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FEDERAL RESERVE BANK
OF N E W Y ORK
Circular No. 9765
December 10, 1984 J
[
REGULATIONS E AND Z
— A m endm ent to Regulation Z R egarding R estrictions
on C redit C ard Issuance and Liability
— Proposed Changes in the Official Staff C om m entaries
T o A ll D e p o s ito r y In s titu tio n s , a n d O th e r s C o n c e r n e d ,
in t h e S e c o n d F e d e r a l R e s e r v e D i s t r i c t :
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System announcing the adoption, effective December 31, 1984, of an amendment to
Regulation Z:
The Federal Reserve Board has announced the adoption of an amendment to Regulation Z — Truth
in Lending — clarifying that a ll credit cards are subject to the provisions of the regulation regarding the
issuance of credit cards and the liability for unauthorized use.
The amendment becomes effective December 31, 1984.
The amendment applies to credit cards issued for use in transactions that are exempt from all other
provisions of Regulation Z. The amendment states that nonetheless such cards are subject to the provi
sions of Regulation Z that limit cardholder liability for unauthorized use of the card to $50, and that
prohibit issuance of credit cards that have not been requested.
The amendment principally affects credit cards issued for use in certain extensions of credit of
more than $25,000, and for extensions of credit for public utility services. Such extensions of credit are
generally exempt from the provisions of Regulation Z. The vast majority of credit cards affected by the
amendment are telephone calling cards. The amendment will not affect the application of the exemp
tions noted above to other provisions of Regulation Z.
A copy of the text of the amendment to Regulation Z is enclosed.
In addition, the Board of Governors has requested comment on proposed changes in the Offi
cial Staff Commentaries on Regulation E, “ Electronic Fund Transfers,” and on Regulation Z,
“Truth in Lending.” The proposals pertain to questions that have arisen about the regulations, and
include new interpretations and changes in existing interpretations of these regulations. Comments
thereon should be submitted by January 31, 1985, and may be sent to our Regulations Division.
Enclosed — for depository institutions in this District — is the text of the proposals, which
have been reprinted from the Federal Register of December 4, 1984; it will be furnished to others
upon request directed to the Circulars Division of this Bank (Tel. No. 212-791-5216).
A nthony
M.
Solom on,
President.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
TRUTH IN LENDING
AMENDMENT TO REGULATION Z
(effective December 31 , 1984)
FEDERAL RESERVE SYSTEM
S U P P L E M E N T A R Y IN F O R M A T IO N :
12CFR Part 226
(1 ) G e n e r a l
[Reg. Z; Doc. No. R-0501]
S e c t i o n 2 2 6 .3 o f R e g u l a t i o n Z (1 2 C F R
P a r t 2 2 6 ) i s a m e n d e d to c l a r i f y t h a t t h e
r e s t r ic t i o n o n u n s o l i c i t e d i s s u a n c e o f
c r e d i t c a r d s in § 2 2 6 .1 2 ( a ) a n d t h e
p r o v i s i o n in § 2 2 6 .1 2 ( b ) lim it in g a
c a r d h o l d e r ’s l i a b i l i t y f o r u n a u t h o r i z e d
u s e o f a c r e d i t c a r d to a m a x i m u m o f $ 5 0
(b o th b a s e d o n th e 1 9 7 0 c r e d it c a r d
a m e n d m e n t s t o t h e T r u th in L e n d in g
A c t ) a p p l y to c r e d it c a r d s i s s u e d f o r u s e
in t r a n s a c t i o n s t h a t a r e e x e m p t fr o m
o th e r s e c t io n s o f th e r e g u la tio n . A c t io n
o n t h i s i s s u e w a s u n d e r t a k e n in
r e s p o n s e to q u e s t i o n s a b o u t t h e
a p p lic a b ilit y o f t h e s e tw o c r e d it c a rd
p r o v i s i o n s f r o m b o t h t h e p u b li c a n d
Truth in Lending; Credit Cards;
issuance and Liability
A G E N C Y : B o a r d o f G o v e r n o r s o f th e
F ed era l R e se r v e S y stem .
A C T IO N : F in a l r u le .
S U M M A R Y : T h e B o a r d is p u b li s h i n g a
f i n a l a m e n d m e n t t o R e g u l a t i o n Z -(T r u th
in L e n d in g ) . T h e a m e n d m e n t s p e c i f i c a l l y
p r o v id e s th a t c r e d it c a r d s is s u e d fo r u s e
w i t h t r a n s a c t i o n s t h a t a r e e x e m p t fr o m
a ll o th e r p r o v is io n s o f th e r e g u la tio n a re
s u b je c t to th e R e g u la tio n Z p r o v is io n s
g o v e r n i n g t h e i s s u a n c e o f c r e d it c a r d s
a n d th e lia b ilit y fo r u n a u th o r iz e d u s e .
T h e a m e n d m e n t r e s o lv e s a n y
u n c e r ta in ty th a t th e is s u a n c e a n d
l i a b i l i t y p r o t e c t i o n s a p p l y to a l l c r e d it
c a r d s r e g a r d le s s o f u s e or c a r d h o ld e r
sta tu s.
EFFECTIVE DATE: D e c e m b e r 31,1984.
F O R F U R T H E R IN F O R M A T IO N C O N T A C T :
R e g a r d in g t h e r e g u la t io n : R u th R .
A m b e r g , S e n io r A t to r n e y , or L y n n C.
G o ld fa d e n o r R ic h a r d S . G a r a b e d ia n ,
S t a f f A t t o r n e y s , in t h e D i v i s i o n o f
C o n s u m e r a n d C o m m u n it y A f f a i r s ,
B o a rd o f G o v e r n o r s o f th e F e d e r a l
R e s e r v e S y s t e m , W a s h i n g t o n , D .C .
20551, a t (202) 45 2-3 667 o r (202) 4 5 2 3867. R e g a r d in g t h e r e g u l a t o r y f le x ib ilit y a n a l y s i s : R o b e r t K u r tz , E c o n o m i s t ,
D iv is io n o f R e s e a r c h a n d S ta tis tic s ,
B o a rd o f G o v e r n o r s o f th e F e d e r a l
R e s e r v e S y s t e m , W a s h i n g t o n , D .C .
20551, a t (202) 452-2915.
p r iv a te s e c to r s . T h e a m e n d m e n t
r e s o l v e s a n y r e m a in in g u n c e r t a i n t y t h a t
t h e i s s u a n c e a n d l i a b i l i t y p r o t e c t io n s
a p p l y to a ll c r e d it c a r d s , r e g a r d l e s s o f
u s e o r c a r d h o ld e r s ta tu s . T h e e x e m p t
s t a t u s o f a t r a n s a c t i o n w i t h r e g a r d to a ll
o f t h e o t h e r p r o v i s i o n s o f t h e r e g u la t io n
is n o t a f fe c te d b y th e a m e n d m e n t,
t h e r e f o r e , t h e e x e m p t i o n s c o n t i n u e to
a p p l y to t h e c o s t d i s c l o s u r e , e r r o r
r e s o lu tio n , r e s c is s io n , a n d a d v e r tis in g
r e q u ir e m e n ts .
T h e B o a r d p u b lis h e d th is a m e n d m e n t
f o r p u b li c c o m m e n t o n J a n u a r y 1 8 ,1 9 8 4
(4 9 F R 2 2 1 0 ) a n d s o l i c i t e d i n f o r m a t io n
o n q u e s t i o n s s u c h a s h o w t o m in i m i z e
c r e d ito r s ’ c o m p lia n c e b u r d e n s a n d c o s ts ,
a n d w h a t o th e r la w s e x is t th a t p r o v id e
p r o te c tio n s a g a in s t u n s o lic it e d is s u a n c e
a n d lia b ility fo r u n a u th o r iz e d u s e o f
c r e d it c a r d s . T h e B o a r d r e c e i v e d
a p p r o x im a te ly 6 0 c o m m e n ts o n th e
p r o p o s e d a m e n d m e n t , i n c l u d in g
c o m m e n t s fr o m 1 1 F e d e r a l R e s e r v e
B a n k s . A p p r o x im a t e ly tw o -th ir d s o f th e
c o m m e n te r s s u p p o r te d th e p r o p o s a l.
(2 )
S cope
T h e R e g u la tio n Z e x e m p tio n s m o s t
l i k e l y t o b e a f f e c t e d a r e t h o s e for: (1)
C r e d it e x t e n d e d b y a r e g u l a t e d p u b lic
u t i l i t y f o r u t i l i t y s e r v i c e s , in c lu d in g
c r e d it e x t e n d e d b y t e le c o m m u n ic a t io n s
c o m p a n i e s , a n d (2) e x t e n s i o n s o f c r e d it
f o r m o r e t h a n $ 2 5 ,0 0 0 ( if u n s e c u r e d b y
r e a l e s t a t e o r b y t h e c o n s u m e r ’s
p r i n c i p a l d w e l l i n g ) . B u s i n e s s c r e d it
t r a n s a c tio n s a ls o a re g e n e r a lly e x e m p t
f r o m t h e r e g u la t io n ; h o w e v e r , t h e
r e g u la tio n p r e s e n tly m a k e s c le a r th a t
th e c r e d it c a r d p r o v is io n s o n u n s o lic it e d
is s u a n c e a n d lia b ilit y fo r u n a u th o r iz e d
u s e a p p l y to c a r d s i s s u e d f o r o b t a i n i n g
b u s i n e s s - p u r p o s e c r e d it . A l t h o u g h t h e
ty p e s o f e x e m p t tr a n s a c tio n s m o s t
c o m m o n l y m a d e w i t h c r e d it c a r d s a r e
b u s in e s s tr a n s a c tio n s a n d te le p h o n e
c a lls , th e a m e n d m e n t m a k e s c le a r th a t
e l l c r e d it c a r d s a re c o v e r e d b y th e
p r o v i s i o n s o n i s s u a n c e a n d l i a b i l i t y fo r
u n a u th o r iz e d u s e , s o th a t th e
a m e n d m e n t a l s o g e n e r a l l y a p p l i e s to
c r e d it c a r d s is s u e d fo r u s e w ith o th e r
ty p e s o f tr a n s a c tio n s th a t a r e e x e m p t
u n d e r R e g u la tio n Z . (T h e r e g u la tio n a ls o
e x e m p t s c r e d it e x t e n d e d b y r e g is te r e d
b r o k e r -d e a le r s fo r th e p u r c h a s e o f
s e c u r itie s a n d c o m m o d it ie s , c e r ta in
stu d e n t lo a n s, a n d h o m e fu el b u d g et
p l a n s .)
T h e v a s t m a j o r it y o f t h e c r e d it c a r d s
t h a t a r e a f f e c t e d b y t h is a m e n d m e n t a r e
te le p h o n e c a llin g c a r d s . O th e r th a n a
n u m b e r o f t h e c r e d it c a r d s i s s u e d f o r u s e
in c o n s u m e r a s s e t m a n a g e m e n t
a c c o u n t s , t h e r e a p p e a r to b e
c o m p a r a t i v e l y f e w c a r d s i s s u e d fo r
PRINTED IN NEW YORK, FROM FEDERAL REGISTER. VOL. 49. NO. 232
For this Regulation to be complete, retain:
1) Pamphlet dated April 1, 1981.
2) Amendments effective December 3, 1981, April 1, 1982, and October 1, 1982 (printed in
slip sheet dated May 1983; also includes amendments to the Truth in Lending Act).
3) Official Staff Commentary on Regulation Z, dated December 1981 (furnished only upon
request).
4) Official Staff Commentary updates, effective September 17, 1982, April 1, 1983, April 1,
1984, and October 16, 1984 (furnished only upon request)
5) This slip sheet.
|Fnc. Cir. No. 97651
consum er use w ith fixed credit lines
over $25,000 that are not secured by real
estate or a principal dwelling.
(Regulation E, Electronic Fund
Transfers—12 CFR Part 205—governs
the issuance and liability for
unauthorized use of virtually all of the
cards in these consum er asset
m anagem ent accounts, as they involve
access to asset accounts prior to
accessing credit lines.) For these
reasons, this discussion w ill focus on
telephqne credit cards.
(3) Telephone Credit Cards
The questions regarding the
applicability of the credit card
am endm ents to telephone cards take on
particular im portance because of the
millions of telephone credit cards that
have been issued in recent years; the
fact that m any paper telephone cards
are being replaced by plastic cards
which resem ble an d function much like
retail and bank credit cards; and the
legal changes in the telecom m unications
industry that even further expand the
num ber of com panies issuing cards.
Furtherm ore, because of the w ide
spectrum of cards through which
telephone services are becoming
available, ranging from cards issued by
traditional telephone com panies to bank
credit cards and travel-andentertainm ent cards, both consum ers
and industry m ay have difficulty
distinguishing situations in w hich the
credit card protections apply.
The Board is concerned that, unless
the credit card provisions apply to these
cards, consum ers w ho use credit cards
in connection w ith credit program s
involving exem pt transactions will not
have any federal protections restricting
unsolicited issuance of such cards and
limiting their liability for the
unauthorized use of the card. Although
there is no evidence of a pattern of
abuse at this time, the lack of uniform,
established legal protection may have a
serious im pact in the future in light of
the scope of these program s and the
indications of their continued growth.
The Board received inform ation
indicating that only a few other lawrs
provide protections against
unauthorized telephone card charges,
and these law s are of limited
application.
The num ber of telephone credit cards
issued by AT&T Com munications, Inc.
(AT&T), local Bell operating com panies,
and the independent
telecom m unications com panies (not
including other long-distance
com petitors) as of January 1984 w as
approxim ately 50 million. The num ber of
outstanding cards has increased
substantially over the last ten m onths as
a result of AT&T’s card distribution. The
use of telephone credit cards is now
being encouraged as the com panies seek
to control fraud losses and other costs
associated w ith operator-assisted calls
billed to third parties, as well as to
provide consum ers w ith easier access to
telephone services. Presently, the Board
u nderstands th at the m ajor card issuers’
stated policies include the issuance of
cards to new custom ers only upon
request and not imposing liability on a
consum er for unauthorized charges
m ade on a card. However, unless the
credit card protections in Truth in
Lending apply to these cards, it is
unknowm w hat policies will be set by
these com panies in the future. It is
possible th at the com panies will reverse
their p ast policies and seek to impose
liability on the cardholder w hose card is
used for unauthorized calls.
Unsolicited issuance of credit cards is
a different type of problem. Among the
congressional findings leading to the
ban on unsolicited issuance was that
unsolicited cards were annoying and
intrusive and that unsolicited issuance
may increase the risk of extensive
unauthorized use when cards are stolen
before reaching the consumer. Because
the vast majority of the telephone cards
contain all of the information necessary
for immediate use, unauthorized calls
are relatively easy to make. Even if,
ultimately, no liability were imposed on
the consumer, the consumer not only
would be subjected to the burden of
proving that the card was never
received, but also to the inconvenience
of resolving the unauthorized billings.
The Board also believes that since
credit cards used by businesses and for
business purposes are subject to the
protections, it is reasonable for credit
cards used by consumers for personal
credit transactions to be subject to the
same protections. In addition, the
2
amendment gives holders of telephone
credit cards protections that are
comparable to those available to
consumers using other credit cards or
debit cards to pay for the calls.
Consumers now have the choice of a
wide spectrum of cards with wrhich to
make telephone calls. Consumers who
use any of these cards are in an equally
difficult position to protect themselves
against the risks of their cards being
used fraudulently.
(4) Effective date; transition provisions
The am endm ent is generally effective
on D ecem ber 31,1984. H ow ever, a
lim ited delayed com pliance date has
been provided for the unsolicited
issuance prohibition set forth in
§ 226.12(a) to minimize initial
com pliance costs associated w ith the
am endm ent while still assuring
consum er protections.
In regard to the unsolicited issuance
prohibition, the Board has set a
com pliance date of January 29,1985, in
order to give issuers sufficient time to
com m unicate the issuance rules
throughout their organizations and to
stop all procedures th at might not
comply, thereby avoiding inadvertent
violations. The Board h ad solicited
com ment on w aiving the unsolicited
issuance prohibition as the AT&T
Communications, Inc.’s one-time card
distribution to all consum ers who have
either a Bell system card or a card
issued by an independent com pany used
for service ovdr AT&T facilities;
however, as distribution of the new card
is substantially complete, that issue is
now moot.
In its proposal, the Board solicited
public comment on possible actions to
minimize initial compliance costs. One
issue involved outstanding cards or
agreements containing language that is
inconsistent with the liability limitation
rules. The Board solicited comment on
whether it should stipulate that card
issuers not be required to replace
existing cards or agreements merely to
change misleading language (such as
language on the card indicating that the
cardholder is responsible for all charges
made with the card), even though the
liability limitations of Regulation Z
already would be effective. Then, as
new cards are issued or new agreements
printed, the language w ould have to be
modified to accurately reflect the limits.
The com m enters overwhelmingly
indicated their support for correction of
inconsistent language on credit cards
and in agreem ents according to normal
replacem ent schedules rather than
im m ediate replacem ent. The Board
agrees that this approach should help to
minimize creditors’ transitional costs.
C ard issuers electing to impose any
liability for unauthorized use on the
cardholder would, of course, need to
comply w ith the conditions of liability
set forth in § 226.12(b).
(5) Regulatory Flexibility A nalysis
The Board’s Division of R esearch and
Statistics has prepared a regulatory
flexibility analysis. A copy of the
analysis m ay be obtained from
Publications Services, Board of
G overnors of the Federal Reserve
System, W ashington, D.C. 20551, a t (202)
452-3245.
List of Subjects in 12 CFR Part 226
Advertising, Banks—banking,
Consum er protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
(6) T ext of Revision
P ursuant to the authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as am ended), Regulation
Z, 12 CFR P art 226, is am ended by
adding an Office of M anagem ent and
Budget control num ber to § 226.1,
removing footnote 4 to § 226.3(a) and
adding a new footnote 4 to §226.3 to
read as follows:
§ 226,1 Authority, purpose, ©overage,
organization, enforcement and liability.
*
*
*
*
§ 226.3
Exempt transactions.
This regulation does not apply to the
following:4 4 4 4
4The provisions in | 226.12 (a) and (b)
governing the issuance of credit cards and
the liability for their unauthorized use apply
to all credit cards, even if the credit cards are
issued for use in connection with extensions
of credit that otherwise are exempt under this
section.
*
*
*
*
*
By order of the Board of Governors of the
Federal Reserve System, November 27,1984.
*
(Information collection requirements
contained in this section have been approved
by the Office of Management and Budget
under OMB Control No. 7100-0199.)
*
*
*
*
*
3
W illia m W . W ile s ,
S e c r e ta r y o f th e B o a rd .
[FR Doc. 84-31493 Filed 11-29-84; 8:45 am]
BILLING CODE 6210-01-M
PROPOSED CHANGES IN THE OFFICIAL STAFF COMMENTARIES ON REGULATIONS E AND Z
applying the regulation to specific
situations. The com m entary is updated
periodically to address significant
questions th at arise. There have been
two updates so far, the first on April 6,
1983 (48 FR 14880), and the second on
O ctober 18,1984 (49 FR 40794). This
notice contains the proposed third
update. It is expected that it wall be
adopted in final form in M arch 1985.
FEDERAL RESERVE SYSTEM
H-2 ©FR Part 20S
[Reg. E; EFT-2]
Electronic Fund Transfers; Proposed
Update-1® Official Staff Commentary
Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
&GEMCY:
SUMMARY: The
Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
E (Electronic Fund Transfers). The
commentary applies and interprets the
requirements of Regulation E and is a
substitute for individual staff
interpretations of the regulation. The
proposed revisions address a variety of
questions that have arisen about the
regulation, and include new material
and changes in existing material.
©ate : Comments m ust be received on or
before January 31,1985.
&0DSSSS: Comments should be m ailed
to W illiam W. W iles, Secretary, Board
of G overnors of the Federal Reserve
System, W ashington, D.C. 20551, or
delivered to Room B-2223, 20th and C
Streets, Pvft/V., W ashington, D .C,
betw een 8:45 a.m. and 5:15 p.m.
w eekdays. Com ments should include
reference to EFT-2. Comments m ay b®
inspected in Room B-1122 betw een 8:45
a.m. an d 5:15 p.m. w eekdays.
FORFU!PiTiHISK! 8^F@1C3ATS®M©@K!TA€Y:
G erald P. H urst or John C W ood, Senior
A ttorneys, or R ichard S. G arabedian,
Staff Attorney, Division of Cdnsum er
and Community Affairs, Board of
G overnors of the Federal Reserve
System, W ashington, D.C. 20551, (202)
452-3667 or (202) 452-2412.'
supplementary sKfFORMATiiOK): (1)
G e n e r a l. The Electronic Fund T ransfer
A ct (15 U.S.C. 1693 e t s e q .) governs any
transfer of funds that is electronically
initiated and that d ebits or credits a
consum er’s account. This statute is
im plem ented by the B oard’s Regulation
E (12 CFR P art 205). Effective Septem ber
24,1981, an official staff com m entary
(EFT-2 Supp. II to 12 CFR P art 205) w as
published to interpret the regulation.
The com m entary is designed to provide
guidance to financial feistitutions in
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language to be deleted is
set off with brackets.
(2)
P r o p o s e d r e v i s i o n s . The m aterial
that has been added or revised is largely
self-explanatory. Q uestions 7-18.5 and
11-11.5 relate to am endm ents to
Regulation E adopted by the Board on
O ctober 11,1984 (49 FR 40794), which
cover all debit card transactions
w hether or not an electronic term inal is
involved. The am endm ents also extend
the time periods for resolution of errors
involving point-of-sale (POS) debit card
transactions; the longer periods parallel
those applicable to foreign-initiated
transfers.
The proposed revision of question 7 18.5 reverses the present interpretation;
currently, disclosure of the longer error
resolution time periods in the case of
foreign-initiated transfers is not
required. Transfers resulting from POS
debit card transactions (unlike foreigninitiated transfers) are quite common,
however, and to assure accurate
disclosures and avoid confusion on the
part of consumers, proposed question 718.5 requires financial institutions to
disclose the longer error resolution
periods. Since m ost institutions w ould
be required to revise their error
resolution disclosures for POS debit
card transactions, it seem s likely that
making the further revision for foreigninitiated transfers w ould result in little
or no additional expense. Consequently
revised question 7-18.5 w ould require
that the error resolution disclosures for
accounts subject to foreign-initiated or
POS debit card transactions state the
extended time periods.
The other proposal relating to the
O ctober am endm ents (new question 1111.5) discusses the meaning of POS debit
card transaction for purposes of the
longer error resolution periods.
O ther proposed changes to the
com m entary respond to inquiries
received by the staff. N ew question 2-28
addresses unauthorized transfers. New
question 5-4.5 states that an institution
may not issue, w ithout request from the
consumer, a validated personal
identification num ber (PIN) to perm it a
debit card previously issued for POS
transactions to be used a t ATMs. T his
interpretation differs from a proposed
interpretation under Regulation Z that
perm its such PIN issuance. The different
treatm ent is b ased on the definition of
an access device in Regulation E. U nder
Regulation E a PIN is an access device
in all cases, even w hen it cannot be
used alone to initiate an EFT; in
contrast, a PIN issued to existing
cardholders that cannot be used by
itself to obtain credit is not a credit card
under Regulation Z. (See the proposed
update to the official staff com mentary
to Regulation Z, Truth in Lending,
published elsew here in this Federal
Register issue.) The rule regarding
access devices is more restrictive in part
because of the consum er’s potentially
greater risk; for example, the consum er
m ay be liable for as much as $500 (or
even an unlim ited amount) rather than
only $50 as under Regulation Z.
M oreover, unauthorized use of an
access device entails the loss of use, and
perhaps even perm anent loss, of the
consum er’s own funds in an access
account; in the case of unauthorized
credit card use, only extensions of credit
are involved. In addition, w hen the debit
card w as originally issued w ithout a
PIN, the consum er may not have
contem plated that the card could later
be used at ATMs to obtain cash.
(3)
T r a n s itio n i s s u e s r e l a ti n g to
a m e n d m e n t s . The staff has received
other inquiries dealing w ith the interim
period betw een the adoption of the POS
debit card a m e n d m e n t in O ctober 1984
(discussed above) and the April 16,1985,
effective date. Since guidance on these
m atters is needed now and will cease to
be relevant after the transition period,
the staff believes it is appropriate to
address them separately for the
proposed com mentary.
Industry representatives have asked
whether revised disclosures must be
provided to existing customers who
have already been given Regulation E
disclosures for certain debit card
transactions, or to customers who
contract for EFT services before April
16,1985. Revised disclosures may but
need not be provided prior to April 16,
1985; however, beginning on that date,
any disclosure given (e.g., initial
disclosures to a new customer, or the
long-form or short-form error resolution
notice to an existing customer) must
accurately reflect the terms and
conditions of the EFT services (including
debit card transactions) offered by the
institution. For example, initial
disclosures to new customers will have
to reflect that all transfers resulting for
debit card transactions are electronic
fund transfers, and that the error
resolution periods for POS debit card
PRINTED IN NEW YORK. FROM FEDERAL REGISTER. VOL. 49, NO. 234
[Enc. Cir. No. 97651
tr a n s a c tio n s a re 20 b u s in e s s d a y s a n d 90
c a le n d a r d a y s (if th e in s titu tio n w is h e s
to ta k e a d v a n ta g e o f th e lo n g e r p e r io d s ].
A f t e r A p r il 1 6 , e r r o r r e s o l u t i o n
n o t ic e s , w h e t h e r g iv e n a n n u a lly o r o n
p e r io d ic s t a t e m e n t s , a ls o m u s t r e fle c t
th e lo n g e r p e r io d s . S im ila r ly , in itia l
d is c lo s u r e s a n d erro r r e s o lu tio n n o tic e s
m u s t r e f l e c t t h e e x c e p t i o n fr o m
p r o v i s i o n a l r e c r e d it i n g in c a s e s w h e r e
a c c o u n t s a r e s u b j e c t t o t h e B o a r d ’s
R e g u l a t i o n T ( C r e d it b y B r o k e r s a n d
D e a le r s ]. In s titu tio n s m a y c o m p ly b y
m o d i f y i n g a p p r o p r i a t e ly t h e e r r o r n o t i c e
f o r m s t h a t a p p e a r i n § § 2 G 5 .7 (a }(1 0 ] a n d
2 0 5 .8 ( b ] .
A n in s titu tio n t h a t w is h e s to u S e
e x is tin g fo r m s u n til its s u p p lie s a r e
e x h a u s te d m a y r e fle c t th e c h a n g e d
t e r m s a n d c o n d i t i o n s b y a n y a p p r o p r ia t e
m e a n s s u c h a s b y u s e o f a n in s e r t,
a tta c h m e n t, o r c o m p u te r -g e n e r a te d
n o t i c e o n p e r i o d i c s t a t e m e n t s ( in t h e
c a s e o f a sh o r t-fo r m n o tic e o n th e
s t a t e m e n t ) . I n s t i t u t i o n s a r e n o t r e q u ir e d
t o m a k e a s p e c i a l m a i li n g o f r e v i s e d
erro r r e s o lu tio n n o t ic e s or o f o th e r
d is c lo s u r e s .
L is t o f S u b j e c t s in 1 2 € F M P a r t 2 0 5
B a n k s , b a n k in g , C o n s u m e r p r o t e c t io n ,
E le c tr o n ic fu n d tr a n s fe r s , F e d e r a l
R e s e r v e S y s te m , P e n a lt ie s .
PA R T 205— [AM ENDED]
T e x t o f r e v is io n s . T h e p r o p o se d
r e v is io n s to th e O f fic ia l S ta f f
C o m m e n t a r y o n R e g u l a t i o n s E (E F T -2 ,
S u p p . II t o 1 2 C F R P a r t 2 0 5 ) r e a d a s
f o llo w s :
*
*
*
*
*
S e c tio n 205 .2 — D e f in itio n s a n d R u le s o f
C o n s tr u c tio n
*
*
*
*
*
o Q 2 -2 8 : U n a u th o r iz e d tr a n s fe r s — f o r c e d
in itia tio n . A c o n su m e r is fo r c e d b y a robber,
a t g u n p o in t, to w ith d r a w c a s h a t a n A T M . D o
th e lia b ility lim its for u n a u th o r iz e d tra n sfers
a p p ly ?
A: Y e s. T h e tr a n sfer is u n a u th o r iz e d for
p u r p o se s o f R e g u la tio n E. U n d e r th o s e
c ir c u m sta n c e s , the a c tio n s o f th e ro b b er are
ta n ta m o u n t to u s e o f a s t o le n a c c e s s d e v ic e .
( | | 205.2(1) a n d 205.9)<3
*
*
*
*
*
Truth in Lending Act and Regulation Z; see
Comment l2(a)(1]-8 of the Official Staff
Commentary to Regulation Z.) (§§ 205.5(a)
and (b) and 205.2(a))o
*
*
*
*
*
S e c tio n 205.7— I n itia l D is c lo s u r e o f T e rm s
a n d C o n d itio n s
*
*
*
*
*
Q 7-18.5: E r r o r re s o lu tio n d is c lo s u r e —
[['f o r e ig n - in itia te d tra n s fe r s! ]
e x te n d e d
tim e p e r i o d s o The regulation expands the
time periods for resolving errors that involve
transfers initiated outside the United States
o o r transfers resulting from POS debit card
transactions<3, from 10 to 20 business days
and from 45 to 90 calendar days. Must the
error-resolution disclosure reflect the longer
time periods with respect to accounts on
which [[transfers may be initiated outside the
United States]] e> these types of transfers can
be made <a?
A: A financial institution [[may but need
not refer to the longer time periods in the
error-resolution disclosure.]] e>must give
error-resolution disclosures that reflect its
actual procedures. An institution that takes
advantage of the longer time periods
applicable to POS and foreign-initiated
transfer must, therefore, state them in its
error-resolution disclosures. Similarly, and
institution that relies on the exception from
provisional recrediting (for accounts subject
to Regulation T) must phrase its disclosures
appropriately.<3 (§§ 205.7(a)(10), 205.8(b), and
205.T1O (c)(3) and 0(c)(4))
*
*
*
*
*
S e c tio n 205.11— P r o c e d u r e s f o r R e s o lv in g
E r ro r s
*
*
*
*
*
o Q 11-11.5: P O S d e b i t c a r d tr a n s a c tio n s .
The deadlines for investigating errors are
extended for all transfers resulting from POS
debit card transactions, regardless of
whether an electronic terminal is involved.
For purposes of these deadlines, w hat types
of transactions can be viewed as POS debit
card transactions?
A: POS debit card transactions generally
take place at merchant locations, but also
include mail and telephone orders of goods or
services involving a debit card. Transactions
at ATMs, however, are not POS even though
the ATM may be in a merchant location.
(§ 2 0 5 .11 (c)(4 )) o
*
*
*
*
*
(15 U.S.C. 1693b)
Board of Governor or the Federal Reserve
System, November 28.1984.
William W. Wiles,
S e c tio n 2 0 5 .5 — I s s u a n c e o f A c c e s s D e v ic e s
*
*
*
*
*
S e c r e t a r y o f th e
b> Q 5-4.5: U n s o lic ite d is s u a n c e — P IN s.
M a y a fin a n c ia l in s titu tio n is s s u e , w ith o u t a
s p e c ific r e q u e st, v a lid a te d p e r s o n a l
id e n tific a tio n n u m b e r s (PIN s), th u s a llo w in g
c o n su m e r s t a u s e th eir e x is tin g d e b it ca r d s a t
a u to m a te d te lle r m a c h in e s?
A : N o Is s u a n c e o f a v a lid a te d PIN for an
e x is tin g d e b it ca rd d o e s n o t m e e t the
r e g u la tio n ’s r e q u irem en t th a t a n u n s o lic ite d
a c c e s s d e v ic e b e u n v a lid a te d w h e n is s u e d .
(T h e is s u a n c e o f P IN s for e x is tin g c red it
c a r d s is , h o w e v e r , p e r m iss ib le u n d er th e
BILLING CODS 6?iO~Ci-M
Board.
[FR Doc. 84-31578 FiJsd 12-3-84; 8:45 am]
12 C FR P art 2 2 6
2; TIL- t I
Ts’u t h In L a n d i n g ; P r o p o s e d U p d a t e t o
O ffic ia l S ta f f C o m m e n t a r y
ASENSY: Board of Governors of the
Federal Reserve System.
2
ACTION: P r o p o s e d o f f i c i a l s t a f f
in te r p r e ta tio n .
SU M M ARY: T h e B o a r d i s p u b li s h i n g f o r
c o m m e n t p r o p o s e d c h a n g e s to th e
o f fic ia l s t a f f c o m m e n ta r y to R e g u la tio n
Z (T r u th in t e n d i n g ) . T h e c o m m e n t a r y
a p p lie s a n d in te r p r e ts th e r e q u ir e m e n ts
o f R e g u la tio n Z a n d is a s u b s tit u te fo r
in d iv id u a l s t a f f in te r p r e ta tio n s o f th e
r e g u la tio n . T h e p r o p o s e d r e v is io n s
a d d r e ss a v a r ie ty o f q u e s tio n s th a t h a v e
a r i s e n a b o u t t h e r e g u la d o n . a n d i n c l u d e
n e w m a t e r ia l a n d c h a n g e s in e x i s t i n g
m a t e r ia l .
©ATE: Comments must be received on or
before January 3 1 , 1 9 8 5 .
A O O R E iS : C o m m e n t s s h o u l d b e m a i l e d
to W illia m W . W ile s , S e c r e ta r y , B o a r d
o f G o v e r n o r s o f th e F e d e r a l R e se r v e
S y s te m , W a s h in g to n , D C . 2 0 551, or
d e liv e r e d to R o o m B -2 2 2 3 , 2 0 th a n d C
S t r e e t s , N W ., W a s h i n g t o n , D C . b e t w e e n
8 :4 5 a .m . a n d 5 :1 5 p .m . w e e k d a y s ,
C o m m e n t s s h o u l d i n c l u d e a r e f e r e n c e to
T I L - 1 . C o m m e n t s m a y b e i n s p e c t e d in
R o o m B - 1 1 2 2 b e t w e e n 8 .4 5 a .m . a n d 5 :1 5
p .m . w e e k d a y s .
FURTH ER INFORMATION CON TACT:
Contact the following attorneys in the
Division of Consumer and Community
Affairs, Board of Governors of the
Federal Reserve System, Washington,
D.C. 2 0 5 5 1 , at (2 0 2 ) 4 5 2 - 2 4 1 2 or (2 0 2 )
4 5 2 -3 8 6 7 :
Subpart
A—Lynn Goldfaden, Gerald
Hurst
S u b p a r t B — R ic h a r d G a r a h e d i a n ,
Adrienne Hurt
C— R u g e n i a
Subpart
S ilv e r , S u s a n
W e r th a n
S U PPLE M E N T A R Y INFORMATION:
I. GeEseira!
T h e T r u t h in L e n d in g A c t (1 5 U .S .C .
1 6 0 1 e t s e q .) g o v e r n s c o n s u m e r c r e d i t
t r a n s a c t io n s a n d is im p le m e n te d b y th e
B o a r d ’s R e g u l a t i o n Z i 12 C F R P a r t 2 2 6 ).
E f f e c t iv e O c t o b e r 1 3 ,1 9 8 1 , a n d o f fic ia l
s t a f f c o m m e n t a r y ( T I L -1 , S u p p . I t o 1 2
C F R P a r t 2 2 6 ) w a s p u b l i s h e d t o in t e r p r e t
t h e r e g u l a t i o n . T h e c o m m e n t a r y is
d e s i g n e d t o p r o v i d e g u i d a n c e to
c r e d i t o r s in a p p l y i n g t h e r e g u l a t i o n t o
s p e c ific tr a n s a c tio n s . T h e c o m m e n ta r y
i s u p d a t e d p e r i o d i c a l l y to a d d r e s s
s ig n ific a n t q u e s t io n s th a t a r is e . T h e r e
h a v e b e e n th r e e g e n e r a l u p d a te s s o
f a r —- t h e f ir s t in S e p t e m b e r 1 9 8 2 (4 7 F R
4 1 3 3 8 ) , t h e s e c o n d in A p r il 1 9 8 3 (4 8 F R
1 4 8 8 2 ) , a n d t h e t h ir d in A p r il 1 9 8 4 ( 4 9 F R
1 3 4 8 2 ). T h e r e w a s a ls o a lim it e d u p d a te
c o n c e r n in g f e e s fo r th e u s e o f a u to m a te d
t e l l e r m a c h i n e s , w h i c h w a s a d o p t e d in
O c t o b e r 1 9 8 4 (4 9 F R 4066C j. T h i s n o t i c e
c o n t a in s th e p r o p o s e d fo u r th g e n e r a l
u p d a t e . It i s e x p e c t e d t h a t it w i l l b e
a d o p t e d in f i n a l f o r m in M a r c h 1 9 8 5 w i t h
o p t i o n a l c o m p l i a n c e u n t il t h e u n if o r m
e f fe c tiv e d a te o f O c to b e r 1 fo r
m a n d a to r y c o m p lia n c e .
C e r t a in c o n v e n t i o n s h a v e b e e n u s e d
t o h ig h lig h t t h e p r o p o s e d r e v i s i o n . N e w
la n g u a g e is s h o w n in s id e b o ld -fa c e d
a r r o w s , w h ile la n g u a g e th a t w o u ld b e
d e le t e d is s e t o ff w it h b r a c k e ts .
II. Proposed Revisions
F o ll o w i n g i s a b r i e f d e s c r i p t i o n o f t h e
p r o p o s e d r e v is io n s to th e c o m m e n ta r y :
Subpart A—Genera!
S e c t i o n 2 2 6 .2 — D e f i n i t i o n a n d R u l e s o f
C o n s tr u c tio n
2(a) Definitions
2 ( a ) ( 1 5 ) “C r e d i t C a r d ”
C o m m e n t 2 (a ){ 1 5 )-2 w o u ld b e r e v is e d
to m a k e c le a r th a t c e r ta in ty p e s o f
a c c e s s d e v ic e s th a t a re u s e d at
w h o le s a le p e tr o le u m d is tr ib u tio n
t e r m in a l s — w h e t h e r o r n o t c r e d i t i s
i n v o l v e d — a r e n o t c o n s i d e r e d c r e d it
c a r d s u n d e r R e g u la tio n Z .
2 ( a ) ( 1 7 ) “C r e d i t o r ”
P a r a g r a p h 2 (a )(1 7 )(i)
C o m m e n t 2 ( a ) ( 1 7 ) ( i) —B w o u l d b e
a d d e d to e x p la in h o w th e n u m e r ic a l
t e s t s f o r d e t e r m in i n g w h o i s a “ c r e d i t o r ”
s h o u ld b e a p p lie d to lo a n s m a d e b y
e m p l o y e e s a v i n g s p l a n s . It p r o v i d e s t h a t
t h e n u m e r i c a l t e s t s h o u l d b e a p p l i e d to
th e p la n a s a w h o le r a th e r th a n to th e
in d iv id u a l a c c o u n t.
2 ( a ) ( 2 0 ) “O p e n - E n d
Credit"
C o m m e n t 2 (a )(2 0 }-5 w o u ld b e r e v is e d
to c o r r e c t a p o te n t ia l c o n tr a d ic tio n
c a u s e d b y th e la n g u a g e “s p e c if ic
a p p r o v a l fo r e a c h e x t e n s io n .” B e c a u s e
“ v e r i f i c a t i o n ” o f c r e d i t in f o r m a t i o n —
w h i c h is p e r m i s s i b l e u n d e r t h e o p e n - e n d
c r e d it d e fin itio n — n e c s s s a r y in v o lv e s
“a p p r o v a l” if a c r e d it e x t e n s io n is n o t
d e n ie d a fte r v e r ify in g th e c r e d it
i n f o r m a t io n , t h e “ s p e c i f i c a p p r o v a l ”
la n g u a g e m a y b e c o n fu s in g . T h e
p r o p o s a l w o u ld , th e r e fo r e , d e le t e th a t
la n g u a g e , T h e c o m m e n t w o u ld c o n t in u e
to m e a n , h o w e v e r , th a t w h ile c r e d ito r s
m a y v e r ify c r e d it in fo r m a tio n o n a n
o p e n - e n d c r e d i t p l a n b e f o r e a u t h o r i z in g
a d d itio n a l c r e d it e x t e n s io n s , t h e y m a y
n o t u n d e r ta k e a c tiv itie s su c h a s
r e q u ir in g a n e w a p p l i c a t i o n f o r e a c h
a d d itio n a l c r e d it e x t e n s io n , w ith o u t
j e o p a r d i z i n g a p r o g r a m ’s s t a t u s a s a
o p e n - e n d c r e d i t P la n .
S e c t i o n 2 2 6 .4 — F i n a n c e C h a r g e
4 (a ) D e fin itio n
T h e f ir s t s e n t e n c e o f c o m m e n t 4 ( a ) - 3
w o u ld b e r e v is e d to c la r ify w h ic h
c h a r g e s b y t h ir d p a r t i e s a r e e x c l u d e d
from the finance charge. The revision
makes clear that, in order to be
excluded, the charge must be imposed
on the consumer rather than the creditor
and the creditor must not retain the
charge.
S u b p a r t f t — O p e n - E n d C r e d it
S e c t i o n 2 2 6 .7 — P e r i o d i c S t a t e m e n t
7 (h ) O t h e r C h a r g e s
C o m m e n t 7 (h )-4 w o u ld b e a d d e d to
m a k e c le a r th a t, in d is c lo s in g “o th e r
c h a r g e s ” o n th e p e r io d ic s ta te m e n t,
c r e d it o r s h a v e t h e f l e x i b i l i t y to d i s c l o s e
t h e m i n d i v i d u a l l y o r a s a t o t a l, a s l o n g
a s th e c h a r g e s a re still ite m iz e d a n d
id e n tifie d b y ta p e .
S e c t i o n 2 2 6 .9 — S u b s e q u e n t D i s c l o s u r e
R e q u ir e m e n ts
9 (d ) F in a n c e C h a r g e I m p o s e d a t T i m e o f
T r a n s a c tio n
C o m m e n t 9 ( d ) - l w o u ld b e t o ta lly
r e w r it t e n s i n c e t h e b a n o n c r e d i t c a r d
su r c h a r g e s e x p ir e d o n F e b r u a r y 2 7 ,1 9 8 4 .
R e v is e d c o m m e n t 9 ( d ) - l w o u ld m a k e
c le a r th a t a f in a n c e c h a r g e , s u c h a s a
c r e d it c a r d su r c h a r g e , im p o s e d b y a
p e r s o n o th e r th a n th e c a r d is s u e r fo r
u s in g a c r e d it c a r d , m u s t b e d is c lo s e d to
c o n s u m e r s p r io r t o t h e ir b e i n g
c o m m itte d to p u r c h a s in g p r o p e r ty o r
s e r v i c e s , in o r d e r t o s a t i s f y t h e
| 2 2 6 .9 ( d ) ( 1 ) r e q u i r e m e n t t h a t t h e
a m o u n t o f th a t fin a n c e c h a r g e b e
d i s c l o s e d p r io r t o i t s i m p o s i t i o n . F o r
e x a m p le , th e c h a r g e m u s t b e d is c lo s e d
t o t h e c o n s u m e r p r io r t o t h e c o n s u m e r ’s
h a v in g d in n e r a t a r e s ta u r a n t, o r s t a y in g
o v e r n ig h t a t a h o t e l .
S e c t i o n 2 2 6 .1 2 — S p e c i a l C r e d i t C a r d
P r o v is io n s
12(a) Issuance of Credit Cards
P a ra g ra p h 1 2 (a )(1 )
C o m m e n t 1 2 (a ) ( l } - 8 w o u ld b e a d d e d
to m a k e c le a r th a t c a r d is s u e r s m a y
is s u e , w ith o u t a s p e c ific r e q u e s t fro m
th e c o n s u m e r , a p e r s o n a l id e n tif ic a t io n
n u m b e r (P I N ) t o e x i s t i n g c a r d h o l d e r s ,
p r o v id e d th a t P IN c a n n o t b e u s e d b y
i t s e l f t o o b t a i n c r e d it . T h i s i n t e r p r e t a t i o n
d iffe r s fro m a p r o p o s e d in te r p r e ta tio n
u n d e r R e g u la tio n E th a t p r o h ib its s u c h
P IN is s u a n c e . T h e d iffe r e n t tr e a tm e n t is
b a s e d o n th e d e fin itio n o f a n a c c e s s
d e v i c e in R e g u l a t i o n E . U n d e r
R e g u la tio n E a P IN is a n a c c e s s d e v ic e
in a ll c a s e s , e v e n w h e n i t c a n n o t b e
u s e d a l o n e t o i n i t i a t e a n E F T ; in
c o n t r a s t , a P I N i s s u e d to e x i s t i n g
c a r d h o ld e r s th a t c a n n o t b e u s e d b y
it s e lf to o b ta in c r e d it is n o t a c r e d it c a r d
u n d e r R e g u l a t i o n Z . T h e r u le r e g a r d in g
a c c e s s d e v i c e s i s m o r e r e s t r i c t i v e in p a r t
b e c a u s e o f t h e c o n s u m e r ’s p o t e n t i a l l y
3
g r e a t e r r is k . S e e Q u e s t i o n 5 - 4 .5 in t h e
p r o p o s e d u p d a te to th e o ffic ia l s t a f f
c o m m e n ta r y to R e g u la tio n E (p u b lis h e d
e l s e w h e r e in t h i s F e d e r a l R e g i s t e r i s s u e ) .
S e c t i o n 2 2 6 .1 5 — R i g h t o f R e s c i s s i o n
1 5 ( a ) C o n s u m e r ’s R ig h t t o R e s c i n d
P a r a g r a p h 1 5 (a )(1 )
C o m m e n t 1 5 ( a )( l)- 2 w o u ld b e r e v is e d
t o r e f l e c t t h e a m e n d m e n t t o t h e T r u t h in
L e n d in g A c t in P u b . L 9 8 - 4 7 9 w h i c h
p e r m a n e n t l y e x e m p t s f r o m t h e r ig h t o f
r e c is s io n in d iv id u a l t r a n s a c t io n s m a d e
o n a n o p e n - e n d l i n e o f c r e d i t in
a c c o r d a n c e w ith a p r e v io u s ly
e s t a b l i s h e d c r e d i t lim it .
R eferen ces
R e fe r e n c e to 1 2 0 5 o f P u b . L 9 8 -4 7 9
w o u ld b e a d d e d to th e R e fe r e n c e s
s e c tio n to r e fle c t th e p e r m a n e n t
e x e m p t i o n f r o m t h e r ig h t o f r e s c i s s i o n
fo r in d iv id u a l c r e d it e x t e n s io n s m a d e o n
a n o p e n -e n d c r e d it lin e .
S u b p a r t G - C I o s e d - E n d C r e d it
Section 2 2 6 .1 7 — General Disclosure
Requirements
1 7 (a ) F orm o f D is c lo s u r e s
P a r a g r a p h 1 7 (a )(1 )
T h e l a s t e x a m p l e in c o m m e n t 1 7 ( a ) ( 1 ) 5 r e g a r d in g d u e - o n - s a l e c l a u s e s w o u l d
b e d e le te d c o n s is te n t w ith th e p r o p o se d
c h a n g e in p o s i t i o n i n c o m m e n t 1 8 ( q ) - l .
S e c t i o n 2 2 6 .1 8 — C o n t e n t o f D i s c l o s u r e s
1 8 ( f) V a r i a b l e R a t e
C o m m e n t 1 8 ( f) —5 w o u l d b e r e v i s e d t o
a d d r e c e n t f e d e r a l a d ju s ta b le ra te
m o r tg a g e r e g u la tio n s to th e lis t o f
v a r ia b le r a te r e g u la tio n s fo r w h ic h
f o o t n o t e 4 3 t o | 2 2 6 .1 8 ( f ) m a y b e u s e d .
U n d e r t h e p r o p o s a l , c r e d i t o r s m a k in g
d i s c l o s u r e s in a c c o r d w i t h t h e r u le s
is s u e d b y th e D e p a r tm e n t o f H o u s in g
a n d U r b a n D e v e l o p m e n t (4 9 F R 2 3 5 8 0 )
n e e d n o t m a k e th e v a r ia b le ra te
d i s c l o s u r e s r e q u i r e d b y § 2 2 6 .1 8 (f).
C o m m e n t 18(F)—5 w o u l d a l s o b e
r e v is e d to r e fle c t a n e w c ita tio n to th e
v a r ia b le r a te r e g u la tio n o f th e F e d e r a l
H o m e L o a n B a n k B o a r d . T h e r e v is io n is
t e c h n ic a l a n d r e f le c t s n o s u b s ta n tiv e
c h a n g e in t h e c o m m e n t .
C o m m e n t 1 8 ( f ) —3 w o u l d b e r e v i s e d to
c la r ify th e a p p lic a tio n o f th e d is c o u n t e d
v a r ia b le r a te r u le s to t w o ty p e s o f
v a r i a b l e r a t e t r a n s a c t i o n s . F ir s t , a
p a r a g r a p h w o u ld b e a d d e d to e x p la in
t h a t t r a n s a c t i o n s in w h i c h t h e o n l y
d iffe r e n c e b e t w e e n th e in itia l ra te a n d
t h e f o d e x r a te a t c o n s u m m a tio n r e s u lts
fr o m a c h a n g e an t h e i n d e x a r e n o t
d is c o u n te d tr a n s a c tio n s . S e c o n d ,
m a t e r ia l w o u l d b e a d d e d t o a d d r e s s
plans that have a built-in delay between
index changes and implementation of
those changes. In calculating a
composite annual percentage rate for
these plans, creditors may use an index
value prior to consummation as long as
it incorporates the same delay used for
later rate adjustments.
18(k) Prepayment
Comment 18(k)-2 would be revised to
delete the example regarding student
loans with loan fees, in order to make
the comment more consistent with
comment 18(k}-3. Comment 18(k)-2
illustrates transactions that may require
disclosures under both § 22@.18(k)(l),
regarding penalties for prepayment of
simple interest transactions, and
i 22©.18(k)(2), regarding rebates for
prepayment of precomputed
transactions. Comment 18(k}-3 clarifies
that prepaid finance charges do not
require rebate disclosures. Since loan
fees in student loans are normally
prepaid finance charges, the continued
use of that type of transaction as an
example of a loan requiring a rebate
disclosure is inappropriate and may
cause confusion. The deletion of the
example is a technical revision and does
not affect the substance of either
■comment.
18(q) Assumption Policy
The substance of comment 18(q)-l
would be deleted and replaced by a new
provision which reverses the rule on
assumption policy disclosure. When
uncertainty exists as to the assumability
of the obligation, a negative rather than
affirmative disclosure would be
required. It is believed that under such
circumstances, a negative disclosure
would be less misleading to consumers.
Since this change would reverse the
current position on assumption
disclosures, it would be applied
prospectively.
Section 226.23—Right of Rescission
23(1) Exempt Transactions
Comment 23(0-8 would be added to
clarify the application of the right of
rescission to closed-end credit
transactions arising from the conversion
of an open-end credit account. Where
consummation of both the closed-end
and open-end credit occurs at the time
the consumer enters into the open-end
agreement, the closed-end disclosures
may be delayed until conversion, as
provided by comment 17(b)-2. Proposed
comment 23(f)—
8 would make clear that,
if the creditor has previously complied
with the rescission requirements on the
open-end account, no new righinf
recession applies on the conversion of
an account secured by the consumer’s
principal dwelling.
List of Subjects Ira 12 CFM Part 22®
Advertising, Banks, Banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
PAIRS? 228—[AMENDED]
Text of revisions. The proposed
revisions to the commentary (TIL-1,
Supplement 1 to 12 CFR Part 226] read
as follows:
Supplement 1—Official Staff Commentary—
TIL-1
SUBPART A—GENERAL
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2 ( a ) ( 2 0 ) ‘‘O p e n - E n d C r e d i t ”
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5. R e u s a b l e l i n 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, o f j o . The creditor
may verify < 3 credit information such as the
consumer’s continued income and
employment status or Jo fJ information for
security purposes 0 2 . This criterion of
unlimited credit distinguishes open-end credit
from a series of advances made pursuant to a
closed-end credit loan commitment. * * *
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Section 22K.2—Definitions and Rules of
Construction
S e c t i o n 2 2 6 .4 — F i n a n c e C h a r g e
2 (a ) D e fin itio n s
4 (a ) D e fin itio n .
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2 ( a ) ( 1 5 ) “C r e d i t C a r d "
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2.
E x a m p l e s . 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, 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 0 a]]£>:
° A <3 check guarantee or debit card with
no credit feature or agreement, even if the
creditor occasionally honors an inadvertent
overdraft [[.J
E>° Any card key that must be used in
order to gain access to a wholesale
distribution facility to obtain petroleum
products for business purposes, and the use
of which is required without regard to
payment terms, o
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2 ( a ) ( 1 7 ) "C r e d i t o r ”
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P a r a g r a p h 2 (a )(1 7 )(i)
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t> 8 . L o a n s f r o m e m p l o y e e s a v i n g s p l a n s .
Some employee savings plans permit
participants to borrow money up to a certain
percentage of their account balances. In such
cases, the numercia! tests should be applied
to the plan as a whole rather than to the
individual accounts, even if the loan amount
is determined by reference to the-balance in
an individual account and the repayments
are credited to the individual account.o
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3.
C h a r g e s b y t h i r d p a r t i e s . Charges
imposed by someone other than the creditor
for services that are not required by the
creditor are not finance chargesE>, provided
the charges are imposed on the consumer
rather than on the creditor by the third party,
and the creditor does not retain the chargeo.
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 of compensa tea the 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)
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Subpart B—-Open-End Credit
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S e c t i o n 2 2 6 .7 — P e r i o d i c S t a t e m e n t
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7 (h ) O th e r C h a rg e s.
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\> 4 . I t e m i z a t i o n — t y p e s o f “o t h e r c h a r g e s ”
Each type o f ’’other charge” (such as late
payment charges, over-the-credit-Jimit
charges, ATM fees that are not finance
charges, and membership fees) imposed
during the cycle must be separately itemized;
for example, disclosure of only a total of
’’other charges” attributable to both an overthe-crtedit-limit charge and a late payment
charge would not be permissible. “Other
charges” of the same type may be disclosed,
however, individually or as a total. For
example, three ATM fees of $1 may be listed
separately or as $3.<3
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S e c t i o n 2 2 6 .9 — S u b s e q u e n t D i s c l o s u r e
R e q u ir e m e n ts
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9 (d ) F in a n c e C h a rg e I m p o s e d a t T im e o f
T r a n s a c tio n .
1. £Z?an o n c r e d i t c a r d s u r c h a r g e s , IS
LLS.C. l©68f provides drat until February 2 3
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.]]
D is c lo s u r e p r i o r to im p o s itio n . The
requirement that the amount of a finance
charge imposed at the time of the honoring ©
consumer’s credit card be disclosed prior to
its imposition requires a person imposing
such a credit card surcharge to disclose its
existence prior to the consumer’s becoming
obligated to purchase property or services, < 3
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rescission right be available for a three-year
trial period. However. Pub. L 98-479 now
permanently exempts such individual credit
extensions from the right of rescission, o
S e c t i o n 2 2 6 .1 2 — S p e c i a l C r e d i t C a r d
P r o v is io n s
5. D i r e c t l y r e l a t e d . The segregated
disclosures may, at the creditor’s optie®,
include any information that is directly
related to those disclosures. Directly related
information includes, for example, the
following: 4 * 4
([° A statement that a due-on-sale clause
is contained in the loan docum ent For
example, the disclosure given your § 228.18(q)
may state, “Someone buying your home may,
subject to conditions in the due-on-sale
clause contained in the loan document,
assume the remainder of the mortgage on the
original terms.”]]
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1 2 (a ) is s u a n c e o f C r e d it C a r d s .
P a r a g r a p h 1 2 (a )(1 ).
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O 8. U n s o l i c i t e d i s s u a n c e o f P I N s . A card
issuer may issue to existing credit
cardholders, without a specific request
personal identification numbers (PINs), thus
allowing consumers to use their existing
credit cards at autom ated teller machines,
provided the PINs cannot be used alone to
obtain c r e d ito
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Subpart
P a r a g r a p h 1 5 (a )(1 ).
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2. E x c e p t i o n s . Although the consumer
generally has the right to rescind with each
transaction on the account section 125(e) of
the act provides an exception: ([until
September 30,1985,J the creditor need not
provide the right to rescind at the time of
each credit extension made under an openend 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. This limited rescission option is
available whether or not the plan existed
prior to the effective date of the act. £The
consumer will have the right to rescind each
extension made after September 30,1985
under such a secured open-end credit plan,
whether that plan w as established before or
after that date.]]
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References
S t a t u e : §§ 113,125, ( [ a n d j o . o 130 e>, and
the Housing and Community Development
Technical Amendments Act of 1984, (Sec. 205,
Pub. L 98-479)0
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1 9 6 1 'C h a n g e s : Section 228.15 reflects the
statutory amendments of 1980, providing for a
limited right of rescission ([for a three-year
trial period]]' when individual credit
extensions are made in accordance with a
previously established credit limit for an
open-end credit plan. o T h e 1980
amendments provided that this limited
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C—Closed-End Credit
1 7 (a ) F o r m o f D is c lo s u r e .
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P a r a g r a p h 1 7 (a ) (1 ).
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S e c t i o n 2 2 6 :1 6 — C o n t e n t o f D i s c l o s u r e s
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1 8 ( f) V a r i a b l e R a t e .
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1 5 ( a ) C o n s u m e r 's R i g h t t o R e s c i n d .
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S e c t i o n 2 2 6 .1 7 — G e n e r a l D i s c l o s u r e
R e q u ir e m e n ts .
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S e c t i o n 2 2 6 .1 5 — R i g h t o f R e s c i s s i o n
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5. O t h e r v a r i a b l e - r a t e r e g u l a t i o n s .
Transactions in which the creditor is required
to comply with and has complied with
variable-rate regulations of other federal
agencies are exempt from the requirements of
§ 226.18(f), by virtue of footnote 43, Those
variable-rate regulations include the
adjustable mortgage loan instrument
regulation issued by the Federal Home Loan
Bank Board £>{12 CFR 545.33),<3 j[(12 CFR
545.6-2(a)) and]] the adjustable-rate mortgage
regulation issued by the Comptroller of the
Currency (12 CFR Part 29) £>and the
adjustable-rate mortgage regulations issued
by the Department of Housing and Urban
Development (24 CFR Part 203 and 24 CFR
Part 234) o . The exception in footnote 43 is
also available to creditors that are required
by state law to comply with the federal
variable-rate regulations noted above and to
creditors that are authorized by title VIII of
the Depository Institutions A ct of 1982 (Pub.
L. 97-320) to make loans in accordance with
those regulations. Creditors using this
exception should comply with the timing
requirements of those regulations rather than
the timing requirements of Regulation Z in
making the variable-rate disclosures.
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8. D i s c o u n t e d v a r i a b l e - r a t e t r a n s a c t i o n s . In
some variable-rate transactions, creditors
may set an initial interest rate that is not
determined by the index or formula used to
make later interest rate adjustments..
Typically, this initial rate 1 9 lower than the
rate would b® if it were calculated using the
index or formula. For example, a creditor
may calculate interest rates according to a
formula using the six-month Treasury bill
5
rate plus a 2 percent margin. If the current
Treasury bill rate is 10 percent, the creditor
may forego the 2 percent spread and charge
only 10 percent for a limited time, instead of
setting an initial rate of 12 percent
° When creditors use an initial rate that is
not calculated using the index or formula for
later rate adjustments, the disclosures should
reflect a composite annual percentage rate
based on the initial rate for as long as ibis
applied and, for the remainder of the term,
the rate that would have been applied using
the index or formula at the time of
consummation. o T h e rate at consummation
need not be used if a contract provides for a
delay in the implementation of changes in an
index value. For example, if the contract
specifies that payment changes are based on
the index value in effect 45 days before the
change date, creditors may use the index
value 45 days before consummation in
calculating a composite annual percentage
rate. < 3
0 The effect of the multiple rates must also
be reflected in the calculation and disclosure
of the finance charge, total of payments, and
payment schedule.
0 If a loan contains a rate or payment cap
that would prevent the initial rate or
payment, at the time of the first adjustment,
from changing to the rate determined by the
index or formula at consummation, the effect
of that rate ©^payment cap should be
reflected in the disclosures.
0 Because these transactions involve
irregular payment amounts, an annual
percentage rate tolerance of Vi of 1 percent
applies, in accordance with § 226.22(a)(3) of
the regulation.
0 Examples of discounted variable-rate
transactions include:
—A 30-year loan for $100,000 with no
prepaid finance charges and rates determined
by the Treasury bill rate plus 2 percent. Rate
and payment adjustments are made annually.
Although the Treasury bill rate at the time of
consummation is 10 percent, the creditor sets
the rate for one year at 9 percent, instead of
12 percent according to the formula. The
disclosures should reflect a composite annual
percentage rate of 11.63 percent based on 9
percent for one year and 12 percent for 29
years. Reflecting those two rate levels, the
payment schedule should show 12 payments
of $804.62 and 348 payments of $1,025.31. The
finance charge should be $226,463.32 and the
total of payments $366,463.32.
—Same loan as above, except with a 2
percent rate cap on periodic adjustments. The
disclosures should reflect a composite annual
percentage rate of 11.53 percent based on 9
percent for the first year, 11 percent for the
second year, and 12 percent for the remaining
28 years. Reflecting those three rate levels,
the payment schedule should show 12
payments of $804.62,12 payments of $950.09.
and 336 payments of $1,024.34. The finance
charge should be $265,234.76. and the total of
payments $365,234.76.
o T h is paragraph does not apply to
variable-rate loans in which the initial rate is
set according to the index or formula used for
later adjustments, but is not set at the value
of the index or formula at consummation. For
example, if a creditor commits to an initial
rate based on the formula on a diate prior to
consummation, but the index has moved
during the period between that time and
consummation, a creditor may base its
disclosures on the initial ra te .o
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1 8 (k ) P r e p a y m e n t.
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2 . . R e b a te - p e n a lty d is c lo s u r e . A sin g le
tr a n sa c tio n m a y in v o lv e b o th a p reco m p u ted
fin a n c e ch a r g e a n d a f in a n c e c h a rg e
co m p u ted b y a p p lic a tio n o f a r a te to th e
u n p a id b a la n c e (fo r e x a m p le , [[sim p lein te rest s tu d e n t lo a n s w ith lo a n f e e s a n d j
m o rtg a g e s w ith m o r tg a te -g u a r a n te e
in su ra n ce). In t h e s e c a s e s , d is c lo s u r e s ab o u t
b o th p re p a y m e n t r e b a te s a n d p e n a ltie s are
required. S a m p le form H-15 in a p p e n d ix H
illu str a te s a m o rtg a g e tr a n sa c tio n in w h ic h
b o th re b a te a n d p e n a lty d is c lo s u r e s a re
n ecessa ry .
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assuming that the right of rescission was
previously provided on the open-end account
pursuant to § 228.15. <j
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(15 U.S.C. 1604)
Board of Governors of the Federal Reserve
System, November 28,1984.
William W. Wiles,
S e c r e t a r y o f th e B o a rd .
[FR Doc. 84-31577 Filed 12-3-84; 8>45 am]
©SUJtJO COBS S21&-S1-K)
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1 8 (q ) A s s u m p tio n P o lic y .
1. P o li c y s t a t e m e n t [[Because a creditor’s
assumption policy may be based on a variety
of circumstances not determinable at the time
the disclosure is made, the creditor may use
phrases such as “subject to conditions” or
“under certain circumstances” in complying
with § 226.18{q). The provision requires only
that the consumer be told whether or not a
subsequent purchaser might be allowed to
assume the obligation on its original terms
and does not contemplate any explanation of
the criteria or conditions for assumability.
However, the creditor may state that a dueon-sale clause is contained in the loan
document. (See comment 17(a)(1)—5 regarding
directly related information.)^} feln making
the disclosure required by this section, if
uncertainty exists as to whether a subsequent
purchaser will be allowed to assume the
obligation on its original terms, the creditor
should state that the obligation cannot be
assumed on its original terms. For example, if
the obligation is subject to a due-on-sale
clause, it is viewed as being nonassumable
for purposes of complying with this section.
However, if the only uncertainty pertains to a
determination of the creditworthiness of the
subsequent purchaser, the obligation is
viewed as being assumable and an
affirmative disclosure is appropriate. <3
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S e c tio n 2 26.23— R ig h t o f R e s c is s io n
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2 3 (f) E x e m p t T r a n s a c tio n s
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*
*
D>8. C o n v e r tin g o p e n - e n d to c l o s e d - e n d
c r e d it. Under certain state laws,
consummation of a closed-end credit
transaction may occur at the time a consumer
enters into the initial open-end credit
agreement. As provided in the commentary to
| 226.17(b), closed-end credit disclosures may
be delayed under these circumstances until
the conversion of the open-end account to a
closed-end transaction. In accounts Secured
by the consumer’s principal dwelling, no new
right of rescission arises at the time of
conversion, assuming that the right of
rescission arises at the time of conversion,
6
@FedFRASER