not exhaustive; it is intended
merely to give examples of the types of
changes that have been made.
INTRODUCTION
• An introduction has been added to
the commentary to cover
information of general applicability
and rules of transition from the
previous regulation.
Subpart A (General)
• Comment 2(a)(3)—
2 describes the
content of disclosures made by an
arranger of credit.
• Comment 2(a)(14)-l identifies
several types of transactions that
are not considered credit for
purposes of the regulation.
• Comment 2(a)(16)-5 permits student
credit transactions to be treated as
either loans or credit sales.
• Comment 2(a)(17)(i)-2 clarifies that
assignees of consumer contracts are
not creditors.
• Comment 2(a)(22)-2 explains that
an attorney and his or her client are
considered the same person for
purposes of the regulation.
• Comments 2(a)(24)-3 and -4 clarify
the meaning of “residential
mortgage transaction.”
• Comments 2(a)(25)-l and -4 further
explain the definition of “security
interest."
• Comment 3(a)-2 expands the list of
factors to consider in determining
the purpose of a credit extension
and modifies the examples of

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
business- and consumer-purpose
credit.
• Comment 3(a)-3 expands the
definition of non-owner-occupied
rental property.
• Comments 3(a)-5 and 3(b)—
3 explain
when the refinancing of previously
exempt transactions are subject to
the regulation.
• Comment 3(b)—
2 describes how the
exemption for credit over $25,000
applies to open-end credit.
• Comment 4(a)-2 specifically
excludes from the finance charge
assignment discounts that are not
separately imposed on the
consumer.
• Comment 4(a)-3 excludes from the
finance charge taxes imposed on a
credit obligation that are payable
by the consumer.
• Comment 4(a)-4 explains when a
consumer’s forfeiture of interest
constitutes a finance charge.
• Comments 4(b) (7) and (8)—
1 and -2
describe what constitutes insurance
“written in connection with” the
credit transaction.
• Comment 4(b)(9)-2 describes the
exception for cash discounts found
in § 167(b) of the act.
• Comment 4(c)(1)—
1 clarifies the
treatment of application fees.
• Comments 4(d)-2 and -3 explain
insurance disclosure
responsibilities.
• Comment 4(d)—
7 clarifies how a
creditor may obtain authorization
when a number of insurance options
are available an$ who may sign an
insurance authorization.
Subpart B (Open-End Credit)
• Comments 5(a)(l)-l and -2 clarify
the format requirements for initial
disclosures and periodic statements.
• Comment 5(b)(2)(ii)—
3 clarifies that
a creditor may permit (but not
require) consumers to call for their
periodic statements.
• Comments 6(a)(2)-2 through -9
provide guidelines on disclosure
requirements for variable rate
plans.
• Comment 7-1 deals with
multifeatured plans.
• Comments 7(d)-l and -2 provide
further examples of what periodic
rates must be disclosed.
• Comment 7(f)-l modifies the rule on
disclosures of the total finance
charge due to the application of
periodic rates.
• Comment 8(a}-3 gives additional
options for "transaction dates” in
mail or telephone orders.
• Comment 9(a)(2)—
1 modifies the
timing requirements when a creditor
changes from a long-form to a short-

form notice and vice versa.
• Comment 9(c)(1)—
5 clarifies that a
copy of the security agreement that
describes the collateral added to or
substituted on an account may be
used as a notice of the changed
term.
• Comment 9(d)—
1 has been added to
cross-reference the statutory ban on
credit card surcharges.
• Comment 11-1 permits a creditor to
fulfill its obligations by making a
good faith effort to refund any '
credit balance prior to the passage
of 6 months.
• Comment ll(b)-l clarifies that a
creditor need not honor standing
orders requesting refunds of any
credit balance on the consumer’s
account.
• Comments 15(a)-5 and -6 clarify the
meaning of “principal dwelling” as
it relates to the right of rescission.
Subpart C (Closed-End Credit)
• Comment 17(a)(l)-5 provides an
expanded list of material
considered directly related to
required disclosures.
• Comments 17(c)(l)-3, -4 and -5
provide a more complete discussion
of "buydowns.”
• Comments 17(c)(1)—
6 and -7 detail
the treatment of “wrap-around”
financing.
• Comment 17(c)(2)—
2 permits a
general statement that most or all
disclosures are estimates, where
applicable.
• Comment 17(c)(6)—
5 explains the
treatment of “points” in multipleadvance construction loans.
• Comment 17(i)—
4 is a new comment
discussing the treatment of loan
origination fees on student credit
extensions.
• Comment 18(c)-2 provides further
guidance on varying the disclosure
of the itemization of the amount
financed.
• Comment 18(f)(1)—
1 clarifies the
treatment of an index to which a
variable rate transaction may be
tied.
• Comment 18(j)-l clarifies that the
total sale price disclosure may be
modified for a variable rate
transaction.
• Comment 19(a)-4 explains the
appropriate treatment of loan
applications that cannot be
approved on their original terms.
• Comment 19(b)-2 permits a creditor
to highlight the changed terms when
giving a complete set of new
disclosures.
• Comment 20(b}-6 is a new comment
explaining changes in terms that do
and do not destroy the existing

50289

obligation for purposes of
assumptions.
• Comments 23(a)(l)-3 and -4 clarify
the meaning of “principal dwelling”
as it relates to the right of
rescission.
• Comment 24(b)-3 explains the
correct treatment of “buydowns” in
advertising.
Subpart D (Miscellaneous)
• Comment 26(b)—
1 permits oral
disclosure of other charges in
closed-end credit when the annual
percentage rate cannot be precisely
determined.
• Comment 27-1 clarifies the
treatment of Spanish-language
disclosures in Puerto Rico.
(2) Authority. 15 U.S.C. 1640(f).
12 CFR Part 226, TIL-1—Official Staff
Commentary to Regulation Z
INTRODUCTION
1. Official status. This commentary is
the vehicle by which the staff of the
Division of Consumer and Community
Affairs of the Federal Reserve Board
issues official staff interpretations of
Regulation Z, as revised effective April
1,1981. Good faith compliance with this
commentary affords protection from
liability under 130(f) of the Truth in
Lending Act. Section 130(f) (15 U.S.C.
1640) protects creditors from civil
liability for any act done or omitted in
good faith in conformity with any
interpretation issued by a duly
authorized official or employee of the
Federal Reserve System.
2. Procedure for requesting
interpretations. Under Appendix C of
the regulation, anyone may request an
official staff interpretation.
Interpretations that are adopted will be
incorporated in this commentary
following publication in the Federal
Register. No official staff interpretations
are expected to be issued other than by
means of this commentary.
3. Status of previous interpretations.
All statements and opinions issued by
the Federal Reserve Board and its staff
interpreting previous Regulation Z
remain effective until April 1,1982, only
insofar as they interpret that regulation.
When compliance with revised
Regulation Z becomes mandatory on
April 1,1982, the Board and staff
interpretations of the previous
regulation will be entirely superseded
by the revised regulation and this
commentary except with regard to
liability under the previous regulation.
4. Rules of construction, (a) Lists that
appear in the commentary may be
exhaustive or illustrative; the

50290

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

appropriate construction should be clear
from the context. In most cases,
illustrative lists are introduced by
phrases such as “including, but not
limited to," “among other things,” “for
example,” or "such as.”
(b) Throughout the commentary and
regulation, reference to the regulation
should be construed to refer to revised
Regulation Z, unless the context
indicates that a reference to previous
Regulation Z is also intended.
(c) Throughout the commentary,
reference to “this section” or "this
paragraph” means the section or
paragraph in the regulation that is the
subject of the comment.
5. Comment designations. Each
comment in the commentary is
identified by a number and the
regulatory section or paragraph which it
interprets. The comments are designated
with as much specificity as possible
according to the particular regulatory
provision addressed. For example, some
of the comments to § 226.18(b) are
further divided by paragraph, such as
Comment 18(b)(l)-l and Comment
18(b)(2)—
1. In other cases, comments
have more general application and are
designated, for example, as Comment
18-1 or Comment 18(b)-l. This
introduction may be cited as Comments
1-1 through 1-7. The appendices may be
cited as Comments App. A-l through
App. 1-2.
6. Cross-references. The following
cross-references to related material
appear at the end of each section of the
commentary: (a) "Statute”—those
sections of the Truth in Lending Act on
which the regulatory provision is based
(and any other relevant statutes): (b)
“Other sections”—other provisions in
the regulation necessary to understand
that section: (c) "Previous regulation”—
parallel provisions in previous
Regulation Z; and (d) “1981 changes”—a
brief description of the major changes
made by the 1981 revisions to
Regulation Z. Where appropriate a fifth
category ("Other regulations”) provides
cross-references to other regulations.
7. Transition rules, (a) Though
compliance with the revised regulation
is not mandatory until April 1,1982,
creditors may begin complying as of
April 1,1981. During the intervening
year, a creditor may convert its'entire
operation to the new requirements at
one time, or it may convert to the new
requirements in stages. In general,
however, a creditor may not mix the
regulatory requirements when making
disclosures for a particular closed-end
transaction or open-end account; all the
disclosures for a single closed-end
transaction (or open-end account) must
be made in accordance with the

statement in June 1981, and converts
previous regulation, or all the
to the new regulation in October
disclosures must be made in accordance
1981, the creditor must give the
with the revised regulation. As an
billing rights statement sometime in
exception to the general rule, the revised
1982, and it must not be fewer than
rescission rules and the revised
6 nor more than 18 months after the
advertising rules may be followed even
June statement.
if the disclosures are based on the
• Section 226.11 of the revised
previous regulation. For purposes of this
regulation affects only credit
regulation, the creditor is not required to
take any particular action beyond the
balances that are created on or after
the date the creditor converts the
requirements of the revised regulation to
account to the revised regulation.
indicate its conversion to the revised
regulation.
Subpart A—General
(b) The revised regulation may be
relied on to determine if any disclosures Section 226.1—Authority, Purpose,
are required for a particular transaction
Coverage, Organization, Enforcement
and Liability
or to determine if a person is a
“creditor” subject to Truth in Lending
1(c) Coverage.
requirements, whether or not other
1.
Foreign applicability. Regulation Z
operations have been converted to the
applies to all persoris (including
revised regulation. For example,
branches of foreign banks and sellers
layaway plans are not subject to the
located in the United States) that extend
revised regulation, nor are oral
consumer credit to residents (including
agreements to lend money if there is no
resident aliens) of any state as defined
finance charge. These provisions may be in § 226.2. If an account is located in the
relied on even if the creditor is making
United States and credit is extended to
other disclosures under the previous
a U.S. resident, the transaction is
regulation. The new rules governing
subject to the regulation. This will te the
whether or not disclosures must be
case whether or not a particular
made for refinancings and assumptions
advance or purchase on the account
are also available to a creditor that has
takes place in the United States and
not yet converted its operations to the
whether or not the extender of credit is
revised regulation.
chartered or based in the United States
(c) In addition to the above rules,
or a foreign country. Thus, a U.S.
applicable to both open-end and closed- resident's use in Europe of a credit card
end credit, the following guidelines are
issued by a bank in the consumer’s
relevant to open-end credit:
home town is covered by the regulation.
• The creditor need not remake initial The regulation does not apply to a
disclosures that were made under
foreign branch of a U.S. bank when the
the previous regulation, even if the
foreign branch extends credit to a U.S.
revised periodic statements contain
citizen residing or visiting abroad or to a
terminology that is inconsistent
foreign national abroad.
with those initial disclosures.
• A creditor may add inserts to its old References
open-end forms in order to convert
Statute: § 102.
them to the revised rules until such
Other sections: None.
time as the old forms are used up.
Previous regulation: § 226.1.
• No change-in-terms notice is
1981 changes: A discussion of
required for changes resulting from
coverage has been added to § 226.1 so
the conversion to the revised
that the reader will understand from the
regulation.
start what is subject to the regulation.
• The previous billing rights
Language has also been added to
statements are substantially similar explain the reorganization of the
to the revised billing rights
regulation into subparts that group
statements and may continue to be
together the provisions relating to
used, except that, if the creditor has general matters, open-end credit, closedan automatic debit program, it must
end credit, and miscellaneous rules. The
use the revised automatic debit
provisions on consumer leasing have
provision.
been issued by the Board as a separate
• For those creditors wishing to use
regulation, Regulation M (12 CFR Part
the annual billing rights statement,
213).
the creditor may count from the
Section 226.2—Definitions and Rules of
date on which it sent its last
Construction
statement under the previous
regulation in determining when to
2(a) Definitions.
give the first statement under the
2(a)(2) “Advertisement”.
new regulation. For example, if the
1.
Coverage. Only commercial
creditor sent a semi-annual
messages that promote consumer credit

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
transactions requiring disclosures are
advertisements. Messages inviting,
offering, or otherwise announcing
generally to prospective customers the
availability of credit transactions,
whether in visual, oral, or print media,
are covered by the regulation. Examples
include:
• Messages in a newspaper,
magazine, leaflet, promotional flyer,
or catalog.
• Announcements on radio,
television, or public address system.
• Direct mail literature or other
printed material on any exterior or
interior sign.
• Point-of-sale displays.
• Telephone solicitations.
• Price tags that contain credit
information.
• Letters sent to customers as part of
an organized solicitaion of business.
• Messages on checking account
statements offering auto loans at a
stated annual percentage rate.
The term does not include:
• Direct personal contacts, such as
follow-up letters, cost estimates for
individual consumers, or oral or
written communication relating to
the negotiation of a specific
transaction.
• Informational material, for example,
interest rate and loan term memos,
distributed only to business entities.
• Notices required by federal or state
law, if the law mandates that
specific information be displayed
and only the information so
mandated is included in the notice.
• News articles the use of which is
controlled by the news medium.
• Market research or educational
material that do not solicit business.
2.
Persons covered. All “persons”
must comply with the advertising
provisions in §§ 226.16 and 226.24, not
just those that meet the definition of
creditor in § 226.2(a)(17). Thus, home
builders, merchants, and others who are
not themselves creditors must comply
with the advertising provisions of the
regulation if they advertise consumer
credit transactions. However, under
§ 145 of the act, the owner and the
personnel of the medium, in which an
advertisement appears, or through
which it is disseminated, are not subject
to civil liability for violations.

credit is someone who does not meet the
definition of creditor.
Note.—The Board is considering a
regulatory amendment to § 226.2(a)(3) that, if
adopted, would clarify the definition of
"arranger of credit," particularly with regard
to real estate brokers involved with seller
financing of homes.

2. Content o f disclosures. If the
arranger makes the disclosures, the
disclosures should be based on the
assumption that the arranger and the
nonprofessional extender of credit are
the same person. For example, the
arranger must disclose that a security
interest is being taken if the extender of
credit takes a security interest, even if
the arranger does not. Similarly, if the
extender of credit is a seller, the
arranger must make credit sale
disclosures.
3. Counting transactions. The
definition uses the same numerical
tests—25 transactions per year or 5
transactions per year when secured by a
dwelling—as does the definition of
creditor. See the commentary to
§ 226.2(a)(17)(i) for illustrations of how
to count credit extensions.
4. A ttorneys. When an attorney and
his or her client are considered the same
person (see the commentary to
§ 226.2(a)(22)), an attorney is not an
arranger of credit as to credit extended
by the client.
5. Trusts. Since a trust and its trustee
are considered the same person (see the
commentary to § 226.2(a)(22)), a trustee
is not an arranger of credit as to credit
extended by the trust. See the
commentary to § 226.2(a)(17)(i) for an
explanation of when a trust is a creditor.
2(a)(4) “Billing cy c le " o r “c y c le ”.
1. Intervals. In open-end credit plans,

the billing cycle determines the intervals
at which periodic disclosure statements
must be sent; these intervals are also
used as measuring points for other
duties of the creditor. Typically, billing
cycles are monthly, but they may be
more frequent or less frequent (but not
less frequent than quarterly).
2. Creditors that do not bill. The term
“cycle” is interchangeable with “billing
cycle” for definitional purposes, since
some creditors' cycles do not involve the
sending of bills in the traditional sense
but only statements of account activity.
This is commonly the case with
2(a)(3) “Arranger o f c re d it”.
financial institutions when periodic
1.
Coverage. An arranger of credit is payments are made through payroll
an intermediary between the
deduction or through automatic debit of
nonprofessional extender of credit and
the consumer’s asset account.
the consumer. There can be an arranger
3. Equal cycles. Although cycles must
only if the credit arranged involves a
be equal, there is a permissible variance
finance charge or is payable by written
to account for weekends, holidays, and
agreement in more than 4 installments
differences in the number of days in
and the person actually extending the
months. If the actual date of each

50291

statement does not vary by more than 4
days from a fixed "day” (for example,
the third Thursday of each month) or
“date" (for example, the 15th of each
month) that the creditor regularly uses,
the intervals between statements are
considered equal. The requirement that
cycles be equal applies even if the
creditor applies a daily periodic rate to
determine the finance charge. The
requirement that intervals be equal does
not apply to the transitional billing cycle
that can occur when the creditor
occasionally changes its billing cycles
so as to establish a new statement day
or date. (See the commentary to
| 226.9(c).)
4. Paym ent reminder. The sending of a
regular payment reminder (rather than a
late payment notice) establishes a cycle
for which the creditor must send
periodic statements.
2(a)(6) “Business d a y ”.
1. Business function test. Activities

that indicate that the creditor is open for
substantially all of its business functions
include the availability of personnel to
make loan disbursements, to open new
accounts, and to handle credit
transaction inquiries. Activities that
indicate that the creditor is not open for
substantially all of its business functions
include a retailer merely acceptir.g
credit cards for purchases or a bank
having its customer-service windows
open only for limited purposes such as
deposits and withdrawals, bill paying,
and related services.
2. R escission rule. A more precise rule
for what is a business day (all calendar
days except Sundays and the federal
legal holidays listed in 5 USC 6103(a))
applies when the right of rescission is
involved.
2(a)(7) “Card issuer".
1.
Agent. An agent of a card issuer is

considered a card issuer. Because
agency relationships are traditionally
defined by contract and by state or
other applicable law, the regulation does
not define agent. Merely providing
services relating to the production of
credit cards or data processing for
others, however, does not make one the
agent of the card issuer. In contrast, a ,
financial institution may become the
agent of the card issuer if an agreement
between the institution and the card
issuer provides that the cardholder may
use a line of credit with the financial
institution to pay obligations incurred by
use of the credit card.
2(a)(8) "Cardholder”.
1.
G eneral rule. A cardholder is a

natural person at whose request a card
is issued for consumer credit purposes
or who is a co-obligor or guarantor for
such a card issued to another. The

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

second category does not include an
employee who is a co-obligor or
guarantor on a card issued to the
employer for business purposes, nor
does it include a person who is merely
the authorized user of a card issued to
another.
2. L im ited application o f regulation.
For the limited purposes of the rules on
issuance of credit cards and liability for
unauthorized use, a cardholder includes
an y person, including an organization, to
whom a card is issued for an y purpose—
including a business, agricultural, or
commercial purpose.
3. Issuance. See the commentary to
§ 226.12(a).
4. Dual-purpose cards and dual-card
system s. Some card issuers offer dualpurpose cards that are for business as
well as consumer purposes. If a card is
issued to an individual for consumer
purposes, the fact that an organization
has guaranteed to pay the debt does not
make it business credit. On the other
hand, if a card is issued for business
purposes, the fact that an individual
sometimes uses it for consumer
purchases does not subject the card
issuer to the provisions on periodic
statements, billing error resolution, and
other protections afforded to consumer
credit. Some card issuers offer dual-card
systems—that is, they issue two cards to
the same individual, one intended for
business use, the other for consumer or
personal use. With such a system, the
same person may be a cardholder for
general purposes when using the card
issued for consumer use, and a
cardholder only for the limited purposes
of the restrictions on issuance and
liability when using the card issued for
business purposes.
2(a)(9) “Cashprice”.
1. Components. This amount is a
starting point in computing the amount
financed and the total sale price under
§ 226.18 for credit sales. Any charges
imposed equally in cash and credit
transactions may be included in the
cash price, or they may be treated as
other amounts financed under
§ 226.18(b)(2).
2. Service contracts. Service contracts
, include contracts for the repair or the
servicing of goods, such as mechanical
breakdown coverage, even if such a
contract is characterized as insurance
under state law.
3. Rebates. The creditor has complete
flexibility in the way it treats rebates for
purposes of disclosure and calculation.
See the commentary to § 226.18(b).
2(a)(10) “Closed-endcredit”.
1. General. The coverage of this term
is defined by exclusion. That is, it
includes any credit arrangement that
does not fall within the definition of

open-end credit. Subpart C contains the
disclosure rules for closed-end credit
when the obligation is subject to a
finance charge or is payable by written
agreement in more than 4 installments.
2 (a )(ll) “Consumer".
1. Scope. Guarantors, endorsers, and

sureties are not generally consumers for
purposes of the regulation, but they may
be entitled to rescind under certain
circumstances and they may have
certain rights if they are obligated on
credit card plans.
2. Rescission rules. For purposes of
rescission under §§ 226.15 and 226.23, a
consumer includes any natural person
whose qwnership interest in his or her
principal dwelling is subject to the risk
of loss. Thus, if a security interest is
taken in A’s ownership interest in a
house and that house is A’s principal
dwelling, A is a consumer for purposes
of rescission, even if A is not liable,
either primarily or secondarily, on the
underlying consumer credit transaction.
An ownership interest does not include,
for example, leaseholds or inchoate
rights, such as dower.
3. Land trusts. Credit extended to land
trusts, as described in the commentary
to § 226.3(a), is considered to be
extended to a natural person for
purposes of the definition of consumer.
2(a)(12) “Consumer c re d it”.
1. Prim ary purpose. There is no

precise test for what constitutes credit
offered or extended for personal, family,
or household purposes, nor for what
constitutes the primary purpose. See,
however, the discussion of business
purposes in the commentary to
§ 226.3(a).
2(a)(13) “Consummation".
1. S tate la w governs. When a
contractual obligation on the consumer’s
part is created is a matter to be
determined under applicable law;
Regulation Z does not make this
determination. Consummation does not
occur merely because the consumer has
made some financial investment in the
transaction (for example, by paying a
nonrefundable fee) unless, of course,
applicable law holds otherwise.
2. Credit v. sale. Consummation does
not occur when the consumer becomes
contractually committed to a sale
transaction, unless the consumer also
becomes legally obligated to accept a
particular credit arrangement. For
example, when a consumer pays a
nonrefundable deposit to purchase an
automobile, a purchase contact may be
created, but consummation for purposes
of the regulation does not occur unless
the consumer also contracts for
financing at that time.
2(af(14) “Credit”.

1. Exclusions. The following situations
are not considered credit for purposes of
the regulation:
• Layaway plans, unless the
consumer is contractually obligated
to continue making payments.
Whether the consumer is so
obligated is a matter to be
determined under applicable law.
The fact that the consumer is not
entitled to a refund of any amounts
paid towards the cash price of the
merchandise does not bring
layaways within the definition of
credit.
• Tax liens, tax assessments, court
judgments, and court approvals of
reaffirmation of debts in
bankruptcy. However, third-party
financing of such obligations (for
example, a bank loan obtained to
pay off a tax lien) is credit for
purposes of the regulation.
• Insurance premium plans that
involve payment in installments
with each installment representing
the payment for insurance coverage
for a certain future period of time,
unless the consumer is contractually
obligated to continue making
payments.
• Home improvement transactions
that involve progress payments, if
the consumer pays, as the work
progresses, only for work completed
and has no contractual obligation to
continue making payments.
• “Borrowing” against the accrued
cash vhlue of an insurance policy or
a pension account, if there is no
independent obligation to repay.
• Letters of credit.
• The execution of option contracts.
However, there may be an
extension of credit when the option
is exercised, if there is an
agreement at that time to defer
payment of a debt.
• Investment plans in which the party
extending capital to the consumer
risks the loss of the capital
advanced. This includes, for
example, an arrangement with a
home purchaser in which the
investor pays a portion of the
downpayment and of the periodic
mortgage payments in return for an
ownership interest in the property,
and shares in any gain or loss of
property value.
• Mortgage assistance plans
administered by a government
agency in which a portion of the
consumer’s monthly payment
amount is paid by the agency. No
finance charge is imposed on the
subsidy amount and that amount is
due in a lump-sum payment on a set

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
date or upon the occurrence of
certain events. (If payment is not
made when due, a new note
imposing a finance charge may be
written, which may then be subject
to the regulation.)
2(a)(15) "C redit ca rd ”.
1. U sable from tim e to time. A credit

card must be usable from time to time.
Since this involves the possibility of
repeated use of a single device, checks
and similar instruments that can be used
only once to obtain a single credit
extension are not credit cards.
2. Examples. Examples of credit cards
include:
• A card that guarantees checks or
similar instruments, if the asset
account is also tied to an overdraft
line or if the instrument directly
accesses a line of credit.
• A card that accesses both a credit
and an asset account (that is, a
debit-credit card).
• An identification card that permits
the consumer to defer payment on a
purchase.
• An identification card indicating
loan approval that is presented to a
merchant or to a lender, whether or
not the consumer signs a separate
promissory note for each credit
extension.
In contrast, credit card does not
include, for example, a check guarantee
or debit card with no credit feature or
agreement, even if the creditor
occasionally honors an inadvertent
overdraft.
2(a)(16) “C redit sale".
1. S pecial disclosure. If the seller is a

creditor in thfe transaction, the
transaction is a credit sale and the
special credit sale disclosures (that is,
the disclosures under § 226.18(j)) must
be given. This applies even if there is
more than one creditor in the
transaction and the creditor making the
disclosures is not the seller. See the
commentary to § 226*17(d).
2. Sellers who arrange credit. If the
seller of the property or services
involved arranged for financing but is
not a creditor as to that sale, the
transaction is not a credit sale. Thus, if a
seller assists the consumer in obtaining
a direct loan from a financial institution
and the consumer’s note is payable to
the financial institution, the transaction
is a loan and only the financial
institution is a creditor.
3. Refinancings. Generally, when a
credit sale is refinanced within the
meaning of § 226.20(a), loan disclosures
should be made. However, if a new sale
of goods or services is also involved, the
transaction is a credit sale.
4. Incidental sales. Some lenders
"sell” a product or service—such as

credit, property, or health insurance—as
part of a loan transaction. Section 226.4
contains the rules on whether the cost of
credit life, disability or property
insurance is part of the finance charge.
If the insurance is financed, it may be
disclosed as a separate credit sale
transaction or disclosed as part of the
primary transaction; if the latter
approach is taken, either loan or credit
sale disclosures may be made. See the
commentary to § 226.17(c)(1) for further
discussion of this point.
5.
C redit extensions fo r educational
purposes. A credit extension for
educational purposes in which an
educational institution is the creditor
may be treated as either a credit sale or
a loan, regardless of whether the funds
are given directly to the student,
credited to the student’s account, or
disbursed to other persons on the
student’s behalf. The disclosure of the
total sale price need not be given if the
transaction is treated as a loan.
2(a)(17) “Creditor".
1. General. The definition contains 5

independent tests. If any one of the tests
is met, the person is a creditor for
purposes of that particular test.
Paragraph 2(a)(17)(i).
1. Prerequisites. This test is composed

of 2 requirements, both of which must be
met in order for a particular credit
extension to be subject to the regulation
and for the credit extension to count
towards satisfaction of the numerical
tests mentioned in footnote 3 to
§ 226.2(a)(17). First, there must be either
or both of the following:
• A written (rather than oral)
agreement to pay in more than 4
installments. A letter that merely
confirms an oral agreement does
not constitute a written agreement
for purposes of the definition.
• A finance charge imposed for the
credit. The obligation to pay the
finance charge need not be in
writing.
Second, the obligation must be

payable to the person in order for that
person to be considered a creditor. If an
obligation is made payable to “bearer,”
the creditor is the one who initially
accepts the obligation.
2. A ssignees. If an obligation is
initially payable to one person, that
person is the creditor even if the
obligation by its terms is simultaneously
assigned to another person. For
example:
• An auto dealer and a bank have a
business relationship in which the
bank supplies the dealer with credit
sale contracts that are initially
made payable to the dealer and
provide for the immediate

50293

assignment of the obligation to the
bank. The dealer and purchaser
execute the contract only after the
bank approves the creditworthiness
of the purchaser. Because the
obligation is initially payable on its
face to the dealer, the dealer is the
only creditor in the transaction.
3. N um erical tests. The examples
below illustrate how the numerical tests
of footnote 3 are applied. The examples
assume that consumer credit with a
finance charge or written agreement for
more than 4 installments was extended
in the years in question and that the
person did not extend such credit in
1982.
4. Counting transactions. For purposes
of closed-end credit, the creditor counts
each credit transaction. For open-end
credit, "transactions” means accounts,
so that outstanding accounts are
counted instead of individual credit
extensions. Normally the number of
transactions is measured by the
preceding calendar year; if the requiste
number is met, then the person is a
creditor for all transactions in the
current year. However, if the person did
not meet the test in the preceding year,
the number of transactions is measured
by the current calendar year. For
example, if the person extends
consumer credit 26 times in 1983, it is a
creditor for purposes of the regulation
for the last extension of credit in 1983
and for all extensions of consumer
credit in 1984. On the other hand, if a
business begins in 1983 and extends
consumer credit 20 times, it is not a
creditor for purposes of the regulation in
1983. If the extends consumer credit 75
times in 1984, however, it becomes a
creditor for purposes of the regulation
(and must begin making disclosures)
after the 25th extension of credit in that
year and is a creditor for all extensions
of consumer credit in 1985.
5. R elationship betw een consum er
cred it in gen eral and cred it secu red b y a
dwelling. Extensions of credit secured

by a dwelling are counted towards the
25-extensions test. For example, if in
1983 a person extends unsecured
consumer credit 23 times and consumer
credit secured by a dwelling twice, it
becomes a creditor for the succeeding
extensions of credit, whether or not they
are secured by a dwelling. On the other
hand, extensions of consumer credit not
secured by a dwelling are not counted
towards the number of credit extensions
secured by a dwelling. For example, if in
1983 a person extends credit not secured
by a dwelling 8 times and credit secured
by a dwelling 3 times, it is not a creditor.
6. Effect o f satisfyin g one test. Once
one of the numerical tests is satisfied,

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the person is also a creditor for the other
type of credit. For example, in 1983 a
person extends consumer credit secured
by a dwelling 5 times. That person is a
creditor for all succeeding credit
extensions, whether they involve credit
secured by a dwelling or not.
7.
Trusts. In the case of credit
extended by trusts, each individual trust
is considered a separate entity for
purposes of applying the criteria. For
example:
• A bank is the trustee for 3 trusts:
Trust A makes 15 extensions of
consumer credit annually; Trust B
makes 10 extensions of consumer
credit annually; and Trust C makes
30 extensions of consumer credit
annually. Only Trust C is a creditor
for purposes of the regulation.
With regard to the trustee’s status, see
the commentary to § 226.2(a)(3).
Paragraph 2(a)(17)(ii).
1. Arranger o f credit. A person who is

an arranger of credit under § 226.2(a)(3)
is a creditor. The disclosures made by
the arranger should be based on the
assumption that the arranger and the
non-professional extender of credit are
the same person. See the commentary to
§ 226.3(a)(3).
Paragraph 2(a)(17)(iv).
1. Card issuers su bject to Subpart B.

Section 226.2(a)(17)(iv) makes certain
card issuers creditors for purposes of the
open-end credit provisions of the
regulation. This includes, for example,
the issuers of so-called travel and
entertainment cards that expect
repayment at the first billing and do not
impose a finance charge. Since all
disclosures are to be made only as
applicable, such card issuers would omit
finance charge disclosures. Other
provisions of the regulation regarding
such areas as scope, definitions,
determination of which charges are
finance charges, Spanish language
disclosures, record retention, and use of
model forms, also apply to such card
issuers.
Paragraph 2(a)(17)(v).
1. Card issuers su bject to Subparts B
an d C. Section 226.2(a)(17)(v) includes

as creditors card issuers extending
closed-end credit in which there is a
finance charge or an agreement to pay in
more than 4 installments. These card
issuers are subject to the appropriate
provisions of Subparts B and C, as well
as to the general provisions.
2(a)(18) “D ow n paym ent”.
1. Allocation. If a consumer makes a

lump-sum payment, partially to reduce
the cash price and partially to pay
prepaid finance charges, only the
portion attributable to reducing the cash
price is part of the downpayment.

2. Pick-up payments. Creditors may
treat the deferred portion of the downpayment, often referred to as “pick-up
payments,” in a number of ways. If the
pick-up payment is treated as part of the
downpayment:

• It is subtracted in arriving at the
amount financed under § 226.18(b).
• It may, but need not, be reflected in
the payment schedule under

§ 226.18(g).
If the pick-up payment does not meet
the definition (for example, if it is
payable after the second regularly
scheduled payment) or if the creditor
chooses not to treat it as part of the
downpayment:
• It must be included in the amount
financed.
• It must be shown in the payment
schedule.

Whichever way the pick-up payment
is treated, the total of payments under
§ 226.18(h) must equal the sum of the
payments disclosed under § 226.18(g).
2(a)(19) "Dwelling".
1. Scope. A dwelling need not be the
consumer’s prin cip a l residence to fit the

definition and thus a vacation or second
home could be a dwelling. However, for
purposes of the definition of residential
mortgage transaction and the right to
rescind, a dwelling must be the principal
residence of the consumer. See the
commentary to §§ 226.2(a)(24), 226.15,
and 226.23.
2. Use as a residence. Mobile homes,
boats, and trailers are dwellings if they
are in fact used as residences, just as
are condominium and cooperative units.
Recreational vehicles, campers, and the
like not used as residences are not
dwellings.
3. Relation to exemptions. Any
transaction involving a security interest
in a consumer’s principal dwelling (as
well as in any real property) remains
subject to the regulation despite the
general exemption in § 226.3(b) for
credit extensions over $25,000.
2(a)(20) “O pen-end c re d it”.
1. General. This definition describes

the characteristics of open-end credit
(for which the applicable disclosure and
other rules are contained in Subpart B),
as distinct from closed-end credit. Openend credit is consumer credit that is
extended under a plan and meets a ll 3
criteria set forth in the definition.
2. Existence o f a plan. The defini tion
requires that there be a plan, whieh
connotes a contractual arrangement
between the creditor and the consumer.
Some creditors offer programs
containing a number of different credit
features. The consumer has a single
account with the institution that can be
accessed repeatedly via a number of

sub-accounts established for the
different program features and rate
structures. Some features of the program
might be used repeatedly (for example,
an overdraft line) while others might be
used infrequently (such as the part of
the credit line available for secured
credit). If the program as a whole is
subject to prescribed terms and
otherwise meets the definition of openend credit, such a program would be
considered a single, multi-featured plan.
3. R e p ea ted transactions. Under this
criterion, the creditor must reasonably
contemplate repeated transactions. This
means that the credit plan must be
usable from time to time and the
creditor must legitimately expect that
there will be repeat business rather than
a one-time credit extension. The creditor
must expect repeated dealings with the
consumer under the credit plan as a
whole, and need not believe the
consumer will reuse a particular feature
of the plan. A standard based on
reasonable belief by a creditor
necessarily includes some margin for
judgmental error. The fact that a
particular consumer does not return for
further credit extensions does not
prevent a plan from having been
properly characterized as open-end. For
example, if much of the customer base
of a clothing store makes repeat
purchases, the fact that some consumers
only use the plan once would not affect
the characterization of the store’s plan
as open-end credit. The criterion
regarding repeated transactions is a
question of fact to be decided in the
context of the creditor’s type of business
and the creditor’s relationship with the
consumer. For example:
• It would be more reasonable for a
thrift institution chartered for the
benefit of its members to
contemplate repeated transactions
with a member, than for a seller of
aluminum siding to make the same
assumption about its customers.
• It would be more reasonable for a
bank to make advances from a line
of credit for the purchase of an
automobile than for an automobile
dealer to sell a car under an openend plan.
4. Finance charge on an outstanding
balance. The requirement that a finance
charge may be computed and imposed
from time to time on the outstanding
balance means that there is no specific
amount financed for the plan for which
the finance charge, total of payments,
and payment schedule can be
calculated. A plan does not meet this
criterion if there is no possibility that a
periodic finance charge will be imposed

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
on the outstanding balance. Some plans,
such as certain "china club” plans,
feature free-ride periods if the consumer
pays all or a specified portion of the.
outstanding balance within a given time
period. For example, the creditor might
not impose finance charges in any
month in which the consumer pays Vio
of the balance. Thus, a plan could meet
this finance charge criterion even though
the consumer actually pays no finance
charges during the existence of the plan
because the consumer takes advantage
of the option to pay the balance (either
in its entirety or in installments) within
the time necessary to avoid finance
charges.
5. R eu sable lin e. The total amount of
credit that may be extended during the
existence of an open-end plan is
unlimited because available credit is
generally replenished as earlier
advances are repaid. A line of credit is
self-replenishing even though the plan
itself has a fixed expiration date, as long
as during the plan’s existence the
consumer may use the line, repay, and
reuse the credit without specific
approval for each extension (beyond
verification, for example, of credit
information such as the consumer’s
continued income and employment
status or of information for security
purposes). This criterion of unlimited
credit distinguishes open-end credit
from a series of advances made
pursuant to a closed-end credit loan
commitment. For example:
• Under a closed-end commitment,
the creditor might agree to lend a
total of $10,000 in a series of
advances as needed by the
consumer. When a consumer has
borrowed the full $10,000, no more
is advanced under that particular
agreement, even if there has been
repayment of a portion of the debt.
This criterion does not mean that the
creditor must establish a specific credit
limit for the line of credit or that the line
of credit must always be replenished to
its original amount. The creditor may
reduce a credit limit or refuse to extend
new credit in a particular case due to
changes in the economy, the creditor’s
financial condition, or the consumer’s
creditworthiness. While consumers
should have a reasonable expectation of
obtaining credit as long as they remain
current and within any preset credit
limits, further extensions of credit need
not be an absolute right in order for the
plan to meet the self-replenishing
criterion.
6. O pen-end r e a l esta te m ortgages.
Some credit plans call for negotiated
advances under so-called open-end real
estate mortgages. Each such plan must

be independently measured against the
definition of open-end credit, regardless
of the terminology used in the industry
to describe the plan. The fact that a
particular plan is called an open-end
real estate mortgage, for example, does
not, by itself, mean that it is open-end
credit under the regulation.
2(a)(21) "P eriodic r a te ”.
1. B asis. The periodic rate may be
stated as a percentage (for example,
1*4% per month) or as a decimal
equivalent (for example, .015 monthly).
It may be based on any portion of a year
the creditor chooses. Some creditors use
*3 60 of an annual rate as their periodic
rate. These creditors:
• May disclose a *460 rate as a
“daily” periodic rate, without
further explanation, if it is in fact
only applied 360 days per year. But
if the creditor applies that rate for
365 days, the creditor must note that
fact and, of course, disclose the true
annual percentage rate.
• Would have to apply the rate to the
balance to disclose the annual
percentage rate with the degree of
accuracy required in the regulation
(that is, within *4 of 1 percentage
point of the rate based on the actual
365 days in the year).
2. T ran saction ch arg es. "Periodic

rate” does not include initial one-time
transaction charges, even if the charge is
computed as a percentage of the
transaction amount.
2(a)(22) "Person".
1. Join t ventures. A joint venture is an
organization and is therefore a person.
2. A ttorneys. An attorney and his or
her client are considered to be the same
person for purposes of this regulation
when the attorney is acting within the
scope of the attorney-client relationship
with regard to a particular transaction.
3. Trusts. A trust and its trustee are
considered to be the same person for
purposes of this regulation.
2(a)(23) "P repaid fin a n ce charge".
1. G eneral. Prepaid finance charges
must be taken into account under
§ 226.18(b) in computing the disclosed
amount financed, and must be disclosed
if the creditor provides an itemization of
the amount financed under § 226.18(c).
2. E xam ples. Common examples of
prepaid finance charges include:
• Buyer’s points.
• Service fees.
• Loan fees.
• Finder’s fees.
• Loan guarantee insurance.
• Credit investigation fees.
However, in order for these or any
other finance charges to be considered
prepaid, they must either be paid
separately in cash or check or withheld
from the proceeds.

50295

3. E xclusions. “Add-on” and
“discount” finance charges are not
prepaid finance charges for purposes of
this regulation. Finance charges are not
“prepaid” merely because they are
precomputed, whether or not a portion
of the charge will be rebated to the
consumer upon prepayment. See the
dommentary to § 226.18(b).
2(a)(24) " R esid en tial m ortgage
tran saction ",
1. R elation to o th er sectio n s. This
term is important in 5 provisions in the
regulation:
• Section 226.4(c)(7)— exclusions from
the finance charge.
• Section 226.15(f)— exemption from
the right of rescission.
• Section 226.18(q)—whether or not
the obligation is assumable.
• Section 226.19— special timing rules.
• Section 226.23(f)—exemption from
the right of rescission.
2. L ien status. The definition is not
limited to first lien transactions. For
example, a consumer might assume a
paid-down first mortgage (or borrow
part of the purchase price) and borrow
the balance of the purchase price from a
creditor who takes a second mortgage.
The second mortgage transaction is a
“residential mortgage transaction” if the
dwelling purchased is the consumer’s
principal residence.
3. P rin cip al dw elling. A consumer can
only have on e principal dwelling at a
time. Thus, a vacation or other second
home would not be a principal dwelling.
However, if a consumer buys or builds a
new dwelling that will become the
consumer’s principal dwelling within a
year or upon the completion of
construction, the new dwelling is
considered the principal dwelling for
purposes of applying this definition to a
particular transaction. See the
commentary to §§ 226.15(a) and
226.23(a).
4. C onstruction fin an cin g. If a
transaction meets the definition of a
residential mortgage transaction and the
creditor chooses to disclose it as several
transactions under § 226.17(c)(6), each
one is considered to be a residential
mortgage transaction, even if different
creditors are involved. For example:
• The creditor makes a construction
loan to finance the initial
construction of the consumer’s
principal dwelling, and the loan will
be disbursed in 5 advances. The
creditor gives 6 sets of disclosures
(5 for the construction phase and 1
for the permanent phase). Each one
is a residential mortgage
transaction.
• One creditor finances the initial
construction of the consumer’s

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

principal dwelling and another
creditor makes a loan to satisfy the
construction loan and provide
permanent financing. Both
transactions are residential
mortgage transactions.
2(a)(25) “S ecu rity in terest”.
1. T h resh old test. The threshold test is
whether a particular interest in property
is recognized as a security interest
under applicable law. The regulation
does not determine whether a particular
interest is a security interest under
applicable law. If the creditor is unsure
whether a particular interest is a
security interest under applicable law
(for example, if statutes and case law
are either silent or inconclusive on the
issue), the creditor may at its option
consider such interests as security
interests for Truth in Lending purposes.
However, the regulation and the
commentary do exclude specific
interests, such as after-acquired
property and accessories, from the
scope of the definition regardless of
their categorization under applicable
law, and these named exclusions may
not be disclosed as security interests
under the regulation.
2. E xclu sion s. The general definition
of security interest excludes three
groups of interests: incidental interests,
interests in after-acquired property, and
interests that arise solely by operation
of law. These interests may not be
disclosed with the disclosures required
under § 226.18, but the creditor is not
precluded from preserving these rights
elsewhere in the contract documents, or
invoking and enforcing such rights, if it
is otherwise lawful to do so.
3. In cid en tal in terests. Incidental
interests in property that are not
security interests include, among other
things:
• Assignment of rents.
• Right to condemnation proceeds.
• Interests in accessories and
replacements.
• Interests in escrow accounts, such
as for taxes and insurance.
• Waiver of homestead or personal
property rights.
The notion of an "incidental interest”
does not encompass an explicit security
interest in an insurance policy if that
policy is the primary collateral for the
transaction—for example, in an
insurance premium financing
transaction.
4. O peration o f law . Interests that
arise solely by operation of law are
excluded from the general definition.
Also excluded are interests arising by
operation of law that are merely
repeated or referred to in the contract.
However, if the creditor has an interest

that arises by operation of law, such as
a vendor’s lien, and takes an
independent security interest in the
same property, such as a UCC security
interest, the latter interest is a
disclosable security interest unless
otherwise provided.
5.
R escission ru les. Security interests
that arise solely by operation of law are
security interests for purposes of
rescission. Examples of such interests
are mechanics’ and materialmen’s liens.
2(b) R u les o f constru ction .
1.
F ootn otes. Footnotes are used
extensively in the regulation to provide
special exceptions and more detailed
explanations and examples. Material
that appears in a footnote has the same
legal weight as material in the body of
the regulation.
References
S tatu te: Sec. 103.
O ther sectio n s: None.
O ther reg u lation s: Regulation E (12
CFR 205.2(d)).
P reviou s reg u lation : §§ 226.2, 226.8,
and 226.9.
1981 ch an g es: Section 226.2
implements amended § 103 of the act.
Separate definitions for “comparative
index of credit cost,” “discount,”
“organization,” "period,” “real
property,” “real property transaction,”
“regular price,” and “surcharge” have
been deleted. The definitions relating
specifically to consumer leases are now
found in the separate consumer leasing
regulation, Regulation M (12 CFR Part
213).
Several terms are now defined
elsewhere in the regulation or
commentary rather than in § 226.2. For
example, “finance charge” is described
and explained in § 226.4, and “agricultural purpose" is discussed in
the commentary to § 226.3. Some terms,
such as “unauthorized use,” are now
defined as part of the substantive
sections to which they apply. Other
terms previously defined, such as
customer “organization,” are merged
into new definitions. Section 226.2
contains new definitions for “arranger of
credit,” “business day," “closed-end
credit,” “consumer," “consummation,”
“downpayment,” “prepaid finance
charge,” and "residential mortgage
transaction.”
The major changes in the definitions
are as follows:
"Arranger of credit” has a
significantly different meaning. It
reflects the statutory amendment that
limits “arrangers” to those who
regularly arrange credit extensions for
persons who are not themselves
creditors.

“Billing cycle” largely restates the
prior definition, but requires cycles to be
regular, and allows the four-day
variance to be measured from a regular
day as well as date. The definition also
incorporates an interpretation that
cycles may be no longer than quarterly.
"Business day” is new in the sense
that the term previously appeared only
in a footnote to the rescission provision,
but it is now of general applicability.
*
The general rule that it is a day when
the creditor is open for business is new,
but the rule for rescission purposes is
the same as in the previous regulation.
“Cash price” now explicitly permits
inclusion of various incidental charges
imposed equally in cash and credit
transactions.
“Consumer” has a narrower meaning
in that guarantors, sureties, and
endorsers are excluded from the general
definition.
“Consumer credit” reflects the new
statutory exemption for agricultural
credit.
“Consummation” is a significant
departure from longstanding
interpretations of the previous
definition. It now focuses only on the
time the consumer becomes
contractually obligated, rather than the
tipie the consumer pays a nonrefundable
fee or suffers an economic penalty for
failing to go forward with the credit
transaction.
“Credit” generally parallels the
previous definition, but modifies the
previous interpretations of the definition
by excluding more transactions.
“Creditor” reflects the statutory
amendments to the act that were
intended to eliminate the problem of
multiple creditors in a transaction. The
“regularly” standard is still used, but it
is now defined in terms of the frequency
of the credit extensions. The new
definition also requires that there be a
w ritten agreement to pay in more than 4
installments if no finance charge is
imposed. Finally, the obligation must be
initially payable to a person for that
person to be the creditor.
“Dwelling” reflects the statutory
amendment that expanded the scope of
the definition to include an y residential
structure, whether or not it is real
property under state law.
“Open-end credit” reflects the
amended statutory definition requiring
that the creditor reasonably contemplate
repeated transactions. The new
definition no longer requires the
consumer to have the privilege of paying
either in installments or in full.
"Periodic rate” combines the previous
definitions of "period" and “periodic
rate” with clarification in the

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
commentary concerning transaction
charges and 360^-day-year factors.
"Security interest” is much narrower
than the previous definition. Reflecting
the legislative history of the
simplification amendments, incidental
interests are expressly excluded from
the definition. Except for purposes of
rescission, interests that arise solely by
operation of law are also excluded.
S ection 226.3—E xem pt T ran saction s
3 (a) B usiness, com m ercial,
agricultural, o r org an ization al credit.
1. P rim ary pu rposes. A creditor must
determine in each case if the transaction
is primarily for an exempt purpose. If
some question exists as to the primary
purpose for a credit extension, the
creditor is, of course, free to make the
disclosures, and the fact that disclosures
are made under such circumstances is
not controlling on the question of
whether the transaction was exempt.
2. F actors. In determining whether
credit to finance an acquisition—such as
securities, antiques, or art—is primarily
for business or commercial purposes (as
opposed to a consumer purpose), the
following factors should be considered:
• The relationship of the borrower’s
primary occupation to the
acquisition. The more closely
related, the more likely it is to be
business purpose.
• The degree to which the borrower
will personally manage the
acquisition. The more personal
involvement there is, the more likely
it is to be business purpose.
• The ratio of income from the
acquisition to the total income of
the borrower. The higher the ratio,
the more likely it is to be business
purpose.
• The size of the transaction. The
larger the transaction, the more
likely it is to be business purpose.
• The borrower’s statement of
purpose for the loan.
Examples of business-purpose credit
include:
• A loan to expand a business, even if
it is secured by the borrower’s
residence or personal property.
• A loan to improve a principal
residence by putting in a business
office.
• A business account used
occasionally for consumer purposes.
Examples of consumer-purpose credit
include:
• Credit extensions by a company to
its employees or agents if the loans
are used for personal purposes.
• A loan secured by a mechanic’s
tools to pay a child's tuition.
• A personal account used

occasionally for business purposes.
3. N on -ow n er-occu pied ren ta l
property. Credit extended to acquire,
improve, or maintain rental property
(regardless of the number of housing
units) that is not owner-occupied is
deemed to be for business purposes.
This includes, for example, the
acquisition of a warehouse that will be
leased or a single-family house that will
be rented to another person to live in. If
the owner expects to occupy the
property for mote than 14 days during
the coming year, the property cannot be
considered non-owner-occupied and this
special rule will not apply. For example,
a beach house that the owner will
occupy for a month in the coming
summer and rent out the rest of the year
is owner occupied and is not governed
by this special rule. See Comment 3(a)4, however, for rules relating to owneroccupied rental property.
4. O w n er-occu pied ren ta l prop erty . If
credit is extended to acquire, improve,
or maintain rental property that is or
will be owner-occupied within the
coming year, different rules apply:
• Credit extended to acquire the
rental property is deemed to be for
business purposes if it contains
more than 2 housing units.
• Credit extended to improve or
maintain the rental property is
deemed to be for business purposes
if it contains more than 4 housing
units. Since the amended statute
defines "dwelling” to include 1 to 4
housing units, this rule preserves
the right of rescission for credit
extended for purposes other than
acquisition.
Neither of these rules means that an
extension of credit for property
containing fewer than the requisite
number of units is necessarily consumer
credit. In such cases, the determination
of whether it is business or consumer
credit should be made by considering
the factors listed in Comment 3(a)-2.
5. B u sin ess cred it la te r refin an ced .
Business-purpose credit that is exempt
from the regulation may later be
rewritten for consumer purposes. Such a
transaction is consumer credit requiring
disclosures only if the existing
obligation is satisfied and replaced by a
new obligation made for consumer
purposes undertaken by the same
obligor.
6. A gricu ltural pu rpose. An
“agricultural purpose” includes the
planting, propagating, nurturing,
harvesting, catching, storing, exhibiting,
marketing, transporting, processing, or
manufacturing of food, beverages
(including alcoholic beverages), flowers,
trees, livestock, poultry, bees, wildlife,

50297

fish, or shellfish by a natural person
engaged in farming, fishing, or growing
crops, flowers, trees, livestock, poultry,
bees, or wildlife. The exemption also
applies to a transaction involving real
property that includes a dwelling (for
example, the purchase of a farm with a
homestead) if the transaction is
primarily for agricultural purposes.
7. O rgan ization al cred it. The
exemption for transactions in which the
borrower is not a natural person applies,
for example, to loans to corporations,
partnerships, associations, churches,
unions, and fraternal organizations. The
exemption applies regardless of the
purpose of the credit extension and
regardless of the fact that a natural
person may guarantee or provide
security for the credit.
8. L an d trusts. Credit extended for
consumer purposes to a land trust is
considered to be credit extended to a
natural person rather than credit
extended to an organization. In some
jurisdictions, a financial institution
financing a residential real estate
transaction for an individual uses a land
trust mechanism. Title to the property is
conveyed to the land, trust for which the
financial institution itself is trustee. The
underlying installment note is executed
by the financial institution in its
capacity as trustee and payment is
secured by a trust deed, reflecting title
in the financial institution as trustee. In
some instances, the consumer executes
a personal guaranty of the indebtedness.
The note provides that it is payable only
out of the property specifically
described in the trust deed and that the
trustee has no personal liability on the
note. Assuming the transactions are for
personal, family, or household purposes,
these transactions are subject to the
regulation since in substance (if not
form) consumer credit is being extended.
3(b) C redit o v er $25,000 n ot sec u red
b y r e a l p rop erty o r a dw elling.
1. C overage. Since a mobile home can
be a dwelling under § 226.2(a)(19), this
exemption does not apply to a credit
extension secured by a mobile home
used or expected to be used as the
principal dwelling of the consumer, even
if the credit exceeds $25,000. A loan
commitment for closed-end credit in
excess of $25,000 is exempt even though
the amounts actually drawn never
actually reach $25,000.
2. O pen-end credit. An open-end
credit plan is exempt under § 226.3(b)
(unless secured by real property or
personal property used or expected to
be used as the consumer’s principal
dwelling) if either of the following
conditions is met:
• The creditor makes a firm

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

commitment to lend over $25,000
with no requirement of additional
credit information for any advances.
• The initial extension of credit on the
line exceeds $25,000.
3. R efin an ced oblig ation s. A closedend loan for over $25,000 may later be
rewritten for less than $25,000 or a
security interest in real property may be
added to an extension of credit for over
$25,000. Such a transaction is consumer
credit requiring disclosures only if the
existing obligation is satisfied and
replaced by a new obligation made for
consumer purposes undertaken by the
same obligor.
3(c) P u blic u tility cred it.
1.
E xam ples. Examples of public
utility services include:
• Gas, water, or electrical services.
• Cable television services.
• Installation of new sewer lines,
water lines, conduits, telephone
poles, or metering equipment in an
area not already serviced by the
utility.
The exemption does n ot apply to
extensions of credit, for example:
• To purchase appliances such as gas
or electric ranges, grills, or
telephones.
• To finance home improvements
such as new heating or air
conditioning systems.
3(d) S ecu rities o r com m od ities
accou n ts.
1.
C overage. This exemption does not
apply to a transaction with a broker
registered solely with the state, or to a
separate credit extension in which the
proceeds are used to purchase securities.
3 (e) H om e fu e l bu dget p lan s.
1.
D efinition. Under a typical home
fuel budget plan, the fuel dealer
estimates the total cost of fuel for the
season, bills the customer for an average
monthly payment, and makes an
adjustment in the final payment for any
difference between the estimated and
the actual cost of the fuel. Fuel is
delivered as needed, no finance charge
is assessed, and the customer may
withdraw from the plan at any time.
Under these circumstances, the
arrangement is exempt from the
regulation, even if a charge to cover the
billing costs is imposed.
References
S tatu te: Secs. 103 (s) and (t) and 104.
O ther sectio n s: § 226.12 (a) and (b).
P reviou s regu lation : § 226.3 and
Interpretations §§226.301 and 226.302.
1981 ch an g es: The business credit
exemption has been expanded to
include credit for agricultural purposes.
The rule of Interpretation § 226.302,

http://fraser.stlouisfed.org/
L
Federal
Reserve Bank of St. Louis

concerning credit relating to structures
containing more than 4 housing units,
has been modified and somewhat
expanded by providing more exclusions
for transactions involving rental
property.
The exemption for transactions above
$25,000 secured by real estate has been
narrowed; all transactions secured by
the consumer’s principal dwelling (even
if not considered real property) are now
subject to the regulation.
The public utility exemption now
covers the financing of the extension of
a utility into an area not earlier served
by the utility, in addition to the
financing of services.
The securities credit exemption has
been extended to broker-dealers
registered with the CFTC as well as the
SEC.
A new exemption has been created
for home fuel biidget plans.
S ection 226.4—F in an ce C harge
4(a) D efinition.
1. C harges in co m p arab le ca sh
tran saction s. Charges imposed
uniformly in cash and credit
transactions are not finance charges. In
determining whether an item is a
finance charge, the creditor should
compare the credit transaction in
question with a similar cash transaction.
A creditor financing the sale of property
or services may compare charges with
those payable in a similar cash
transaction by the seller of the property
or service. For example, the following
items are not finance charges:
• Taxes, license fees, or registration
fees paid by both cash and credit
customers.
• Discounts that are available to cash
and credit customers, such as
quantity discounts.
• Discounts available to a particular
group of consumers because they
meet certain criteria, such as being
members of an organization or
having accounts at a particular
financial institution. This is the case
even if an individual must pay cash
to obtain the discount, provided
credit customers who are members
of the group and don’t qualify for
the discount pay no more than the
non-member cash customers.
• Charges for a service policy, auto
club membership, or policy of
insurance against latent defects
offered to or required of both cash
and credit customers for the same
price.
In contrast, the following items are
finance charges:
• Inspection and handling fees for the
staged disbursement of construction

loan proceeds.
• Fees for preparing a Truth in
Lending disclosure statement.
• Charges for a required maintenance
or service contract imposed only in
a credit transaction.
If the charge in a credit transaction
exceeds the charge imposed in a
comparable cash transaction, only the
difference is a finance charge. For
example:
• If an escrow agent is used in both
cash and credit sales of real estate
and the agent’s charge is $100 in a
cash transaction and $150 in a
credit transaction, only $50 is a
finance charge.
2. C osts o f doing bu sin ess. Charges
absorbed by the creditor as a cost of
doing business are not finance charges,
even though the creditor may take such
costs into consideration in determining
the interest rate to be charged or the
cash price of the property or service
sold. However, if the creditor separately
imposes a charge on the consumer to
cover certain costs, the charge is a
finance charge if it otherwise meets the
definition. For example:
• A discount imposed on a credit
obligation when it is assigned by a
seller-creditor to another party is
not a finance'charge as long as the
discount is not separately imposed
on the consumer. (See § 226.4(b)(6).)
3. C harges b y th ird p arties. Charges
imposed by someone other than the
creditor for services that are not
required by the creditor are not finance
charges. For example:
• A fee charged by a loan broker to a
consumer, provided the creditor
does not require the use of a broker
(even if the creditor knows of the
loan broker’s involvement or
compensates the loan broker).
• A tax imposed by a state or other
governmental body on the credit
transaction that is payable by the
consumer (even if the tax is
collected by the creditor).
4. F orfeitu res o f in terest. If the
creditor reduces the interest rate it pays
or stops paying interest on the
consumer’s deposit account or any
portion of it for the term of a credit
transaction (including, for example, an
overdraft on a checking account or a
loan secured by a certificate of deposit),
the interest lost is a finance charge. (See
the commentary to § 226.4(c)(6).) For
example:
• A consumer borrows $5,000 for 90
days and secures it with a $10,000
certificate of deposit paying 15%
interest. The creditor charges the

Federal Register / Vol. 46, No. 196 / Friday,. October 9, 1981 / Rules and Regulations
consumer and interest rate of 6% on
the loan and stops paying interest
on $5,000 of the $10,000 certificate
for the term of the loan. The interest
lost is a finance charge and must be
reflected in the annual percentage
rate on the loan.
However, the consumer must be
en titled to the interest that is not paid in
order for the lost interest to be a finance
charge. For example:
• A consumer wishes to buy from a
financial institituion a $10,000
certificate of deposit paying 15%
interest but has only $4,000. The
financial institution offers to lend
the consumer $6,000 at an interest
rate of 6%, but will pay the 15%
interest only on the amount of the
consumer’s deposit, $4,000. The
creditor’s failure to pay interest on
the $6,000 does not result in an
additional finance charge on the
extension of credit, provided the
consumer is entitled by the deposit
agreement with the financial
institution to interest only on the
amount of the consumer’s deposit.
• A consumer enters into a combined
time deposit/credit agreement with
a financial institution that
establishes a time deposit account
and an open-end line of credit. The
line of credit may be used to borrow
against the funds in the time
deposit. The agreement provides for
an interest rate on any credit
extension of, for example, 1%. In
addition, the agreement states that
the consumer will pay 0% interest
.
on the amount of the time deposit
that corresponds to the amount of
the credit extension(s). The interest
that is not paid on the time deposit
by the financial institution is not a
finance charge (and therefore does
not affect the annual percentage
rate computation).
4(b) E xam ples o f fin a n ce ch arges.
1.
R elation sh ip to oth er p rov ision s.
Charges or fees shown as examples of
finance charges in § 226.4(b) may be
excludable under § 226.4(c), (d), or (e).
For example:
• Premiums for credit life insurance,
shown as an example of a finance
charge under § 226.4(b)(7), may be
excluded if the requirements of
§ 226.4(d)(1) are met.
• Appraisal fees mentioned in
§ 226.4(b)(4) are excluded for real
property or residential mortgage
transactions under § 226.4(c)(7).
P aragraph 4(b)(2).
1.
C heckin g accou n t ch arg es. The
checking or transaction account charges
discussed in § 226.4(b)(2) include, for
example, the following situations:

• An account with an overdraft line of
credit incurs a $4.50 service charge
while an account without a credit
feature has a $2.50 service charge;
the $2.00 difference is a finance
charge. If the difference is not
related to account activity,
however, it may be excludable as a
participation fee. (See the
commentary to § 226.4(c)(4).)
• A service charge of $5.00 for each
item that triggers an overdraft credit
line is a finance charge. However, a
charge imposed uniformly for any
item that overdraws a checking
account, regardless of whether the
items are paid or returned and
whether the account has a credit
feature or not, is not a finance
charge.
P aragraph 4(b)(3).
1.
A ssum ption fe e s . The assumption
fees mentioned in § 226.4(b)(3) are
finance charges only when the
assumption occurs and the fee is
imposed on the new buyer. The
assumption fee is a finance charge in the
new buyer’s transaction.
P aragraph 4(b)(5).
1.
C redit lo ss in su ran ce. Common
examples of the insurance against credit
loss mentioned in § 226.4(b)(5) are
mortgage guaranty insurance, holder in
due course insurance, and repossession
insurance. Such premiums must be
included in the finance charge only for
the period that the creditor requires the
insurance to be maintained.
P aragraphs 4(b) (7) an d (8).
1. P re-existin g in su ran ce p olicy . The
insurance discussed in § 226.4(b) (7) and
(8) does not include an insurance policy
(such as a life or an automobile collision
insurance policy) that is already owned
by the consumer, even if the policy is
assigned to or otherwise made payable
to the creditor to satisfy an insurance
requirement. Such a policy is not
“written in connection with” the
transaction, as long as the insurance
was not purchased for use in that credit
extension, since it was previously
owned by the consumer.
2. Insu ran ce w ritten a fter
consum m ation. In closed-end credit
transactions, insurance sold after
consummation is not “written in
connection with” the credit transaction
if the insurance is written because of the
consumer's default (for example, by
failing to obtain or maintain required
property insurance) or because the
consumer requests insurance after
consummation (although credit sale
disclosures may be required for the
insurance if it is financed).
3. Substitution o f life in su ran ce. The
premium for a life insurance policy

50299

purchased and assigned to satisfy a
credit life insurance requirement must
be included in the finance charge, but
only to the extent of the cost of the
credit life insurance if purchased from
the creditor or the actual cost of the
policy (if that is less than the cost of the
insurance available from the creditor). If
the creditor does not offer the required
insurance, the premium to be included in
the finance charge is the cost of a policy
of insurance of the type, amount, and
term required by the creditor.
4.
O ther in su ran ce. Fees for required
insurance not of the types described in
§ 226.4(b) (7) and (8) are finance charges
and are not excludable. For example:
• The premium for a hospitalization
insurance policy, if it is required to
be purchased only in a credit
transaction, is a finance charge.
P aragraph 4(b)(9).
1. D iscou nts fo r p ay m en t b y o th er
than cred it. The discounts to induce
payment by other than credit mentioned
in § 226.4(b)(9) include, for example, the
following situation:
• The seller of land offers individual
tracts for $10,000 each. If the
purchaser pays cash, the price is
$9,000, but if the purchaser finances
the tract with the seller the price is
$10,000. The $1,000 difference is a
finance charge for those who buy
the tracts on credit.
2. E xception fo r ca sh discou n ts.
Discounts offered to induce consumers
to pay for property or services by cash,
check, or other means not involving the
use of either an open-end credit plan or
a credit card (whether open-end or
closed-end credit is extended on the
card) may be excluded from the finance
charge under § 167(b) of the act (as
amended by Pub. L. 97-25, July 27,1981).
The discount may be in whatever
amount the seller desires, either as a
percentage of the regular price (as
defined in § 103(z) of the act, as
amended) or a dollar amount. This
provision applies only to transactions
involving an open-end credit plan or a
credit card. The merchant must offer the
discount to prospective buyers whether
or not they are cardholders or members
of the open-end credit plan. The
merchant may, however, make other
distinctions. For example:
• The merchant may limit the
discount to payment by cash, and
not offer it for payment by check or
by use of a debit card.
• The merchant may establish a
discount plan that allows a 15%
discount for payment by cash, a 10%
discount for payment by check, and
a 5% discount for payment by a

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interest to the amount of the overdraft is
particular credit card. None of these
riot a finance charge, even though the •
discounts is a finance charge.
consumer agrees to the charge in the
Section 171(c) of the act excludes
account agreement, unless the financial
§ 167(b) discounts from treatment as a
institution agrees in writting that it will
finance charge or other charge for credit
pay such items.
under any state usury or disclosure
P aragraph 4(c)(4).
laws.
1. P articip ation fe e s . The participation
4(c) C harges ex clu d ed from th e
fees mentioned in § 226.4(c)(4) do not
fin a n ce charge.
necessarily have to be formal
P aragraph 4(c)(1).
1.
A p p lication fe e s . An application feemembership fees, nor are they limited to
credit card plans. The provision applies
that is excluded from the finance charge
to any credit plan in which payment of a
is a charge to recover the costs
fee is a condition of access to the plan
associated with processing applications
itself, but it does not apply to fees
for credit. The fee may cover the costs of
imposed separately on individual
services such as credit reports, credit
closed-end transactions. The fee may be
investigations, and appraisals. The
charged on a monthly or other periodic
creditor is free to impose the fee in only
basis as well as annually; however,
certain of its loan programs, such as
minimum monthly charges or other
mortgage loans, However, if the fee is to
charges based on current account
be excluded from the finance charge
activity are not excluded from the
under § 226.4(c)(lJ, it must be charged to
finance charge by § 226.4(c)(4). (See the
all applicants, not just to applicants who
commentary to § 226.4(b)(2).)
are approved or who actually receive
P aragraph 4(c)(5).
credit.
1. S e lle r ’s poin ts. The seller’s points
P aragraph 4(c)(2).
mentioned in § 226.4(c)(5) include any
1. L ate p ay m en t ch arg es. Late
charges imposed by the creditor upon
payment charges can be excluded from
the non-creditor seller of property for
the finance charge under § 226.4(c)(2)
providing credit to the buyer or for
whether or not the person imposing the
providing credit on certain terms. These
charge continues to extend credit on the
charges are excluded from the finance
account or continues to provide property
charge even if they are passed on to the
or services to the consumer. In
buyer, for example, in the form of a
determining whether a charge is for
higher sales price". Seller’s points are
actual unanticipated late payment on a
frequently involved in real estate
30-day account, for example, factors to
transactions guaranteed or insured by
be considered include:
governmental agencies. A “commitment
• The terms of the account. For
fee” paid by a non-creditor seller (such
example, is the consumer required
as a real estate developer) to the
by the account terms to pay the
creditor should be treated as seller’s
account balance in full each month?
points. Buyer’s points (that is, points
If not, the charge may be a finance
charged to the buyer by the creditor),
charge.
however, are finance charges.
• The practices of the creditor in
P aragraph 4(c)(6).
handling the accounts. For example,
1. L ost in terest. Certain federal and
regardless of the terms of the
state laws mandate a percentage
account, does the creditor allow
differential between the interest rate
consumers to pay the accounts over
paid on a deposit and the rate charged
a period of time without demanding
on a loan secured by that deposit. In
payment in full or taking other
some situations because of usury limits
action to collect? If no effort is
the creditor must reduce the interest rate
made to collect the full amount due,
paid on the deposit and, as a result, the
the charge may be a finance charge.
consumer loses some of the interest that
Section 226.4(c)(2) applies to late
would otherwise have been earned.
payment charges imposed for failure to
Under § 226.4(c)(6), such “lost interest”
need not be included in the finance
make payments as agreed, as well a
failure to pay an account in full when
charge. This rule applies only to an
interest reduction imposed because a
due.
2. Other ex clu d ed ch arg es. Charges
rate differential is required by law and a
for “delinquency, default, or a similar
usury limit precludes compliance by any
other means. If the creditor imposes a
occurrence” include, for example,
charges for reinstatement of credit
differential that exceeds that required,
only the lost interest attributable to the
privileges or for summitting as payment
excess amount is a finance charge. (See
a check that is later returned unpaid.
the commentary to §226.4(a).)
P aragraph 4(c)(3).
P aragraph 4(c)(7).
1. A ssessin g in terest on an ov erd raft
1. R ea l esta te or resid en tia l m ortgage
b a la n ce. A charge on an overdraft
tran saction charges. The list of charges
balance computed by applying a rate of

in § 226.4(c)(7) applies both to
residential mortgage transactions
(which may include, for example, the
purchase of a mobile home) and to other
transactions secured by real estate. The
fees are excluded from the finance
charge even if the services for which the
fees are imposed are performed by the
creditor’s employees rather than by a
third party. In addition, credit report
fees include not only the cost of the
report itself, but also the cost of
verifying information in the report. In all
cases, the charges must be bona fide
and reasonable. If a Lump sum is
charged for several services and
includes a charge that is not excludable
(for example, a charge for a lawyer’s
attending the closing), a portion of the
total should be allocated to that service
and included in the finance charge.
4(d) Insu ran ce.
1. G en eral. Section 226.4(d) permits
insurance premiums and charges to be
excluded from the finance charge. The
required disclosures must be made in
writing. The rules on location of
insurance disclosures for closed-end
transactions are in § 226.17(a).
2. Timing o f d isclosu res. If disclosures
are given early, for example under
§ 226.17(f) or § 226.19(a), the creditor
need not redisclose if the actual
premium is different at the time of
consummation. If insurance disclosures
are not given at the time of early
disclosure and insurance is in fact
written in connection with the
transaction, the disclosures under
§ 226.4(d) must be made in order to
exclude the premiums from the finance
charge.
3. Prem ium ra te in crea ses. The
creditor should disclose the premium
amount based on the rates currently in
effect and need not designate it as an
estimate even if the premium rates may
increase. An increasejn insurance rates
after consummation of a closed-end
credit transaction or during the life of an
open-end credit plan does not require
redisclosure in order to exclude the
additional premium from treatment as a
finance charge.
4. U nit-cost d isclosu res. One of the
transactions for which unit-cost
disclosures (such as 50 cents per year
for each $100 of the amount financed)
may be used in place of the total
insurance premium involves a particular
kind of insurance plan. For example, a
consumer with a current indebtedness of
$8,000 is covered by a plan of credit life
insurance coverage with a maximum of
$10,000. The consumer requests an
additional $4,000 loan to be covered by
the same insurance plan. Since the
$4,000 loan exceeds, in part, the

■

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
maximum amount of indebtedness that
can be covered by the plan, the creditor
may properly give the insurance cost
disclosures on the $4,000 loan on a unitcost basis.
5. R equ ired cred it life in suran ce.
Credit life, accident, health, or loss-ofincome insurance must be voluntary in
order for the premiums or charges to be
excluded from the finance charge.
Whether the insurance is in fact
required or optional is a factual
question. If the insurance is required, the
premiums must be included in the
finance charge, whether the insurance is
purchased from the creditor or from a
third party. If the only option the
creditor gives the consumer is to
purchase credit life insurance from the
creditor or to assign an existing life
insurance policy, and the consumer
purchases the credit life insurance, the
premium must be included in the finance
charge. (If the consumer assigns a pre
existing policy instead, no premium is
included in the finance charge. See the
commentary to § 226.4(b)(7) and (8).)
6. O ther types o f voluntary in suran ce.
Insurance is not credit life, accident,
health, or loss-of-income insurance if the
creditor or the credit account of the
consumer is not the beneficiary of the
insurance coverage. If such insurance is
not required by the creditor as an
incident to or a condition of credit, it is
not covered by § 226.4.
7. Signatures. If the creditor offers a
number of insurance options under
§ 226.4(d), the creditor may provide a
means for the consumer to sign or initial
for each option, or it may provide for a
single authorising signature or initial
with the options selected designated by
some other means, such as a check
mark. The insurance authorization may
be signed or initialed by any consumer,
as defined in § 226.2(a)(ll), or by an
authorized user on a credit card
account.
8. P roperty in suran ce. To exclude
property insurance premiums or charges
from the finance charge, the creditor
must allow the consumer to choose the
insurer and disclose that fact. This
disclosure must be made whether or not
the property insurance is available from
or through the creditor. The requirement
that an option be given does not require
that the insurance be readily available
from other sources. The premium or
charge must be disclosed only if the
consumer elects to purchase the
insurance from the creditor; in such a
case, the creditor must also disclose the
term of the property insurance coverage
if it is less than the term of the
obligation.
9. S ingle in terest in suran ce, blanket
and specific single interest coverage are

treated the same for purposes of the
regulation. A charge for either type of
single interest insurance may be
excluded from the finance charge if:
• The insurer waives any right of
subrogation.
• The other requirements of
§ 226.4(d)(2) are met. This includes,
of course, giving the consumer the
option of obtaining the insurance
from a person of the consumer’s
choice. The creditor need not
ascertain whether the consumer is
able to purchase the insurance from
someone else.
10.
S ingle in terest in su ran ce d efin ed .
The term “single interest insurance” as
used in the regulation refers only to the
types of coverage traditionally included
in the term "vendor’s single interest
insurance” (or “VSI”), that is, protection
of tangible property against normal
property damage, concealment,
confiscation, conversion, embezzlement,
and skip. Some comprehensive
insurance policies may include a variety
of additional coverages, such as
repossession insurance and holder in
due course insurance. These types of
coverage do not constitute single
interest insurance for purposes of the
regulation, and premiums for them do
not qualify for exclusion from the
finance charge under § 226.4(d). If a
policy that is primarily VSI also
provides coverages that are not VSI or
other property insurance, a portion of
the premiums must be allocated to the
non-excludable coverages and included
in the finance charge.
4(e) C ertain secu rity in terest charges.
1. E xam ples. Examples of charges
excludable from the finance charge
under § 226.4(e)(1) include:
• Charges for filing or recording
security agreements, mortgages,
continuation statements,
termination statements, and similar
documents.
• Stamps evidencing payment of
taxes on property if the stamps are
required to file a security agreement
on the property.

Only sums actually paid to public
officials are excludable under
§ 226.4(e)(1).
2. Item ization . The various charges
described in § 226.4(e)(1) may be totaled
and disclosed as an aggregate sum, or
they may be itemized by the specific
fees and taxes imposed. If an aggregate
sum is disclosed, a general term such as
security interest fees or "filing fees”
may be used.
3. N otary fe e s . In order for a notary
fee to be excluded under § 226.4(e)(1),
all of the following conditions must be
met:
• The document to be notarized is one

50301

used to perfect, release, or continue
a security interest.
• The document is required by law to
be notarized.
• A notary is considered a public
official under applicable law.
• The amount of the fee is set or
authorized by law.
4.
N on-film g in su ran ce. The exclusion
in § 226.4(e)(2) is available only if non
filing insurance is purchased. If the
creditor collects and simply retains a fee
as a sort of “self-insurance” against
non-filing it may not be excluded from
the finance charge. If the non-filing
insurance premium exceeds the amount
of the fees excludable from the finance
charge under § 226.4(e)(1), only the
excess is a finance charge. For example:
• The fee for perfecting a security
interest is $5.00 and the fee for
releasing the security interest is
$3.00. The creditor charges $10.00
for non-filing insurance. Only $8.00
of the $10.00 is excludable from the
finance charge.
4(f) P roh ib ited offsets.
1.
E arnings on d ep o sits o r
in vestm en ts. The rule that the creditor
shall not deduct any earnings by the
consumer or deposits or investments
applies whether or not the creditor has a
security interest in the property.

References
S tatu te: §§ 106,167, and 171(c).
O ther sectio n s: § § 226.9(d) and 226.12.
P reviou s regu lation : § 226.4 and
Interpretations §§ 226.401 through
226.407.
1981 ch an g es: While generally
continuing the rules under the previous
regulation, § 226.4 reflects amendments
to § 106 of the act and makes certain
other changes in the rules for
determining the finance charge. For
example, § 226.4(a) expressly excludes
from the finance charge amounts
payable in comparable cash
transactions. Section 226.8(o) of the
previous regulation, dealing with
discounts for prompt payment of a credit
sale, was deleted in the revised
regulation since the general test for a
finance charge now focuses on a
comparison of cash and credit
transactions. With respect to various
exclusions from the finance charge:
application fees imposed on all
applicants are no longer finance
charges; continuing to extend credit to a
consumer is no longer a controlling test
for determining whether a late payment
charge is bona fide; seller's points are
not to be included in the finance charge;
and the special exclusions for real
estate transactions apply to all
“residential mortgage transactions.”

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The simplified rules for excluding
insurance from the finance charge allow
unit-cost disclosure in certain closedend credit transactions; permit initials
as well as signatures on the
authorization; permit any consumer to
authorize insurance for other consumers;
and delete the requirement that the
authorization be separately dated.
Subpart B—Open-End Credit
S ection 226.5—G en eral D isclosu re
R equ irem en ts
5(a) Form o f d isclosu res.
P aragraph 5(a)(1).
1. C lea r an d con spicu ou s. The “clear
and conspicuous” standard requires that
disclosures be in a reasonably
understandable form. It does not require
that disclosures be segregated from
other material or located in any
particular place on the disclosure
statement, or that numerical amounts or
percentages be in any particular type
size. The standard does not prohibit:
• Pluralizing required terminology
(“finance charge” and “annual
percentage rate”).
• Adding to the required disclosures
such items as contractual
provisions, explanations of contract
terms, state disclosures, and
translations.
• Sending promotional material with
the required disclosures.
• Using commonly accepted or
readily understandable
abbreviations (such as “mo.” for
“month” or “Tx.” for "Texas”) in
making any required disclosures.
• Using codes or symbols such as
“APR” (for annual percentage rate),
“FC” (for finance charge), or “Cr”
(for credit balance), so long as a
legend or description of the code or
symbol is provided on the
disclosure statement.
2. In teg rated docum ent. The creditor
may make both the initial disclosures
(§ 226.6) and the periodic statement
disclosures (§ 226.7) on more than one
page, and use both the front and the
reverse sides, so long as the pages
constitute an integrated document. An
integrated document would not include
disclosure pages provided to the
consumer at different times or
disclosures interspersed on the same
page with promotional material. An
integrated document would include, for
example:
• Multiple pages provided in the same
envelope that cover related material
and are folded together, numbered
consecutively, or clearly labelled to
show that they relate to one
another.
• A brochure that contains

disclosures and explanatory
material about a range of services
the creditor offers, such as credit,
checking account, ahd electronic
fund transfer features.
P aragraph 5(a)(2).
1. W hen d isclosu res m ust b e “m ore
con spicu ou s. ” The terms “finance
charge” and “annual percentage rate”
must be disclosed more conspicuously
when required to be used with a
number. For example, on the initial
disclosure statement, the annual
percentage rate disclosure under
§ 226.6(a)(2) must be "more
conspicuous.” The following apply to the
“more conspicuous” rule:
• Neither term need be emphasized
when used as part of general
informational material or in textual
descriptions of other terms,
although emphasis is permissible in
such cases. For example, when the
terms appear as part of the
explanations required under
§'226.6(a) (3) and (4), they may be
as conspicuous as the disclosures
required under §§ 226.6(a)(2) and
226.7(g).
• The corresponding annual
percentage rate under § 226.7(d)
may be less conspicuous than the
disclosure of the actual annual
percentage rate (historical rate)
under § 226.7(g) when the two rates
differ. This is permitted by footnote
9 to § 226.5(a)(2), which excepts
§ 226.7(d) disclosures from the
“more conspicuous” requirement.
2. M aking d isclosu res m ore
con spicu ou s. In disclosing the terms
“finance charge” and “annual
percentage rate” more conspicuously,
only the words “finance charge” and
“annual percentage rate” should be
accentuated. For example, if the term
“total finance charge” is used, only
"finance charge” should be emphasized.
The disclosures may be made more
conspicuous by, for example:
• Capitalizing the words when other
disclosures are printed in lower
case.
• Putting them in bold print or a
contrasting color.
• Underlining them.

• Setting them off with asterisks.
• Printing them in larger type.
5(b) Tim e o f d isclosu res.
5(b)(1) In itia l d isclosu res.
1.
D isclosu re b efo re th e fir st
tran saction . The rule that the initial
disclosure statement must be furnished
“before the first transaction” requires
delivery of the initial disclosure
statement before the consumer becomes
obligated on the plan (for example,
before the consumer makes the first

purchase, receives the first advance, or
pays a fee under the plan). Delivery of
the initial disclosure statement is timely
even if a membership fee, advance, or
purchase already has been posted to the
consumer’s account, so long as the
consumer may, after receiving the
disclosures, reject the plan and have no
further obligation beyond returning a
credit card or any money or goods.
If the consumer has paid a fee and
rejects the plan after receiving the
disclosures," the creditor must refund the
amount paid and clear the consumer’s
account. Initial disclosures need not be
given before the imposition of an
application fee under § 226.4(c)(1).
2. R eactiv ation o f su sp en d ed account.
If an account is temporarily suspended
(for example, because the consumer has
exceeded a credit limit, or because a
credit card is reported lost or stolen)
and then is reactivated, no new initial
disclosures are required.
3. R eopen in g c lo s e d accou nt. If an
account has been closed (for example,
due to inactivity, cancellation, or
expiration) and then is reopened, new
initial disclosures are required.
4. C onverting clo sed -en d to op en -en d
cred it. If a closed-end credit transaction
is converted to an open-end credit
account under a written agreement with
the consumer, the initial disclosures
under § 226.6 must be given before the
consumer becomes obligated on the
open-end credit plan. (See the
commentary to § 226.17 on converting
open-end credit to closed-end credit.)
5(b)(2) P erio d ic statem en ts.
P aragraph 5(b)(2)(i).
1.
P erio d ic statem en ts n ot requ ired.
Periodic statements need not be sent in
the following cases:
• If the creditor adjusts an account
balance so that at the end of the
cycle the balance is less than $1—
so long as no finance charge has
been impdsed on the account for
that cycle.
• If a statement was returned as
undeliverable. If a new address is
provided, however, within a
reasonable time before the creditor
must send a statement, the creditor
must resume sending statements.
Receiving the address at least 20
days before the end of a cycle
would be a reasonable amount of
time to prepare the statement for
that cycle. For example, if an
address is received 22 days before
the end of the June cycle, the
creditor must send the periodic
statement for the June cycle. (See
§ 226.13(a)(7).)

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
2.
T erm ination o f cred it p riv ileg es.
When an open-end account is
terminated without being converted to
closed-end credit under a written
agreement, the creditor must continue to
provide periodic statements to those
consumers entitled to receive them
under § 226.5(b)(2]((i) (for example,
when an open-end credit plan ends and
consumers are paying off outstanding
balances) and must continue to follow
all of the other open-end credit
requirements and procedures in Subpart
B.
P aragraph 5(b)(2)(H).
1 . 14-day rule. The 14-day rule for
mailing or delivering periodic
statements does not apply if charges (for
example, transaction or activity
charges) are imposed regardless of the
timing of a periodic statement. The 14day rule does apply, for example:
• If current debits retroactively
become subject to finance charges
when the balance is not paid in full
by a specified date.
• If charges other than finance
charges will accrue when the
consumer does not make timely
payments (for example, late
payment charges or charges for
exceeding a credit limit).
2. C om puter m alfunction. Footnote 10
does not extend to the failure to provide
a periodic statement because of
computer malfunction.
3. C alling fo r p erio d ic statem en ts. The
creditor may permit consumers to call
for their periodic statements, but may
not require them to do so. If the
consumer wishes to pick up the
statement and the plan has a free-ride
period, the statement must be made
available in accordance with the 14-day
rule.
5(c) B asis o f d isclosu res an d u se o f
estim ates.
1.
L eg al obligation . The disclosures
should reflect the credit terms to which
the parties are legally bound at the time
of giving the disclosures.
• The legal obligation is normally
determined by applicable state or
other law.
• The fact that a contract may later
be deemed unenforceable by a court
on the basis of equity or other
grounds does not, by itself, mean
that disclosures based on that
contract did not reflect the legal
obligation.
• The legal obligation normally is
presumed to be contained in the
contract that evidences the
agreement. But this may be rebutted
if another agreement between the
parties legally modifies that
contract.

2. E stim ates—obtain in g in form ation.
Disclosures may be estimated when the
exact information is unknown at the
time disclosures are made. Information
is unknown if it is not reasonably
available to the creditor at the time
disclosures are made. The “reasonably
available” standard requires that the
creditor, acting in good faith, exercise
due diligence in obtaining information.
In using estimates, the creditor is not
required to disclose the basis for the
estimated figures, but may include such
explanations as additional information.
The creditor normally may rely on the
representations of other parties in
obtaining information. For example, the
creditor might look to insurance
companies for the cost of insurance.
3. E stim ates—red isclosu re. If the
creditor makes estimated disclosures,
redisclosure is not required for that
consumer, even though more accurate
information becomes available before
the first transaction. For example, in an
open-end plan to be secured by real
estate, the creditor may estimate the
appraisal fees to be charged; such an
estimate might reasonably be based on
the prevailing market rates for similar
appraisals. If the exact appraisal fee is
determinable after the estimate is
furnished but before the consumer
receives the first advance under the
plan, no new disclosure is necessary.
5(d) M ultiple cred ito rs; m u ltiple
consu m ers.
1. M ultiple cred itors. Under § 226.5(d):
• Creditors must choose which of
them will make the disclosures.
• A single, complete set of disclosures
must be provided, rather than
partial disclosures from several
creditors.
• Each creditor in the plan is legally
responsible for seeing that the
disclosures are provided.
• All disclosures for the open-end
credit plan must be given, even if
the disclosing creditor would not
otherwise have been obligated to
make a particular disclosure.
• In some open-end credit programs
involving multiple creditors, the
consumer has the option (for
example, at the end of a billing
cycle) to pay creditor A directly or
to transfer to creditor B all or part of
the amount owing. If the consumer
elects the latter option, the
consumer no longer is obligated to
creditor A for the specific amount(s)
transferred. In such a case, creditor
A and creditor B may send separate
periodic statements that reflect the
separate obligations owed to each.
2. M ultiple consum ers. Disclosures
may be made to either obligor on a joint

50303

account. Disclosure responsibilities are
not satisfied by giving disclosures to
only a surety or guarantor for a principal
obligor or to an authorized user. In
rescindable transactions, however,
separate disclosures must be given to
each consumer who has the right to
rescind under § 226.15.
5 (e) E ffec t o f su bsequ en t ev en ts.
1. E ven ts cau sin g in accu ra cies.

Inaccuracies in disclosures are not
violations if attributable to events
occurring after disclosures are made.
For example, when the consumer fails to
fulfill a prior commitment to keep the
collateral insured and the creditor then
provides the coverage and charges the
consumer for it, such a change does not
make the original disclosures
inaccurate. The creditor may, however,
be required to provide a new
disclosure(s) under § 226.9(c).
2. U se o f in serts. When changes in a
creditor’s plan affect required
disclosures, the creditor may use inserts
with outdated disclosure forms. Any
insert:
• Should clearly refer to the
disclosure provision it replaces.

• Need not be physically attached or
affixed to the basic disclosure
statement.
• May be used only until the supply of
outdated forms is exhausted.

References
S tatu te: Secs. 121 (a) through (c), 122
(a) and (b), 124,127 (a) and (b), and
163(a).
O ther sectio n s: Secs. 226.6, 226.7, and
226.9.
P reviou s reg u lation : Secs. 226.6 (a)
and (c) through (g), and 226.7 (a) through
(c).
1981 ch an g es: Section 226.5
implements amendments to the act and
reflects several simplifying changes to
the regulation. The use of required
terminology, except for “finance charge”
and “annual percentage rate,” is no
longer required. Type size requirements
have been deleted. Initial and periodic
statement disclosures may be multi
page, so long as they constitute an
integrated statement. New rules are
provided for the basis of disclosures and
for the use of estimates. The rules for
credit plans involving multiple creditors
or multiple consumers now provide that
only one creditor need make the
disclosures and that the disclosures
need be made to only one primarily
liable consumer.
S ection 226.8—In itia l D isclosu re
S tatem en t

jl . C on sisten t term in ology. Language
on the initial and periodic disclosure

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

statements must be close enough in
meaning to enable the consumer to
relate the 2 sets of disclosures; however,
the language need not be identical. For
example, in making the disclosure under
§ 226.6(a)(3), the creditor may refer to
the “outstanding balance at the end of
the billing cycle,” while the disclosure
for § 226.7(i) refers to the “ending
balance” or “new balance.”
6(a) F in an ce charge.
P aragraph 6(a)(1)
1. W hen fin a n ce ch a rg es accru e.
Creditors may provide a general
explanation about finance charges
beginning to run and need not disclose a
specific date. For example, a disclosure
that the consumer has 30 days from the
closing date to pay the new balance
before finance charges will accrue on
the account would describe when
finance charges begin to run.
2. F ree-rid e p eriod s. In disclosing
whether or not a free-ride period exists,
the creditor need not use “free period,”
“free-ride period,” or any other
particular descriptive phrase or term.
For example, a statement that “the
finance charge begins on the date the
transaction is posted to your account”
adequately discloses that no free-ride
period exists. In the same^ashion, a
statement that “finance charges will be
imposed on any new purchases only if
they are not paid in full within 25 days
after the close of the billing cycle”
indicates that a free-ride period exists in
the interim.
P aragraph 6(a)(2).
1. R ange o f b a la n ces. The range of
balances disclosure is inapplicable:
• If only one periodic rate may be
applied to the entire account
balance.
• If only one periodic rate may be
applied to the entire balance for a
feature (for example, cash
advances), even though the balance
for another feature (purchases) may
be subject to 2 rates (a 1.5% periodic
rate on purchase balances of $0$500, while balances above $500 are
subject to a 1% periodic rate). Of
course, the creditor must give a
range of balances disclosure for the
purchase feature.
2. V ariab le ra te p la n d efin ed . A
variable rate plan contemplates a series
of rate changes in accordance with an
index that is readily verifiable by the
borrower and beyond the control of the
lender (for example, the Treasury bill
rate). A contract right to increase the
rate upon any other contingency, or at
the creditor’s discretion, would not be a
variable rate plan. For example, an
open-end credit plan in which the
employee receives a lower rate
-v
contingent upon employment, with the

rate to be increased upon termination of
employment, would not be a variable
rate plan. Similarly, an open-end credit
plan that provides for rate increases
voted by the board of directors of a
financial institution would not.be a
variable rate plan.
3. V ariable ra te p lan —ra te(s) in
effec t. In disclosing the rate(s) in effect
at the time of the initial disclosures (as
is required by § 226.6(a)(2)), the creditor
may use an insert showing the current
rate; may give the rate as of a.specified
date and then update the disclosure
from time to time, for example, each
calendar pionth; or may disclose an
estimated rate under § 226.5(c).
4. V ariab le ra te p la n —ad d ition al
d isclosu res requ ired . In addition to
disclosing the rates in effect at the time
of the initial disclosures, the disclosures
under footnote 12 also must be made.
5. V ariab le ra te p la n —in dex. The
index to be used must be clearly
identified; the creditor need not give,
however, an explanation of how the
index is determined or provide
instructions for obtaining it.
6. V ariab le ra te p la n —circu m stan ces
fo r in crea se. Circumstances under

which the rate(s) may increase include,
for example:
• An increase in the Treasury bill
rate.
• An increase in the Federal Reserve
discount rate.
The creditor must disclose when the
increase will take effect; for example,
• “An increase will take effect on the
day that the Treasury bill rate
increases,” or
• “An increase in the Federal Reserve
discount rate will take effect on the
first day of the creditor’s billing
cycle.”
7. V ariab le ra te p la n —lim itation s on
in crea se. In disclosing any limitations
on rate increases, limitations such as the
maximum increase per year or the
maximum increase over the duration of
the plan must be disclosed. When there
are no limitations, the creditor may, but
need not, disclose that fact. Legal limits
such as usury or rate ceilings under
state or federal statutes or regulations
need not be disclosed. Examples of
limitations that must be disclosed
include:
• ‘T h e rate on the plan will not
exceed 25% annual percentage
rate.”
• “Not more than Vz% increase in the

annual percentage rate per year will
occur.”
8. V ariable ra te p lan —e ffe c ts o f
in crea se. Examples of effects that must
be disclosed include:
• Any requirement for additional
collateral if the annual percentage

rate increases beyond a specified
rate.
• Any increase in the scheduled
minimum periodic payment amount.
9.
V ariable ra te p lan —chan ge-in
term s n otice n ot requ ired . No notice of a
change in terms is required for a rate
increase under a variable rate plan as
defined in Comment 6(a) (2)-2.
P aragraph 6(a)(3).
1. E xplan ation o f b a la n ce
com putation m ethod. A shorthand
phrase such as “previous balance
method” does not suffice in explaining
the balance computation method. (See
Appendix G -l for model clauses.)
2. A llocation o f p aym en ts. Disclosure
about the allocation of payments and
other credits is not required. For
example, the creditor need not disclose
that payments are applied to late
charges, overdue balances, and finance
charges before being applied to the
principal balance; or in a multifeatured
plan, that payments are applied first to
finance charges, then to purchases, and
then to cash advances. (See Comment 71 for definition of multifeatured plan.)
P aragraph 6(a)(4).
1. F in an ce ch arg es. In addition to
disclosing the periodic rate(s) under
§ 226.6(a)(2), disclosure is required of
any other type of finance charge that
may be imposed, such as minimum,
fixed, transaction, and activity charges;
required insurance; or appraisal or
credit report fees (unless excluded from
the finance charge under § 226.4(c)(7).)
6(b) O ther ch arg es.
1. G en eral; ex am p les o f o th er charges.
Under § 226.6(b), significant charges
related to the plan (that are not finance
charges) must also be disclosed. For
example:
• Late payment and over-the-creditlimit charges.
• Fees for providing documentary
evidence of transactions requested
under § 226.13 (billing error
resolution).
• Charges imposed in connection with
real estate transactions. (See
§ 226.4(c)(7).)
• Taxes and filing or notary fees
excluded from the finance charge
under § 226.4(e).
• A tax imposed on the credit
transaction by a state or other
governmental body, such as a
documentary stamp tax on cash
advances. (See the commentary to
§ 226.4(a).)
• Membership or participation fees
for a package of services that
includes an open-end credit feature,
unless the fee is required whether or
not the open-end credit feature is
included. For example, a

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
membership fee to join a credit
union would not be an “other
charge,” even if membership is
required to apply for credit.
2.
E xclu sions. The following are
examples of charges that are not “other
charges”:
• Fees charged for documentary
evidence of transactions for income
tax purposes.
• Amounts payable by a consumer for
collection activity after default:
attorney’s fees, whether or not
automatically imposed: foreclosure
costs: post-judgment interest rates
imposed by law; and reinstatement
or reissuance fees.
• Premiums for voluntary credit life or
disability insurance, or for property
insurance, that are not part of the
finance charge.
• Application fees under § 226.4(c)(1).
• A monthly service charge for a
checking account with overdraft
protection that is applied to all
checking accounts, whether or not a
credit feature is attached.
6(c) S ecu rity in terests.
1. G eneral. Disclosure is not required
about the type of security interest, or
about the creditor’s rights with respect
to that collateral. In other words, the
creditor need not expand on the term
“security interest.” Also, since no
specified terminology is required, the
creditor may designate its interest by
using, for example, “pledge,” “lien,” or
“mortgage" (instead of “security
interest”).
2. Id en tification o f property.
Identification of the collateral by type is
satisfied by stating, for example, “motor
vehicle” or "household appliances.” The
creditor may, at its option, provide a
more specific identification (for
example, a model and serial number).
3. S p read er clau se. The fact that
collateral for pre-existing credit
extensions with the institution is being
used to secure the present obligation
constitutes a security interest and must
be disclosed. (Such security interests
may be known as “spreader" or
“dragnet" clauses, or as “crosscollateralization” clauses.) A specific
identification of that collateral is
unnecessary, but a reminder of the
interest arising from the prior
indebtedness is required. This may be
accomplished by using 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.
4. A d d ition al co lla tera l. If collateral is
required when advances reach a certain
amount, the creditor should disclose the

information available at the time of the
initial disclosures. For example, if the
creditor knows that a security interest
will be taken in household goods if the
consumer’s balance exceeds $1,000, the
creditor should disclose accordingly. If
the creditor knows that security will be
required if the consumer’s balance
exceeds $1,000, but the creditor does not
know what security will be required, the
creditor must disclose on the initial
disclosure statement that security will
be required if the balance exceeds
$1,000, and the creditor must provide a
change-in-terms notice under § 226.9(c)
at the time the security is taken.
5.
C o lla teral from th ird party. In
certain situations, the consumer’s
obligation may be secured by collateral
belonging to a third party. For example,
an open-end credit plan may be secured
by an interest in property owned by the
consumer’s parents. In such cases, the
security interest is taken in connection
with the plan and must be disclosed,
even though the property encumbered is
owned by someone other than the
consumer.
6(d) S tatem en t o f billin g rights.
See the commentary to Appendix G-3.

References
S tatu te: Section 127(a).
O ther sectio n s: §§ 226.4, 226.5, 226.7,
226.9, 226.14, and Appendix G.
P reviou s reg u lation : § 226.7(a) and
Interpretation § 226.706.
1981 ch an g es: Section 226.6
implements the amended statute which
requires disclosure of the fact that n o
free period exists. Disclosures about the
minimum periodic payment and the
Comparative Index of Credit Cost have
been eliminated. The security interest
disclosures have been simplified. “Other
charges” no longer include voluntary
credit life or disability insurance,
required property insurance premiums,
plefault charges, or fees for collection
activity. Disclosures for variable rate
plans are now required by the
regulation, replacing Interpretation
§ 226.707. The regulation no longer
specifies the exact language to be used
for the billing rights notice: creditors
may use any version “substantially
similar” to the one in Appendix G.
S ection 226.7—P erio d ic S tatem en t
1. M u ltifeatu red p lan s. Some plans
involve a number of different features,
such as purchases, cash advances, or
overdraft checking. Groups of
transactions subject to different finance
charge terms because of the dates on
which the transactions took place are
treated like different features for
purposes of disclosures on the periodic
statements. The commentary includes

50305

some special rules for multifeatured
plans.
7(a) P reviou s b a la n ce.
1. C redit b a la n c es. If the previous
balance is a credit balance, it must be
disclosed in such a way so as to inform
the consumer that it is a credit balance,
rather than a debit balance.
2. M u ltifeatu red p lan s. In a
multifeatured plan, the previous balance
may be disclosed either as an aggregate
balance for the account or as separate
balances for each feature (for example,
a previous balance for purchases and a
previous balance for cash advances). If
separate balances are disclosed, a total
previous balance is optional.
3. A ccru ed fin a n ce ch a rg es a llo c a te d
from paym en ts. Some open-end credit
plans provide that the amount of the
finance charge that has accrued since
the consumer’s last payment is directly
deducted from each new payment,
rather than being separately added to
each statement and reflected as an
increase in the obligation. In such a
plan, the previous balance need not
reflect finance charges accrued since the
last payment.
7(b) Id en tificatio n o f tran saction s.
1.
M u ltifeatu red p lan s. In identifying
transaction under § 226.7(b),
transactions may be grouped by feature
(such as by disclosing sale transactions
separately from cash advance
transactions) or may be arranged by
date.
7(c) C redits.
1. Id en tificatio n —su fficien cy . The
creditor need not describe each credit
by type (returned merchandise, rebate of
finance charge, etc.)— “credit” would
suffice— except if the creditor is using
the periodic statement to satisfy the
billing error correction notice
requirement. (See the commentary to
§ 226.13 (e) and (f).)
2. Form at. A creditor may list credits
relating to credit extensions (payments,
rebates, etc.) together with other ty p es'
of credits (such as deposits to a
checking account), as long as the entries
are identified so as to inform the
consumer which type of credit each
entry represents.
3. D ate. The crediting date need not
be identified as “crediting date,” unless
2 or more dates are disclosed for a
single entry (for example, the posting
date and the crediting date).
7(d) P erio d ic ra tes.
1.
D isclosu re o f p e r io d ic r a tes —
w h eth er o r n ot actu ally ap p lied . Any
periodic rate that may be used to
compute finance charges (and its
corresponding annual percentage rate)
must be disclosed whether or not it is

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

applied during the billing cycle. For
example:
• If the consumer’s account has both
a purchase feature and a cash
advance feature, the creditor must
disclose the rate for each, even if
the consumer only makes purchases
on the account during the billing
cycle.
.
(
• If the rate varies (such as when it is
tied to a particular index), the
creditor must disclose each rate in
effect during the cycle for which the
statement was issued.
2.
D isclosu re o f p erio d ic ra tes
req u ired on ly i f im p osition p o s sib le.
With regard to the periodic rate
disclosure (and its corresponding annual
percentage rate), only rates that co u ld
h a v e been imposed during the billing
cycle reflected on the periodic statement
need to be disclosed. For example:
• If the creditor is changing rates
effective during the next billing
cycle (either because it is changing
terms or because of a variable rate
plan), the rates required to be
disclosed under § 226.7(d) are only
those in effect during the billing
cycle reflected on the periodic
statement. For example, if the
monthly rate applied during May
was 1.5 percent, but the creditor
will increase the rate to 1.8 percent
effective June 1,1.5 percent (and its
corresponding annual percentage
rate) is the only required disclosure
under § 226.7(d) for the periodic
statement reflecting the May
account activity.
• If the consumer has an overdraft
line that might later be expanded
upon the consumer’s request to
include secured advances, the rates
for the secured advance feature
need not be given until such time as
the consumer has requested and
received access to the additional
feature.
• If rates applicable to a particular
type of transaction changed after a
certain date, and the old rate is only
being applied to transactions that
took place prior to that date, the
creditor need not continue to
disclose the old rate for those
consumers that have no outstanding
balances to which that rate could be
applied.
3.
M u ltiple ra tes—sa m e tran saction .
two or more periodic rates are applied
to the sa m e balance for the same type of
transaction (for example, if the finance
charge consists of a monthly periodic
rate of 1.5% applied to the outstanding
balance and a required credit life
insurance component calculated at .1%
per month on the same outstanding

http://fraser.stlouisfed.org/
Federal Reserve Bank Tof St. Louis

balance), the creditor may do either of
rates, the balance is adequately
the following:
disclosed if the statement gives the
• Disclose each periodic rate, the
amount of the average daily balance on
range of balances to which it is
which the finance charge was computed,
applicable, and the corresponding
and also states how the balance is
annual percentage rate for each.
determined.
(For example, 1.5% monthly, 18%
4.
D aily ra te on d a ily b ala n ce. If the
annual percentage rate; .1%
finance charge is computed on the
monthly, 1.2% annual percentage
balance each day by application of one
rate.)
or more daily periodic rates, the balance
• Disclose one composite periodic
on which the finance charge was
rate (that is, 1.6% per month) along
computed may be disclosed in any of
with the applicable range of
the following ways for each feature:
balances and corresponding annual
• If a single daily periodic rate is
percentage rate.
imposed, the balance to which it is
4. C orresponding an n u al p ercen tag e
applicable may be stated as:
rate. In disclosing the annual percentage
—A balance for each day in the billing
rate that corresponds to each periodic
cycle.
rate, the creditor may use
—A
balance for each day in the billing
“corresponding annual percentage rate,”
cycle on which the balance in the
“nominal annual percentage rate,"
account changes.
"corresponding nominal annual
—The
sum of the daily balances
percentage rate,” or similar phrases.
during the billing cycle.
5. R a te sa m e a s actu a l an n u al
—The average daily balance during
p ercen ta g e rate. When the
the billing cycle, in which case the
corresponding rate is the same as the
creditor shall explain that the
actual annual percentage rate (historical
average daily balance is or can be
rate) required to be disclosed
multiplied by the number of days in
(§ 226.7(g)), the creditor need disclose
the billing cycle and the periodic
only one annual percentage rate, but
rate applied to the product to
must use the phrase “annual percentage
determine the amount of the finance
rate.”
charge.
6. R an ges o f b a la n ces. See Comment
• If 2 or more daily periodic rates may
6(a)(2)-l.
be imposed, the balances to which
7(e) B alan ce on w hich fin a n ce ch arg e
the rates are applicable may be
com puted.
stated as:
1. L im itation to p erio d ic rates. Section
—-A balance for each day in the billing
226.7(e) only requires disclosure of the
cycle.
balance(s) to which a periodic rate was
—A balance for each day in the billing
applied and does not apply to balances
cycle on which the balance in the
on which other kinds of finance charges
account changes.
(such as transaction charges) were
—As 2 or more average daily
imposed. For example, if a consumer
balances, each applicable to the
obtains a $1,500 cash advance subject to
daily periodic rates imposed for the
both a 1% transaction fee and a 1%
time that those rates were in effect,
monthly periodic rate, the creditor need
only disclose the balance subject to the
as long as the creditor explains that
the finance charge is or may be
monthly rate (which might include
portions of earlier cash advances not
determined by (1) multiplying each
of the average balances by the
paid off in previous cycles).
2. S p lit ra tes a p p lied to b a la n c e
number of days in the billing cycle
ran ges. If split rates were applied to a
(or if the daily rate varied during the
balance because different portions of
cycle, by multiplying by the number
the balance fall within 2 or more
of days the applicable rate was in
balance ranges, the creditor need not
effect), (2) multiplying each of the
separately disclose the portions of the
results by the applicable daily
balance subject to such different rates
periodic rate, and (3) adding these
since the range of balances to which the
products together. If the different
rates apply has been separately
rates are due to disclosed ranges of
disclosed. For example, a creditor could
balances (see Comment 7(e)—2), the
Ifdisclose a balance of $700 for purchases
creditor need give only one average
even though a monthly periodic rate of
daily balance together with the
1.5% applied to the first $500, and a
additional information required by
this paragraph.
monthly periodic rate of 1% to the
remainder.
5. E xplan ation o f b a la n ce
3. M onthly ra te on av erag e d a ily
com putation m ethod. See the
b ala n ce. If a creditor computes a finance commentary to § 226.6(a)(3).
charge on the average daily balance by
6. In form ation to com pute b ala n ce. In
application of a monthly periodic rate or connection with disclosing the finance

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
charge balance, the creditor need not
give the consumer all of the information
necessary to compute the balance if that
information is not otherwise required to
be disclosed. For example, if current
purchases are included from the date
they are posted to the account, the
posting date need not be disclosed.
7. N on-deduction o f cred its. The
creditor need not specifically identify
the total dollar amount of credits not
deducted in computing the finance
charge balance. Disclosure of the
amount of credits not deducted is
accomplished by listing the credits
(§ 226.7(c)) and indicating which credits
will not be deducted in determining tire
balance (for example, “credits after the
15th of the month are not deducted in
computing the finance charge.”)
8. M u ltifeatu red p lan s. In a
multifeatured plan, the balance on
which the finance charge was computed
must be disclosed for each feature to
which a periodic rate was applied. A
total balance for the entire plan is
optional.
7(f) A m ount o f fin a n ce charge.
1. T otal. A total finance charge
amount for the plan is not required.
2. Item ization —types o f fin a n ce
ch arg es. Each type of finance charge
(such as periodic rates, transaction
charges, and minimum charges) imposed
during the cycle must be separately
itemized; for example, disclosure of only
a combined finance charge attributable
to both a minimum charge and
transaction charges would not be
permissible. Finance charges of the
same type may be disclosed, however,
individually or as a total. For example, 5
transaction charges of $1 may be listed
separately or as $5.
3. Item ization —d ifferen t p erio d ic
rates. Whether different periodic rates
are applicable to different types of
transactions or to different balance
ranges, the creditor may give the finance
charge attributable to each rate or may
give a total finance charge amount. For
example, if a creditor charges 1.5% per
month on the first $500 of a balance and
1% per month on amounts over $500, the
creditor may itemize the two
components ($7.50 and $1.00) of the $8.50
charge, or may disclose $8.50.
4. M u ltifeatu red plan s. In a
multifeatured plan, in disclosing the
amount of the finance charge
attributable to the application of
periodic rates no total periodic rate
disclosure for the entire plan need be
given.
5. F in an ce ch arg es not a d d ed to
accou nt. A finance charge that is not
included in the new balance because it
is payable to a third party (such as
required life insurance) must still be

50307

shown on the periodic statement as a
the new balance before
” would
suffice.
finance charge.
6. F in an ce ch arg es oth er than p erio d ic
7(k) A d d ress fo r n o tice o f b illin g
rates. See Comment 6(a)(4)-l for
errors.
examples.
1. W ording. The periodic statement
7. A ccru ed fin a n ce ch arg es a llo c a ted
must contain the address for consumers
from paym en ts. Some plans provide that
to use in asserting billing errors under
the amount of the finance charge that
§ 226.13. Since all disclosures must be
has accrued since the consumer’s last
"clear/’ the statement should indicate
payment is directly deducted from each
the general purpose for the address,
new payment, rather than being
although no elaborate explanation or
separately added to each statement and
particular wording is required.
therefore reflected as an increase in the
2. T elep h on e num ber. A telephone
obligation. In such a plan, no disclosure
number may be included, but the
is required of finance charges that have
address for billing error inquiries, which
accrued since the last payment.
is the required disclosure, must be clear
7(g) A nnual p ercen tag e rate.
and conspicuous. One way to ensure
1.
R ate sam e a s corresp on d in g an n u althat the address is clear and
p ercen tag e rate. See Comment 7(d)—5.
conspicuous is to include a
Rate that reflects the finance charge
precautionary instruction that
imposed during the cycle may be
telephoning will not preserve the
separately stated for each feature. If
consumer’s billing error rights. Both of
separate rates are given, a composite
the billing rights statements in Appendix
annual percentage rate for the entire
G contain such a precautionary
plan is optional.
instruction, so that a creditor could, by
7(h) O ther ch arg es.
including either of these statements with
1. Id en tification . In identifying any
each periodic statement, ensure that
"other charges” actually imposed during
required address is provided in a clear
the billing cycle, the type is adequately
and conspicuous manner.
described as “late charge” or
"membership fee,” for example. (See
References
Comment 6 (b )-l for examples of "other
S tatu te: section 127(b).
charges.”)
P reviou s reg u lation : § 226.7(b)(1) and
2. D ate. The date of imposing or
Interpretation § § 226.701, 226.703,
debiting "other charges” need not be
226.706, and 226.707.
disclosed.
O ther sectio n s: § § 226.4 through 226.6,
3. T otal. Disclosure of the total
226.8, 226.14, and Appendix G.
amount of other charges is optional.
1981 ch an g es: Under § 226.7, required
7(i) C losing d a te o f billin g cy cle; n ew
terminology is no longer mandated
b ala n ce.
1. C redit b ala n ces. See Comment 7(a)- except for the terms “finance charge”
and “annual percentage rate.” The
1.
requirement in the previous regulation
2. M u ltifeatu red p lan s. In a
about the location of disclosures has
multifeatured plan, the new balance
been deleted.
may be disclosed for each feature or for
Under the revised § 226.7, disclosure
the plan ds a whole. If separate new
of credits to the account no longer have
balances are disclosed, a total new
to indicate the type of credit. A short
balance is optional.
disclosure for variable rate plans must
3. A ccru ed fin a n ce ch arg es a llo c a ted
be included on the periodic statement.
from paym en ts. Some plans provide that
Disclosures relating to multifeatured
the amount of the finance charge that
accounts have been clarified.
has accrued since the consumer’s last
payment is directly deducted from each
Section 226.7 now specifically requires
new payment, rather than being
a periodic statement disclosure of “other
separately added to each statement and
charges” (non-finance charges related to
therefore reflected as an increase in the
the plan) that are actually imposed
obligation. In such a plan, the new
during the billing cycle.
balance need not reflect finance charges
Disclosures about minimum charges
accrued since the last payment.
that might be imposed on the account
7(j) F ree-rid e p eriod .
and about the Comparative Index of
1. W ording. Although the creditor is
Credit Cost have been deleted.
required to indicate any time period the
Section 226.8—Identification of
consumer may have to pay the balance
Transactions
outstanding without incurring additional
finance charges, no specific wording is
1.
A p p lication o f id en tifica tio n ru les.
required, so long as the language used is
Section 226.8 deals with the requirement
consistent with that used on the initial
(imposed by § 226.7(b)) for identification
disclosure statement. For example, “To
of each credit transaction made during
avoid additional finance charges, pay
the billing cycle. The rules for

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

identifying transactions on periodic
statements vary, depending on whether:
• The transaction involves sale credit
(purchases) or nonsale credit (cash
advances, for example).
• An actual copy of the credit
document reflecting the transaction
accompanies the statement (this is
the distinction between so-called
“country club” and "descriptive”
billing).
• The creditor and seller are the same
or related persons.
2. S a le cred it. The term “sale credit”
refers to a purchase in which the
consumer uses a credit card or
otherwise directly accesses an open-end
line of credit (see Comment 8-3 if access
is by means of a check) to obtain goods
or services from a merchant, whether or
not the merchant is the card issuer.
“Sale credit” even includes:
• Premiums for voluntary credit life
insurance whether sold by the card
issuer or another person.
• The purchase of funds-transfer
services (such as telegrams) from an
intermediary.
/
3. N on sale cred it. The term “nonsale
credit” refers to any form of loan credit
including, for example:
• Cash advances.
• Overdraft checking.
• The use of a “supplemental credit
device” in the form of a check or
draft or the use of the overdraft
feature of a debit card, even if such
use is in connection with a purchase
of goods or services.
• Miscellaneous debits to remedy
mispostings, returned checks, and
similar entries.
4. A ctu al copy. An actual copy does
not include a recreated document. It
includes, for example, a duplicate,
carbon, or photographic copy, but does
not include a so-called “facsimile draft”
in which the required information is
typed, printed, or otherwise recreated. If
a facsimile draft is used, the creditor
must follow the rules that apply when a
copy of the credit document is not
furnished.
5. S am e or re la te d p erson s. The term
“same or related persons” refers to, for
example:
• Franchised or licensed sellers of a
creditor’s product or service.
• Sellers who assign or sell open-end
sales accounts to a creditor or
arrange for such credit under a plan
that allows the consumer to use the
credit only in transactions with that
seller.
A person is not related to the creditor
merely because, for example:
• The person and the creditor have an
agreement by which the person is
authorized to honor the creditor’s

http://fraser.stlouisfed.org/
y
Federal Reserve Bank of St. Louis

credit card under the terms
specified in the agreement.
• The person and the creditor have a
corporate connection, such as
subsidiary-parent, if that connection
is not obvious from the names they
use. For example, if XYZ card issuer
owns the ABC hotel, the card issuer
and the hotel are not “related.”
6.
T ran saction s resu ltin g from
p ro m otio n a l m aterial. In describing
transactions with third-party sellers
resulting from promotional material
mailed by the creditor, creditors may
use the rules either for “related” or for
“non-related” sellers and creditors.
8(a) S a le cred it.
1. D ate— d isclosu re o f on ly on e d ate.
If only the required date is disclosed for
a transaction, the creditor need not
identify it as the “transaction date.” If
the creditor discloses more than one
date (for example, the transaction date
and the posting date), the creditor must
identify each.
2. D ate— d isclosu re o f m onth an d d ay
only. The month and day are sufficient
disclosure of the date on which the
transaction took place, unless the
posting of the transaction is delayed so
long that the year is needed for a clear
disclosure to the consumer.
3. W hen tran saction ta k es p la c e. If
the consumer conducts the transaction
in person, the date of the transaction is
the calendar date on which the
consumer made the purchase or order,
or secured the advance. For transactions
billed to the account on an ongoing
basis (other than installments to pay a
precomputed amount), the date of the
transaction is the date on which the
amount is debited to the account. This
might include, for example, monthly
insurance premiums. For mail or
telephone orders, a creditor may
disclose as the transaction date either
the invoice date, the debiting date, or
the date the order was placed by
telephone.
4. T ran saction s n ot b ille d in fu ll. If
sale transactions are not billed in full on
any single statement, but are billed
periodically in precomputed
installments, the first periodic statement
reflecting the transaction must show
either the full amount of the transaction
together with the date the transaction
actually took place: o r the amount of the
first installment that was debited to the
account together with the date of the
transaction or the date on which the
first installment was debited to the
account. In any event, subsequent
periodic statements should reflect each
installment due, together with either any
other identifying information required
by § 226.8(a) (such as the seller’s name

and address in a three-party situation)
or other appropriate identifying
information relating the transaction to
the first billing. The debiting date for the
particular installment, or the date the
transaction took place, may be used as
the date of the transaction on these
subsequent statements.
8(a)(1) C opy o f cred it docum ent
p rov id ed .
1. Form at. The information required
by § 226.8(a)(1) may appear either on the
copy of the credit document reflecting
the transaction or on the periodic
statement.
8(a)(2) C opy o f cred it docum ent n ot ■*
p ro v id ed —cred ito r an d s e lle r sam e o r
re la te d p erson (s).
1. P roperty id en tifica tion —su fficien cy
o f d escrip tion . The “brief identification”
provision in § 226.8(a)(2) requires a
designation that will enable the
consumer to reconcile the periodic
statement with the consumer’s own
records. In determining the sufficiency
of the description, the following rules
apply:
• While item-by-item descriptions are
not necessary, reasonable precision
is required. For example,
“merchandise,” “miscellaneous,”
“second-hand goods,” or
“promotional items” would not
suffice.
• A reference to a department in a
sales establishment that accurately
conveys the identification of the
types of property or services
available in the department is
sufficient—for example, “jewelry,”
“sporting goods.”
2. P rop erty id en tifica tion —n um ber or
sym bol. The “brief identification” may
be made by disclosing on the periodic
statement a number or symbol that is
related to an identification list printed
elsewhere on the statement.
3. P roperty id en tifica tion —ad d ition al
docum ent. In making the “brief
identification” required by § 226.8(a)(2),
the creditor may identify the property by
describing the transaction on a
document accompanying the periodic
statement (for example, on a facsimile
draft). (See also footnote 17.)
4. S m all cred itors. Under footnote 18,
which provides a further identification'
alternative to a creditor with fewfer than
15,000 accounts, the creditor need count
only its own accounts and not others
serviced by the same data processor or
other shared-service provider.
8(a)(3) C opy o f cred it docum ent not
p ro v id ed —cred ito r an d s e lle r n ot sam e
o r r ela ted p erson (s).
1. S e lle r ’s nam e. The requirement
contemplates that the seller’s name will

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
appear on the periodic statement in
essentially the same form as it appears
on transaction documents provided to
the consumer at the time of the sale. The
seller’s name may also be disclosed as,
for example:
• A more complete spelling of the
name that was alphabetically
abbreviated on the receipt or other
credit document.
• An alphabetical abbreviation of the
name on the periodic statement
even if the name appears in a more
complete spelling on the receipt or
other credit document. Terms that
merely indicate the form of a
business entity, such as “Inc.,”
“Co.,” or “Ltd.,” may always be
omitted.
2. L ocation o f tran saction. The
disclosure of the location where the
transaction took place generally
requires an indication of both the city,
and the state or foreign country. If the
creditor has multiple stores or branches
within that city, the creditor need not
identify the specific branch at which the
sale occurred.
3. N o fix e d location . When no
meaningful address is available because
the consumer did not make the purchase
at any fixed location of the seller, the
creditor:
• May omit the address.
• May provide some other identifying
designation, such as “aboard
plane,” “ABC Airways Flight,”
“customer’s home,” “telephone
order,” or “mail order.”
8(b) N on sale credit.
1. D ate o f tran saction. If only one of
the required dates is disclosed for a
transaction, the creditor need not
identify it. If the creditor discloses more
than one date (for example, transaction
date and debiting date), the creditor
must identify each.
2. A m ount o f tran saction. If credit is
extended under an overdraft checking
account plan or by means of a debit
card with an overdraft feature, the
amount to be disclosed is that of the
credit extension, not the face amount of
the check or the total amount of the
debit/credit transaction.
3. Am ount—d isclosu re on cu m u lative
b asis. If credit is extended under an
overdraft checking account plan or by
means of a debit card with an overdraft
feature, the creditor may disclose the
amount of the credit extensions on a
cumulative daily basis, rather than the
amount attributable to each check or
each use of the debit/credit card.
4. Id en tification o f tran saction type.
The creditor may identify a transaction
by describing the type of advance it
represents, such as cash advance, loan,

overdraft loan, or any readily
understandable trade name for the
credit program.
References
S tatu te: § 127(b)(2).
P revious regu lation : § 226.7(k).
O ther sectio n s: § § 226.7.
1981 ch an g es: Section 226.8 has been
streamlined and reorganized to facilitate
its use. Technical detail has been
deleted from the regulation for inclusion
in the commentary. The regulation
implements the amended § 127(b)(2) of
the act by providing for protection from
civil liability under certain
circumstances when required
information is not provided and by
reducing disclosure responsibilities for
certain small creditors. For descriptive
billing of nonsale transactions, the
regulation now permits the use of the
debiting date in all cases.
S ection 226.9—S u bsequ en t D isclosu re
R equ irem en ts
9(a) Furnishing statem en t o f billin g
rights.
9(a)(1) A nnual statem en t.
1. G eneral. The creditor may provide
the annual billing rights statement:
• By sending it in one billing period
per year to each consumer that gets
a periodic statement for that period;
or
• By sending a copy to all of its
account holders sometime during
the calendar year but not
necessarily all in one billing period
(for example, sending the annual
notice in connection with renewal
cards or when imposing annual
membership fees).
2. S u bstan tially sim ilar. See the
commentary to Appendix G-3.
9(a)(2) A ltern ativ e sum m ary
statem en t.
1. Changing from long-form to shortform statem en t an d v ice versa. If the
creditor has been sending the long-form
annual statement, and subsequently
decides to use the alternative summary
statement, the first summary statement
must be sent no later than 12 months
after the last long-form statement was
sent. Conversely, if the creditor wants to
switch to the long-form, the first longform statement must be sent no later
than 12 months after the last summary
statement.
2. S u bstan tially sim ilar. See the
commentary to Appendix G-4.
9(b) D isclosu res fo r su p p lem en tal
cred it d ev ic es an d a d d ition al fea tu res.
1. C redit d ev ice—ex am p les. “Credit
device” includes, for example, a blank
check, payee-designated check, blank
draft or order, or authorization form for
issuance of a check; it does not include

50309

a check issued payable to a consumer
representing loan proceeds or the
disbursement of a cash advance.
2.
C redit fea tu re—ex am p les. A new
credit “feature” would include, for
example:
• The addition of overdraft checking
to an existing account (although the
regular checks that could trigger the
overdraft feature are not themselves
“devices”).
• The option to use an existing credit
card to secure cash advances, when
previously the card could only be
used for purchases.
P aragraph 9(b)(1).
1. S am e fin a n ce ch a rg e term s. If the
new means of accessing the account is
subject to the same finance charge terms
as those previously disclosed, the
creditor:
• Need only provide a reminder that
the new device or feature is covered
by the earlier disclosures. (For
example, in mailing special checks
that directly access the credit line,
the creditor might give a disclosure
such as “Use this as you would your
XYZ card to obtain a cash advance
from our bank”); or
• May remake the § 226.6(a) finance
charge disclosures.
P aragraph 9(b)(2).
1. D ifferen t fin a n ce ch arg e term s. If
the finance charge terms are different
from those previously disclosed, the
creditor may satisfy the requirement to
give the finance charge terms either by
giving a complete set of new initial
disclosures reflecting the terms of the
added device or feature or by giving
only the finance charge disclosures for
the added device or feature.
9(c) C hange in term s.
1 . “C h an g es” in itia lly d isclo sed . No
notice of a change in tercqs need be
given if the specific change is set forth
initially, such as rate increases under a
properly disclosed variable rate plan; a
rate increase that occurs when an
employee has been under a preferential
rate agreement and terminates
employment; or an increase that occurs
when the consumer has been under an
agreement to maintain a certain balance
in a savings account in order to keep a
particular rate and the account balance
falls below the specified minimum. In
contrast, notice must be given if the
contract allows the creditor to increase
the rate at its discretion, but does not
include specific terms for an increase
(for example, when an increase may
occur by vote of the board of directors).
2. S tate la w issu es. Examples of
issues not addressed by § 226.9(c)
because they are controlled by state or
other applicable law include:

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

• The types of changes a creditor may
make.
• How changed terms affect existing
balances, such as when a periodic
rate is changed and the consumer
does not pay off the entire existing
balance before the new rate takes
effect,
3.
C hange in billin g cy cle. Whenever
the creditor changes the consumer’s
billing cycle, it must give a change-in
terms notice if the change either affects
any of the terms required to be disclosed
under § 226.6 or increases the minimum
payment, unless an exception under
§ 226.9(cj( 2] applies; for example, the
creditor must give advance notice if the
creditor initially disclosed a 25-day freeride period on purchases and the
consumer will have fewer days during
the billing cycle change.
9(c)(1) W ritten n o tice requ ired .
1. A ffec ted consu m ers. Change-interms notices need only go to those
consumers who may be affected by the
change. For example, a change in the
periodic rate for check overdraft credit
need not be disclosed to consumers who
do not have that feature on their
accounts.
2. Tim ing—e ffe c tiv e d a te o f change.
The rule that the notice of the change in
terms be provided at least 15 days
before the change takes effect permits
mid-cycle changes when there is clearly
no retroactive effect, such as the
imposition of a transaction fee. Any
change in the balance computation
method, in contrast, would need to be
disclosed at least 15 days prior to the
billing cycle in which the change is to be
implemented.
3. Tim ing—a d v a n ce n o tice n ot
requ ired . Advance notice of 15 days is
not necessary—that is, a notice of
change in terms is required, but it may
be sent as late as the effective date of
the change—in 2 circumstances:
• If there is an increased periodic rate
or any other finance charge
attributable to the consumer’s
delinquency or default.
• If the consumer agrees to the
particular change (for example, an
agreed-upon addition or
substitution of collateral). But the
consumer’s general acceptance of
the creditor’s contract reservation
of the right to change terms, or the
consumer’s use of the account
(which might imply acceptance of
its terms under state law), are not
“agreements” between the
consumer and the creditor for
purposes of § 226.9(c)(1).
4. Form o f ch an ge-in -term s n otice. A
complete new set of the initial
disclosures containing the changed term
complies with § 226.9(c) if the change is

highlighted in some way on the
disclosure statement, or if the disclosure
statement is accompanied by a letter or
some other insert that indicates or
draws attention to the term change.
5.
S ecu rity in terest ch an g e—form o f
n otice. A copy of the security agreement
that describes the collateral securing the
consumer’s account may be used as the
notice, when the term change is the
additioft of a security interest or the
addition or substitution of collateral.
9(c)(2) N otice n ot requ ired.
1. C hanges n ot requ irin g n otice. The
following are examples of changes that
do not require a change-in-terms notice:
• A change in the consumer’s credit
limit.
• A change in the name of the credit
card or credit card plan.
• The substitution of one insurer for
another.
• A termination or suspension of
credit privileges.
• Changes arising merely by
operation of law; for example, if the
creditor’s security interest in a
. consumer’s car automatically
extends to the proceeds when the
consumer sells the car.
2. S kip fea tu res. If a credit program
allows consumers to skip or reduce one
or more payments during the year, or
involves temporary reductions in
finance charges, no notice of the change
in terms is required either prior to the
reduction or upon resumption of the
higher rates if these features are
explained on the initial disclosure
statement (including an explanation of
the terms upon resumption). For
example, a merchant may allow
consumers to skip the December
,
payment to encourage holiday shopping,
or a teacher’s credit union may not
require payments during summer
vacation. Otherwise, the creditor must
give notice prior to resuming the original
schedule or rate, even though no notice
is required prior to the reduction.
9(d) F in an ce ch arg e im p o sed a t tim e
o f tran saction .
1. B an on cred it ca rd su rcharges. 15
U.S.C. 1666f provides that until February
27,1984, no seller in any Sales
transaction may impose a surcharge on
a cardholder who elects to use a credit
card instead of paying by cash, check, or
similar means.
References
S tatu te: Section 127(a)(7).
O ther sectio n s: Sections 226.4 through
226.7 and Appendix G.
P reviou s regu lation : Section 226.7 (d)
through (f) and (j) and Interpretation
§ § 226.705 and 226.708.
1981 ch an g es: Section 226.9(a)
implements the statutory change that the

long-form statement of billing rights be
provided only once a year. The
provision now permits two rather than
one means of providing the long-form
statement to consumers. The verbatitn
text of the annual statement is no longer
required; creditors may use any version
“substantially similar” to the one in
Appendix G. If the creditor elects to use
the alternative summary statement, the
new regulation no longer requires that
the long-form statement be sent upon
receiving a billing error notice and at the
consumer’s request. The rules in
§ 226.708 on switching the type of billing
rights statement used have been
modified.
Under § 226.9(b) disclosure
requirements have been streamlined
when supplemental credit devices or
new credit features are added to an
existing open-end plan.
Section 226.9(c) substantially changes
the change-in-terms rules. Change-interms disclosures must now be made 15
days before the effective date of the
change, rather than 15 days before the
billing cycle in which the change will
take effect. The kinds of changes that
will trigger disclosures have been
reduced: change-in-terms notices are no
longer required for the types of changes
described in § 226.9(c)(2). But the
provision reverses Interpretation
§ 226.705, which indicated that certain
changes in the balance computation
method did not require disclosure
because,they could result in lowered
finance charges; now, any change in the
balance computation method requires
disclosure.
When a finance charge is imposed at
the time of a transaction, § 226.9(d) only
requires disclosure of the finance charge
at point of sale; the amount financed
and annual percentage rate figured in
accordance with the closed-end credit
provisions need no longer be disclosed.
Furthermore, the finance charge
disclosure now may be made orally by
the person honoring the card.
S ection 226.10—P rom pt C rediting o f
P aym ents
10(a) G en eral rule.
1. C rediting date. Section 226.10(a)
does not require the creditor to post the
payment to the consumer’s account on a
particular date; the creditor is only
required to credit the payment as of the
date of receipt.
2. D ate o f receip t. The “date of
receipt” is the date that the payment
instrument or other means of completing
the payment reaches the creditor. For
example:
• Payment by check is received when
the creditor gets it, not when the

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
funds are collected.
• In a payroll deduction plan in which
funds are deposited to an asset
account held by the creditor, and
from which payments are made
periodically to an open-end credit
account, payment is received on the
date when it is debited to the asset
account (rather than on the date of
the deposit), provided the payroll
deduction method is voluntary and
the consumer retains use of the
funds until the contractual payment
date.
• If the consumer elects to have
payment made by a third-party
payor such as a financial institution,
through a preauthorized payment or
telephone bill-payment
arrangement, payment is received
when the creditor gets the thirdparty payor’s check or other
transfer medium, such as an
electronic fund transfer, as long as
the payment meets the creditor’s
requirements as specified under
§ 226.10(b).
10(b) S p ecific requ irem en ts fo r
paym ents.
1. P aym ent requ irem en ts. The creditor
may specify requirements for making
payments, such as:
• Requiring that payments be
accompanied by the account
number of the payment stub.
• Setting a cut-off hour for payment to
be received, or set different hours
for payment by mail and payments
made in person.
• Specifying that only checks or
money orders should be sent by
mail.
• Specifying that payment is to be
made in U.S. dollars.
• Specifying one particular address
for receiving payments, such as a
post office box.
The creditor may be prohibited,
however, from specifying payment by
preauthorized electronic fund transfer.
(See § 913 of the Electronic Fund
Transfer Act.)
2. P aym ent requ irem en ts—lim itation s.
Requirements for making payments must
be reasonable: it should not be difficult
for most consumers to make conforming
payments. For example, it would not be
reasonable to require that all payments
be made in person between 10 a.m. and
11 a.m., since this would require
consumers to take time*off from their
jobs to deliver payments.
3. A ccep tan ce o f non-conform ing
paym en ts. If the creditor accepts a nonconforming payment (for example,
payment at a branch office, when it had
specified that payment be sent to
headquarters), finance charges may

50311

P aragraph 11(b).
accrue for the period between receipt
and crediting of payments.
1. W ritten req u ests—stan din g ord ers.
4.
Im p lied g u id elin es fo r paym en ts. In The creditor is not required to honor
the absence of specified requirements
standing orders requesting refunds of
for making payments (see § 226.10(b)):
any credit balance that may be created
on the consumer’s account.
• Payments may be made at any
P aragraph 11(c).
location where the creditor
1. G ood fa ith effo rt to refund. The
conducts business.
creditor must take positive steps to
• Payments may be made any time
return any credit balance that has
during the creditor’s normal
remained in the account for over 6
business hours.
months. This includes, if necessary,
• Payments may be made by cash,
attempts to trace the consumer through
money order, draft, or other similar
the consumer’s last known address or
instrument in properly negotiable
telephone number, or both.
form, or by electronic fund transfer
2. G ood fa ith effo rt u n su ccessfu l.
if the creditor and consumer have
Section 226.11 imposes no further duties
so agreed.
on the creditor if a good faith effort to
References
return the balance is unsuccessful. The
S tatu te: § 164.
ultimate disposition of the credit
O ther sectio n s: § 226.70.
balance (or any Credit balance of $1 or
P reviou s regu lation : § 226.7(g).
less) is to be determined under other
1981 ch an g es: Much of the
applicable law.
explanatory detail of the previous
References
regulation is now in the commentary.
S tatu te: Section 165.
The revised regulation gives the creditor
5 days in which to credit nonP reviou s reg u lation : § 226.7(h).
conforming payments, whereas the
1981 ch an g es: Under the previous
previous regulation required the
regulation, the creditor’s duty to refund
crediting of such payments promptly,
credit balances applied only to “excess
with an outside limit of 5 days. The 5
payments”: § 226.10 of the revised
days in which to credit are available
regulation implements the amendments
whenever the creditor accepts payment
to § 165 of the statute which impose
that does not conform to the creditor’s
refunding duties on the creditor
disclosed specifications, in contrast to
'whatever the source of the credit
the previous regulation, which only
balance. The revised regulation permits
allowed deferred crediting for payments
the creditor, in computing the refund, to
made at th& wrong location.
take account of intervening debits, not
just
the difference between the previous
S ection 226.11— T reatm ent o f C redit
balance and the overpayment as is
B alan ces
provided in the previous regulation. The
1. Timing o f refund. The creditor may
revised regulation gives the creditor 7
also fulfill its obligations under § 226.11
business days in which to make the
by:
refund after receiving the consumer’s
• Refunding any credit balance to the
written request, whereas the previous
consumer immediately.
regulation required the creditor to make
• Refunding any credit balance prior
the refund promptly, with an outside
to receiving a written request (under limit of 5 business days. This provision
§ 226.11(b)) from the consumer.
also implements the amended statute by
• Making a good faith effort to refund
requiring a good faith effort to refund
any credit balance before 6 months
the credit balance after 6 months.
have passed. If that attempt is
S
ection 226.12—S p ec ia l C redit C ard
unsuccessful, the creditor need not
P rovision s
try again to refund the credit
balance at the end of the 6-month
1. S cop e. Sections 226.12(a) and (bj
period.
deal with the issuance and liability rules
2. A m ount o f refund. The phrase “any
for credit cards, whether the card is
part of the credit balance remaining in
intended for consumer, business, or any
the account” in § 226.11(b) and (c)
other purposes. Sections 226.12(a) and
means the amount of the credit balance
(b) are exceptions to the general rule
at the time the creditor is required to
that the regulation applies only to
make the refund. The creditor may take
consumer credit. (See §§ 226.1 and
into consideration intervening purchases
226.3.)
or other debits to the consumer’s
12(a) Issu an ce o f cred it cards.
account (including those that have not
P aragraph 12(a)(1).
yet been reflected on a periodic
1. E xplicit request. A request or
statement) that decrease or eliminate
application for a card must be explicit.
the credit balance.
For example, a request for overdraft

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privileges on a checking account does
not constitute an application for a credit
card with overdraft checking features.
2. A ddition o f cred it fea tu res. If the
consumer has a non-credit card, the
addition of credit features to the card
(for example, the granting of overdraft
privileges on a checking account when
the consumer already has a check
guarantee card) constitutes issuance of
a credit card.
3. V arian ce o f ca rd fro m requ est. The
request or application need not
correspond exactly to the card that is
issued. For example:
• The name of the card requested
may be different when issued.
• The card may have features in
addition to those reflected in the
request or application.
4. P erm issib le form o f requ est. The
request or application may be oral (in
response to a telephone solicitation by a
card issuer, for example) or written.
5. T im e o f issu an ce. A credit card may
be issued in response to a request made
before any cards are ready for issuance
(for example, if a new program is
established), even if there is some delay
in issuance.
6. P erson s to w hom ca rd s m ay b e
issu ed . A card issuer may issue a credit
card to the person who requests it, and
to anyone else for whom that person
requests a card and who-will be an
authorized user on the requester’s
account. In other words, cards may be
sent to consumer A on A’s request, and
also (on A’s request) to consumers B and
C, who will be authorized users on A’s
account. In these circumstances, the
following rules apply:
• The additional cards may be
imprinted in either A’s name or in
the names of B and C.
• No liability for unauthorized use (by
persons other than B and C), not
even the $50, may be imposed on B
or C since they are merely users
and not “cardholders” as that term
is defined in § 226.2 and used in

§ 226.12(b); of course, liability of up
to $50 for unauthorized use of B’s
and C’s cards may be imposed on
A.

• Whether B and C may be held liable
for their own use, or on the account
generally, is a matter of state or
other applicable law.
7. Issu an ce o f n on -cred it card s. The
issuance of an unsolicited device that is
not, but may become, a credit card, is
not prohibited provided:
• The device has some substantive
purpose other than obtaining credit,
such as access to non-credit
services offered by the issuer;
• It cannot be used as a credit card

when issued; and
• A credit capability will be added
only on the recipient’s request.
For example, the card issuer could
send a check guarantee card on an
unsolicited basis, but could not add a
credit feature to that card without the
consumer’s specific request. The re
encoding of a debit card or other
existing card that had no credit
privileges when issued would be
appropriate after the consumer has
specifically requested a card with credit
privileges. Similarly, the card issuer may
add a credit feature, for example, by
reprogramming the issuer’s computer
program or automated teller machines,
or by a similar program adjustment.
P aragraph 12(a)(2).
1. R en ew al. “Renewal” generally
contemplates the regular replacement of
existing cards because of, for example,
security reasons or new technology or
systems. It also includes the re-issuance
of cards that have been suspended
temporarily, but does not include the
opening of a new account after a
previous account was closed.
2. S ubstitution—ex am p les.
“Substitution” encompasses the
replacement of one card with another
because the underlying account
relationship has changed in some way—
such as when the card issuer has:
• Changed its name.
• Changed the name of the card.
• Changed the credit or other features
available on the account. For
example, the original card could be
used to make purchases and obtain
cash advances at teller windows.
The substitute card might be usable,
in addition, for obtaining cash
advances through automated teller
machines. (If the substitute card
constitutes an access device, as
defined in Regulation E, then the
Regulation E issuance rules would
have to be followed.)
• Substituted a card user’s name on
the substitute card for the
cardholder’s name appearing on the
original card.
• Changed the merchant base.
However, the new card must be
honored by at least one of the
persons that honored the original
card.
3. Substitution—su ccesso r ca rd
issu er. "Substitution” also occurs when
a successor card issuer replaces the
original card issuer (for example, when
a new card issuer purchases die
accounts of the original issuer and
issues its own card to replace the
original one). A permissible substitution
exists even if the original issuer retains
the existing receivables and the new
card issuer acquires the right only to

future receivables, provided use of the
original card is cut off when use of the
new card becomes possible.
4. Substitution—n on -cred it-card plan .
A credit card that replaces a retailer’s
open-end credit plan n ot involving a
credit card is not considered a substitute
for the retailer’s plan— even if the
consumer used the retailer’s plan. A
credit card cannot be issued in these
circumstances without a request or
application.
5. O n e-for-on e rule. An accepted card
may be replaced by no more than one
renewal or substitute card. For example,
the card issuer may not replace a credit
card permitting purchases and cash
advances with two cards, one for the
purchases and another for the cash
advances.
6. O ne-for-on e ru le—ex cep tion . The
regulation does not prohibit the card
issuer from replacing a debit/credit card
with a credit card and another card with
only debit functions (or debit functions
plus an associated overdraft capability),
since the latter card could be issued on
an unsolicited basis under Regulation E.
7. M ethods o f term inating rep la ced
card. The card issuer need not
physically retrieve the original card,
provided the old card is voided in some
way; for example:
• The issuer includes with the new
card a notification that the existing
card is no longer valid and should
be destroyed immediately.
• The original card contained an
expiration date.
• The card issuer, in order to preclude
use of the card, reprograms
computers or issues instructions to
authorization centers.
8. In com p lete rep lacem en t. If a
consumer has duplicate credit cards on
the same account (Card A—one type of
bank credit card, for example), the card
issuer may not replace the duplicate
cards with one Card A and one Card B
(Card B— another type of bank credit
card) unless the consumer requests Card
B.
12(b) L ia b ility o f ca rd h old er fo r
u n au thorized use.
1. M eaning o f ‘‘card h old er. ” For
purposes of this provision, “cardholder”
includes any person (including
organizations) to whom a credit card is
issued for any purpose, including
business. When a corporation is the
cardholder, required disclosures should
be provided to the corporation (as
opposed to an employee user).
12(b)(1) Lim itation on am ount.
1. M eaning o f ‘‘authority. ” Footnote 22
defines unauthorized use in terms of
whether the user has “actual, implied, or
apparent authority.” Whether such

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
even though it is not given to, or does
authority exists must be determined
not reach, some particular person within
under state or other applicable law.
2.
L ia b ility lim its—d o lla r am ounts. Asthe issuer's organization. Notice also
a general rule, the cardholder’s liability
for a series of unauthorized uses cannot
exceed either $50 or the value obtained
through the unauthorized use before the
care issuer is notified, whichever is less.
12(b)(2) C onditions o f liab ility .
1. Issu er’s option n ot to com ply. A
card issuer that chooses not to impose
any liability on cardholders for
unauthorized use need not comply with
the disclosure and identification
requirements discussed below.
P aragraph 12(b)(2)(H).
1. D isclosu re o f lia b ility an d m ean s o f
notifyin g issu er. The disclosures
referred to in § 226.12(b)(2)(ii) may be
given, for example, with the initial
disclosures under § 226.6, on the credit
card itself, or on periodic statements.
They may be given at any time
preceding the unauthorized use of the
card.
P aragraph 12(b)(2)(iii).
1. M eans o f iden tifyin g ca rd h old er o r
user. To fulfill the condition set forth in
§ 226.12(b)(2)(iii), the issuer must
provide some method whereby the
cardholder or the authorized user can be
identified. This could include, for
example, signature, photograph, or
fingerprint on the card, or electronic or
mechanical confirmation.
2. Id en tification b y m agn etic strip.

Unless a magnetic strip (or similar
device not readable without physical
aids) must be used in conjunction with a
secret code or the like, it would not
constitute sufficient means of
identification. Sufficient identification
also does not exist if a "pool” or group
card, issued to a corporation and signed
by a corporate agent who will not be a
user of the card, is intended to be used
by another employee for whom no
means of identification is provided.
3. T ran saction s n ot involving card.
The cardholder may not be held liable
under § 226.12(b) when the card itself
(or some other sufficient means of
identification of the cardholder) is not
presented. Since the issuer has not
provided a means to identify the user
under these circumstances, the issuer
has not fulfilled one of the conditions for
imposing liability. For example, when
merchandise is ordered by telephone by
a person without authority to do so,
using a credit card account number or
other number only (which may be
widely available), no liability may be
imposed on the cardholder.
12(b)(3) N otification to ca rd issu er.
1. H ow n otice m ust b e p rov id ed .
Notice given in a normal business
manner—for example, by mail,
telephone, or personal visit—is effective

may be effective even though it is not
given at the address or phone number
disclosed by the card issuer under
§ 226.12(b)(2)(ii).
2. W ho m ust p ro v id e n otice. Notice of
loss, theft, or possible unauthorized use
need not be initiated by the cardholder.
Notice is sufficient so long as it gives the
“pertinent information” which would
include the name or card number of the
cardholder and an indication that
unauthorized use has or may have
occurred.
12(b)(5) B u sin ess u se o f cred it card s.
1. A greem en t fo r h ig h er lia b ility fo r
b u sin ess u se card s. The card issuer may
not rely on § 226.12(b)(5) if the business
is clearly not in a position to provide 10
or more cards to employees (for
example, if the business has only 3
employees). On the other hand, the
issuer need not monitor the personnel
practices of the business to make sure
that it has at least 10 employees at all
times.
2. U n authorized u se b y em p loy ee. The
protection afforded to an employee
against liability for unauthorized use in
excess of the limits set in § 226.12(b)
applies only to unauthorized use by
someone other then the employee. If the
employee uses the card in an
unauthorized manner, the regulation
sets no restriction on the employee’s
potential liability for such use.
12(c) R ight o f ca rd h o ld er to a ssert
claim s o r d efen ses ag ain st ca rd issu er.
1. R elation sh ip to § 226.13. The
§ 226.12(c) credit card "holder in due
course” provision deals with the
consumer’s right to assert against the
card issuer a claim or defense
concerning property or services
purchased with a credit card, if the
merchant has been unwilling to resolve
the dispute. Even though certain
merchandise disputes, such as non
delivery of goods, may also constitute
“billing errors” under § 226.13, that
section operates independently of
§ 226.12(c). The cardholder whose
asserted billing error involves
undelivered goods may institute the
error resolution procedures of § 226.13;
but whether or not the cardholder has
done so, the cardholder may assert
claims or defenses under § 226.12(c).
Conversely, the consumer may pay a
disputed balance and thus have no
further right to assert claims and
defenses, but still may assert a billing
error if notice of that billing error is
given in the proper time and manner. An
assertion that a particular transaction
resulted from unauthorized use of the

50313

card could also be both a “defense” and
a billing error.
2. C laim s an d d e fe n ses assertib le.
Section 226.12(c) merely preserves the
consumer’s right to assert against the
card issuer any claims or defenses that
can be asserted against the merchant. It
does not determine what claims or
defenses are valid as to the merchant;
this determination must under be made
under state or other applicable law.
12(c)(1) G en eral rule.
1. Situations ex clu d ed an d included.
The consumer may assert claims or
defenses only when the goods or
services are “purchased with the credit
card.” This could include:
• Mail or telephone orders, if the
purchase is charged to the credit
card account.
But it would exclude:
• Use of a credit card to obtain a
cash advance, even if the consumer
then uses the money to purchase
goods or services. Such a
transaction would not involve
“property or services purchased
with the credit card.”
• The purchase of goods or services
by use of a check accessing an
overdraft account and a credit card
used solely for identification of the
consumer. (On the other hand, if the
credit card is used to make partial
payment for the purchase and not
merely for identification, the right to
assert claims or defenses would
apply to credit extended via the
credit card, although not to the
credit extended on the overdraft
line.)
• PurchasesTmade by use of a check
guarantee card in conjunction with
a cash advance check (or by cash
advance checks alone). See footnote
24. A cash advance check is a check
that, when written, does not draw
on an asset account; instead, it is
charged entirely to an open-end
credit account.

• Purchases effected by use of either
a check guarantee card or a debit
card when used to draw on
overdraft credit lines (see footnote
24). The debit card exemption
applies whether the card accesses
an asset account via point-of-sale
terminals, automated teller
machines, or in any other way, and
whether the card qualifies as an
“access device" under Regulation E
or is only a paper-based debit card.
If a card serves both as an ordinary
credit card and also as check
guarantee or debit card, a
transaction will be subject to this
rule on asserting claims and

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

defenses when used as an ordinary
credit card, but not when used as a
check guarantee or debit card.
12(c)(2) A d v erse cred it rep orts p ro h ib ited .
1. S cop e o f p roh ibition . Although an
amount in dispute may not be reported
as delinquent until the matter is
resolved:
• That amount may be reported as
disputed.
• Nothing in this provision prohibits
the card issuer from undertaking its
normal collection activities for
delinquent accounts.
12(c)(3) L im itations.
P aragraph 12(c)(3)(i).
1.
R esolu tion w ith m erchan t. The
consumer must have tried to resolve the
dispute with the merchant. This does not
require any special procedures or
correspondence between them, and is a
matter for factual determination in each
case. The consumer is not required to
seek satisfaction from the manufacturer
of the goods involved. When the
merchant is in bankruptcy proceedings,
the consumer is not required to file a
claim in those proceedings.
P aragraph 12(c)(3)(H).
1. G eog rap h ic lim itation . The question
of where as transaction occurs (as in the
case of mail or telephone orders, for
example) is to be determined under
state or other applicable law.
2. M erchan t hon oring card. The
exceptions (stated in footnote 26) to the
amount and geographic limitations do
not apply if the merchant merely honors,
or indicates through signs or advertising
that it honors, a particular credit card.
12(d) O ffsets b y ca rd issu er
p ro h ib ited .
P aragraph 12(d)(1).
1. “H o ld s” on accou n ts. “Freezing” or
placing a hold on funds in the
cardholder’s deposit account is the
functional equivalent of an offset and
would contravene the prohibition in
§ 226.12(d)(1), unless done in the context
of one of the exceptions specified in
§ 226.12(d)(2). For example, if the terms
of a security agreement permitted the
card issuer to place a hold on the funds,
the hold would not violate the offset
prohibition. Similarly, if an order of a
bankruptcy court required the card
issuer to turn over deposit account funds
to the trustee in bankruptcy, the issuer
would not violate the regulation by
placing a hold on the funds in order to
comply with the court order.
2. Funds in ten d ed a s d ep osits. If the
consumer tenders funds as a deposit (to
a checking account, for example), the
card issuer may not apply the funds to
repay indebtedness on the consumer’s
credit card account.

3. T ypes o f in d eb ted n ess; ov erd raft
accou n ts. The offset prohibition applies
to any indebtedness arising from
transactions under a credit card plan,
including accrued finance charges and
other charges on the account. The
prohibition also applies to balances
arising from transactions not using the
credit card itself but taking place under
plans that involve credit cards. For
example, if the consumer writes a check
that accesses an overdraft line of credit,
the resulting indebtedness is subject to
the offset prohibition since it is incurred
through a credit card plan, even though
the consumer did not use an associated
check guarantee or debit card.
4. W hen p roh ib ition ap p lies in c a s e o f
term in ation o f accou nt. The offset
prohibition applies even after the card
issuer terminates the cardholder’s credit
card privileges, if the indebtedness was
incurred prior to termination. If the
indebtedness was incurred after
termination, the prohibition does not
apply.
P aragraph 12(d)(2).
1. S ecu rity in terest—lim itation s. In
order to qualify for the exception stated
in § 226.12(d)(2), a security interest must
be affirmatively agreed to by the
consumer, must be disclosed in the
issuer’s initial disclosures under § 226.6,
and must be obtained and enforced only
through procedures equally available to
other creditors. For example, the
consumer may offer a savings account
(as an alternative to other personal
property, such as an automobile) as
security for credit card indebtedness.
Another example of a permissible
security interest in deposit account
funds would be one granted by the
consumer in return for an incentive
offered by the issuer (for example, lower
rates on the credit card account).
2. S ecu rity in terest—after-a cq u ired
p rop erty . As used in § 226.12(d), the
term "security interest” does not
exclude (as it does for other Regulation
Z purposes) interests in after-acquired
property. Thus, a consensual security
interest in deposit-account funds,
including funds deposited after the
granting of the security interest, would
constitute a permissible exception to the
prohibition on offsets.
3. Court order. If the card issuer
obtains a judgment against the
cardholder, and if state and other
applicable law and the terms of the
judgment do not so prohibit, the card
issuer may offset the indebtedness
against the cardholder’s deposit
account.
P aragraph 12(d)(3).
1. A utom atic p ay m en t p la n s—sc o p e o f
ex cep tion . With regard to automatic

debit plans under § 226.12(d)(3), the
following rules apply:
• The cardholder’s authorization
must be in writing and signed or
initialed by the cardholder.
• The authorizing language need not
appear directly above or next to the
cardholder’s signature or initials,
provided it appears on the same
document and that it clearly spells
out the terms of the automatic debit
plan.
• If the cardholder has the option to
accept or reject the automatic debit
feature (such option may be
required under § 913 of the
Electronic Fund Transfer Act), the
facf that the option exists should be
clearly indicated.
2. A utom atic p ay m en t p lan s —
ad d ition al exceptions. The following
practices are not prohibited by
§ 226.12(d)(1):
• Automatically deducting charges
for participation in a program of
banking services (one aspect of
which may be a credit card plan).
• Debiting the cardholder’s deposit
account on the cardholder’s sp ec ific
request rather than on an au tom atic
periodic basis (for example, a
cardholder might check a box on
the credit card bill stub, requesting
the issuer to debit the cardholder’s
account to pay that bill).
12(e) Prom pt n otification o f returns
an d creditin g o f refunds.
P aragraph 12(e)(1).
1. N orm al channels. The term “normal
channels” refers to any network or
interchange system used for the
processing of the original charge slips
(or equivalent information concerning
the transaction).
P aragraph 12(e)(2).
1.
Crediting account. The card issuer
need not actually post the refund to the
consumer’s account within 3 business
days after receiving the credit
statement, provided that it credits the
account as of a date within that time
period.
References
Statute: Secs. 103(1), 132,133,135,162,
166,167,169, and 170.
O ther section s: §226.13.
Other regulations: Regulation E (12
CFR 205).
Previous regulation: § 226.13.
1981 ch an g es: The issuance rules in
§ 226.12(a) make clear that cards may be
sent to the person making the request
and also to any other person for whom a
card is requested, except that no
liability for unauthorized use may be
imposed on persons who are only
authorized users.

Federal Register / Vol. 46, No. 196 / Eriday, October 9, 1981 / Rules and Regulations
The principal differences in § 226.12(b)
about conditions of liability are as
follows: the requirement that the
cardholder be given a postage-paid,
preaddressed card or envelope for
notification of loss or theft has been
deleted (corresponding to an
amendment to the act); the required
disclosures of maximum liability and of
means of notification have been
simplified; and the required provision of
a means of identification has been
'changed in that the issuer now may
provide a means to identify either the
cardholder or the authorized user.
Finally, anyone may provide the
notification to the card issuer, not just
the cardholder.
Section 226.12(d) on offsets clarifies
that the offset prohibition does not
apply to consensual security interests.
The separate promptness standard
which used to apply in addition to the
7-business-day and 3-business-day
standards has been deleted from
§ 226.12(e) on prompt notification of
returns. Section 226.12(f) now clarifies
rules on clearing accounts.
Section 226.12(g), dealing with the
relationship of the regulation to
Regulation E (Electronic Fund
Transfers), has been added.
S ection 226.13—B illing E rror R esolu tion
1. G en eral p roh ibition s. Footnote 27
prohibits a creditor from responding to a
consumer’s billing error allegation by
accelerating the debt or closing the
account, and reflects protections
authorized by § 161(d) of the Truth in
Lending Act and § 701 of the Equal
Credit Opportunity Act. The footnote
also alerts creditors that failure to
comply with the error resolution
procedures may result in the forfeiture
of disputed amounts as prescribed in
§ 161(e) o f the act. (Any failure to
comply may also be a violation subject
to the liability provisions of § 130 of the
act.)
2. C harges fo r erro r resolu tion . If a
billing error occurred, whether as
alleged or in a different amount or
manner, the creditor may not impose a
charge related to any aspect of the error
resolution process (including charges for
documentation or investigation) and
must credit the consumer’s account if
such a charge was assessed pending
resolution. Since the act grants the
consumer error resolution rights, the
creditor should avoid any chilling effect
on the good faith assertion of errors that
might result if charges are assessed
when no billing error has occurred.
13(a) D efinition o f billin g error.
1.
A ctual, im plied, o r ap p aren t
authority. Whether use of a credit card
or open-end credit plan is authorized is

determined by state or other applicable
law.
P aragraph 13(a)(3).
1. C overage. Section 226.13(a)(3)
covers disputes about goods or services
that are “not accepted” or “not
delivered . . . as agreed”; for example:
• The appearance on a periodic
statement of a purchase, when the
consumer refused to take delivery
of goods because they did not
comply with the contract.
• Delivery of property or services
different from that agreed upon.
• Delivery of the wrong quantity.
• Late delivery.
• Delivery to the wrong location.
Section 226.13(a)(3) does not apply to
a dispute relating to the quality of
property or services that the consumer
accepts. Whether acceptance occured is
determined by state or other applicable
law.
P aragraph 13(a)(5).
1. C om pu tation al errors. In periodic
statements that are combined with other
information, the error resolution
procedures are triggered only if the
consumer asserts a computational
billing error in the credit-related portion
of the periodic statement. For example:
• If a bank combines a periodic
statement reflecting the consumer’s
credit card transactions with the
consumer’s monthly checking
statement, a computational error in
the checking account portion of the
combined statement is not a billing
error.
P aragraph 13(a)(6).
1. D ocum entation requ ests. A request
for documentation such as receipts or
sales slips, unaccompanied by an
allegation of an error under § 226.13(a)
or a request for additional clarification
under § 226.13(a)(6), does not trigger the
error resolution procedures. For
example, a request for documentation
merely for purposes such as tax
preparation or recordkeeping does not
trigger the error resolution procedures.
13(b) B illing erro r n otice.
1. W ithdraw al. The consumer’s
withdrawal of a billing error notice may
b e oral or written.
P aragraph 13(b)(1).
1. F ailu re to sen d p erio d ic
statem en t—timing. If the creditor has
failed to send a periodic statement, the
60-day period runs from the time the
statement should have been sent. Once
the statement is provided, the consumer
has another 60 days to assert any billing
errors reflected on it.
2. F ailu re to r e fle c t cred it—timing. If
the periodic statement fails to reflect a *
credit to the account, the 60-day period
runs from transmittal of the statement

50315

on which the credit should have
appeared.
3.
Transmittal. If a consumer has
arranged for periodic statements to be
held at the financial institution until
called for, the statement is "transmitted”
when it is first made available to the
consumer.
P aragraph 13(b)(2).
1. Identity o f the consum er. The billing

error notice need not specify both the
name and the account number if the
information supplied enables the
creditor to identify the consumer’s name
and account.
13(c) T im e fo r resolu tion ; g en era l
p roced u res.
1. T em porary o r p ro v isio n a l
corrections. A creditor may temporarily

correct the consumer’s account in
response to a billing error notice, but is
not excused from complying with the
remaining error resolution procedures
within the time limits for resolution.
2. C orrection without investigation. A
creditor may correct a billing error in the
manner and amount asserted by the
consumer without the investigation or
the determination normally required.
The creditor must comply, however,
with all other applicable provisions. If a
creditor follows this procedure, no
presumption is created that a billing
error occurred.
P aragraph 13(c)(2).
1. Tim e fo r resolution. The phrase
"two complete billing cycles” means 2
actual billing cycles occurring after
receipt of the billing error notice, not a
measure of time equal to 2 billing cycles.
For example, if a creditor on a monthly
billing cycle receives a billing error
notice mid-cycle, it has the remainder of
that cycle plus the next 2 full billing
cycles to resolve the error.
13(d) R u les p en din g resolu tion .
1. D isputed amount. “Disputed

amount” is the dollar amount alleged by
the consumer to be in error. When the
allegation concerns the description or
identification of the transaction (such as
the date or the seller’s name) rather than
a dollar amount, the disputed amount is
the amount of the transaction or charge
that corresponds to the disputed
transaction identification. If the
consumer alleges a failure to send a
periodic statement under
§ 226.13(a)(7),the disputed amount is the
entire balance owing.
13(d)(1) C onsum er’s right to w ith h old
d isp u ted am ount; co llec tio n action
p roh ibited .
1. P roh ibited co llectio n actions.

During the error resolution period, the
creditor is prohibited from trying to
collect the disputed amount from the
consumer. Prohibited collection actions

50316

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

to any person—including employers,
include, for example, instituting court
insurance companies, other creditors,
action, taking a lien, or instituting
and credit bureaus.
attachment proceedings.
3.
C red itor’s agent. Whether an
2. Right to withhold payment. The
agency relationship exists between a
disclosure that payment of any disputed
creditor and an issuer of an adverse
amount is not required pending error
credit report is determined by state or
resolution need not appear in any
other applicable law.
specific place on the periodic statement
13(e) P roced u res i f billin g erro r
and it need not state the specific amount
occu rred a s asserted .
that the consumer may withhold. The
1. C orrection o f error. The phrase “as
creditor may preprint on its periodic
applicable” means that the necessary
statement forms a statement that
corrections vary with the type of billing
payment of any disputed amount is not
error that occurred. For example, a
required pending resolution.
misidentified transaction (or a
3. Im position o f a d d itio n a l ch arg es on
transaction that is identified by one of
u n dispu ted am ounts. The consumer’s
withholding of the disputed amount from the alternative methods in § 226.8] is
cured by properly identifying the
the total bill cannot subject the
transaction and crediting related finance
undisputed portion to the imposition of
and any other charges imposed. The
finance or other charges. For qxample, if
creditor is not required to cancel the
on an account with a free-ride period, a
amount of the underlying obligation
consumer disputes a $2 item out of a
incurred by the consumer.
total bill of $300 and pays $298 within
2. Form o f correction n otice. The
the free-ride period, the consumer would
written correction notice may take a
not lose the free-ride as to the
variety of forms. It may be sent
undisputed portion, even if the creditor
separately, or it may be included on or
determines later that no billing error
with a periodic statement that is mailed
occurred.
within the time for resolution. If the
4. A utom atic pay m en t p la n s—
periodic statement is used, the amount
cov erag e. The coverage of this provision
of the billing error must be specifically
is limited to the card issuer’s intraidentified.
ipstitutional payment plans. It does not
If a separate billing error correction
apply to:
notice
is provided, the accompanying or
• Inter-institutional payment plans
subsequent periodic statement reflecting
that permit a cardholder to pay
the corrected amount may simply
automatically any credit card
identify it as “credit.”
indebtedness from an asset account
13(f) P roced u res i f d ifferen t billin g
not held by the card issuer receiving
erro r o r n o billin g erro r occu rred.
payment.
1. D ifferen t billin g error. Examples of
• Intra-institutional automatic
a
“different
billing error” include:
payment plans offered by financial
• Differences in the amount of an
institutions that are not credit card
error (for example, the customer
issuers.
asserts a $55.00 error but the error
5. A u tom atic p ay m en t p la n s—tim e o f
was only $53.00).
n otice. While the card issuer does not
• Differences in other particulars
have to restore or prevent the debiting
asserted by the consumer (such as
of a disputed amount if the billing error
when a consumer asserts that a
notice arrives after the 3-business-day
particular transaction never
cut-off, the card issuer must, however,
occurred, but the creditor
prevent the automatic debit of any part
determines that only the seller’s
of the disputed amount that is still
name
was disclosed incorrectly).
outstanding and unresolved at the time
2. Form o f cre d ito r’s ex p lan ation . The
of the next scheduled debit date.
written explanation (which also may
13(d)(2) A d v erse cred it rep orts
notify the consumer of corrections to the
p ro h ib ited .
account) may take a variety of forms. It
1. R ep ort o f dispu te. Although the
creditor must not issue an adverse credit may be sent separately, or it may be
included on or with a periodic statement
report because the consumer fails to pay
that is mailed within the time for
the disputed amount or any related
resolution. If the creditor uses the
charges, the creditor may report that the
periodic statement for the explanation
amount or the account is in dispute.
and correction(s), the corrections must
Also, the creditor may report the
be specifically identified. If a separate
account as delinquent if undisputed
explanation, including the correction
amounts remain unpaid.
notice, is provided, the enclosed or
2. “P erson. ” During the error
subsequent periodic statement reflecting
resolution period, the creditor is
the corrected amount may simply
prohibited from making an adverse
identify it as a “credit.” The explanation
credit report about the disputed amount

may be combined with the creditor’s
notice to the consumer of amounts still
owing, which is required under
§ 226.13(g)(1), provided it is sent within
the time limit for resolution. (See
Comment 13(e)-l.)
13(g) C red itor’s rights an d du ties a fter
resolu tion .
P aragraph 13(g)(1).
1. A m ounts ow ed b y consum er.
Amounts the consumer still owes may
include both minimum periodic
payments and related finance and other
charges that accrued during the
resolution period.
2. Tim e o f n otice. The creditor need
not send the notice of amount owed
within the time period for resolution,
although it is under a duty to send the
notice promptly after resolution of the
alleged error. If the creditor combines
the notice of the amount owed with the
explanation required under
§ 226.13(f)(1), the combined notice must
be provided within the time limit for
resolution.
P aragraph 13(g)(2).
1. The creditor need not allow any
free-ride period disclosed under
§§ 226.6(a)(1) and 226.7(j) to pay the
amount due under § 226.13(g)(1) if no
error occurred and the consumer was
not entitled to a free-ride period at the
time the consumer asserted the error.
P aragraph 13(g)(3).
1. Tim e fo r paym ent. The consumer
has a minimum of 10 days to pay
(measured from the time the consumer"
could reasonably be expected to have
received notice of the amount owed)
before the creditor may issue an adverse
credit report; if an initially disclosed
free-ride period allows the consumer a
longer time in which to pay, the
consumer has the benefit of that longer
period.
P aragraph 13(g)(4).
1. C redit reporting. Under
§ 226.13(g)(4](i) and (iii) the creditor’s
additional credit reporting
responsibilities must be accomplished
promptly. The creditor need not
establish costly procedures to fulfill this
requirement. For example, a creditor
that reports to a credit bureau on
scheduled updates need not transmit
corrective information by an
unscheduled computer or magnetic tape;
it may provide the credit bureau with
the correct information by letter or other
commercially reasonable means when
using the scheduled update would not
be “prompt.” The creditor is not
responsible for ensuring that the credit
bureau corrects its information
immediately.
2. A d v erse rep ort to cred it bureau. If a
creditor made an adverse report to a

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
credit bureau that disseminated the
information to other creditors, the
creditor fulfills its § 226.13(g)(4)(ii)
obligations by providing the consumer
with the name and address of the credit
bureau.
13(i) R elation to E lectron ic Fund
T ran sfer A ct an d R egulation E.
1. C overage. Credit extended directly
from a non-overdraft credit line is
governed solely by Regulation Z, even
though a combined credit card/access
device is used to obtain the extension.
2. In cid en tal cred it under agreem en t.
Credit extended incident to an
electronic fund transfer under an
agreement between the consumer and
the financial institution is governed by
§ 226.13(i), which provides that certain
error resolution procedures in both this
regulation and Regulation E apply.
Incidental credit that is not extended
under an agreement between the
consumer and the financial institution is
governed so lely by the error resolution
procedures in Regulation E. For
example:
• Credit inadvertently extended
incident to an electronic fund
transfer is governed solely by the
Regulation E error resolution
procedures, if the bank and the
consumer do not have an agreement
to extend credit when the
consumer’s account is overdrawn.
2.
A pplication to d eb it/cred it
tran saction s—ex am p les. If a consumer
withdraws money at an automated teller
machine and activates an overdraft
credit feature on the checking account:
• An error asserted with respect to
the transaction is subject, for error
resolution purposes, to the
applicable Regulation E provisions
(such as timing and notice) for the
entire transaction.
• The creditor need not provisionally
credit the consumer’s account,
under § 205.11(c)(2)(i) of Regulation
E, for any portion of thn unpaid
extension of credit.
• The creditor must credit the
consumer’s account under
§ 205.11(e) with any finance or other
charges incurred as a result of the
alleged error.
• The provisions of § 226.13 (d) and
(g) apply only to the credit portion
of the transaction.
References
Statu te: Sections 161 and 162.
O ther regu lation s: Regulation E (12
CFR 205).
P revious regu lation : §§ 226.2(j) and
(cc), and 226.14.
1981 ch an g es: Section 226.13 reflects
several substantive changes from the

previous regulation and a complete
restructuring of the error resolution
provisions. The new organization, for
example, arranges the creditor’s
responsibilities in chronological
sequence.
Section 226.13(a)(7) implements
amended § 161(b) of the act, and
provides that the creditor’s failure to
send a periodic statement to the
consumer’s current address is a billing
error, unless the creditor received
written notice of the address change
fewer than 20 days (instead of 10 days)
before the end of the billing cycle.
Several provisions regarding the
creditor’s duties after a billing error is
alleged have been revised. The previous
regulation immunized a creditor from
liability for inadvertently taking
collection action or making an adverse
credit report within 2 days after
receiving a billing error notice: these
provisions are deleted from the revised
regulation. The revised regulation no
longer requires placement “on the face”
of the periodic statment of the
disclosure about payment of disputed
amounts.
The revised regulation changes the
rule in the previous regulation that a
card issuer must prevent or restore an
automatic debit of a disputed amount if
it receives a billing error notice within
16 days after transmitting the periodic
statement that reflects the alleged error.
Under the revised regulation, the card
issuer must prevent an automatic debit
if it receives a billing error notice up to 3
days before the scheduled payment date
(provided that the notice is received
within the 60 days for the consumer to
assert the error).
S ection 226.14—D eterm ination o f
A nnual P ercen tag e R ate
14(a) G en eral rule.
1. T oleran ce. The tolerance of Vs of 1
percentage point above or below the
annual percentage rate applies to any
required disclosure of the annual
percentage rate. The disclosure of the
annual percentage rate is required in
§ § 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. Rounding. The regulation does not
require that the annual percentage rate
be calculated to any particular number
of decimal places: rounding is
permissible within the Vs of 1 percent
tolerance. For example, an exact annual
percentage rate of 14.33333% may be
stated as 14.33% or as 14.3%, or even as
14V4%: but it could not be stated as
14.2% or 14%, since each varies by more
than the permitted tolerance.
3. P eriod ic rates. No explicit tolerance
exists for any periodic rate as such; a
disclosed periodic rate may vary from

50317

precise accuracy (for example, due to
rounding) only to the extent that its
annualized equivalent is within the
tolerance permitted § 226.14(a). Further,
a periodic rate need not be calculated to
any particular number of decimal
places.
4.
F in an ce ch arg es. The regulation
does not prohibit creditors from
assessing finance charges on balances
that include prior, unpaid finance
charges: state or other applicable law
may do so, however.
14(b) A nnual p ercen tag e ra te fo r
in itia l d isclosu res an d fo r ad v ertisin g
p u rp oses.
1. C orresponding an n u al p ercen tag e
ra te com putation. For initial disclosures
(under § 226.6) and for advertising
(under § 226.16), the annual percentage
rate is determined by multiplying the
periodic rate by the number of periods
in the year. This computation reflects
the fact that, in such disclosures, the
rate (known as the corresponding
annual percentage rate) is prospective
and does not involve any particular
finance charge or periodic balance. This
computation also is used to determine
any annual percentage rate for oral
disclosures under § 226.26(a).
14(c) A nnual p ercen tag e ra te fo r
p erio d ic statem en ts.
1. G en eral rule. Section 226.14(c)
requires disclosure of the corresponding
annual percentage rate for each periodic
rate (under § 226.7(d)). It is figured by
multiplying each periodic rate by the
number of periods per year. This
disclosure is like that provided on the
initial disclosure statement. The
periodic statement also must reflect
(under § 226.7(g)) the annualized
equivalent of the rate actually applied
during a particular cycle (the historical
rate): this rate may differ from the
corresponding annual percentage rate
because of the inclusion of fixed,
minimum, or transaction charges.
Sections 226.14 (c)(1) through (c)(4) state
the computation rules for the historical
rate.
2. P erio d ic rates. Section 226.14(c)(1)
applies if the only finance charge
imposed is due to the application of a
periodic rate to a balance. The creditor
may compute the annual percentage rate
either:
• By multiplying each periodic rate by
the number of periods in the year; or
• By the “quotient” methods. This
method refers to a composite
annual percentage rate when
different periodic rates apply to
different balances. For example, a
particular plan may involve a
periodic rate of 1 Vs>% on balances
up to $500, and 1% on balances over

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Federal Register / Vol. 46, No. 196 / Friday,. October 9, 1981 / Rules and Regulations

include, for example, instituting court
action, taking a lien, or instituting
attachment proceedings.
2. Right to withhold payment. The
disclosure that payment of any disputed
amount is not required pending error
resolution need not appear in any
specific place on the periodic statement
and it need not state the specific amount
that the consumer may withhold. The
creditor may preprint on its periodic
statement forms a statement that
payment of any disputed amount is not
required pending resolution.
3. Im position o f a d d itio n a l ch arg es on
u n dispu ted am ounts. The consumer’s
withholding of the disputed amount from
the total bill cannot subject the
undisputed portion to the imposition of
finance or other charges. For qxample, if
on an account with a free-ride period, a
consumer disputes a $2 item out of a
total bill of $300 and pays $298 within
the free-ride period, the consumer would
not lose the free-ride as to the
undisputed portion, even if the creditor
determines later that no billing error
occurred.
4. A u tom atic pay m en t p la n s—
cov erag e. The coverage of this provision
is limited to the card issuer’s intrainstitutional payment plans. It does not
apply to:
• Inter-institutional payment plans
that permit a cardholder to pay
automatically any credit card
indebtedness from an asset account
not held by the card issuer receiving
payment.
• Intra-institutional automatic
payment plans offered by financial
institutions that are not credit card
issuers.
5. A utom atic p ay m en t p la n s—tim e o f
n otice. While the card issuer does not
have to restore or prevent the debiting
of a disputed amount if the billing error
notice arrives after the 3-business-day
cut-off, the card issuer must, however,
prevent the automatic debit of any part
of the disputed amount that is still
outstanding and unresolved at the time
of the next scheduled debit date.
13(d)(2) A d v erse cred it rep orts
p ro h ib ited .
1. R ep ort o f dispu te. Although the
creditor must not issue an adverse credit
report because the consumer fails to pay
the disputed amount or any related
charges, the creditor may report that the
amount or the account is in dispute.
Also, the creditor may report the
account as delinquent if undisputed
amounts remain unpaid.
2. “P erson. ” During the error
resolution period, the creditor is
prohibited from making an adverse
credit report about the disputed amount

to any person—including employers,
insurance companies, other creditors,
and credit bureaus.
3.
C red itor’s agent. Whether an
agency relationship exists between a
creditor and an issuer of an adverse
credit report is determined by state or
other applicable law.
13(e) P roced u res i f billin g erro r
occu rred a s asserted .
1. C orrection o f error. The phrase “as
applicable” means that the necessary
corrections vary with the type of billing
error that occurred. For example, a
misidentified transaction (or a
transaction that is identified by one of
the alternative methods in § 226.8] is
cured by properly identifying the
transaction and crediting related finance
and any other charges imposed. The
creditor is not required to cancel the
amount of the underlying obligation
incurred by the consumer.
2. Form o f correction n otice. The
written correction notice may take a
variety of forms. It may be sent
separately, or it may be included on or
with a periodic statement that is mailed
within the time for resolution. If the
periodic statement is used, the amount
of the billing error must be specifically
identified.
If a separate billing error correction
notice is provided, the accompanying or
subsequent periodic statement reflecting
the corrected amount may simply
identify it as "credit.”
13(f) P roced u res i f d ifferen t billin g
erro r o r n o billin g erro r occu rred.
1. D ifferen t billin g error. Examples of
a “different billing error” include:
• Differences in the amount of an
error (for example, the customer
asserts a $55.00 error but the error
was only $53.00).
• Differences in other particulars
asserted by the consumer (such as
when a consumer asserts that a
particular transaction never
occurred, but the creditor
determines that only the seller’s
name was disclosed incorrectly).
2. Form o f c re d ito r’s ex p lan ation . The
written explanation (which also may
notify the consumer of corrections to the
account) may take a variety of forms. It
may be sent separately, or it may be
included on or with a periodic statement
that is mailed within the time for
resolution. If the creditor uses the
periodic statement for the explanation
and correction(s), the corrections must
be specifically identified. If a separate
explanation, including the correction
notice, is provided, the enclosed or
subsequent periodic statement reflecting
the corrected amount may simply
identify it as a “credit.” The explanation

may be combined with the creditor’s
notice to the consumer of amounts still
owing, which is required under
§ 226.13(g)(1), provided it is sent within
the time limit for resolution. (See
Comment 13(e)—1.)
13(g) C red itor’s rights an d du ties a fter
resolu tion .
P aragraph 13(g)(1).
1. A m ounts ow ed b y consum er.
Amounts the consumer still owes may
include both minimum periodic
payments and related finance and other
charges that accrued during the
resolution period.
2. Tim e o f n otice. The creditor need
not send the notice of amount owed
within the time period for resolution,
although it is under a duty to send the
notice promptly after resolution of the
alleged error. If the creditor combines
the notice of the amount owed with the
explanation required under
§ 226.13(f)(1), the combined notice must
be provided within the time limit for
resolution.
P aragraph 13(g)(2).
1. The creditor need not allow any
free-ride period disclosed under
§§ 226.6(a)(1) and 226.7(j) to pay the
amount due under § 226.13(g)(1) if no
error occurred and the consumer was
not entitled to a free-ride period at the
time the consumer asserted the error.
P aragraph 13(g)(3).
1. Tim e fo r paym ent. The consumer
has a minimum of 10 days to pay
(measured from the time the consumer*'
could reasonably be expected to have
received notice of the amount owed)
before the creditor may issue an adverse
credit report; if an initially disclosed
free-ride period allows the consumer a
longer time in which to pay, the
consumer has the benefit of that longer
period.
P aragraph 13(g)(4).
1. C redit reporting. Under
§ 226.13(g)(4)(i) and (iii) the creditor’s
additional credit reporting
responsibilities must be accomplished
promptly. The creditor need not
establish costly procedures to fulfill this
requirement. For example, a creditor
that reports to a credit bureau on
scheduled updates need not transmit
corrective information by an
unscheduled computer or magnetic tape;
it may provide the credit bureau with
the correct information by letter or other
commercially reasonable means when
using the scheduled update would not
be "prompt.” The creditor is not
responsible for ensuring that the credit
bureau corrects its information
immediately.
2. A d v erse rep ort to cred it bureau. If a
creditor made an adverse report to a

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
credit bureau that disseminated the
information to other creditors, the
creditor fulfills its § 226.13(g)(4)(ii)
obligations by providing the consumer
with the name and address of the credit
bureau.
13(i) R elation to E lectron ic Fund
T ran sfer A ct an d R egulation E.
1. C overage. Credit extended directly
from a non-overdraft credit line is
governed solely by Regulation Z, even
though a combined credit card/access
device is used to obtain the extension.
2. In cid en tal cred it under agreem en t.
Credit extended incident to an
electronic fund transfer under an
agreement between the consumer and
the financial institution is governed by
§ 226.13(i), which provides that certain
error resolution procedures in both this
regulation and Regulation E apply.
Incidental credit that is not extended
under an agreement between the
consumer and the financial institution is
governed so lely by the error resolution
procedures in Regulation E. For
example:
• Credit inadvertently extended
incident to an electronic fund
transfer is governed solely by the
Regulation E error resolution
procedures, if the bank and the
consumer do not have an agreement
to extend credit when the
consumer’s account is overdrawn.
2.
A pplication to d eb it/cred it
tran saction s—ex am p les. If a consumer
withdraws money at an automated teller
machine and activates an overdraft
credit feature on the checking account:
• An error asserted with respect to
the transaction is subject, for error
resolution purposes, to the
applicable Regulation E provisions
(such as timing and notice] for the
entire transaction.
• The creditor need not provisionally
credit the consumer’s account,
under § 205.11(c)(2)(i) of Regulation
E, for any portion of tha unpaid
extension of credit.
• The creditor must credit the
consumer’s account under
§ 205.11(e) with any finance or other
charges incurred as a result of the
alleged error.
• The provisions of § 226.13 (d) and
(g) apply only to the credit portion
of the transaction.
References
S tatu te: Sections 161 and 162.
O ther regu lation s: Regulation E (12
CFR 205).
P revious regu lation : §§ 226.2(j) and
(cc), and 226.14.
1981 ch an g es: Section 226.13 reflects
several substantive changes from the

previous regulation and a complete
restructuring of the error resolution
provisions. The new organization, for
example, arranges the creditor’s
responsibilities in chronological
sequence.
Section 226.13(a)(7) implements
amended § 161(b) of the act, and
provides that the creditor’s failure to
send a periodic statement to the
consumer’s current address is a billing
error, unless the creditor received
written notice of the address change
fewer than 20 days (instead of 10 days)
before the end of the billing cycle.
Several provisions regarding the
creditor's duties after a billing error is
alleged have been revised. The previous
regulation immunized a creditor from
liability for inadvertently taking
collection action or making an adverse
credit report within 2 days after
receiving a billing error notice; these
provisions are deleted from the revised
regulation. The revised regulation no
longer requires placement “on the face”
of the periodic statment of the
disclosure about payment of disputed
amounts.
The revised regulation changes the
rule in the previous regulation that a
card issuer must prevent or restore an
automatic debit of a disputed amount if
it receives a billing error notice within
16 days after transmitting the periodic
statement that reflects the alleged error.
Under the revised regulation, the card
issuer must prevent an automatic debit
if it receives a billing error notice up to 3
days before the scheduled payment date
(provided that the notice is received
within the 60 days for the consumer to
assert the error).
Section 226.14—D eterm ination o f
A nnual P ercen tage R ate
14(a) G en eral rule.
1. Tolerance. The tolerance of Vs of 1
percentage point above or below the
annual percentage rate applies to any
required disclosure of the annual
percentage rate. The disclosure of the
annual percentage rate is required in
§ § 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. Rounding. The regulation does not
require that the annual percentage rate
be calculated to any particular number
of decimal places; rounding is
permissible within the Vs of 1 percent
tolerance. For example, an exact annual
percentage rate of 14.33333% may be
stated as 14.33% or as 14.3%, or even as
14 x/4%; but it could not be stated as
14.2% or 14%, since each varies by more
than the permitted tolerance.
3. P eriod ic rates. No explicit tolerance
exists for any periodic rate as such; a
disclosed periodic rate may vary from

50317

precise accuracy (for example, due to
rounding) only to the extent that its
annualized equivalent is within the
tolerance permitted § 226.14(a). Further,
a periodic rate need not be calculated to
any particular number of decimal
places.
4.
F in an ce charges. The regulation
does not prohibit creditors from
assessing finance charges on balances
that include prior, unpaid finance
charges; state or other applicable law
may do so, however.
14(b) A nnual p ercen ta g e ra te fo r
in itia l d isclosu res an d fo r ad v ertisin g
p u rp oses.
1. C orresponding an n ual p ercen tag e
rate com putation. For initial disclosures
(under § 226.6) and for advertising
(under § 226.16), the annual percentage
rate is determined by multiplying the
periodic rate by the number of periods
in the year. This computation reflects
the fact that, in such disclosures, the
rate (known as the corresponding
annual percentage rate) is prospective
and does not involve any particular
finance charge or periodic balance. This
computation also is used to determine
any annual percentage rate for oral
disclosures under § 226.26(a).
14(c) A nnual p ercen tag e ra te fo r
p erio d ic statem en ts.
1. G en eral rule. Section 226.14(c)
requires disclosure of the corresponding
annual percentage rate for each periodic
rate (under § 226.7(d)). It is figured by
multiplying each periodic rate by the
number of periods per year. This
disclosure is like that provided on the
initial disclosure statement. The
periodic statement also must reflect
(under § 226.7(g)) the annualized
equivalent of the rate actually applied
during a particular cycle (the historical
rate); this rate may differ from the
corresponding annual percentage rate
because of the inclusion of fixed,
minimum, or transaction charges.
Sections 226.14 (c)(1) through (c)(4) state
the computation rules for the historical
rate.
2. P eriod ic rates. Section 226.14(c)(1)
applies if the only finance charge
imposed is due to the application of a
periodic rate to a balance. The creditor
may compute the annual percentage rate
either:
• By multiplying each periodic rate by
the number of periods in the year; or
• By the “quotient” methods. This
method refers to a composite
annual percentage rate when
different periodic rates apply to
different balances. For example, a
particular plan may involve a
periodic rate of Wz% on balances
up to $500, and 1% on balances over

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

$500. If, in a given cycle, the
consumer has a balance of $800, the
finance charge would consist of
$7.50 (500X .015) plus $3.00
(300X .01), for a total finance charge
of $10.50. The annual percentage
rate for this period may be
disclosed either as 18% on $500 and
12% on $300, or as 15.75% on a
balance of $800 (the quotient of
$10.50 divided by $800, multiplied
by 12).
3. C harges n ot b a s e d on p erio d ic
rates. Section 226.14(c)(2) applies if the
finance charge imposed includes a
charge not due to the application of a
periodic rate (other than a charge
relating to a specific transaction). For
example, if the creditor imposes a
minimum $1 finance charge on all
balances below $50, and the consumer’s
balance was $40 in a particular cycle,
the creditor wopld disclose an annual
percentage rate of (30% 1/40X12).
4. N o b ala n ce. Footnote 32 to
§ 226.14(c)(2) would apply not only
when minimum charges are imposed on
an account with no balance, but also to
a plan in which a periodic rate is
applied to advances from the date of the
transaction. For example, if on May 19
the consumer pays the new balance in
full from a statement dated May 1, and
has no further transactions reflected on
the June 1 statement, that statement
would reflect a finance charge with no
account balance.
5. T ran saction ch arg es. Section
226.14(c)(3) transaction charges include,
for example:
• A loan fee of $10 imposed on a
particular advance.
• A charge of 3% of the amount of
eacn transaction.
The reference to avoiding duplication
in the computation requires that the
amounts of transactions on which
transaction charges were imposed not
be included both in the amount of total
balances an d in the “other amounts on
which a finance charge was imposed”
figure. For further explanation and
examples of how to determine the
components of this formula, see
Appendix F.
6. C harges re la te d to openin g account.
Footnote 33 is applicable to
§ 226.14 (c)(2) and (c)(3). The charges
involved here do not relate to a specific
transaction or to activity on the account,
but relate solely to the opening of the
account. Inclusion of these charges in
the annual percentage rate calculation
results in significant distortions of the
annual percentage rate and delivery of a
possibly misleading disclosure to
consumers. The rule in footnote 33
applies even if the loan fee, points, or

http://fraser.stlouisfed.org/
Federal Reserve Bank ofI St. Louis

similar charges are billed on a
subsequent periodic statement or
withheld from the proceeds of the first
advance on the account.
7. C lassifica tion o f ch arg es. If the
finance charge includes a charge not due
to the application of a periodic rate, the
creditor must determine the proper
annual percentage rate computation
method according to the type of charge
imposed. If the charge is tied to a
specific transaction (for example, 3% of
the amount of each transaction), then
the method in § 226.14(c)(3) must be
used. If a fixed or minimum charge is
applied, that is, one not tied to any
specific transaction, then the formula in
§ 226.14(c)(2) is appropriate.
8. S m all fin a n ce ch arg es. Section
226.14(c)(4) gives the creditor an
alternative to § 226.14(c)(2) and (c)(3) if
small (50 cents or less) minimum or
fixed fees are involved. For example,
while a monthly activity fee of 50 cents
on a balance of $20 would produce an
annual percentage rate of 30% under the
rule in § 226.14(c)(2), the creditor may
disclose an annual percentage rate of
18% if the periodic rate generally
applicable to all balances is l x/2% per
month. This option is consistent with the
provision in footnote 11 to §§ 226.6 and
226.7 permitting the creditor to disregard
the effect of minimum charges in
disclosing the ranges of balances to
which periodic rates apply.
14(d) C alcu lation s w h ere d a ily
p erio d ic ra te ap p lied .
1. Q uotient m ethods. Section 226.14(d)
addresses use of a daily periodic rate(s)
to determine some or all of the finance
charge and use of the quotient method to
determine the annual percentage rate.
Since the quotient formula in
§ 226.14(c)(l)(ii) does not work when a
daily rate is being applied to a series of
daily balances, § 226.14(d) gives the
creditor 2 alternative ways to figure the
annual percentage rate—cither of which
satisfies the requirement in § 226.7(g).
2. D aily ra te w ith s p e c ific tran saction
chary ' Tr ' e finance charge results
from a charge relating to a specific
transaction and the application of a
daily periodic rate, the calculation
method in § 226.14(d)(2) should be used.
References
S tatu te: Section 107.
O ther sectio n s: § § 226.6, 226.7, 226.9,
226.15, 226.16, and 226.26.
P reviou s reg u lation : § 226.5(a) and
Interpretation §§ 226.501 and 226.506.
1981 ch an g es: Section 226.14 reflects
the statutory amendment permitting a Vs
of 1 percent tolerance for annual
percentage rates. The revised regulation
no longer reflects the provision dealing
with finance charges imposed on

specified ranges or brackets of balances.
The revised regulation includes a
footnote providing that loan fees, points,
or similar charges unrelated to any
specific transaction are not figured into
the annual percentage rate computation.
S ection 226.15—R ight o f R escission
1. T ran saction s n ot cov ered . Credit
extensions that are not subject to the
regulation are not covered by § 226.15
even if the customer’s principal dwelling
is the collateral securing the credit. For
this purpose, “credit extensions” also
would include the occurrences listed in
Comment 15(a)(1)—1. For example, the
right of rescission does not apply to the
opening of a business-purpose credit
line, even though the loan is secured by
the customer’s principal dwelling.
15(a) C onsum er’s right to rescin d.
P aragraph 15(a)(1).
1. O ccu rren ces su b ject to right. Under
an open-end credit plan secured by the
consumer’s principal dwelling, the right
of rescission generally arises with each
of the following occurrences:
•
•
•
•

Opening the account.
Each credit extension.
Increasing the credit limit.
Adding to an existing account a
security interest in the consumer’s
principal dwelling.
• Increasing the dollar amount of the
security interest taken in the
dwelling to secure the plan. For
example, a consumer may open an
account with a $10,000 credit limit,
$5,000 of which is initially secured
by the consumer’s principal
dwelling. The consumer has the
right to rescind at that time and
(except as noted in § 226.15(a)(l)(ii))
with each extension on the account.
Later, if the creditor decides that it
wants the credit line fully secured,
and increases the amount of its
interest in the consumer’s dwelling,
the consumer has the right to
rescind the increase.
2. E xception s. Although the consumer
generally has the right to rescind with
each transaction on the account, § 125(e)
of the act provides an exception: until
March 31,1985, the creditor need not
provide the right to rescind at the time
of each credit extension made under an
open-end credit plan secured by the
consumer’s principal dwelling to the
extent that the credit extended is in
accordance with a previously
established credit limit for the plan. The
consumer will have the right to rescind
each extension made after March 31,
1985, under such a secured open-end
credit plan, whether that plan was
established before or after that date.

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
3. S ecu rity in terest arisin g from
tran saction. In order for the right of
rescission to apply, the security interest
must be retained as part of the credit
transaction. For example:
• A security interest that is acquired
by a contractor who is also
extending the credit in the
transaction.
• A mechanic’s or materialman’s lien
that is retained by a subcontractor
or supplier of a contractor-creditor,
even when the latter has waived its
own security interest in the
consumer’s home.
The security interest is not part of the
credit transaction, and therefore the
transaction is not subject to the right of
rescission when, for example:
• A mechanic’s or materialman’s lien
is obtained by a contractor who is
not a party to the credit transaction
but merely is paid with the proceeds
of the consumer’s cash advance.
• All security interests that may arise
in connection with the credit
transaction are validly waived.
• The creditor obtains a lien and
completion bond that in effect
satisfies all liens against the
consumer’s principal dwelling as a
result of the credit transaction.
Although liens arising by operation of
law are not considered security interests
for purposes of disclosure under § 226.2,
that section specifically includes them in
the definition for purposes of the right of
rescission. Thus, even though an interest
in the consumer’s principal dwelling is
not a required disclosure under
§ 226.6(c), it may still give rise to the
right of rescission.
4. Consum er. To be a consumer within
the meaning of § 226.2, that person must
at least have an ownership interest in
the dwelling that is encumbered by the
creditor’s security interest, although that
person need not be a signatory to the
credit agreement. For example, if only
orte spouse enters into a secured plan,
the other spouse is a consumer if the
ownership interest of that spouse is
subject to the security interest.
5. P rin cip al dw elling. A consumer can
only have on e principal dwelling at a
time. A vacation or other second home
would not be a principal dwelling. A
transaction secured by a second home
(such as a vacation home) that is not
currently being used as the consumer's
principal dwelling is not rescindable,
even if the consumer intends to reside
there in the future. When a consumer
buys or builds a new dwelling that will
become the consumer’s principal
dwelling within one year or upon
completion of construction, the new
dwelling is considered the principal

dwelling when it secures the open-end
credit line. Dwelling, as defined m
§ 226.2, includes structures that are
classified as personalty under state law.
For example, a transaction secured by a
mobile home, trailer, or houseboat used
as the consumer’s principal dwelling
may be rescindable.
6.
S p ecia l ru le fo r p rin cip a l dw elling.
When the consumer is acquiring or
constructing a new principal dwelling,
an y credit plan or extension secured by
the equity in the consumer’s current
principal dwelling (for example, an
advance to be used as a bridge loan) is
still subject to the right of rescission.
P aragraph 15(a)(2).
1. Consum er's ex erc ise o f right. The
consumer must exercise the right of
rescission in writing, but not necessarily
on the notice supplied under § 226.15(b).
Whatever the means of sending the
notification of rescission—mail,
telegram, or other written means—the
time period for the creditor’s
performance under § 226.15(d)(2) does
not begin to run until the notification
has been received. The creditor may
designate an agent to receive the
notification so long as the agent’s name
and address appear on the notice
provided to the consumer under
§ 226.15(b).
P aragraph 15 (a)(3).
1. R escission p eriod , the period
within which the consumer may
exercise the right to rescind runs for 3
business days from the last of 3 events:
• The occurrence that gives rise to the
right of rescission.
• Delivery of a ll material disclosures
that are relevant to the plan.
• Delivery to the consumer of the
required rescission notice.
For example, an account is opened on
Friday, June 1, and the disclosures and
notice of the right to rescind were given
on Thursday, May 31; the rescission
period will expire at midnight of the
third business day after June 1— that is,
Tuesday June 5. In another example, if
the disclosures are given and the
account is opened on Friday, June 1, and
the rescission notice is given on
Monday, June 4, the rescission period
expires at midnight of the third business
day after June 4— that is Thursday, June
7. The consumer must place the
rescission notice in the mail, file it for
telegraphic transmission, or deliver it to
the creditor's place of business within
that period in order to exercise the right.
2. M aterial d isclosu res. Footnote 36
sets forth the material disclosures that
must be provided before the rescission
period can begin to run. The creditor
must provide sufficient information to
satisfy the requirements of §226.6 for

50319

these disclosures. A creditor may satisfy
this requirement by giving an initial
disclosure statement that complies with
the regulation. Failure to give the other
required initial disclosures (such as the
billing rights statement) does not
prevent the running of the rescission
period, although that failure may result
in civil liability or administrative
sanctions.
3. M a teria l d isclo su res— v a ria b le ra te
program . For a variable rate program,

the material disclosures also include the
disclosures listed in footnote 12 to
§226.6(a)(2): the circumstances under
which the rate may increase; the
limitations on the increase; and the
effect of an increase.
4. U n expired right o f rescissio n . When
the creditor has failed to take the action
necessary to start the 3-day rescission
period running, the right to rescind
automatically lapses on the occurrence
of the earliest of the following 3 events:
• The expiration of 3 years after the
occurrence giving rise to the right of
rescission.
• Transfer of all the consumer’s
interest in the property.

• Sale of the consumer’s interest in
the property, including a transaction
in which the consumer sells the
dwelling and takes back legal title
through a purchase money note and
mortgage.
Transfer of all the consumer’s interest
includes such transfer as bequests and
gifts. A sale or transfer of the property
need not be voluntary to terminate the
right to rescind. For example, a
foreclosure sale would terminate an
unexpired right to rescind. As provided
in §125 of the act, the 3-year limit may
be extended by an administrative
proceeding to enforce the provisions of
§226.15. A partial transfer of the
consumer’s interest, such as a transfer
bestowing co-ownership on a spouse,
does not terminate the right of
rescission.
P aragraph 15(a)(4).
1. Join t ow n ers. When more than one

consumer has the right to rescind a
transaction, any one of them may
exercise that right and cancel the
transaction on behalf of all. For
example, if both a husband and wife
have the right to rescind a transaction,
either spouse acting alone may exercise
the right and both are bound by the
rescission.
15(b) N otice o f right to rescin d .
1. W ho r e c eiv es n otice. Each

consumer entitled to rescind must be
given:
• Two copies of the rescission notice.
• The material disclosures.

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Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

In a transaction involving joint
owners, both of the whom are entitled to
rescind, both must receive the notice of
the right to rescind and disclosures. For
example, if both spouses are entitled to
rescind a transaction, each must receive
2 copies of the rescission notice and one
copy of the disclosures.
2. Form at. The rescission notice may
be physically separated from the
material disclosures or combined with
the material disclosures, so long as the
information required to be included on
the notice is set forth in a clear and
conspicuous manner. See the model
notices in Appendix G.
3. Content. The notice must include all
of the information outlined in
§ 226.15(b)(1) through (5). The
requirement in § 226.15(b) that the
transaction or occurrence be identified
may be met by providing the date of the
transaction or occurrence. The notice
may include additional information
related to the required information, such
as:
• A description of the property
subject to the security interest.
• A statement that joint owners may
have the right to rescind and that a
rescission by one is effective for all.
• The name and address of an agent
of the creditor to receive notice of
rescission.
4. Tim e o f providin g notice. The notice
required by § 226.15(b) need not be
given before the occurrence giving rise
to the right of rescission. The creditor
may deliver the notice after the
occurrence, but the rescission period
will not begin to run until the notice is
given. For example, if the creditor
provides the notice on May 15, but
disclosures were given and the credit
limit was raised on May 10, the 3business-day rescission period will run
from May 15.
15(c) D elay o f cre d ito r’s perform an ce.
1. G en eral rule. Until the rescission
period has expired and the creditor is
reasonably satisfied that the consumer
has not rescinded, the creditor must not,
either directly or through a third party:
• Disburse advances to the consumer.
• Begin performing services for the
consumer.
• Deliver materials to the consumer.
2. E scrow . The creditor may disburse
advances during the rescission period in
a valid escrow arrangement. The
creditor may not, however, appoint the
consumer as "trustee” or “escrow
agent” and distribute funds to the
consumer in that capacity during the
delay period.
3. P erm issib le actions. Section
226.15(c) does not prevent the creditor
from taking other steps during the delay,

short of beginning actual performance.
The creditor may, for example:
• Prepare the cash advance check.
• Perfect the security interest.
• Accrue finance charges during the
delay period.
4. P erform an ce b y th ird p arty. The
creditor is relieved from liability for
failure to delay performance if a third
party with no knowledge that the
rescission right has been activated
provides materials or services, as long
as any debt incurred for materials or
services obtained by the consumer
during the rescission period is not
secured by the security interest in the
consumer’s dwelling. For example, if a
consumer uses a bank credit card to
purchase materials from a merchant in
an amount below the floor limit, the
merchant might not contact the card
issuer for authorization and therefore
would not know that materials should
not be provided.
5. D elay b ey on d rescissio n p eriod .
The creditor must wait until it is
reasonably satisfied that the consumer
has not rescinded. For example, the
creditor may satisfy itself by doing one
of the following:
• Waiting a reasonable time after
expiration of the rescission period
to allow for delivery of a mailed
notice.
• Obtaining a written statement from
the consumer that the right has not
been exercised.
When more than one consumer has
the right to rescind, the creditor cannot
reasonably rely on the assurance of only
one consumer, because other consumers
may exercise the right.
15(d) E ffec ts o f rescissio n .
P aragraph 15(d)(1).
1. T erm ination o f secu rity in terest.
Any security interest giving rise to the
right of rescission becomes void when
the consumer exercises the right of
rescission. The security interest is
automatically negated, regardless of its
status and whether or not it was
recorded or perfected. Under
§ 226.15(d)(2), however, the creditor
must take any action necessary to
reflect the fact that the security interest
no longer exists.
2. E xtent o f term in ation. The
creditor’s security interest is void to the
extent that it is related to the occurrence
giving rise to the right of rescission. For
example, upon rescission:
• If the consumer’s right to rescind is
activated by the opening of a plan,
any security interest in the principal
dwelling is void.
• If the right arises due to an increase
in the credit limit, the security
interest is void as to the amount of

credit extensions over the prior
limit, but the security interest in
amounts up to the original credit
limit is unaffected.
• If the right arises with each
individual credit extension, then the
interest is void as to that extension,
and other extensions are
unaffected.
P aragraph 15(d)(2).
1. R efun ds to consum er. The consumer
cannot be required to pay any amount in
the form of money or property either to
the creditor or to a third party as part of
the occurrence subject to the right of rescission. Any amounts of this nature
already paid by the consumer must be
refunded. “Any amount” includes
finance charges already accrued, as well
as other charges such as application and
commitment fees or fees for a title
search or appraisal,' whether paid to the
creditor, paid directly to a third party, or
passed on from the creditor to the third
party. It is irrelevant that these amounts
may not represent profit to the creditor.
For example;
• If the occurrence is the opening of
the plan, the creditor must return
any membership or application fee
paid.
• If the occurrence is the increase in a
' credit limit or the addition of a
security interest, the creditor must
return any fee imposed for a new
credit report or filing fees.
• If the occurrence is a credit
extension, the creditors must return
fees such as application, title, and
appraisal or survey fees, as well as
any finance charges related to the
credit extension.
2. A m ounts n ot refu n d ab le to
consum er. Creditors need not return any
money given by the consumer to a third
party outside of the occurrence, 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 § 226.15(d)(3).
3. R eflectio n o f secu rity in terest
term ination. The creditor must take
whatever steps are necessary to indicate
that the security interest is terminated.
Those steps include the cancellation of
documents creating the security interest,
and the filing of release or termination
statements in the public record. In a
transaction involving subcontractors or
suppliers that also hold security
interests related to the occurrfence
rescinded by the consumer, the creditor
must insure that the termination of their
security interests is also reflected. The
20-day period for the creditor’s action

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
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.
P aragraph 15(d)(3).
1. P roperty exchan ge. Once the
creditor has fulfilled its obligation under
§ 226.15(d)(2), the consumer must tender
to the creditor any property or money
the creditor has already delivered to the
consumer. At the consumer’s option,
property may be tendered at the
location of the property. For example, if
fixtures or furniture have been delivered
to the consumer’s home, the consumer
may tender them to the creditor by
making them available for pick-up at the
home, rather than physically returning
them to the creditor’s premises. Money
already given to the consumer m ust be
tendered at the creditor’s place of
business. For purpose of property
exchange, the following additional rules
apply:
• 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.
• In a 3-party open-end credit 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 transaction is a purchase for
other purposes under the regulation.
For example, if a consumer
exercises the unexpired right to
rescind after using a 3-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.
2. R ea so n a b le value. If returning the
property would be extremely
burdensome to the consumer, the
consumer may offer the creditor its.
reasonable value rather than returning
the property itself. For example, if
building materials have already been
incorporated into the consumer’s
dwelling, the consumer may pay their
reasonable value.
P aragraph 15(d)(4).
1. M odification s. The procedures
outlined in § 226.15(d)(2) and (d)(3) may
be modified by a court. For example,
when a consumer is in bankruptcy
proceedings and prohibited from
returning anything to the creditor, or

when the equities dictate, a modification
might be made.
15(e) C onsum er’s w aiv er o f right to
rescin d.
1. N eed fo r w aiver. 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
rescission period. The existence of the
consumer’s waiver will not, of itself,
automatically insulate the creditor from
liability for failing to provide the right of
rescission.
2. P rocedu re. To waive or modify the
right to rescind, the consumer must give
a written statement that specifically
waives or modifies the right, and also
includes a brief description of the
emergency. Each consumer entitled to
rescind must sign the waiver statement.
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.
15(f) E xem pt tran saction s.
1. R esid en tia l m ortgage tran saction .
Although residential mortgage
transactions would seldom be made on
bona fide open-end credit plans (under
which repeated transactions must be
reasonably contemplated), an advance
on an open-end plan could be for a
downpayment for the purchase of a
dwelling that would then secure the
remainder of the line. In such a case,
only the particular advance for the
downpayment would be exempt from
the rescission right.
2. S tate cred itors. Cities and other
political subdivisions of states acting as
creditors are not exempt from § 226.15.
3. S p read er clau se. 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” (also known as a
“dragnet” or cross-collateralization
clause), subsequent occurrences such as
the opening of a plan or individual credit
extensions are subject to the right of
rescission to the same degree as if the
security interest were taken directly to
secure the open-end plan, unless the
creditor effectively waives its security
interest under the spreader clause with
respect to the subsequent open-end
credit extensions.
References
S tatu te: Secs. 113,125, and 130.
O ther sectio n s: § § 226.2 and
Appendix G.
P reviou s regu lation : § 226.9.
1981 ch an g es: Section 226.15 reflects
the statutory amendments of 1980,
providing for a limited right of rescission
for a 3-year trial period when individual
credit extensions are made in

50321

accordance with a previously
established credit limit for an open-end
credit plan.
The right to rescind applies not only
to real property used as the consumer’s
principal dwelling, but to personal
property as well. The regulation
provides no specific text or format for
the rescission notice.
When a consumer exercises the right
to rescind, the creditor now has 20 days
to return a consumer’s money or
property and take the necessary action
to terminate the security interest. The
creditor has 20 days to take possession
of the money or property after the
consumer’s tender before the consumer
may keep it without further obligation.
Under the revised regulation, the
waiver provision has been relaxed. The
lien status of the mortgage is irrelevant
for purposes of the residential mortgage
transaction exemption. The exemption
for agricultural loans from the right to
rescind has been deleted.
Section 226.18—A dvertising

1. C lear an d conspicuous standard.
Section 226.16 is subject to the general
“clear and conspicuous” standard for
Subpart B (see § 226.5(a)(1)) 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) A ctu ally a v a ila b le term s.
1. G en eral rule. To the extent that 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. Section 226.16(a) is not
intended to inhibit the promotion of new
credit programs, but to bar the
advertising of terms that are not and
wilt not be available. For example, a
creditor may advertise terms that will be
offered for only a limited period, or
terms that will become available at a
future date.
2. S p ecific cred it terms. “Specific
credit terms” is not limited to the
disclosures required by the regulation
but would include any specific
components of a credit plan, such as the
minimum periodic payment amount or
seller s points in a plan secured by real
estate.
16(b) A dvertisem en t o f term s that
requ ire ad d ition al disclosu res.
1. Use o f p o sitiv e terms. An
advertisement must state a credit term
a^ . P ° sitive number in order to trigger
additional disclosures. For example, “no

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annual membership fee” would not
trigger the additional disclosures
required by § 226.16(b).
2. Im p licit term s. Section 226.16(b)
applies even if the triggering term is not
sta-ted 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. M em bersh ip fe e s . A membership
fee is not a triggering term nor need it be
disclosed under § 226.16(b)(3) if it is
required for participation in the plan
whether or not an open-end credit
feature is attached. (See Comment 6(b)—
1.)

4. V ariab le ra te p lan s. An
advertisement for a variable rate plan
complies with § 226.16(b)(2) if it
discloses that “the annual percentage
rate may vary” or a similar statement,
but the advertisement need not include
the information required by footnote 12
to § 226.6(a)(2).
5. Triggering term s. The following are
examples of terms that trigger additional
disclosures:
• “Charge it—it won’t be billed to
your account until February.”
• "Small montly service charge on the
remaining balance.”
• “12% Annual Percentage Rate.”
• “A $15 annual membership fee buys
you $2,000 in credit.”
16(c) C atalogs an d m u ltiple-page
ad v ertisem en ts.
1. D efinition. The multiple-page
advertisements to which § 226.16(c)
refers are advertisements consisting of a
series of sequentially numbered pages—
for example, a supplement to a
newspaper. 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 § 226.16(c).
P aragraph 16(c)(1).
1. G en eral. Section 226.16(c)(1)
permits creditors to put credit
information together in one place in a
catalog or multiple-page advertisement.
The rule applies only if the catalog or
multiple-page advertisement contains
one or more of the triggering terms from
§ 226.16(b).
P aragraph 16(c)(2).
1. T ab le o r sch ed u le i f cred it term s
d ep en d on outstanding b ala n ce. If the
credit terms of a plan vary depending on
the amount of the balance outstanding,
rather than the amount of any property
purchased, a table or schedule complies
with § 226.16(c)(2) if it includes the
required disclosures for representative

balances. For example, a creditor would
disclose that a periodic rate of 1.5% is
applied to balances of $500 or less, and
a 1% rate is applied to balances greater
than $500.
References
S tatu te: Secs. 141 and 143.
P reviou s regu lation : § 226.10 (a)
through (c) and Interpretation
§ 226.1002.
O ther sectio n s: § § 226.2 and 226.6.
1981 ch an g es: Section 226.16 reflects
the statutory changes to § 143 of the act
which reduce both the number of
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 triggering
term is used. The substance of
Interpretation § 226.1002, requiring
disclosure of representative amounts of
credit in catalogs and multiple-page
advertisements, has been incorporated
in simplified form in paragraph (c).

Subpart C—Closed-End Credit
S ection 226.17—G en eral D isclosu re
R equ irem en ts
17(a) Form o f d isclosu res.
P aragraph 17(a)(1).
1. C lear an d con spicu ou s. This
standard requires that disclosures be in
a reasonably understandable form. For
example, while the regulation requires
no 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. S egregation o f d isclosu res. The
disclosures may be grouped together
and segregated from other information
in a variety of ways. For example, the
disclosures may appear on a separate
sheet of paper or may be set off from
other information on the contract or
other documents:
• By outlining them in a box.
• By bold print dividing lines.
• By a different color background.
• By a different type style.
3. L ocation . The regulation imposes no
specific location requirements on the
segregated disclosures. For example:
• They may appear on a disclosure
statement separate from all other
material.
• They may be placed on the same
document with the credit contract
or other information, so long as they
are segregated from that
information.
• They may be shown on the front or

back of a document.
• They need not begin at the top of a
page.
• They may be continued from one
page to another.

4. Content o f seg reg ated disclosures.
Footnotes 37 and 38 contain exceptions
to the requirement that the disclosures
under § 226.18 be segregated from
material that is not directly related to
those disclosures. Footnote 37 lists the
items that may be added to the
segregated disclosures, even though not
directly related to those disclosures.
Footnote 38 lists the items required
under § 226.18 that may be deleted from
the segregated disclosures and appear
elsewhere. Any one or more of these
additions or deletions may be combined
and appear either together with or
separate from the segregated
disclosures. The itemization of the
amount financed under § 226.18(c),
however, must be separate from the
other segregated disclosures under
§ 226.18.
5. D irectly related. The segregated
disclosures may, at the creditor’s option,
include any information that is directly ’
related to those disclosures. Directly
related information includes, for
example, the following:
• A description of a grace period after
which a late payment charge will be
imposed. For example, the
disclosure given under § 226.18(1)
may state that a late charge will
apply to any payment received
more than 15 days after the due
date.”
• A statement that the transaction is
not secured. For example, the
creditor may add a category
labelled "unsecured” or “not
secured” to the security interest
disclosures given under § 226.18(m).
• The basis for any estimates used in
making disclosures. For example, if
the maturity date of a loan depends
solely on the occurrence of a future
event, the creditor may indicate that
the disclosures assume that event
will occur at a certain time.
• The conditions under which a
demand feature may be exercised.
For example, in a loan subject to
demand after 5 years, the
disclosures may state that the loan
will become payable on demand in
5 years.
• When a variable rate feature is
disclosed on other documents under
footnote 43 to § 226.18(f), a
reference to the variable rate
feature and/or to other documents
on which the variable rate
disclosures are made.

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
• An explanation of the use of
pronouns or other references to the
parties to the transaction. For
example, the disclosures may state,
“ ‘You’ refers to the customer and
‘we’ refers to the creditor."
• Instructions to the creditor or its
employees on the use of a multiplepurpose form. For example, the
disclosures may state, “Check box if
applicable.”
6.
M u ltiple-pu rpose form s. The
creditor may design a disclosure
statement that can be used for more
than one type of transaction, so long as
the required disclosures for individual
transactions are clear and conspicuous.
(See the commentary to Appendices G
and H for a discussion of the treatment
of disclosures that do not apply to
specific transactions.) Any disclosure
listed in § 226.18 (except the itemization
of the amount Financed under
§ 226.18(c)) may be included on a
standard disclosure statement even
though not all of the creditor’s
transactions include those features. For
example, the statement may include:
• The variable rate disclosure under
§ 226.18(f).
• The demand feature disclosure
under § 226.18(i).
• A reference to the possibility of a
security interest arising from a
spreader clause, under § 226.18(m).
• The assumption policy disclosure
under § 226.18(q).
• The required deposit disclosure
under § 226.18(r).
P aragraph 17(a)(2).
1. W hen d isclosu res m ust b e m ore
conspicuous. The following rules apply
to the requirement that the terms
“annual percentage rate" and “finance
charge” be shown more conspicuously:

• The terms must be more
conspicuous only in relation to the
other required disclosures under
§ 226.18. For example, when the
disclosures are included on the
contract document, those 2 terms
need not be more conspicuous as
compared to the heading on the
contract document or information
required by state law.
• The terms need not be more
conspicuous except as part of the
finance charge and annual
percentage rate disclosures under
§ 226.18 (d) and (e), although they
may, at the creditor’s option, be
highlighted wherever used in the
required disclosures. For example,
the terms may, but need not, be
highlighted when used in disclosing
a prepayment penalty under
§ 226.18(k) or a required deposit
under § 226.18(r).

• The creditor’s identity under
§ 226.18(a) may, but need not, be
more prominently displayed than
the finance charge and annual
percentage rate.
2. M aking d isclosu res m ore
con spicu ou s. The terms “finance
charge” and "annual percentage rate”
may be made more conspicuous in any
way that highlights them in relation to
the other required disclosures. For
example, they may be:
• Capitalized when other disclosures
are printed in capital and lower
case.
• Printed in larger type, bold print or
different type face.
• Printed in a contrasting color.

• Underlined.
• Set off with asterisks.
17(b) Tim e o f d isclosu res.
1. Consum m ation. As a general rule,
disclosures must be made before
“consummation” of the transaction. The
disclosures need not be given by any
particular time before consummation,
except in certain mortgage transactions
under § 226.19. (See the commentary to
§ 226.2(a)(13) regarding the definition of
consummation.)
2. C onverting op en -en d to clo sed -en d
cred it. If an open-end credit account is
converted to a closed-end transaction
under a written agreement with the
consumer, the creditor must provide a
set of closed-end credit disclosures
before consummation of the closed-end
transaction. (See the commentary to
§ 226.5 regarding conversion of closedend to open-end credit.)
17(c) B asis o f d isclosu res an d u se o f
estim ates.
P aragraph 17(c)(1).
1. L eg al oblig ation . The disclosures
should reflect the credit terms to which
the parties are legally bound at the
outset of the transaction.
• The legal obligation is normally
determined by applicable state or
other law, but certain transactions
are specifically addressed in this
commentary. (See, for example, the
discussion of buydown transactions
elsewhere in the commentary to
§ 226.17(c).)
• The fact that a credit contract may
later be deemed unenforceable by a
court on the basis of equity or other
grounds does not, by itself, mean
that disclosures based on that
contract did not reflect the legal
obligation.
• The legal obligation normally is
presumed to be contained in the
note or contract that evidences the
agreement. But this presumption is
rebutted if another agreement
between the parties legally modifies

50323

that note or contract.
2. M od ification o f oblig ation . 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:
• If the creditor-employer offers a
preferential employee rate, the
disclosures should reflect the terms
of the legal obligation. (See the
commentary to § 226.18(f) for a
discussion of whether employee
transactions are variable rate
transactions.)
• If the contract provides for a certain
monthly payment schedule but
payments are made on a voluntary
payroll deduction plan or an
informal principal reduction
agreement, the disclosures should
reflect the schedule in the contract.
• If the contract provides for regular
monthly payments but the creditor
informally permits the consumer to
defer payments from time to time,
for instance, to take account of
holiday seasons or seasonal
employment, the disclosures should
reflect the regular monthly
payments.
3. T hird-party buydow ns. In certain
transactions, a seller or other third party
may pay an amount, either to the
creditor or to the consumer, in order to
reduce the consumer’s payments or buy
down the interest rate for all or a
portion of the credit term. For example,
a consumer and a bank agree to a
mortgage with an interest rate of 15%
and level payments over 25 years. By a
separate agreement, the seller of the
property agrees to subsidize the
consumer’s payments for the First 2
years of the mortgage, giving the
consumer an effective rate of 12% for
that period.
• If the lower rate is reflected in the
credit contract between the
consumer and the bank, the
disclosures must take the buydown
into account. For example, the
annual percentage rate must be a
composite rate that takes account of
both the lower initial rate and the
higher subsequent rate, and the
payment schedule disclosures must
reflect the 2 payment levels.
However, the amount paid by the
seller would not be specifically
reflected in the disclosures given by
the bank, since that amount
constitutes seller’s points and thus
is not part of the finance charge.
• If the lower rate is not reflected in
the credit contract between the

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transmittal of the periodic statement
showing the alleged error. If a state law
allows the consumer 90 days to submit a
notice, the state law remains in effect to
provide the extra 30 days. Any state law
disclosures concerning this extended
state time limit must reflect the
qualifications and conform to the format
specified in § 226.28(a)(2)(i). Examples of
laws that would be preempted include:
• A state law that has a narrower or
broader definition of “billing error.”
• A state law that requires the
creditor to take different steps to
resolve errors.
• A state law that provides different
timing rules for error resolution
(subject to the exception discussed
above).
6. R ules fo r other fa ir cred it billing
provisions. The second part of the
criteria for fair credit billing relates to
the other rules implementing chapter 4
of the act (addressed in §§ 226.4(c)(8),
226.5(b)(2)(ii), 226.6(d), 226.7(k), 226.9(a),
226.10, 226.11, 226.12 (c) through (f),
226.13, and 226.21). Section
226.28(a)(2)(ii) provides that the test of
inconsistency is whether the creditor
can comply with state law without
violating federal law. For example:
• A state law that allows the card
issuer to offset the consumer’s
credit-card indebtedness against
funds held by the card issuer would
be preempted, since § 226.12(d)
prohibits such action.
• A state law that requires periodic
statements to be sent m ore than 14
days before the end of a free-ride
period would not be preempted.
• A state law that permits consumers
to assert claims and defenses
against the card issuer without
regard to the $50 and 100-mile
limitation of § 226.12(c)(3)(ii) would
not be preempted.
In the last 2 cases, compliance with
state law would involve no violation of
the federal law.
7. W ho m ay receiv e a chapter 4
determ ination. Only states (through
their authorized officials) may request
and receive determinations on
inconsistency with respect to the fair
credit billing provisions.

to the finance charge or annual
percentage rate, no state provision on
computation, description, or disclosure
of these terms may be substituted for the
federal provision.
References
S tatu te: Secs. I l l and 171 (a) and (c).
O ther sectio n s: Appendix A.
P reviou s regu lation : § 226.6 (b) and
(c), and Interpretation § 226.604.
1981 ch an g es: Section 226.28
implements amended § 111 of the act.
The test for preemption of state laws
relating to disclosure and advertising is
now whether the state law “contradicts”
the federal, rather than whether state
requirements are “different.”
The revised regulation contains no
counterpart to § 226.6(c) of the previous
regulation concerning placement of
inconsistent disclosures. It also reflects
the statutory amendment providing that
once the Board determines that a staterequired disclosure is inconsistent with
federal law, the creditor may not make
the state disclosure.
S ection 226.29—S tate E xem ption s

29(a) G en eral rule.
1. C lasses elig ib le. The state
determines the classes of transactions
for which it will request an exemption,
and makes its application for those
classes. Classes might be, for example,
all open-end credit transactions, all
open-end and closed-end transactions,
or all transactions in which the creditor
is a bank.
2. S u bstan tial sim ilarity. The
“substantially similar” standard
requires that state statutory or
regulatory provisions and state
interpretations of those provisions be
generally the same as the federal act
and Regulation Z. This includes the
requirement that state provisions for
reimbursement to consumers for
overcharges be at least equivalent to
those required in § 108 of the act. A
state will be eligible for an exemption
even if its law covers classes of
transactions not covered by the federal
law. For example, if a state’s law covers
agricultural credit, this will not prevent
the Board from granting an exemption
for consumer credit, even though
28(b) Equivalent disclosu re
agricultural credit is not covered by the
requirem ents.
1.
G eneral. A state disclosure may be federal law.
3. A d equ ate en forcem en t. The
substituted for a federal disclosure only
standard requiring adequate provision
a fter the Board has made a finding of
for enforcement generally means that
substantial similarity. Thus, the creditor
appropriate state officials must be
may not unilaterally choose to make a
authorized to enforce the state law
state disclosure in place of a federal
through procedures and sanctions
disclosure, even if it believes that the
comparable to those available to federal
state disclosure is substantially similar.
enforcement agencies. Furthermore,
Since the rule stated in § 226.28(b) does
state law must make adequate provision
not extend to any requirement relating

for enforcement of the reimbursement
rules.
29(b) C ivil lia b ility .
1.
N ot elig ib le fo r exem ption. The
provision that an exemption may not
extend to § § 130 and 131 of the act
assures that consumers retain access to
both federal and state courts in seeking
damages or civil penalties for violations,
while creditors retain the defenses
specified in those sections.
References
S tatu te: Secs. 108,123, and 171(b).
O ther sectio n s: Appendix B.
P reviou s regu lation : § 226.12.
1981 ch an g es: The procedures that
states must follow to seek exemptions
are now located in an appendix.
Exemptions under the previous
regulation will be automatically revoked
on April 1,1982, when compliance with
the new regulation is mandatory.
Appendix A—Effect on State Laws
1. W ho m ay m a ke requ ests. Appendix
A sets forth the procedures for
preemption determinations. As
discussed in § 226.28, which contains the
standards for preemption, a request for
a determination of whether a state law
is inconsistent with the requirements of
chapters 1, 2, or 3 may be made by
creditors, states, or any interested party.
However, only states may request and
receive determinations in connection
with the fair credit billing provisions of
chapter 4.
References
S tatu te: Secs. I l l and 171(a).
O ther sectio n s: § 226.28.
P reviou s regu lation : § § 226.6(b) and
226.70 (Supplement V, Section II).
1981 ch an g es: The procedures in
Appendix A were largely adapted from
Supplement V, Section II of the previous
regulation (§ 226.70), with changes made
to streamline the procedures.
Appendix B— State Exemptions
1. G en eral. Appendix B sets forth the
procedures for exemption applications.
The exemption standards are found in
§ 226.29 and are discussed in the
commentary to that section.
References
S tatu te: Secs. 123 and 171(b).
O ther sectio n s: § 226.29.
P reviou s regu lation : §§226.12, 226.50
(Supplement II), 226.60 (Supplement IV),
and 226.70 (Supplement V, Section I).
1981 ch an g es: The procedures in
Appendix B represent a combination
and streamlining of the procedures set
forth in the supplements to the previous
regulation.

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

50343

are subtracted in calculating the
balance, that fact must be stated so that
the disclosure of the computation
1.
G eneral. This commentary is the
method
is accurate. Only Model G -l(b )
vehicle for providing official staff
contains of final sentence appearing in
interpretations. Individual
brackets which reflects the total dollar
Appendices G and H —Open-End and
interpretations generally will not be
amount of payments and credits
Closed-End Model Forms and Clauses
issued separately from the commentary.
received during the billing cycle. The
1.
P erm issib le chan ges. Although use other models do not contain this
References
of the model forms and clauses is not
language because they reflect plans in
Statute: Secs. 105 and 130(f).
required, creditors using them properly
which payments and credits received
O ther section s: None.
will be deemed to be in compliance with
during the billing cycle are subtracted. If
Previous regulation: § 226.1(d).
the regulation with regard to those
this is not the case, however, the
1981 changes: Appendix C reflects the
disclosures. Creditors may make certain
language relating to payments and
Board’s intention that this commentary
changes in the format or content of the
credits should be changed, and the
serve as the vehicle for interpreting the
forms and clauses and may delete any
creditor should add either the disclosure
regulation, rather than individual
disclosures that are inapplicable to a
of the dollar amount as in Model G -l(b )
interpretive letters.
transaction or a plan without losing the
or an indication of which credits
act’s protection from liability. The
Appendix D—Multiple-Advance
(disclosed elsewhere on the periodic
rearrangement of the model forms and
Construction Loans
statement) will not be deducted in
clauses may not be so extensive as to
determining the balance. (Such an
1.
G eneral rule. Appendix D provides affect the substance, clarity, or
indication may also substitute for the
a special procedure that creditors may
meaningful sequence of the forms and
bracketed sentence in Model G—1(b)).
use, at their option, to estimate and
clauses. Creditors making revisions with
See the commentary to § 226.7(e).
disclose the terms of multiple advance
that effect will lose their protection from
2. M odel G-2. This model contains the
construction loans when the amounts
civil liability. Acceptable changes
notice of liability for unauthorized use of
an.d timing of advances are unknown at
include, for example:
a credit card.
consummation of the transaction. This
• Using the first person, instead of the
3. M odels G-3 an d G-4. These set out
appendix reflects the approach taken in
second person, in referring ot the
models for the long form billing error
§ 226.17(c)(6)(ii), which permits creditors
borrower.
rights statement (for use with the initial
to provide separate or combined
• Using "borrower” and “creditor"
disclosures and as annual disclosure or,
disclosures for the construction period
instead of pronouns.
at the creditor’s option, with each
and for the permanent financing, if any;
• Rearranging the sequence of the
periodic
statement) and the alternative
i.e., the construction phase and the
disclosures.
billing error rights statement (for use
permanent phase may be treated as one
• Not using bold type for headings.
with each periodic statement),
transaction or more than one
• Incorporating certain state "plain
respectively. Creditors must provide the
transaction.
English” requirements.
billing error rights statements in a form
•
Deleting
inapplicable
disclosures
by
References
substantially similar to the models in
whiting out, blocking out, filling in
Statute: None.
order to comply with the regulation. The
"N/A” (not applicable) or “0”,
O ther section s: § § 226.17 and 226.22.
model billing rights statements may be
crossing out, leaving blanks,
Previous regulation: Interpretation
modified in any of the ways set forth in
checking a box for applicable items,
the first paragraph to the commentary
§ 226.813.
or circling applicable items. (This
1981 changes: The use of Appendix D
on Appendices G and H. The models
should permit use of multipurpose
may, furthermore, be modified by
is limited to multiple-advance loans for
standard forms.)
construction purposes.
deleting inapplicable information, Such
• Substituting appropriate references,
as:
such as "bank,” “we," or a specific
Appendix E—Rules for Card Issuers
name,
for
“creditor”
in
the
initial
• The paragraph concerning stopping
That Bill on a Transaction-byopen-end disclosures.
a debit in relation to a disputed
Transaction Basis
• Using a vertical, rather than a
amount, if the creditor does not
Statute: None.
horizontal, format for the boxes in
have the ability to debit
Previous regulation: Interpretation
the closed-end disclosures.
automatically the consumer's saving
§ 226.709.
or checking account for payment.
Appendix
G
—
Open—End
Model
Forms
O ther section s: § § 226.6 through
• The rights stated in the special rule
and Clauses
226.13, and 226.15.
for credit card purchases and any
1981 changes: The rules in this
1. M od el G -l. The model disclosures
limitations on those rights.
appendix have been streanlined and
in G -l (different balance computation
The
model billing rights statements
clarified to indicate how certain card
methods) may be used in both the initial
also contain optional language that
disclosures under § 226.6 and the
issuers that bill on a transaction basis
creditors may use. For example, the
may comply with the requirements of
periodic disclosures under § 226.7. As is
creditor may:
clear from the models given, "short
Subpart B.
hand” descriptions of the balance
• Include a statement to the effect
Appendix F—Annual Percentage Rate
computation methods are not sufficient.
that notice of a billing error must be
Computations for Certain Open-End
The phrase "a portion o f ’ the finance
submitted on something other than
Credit
charge should be included if the total
the payment ticket or other material
Statute: Section 107.
finance charge includes other amounts,
accompanying the periodic
Previous regulation: § 226.5(a)(3)(ii),
such as transaction charges, that are not
disclosures.
footnote 5(a).
due to the application of a periodic rate.
• Insert its address or refer to the
O ther section s: § 226.14.
In addition, if unpaid finance charges
address that appears elsewhere on
Appendix C—Issuance of Staff
Interpretations

1981 ch an g es: This appendix
incorporates a sixth example in which
the transaction amount exceeds the
amount of the balance subject to the
periodic rate.

50344

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations

the bill.
Additional information may be
included on the statements as long as it
does npt detract from the required
disclosures. For instance, information
concerning the reporting of errors in
connection with a checking account may
be included on a combined statement as
long as the disclosures required by the
regulation remain clear and
conspicuous.
4.
M od els G -5 through G -9. These
models set out notices of the right to
rescind that would be used at different
times in an open-end plan. The last
paragraph of each of the rescission
model forms contains a blank for the
date by which the consumer’s notice of
cancellation must be sent or delivered.
A parenthetical is included to address
the situation in which the consumer’s
right to rescind the transaction exists
beyond 3 business days following the
date of the transaction, for example,
when the notice or material disclosures
are delivered late or when the date of
the transaction in paragraph 1 of the
notice is an estimate. The language of
the parenthetical is not optional.
Appendix H—Closed-End Model Forms
and Clauses
1. M od els H -l an d H -2. Creditors may
make several types of changes to
closed-end model forms H -l (credit
sale) and H-2 (loan) and still be deemed
to be in compliance with the regulation,
provided that the required disclosures
are made clearly and conspicuously.
Permissible changes include the
addition of the information permitted by
footnote 37 to § 226.17 and “directly
related” information as set forth in the
commentary to § 226.17(a).
The creditor may also delete or, on
multi-purpose forms, indicate
inapplicable disclosures, such as:
• The itemization of the amount
financed option. (See Samples H-12
through H -l 5.)
• The credit life and disability
insurance disclosures. (See Samples
H - ll and H -12.)
• The property insurance disclosures.
(See Samples H-10 through H-12,
and H-14.)
• The “filing fees” and “non-filing
insurance” disclosures. (See
Samples H - ll and H-12.)
• The prepayment penalty or rebate
disclosures. (See Samples H-12
through H-14.)
• The total sale price. (See Samples
H - l l and H-15.)
Other permissible changes include:
• Adding the creditor’s address or
telephone number. (See the
commentary to § 226.18(a).)
• Combining required terms where

several numerical disclosures are
the same, for instance, if the “total
of payments” equals the “total sale
price.” (See the commentary to
§ 226.18.)
• Rearranging the sequence or
location of the disclosures—for
instance, by placing the descriptive
phrases outside the boxes
containing the corresponding
disclosures, or by grouping the
descriptors together as a glossary of
terms in a separate section of the
segregated disclosures: by placing
the payment schedule at the top of
the form; or by changing the order
of the disclosures in the boxes,
including the annual percentage
rate and finance charge boxes.
• Using brackets, instead of
checkboxes, to indicate
inapplicable disclosures.
• Using a line for the consumer to
initial, rather than a checkbox, to
indicate an election to receive an
itemization of the amount financed.
• Deleting captions for disclosures.
• Using a symbol, such as an asterisk,
for estimated disclosures, instead of
an “e.”
• Adding a signature line to the
insurance disclosures to reflect joint
policies.
• Separately itemizing the filing fees.
• Revising the late charge disclosure
in accordance with the commentary
to § 226.18(1).
2. M odel H-3. Creditors have
considerable flexibility in filling out
Model H-3 (itemization of the amount
financed). Appropriate revisions, such
as those set out in the commentary to
§ 226.18(c), may be made to this form
without loss of protection from civil
liability for proper use of the model
forms.
3. M odels H -4 through H-7. The
model clauses are not included in the
model forms although they are
mandatory for certain transactions.
Creditors using the model clauses when
applicable to a transaction are deemed
to be in compliance with the regulation
with regard to that disclosure.
4. M odel H-4. This model contains the
variable rate model clauses and is
intended to give creditors considerable
flexibility in structuring variable rate
disclosures to fit individual plans. The
information about circumstances,
limitations, and effects of an increase
may be given in terms of the contract
interest rate or the annual percentage
rate. Clauses are shown for hypothetical
examples based on the specific amount
of the transaction and based on a
representative amount. Creditors may
preprint the variable rate disclosures
based on a representative amount for

similar types of transactions, instead of
constructing an individualized example
for each transaction. In both
representative examples and
transaction-specific examples, creditors
may refer either to the incremental
change in rate, payment amount, or
number of payments, or to the resulting
rate, payment amount, or number of
payments. For example, creditors may
state that the rate will increase by 2%,
with a corresponding $150 increase in
the payment, or creditors may state that
the rate will increase to 16%, with a
corresponding payment of $850.
5. M od el H -5. This contains the
demand feature clause.
6. M od el H -6. This contains the
assumption clause.
7. M od el H -7. This contains the
required deposit clause.
8. M od els H -8 an d H -9. These models
contain the rescission notices for a
typical closed-end transaction and a
refinancing, respectively. The last
paragraph of each model form contains
a blank for the date by which the
consumer’s notice of cancellation must
be sent or delivered. A parenthetical is
included to address the situation in
which the consumer’s right to rescind
the transaction exists beyond 3 business
days following the date of the
transaction, for example, where the
notice or material disclosures are
delivered late or where the date of the
transaction in paragraph 1 of the notice
is an estimate. The language of the
parenthetical is not optional.
9. S am p le form s. The sample forms
(H-10 through H-15) serve a different
purpose than the model forms. The
samples illustrate various ways of
adapting the model forms to the
individual transactions described in the
commentary to Appendix H. The
deletions and rearrangments shown
relate only to the specific transactions
described. As a result, the samples do
hot provide the general protection from
civil liability provided by the model
forms and clauses.
10. S am p le H -10. This sample
illustrates an automobile credit sale.
The cash price is $7,500 with a
downpayment of $1,500. There is an 8%
add-on interest rate and a term of 3
years, with 36 equal monthly payments.
The credit life insurance premium and
the filing fees are financed by the
creditor. There is a $25 credit report fee
paid by the consumer before
consummation, which is a prepaid
finance charge.
11. S am p le H - ll. This sample
illustrates an installment loan. The
amount of the loan is $5,000. There is a
12% simple interest rate and a term of 2

Federal Register / Vol. 46, No. 196 / Friday, October 9, 1981 / Rules and Regulations
years. The date of the transaction is
expected to be April 15,1981, with the
first payment due on June 1,1981. The
first payment amount is labelled as an
estimate since the transaction date is
uncertain. The odd days’ interest
12. S am ple H-12. This sample
illustrates a refinancing and
consolidation loan. The amount of the
loan is $5,000. There is a 15% simple
interest rate and a term of 3 years. The
date of the transaction is April 1,1981,
with the first payment due on May 1,
1981. The first 35 monthly payments are
equal, with an odd final payment. The
credit disability insurance premium is
financed. In calculating the annual
percentage rate, the U.S. Rule has been
used. Since an itemization of the amount
financed is included with the
disclosures, the statement regarding the
consumer’s option to receive an
itemization is deleted.
13. S am ples H -13 through H -15. These
samples illustrate various mortgage
transactions. They assume that the
mortgages are subject to the Real Estate
Settlement Procedures Act (RESPA). As
a result, no option regarding the
itemization of the amount financed has
been included in the samples, because
providing the good faith estimates of
settlement costs required by RESPA
satisfies Truth in Lending’s amount
financed itemization requirement. (See
footnote 39 to § 226.18(c).)
14. S am ple H -13. This satnple
illustrates a mortgage with a demand
feature. The loan amount is $44,900,
payable in 360 monthly installments at a
simple interest rate of 14.75%. The 15
days of interim interest ($294.34) is
collected as a prepaid finance charge at
the time of consummation of the loan
(April 15,1981)..In calculating the
disclosure amounts, the minor
irregularities provision in § 226.17(c)(4)
has been used. The property insurance
premiums are not included in the
payment schedule. This disclosure
statement could be used for notes with
the 7-year call option required by the
Federal National Mortgage Association
(FNMA) in states where due-on-sale
clauses are prohibited.
15. S am ple H-14. This sample
illustrates a variable rate mortgage. The
loan amount is $44,900, payable in 360

monthly installments at an initial
interest rate of 14.75%. All payment
periods are regular. Two points ($898)
have been imposed and included in the
prepaid finance charge. The note
provides that the interest rate may vary
with the lender’s prime rate, Xvith a
maximum permissible increase of 5%
over the term of the mortgage. The
interest rate may not vary more
frequently than once a year, and may
not increase by more than 1% annually.
Rate fluctuations will be reflected in the
monthly payment amount.
16.
S am ple H -15. This sample
illustrates a graduated payment
mortgage with a 5-year graduation
period and a 7 Vi2 percent yearly increase
in payments. The loan amount is
$44,900, payable in 360 monthly
installments at a simple interest rate of
14.75%. Two points ($898), as well as an
initial mortgage guarantee insurance
premium of $225.00, are included in the
prepaid finance charge. The mortgage
guarantee insurance premiums are
calculated on the basis of V\ of 1% of the
outstanding principal balance under an
annual reduction plan. The abbreviated
disclosure permitted under § 226.18(g)(2)
is used for the payment schedule for
years 6 through 30. The prepayment
disclosure refers to both penalties and
rebates because information about
penalties is required for the simple
interest portion of the obligation and
information about rebates is required for
the mortgage insurance portion of the
obligation.
References
S tatu te: Secs. 105 and 130.
O ther sectio n s: § § 226.6, 226.7, 226.9,
226.12, 226.15, 226.18, and 226.23.
P reviou s regu lation : None.
1981 ch an g es: The model forms and
clauses have no counterpart in the
previous regulation.
Appendix I—Federal Enforcement
Agencies
S tatu te: Section 108.
O ther sectio n s: None.
P reviou s regu lation : § 226.1(b).
1981 ch an g es: None.

50345

Appendix J—Annual Percentage Rate
Computations for Closed-End Credit
Transactions
1. U se o f A ppen dix f. Appendix J sets
forth the actuarial equations and
instructions for calculating the annual
percentage rate in closed-end credit
transactions. While the formulas
contained in this appendix may be
directly applied to calculate the annual
percentage rate for an individual
transaction, they may also be utilized to
program calculators and computers to
perform the calculations.
2. R elation to B oa rd tab les. The
Board’s Annual Percentage Rate Tables
also provide creditors with a calculation
tool that applies the technical
information in Appendix J. An annual
percentage rate computed in accordance
with the instructions in the tables is
deemed to comply with the regulation.
Volume I of the tables may be used for
credit transactions involving equal
payment amounts and periods, as well
as for transactions involving any of the
following irregularities: odd first period,
odd first payment and odd last payment.
Volume II of the tables may be used for
transactions that involve any type of
irregularities. These tables may be
obtained from any Federal Reserve
Bank or from the Board in Washington,
D.C. 20551, upon request.
References
S tatu te: Section 107.
O ther sectio n s: § 226.22.
P reviou s reg u lation : § 226.40
(Supplement I).
1981 ch an g es: Paragraph (b)(2) has
been revised to clarify that the term of
the transaction never begins earlier than
consummation of the transaction.
Paragraph (b)(5)(vi) has been revised to
permit creditors in all cases where the
transaction term equals a whole number
of months, to use either the 12-month
method or the 365-day method to
compute the number of unit-periods per
year.
Board of Governors of the Federal Reserve
System, October 5,1981.

William W. Wiles,
S ecreta ry o f the Board.
[FR Doc. 61-29374 Filed 10-8-81; 8:45 am]

BILLING CODE 6210-01-M

Full text of Federal Reserve Bank of New York Circulars : 9163. Regulation Z - Truth in Lending

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