Full text of Federal Reserve Bank of New York Circulars : 9600. Regulation Z

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 9600 ~|
December 15, 1983 J

REGULATION Z
Proposed Revision of Official Staff Commentary
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has announced a proposed revision of the official staff
commentary on Regulation Z (Truth in Lending). Printed below is an excerpt from the F e d e r a l R e g i s t e r of
December 6, containing the text of the proposed revision.
Comments on the proposal should be submitted by January 31, 1984 and may be directed to our Regulations
Division.
A nthony M. S olomon ,
P r e s id e n t.

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Reg. Z; TIL-1]
Truth in Lending; Official Staff
Commentary Update
a g e n c y : Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
s u m m a r y : The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
Z (Truth in Lending), 12 CFR Part 226.
The commentary applies and interprets
the requirements of Regulation Z with
regard to consumer credit transactions
and is a substitute for individual staff
interpretations of the regulation. The
commentary proposals address a variety
of questions that have arisen about the
regulation, such as the proper treatment
of certain mortgage guarantee insurance
premiums, certain fees for the use of
credit cards in interchange or shared
system s, and certain types of variablerate transactions.
DATE: Comments must be received on or
before January 3T, 1984.




address:

Comments should be mailed
to William W. W iles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, D.C. 20551, or
delivered to Room B-2223, 20th and
Constitution Avenue, NW., Washington,
D.C. between 8:45 a.m. and 5:15 p.m.
Comments should include a reference to
TIL-1. Comments may be inspected in
Room B-1122 between 8:45 a.m. and 5:15
p.m.

updated periodically to address
significant questions that arise. There
have been two updates to the
commentary so far, the first in
September 1982 (47 FR 41338) and the
second in April 1983 (48 FR 14882). This
notice contains the proposed third
update. It is expected that it w ill be
adopted in final form in March 1984 with
optional compliance until the uniform
effective date of October 1 for
mandatory compliance.

FOR FURTHER INFORMATION CONTACT:

Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language that would be
deleted is set off with brackets.
(2) Proposed revisions. Following is a
brief description of the proposed
revisions to the commentary:

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) 452-2412 or (202)
452-3867:
Subpart A—Ruth Amberg, Steven Zeisel
Subpart B—Richard Garabedian, Lynn
Goldfaden
Subpart C—Clarence Cain, Susan

Werthan
Subpart D—Rugenia Silver
SUPPLEMENTARY INFORMATION: (1)

General. Effective October 13,1981, an
official staff commentary w as published
to interpret Regulation Z (12 CFR Part
226). The commentary is designed to
provide guidance to creditors in
applying the regulation to specific
transactions. The commentary is

Subpart A—General
Section 226.2—Definitions and Rules o f
Construction.
2(a)(17) “Creditor”.
The last sentence of comment
2(a)(17)(i)-7 would be deleted because it
contains a cross-reference to the
commentary discussing “arranger of
credit,” which w as deleted in April 1983
(48 FR 14882). The sentence should have
been deleted at that time.

Section 226.4—Finance Charge.
4(b) Examples of Finance Charges.
Comment 4(b)(2)—2 would be added to
except from the finance charge certain
fees imposed on cardholders for the use
of electronic terminals in interchange or
shared systems. A companion provision
would be added to the commentary on
§ 226.6(b) to retain certain disclosure
requirements for these fees.
4(c) Charges Excluded from the
Finance Charge.
Paragraph 4(c)(5).
Comment 4(c)(5)—2 would be added to
explain the correct treatment of
mortgage insurance premiums (and
other charges that are normally paid by
the borrower) when they are paid at or
before settlement in a lump sum by the
noncreditor seller. This is most likely to
arise in the case of FHA mortgate
insurance premiums, which the
Department of Housing and Urban
Development now collects in a lump
sum rather than periodically. If the seller
makes the payment, the creditor should
treat the amount of the payment as
seller’s points and exclude it from the
finance charge. A creditor who gives
disclosures before the payment has been
made should rely on the estimate
provision of § 226.17(c)(2) to determine
the correct disclosures.
Subpart B— Open-End Credit
Section 226.6—Initial D isclosure
Statem ent.

6(a) Finance Charge.
A paragraph would be added to the
commentary to § 226.6(a)(2) to clarify
the disclosures for discounted variablerate plans.
6(b) O ther Charges.
If the proposal to except certain
interchange fees paid by the cardholder
from the finance charge is adopted (see
proposed comment 4(b)(2)—2), an
example would be added to the list of
"other charges” in comment 6(b)—1, to
clarify that suqh fees must still be
disclosed as “other charges” under
§ § 226.6(b) and 226.7(h). In addition to
fees assessed by interchange system s,
there may be fees assessed by other
system participants that should be
disclosed to cardholders. An example
would be the various fees assessed by
terminal owners that are passed through
to the cardholder by the card issuer.
While card issuers may not know the
amounts of the various charges and,
therefore, may not be able to disclose
them on the initial disclosure statement,
such fees may be candidates for
disclosure on the periodic statement.

Comment is solicited on the technical
aspects of how these terminal fees will




be passed through to card issuers—and,
subsequently, to cardholders. (For
example, some fees may be included in
the amount of the transaction and
disclosed to the cardholder at the
terminal, whereas others may be sent
through the system separately from the
underlying transaction.) Comment is
also solicited on whether there are
operational problems in disclosing these
fees on the periodic statement.
Section 226.12—S pecial C redit Card
Provisions.
12(b)(3) N otification to Card Issuer.
Comrrient 12(b)(3)—3 would be added
to point out that, under the regulation,
the applicability of the liability
limitation provision for unauthorized use
detailed in 5 226.12 is not dependent
upon whether the consumer follow s the
error resolution procedures of $ 226.13.
Section 226.13—Billing-Error
Resolution.
13(d)(1) Consum er’s Right to W ithhold
D isputed Amount; Collection A ction
Prohibited.
Language would be added to comment
13(d)(1)—1 to clarify that finance or other
charges cannot be imposed on
undisputed balances even in subsequent
billing cycles, merely because the
consumer withholds payment of a
disputed amount.
Paragraph 13(g)(1). Comment 13(g)(1)1 would be revised to make clear that,
when the creditor notifies the consumer
of amounts still ow ed from the
resolution period, the creditor may not
include finance or other charges
imposed on the undisputed amounts
solely because the consumer withheld
payment of a disputed amount.
Section 226.14—Determ ination o f
Annual Percentage Rate.
14(a) General Rule.
A comment would be added to the
commentary to § 226.14(a) to clarify the
circumstances under which creditors
may utilize footnote 31a, regarding
faulty calculation tools.
Section 226.16—Advertising.
16(b) A dvertisem en t o f Terms that
Require A ddition al Disclosures.
Comment 16(b)-4 would be modified
to describe several w ays of satisfying
the required disclosure of the annual
percentage rate in an advertisement for
a variable-rate plan.
A new comment 16(b)-5 would be
added to explain how to advertise
discounted variable-rate plans.
Comments 16(b) 5 and 6 would be
redesignated as comments 16(b) 6 and 7.

17(b) Time o f D isclosures.
Comment 17(b)-2 would be revised to
clarify the time of disclosure w hen an
open-end credit account is converted to
a closed-end-transaction. Under some
state law s, consummation of the closedend transaction is deem ed to occur at
the sam e time as the opening of the
open-end credit plan, even though the
conversion may occur several years
later. In these cases, the closed-end
credit disclosures may be given at the
time of the conversion.
Section 226.18—Content o f Disclosures.
18(f) Variable Rate.
A paragraph would be added to the
commentary to § 226.18(f) to clarify the
disclosures for discounted variable-rate
transactions.
Section 226.22—D eterm ination o f the
Annual Percentage Rate.
22(a) A ccu racy o f the Annual
Percentage Rate.
A comment would be added to the
commentary to § 226.22(a)(1) to clarify
the circumstances under which creditors
may utilize footnote 45a, regarding
faulty calculation tools.
Section 226.24—Advertising.
24(b) Advertisement of Rate of
Finance Charge.
A comment would be added to
§ 226.24(b) to explain how to advertise
discounted variable-rate transactions.
The comment would allow creditors to
use the advertising rules for buydowns
when advertising these transactions.
24(c) Advertisement of Terms That
Require Additional Disclosures.
Comment 24(c)(1), relating to the use
of downpaym ents in advertisements,
would be revised by the deletion of the
second sentence, limiting the application
of § 226.24(c)(1) to credit sales. In the
sta ffs view, the removal of this current
limitation would better fulfill the
purpose of the advertising rules to
provide complete information to
prospective credit customers.
Subpart D—M iscellaneous
Section 226.28—Effect on S ta te Laws.
28(a) Inconsistent Disclosure
Requirements.
The commentary to § 226.28 would be
expanded by the addition of two new
comments, reflecting recent Board
determinations on the effect of the Truth
in Lending Act on the consumer credit
law s of M ississippi and South Carolina.

Subpart C—Closed-End Credit

List of Subjects in 12 CFR Part 226

Section 226.17—G eneral D isclosure
Requirements.

Advertising, Banks, banking,
Consumer protection, Federal Reserve

2

System, Finance, Penalties, Truth in
lending.
(3)
Text o f revisions. The proposed
revisions to the commentary
(Supplement I to Part 226) read as
follows:

insurance premiums and other charges that
are normally paid by the borrower are
sometimes paid in a lump sum at
consummation or settlement on the
borrower's behalf by a noncreditor seller. In
such cases, the creditor should treat the
payment made by the seller as seller’s points,
and exclude it from the finance charge. *

Supplement I—Official Staff
Interpretations

Subpart B—Open-End Credit
*
*
*
*
*

Subpart A—General
*
*
*
*
*

Section 226.6—Initial Disclosure Statement.

Section 226.2— Definitions and Rules of
Construction.

*

*

*

*

*

Paragraph 6(a)(2).

*

*

*

*

*

*

*

*

4(c) Charges Excluded from the Finance
Charge.

*

*

*

*

*

Paragraph 4(c)(5).
*

*
►2.

*

*

*

Other seller-paid amounts. Mortgage




*

*

*

*

*

*

*

*

13(d)(1) Consumer’s Right to Withhold
Disputed Amount; Collection Action
Prohibited.
*

*

*

*

*

Imposition of additional charges on
undisputed amounts. The consumer's

*

12(b)(3) Notification to Card Issuer.
*

Section 226.13—Billing-Error Resolution.

3.

►10. Discounted variable-rate plans. In
2(a) Definitions.
some variable-rate plans, creditors may set
* * * * *
an initial rate that is not tied to the index
used to make rate adjustments. Typically,
2(a)(17) "Creditor".
*
*
*
*
*
this initial rate is lower than the rate would
be if it were calculated using the index. W hen
Paragraph 2(a)(17)(i)
creditors use an initial rate that is not tied to
*
*
*
*
*
the variable-rate index, the initial disclosure
7.
Trusts. In the case of credit extended by statement should reflect the initial rate (with
trusts, each individual trust is considered a
a statement of how long it will remain in
separate entity for purposes of applying the
effect), and the current indexed rate together
criteria. For example:
with the other variable-rate information
required by footnote 12 to $ 228.6(a)(2). *
• A bank is the trustee for three trusts.
Trust A makes 15 extensions of consumer
*
*
*
*
*
credit annually; Trust B makes 10 extensions
6(b) Other Charges.
of consumer credit annually; and Trust C
1. General; examples of other charges.
makes 30 extensions of consumer credit
Under § 226.6(b), significant charges related
annually. Only Trust C is a creditor for
to the plan (that are not finance charges)
purposes of the regulation.
must also be disclosed. For example:
[W ith regard to the trustee's status, see
• Late payment and over-the-credit-limit
the commentary to $ 226.2(a)(3).!
charges.
*
*
*
*
*
• Fees for providing documentary evidence
of transactions requested under § 228.13
Section 226.4— Finance Charge.
(billing-error resolution).
*
*
*
*
*
• Charges imposed in connection with real
4(b) Examples of Finance Charges.
estate transactions (See § 226.4(c)(7).)
*
*
*
*
*
• Taxes and filing or notary fees excluded
from the finance charge under § 226.4(e).
Paragraph 4(b)(2).
• A tax imposed on the credit transaction
►2. Treatment of fees for use of electronic
by a state or other governmental body, such
terminals in an interchange or shared
as a documentary stamp tax on cash
system. Fees paid by the cardholder for use
advances (&ee the commentary to § 226.4(a).)
of electronic terminals in an interchange or
• Membership or participation fees for a
shared system are not finance charges to the
package of services that includes an openextent that:
end credit feature, unless the fee is required
• The fee is assessed by som eone other
whether or not the open-end credit feature is
than the card issuer (an example of such a
included. For example, a membership fee to
fee is a network switch fee);
join a credit union would not be an “other
• The fee for transactions involving access
charge," even if membership is required to
to credit lines is no greater than the fee the
apply for credit.
cardholder would pay for transactions
► • Fees excepted from the finance charge
involving access to asset accounts through
that are assessed by an interchange system
the same terminal or on the same
and that are paid by cardholders for use of
interchange; and
electronic terminals in the interchange
• Any fee that is passed through to the
system. (See the commentary to
cardholder by the card issuer is no greater
S 226.4(b)(2).)*
than the actual fee charged to the card issuer
* * * * *
for the transaction.
Section 226.12—Special Credit Card
N ote. —However, that certain fees that are
Provisions.
excepted from the finance charge under this
* * * * *
provision must be disclosed by the card
issurer as “other charges" under §§ 226.6(b)
12(b) Liability of Cardholder for
and 226.7(h). (See the commentary to
Unauthorized Use.
§ 226.(b).)*
* * * * *

*

resolution procedures. For example,
notification of unauthorized use need not be
given in writing nor within a specified
number of days in order to limit the
consumer’s liability, *
*
*
*
*
*

withholding of [ t h e } ► a-* disputed amount
from the total bill cannot subject [ t h e !
undisputed [p o rtio n ! ►balances (including
new purchases or cash advances made
during the present or subsequent cycles) * to
the imposition of finance or other charges.
For example, if on an account with a free-ride
period ►(that is, an account in which paying
the new balance in full allow s the consumer
to avoid the imposition of additional finance
charges)-4, 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 [ t h e ! ► a n y * undisputed
[p o rtio n ! ► am ounts*, even if the creditor
determines later that no billing error
occurred. ►Furthermore, finance charges
could not be imposed on any new purchases
or advances that, absent the unpaid disputed
balance, would not have finance charges
imposed on them, *

*

*

*

*

*

13(g) Creditor's Rights and Duties after
Resolution.
Paragraph 13(g)(1).
1. Amounts owed by consumer. Amounts
the consumer still ow es may include both
minimum periodic payments and related
finance and other charges that accrued during
the resolution period. ►As noted in the
commnetary to § 226.13(d)(1), even if the
creditor later determines that no billing error
occurred, the creditor may not include
finance or other charges that are imposed on
undisputed balances solely as a result of a
consumer’s withholding payment of a
disputed amount. *

*

*

*

*

*

Section 226.14—Determination of Annual
Percentage Rate.
14(a) General Rule.
*

*

*

*

*

Good faith reliance on faulty
calculation tool. Footnote 31a absolves
►5.

creditors of liability for errors in the annual
percentage rate and fiance charge that result
from a corresponding error in a calculation
tool. The availability of the footnote is
limited to faulty calculation tools that are
externally produced, not those that were
internally prepared by the creditor.
Moreover, “good faith" as used in footnote
31a requires some effort on the part of the
creditor to independently verify the accuracy
of the calculation tool.-*
*
*
*
*
*

*

►3. Relationship to § 226.13. While
unauthorized use may be asserted as a billing
error under § 226.13 (a) and (b), limitations on
the consumer's liability for unauthorized use
do not depend upon following those error
3

Section 226.16—Advertising.
*

*

*

*

*

16(b) Advertisement of Terms That Require
Additional Disclosures. •«
*

*

*

*

*

4 .Variable-rateplans. ►In disclosing the
annual percentage rate in an advertisement
for a variable-rate plan, as required by
§ 226.16(b)(2), the creditor may use an insert
showing the current rate; may give the rate as
of a specified recent date; or may disclose an
estimated rate under § 226.5(c). The
requirement in § 226.16(b)(2) to disclose the
variable-rate feature may be satisfied by
disclosing-^ [A n advertisement for a
variable-rate plan complies with
S 226.16(b)(2) if it d isc lo se s! 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. Discounted variable-rate plans—

disclosure of the annual percentage rates.
The advertised annual percentage rates for
discounted variable-rate plans must include
both the initial rate and the current indexed
rate, in accordance with comment 6(a)(2)—

10.◄

Comments 16(b) 5 and 6 are
redesignated 16(b) 6 and 7, respectively.
* * * * *
Subpart C— Closed-end Credit

Section 226.17—General Disclosure
Requirements.

*

*

*

*

*

17(b) Time of Disclosures.
*

*

*

*

*

2. Converting open-end to closed-end
credit. 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. ►If
consummation of the closed-end transaction
occurs at the same time as the consumer
enters into the open-end agreement, the
closed-end credit disclosures may be given at
the time of conversion.-^ (See the
commentary to § 226.5 regarding conversion
of closed-end to open-end credit.)
*
*
*
*
*

Section 226.18—Content of Disclosures.
*

*

*

*

*

18(f) Variable Rate.
*

*

*

*

*

►8. Discounted variable-rate transactions.
In some variable-rate transactions, creditors
may set an initial rate that is not tied to the
index used to make rate adjustments.
Typically, this initial rate is lower than the
rate would be if it were calculated using the
index. When creditors use an initial rate that




is not tied to the variable-rate index, the
disclosures should reflect a composite annual
percentage rate based on the initial rate for
as long as it remains in effect and the
indexed rate at the time of consummation of
the transaction for the remainder of the term.
For example, in a 30-year transaction with a
rate tied to the 6-month Treasury bill rate
plus 2 percent, a creditor may set the rate at 9
percent for the first year although the
Treasury bill rate at the time of
consummation is 10 percent. The disclosures
should reflect a composite annual percentage
rate based on 9 percent for one year and 12
percent for 29 years. The payment schedule
should reflect 12 payments at 9 percent and
348 payments at 12 percent.-*
*
*
*
*
*

Section 226.22—Determination of the Annual
Percentage Rate.
22(a) Accuracy of the Annual Percentage
Rate.
Paragraph 22(a)(1).
*

*

*

*

*

►5. Good faith reliance on faulty
calculation tool. Footnote 45a absolves
creditors of liability for errors in the annual
percentage rate and finance charge that result
from a corresponding error in a calculation
pool. The availability of the footnote is
limited to faulty calculation tools that are
externally produced, not those that were
internally prepared by the creditor.
Moreover, “good faith" as used in footnote
45a requires some effort on the part of the
creditor to independently verify the accuracy
of the calculation to o l-*
*
*
*
*
*

Section 226.24— Advertising.
*

*

*

*

*

24(b) Advertisement of Rate of Finance
Charge.

*

*

*

*

*

►5. Discounted variable-rate transactions.
The advertised annual percentage rate for
discounted variable-rate transactions must be
determined in accordance with comment
18(f)—a. To promote the availability of the
initial rate reduction in such transactions,
creditors or other persons may apply the
rules regarding buydowns in comment 24(b)3 to show the reduced simple interest rate
and its effect on the payment schedule
without triggering the additional disclosures
under § 226.24(c) of the regulation.*

24(c) Advertisement of Terms That Require
Additional Disclosures.
*

*

*

*

*

1. Downpayment. The dollar amount of a
downpayment or a statement of the
downpayment as a percentage of the price
requires further information. [B y virtue of
the definition of "downpayment” in § 226.2,
this triggering term is limited to credit sale
transactions.! It includes such statements as:
• "Only 5 percent dow n”
• "As low as $100 down"
• "Total move-in costs of $800"
This provision applies only if a downpayment
is actually required; statements such as "no
downpayment” or "no trade-in required" do
not trigger the additional disclosures under
this paragraph.

*

*

*

*

*

Subpart D— Miscellaneous
*
*
*
*
*
Section 226.28—Effect on State Laws.
28(a) Inconsistent Disclosure
Requirements.

*

*

*

*

*

►11. Preemption determination—
Mississippi. Effective October 1,1984, the
Board has determined that the following
provision in the state law of Mississippi is
preempted by the federal law:
• Section 63—19—32(2)(g)— Disclosure of
finance charge. This disclosure is. preempted
in those cases in which the term "finance
charge" would be used under state law to
describe a different amount than the finance
charge disclosed under federal law.
12. Preemption determination—South
Carolina. Effective October 1,1984, the Board
has determined that the following provision
in the state law of South Carolina is
preempted by the federal law:
• Section 37-10-102(c)—Disclosure of dueon-sale clause. This provision is preempted,
but only to the extent that the creditor is
required to include the disclosure with the
segregated federal disclosures. If the creditor
may comply with the state law by placing the
due-on-sale notice apart from the federal
disclosures, the state law is not preem pted.^
*
*
*
*
*

Board of Governors of the Federal Reserve
System, November 28,1983.

William W. Wiles,
Secretary of the Board.
|FR D oc. 83-32188 F ile d 12-5-83; 8:45 am )

Paragraph 24(c)(1).

BILLING CODE 6210-01-M

4