Full text of Federal Reserve Bank of New York Circulars : 9775. Regulations Z and E

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FEDERAL RESERVE BANK
OF N E W YORK

Circular No. 9 7 7 5
December 20, 1984

REGULATIONS Z AND E
—Revised Official Staff Commentary on Regulation Z
—Amendments to Official Staff Commentary on Regulation E

To A l l D e p o s ito r y I n s titu tio n s , a n d O th ers C oncerned,
i n the S e c o n d F e d e r a l R eserve D is tr ic t:

Enclosed — for depository institutions in this District — is a copy of the “Official
Staff Commentary on Regulation Z — Truth in Lending,” amended effective October 16,
1984. A summary of the October 16 revision, which reflects new rulings on the
disclosure of fees for the use of automated teller machines, was sent to you with our
Circular No. 9743, dated October 18, 1984. Also enclosed for depository institutions is a
complete set of amendments to the “Official Staff Commentary on Regulation E —
Electronic Fund Transfers,” dated November 1984; these amendments reflect recent
changes that were also summarized in Circular No. 9743.
Questions regarding either of the Commentaries should be directed to our
Regulations Division (Tel. No. 212-791-5914). Copies will be furnished to others upon
request to the Circulars Division (Tel. No. 212-791-5216).

A nthony M. Solomon,
President.

Board of Governors of the Federal Reserve System

Amendments to the Official Staff Commentary
on Regulation E
Electronic Fund Transfers
November 1984

The

fo ll o w i n g

c o m m e n ts

w ere

added

a m e n d e d e ffe c tiv e A p r i l '1, 1983. T h e se a m e n d
m e n t s w ere in c lu d e d in th e p r e v io u s slip sheet,
d a t e d M a y 1983.

SECTION 2 0 5 .2 — Definitions and Rules
of Construction
a
o
a
$
e>
Q2-5.5: R e t a i l r e p u rc h a se a g r e e m e n ts . A re
tail repurchase agreement (repo) is essentially
a loan made to a financial institution by a con
sumer that is collateralized by government or
government-insured securities. Is a repo an
account for purposes o f Regulation E?
A: While repos may not be deposits for pur
poses o f some other banking regulations, re
pos are accounts as defined in Regulation E.
(§ 2 0 5 .2 (b ))
0

Q2-12.5:

F u n d tr a n s fe r — w ith h o ld in g o f i n

electronically debits a portion o f the interest
on a consumer account for transmittal to the
Internal Revenue Service, to comply with
withholding requirements. Is the debit subject
to the regulation?
No. (§ 2 0 5 .2 (g ))
0

Q2-25.5: C a r d - a c tiv a te d tele p h o n es. D oes
the regulation cover transfers to pay for calls
made from a telephone that is activated when
the consumer inserts a card into a magnetic
strip or card reader, and does the terminalreceipt requirement apply?*•
• For this commentary to be complete, as amended effec
tive October 16, 1984, retain—
• Regulation E commentary pamphlet dated October
1981 (see inside cover) and
0 this slip sheet.

Q2-27:

U n a u th o r iz e d

tr a n s fe r s — a ccess

vice o b ta in e d f r o m th e c o n s u m e r . A consumer

is robbed or induced by fraud to furnish an
other person with an access device. Are trans
fers initiated at an A TM by the person who
obtained the access device from the consumer
“unauthorized electronic fund transfers”?

c o m e t a x o n in te re st. A financial institution

A: The regulation applies to transfers initiat
ed electronically. As a result the electronic
transfers from a consumer’s account to pay
for telephone calls are covered by the regula
tion as electronic fund transfers. A receipt is
not required provided the only transfer of
funds occurring as a result o f the use of the
card at the combination telephone/reader is
to pay for the charges incurred by use o f the
telephone. (§ 2 0 5 .2 (h ))

A: The transfers are unauthorized for pur
poses o f Regulation E. A lthough the defini
tion o f “unauthorized electronic fund trans
fer” excludes any transfer initiated by a per
son “who was furnished with the access de
vice to the consumer’s account by the con
sumer,” it assumes that the'consumer has au
thorized the person to make transfers with the
access device. This exclusion does not apply
when the access device is “ furnished” as the
result o f a robbery, or as the result o f a fraud
on the consumer in which the consumer does
not authorize the use o f the access device to
make transfers. But if the consumer furnishes
an access device and grams actual authority
to make transfers to another person (a family
member or co-worker, for exam ple) who then
exceeds that authority, the consumer is liable
for the transfers unless the financial institu
tion has been notified that transfers by that
person are no longer authorized. (§ 205.2(7))
®

Regulation E Commentary

§ 205.3

SECTION 205.3—Exemptions
*
8
0
8
Q3-19.5:

■*

T e le p h o n e tra n sfe rs— m o n e y m a r

A: .T he financial institution may but need
not refer to the longer time periods in the
error-resolution disclosure. (§§ 2 0 5.7(a) (1 0 ).
2 05.8(b ), and 2 0 5 .1 1 (c )(4 ))

k e t d e p o s it a c c o u n ts , re ta il re p u rc h a se a g re e

Are telephone transfers between a
money market deposit account (or a retail
repo account) and another account within the
institution subject to the regulation?

m e n ts .

A: The answer depends on whether the
transfers are made pursuant to a written plan
or agreement in which penodic or recurring
transfers are contemplated. An agreement
that merely permits the consumer to tele
phone institutions for the rollover of all or a
portion of the funds at maturity does not meet
this test. (§ 2 0 5 .3 (e ))
*

Q3-22:

S m a l l - in s ti t u ti o n

e x e m p tio n — g ra c e

financial institution exceed S25 million on D e
cember 31, when must the institution begin
complying with the regulation?
A: Such an institution would have a oneyear grace period. For example, if the assets
exceed S25 million on December 31, 1983,
compliance is not required until January 1,
1985. On the other hand, a previously covered
institution whose assets fall below S25 million
on December 31, 1983, may take advantage of
the exemption beginning on January 1, 1984.
(§ 2 0 5 .3 (g ))
0

Q7-18.5:

E r r o r -r e s o lu tio n

d is c lo s u r e — f o r -

The .regulation ex
pands the time periods for resolving errors
that involve transfers initiated outside the
United States, 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 ig n - in itia te d

tra n sfe rs.

Q9-9: R e c e ip ts — typ e o f a c c o u n t. A footnote
states that the type of account need not be
identified if the access device used to initiate
the transfer can access only one account at a
given terminal. When does this exception
apply?
A: The exception applies to point-of-sale ter
minals, ATM s, and any other electronic ter
minals. It is available even if the access device
can access more than one account when used
at another terminal. For example, it is avail
able when, in a shared ATM system, an access
device can access only one account at a termi
nal operated by an institution other than the
account-holding institution, even though the
access device can access more than one a c
count at terminals operated by the account
holding institution. Moreover, account refers
only to asset accounts. If a consumer can use
an access device at a terminal to debit an asset
account and also to access a credit line, for
example, the exception is still available.
(§ 2 0 5 .9 (a )(3 ), footnote 3)
8

SECTION 205.7—Initial Disclosure of
Terms and Conditions
8

p e rio d . If the assets of a previously exempt

SECTION 205.9—Documentation of
Transfers

Q9-10.5:

R e c e ip ts — ty p e

o f a c c o u n t,

in te r

What about an interchange
system in which consumers can access m ulti
ple accounts of the same type at their account
holding institution’s terminals, but only a pri
mary account o f each type at other terminals
in the system — may the receipt at such other
terminals describe the account in terms of
“checking” or “savings,” without unique
identification?
c h a n g e s y s te m .

Yes. (§ 2 0 5 .9 (a )(3 ), footnote 3)

§ 205.9

Regulation E Commentary
Q9-16: P e r io d ic s ta te m e n ts —f r e q u e n c y . How
often must periodic statements be sent for ac
counts that are subject to the regulation?
A: A monthly statement is required for any
account to or from which an EFT has oc
curred during the month, if the account is one
that can be debited electronically (by use of
an access device, telephone bill-payment serv
ice, or preauthorized transfers from the con
sumer’s account, for example) or if the ac
count can be credited electronically by other
than preauthorized deposits. If no transfers
occur during some months, the statement
must be provided at least quarterly.
There are certain exceptions for accounts
on which the only EFT service relates to
preauthorized credits. The institution may
send quarterly statements or, if the account is
a passbook account, the institution may sim
ply update the passbook when it is presented
for updating (with the amount and date of
each EFT since the last update).
Also, to eliminate duplicative statements,
the regulation provides an exception from the
periodic statement required for certain intrainstitutional transfers between a consum
er’s accounts. This exception does not alter
the statement provisions, however, with re
spect to accounts that receive preauthorized
credits; such accounts continue to require
quarterly statements or passbook updates.
(§ 2 0 5 .9 (b ), (c ), (d ), and ( h ) )

<■

Q9-22 [Reserved]

o
Q9-26:

th e consumer with the A TM location if it has
captured that information with regard to
deposits. If the consumer merely calls to as
certain whether or not a deposit (ATM ,
preauthorized, or any other type o f electronic
transfer) was credited to the account, the
error-resolution procedures do not apply.
(§§ 2 0 5 .9 (b )(1 )(iv ),
footnote
4a,
and
2 0 5 .1 1 (a )(7 ))
<

Q9-50:

■

P e r io d ic

s t a te m e n ts — tr a n s fe r s

tw e e n a c c o u n ts. The regulation provides that

an account is excepted from the periodicstatement requirements for transfers to or
from another account of the consumer within
the institution, if these transfers are described
on a complying statement for the other ac
count. What effect does this have on the peri
odic-statement requirements for accounts that
also are accessed by other electronic transfer
activity?
A: The exception applies only to the trans
fers between accounts. The financial institu
tion must comply with the applicable period
ic-statement requirements for any other elec
tronic transfers to or from the account. For
example, a quarterly Regulation E statement
must be sent for an account that also receives
payroll deposits electronically; and a Regula
tion E statement must be sent for any month
in which an account is also accessed by a
withdrawal at an ATM . However, a financial
institution need not comply with the Regula
tion E requirements on such statements for
transfers that are otherwise exempt, such as
the transfers between accounts discussed
above. (§ 2 0 5 .9 (c ), (d ), and (h ) )

P e r io d ic s t a te m e n ts — t e r m i n a l lo c a

tio n o m itte d . When a consumer makes a de

posit at an ATM , the institution need not
identify the A TM location on the periodic
statement. D oes the consumer’s request for
the terminal location (or any other informa
tion about the deposit) trigger the error-reso
lution procedures under the regulation?
A: Yes, if the request for the location is
made in accordance with the requirements of
the error-resolution section. However, in re
sponding, the institution need only provide

Q9-51:

P e r io d ic

s ta te m e n ts — fo r e ig n - in itia t-

e d tra n sfe rs. Failure to provide terminal re

ceipts and periodic statements for transfers
initiated outside the United States is deemed
not to be a failure to comply with the regula
tion if an inquiry or request for docum enta
tion is treated as a notice o f an error. What
does this mean?
A: The relaxation in documentation require
ments takes account o f the fact that som e for
eign-based terminals do not capture all o f the
- 3

Regulation E Commentary

§ 205.9
information required by the regulation. H ow
ever, it is expected that the institution would
make a good faith attempt to provide on the
periodic statement the information required
by the regulation to identify the transfer. For
example, even though the institution may not
be able to provide the location of the specific
terminal, it should, if possible, identify the
country' and city in which the transfer was ini
tiated. (§ 20 5 .9 (i ))

dation if they capture data electronically, for
debiting or crediting to the consumer’s asset
account, using the consumer’s access device—
for example, when the consumer's personal
identification number is required, in part, to
activate the terminal. (See question 2-21.5.
Also see § 2 0 5 .1 1 (c )(4 ) regarding the exten
sion of certain error-resolution deadlines.)
(§§ 205.2(h ) and 2 0 5 .9 (a ))

0
SECTION 205.3—Exemptions

The

fo ll o w i n g

c o m m e n ts

w ere

added

a m e n d e d e ffe c tiv e O c to b e r 16, 1984.

Q3-3.5:

S e c u r itie s e x e m p t io n — a s s e t- m a n a g e

m e n t a c c o u n ts. Some consumer financial serv

SECTION 205.2—Definitions and Rules
of Construction
0
0
0
0
0
Q2-21.5: F u n d t r a n s fe r — d e b it c a r d tr a n s a c
tio n . A consumer uses a debit card to pur
chase goods or services or to obtain cash. The
card is used to generate a sales slip and no
electronic terminal is involved. The consum
er’s asset account is later debited for the
amount o f the transaction. Is this transfer sub
ject to the regulation?
A: Yes. The definition of “electronic fund
transfer” covers transfers resulting from debit
card transactions whether or not an electronic
terminal is involved at the time o f the transac
tion. (See question 2-24.) (§ 2 0 5 .2 (g ))
0

Q2-24: P o in t-o f-s a le te r m in a ls . D oes the reg
ulation cover POS transactions in which the
consumer presents an access device such as a
debit card, and does the terminal-receipt re
quirement apply?
A: The regulation applies to all transfers re
sulting from debit card transactions at point
o f sale whether or not an electronic terminal is
involved. However, if there is no electronic
terminal, a terminal receipt is not required
and the periodic statement need not disclose
terminal location. Point-of-sale terminals are
electronic terminals for purposes o f the regu4

ices include both an electronic fund transfer
service and the purchase and sale of securities.
A n example is a program involving a debit
card issued by a bank or other card issuer
which the consumer uses to purchase goods or
services, and a money market mutual fund
held by a broker. Debits are processed by the
card issuer and transmitted to the broker for
payment from the money market mutual
fund. Are such transfers exempt from cover
age under the securities exemption?
A: No. The exemption applies only to trans
fers whose “primary purpose" is the purchase
or sale of securities— for example, a telephone
order to a stockbroker to buy or sell securities.
It does not apply to transfers resulting from
use o f the card for the purchase of goods or
services or to obtain cash. (A transaction in
volving the purchase or sale of securities also
remains subject to the Board’s margin require
ments under Regulation T (12 C FR 220) and
other applicable securities regulations.)
(§ 2 0 5 .3 (c ))
0

SECTION 205.5—Issuance of Access
Devices
O

Q5-1.5: I s s u a n c e — a d d itio n o f n e w a c c o u n ts.
A consumer has been issued an access device
for accessing an asset account. The account-

§ 205.7

Regulation E Commentary
holding institution wants to make an addition
al account accessible to the consumer by
means o f the same access device. May the in
stitution do so without a request by the con
sumer?
A: No. Making an additional account acces
sible through an existing access device is
.equivalent to issuing an access device for that
account and is subject to the unsolicited-issu
ance provisions. (Additional disclosures may
be required in some circumstances. See ques
tion 7-5.5.) (§ 2 0 5 .5 (a )(1 ))
C

SECTION 205.6— Liability of Consumer
for Unauthorized Transfers
o

Q6-6.5: C o n s u m e r n e g lig en ce. A consumer
writes the PIN on the ATM card or on a piece
of paper kept with the card— actions that may
constitute negligence under state law. D o such
actions affect the liability for unauthorized
transfers that may be imposed on the
consumer?
A: No. The extent of the consumer’s liability
is determined by the promptness in reporting
loss or theft o f an access device or unautho
rized transfers appearing on a periodic state
ment. Negligence on the consumer’s part can
not be taken into account to impose greater
liability than is permissible under the act and
Regulation E. (§ 2 0 5 .6 (b ))

SECTION 205.7—Initial Disclosure of
Terms and Conditions
O

Q7-5.5: A d d it i o n o f n e w a c c o u n ts. A con
sumer arranges for electronic fund transfers to
and from an account, and receives disclosures.
Later, the consumer arranges for transfers in
volving an additional account at the same fi
nancial institution. D oes the addition o f the
new account require further disclosures?

A: The addition o f a new account would re
quire the institution to furnish any of the re
quired disclosures that differ from those previ
ously given. (See questions 5-1.5 and 7-6.)
(§ 2 0 5 .7 (a ))

3
Q7-6.5:

A d d itio n o f se rv ice — in in te r c h a n g e

sy ste m . A financial institution operates elec

tronic terminals through which consumers
can access their accounts, and gives the re
quired disclosures regarding the service. Lat
er, the institution joins an interchange or
shared system o f terminals, giving consumers
access to terminals operated by other institu
tions in the system. Are new disclosures re
quired?
A: The institution must provide any o f the
required disclosures that differ from those pre
viously given. (§ 2 0 5 .7 (a ))

Q7-15.5: C h a rg e s— in in te r c h a n g e sy ste m .
Charges are imposed on the account-holding
institution by the operator of a shared or in
terchange A TM system for the use of the sys
tem. In addition, charges may be imposed by
other institutions in the system for the use of
their ATM s. Must such charges be disclosed
by the account-holding institution in the ini
tial disclosures?
A: The fact that charges are imposed on the
account-holding institution by the system or
terminal-operating institution does not, by it
self, require a disclosure to the consumer.
However, the institution must disclose any
charges it imposes on the consumer for EFT
services, including charges for ATM trans
actions in an interchange or shared A TM
system.
Charges for use o f an A TM imposed on the
consumer by an institution other than the ac
count-holding institution are not within the
purview o f the account-holding institution's
relationship with its customer and need not be
disclosed in the initial disclosures. (See ques
tion 4-1.) (§§ 2 0 5 .7 (a )(5 ) and 2 0 5 .4 (a ))

0
5

Regulation E Commentary

§ 205.9
S E C T IO N 2 0 5 .9 — D o cu m e n ta tio n o f
T ransfers

Q9-31: P e r io d ic s ta te m e n ts — charges. What
charges must be disclosed on the periodic
statement?
A: Financial institutions should disclose the
charges assessed against the account during
the statement period for electronic fund trans
fers or the right to make transfers, or for ac
count maintenance (including both EFT and
non-EFT and both fixed fees and per-item
charges). The charges may be disclosed as a
total or may be itemized in pan or in full, at
the institution’s option. (§ 2 0 5 .9 (b )(3 ))

’There is no prescribed terminology, although
some examples are contained in the regula
tion. On periodic statements, for example, it is
enough simply to show the amount o f the
transfer in the debit or the credit,column if
other information on the statement (such as a
terminal location or third-party nam e) en
ables the consumer to identify the type of
transfer. As a further example, when a con
sumer obtains cash from a merchant in addi
tion to purchasing goods, it is not necessary to
treat the transaction as involving two different
types o f transfers. (§ 2 0 5 .9 (a )(3 ) and
(b) ( 1) ( iii) )

0
Q9-40.5:

P e r io d ic s ta te m e n ts — c h a rg e s in i n

te r c h a n g e sy ste m . Charges are imposed on the
account-holding institution by the operator of
a shared or interchange ATM system for the
use of the system. In addition, charges may be
imposed by other institutions in the system for
the use o f their ATM s. Must such charges be
disclosed by the account-holding institution
on the periodic statement?

A: The fact that charges are imposed on the
account-holding institution by the system or
terminal-operating institution does not, by it
self, require a disclosure to the consumer.
However, the institution must disclose any
charges it imposes on the consumer for EFT
services, including charges for A TM trans
actions in an interchange or shared ATM
system.
Charges for use o f an A TM imposed on the
consumer by an institution other than the ac
count-holding institution and included in the
amount o f the transfer by the terminaloperating institution need not be separately
disclosed
on
the
periodic
statement.
(§ 2 0 5 .9 (a )(1 ), ( b ) ( 1 ) ( i) , and ( b ) ( 3 ) )
o

Q9-36:

R e c e ip ts /p e r io d ic s t a te m e n ts — ty p e o f

tra n sfe r. What degree o f specificity is required

on terminal receipts and periodic statements
for the type o f transfer?
A:

Common

descriptions

are

sufficient.

s ta t e m e n t s — in

R e c e ip ts /p e r io d ic

lo ca tio n . In a
shared or interchange system, a consumer
uses terminals operated by institutions other
than the account-holding institution. The ter
minal operators have terminals at more than
one location, and the terminal receipts include
a street address, city, and state in addition to
the name of the terminal operator. In con
trast, the periodic statement provided by the
account-holding institution identifies the ter
minal location for these transfers by listing the
name o f the terminal operator and the city
and state. D oes this identification comply
with the regulation?

te r c h a n g e

Q9-31.5:

s y s te m ;

te r m i n a l

A: Yes. For transfers initiated at nonpro
prietary terminals, the account-holding insti
tution may describe the location on the peri
odic statement by naming the entity at whose
place o f business the terminal is located (or
which owns or operates the terminal), plus
the city and state. It need not repeat on the
periodic statement the street address given on
the terminal receipt; similarly, it need not in
clude identification codes or terminal numbers
shown on the receipt by the terminal operator.
(§ 2 0 5 .9 (a )(5 ) and ( b ) ( l ) ( i v ) )
0

SECTION 205.10—Preauthorized
Transfers
o

Q 10-18.5:

P r e a u th o r iz e d

<■

d e b its — a u th o r iz e -

§ 205.12

Regulation E Commentary
tio rt A consumer telephones the financial in
stitution or designated payee to arrange for
preauthorized electronic fund transfers from
the consumer’s account, and subsequently re
ceives a form for authorizing the fund trans
fers. The consumer signs and returns one copy
o f the form, and retains a copy. D oes this pro
cedure comply with the regulation?

A: Yes; the confirmation form serves as the
required written authorization. The regulation
does not require that a prescribed format be
used. (§ 2 0 5 .1 0 (b ))

SECTION 205.12—Relation to State
Law
Q 1 2 -1 :

P r e e m p tio n o f s ta le E F T la w s — s p e

cific d e te r m in a tio n s . The regulation prescribes
standards for determining whether state laws
that govern electronic fund transfers are pre
empted by the act and the regulation. If, un
der these standards, a state law is inconsistent
with the federal law, and is not more protec
tive, is it automatically preempted by opera
tion of law, absent a Board determination of
preemption?

A: State law may be preempted even if the
Board has not issued a determination. Inter
ested parties may seek a Board determination
by following the procedures set forth in the
regulation. (§ 205.12(a) and (b ))
o

Board of Governors of the Federal Reserve System

Official Staff Commentary
on Regulation Z
Truth in Lending
A s amended effective October 16, 1984

A ny inquiry relating to Regulation Z should be addressed to the Federal Reserve Bank o f the
Federal Reserve District in which the inquiry arises.
November 1984

Contents

Page

In trod u ction ....................................................

Subpart A — General Section 226.1— Authority, purpose,
coverage, organization, enforcement
and lia b ility .................................................
Section 226.2— Definitions and rules of
co n stru ctio n ...............................................
Section 226.3— Exempt transactions.........
Section 226.4— Finance charge ...................

2
3
14
17

P age

Section 226.20— Subsequent disclosure
requirem ents...............................................
Section 226.21— Treatment o f credit
balances........................................................
Section 226.22— Determination o f annual
percentage r a t e ...........................................
Section 226.23— Right o f r e sc issio n .........

93
95

Section 226.24— A d v e r tisin g .....................

89
92

Subpart D — Miscellaneous
Section 226.25— Record retention..............103

Subpart B— Open-End Credit
Section 226.5— General disclosure
requirem ents...............................................
Section 226.6— Initial disclosure
statem ent............................................... —
Section 226.7— Periodic sta te m e n t...........
Section 226.8— Identification of
transactions.................................................
Section 226.9— Subsequent disclosure
requirem ents...............................................
Section 226.10— Prompt crediting of
paym ents......................................................
Section 226.11— Treatment o f credit
b alances........................................................
Section 226.12— Special credit card
p ro v isio n s..................
Section 226.13— Billing-error resolution .
Section 226.14— Determination o f annual
percentage r a t e ...........................................
Section 226.15— Right o f re sc issio n .........
Section 226.16— A dvertisin g.......................

24
28
32
37
40
43
44
45
51
56
58
64

Subpart C— Closed-End Credit
Section 226.17— General disclosure
requirem ents...............................................
Section 226.18— Content of disclosures . .
Section 226.19— Certain residential
mortgage tra n sa ctio n s.............................

65
75
87

Section 226.26— U se o f annual percentage
rate in oral d isclo su res............................... 103
Section 226.27— Spanish language
d isclosures......................................................104
Section 226.28— Effect on state la w s ......... 104
Section 226.29— State exem ptions..............107
Appendix A — Effect on state laws ............. 108
Appendix B— State exem ptions.................... 109
Appendix C— Issuance o f staff
interpretations............................................... 109
Appendix D — Multiple-advance
construction loans ...................................... 109
Appendix E— Rules for card issuers that
bill on a transaction-by-transaction
b a sis................................................................. 110
Appendix F— Annual percentage rate
computations for certain open-end
credit p la n s .................................................... 110
Appendix G— Open-end model forms and
c la u se s............................................................. 110
Appendix H — Closed-end model forms
and c la u s e s ....................................................I l l
Appendix I— Federal enforcement
ag en cies.......................................................... 114
Appendix J— Annual percentage rate
computations for closed-end credit
transactions....................................................114

Official Staff Commentary
on Regulation Z
As revised effective October 16, 1984

INTRODUCTION
1. O ffic ia l s ta tu s. This commentary is the ve
hicle by which the staff o f the Division of
Consumer and Community Affairs o f the Fed
eral Reserve Board issues official staff inter
pretations o f Regulation Z. Good faith com
pliance with this commentary affords protec
tion from liability under section 130(f) o f the
Truth in Lending Act. Section 130(f) (15
USC 1640) protects creditors from civil liabil
ity for any act done or omitted in good faith in
conformity with any interpretation issued by a
duly authorized official or employee o f the
Federal Reserve System.
2. P r o c e d u r e f o r re q u e s tin g in te rp r e ta tio n s .
Under appendix C o f the regulation, anyone
may request an official staff interpretation. In
terpretations that are adopted will be incorpo
rated in this commentary following publica
tion in the F e d e r a l R eg iste r. N o official staff
interpretations are expected to be issued other
than by means o f this commentary.
3. S t a t u s o f p r e v io u s in te rp reta tio n s. A ll state
ments and opinions issued by the Federal R e
serve Board and its staff interpreting previous
Regulation Z remain effective until October 1,
1982 only insofar as they interpret that regu
lation. When compliance with revised Regula
tion Z becomes mandatory on October 1,
1982, the Board and staff interpretations of
the previous regulation will be entirely super
seded by the revised regulation and this com
mentary except with regard to liability under
the previous regulation.
4. R u le s o f c o n stru c tio n , (a) Lists that appear
in the commentary may be exhaustive or
illustrative; the 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 reg
ulation, reference to the regulation should
be construed to refer to revised Regulation
Z, unless the context indicates that a refer

ence to previous Regulation Z is also
intended.
(c ) Throughout the commentary, refer
ence to “this section” or “this paragraph”
means the section or paragraph in the regu
lation that is the subject o f the comment.
5. C o m m e n t d e sig n a tio n s. 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 o f the comments to section
226.18(b ) are futher divided by subpara
graph, such as comment 1 8 (b )(1 )-! and
comment 18(b) ( 2 ) - l. In other cases, com
ments have more general application and are
designated, for example, as comment 18-1 or
comment 1 8 (b )-l. This introduction may be
cited as comments 1-1 through 1-7. The ap
pendixes may be cited as comments app. A -l
through app. 1-2 .

6 . C ro ss-referen ces. The following cross-refer
ences to related material appear at the end o f
each section o f the commentary: (a) “Stat
ute”— those sections o f the Truth in Lending
A ct on which the regulatory provision is
based (and any other relevant statutes); (b)
“Other sections”— other provisions in the reg
ulation necessary to understand that section;
(c ) “Previous regulation”— parallel provi
sions in previous Regulation Z; and (d ) “ 1981
changes”— a brief description o f the major
changes made by the 1981 revisions to Regu
lation Z. Where appropriate, a fifth category
( “Other regulations” ) provides cross-refer
ences to other regulations.
7. T r a n sitio n rules, (a) Though compliance
with the revised regulation is not mandato
ry until April 1, 1982, creditors may begin
complying as o f 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 re1

Introduction
quirements in stages. In general, however, h '
creditor may not mix the regulatory re
quirements when making disclosures for a
particular closed-end transaction or openend account; all the disclosures for a single
closed-end transaction (or open-end ac
count) must be made in accordance with
the previous regulation, or all the disclo
sures must be made in accordance with the
revised regulation. As an exception to the
general rule, the revised rescission rules and
the revised advertising rules may be fol
lowed even if the disclosures are based on
the previous regulation. For purposes of
this regulation, the creditor is not required
to take any particular action beyond the re
quirements of the revised regulation to indi
cate its conversion to the revised regulation.
(b) The revised regulation may be relied
on to determine if any disclosures are re
quired for a particular transaction or to de
termine if a person is a “creditor” subject to
Truth in Lending requirements, whether or
not other operations have been converted to
the revised regulation. For example, lay
away plans are not subject to the revised
regulation, nor are oral agreements to lend
money if there is no finance charge. These
provisions may be relied on even if the cred
itor is making other disclosures under the
previous regulation. The new rules govern
ing whether or not disclosures must be
made for refinancings and assumptions are
also available to a creditor that has not yet
converted its operations to the revised
regulation.
(c) In addition to the above rules, applica
ble to both open-end and closed-end credit,
the following guidelines are relevant to
open-end credit:
° The creditor need not remake initial dis
closures that were made under the pre
vious regulation, even if the revised peri
odic statements contain terminology
that is inconsistent with those initial
disclosures.
° A creditor may add inserts to its old
open-end forms in order to convert
them to the revised rules until such time
as the old forms are used up.
° No change-in-terms notice is required
2

Regulation Z Commentary
for changes resulting from the conver
sion to the revised regulation.
° The previous billing rights statements
are substantially similar to the revised
billing rights statements and may con
tinue to be used, except that, if the cred
itor has an automatic debit program, it
must use the revised automatic debit
provision.
° For those creditors wishing to use the
annual billing rights statement, the
creditor may count from the date on
which it sent its last statement under the
previous regulation in determining
when to give the first statement under
the new regulation. For example, if the
creditor sent a semiannual statement in
June 1981 and converts to the new regu
lation in October 1981, the creditor
must give the billing rights statement
sometime in 1982, and it must not be
fewer than 6 nor more than 18 months
after the June statement.
° Section 226.11 of the revised regulation
affects only credit balances that are cre
ated on or after the date the creditor
converts the account to the revised
regulation.

SUBPART A—GENERAL
SECTION 226.1—Authority, Purpose,
Coverage, Organization, Enforcement
and Liability
1(c) Coverage
1. Foreign applicability. Regulation Z applies
to all persons (including branches of foreign
banks and sellers located in the United States)
that extend consumer credit to residents (in
cluding resident aliens) of any state as defined
in section 226.2. If an account is located in the
United States and credit is extended to a U.S.
resident, the transaction is subject to the regu
lation. This will be the case whether or not a
particular advance or purchase on the account
takes place in the United States and whether
or not the extender of credit is chartered or
based in the United States or a foreign coun-

Regulation Z Commentary
try. Thus, a U.S. resident’s use in Europe o f a
credit card issued by a bank in the consumer’s
home town is covered by the regulation. The
regulation does not apply to a foreign branch
of a U.S. bank when the foreign branch ex
tends credit to a U.S. citizen residing or visit
ing abroad or to a foreign national abroad.

§ 226.2
°

The term does n o t include:
°

References
S ta tu te : § 102

O th e r sectio n s: None
P re v io u s re g u la tio n : § 226.1
1 9 8 1 ch a n g es: A discussion o f coverage has
been added to section 226.1 so that the reader
will understand from the start what is subject
to the regulation. Language has also been add
ed to explain the reorganization of the regula
tion into subparts that group together the pro
visions relating to general matters, open-end
credit, closed-end credit, and miscellaneous
rules. The provisions on consumer leasing
have been issued by the Board as a separate
regulation, Regulation M (12 CFR 213).

SECTION 226.2—Definitions and Rules
of Construction
2(a) Definitions
2 (a ) ( 2 ) “A d v e r t i s e m e n t ”

1. C overage. Only commercial messages that
promote consumer credit transactions requir
ing disclosures are advertisements. Messages
inviting, offering, or otherwise announcing
generally to prospective customers the avail
ability o f credit transactions, whether in visu
al, oral, or print media, are covered by the
regulation. Examples include:
°

Messages in a newspaper, magazine, leaf
let, promotional flyer, or catalog
» Announcements on radio, television, or
public address sytem
« Direct mail literature or other printed ma
terial on any exterior or interior sign
° Point-of-sale displays
° Telephone solicitations
o Price tags that contain credit information
° Letters sent to customers as part o f an or
ganized solicitation o f business

Messages on checking account statements
offering auto loans at a stated annual per
centage rate

°
o

Direct personal contacts, such as follow
up letters, cost estimates for individual
consumers, or oral or written communica
tion relating to the negotiation o f a specific
transaction
Informational material, for example, inter
est 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
N ew s articles the use o f which is con
trolled by the news medium
Market research or educational materials
that do not solicit business

2. P erso n s covered. A ll “persons” must com
ply with the advertising provisions in sections
226.16 and 226.24, not just those that meet
the definition o f creditor in section 2 2 6.2(a)(1 7 ). Thus, home builders, merchants, and
others who are not themselves creditors must
comply with the advertising provisions o f the
regulation if they advertise consumer credit
transactions. However, under section 145 o f
the act, the owner and the personnel o f the
medium in which an advertisement appears,
or through which it is disseminated, are not
subject to civil liability for violations.
2 (a )(4 ) “B illin g C y c l e " o r “C y c le "

1. In te r v a ls. In open-end credit plans, the bill
ing cycle determines the intervals for which
periodic disclosure statements are required;
these intervals are also used as measuring
points for other duties o f the creditor. Typi
cally, billing cycles are monthly, but they may
be more frequent or less frequent (but not less
frequent than quarterly).
2. C re d ito r s th a t d o n o t bill. The term “cycle”
is interchangeable with “billing cycle” for def
initional purposes, since some creditors’ cycles
do not involve the sending o f bills in the tradi
tional sense but only statements o f account ac
tivity. This is commonly the case with finan3

§ 226.2
cial institutions when periodic payments are
made through payroll deduction or through
automatic debit o f the consumer’s asset
account.
3. E q u a l cycles. Although cycles must be
equal, there is a permissible variance to ac
count for weekends, holidays, and differences
in the number o f days in months. If the actual
date o f each statement does not vary by more
than four days from a fixed “day” (for exam
ple, the third Thursday o f each m onth) or
“date” (for example, the 15th o f each m onth)
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 require
ment 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 state
ment day or date. (See the commentary to
section 2 2 6 .9 (c).)
4. P a y m e n t re m in d e r . The sending o f a regu
lar payment reminder (rather than a late pay
ment notice) establishes a cycle for which the
creditor must send periodic statements.

2 (a ) (6) “B u s in e s s D a y ”

1. B u s in e s s f u n c t i o n test. Activities that indi
cate that the creditor is open for substantially
all o f its business functions include the avail
ability o f personnel to make loan disburse
ments, to open new accounts, and to handle
credit transaction inquiries. Activities that in
dicate that the creditor is not open for sub
stantially all o f its business functions include a
retailer’s merely accepting credit cards for
purchases or a bank’s having its customerservice windows open only for limited purpos
es such as deposits and withdrawals, bill pay
ing, and related services.
2. R e s c iss io n ru le. A more precise rule for
what is a business day (all calendar days ex
cept Sundays and the federal legal holidays
listed in 5 USC 6 1 0 3 (a )) applies when the
right o f rescission is involved.
4

Regulation Z Commentary
2 ( a ) ( 7 ) “C a r d I s s u e r ”

1. A g e n t. A n agent o f a card issuer is consid
ered a card issuer. Because agency relation
ships are traditionally defined by contract and
by state or other applicable law, >the regulation
does not define agent. Merely providing serv
ices relating to the production o f credit cards
or data processing for others, however, does
not make one the agent o f the card issuer. In
contrast, a financial institution may become
the agent o f 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 ob
ligations incurred by use o f the credit card.
2 ( a ) ( 8 ) “C a r d h o ld e r ”

1. G e n e r a l ru le. A cardholder is a natural per
son at whose request a card is issued for con
sumer credit purposes or who is a co-obligor
or guarantor for such a card issued to anoth
er. The second category does not include an
employee who is a co-obligor or guarantor on
a card issued to the employer for business pur
poses, nor does it include a person who is
merely the authorized user o f a card issued to
another.
2. L i m i t e d a p p lic a tio n o f re g u la tio n . For the
limited purposes o f the rules on issuance of
credit cards and liability for unauthorized use,
a cardholder includes a n y person, including
an organization, to whom a card is issued for
a n y purpose— including a business, agricul
tural, or commercial purpose.
3. Iss u a n c e . See the commentary to section
226.12(a).
4. D u a l-p u r p o s e c a r d s a n d d u a l- c a r d sy ste m s.
Some card issuers offer dual-purpose cards
that are for business as well as consumer pur
poses. If a card is issued to an individual for
consumer purposes, the fact that an organiza
tion 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 con
sumer purchases does not subject the card is
suer to the provisions on periodic statements,
billing-error resolution, and other protections
afforded to consumer credit. Some card is-

Regulation Z Commentary
suers offer dual-card systems— that is, they is
sue two cards to the same individual, one
intended for business use, the other for con
sumer or personal use. With such a system,
the same person may be a cardholder for gen
eral purposed when using the card issued for
consumer use, and a cardholder only for the
limited purposes o f the restrictions on issu
ance and liability when using the card issued
for business purposes.
2 ( a ) ( 9 ) “ C a s h P r ic e ”

This amount is a starting
point in computing the amount financed and
the total sale price under section 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 section
2 2 6 .1 8 (b )(2 ).
1. C o m p o n e n ts .

2. S e rv ic e c o n tra c ts . Service contracts include
contracts for the repair or the servicing o f
goods, such as mechanical breakdown cover
age, even if such a contract is characterized as
insurance under state law.
3. R e b a te s . The creditor has complete flexibil
ity in the way it treats rebates for purposes of
disclosure and calculation. See the commen
tary to section 226.18(b).
2 ( a ) ( 1 0 ) “ C lo s e d -e n d C r e d it”

1. G e n e ra l. The coverage o f this term is de
fined by exclusion. That is, it includes any
credit arrangement that does not fall within
the definition o f open-end credit. Subpart C
contains the disclosure rules for closed-end
credit when the obligation is subject to a fi
nance charge or is payable by written agree
ment in more than four installments.
2 ( a ) ( l l) “ C o n s u m e r”

1. S co p e . Guarantors, endorsers, and sureties
are not generally consumers for purposes of
the regulation, but they may be entitled to re
scind under certain circumstances and they
may have certain rights if they are obligated
on credit card plans.
2. R e s c is s io n ru le s . For purposes o f rescission
under sections 226.15 and 226.23, a consumer

§ 226.2
includes any natural person whose ownership
interest in his or her principal dwelling is sub
ject to the risk o f loss. Thus, if a security inter
est is taken in A ’s ownership interest in a
house and that house is A ’s principal dwell
ing, A is a consumer for purposes o f rescis
sion, 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 incho
ate rights, such as dower.
3. L a n d tru s ts . Credit extended to land trusts,
as described in the commentary to section
2 2 6 .3 (a ), is considered to be extended to a
natural person for purposes o f the definition
o f consumer.
2 ( a ) ( 1 2 ) “ C o n s u m e r C r e d it”

1. P r im a r y p u rp o s e . 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 o f business pur
poses in the commentary to section 226.3(a).
2 ( a ) ( 1 3 ) “ C o n s u m m a tio n ”

1. S ta te la w g o v e rn s . When a contractual obli
gation on the consumer’s part is created is a
matter to be determined under applicable law;
Regulation Z does not make this determina
tion. A contractual commitment agreement,
for example, that under applicable law binds
the consumer to the credit terms would be
consummation. Consummation, however,
does not occur merely because the consumer
has made some financial investment in the
transaction (for example, by paying a nonrefundable fee) unless, o f course, applicable law
holds otherwise.
2. C r e d it v. s a le . Consummation does not oc
cur when the consumer becomes contractually
committed to a s a le 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 pur
chase contract may be created, but consum
mation for purposes o f the regulation does not
occur unless the consumer also contracts for
financing at that time.
5

§ 226.2

Regulation Z Commentary

2 ( a ) ( 1 4 ) “C r e d it ”

1. E x c lu s io n s . The following situations are
not considered credit for purposes o f the
regulation:

Layaway plans, unless the consumer is
contractually obligated to continue mak
ing payments. Whether the consumer is so
obligated is a matter to be determined un
der applicable law. The fact that the con
sumer is not entitled to a refund o f any
amounts paid towards the cash price o f the
merchandise does not bring layaways
within the definition o f credit.

Tax liens, tax assessments, court judg
ments, and court approvals o f reaffirma
tion o f debts in bankruptcy. However,
third-party financing o f such obligations
(for example, a bank loan obtained to pay
off a tax lien) is credit for purposes o f the
regulation.

Insurance premium plans that involve
payment in installments with each install
ment representing the payment for insur
ance coverage for a certain future period
o f time, unless the consumer is contractu
ally o b lig ated to c o n tin u e m a k in g
payments
Home improvement transactions that in
volve 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 val
ue o f an insurance policy or a pension ac
count, if there is no independent obligation
to repay

Letters o f credit

The execution o f option contracts. Howev
er, there may be an extension o f credit
when the option is exercised, if there is an
agreement at that time to defer payment o f
a debt.

Investment plans in which the party ex
tending capital to the consumer risks the
loss o f the capital advanced. This includes,
for example, an arrangement with a home
purchaser in which the investor pays a
portion of the downpayment and o f the pe
riodic mortgage payments in return for an
ownership interest in the property, and

shares in any gain or loss o f property
value.
Mortgage assistance plans administered by
a government agency in which a portion o f
the consumer’s monthly payment amount
is paid by the agency. N o finance charge is
imposed on the subsidy amount, and that
amount is due in a lump-sum payment on
a set date or upon the occurrence o f cer
tain events. (I f 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 ) ( 1 5 ) “ C r e d it C a r d ”

1. U s a b le f r o m tim e to tim e . A credit card
must be usable from time to time. Since this
involves the possibility o f repeated use o f a
single device, checks and similar instruments
that can be used only once to obtain a single
credit extension are not credit cards.
2. E x a m p le s .
include:
°

°
°
°

Examples

credit

cards

A card that guarantees checks or similar
instruments, if the asset account is also
tied to an overdraft line or if the instru
ment directly accesses a line o f credit
A card that accesses both a credit and an
asset account (that is, a debit-credit card)
A n identification card that permits the
consumer to defer payment on a purchase
A n identification card indicating loan ap
proval 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 ) (1 6 ) “ C r e d itS a le ”

1. S p e c ia l d is c lo s u re . If the seller is a creditor
in the transaction, the transaction is a credit
sale and the special credit sale disclosures
(that is, the disclosures under section
226.18 (j) ) must be given. This applies even if
there is more than one creditor in the transac

§ 226.2

Regulation Z Commentary
tion and the creditor making the disclosures is
not the seller. See the commentary to section
226.17(d).
2. S e lle rs w h o a rra n g e c r e d it. 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 di
rect loan from a financial institution and the
consumer’s note is payable to the financial in
stitution, the transaction is a loan and only
the financial institution is a creditor.
3. R e fin a n c in g s . Generally, when a credit sale
is refinanced within the meaning of section
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. In c id e n ta l sa le s . Some lenders “sell” a
product or service—such as credit, property,
or health insurance—as part of a loan transac
tion. 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 transac
tion; if the latter approach is taken, either
loan or credit sale disclosures may be made.
See the commentary to section 226.17(c)(1)
for further discussion of this point.
5. C r e d it e x te n s io n s f o r e d u c a tio n a l p u rp o s e s .
A credit extension for educational purposes in
which an educational institution is the credi
tor may be treated as either a credit sale or a
loan, regardless of whether the funds are giv
en directly to the student, credited to the stu
dent’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 trans
action is treated as a loan.
2 ( a ) ( 1 7 ) “i
C r e d ito r ”

1. G e n e ra l. The definition contains four inde
pendent tests. If any one of the tests is met,
the person is a creditor for purposes of that
particular test.
P a ra g ra p h 2 ( a ) ( 1 7 ) ( i)

P re re q u is ite s .

This test is composed of two

requirements, both of which must be met in
order for a particular credit extension to be
subject to the regulation and for the credit ex
tension to count towards satisfaction of the
numerical tests mentioned in footnote 3 to
section 226.2(a)(17). F ir s t, there must be ei
ther or both of the following:
° A written (rather than oral) agreement to
pay in more than four installments. A let
ter 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.
the obligation must be payable to the
person in order for that person to be consid
ered a creditor. If an obligation is made pay
able to “bearer,” the creditor is the one who
initially accepts the obligation.

S econd,

2. A s s ig n e e s . If an obligation is initially pay
able to one person, that person is the creditor
even if the obligation by its terms is simulta
neously 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 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 u m e r ic a l te sts. The examples below illus
trate how the numerical tests of footnote 3 are
applied. The examples assume that consumer
credit with a finance charge or written agree
ment for more than four installments was ex
tended in the years in question and that the
person did not extend such credit in 1982.
4. C o u n tin g tra n s a c tio n s . For purposes of
closed-end credit, the creditor counts each
credit transaction. For open-end credit,
“transactions” means accounts, so that out7

§ 226.2
standing accounts are counted instead of
individual credit extensions. Normally the
number o f transactions is measured by the
preceding calendar year; if the requisite num
ber 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 preced
ing year, the number o f transactions is meas
ured by the current calendar year. For exam
ple, if the person extends consumer credit 26
times in 1983, it is a creditor for purposes of
the regulation for the last extension o f credit
in 1983 and for all extensions o f consumer
credit in 1984. On the other hand, if a busi
ness begins in 1983 and extends consumer
credit 20 times, it is not a creditor for purpos
es o f the regulation in 1983. If it extends con
sumer credit 75 times in 1984, however, it
becomes a creditor for purposes o f the regula
tion (and must begin making disclosures) af
ter the 25th extension o f credit in that year
and is a creditor for all extensions o f consum
er credit in 1985.
5. R e la tio n s h ip b e tw e en c o n s u m e r c r e d it in
g e n e r a l a n d c r e d it s e c u r e d b y a d w e llin g . Ex

tensions o f credit secured by a dwelling are
counted towards the 25-extensions test. For
example, if in 1983 a person extends unse
cured 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
n o t counted towards the number o f credit ex
tensions secured by a dwelling. For example,
if in 1983 a person extends credit not secured
by a dwelling eight times and credit secured
by a dwelling three times, it is not a creditor.

Regulation Z Commentary
separate entity for purposes o f applying the
criteria. For example:
°

A bank is the trustee for three trusts. Trust
A makes 15 extensions o f consumer credit
annually; Trust B makes 10 extensions o f
consumer credit annually; and Trust C
makes 30 ex ten sio n o f consumer credit
annually. Only Trust C is a creditor for
purposes o f the regulation.

P a ra g ra p h 2 (a ) ( 1 7 ) ( iii)

1. C a r d issu e rs s u b je c t to s u b p a r t B . Section
226.2(a) (1 7 ) (iii) makes certain card issuers
creditors for purposes o f the open-end credit
provisions o f the regulation. This includes, for
example, the issuers o f so-called travel and en
tertainment 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 provi
sions o f the regulation regarding such areas as
scope, definitions, determination o f which
charges are finance charges, Spanish language
disclosures, record retention, and use o f mod
el forms, also apply to such card issuers.
P a ra g ra p h 2 (a ) (1 7 ) (iv)

1. C a r d issu e rs s u b je c t to s u b p a r ts B a n d C.
Section 2 2 6.2(a) (1 7 ) (iv ) includes as credi
tors card issuers extending closed-end credit
in which there is a finance charge or an agree
ment to pay in more than four installments.
These card issuers are subject to the appropri
ate provisions o f subparts B and C, as well as
to the general provisions.

2 ( a ) ( 1 8 ) “D o w n p a y m e n t ”

6 . E ff e c t o f s a tis fy in g o n e test. Once one o f the
numerical tests is satisfied, the person is also a
creditor for the other type o f credit. For ex
ample, in 1983 a person extends consumer
credit secured by a dwelling five times. That
person is a creditor for all succeeding credit
extensions, whether they involve credit se
cured by a dwelling or not.
7. T ru sts. In the case o f credit extended by
trusts, each individual trust is considered a
8

1. A llo c a tio n . 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 re
ducing the cash price is part o f the downpay
ment. (See the commentary to section
226.2(a) (2 3 ).)
2. P ic k u p p a y m e n ts . Creditors may treat the
deferred portion o f the downpayment, often
referred to as “pickup payments,” in a num-

Regulation Z Commentary

§ 226.2

ber of ways. If the pickup payment is treated
as part of the downpayment:

that is extended under a plan and meets
th re e criteria set forth in the definition.

° It is subtracted in arriving at the amount
financed under section 226.18(b)
° It may, but need not, be reflected in the
payment schedule under section 226.18(g)

2. E x is te n c e o f a p la n . The definition requires
that there be a plan, which connotes a con
tractual arrangement between the creditor
and the consumer. Some creditors offer pro
grams containing a number of different credit
features. The consumer has a single account
with the institution that can be accessed re
peatedly via a number of subaccounts estab
lished 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 in
frequently (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 open-end
credit, such a program would be considered a
single, multifeatured plan.

If the pickup payment does not meet the defi
nition (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 pickup payment is treat
ed, the total of payments under section
226.18(h) must equal the sum of the pay
ments disclosed under section 226.18(g).
2 ( a ) (1 9 ) “ D w e llin g ”

1. S co p e . A dwelling need not be the consum
er’s p r in c ip a l residence to fit the definition,
and thus a vacation or second home could be
a dwelling. However, for purposes of the defi
nition of residential mortgage transaction and
the right to rescind, a dwelling must be the
principal residence of the consumer. See the
commentary to sections 226.2(a) (24),
226.15, and 226.23.
2. U se a s a re s id e n c e . 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. R e la tio n to e x e m p tio n s . Any transaction in
volving 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 section
226.3(b) for credit extensions over $25,000.
2 ( a ) ( 2 0 ) “ O p e n -E n d C r e d it ”

1. G e n e ra l. This definition describes the char
acteristics of open-end credit (for which the
applicable disclosure and other rules are con
tained in subpart B), as distinct from closedend credit. Open-end credit is consumer credit

a ll

3. R e p e a te d tra n s a c tio n s . Under this criterion,
the creditor must reasonably contemplate re
peated transactions. This means that the cred
it 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 rea
sonable belief by a creditor necessarily in
cludes some margin for judgmental error. The
fact that a particular consumer does not re
turn for further credit extensions does not pre
vent a plan from having been properly charac
terized as open-end. For example, if much of
the customer base of a clothing store makes
repeat purchases, the fact that some consum
ers use the plan only once would not affect the
characterization of the store’s plan as openend 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 con
sumer. For example:
° It would be more reasonable for a thrift
institution chartered for the benefit of its
members to contemplate repeated transac
tions with a member than for a seller of
9

§ 226.2

itor might agree to lend a total o f $ 10,000
in a series o f advances as needed by the
consumer. When a consumer has bor
rowed the full $ 10,000 , no more is ad
vanced under that particular agreement,
even if there has been repayment o f a por
tion o f the debt.

aluminum siding to make the same as
sumption about its customers.
It would be more reasonable for a bank to
make advances from a line o f credit for the
purchase o f an automobile than for an au
tomobile dealer to sell a car under an
open-end plan.

4. F in a n c e c h a rg e o n a n o u ts ta n d in g b a la n c e .
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 o f payments,
and payment schedule can be calculated. A
plan does not meet this criterion if there is n o
possibility that a periodic finance charge will
be imposed on the outstanding balance. Some
plans, such as certain “china club” plans, fea
ture free-ride periods if the consumer pays all
or a specified portion of the outstanding bal
ance within a given time period. For example,
the creditor might not impose finance charges
in any month in which the consumer pays
1/10 o f 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 o f the option to
pay the balance (either in its entirety or in
installments) within the time necessary to
avoid finance charges.
5. R e u s a b le lin e . The total amount o f credit
that may be extended during the existence of
an open-end plan is unlimited because avail
able 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 spe
cific approval for each extension (beyond veri
fication, for example, o f credit information
such as the consumer’s continued income and
employment status or of information for secu
rity purposes). This criterion o f unlimited
credit distinguishes open-end credit from a se
ries o f advances made pursuant to a closedend credit loan commitment. For example:
°

Regulation Z Commentary

Under a closed-end commitment, the cred

This criterion does not mean that the creditor
must establish a specific credit limit for the
line o f credit or that the line o f credit must
always be replenished to its original amount.
The creditor may reduce a credit limit or re
fuse 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 o f obtaining credit as
long as they remain current and within any
preset credit limits, further extensions o f cred
it need not be an absolute right in order for
the plan to meet the self-replenishing
criterion.

6. O p e n -e n d r e a l e s ta te m o rtg a g e s . Some cred
it plans call for negotiated advances under socalled open-end real estate mortgages. Each
such plan must be independently measured
against the definition o f “open-end credit,” re
gardless o f the terminology used in the indus
try to describe the plan. The fact that a partic
ular 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 ) ( 2 1 ) “ P e r io d ic R a te ”

1. B a s is . The periodic rate may be stated as a
percentage (for example, I -5 percent per
m onth) or as a decimal equivalent (for exam
ple, .015 m onthly). It may be based on any
portion o f a year the creditor chooses. Some
creditors use 1/360 o f an annual rate as their
periodic rate. These creditors:
°

May disclose a 1/360 rate as a “daily” pe
riodic 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,
o f course, disclose the true annual percent
age rate.
Would have to apply the rate to the bal

Regulation Z Commentary
ance to disclose the annual percentage rate
with the degree o f accuracy required in the
regulation (that is, within 1/8 o f 1 per
centage point o f the rate based on the actu
al 365 days in the year).
2. T ra n s a c tio n c h a rg e s . “Periodic rate” does
not include initial one-time transaction
charges, even if the charge is computed as a
percentage o f the transaction amount.
2 ( a ) (2 2 ) “ P e rs o n ”

1. J o in t v e n tu re s . A joint venture is an organi
zation and is therefore a person.
2. A tto rn e y s . An attorney and his or her client
are considered to be the same person for pur
poses o f this regulation when the attorney is
acting within the scope o f the attorney-client
relationship with regard to a particular
transaction.
3. T ru s ts . A trust and its trustee are consid
ered to be the same person for purposes o f this
regulation.
2 ( a ) (2 3 ) “ P re p a id F in a n c e C h a rg e ”

1. G e n e ra l. Prepaid finance charges must be
taken into account under section 226.18(b) in
computing the disclosed amount financed, and
must be disclosed if the creditor provides an
itemization o f the amount financed under sec
tion 226.18(c).
2. E x a m p le s . Common examples o f prepaid
finance charges include:
°
o
»
°
®
•

Buyer’s points
Service fees
Loan fees
Finder’s fees
Loan guarantee insurance
Credit investigation fees

§ 226.2
for purposes o f this regulation. Finance
charges are not “prepaid” merely because
they are precomputed, whether or not a por
tion o f the charge will be rebated to the con
sumer upon prepayment. See the commentary
to section 226.18(b ).
4. A llo c a tio n o f lu m p -s u m p a y m e n ts . In a
credit sale transaction involving a lump-sum
payment by the consumer and a discount or
other item that is a finance charge under sec
tion 226.4, the discount or other item is a pre
paid finance charge to the extent the lump
sum payment is not applied to the cash price.
For example, a seller sells property to a con
sumer for $ 10,000 , requires the consumer to
pay $3,000 at the time o f the purchase, and
finances the remainder as a closed-end credit
transaction. The cash price o f the property is
$9,000. The seller is the creditor in the
transaction
and
therefore
the
$ 1,000
difference between the credit and cash prices
(the discount) is a finance charge. (See the
commentary to sections 2 2 6 .4 (b )(9 ) and
2 2 6 .4 (c )(5 ).) If the creditor applies the en
tire $3,000 to the cash price and adds the
$ 1,000 finance charge to the interest on the
$ 6,000 to arrive at the total finance charge, all
o f the $3,000 lump-sum payment is a downpayment and the discount is not a prepaid fi
nance charge. However, if the creditor only
applies $2,000 o f the lump-sum payment to
the Cash price, then $2,000 o f the $3,000 is a
downpayment and the $ 1,000 discount is a
prepaid finance charge.
2 ( a ) ( 2 4 ) “ R e s id e n tia l M o rtg a g e T ra n s a c tio n ”

1. R e la tio n to o th e r s e c tio n s . This term is im
portant in six provisions in the regulation:
°
°

However, in order for these or any other fi
nance charges to be considered prepaid, they
must be either paid separately in cash or
check or withheld from the proceeds. Prepaid
finance charges include any portion o f the fi
nance charge paid prior to or at closing or
settlement.
3. E x c lu s io n s . “Add-on” and “discount” fi
nance charges are not prepaid finance charges

°
°
°
°

Section 2 2 6 .4 (c )(7 )— exclusions from the
finance charge
Section 2 2 6 .1 5 (f)— exemption from the
right o f rescission
Section 226.18 (q )— whether or not the
obligation is assumable
Section 226.19— special timing rules
Section 2 2 6.20(b )— disclosure require
ments for assumptions
Section 2 2 6 .2 3 (f)— exemption from the
right o f rescission
L ie n s ta tu s .

The definition is not limited to
11

§ 226.2
first lien transactions. For example, a consum
er might assume a paid-down first mortgage
(or borrow part o f the purchase price) and
borrow the balance o f the purchase price from
a creditor who takes a second mortgage. The
second mortgage transaction is a “residential
mortgage transaction” if the dwelling pur
chased is the consumer’s principal residence.
3. P r in c ip a l d w e llin g . A consumer can have
only o n 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 be
come the consumer’s principal dwelling with
in a year or upon the completion o f construc
tion, the new dwelling is considered the
principal dwelling for purposes o f applying
this definition to a particular transaction. See
the commentary to sections 226.15(a) and
226.23(a).
4. C o n s tru c tio n fin a n c in g . If a transaction
meets the definition o f a residential mortgage
transaction and the creditor chooses to dis
close it as several transactions under section
2 2 6 .1 7 (c )(6 ), each one is considered to be a
residential mortgage transaction, even if dif
ferent creditors are involved. For example:
°

The creditor makes a construction loan to
finance the initial construction o f the con
sumer’s principal dwelling, and the loan
will be disbursed in five advances. The
creditor gives six sets o f disclosures (five
for the construction phase and one for the
permanent phase). Each one is a residen
tial mortgage transaction.
One creditor finances the initial construc
tion o f the consumer’s principal dwelling
and another creditor makes a loan to satis
fy the construction loan and provide per
manent financing. Both transactions are
residential mortgage transactions.

5. A c q u is itio n . A transaction is not “to fi
nance the acquisition” of the consumer’s prin
cipal dwelling (and therefore is not a residen
tial mortgage transaction) if the consumer
had previously purchased the dwelling and ac
quired some title to the dwelling, even though
the consumer has not acquired full legal title.
Thus, the following types o f transactions are
not residential mortgage transactions:
12

Regulation Z Commentary
°
°

The financing o f a balloon payment due
under a land sale contract
A n extension o f credit made to a joint
owner o f property to buy out the other
joint owner’s interest

As a result, in giving the disclosures for these
transactions several provisions o f the regula
tion are not applicable, for example, the ex
ceptions to the right o f rescission (sections
2 2 6 .2 3 (f)(1 ) and 2 2 6 .1 5 (f)(1 )), the early
disclosure requirement (section 2 2 6 .1 9 (a )),
and the disclosure concerning assumability
(section 226.18 ( q )). In the following situa
tion, by contrast, since the transaction is not a
residential mortgage transaction, no disclo
sures are required by section 226.20(b) and
therefore the right o f rescission does not
apply:
°

A written agreement between a creditor
holding a seller’s mortgage and the buyer
o f the property which allows the buyer to
assume the mortgage, where the buyer
previously purchased the property and
agreed with the seller to make the mort
gage payments.

2 ( a ) ( 2 5 ) “ S e c u r ity In te r e s t ”

1. T h re s h o ld te s t. The threshold test is wheth
er a particular interest in property is recog
nized as a security interest under applicable
law. The regulation does not determine
whether a particular interest is a security in
terest under applicable law. If the creditor is
unsure whether a particular interest is a secu
rity interest under applicable law (for exam
ple, 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. H ow
ever, the regulation and the commentary do
exclude specific interests, such as afteracquired property and accessories, from the
scope o f the definition regardless o f their cate
gorization under applicable law, and these
named exclusions may not be disclosed as se
curity interests under the regulation. (But see
the discussion o f exclusions elsewhere in the
commentary to section 2 2 6 .2 (a )(2 5 ).)
2. E x c lu s io n s . The general definition o f secu
rity interest excludes three groups o f interests:

§ 226.2

Regulation Z Commentary
incidental interests, interests in after-acquired
property, and interests that arise solely by op
eration o f law. These interests may not be dis
closed with the disclosures required under
section 226.18, but the creditor is not preclud
ed from preserving these rights elsewhere in
the contract documents, or invoking and en
forcing such rights, if it is otherwise lawful to
do so. If the creditor is unsure whether a par
ticular interest is one o f the excluded interests,
the creditor may, at its option, consider such
interests as security interests for Truth in
Lending purposes.
3. In c id e n ta l in te re s ts . Incidental interests in
property that are not security interests in
clude, among other things:
°
°
°
°
°

Assignment o f 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 o f an “incidental interest” does
not encompass an explicit security interest in
an insurance policy if that policy is the pri
mary collateral for the transaction— for exam
ple, in an insurance premium financing
transaction .

4. O p e ra tio n o f la w . Interests that arise solely
by operation o f 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. H ow
ever, if the creditor has an interest that arises
by operation o f 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 se
curity interest unless otherwise provided.
5. R e s c is s io n ru le s . Security interests that
arise solely by operation o f law are security
interests for purposes of rescission. Examples
o f such interests are mechanics’ and materialmen’s liens.

2(b) Rules of Construction
1. F o o tn o te s .

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 ta tu te :

§ 103

O th e r s e c tio n s :
O th e r

N one
Regulation E (12 CFR

re g u la tio n s :

2 0 5 .2 (d ))
§§ 226.2, 226.8, and 226.9
Section 226.2 implements
amended section 103 o f the act. Separate defi
nitions for “comparative index o f credit cost,”
“discount,” “organization,” “period,” “real
property,” “real property transaction,” “regu
lar price,” and “surcharge” have been deleted.
The definitions relating specifically to con
sumer leases are now found in the separate
consumer leasing regulation, Regulation M
(12 CFR 213).
Several terms are now defined elsewhere in
the regulation or commentary rather than in
section 226.2. For example, “finance charge”
is described and explained in section 226.4,
and “agricultural purpose” is discussed in the
commentary to section 226.3. Some terms,
such as “unauthorized use,” are now defined
as part o f the substantive sections to which
they apply. Other terms previously defined,
such as “customer” and “organization,” are
merged into new definitions. Section 226.2
contains new definitions for “arranger o f cred
it,” “business day,” “closed-end credit,”
“consumer,” “consummation,” “downpay
ment,” “prepaid finance charge,” and “resi
dential mortgage transaction.”
The major changes in the definitions are as
follows:
“Arranger of credit” has a significantly dif
ferent meaning. It reflects the statutory
amendment that limits “arrangers” to those
who regularly arrange credit extensions for
persons who are not themselves creditors.
This definition was deleted effective October
1, 1982.
“Billing cycle” largely restates the prior
definition, but requires cycles to be regular,
and allows the four-day variance to be meas
ured from a regular day as well as date. The
P re v io u s r e g u la tio n :
1981

changes:

§ 226.2
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 gener
al 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 inclu
sion 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 statuto
ry exemption for agricultural credit.
“Consummation” is a significant departure
from longstanding interpretations of the pre
vious definition. It now focuses only on the
time the consumer becomes contractually ob
ligated, rather than the time the consumer
pays a nonrefundable fee or suffers an eco
nomic penalty for failing to go forward with
the credit transaction.
“Credit” generally parallels the previous
definition, but modifies the previous interpre
tations of the definition by excluding more
transactions.
“Creditor” reflects the statutory amend
ments to the act that were intended to elimi
nate 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 written
agreement to pay in more than four install
ments 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 amend
ment that expanded the scope of the definition
to include any 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 con
sumer to have the privilege of paying either in
installments or in full.
“Periodic rate” combines the previous defi
nitions of “period” and “periodic rate” with
14

Regulation Z Commentary
clarification in the commentary concerning
transaction charges and 360-day-year factors.
“Security interest” is much narrower than
the previous definition. Reflecting the legisla
tive history of the simplification amendments,
incidental interests are expressly excluded
from the definition. Except for purposes of re
scission, interests that arise solely by opera
tion of law are also excluded.

SECTION 226.3—Exempt Transactions
3(a) Business, Commercial,
Agricultural, or Organizational Credit
1. Primary purposes. A creditor must deter
mine in each case if the transaction is primari
ly 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 disclo
sures are made under such circumstances is
not controlling on the question of whether the
transaction was exempt.
2. Factors. In determining whether credit to
finance an acquisition—-such as securities, an
tiques, or art—-is primarily for business or
commercial purposes (as opposed to a con
sumer 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 per
sonally 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 busi
ness 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

Regulation Z Commentary
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 o f consumer-purpose credit include:
°

Credit extensions by a company to its em
ployees 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 o n -o w n e r-o c c u p ie d r e n ta l p ro p e rty . Credit
extended to acquire, improve, or maintain
rental property (regardless o f the number of
housing units) that is not owner-occupied is
deemed to be for business purposes. This in
cludes, for example, the acquisition o f a ware
house 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 more than 14 days during the
coming year, the property cannot be consid
ered 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 o f the
year is owner-occupied and is not governed by
this special rule. See comment 3 ( a ) -4, howev
er, for rules relating to owner-occupied rental
property.
4. O w n e r-o c c u p ie d r e n ta l p ro p e r ty . If credit is
extended to acquire, improve, or maintain
rental property that is or will be owner-occu
pied within the coming year, different rules
apply:
°

Credit extended to acquire the rental prop
erty is deemed to be for business purposes
if it contains more than two housing units.
Credit extended to improve or maintain
the rental property is deemed to be for
business purposes if it contains more than
four housing units. Since the amended
statute defines “dwelling” to include one
to four housing units, this rule preserves
the right o f rescission for credit extended
for purposes other than acquisition.

§ 226.3
Neither o f 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 determina
tion of whether it is business or consumer
credit should be made by considering the fac
tors listed in comment 3 ( a ) -2.
5. B u s in e s s c r e d it la te r re fin a n c e d . Businesspurpose credit that is exempt from the regula
tion may later be rewritten for consumer pur
poses. Such a transaction is consumer credit
requiring disclosures only if the existing obli
gation is satisfied and replaced by a new obli
gation made for consumer purposes under
taken by the same obligor.

6 . A g r ic u ltu r a l p u rp o s e . A n “agricultural pur
pose” includes the planting, propagating, nur
turing, harvesting, catching, storing, exhibit
ing, marketing, transporting, processing, or
manufacturing o f food, beverages (including
alcoholic beverages), flowers, trees, livestock,
poultry, bees, wildlife, fish, or shellfish by a
natural person engaged in farming, fishing, or
growing crops, flowers, trees, livestock, poul
try, bees, or wildlife. The exemption also ap
plies to a transaction involving real property
that includes a dwelling (for example, the
purchase o f a farm with a homestead) if the
transaction is primarily for agricultural
purposes.
7. O r g a n iz a tio n a l c r e d 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 o f the pur
pose o f the credit extension and regardless o f
the fact that a natural person may guarantee
or provide security for the credit.

8. L a n d tru s ts . 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 fi
nancing 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 ex
ecuted by the financial institution in its capac15

§ 226.3
ity as trustee and payment is secured by a
trust deed, reflecting title in the financial insti
tution as trustee. In some instances, the con
sumer 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 trust
ee has no personal liability on the note. As
suming the transactions are for personal, fam
ily, or household purposes, these transactions
are subject to the regulation since in substance
(if not form) consumer credit is being
extended.

3(b) Credit Over $25,000 Not Secured
by Real Property or a Dwelling
1. C o v e ra g e . Since a mobile home can be a
dwelling under section 226.2(a) (19), this ex
emption does not apply to a credit extension
secured by a mobile home used or expected to
be used as the principal dwelling of the con
sumer, even if the credit exceeds $25,000. A
loan commitment for closed-end credit in ex
cess of $25,000 is exempt even though the
amounts actually drawn never actually reach
$25,000.

Regulation Z Commentary

3(c) Public Utility Credit
1. E x a m p le s . Examples of public utility serv
ices 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
credit, for example:

not

apply to extensions of

° 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) Securities or Commodities
Accounts
1. C o v e ra g e . 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) Home Fuel Budget Plans
2. O p e n -e n d c r e d it. An open-end credit plan
is exempt under section 226.3(b) (unless se
cured 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 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 e fin a n c e d o b lig a tio n s . A closed-end 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 pur
poses undertaken by the same obligor.
16

1. D e fin itio n . Under a typical home fuel bud
get 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 actu
al cost of the fuel. Fuel is delivered as needed,
no finance charge is assessed, and the custom
er 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.

3(f) Student Loan Programs
1. C o v e ra g e . This exemption applies to the
Guaranteed Student Loan program (adminis
tered by the federal government, state and pri
vate nonprofit agencies), the Auxiliary Loans
to Assist Students (also know as PLUS) pro
gram, and the National Direct Student Loan
program.

§ 226.4

Regulation Z Commentary

References
S ta tu te : §§ 103 (s) and (t) and 104
O th e r sectio n s: § 226.12(a) and (b)
P re vio u s re g u la tio n : § 226.3 and interpreta

tions §§226.301 and 226.302.
1 9 8 1 c h a n g es: The business credit exemption
has been expanded to include credit for agri
cultural purposes. The rule o f interpretation
section 226.302, concerning credit relating to
structures containing more than four housing
units, has been modified and somewhat ex
panded by providing more exclusions for
transactions involving rental property.
The exemption for transactions above
$25,000 secured by real estate has been nar
rowed; all transactions secured by the con
sumer’s principal dwelling (even if not con
sidered real property) are now subject to the
regulation.
The public utility exemption now covers the
financing o f the extension o f a utility into an
area not earlier served by the utility, in addi
tion 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 budget plans.

SECTION 226.4—Finance Charge

of consumers because they meet certain
criteria, such as being members o f an orga
nization 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 o f the group and don’t quali
fy 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:
o

°
°

Inspection and handling fees for the staged
disbursement
of
construction
loan
proceeds
Fees for preparing a Truth in Lending dis
closure 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:
°

4(a) Definition

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.

1. C h a rg e s in c o m p a r a b le ca sh tra n sa c tio n s.
Charges imposed uniformly in cash and credit
transactions are not finance charges. In deter
mining whether an item is a finance charge,
the creditor should compare the credit trans
action in question with a similar cash transac
tion. A creditor financing the sale o f 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:

2. C o sts o f d o in g b u sin ess. Charges absorbed
by the creditor as a cost o f doing business are
not finance charges, even though the creditor
may take such costs into consideration in de
termining the interest rate to be charged or
the cash price o f 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:

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

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 im
posed on the consumer. (See section
2 2 6 .4 (b )(6 ).)
17

Regulation Z Commentary

§ 226.4

institution that establishes a time deposit
account and an open-end line of credit.
The Sine 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 per
cent. In addition, the agreement states that
the creditor will pay“0 percent interest on
the amount of the time deposit that corre
sponds to the amount of the credit exten
sion (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).

3. C h a rg e s b y t h ir d p a rtie s . Charges imposed
by someone other than the creditor for serv
ices that are not required by the creditor are
not finance charges. For example:
° A fee charged by a loan broker to a con
sumer, provided the creditor does not re
quire the use of a broker (even if the credi
tor knows of the loan broker’s involvement
or compensates the loan broker)
° A tax imposed by a state or other govern
mental body on the credit transaction that
is payable by the consumer (even if the tax
is collected by the creditor)
4. F o r fe itu r e s o f in te re s t. If the creditor reduc
es the interest rate it pays or stops paying in
terest on the consumer’s deposit account or
any portion of it for the term of a credit trans
action (including, for example, an overdraft
on a checking account or a loan secured by a
certificate of deposit), the interest lost is a fi
nance charge. (See the commentary to section
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 percent interest. The
creditor charges the consumer an interest
rate of 6 percent 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 e n title d 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
institution a $10,000 certificate of deposit
paying 15 percent interest but has only
$4,000. The financial institution offers to
lend the consumer $6,000 at an interest
rate of 6 percent but will pay the 15 per
cent 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 agree
ment with the financial institution to inter
est only on the amount of the consumer’s
deposit.
° A consumer enters into a combined time
deposit/credit agreement with a financial
18

T re a tm e n t o ffe e s f o r u se o f a u to m a te d t e ll

Any charge imposed on a card
holder by a card issuer for the use of an auto
mated teller machine (ATM) to obtain a cash
advance (whether in a proprietary, shared, in
terchange, or other system) is not a finance
charge to the extent that it does not exceed
the charge imposed by the card issuer on its
cardholders for using the ATM to withdraw
cash from a consumer asset account, such as a
checking or savings account. (See the com
mentary to section 226.6(b)).
e r m a c h in e s .

4(b) Examples of Finance Charges
1. R e la tio n s h ip to o th e r p ro v is io n s . Charges or
fees shown as examples of finance charges in
section 226.4(b) may be excludable under
section 226.4(c), (d), or (e). For example:
° Premiums for credit life insurance, shown
as an example of a finance charge under
section 226.4(b)(7), may be excluded if
the requirements of section 226.4(d)(1)
are met.
° Appraisal fees mentioned in section
226.4(b)(4) are excluded for real proper
ty or residential mortgage transactions un
der section 226.4(c)(7).
P a ra g ra p h 4 ( b ) ( 2 )

1. C h e c k in g a c c o u n t c h a rg e s . The checking or
transaction account charges discussed in sec
tion 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 ac
count without a credit feature has a $2.50
service charge; the $2.00 difference is a fi
nance charge. If the difference is not relat
ed to account activity, however, it may be

Regulation Z Commentary

excludable as a participation fee. (See the
commentary to section 2 2 6 .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 im
posed uniformly for any item that over
draws 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 a ra g ra p h 4 (b ) ( 3 )

1. A s s u m p tio n fe e s . The assumption fees men
tioned in section 2 2 6 .4 (b )(3 ) are finance
charges only when the assumption occurs and
the fee is imposed on the new buyer. The as
sumption fee is a finance charge in the new
buyer’s transaction.
P a ra g ra p h 4 ( b ) ( 5 )

1. C r e d it lo s s in s u ra n c e . Common examples
o f the insurance against credit loss mentioned
in section 2 2 6 .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 a ra g r a p h s 4 (b )(7 ) a n d (8)

1. P r e e x is tin g in s u ra n c e p o lic y . The insurance
discussed in section 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. In s u ra n c e w r itte n a fte r c o n s u m m a tio n . In
closed-end credit transactions, insurance sold
after consummation is not “written in connec
tion with” the credit transaction if the insur
ance is written because o f the consumer’s de
fault (for example, by failing to obtain or
maintain required property insurance) or be
cause the consumer requests insurance after
consummation (although credit sale disclo

§ 226.4
sures may be required for the insurance if it is
financed).
3. S u b s titu tio n o f life in s u ra n c e . The premium
for a life insurance policy purchased and as
signed to satisfy a credit life insurance re
quirement must be included in the finance
charge, but only to the extent o f the cost of
the credit life insurance if purchased from the
creditor or the actual cost o f the policy (if
that is less than the cost o f the insurance
available from the creditor). If the creditor
does not offer the required insurance, the pre
mium to be included in the finance charge is
the cost o f a policy of insurance o f the type,
amount, and term required by the creditor.
4. O th e r in s u ra n c e . Fees for required insur
ance not o f the types described in section
2 2 6 .4 (b )(7 ) and ( 8 ) are finance charges and
are not excludable. For example:

8 The premium for a hospitalization insur
ance policy, if it is required to be pur
chased only in a credit transaction, is a
finance charge.
P a ra g ra p h 4 ( b ) ( 9 )

1. D is c o u n ts f o r p a y m e n t b y o th e r th a n c re d it.

The discounts to induce payment by other
than credit mentioned in section 2 2 6 .4 (b )(9 )
include, for example, the following situation:
°

The seller o f land offers individual tracts
for $10,000 each. If the purchaser pays
cash, the price is $9,000, but if the pur
chaser 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 x c e p tio n f o r c a s h d is c o u n ts . D iscounts of
fered to induce consumers to pay for property
or services by cash, check, or other means not
involving the use o f 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 un
der section 167(b) o f 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 o f the regular price (as
defined in section 103 (z ) of the act, as amend
ed) or a dollar amount. This provision applies
19

§ 226.4
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 mem
bers of the open-end credit plan. The mer
chant may, however, make other distinctions.
For example:
•

The merchant may limit the discount to
payment by cash and not offer it for pay
ment by check or by use o f a debit card.
The merchant may establish a discount
plan that allows a 15 percent discount for
payment by cash, a 10 percent discount for
payment by check, and a 5 percent dis
count for payment by a particular credit
card. N one o f these discounts is a finance
charge.

Section 171(c) o f the act excludes section
167(b) discounts from treatment as a finance
charge or other charge for credit under any
state usury or disclosure laws.
3. D e te rm in a tio n o f th e r e g u la r p ric e . The
“regular price” is critical in determining
whether the difference between the price
charged to cash customers and credit custom
ers is a “discount” or a “surcharge,” as these
terms are defined in amended section 103 of
the act. The “regular price” is defined in sec
tion 103 o f the act as “the tag or posted price
charged for the property or service if a single
price is tagged or posted, or the price charged
for the property or service when payment is
made by use o f an open-end credit account or
a credit card if either ( 1) no price is tagged or
posted, or ( 2 ) two prices are tagged or post
ed. . . . ” For example, in the sale o f motor ve
hicle fuel, the tagged or posted price is the
price displayed at the pump. As a result, the
higher price (the open-end credit or credit
card price) must be displayed at the pump,
either alone or along with the cash price. Serv
ice station operators may designate separate
pumps or separate islands as being for either
cash or credit purchases and display only the
appropriate prices at the various pumps. If a
pump is capable o f displaying on its meter ei
ther a cash or a credit price depending upon
the consumer’s means o f payment, both the
cash price and the credit price must be dis
played at the pump. A service station operator
20

Regulation Z Commentary
may display the cash price o f fuel by itself on
a curb sign, as long as the sign clearly indi
cates that the price is limited to cash
purchases.

4(c) Charges Excluded from the Finance
Charge
P a ra g ra p h 4 (c ) ( 1 )

1. A p p lic a tio n fe e s . An application fee that is
excluded from the finance charge is a charge
to recover the costs associated with processing
applications for credit. The fee may cover the
costs o f services such as credit reports, credit
investigations, and appraisals. The creditor is
free to impose the fee in only certain o f its
loan programs, such as mortgage loans. H ow
ever, if the fee is to be excluded from the fi
nance charge under section 2 2 6 .4 (c )(1 ), it
must be charged to all applicants, not just to
applicants who are approved or who actually
receive credit.
P a ra g ra p h 4 ( c ) ( 2 )

1. L a te - p a y m e n t
c h a rg e s .
Late-payment
charges can be excluded from the finance
charge under section 2 2 6 .4 (c )(2 ) whether or
not the person imposing the charge continues
to extend credit on the account or continues
to provide property or services to the consum
er. In determining whether a charge is for ac
tual unanticipated late payment on a 30-day
account, for example, factors to be considered
include:
°

The terms o f the account. For example, is
the consumer required by the account
terms to pay the account balance in full
each month? If not, the charge may be a
finance charge.
The practices o f the creditor in handling
the accounts. For example, regardless of
the terms o f the account, does the creditor
allow consumers to pay the accounts over
a period o f time without demanding pay
ment in full or taking other action to col
lect? If no effort is made to collect the full
amount due, the charge may be a finance
charge.

Section 2 2 6 .4 (c )(2 ) applies to late-payment
charges imposed for failure to make payments

§ 226.4

Regulation Z Commentary
as agreed, as well as failure to pay an account
in full when due.
2. O th e r e x c lu d e d c h a rg e s . Charges for “deliquency, default, or a similar occurrence” in
clude, for example, charges for reinstatement
of credit privileges or for submitting as pay
ment a check that is. later returned unpaid.
P a ra g ra p h 4 (c ) ( 3 )

A s s e s s in g in te re s t o n a n o v e r d r a ft b a la n c e .

A charge on an overdraft balance computed
by applying a rate o f interest to the amount of
the overdraft is not a finance charge, even
though the consumer agrees to the charge in
the account agreement, unless the financial in
stitution agrees in writing that it will pay such
items.
P a ra g ra p h 4 (c ) ( 4 )

1. P a r tic ip a tio n fe e s . The participation fees
mentioned in section 2 2 6 .4 (c )(4 ) do not nec
essarily have to be formal membership fees,
nor are they limited to credit card plans. The
provision applies to any credit plan in which
payment o f a fee is a condition of access to the
plan itself, but it does not apply to fees im
posed separately on individual closed-end
transactions. The fee may be charged on a
monthly or other periodic basis as well as an
nually; however, minimum monthly charges
or other charges based on current account ac
tivity are not excluded from the finance
charge by section 2 2 6 .4 (c )(4 ). (See the com
mentary to section 2 2 6 .4 (b )(2 ).)
P a ra g ra p h 4 ( c ) ( 5 )

1. S e lle r 's p o in ts . The seller’s points men
tioned in section 2 2 6 .4 (c )(5 ) include any
charges imposed by the creditor upon the
non-creditor seller of property for providing
credit to the buyer or for providing credit on
certain terms. These charges are excluded
from the finance charge even if they are
passed on to the buyer, for example, in the
form o f a higher sales price. Seller’s points are
frequently involved in real estate transactions
guaranteed or insured by governmental agen
cies. A “commitment fee” paid by a noncred
itor seller (such as a real estate developer) to
the creditor should be treated as seller’s

points. Buyer’s points (that is, points charged
to the buyer by the creditor), however, are
finance charges.
2. O th e r s e lle r - p a id a m o u n ts . Mortgage insur
ance premiums and other charges are some
times paid at or before consummation or
settlement on the borrower’s behalf by a non
creditor 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. A creditor who gives disclosures be
fore the payment has been made should base
them on the best information reasonably
available, as called for by the estimate provi
sions o f the regulation.
P a ra g ra p h 4 ( c ) ( 6 )

1. L o s t in te re s t. Certain federal and state laws
mandate a percentage differential between the
interest rate paid on a deposit and the rate
charged on a loan secured by that deposit. In
some situations because o f usury limits the
creditor must reduce the interest rate paid on
the deposit and, as a result, the consumer los
es some o f the interest that would otherwise
have been earned. Under section 2 2 6 .4 (c)(6 ), such “lost interest” need not be included
in the finance charge. This rule applies only to
an interest reduction imposed because a rate
differential is required by law and a usury lim
it precludes compliance by any other means.
If the creditor imposes a differential that ex
ceeds that required, only the lost interest at
tributable to the excess amount is a finance
charge. (See the commentary to section
2 2 6 .4 (a ).)
P a ra g ra p h 4 ( c ) ( 7 )

1. R e a l e s ta te o r r e s id e n tia l m o rtg a g e tra n s a c
c h a rg e s . The list o f charges in section
2 2 6 .4 (c )(7 ) applies both to residential mort
gage transactions (which may include, for ex
ample, the purchase o f 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, cred
it report fees include not only the cost of the
report itself, but also the cost of verifying in21
tio n

§ 226.4

formation in the report. If a lump sum is
charged for several services and includes a
charge that is not excludable, a portion of the
total should be allocated to that service and
included in the finance charge. A charge for a
lawyer’s attendance at the closing or a charge
for conducting the closing (for example, by a
title company) is excluded from the finance
charge if the charge is primarily for services
related to items listed in section 226.4(c)(7)
(for example, reviewing or completing docu
ments), even if other incidental services, such
as explaining various documents or disbursing
funds for the parties, are performed. In all
cases, charges excluded under section
226.4(c) (7) must be bona fide and reasonable.

4(d) Insurance
1. G e n e ra l. Section 226.4(d) permits insur
ance premiums and charges to be excluded
from the finance charge. The required disclo
sures must be made in writing. The rules on
location of insurance disclosures for closedend transactions are in section 226.17(a).
2. T im in g o f d is c lo s u re s . If disclosures are
given early, for example under section
226.17(f) or section 226.19(a), the creditor
need not redisclose if the actual premium is
different at the time of consummation. If in
surance disclosures are not given at the time
of early disclosure and insurance is in fact
written in connection with the transaction, the
disclosures under section 226.4(d) must be
made in order to exclude the premiums from
the finance charge.
3. P re m iu m r a te in c re a s e s . The creditor
should disclose the premium amount based on
the rates currently in effect and need not des
ignate it as an estimate even if the premium
rates may increase. An increase in insurance
rates after consummation of a closed-end
credit transaction or during the life of an
open-end credit plan does not require redis
closure in order to exclude the additional pre
mium from treatment as a finance charge.
4. U n it-c o s t d is c lo s u re s . One of the transac
tions 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
22

Regulation Z Commentary

insurance premium involves a particular kind
of insurance plan. For example, a consumer
with a current indebtedness of $8,000 is cov
ered by a plan of credit life insurance coverage
with a maximum of $10,000. The consumer
requests an additional $4,000 loan to be cov
ered by the same insurance plan. Since the
$4,000 loan exceeds, in part, the 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 unit-cost basis.
5. R e q u ire d c r e d it lif e in s u ra n c e . Credit life,
accident, health, or loss-of-income insurance
must be voluntary in order for the premiums
or charges to be excluded from the finance
charge. Whether the insurance is in fact re
quired 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 cred
itor gives the consumer is to purchase credit
life insurance from the creditor or to assign an
existing life insurance policy, and the consum
er purchases the credit life insurance, the pre
mium must be included in the finance charge.
(If the consumer assigns a preexisting policy
instead, no premium is included in the finance
charge. See the commentary to section
226.4(b)(7) and (8).)
6. O th e r ty p e s o f v o lu n ta r y in s u ra n c e . Insur
ance is not credit life, accident, health, or lossof-income insurance if the creditor or the
credit account of the consumer is not the ben
eficiary of the insurance coverage. If such in
surance is not required by the creditor as an
incident to or a condition of credit, it is not
covered by section 226.4.
7. S ig n a tu re s . If the creditor offers a number
of insurance options under section 226.4(d),
the creditor may provide a means for the con
sumer to sign or initial for each option, or it
may provide for a single authorizing 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 sec
tion 226.2(a) (11), or by an authorized user
on a credit card account.

Regulation Z Commentary

8. P r o p e rty in s u ra n c e . To exclude property in
surance 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 in
surance be readily available from other sourc
es. 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 in g le -in te r e s t in s u ra n c e . Blanket and spe
cific 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 section
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 in g le -in te r e s t in s u ra n c e d e fin e d . 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 re
possession insurance and holder-in-due-course
insurance. These types of coverage do not
constitute single-interest insurance for pur
poses of the regulation, and premiums for
them do not qualify for exclusion from the
finance charge under section 226.4(d). If a
policy that is primarily VSI also provides cov
erages that are not VSI or other property in
surance, a portion of the premiums must be
allocated to the nonexcludable coverages and

§ 226.4

included in the finance charge. However, such
allocation is not required if the total premium
in fact attributable to all of the non-VSI cov
erages included in the policy is $1.00 or less
(or $5.00 or less in the case of a multiyear
policy).
11. I n i t i a l te rm . The initial term of insurance
coverage determines the period for which a
premium amount must be disclosed. In some
cases the initial term is clear, for example, a
property insurance policy on an automobile
written for one year (even though the term of
the credit transaction is four years) or a credit
life insurance policy for the term of the credit
transaction purchased by paying or financing
a single premium. In other cases, however, it
may not be clear what the initial term of the
insurance is, for example, when the consumer
agrees to pay a premium that is assessed peri
odically and the consumer is under no obliga
tion to continue making the payments. In
cases such as this, the cost disclosure may be
made on the basis of a premium for one year
of insurance coverage. The premium must be
clearly labeled as being for one year.
12. L o s s -o f-in c o m e in s u ra n c e . The loss-ofincome insurance mentioned in section
226.4(d) includes involuntary unemployment
insurance, which provides that some or all of
the consumer’s payments will be made if the
consumer becomes unemployed involuntarily.

4(e) Certain Security Interest Charges
1. E x a m p le s . Examples of charges excludable
from the finance charge under section
226.4(e)(1) include:
° Charges for filing or recording security
agreements, mortgages, continuation state
ments, 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 section 226.4(e)(1).
2. Ite m iz a tio n . The various charges described
in section 226.4(e)(1) may be totaled and
disclosed as an aggregate sum, or they may be
itemized by the specific fees and taxes im23

§ 226.4

posed. If an aggregate sum is disclosed, a gen
eral term such as security interest fees or “fil
ing fees” may be used.
3. N o ta r y fe e s . In order for a notary fee to be
excluded under section 226.4(e)(1), all of the
following conditions must be met:
° The document to be notarized is one 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 un
der applicable law.
• The amount of the fee is set or authorized
by law.
4. N o n filin g in s u ra n c e . The exclusion in sec
tion 226.4(e) (2) is available only if nonfiling
insurance is purchased. If the creditor collects
and simply retains a fee as a sort of “self-in
surance” against nonfiling, it may not be ex
cluded from the finance charge. If the nonfil
ing insurance premium exceeds the amount of
the fees excludable from the finance charge
under section 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 nonfiling insurance. Only $8.00
of the $10.00 is excludable from the fi
nance charge.

Regulation Z Commentary

example, section 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 exclu
sions from the finance charge: application fees
imposed on all applicants are no longer fi
nance 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 exclu
sions for real estate transactions apply to all
“residential mortgage transactions.”
The simplified rules for excluding insurance
from the finance charge allow unit-cost disclo
sure in certain closed-end credit transactions,
permit initials as well as signatures on the au
thorization, permit any consumer to authorize
insurance for other consumers, and delete the
requirement that the authorization be sepa
rately dated.

SUBPART B—OPEN-END CREDIT
SECTION 226.5—General Disclosure
Requirements

4(f) Prohibited Offsets
5(a) Form of Disclosures

1. E a r n in g s o n d e p o s its o r in v e s tm e n ts . The
rule that the creditor shall not deduct any
P a ra g ra p h 5 ( a ) ( 1 )
earnings by the consumer on deposits or in
vestments applies whether or not the creditor 1. C le a r a n d c o n s p ic u o u s . The “clear and con
spicuous” standard requires that disclosures
has a security interest in the property.
be in a reasonably understandable form. It
does not require that disclosures be segregated
References
from other material or located in any particu
S ta tu te : §§ 106, 167, and 171(c)
lar place on the disclosure statement, or that
O th e r s e c tio n s : §§ 226.9(d) and 226.12
numerical amounts or percentages be in any
P re v io u s r e g u la tio n : § 226.4 and interpreta
particular type size. The standard does not
tions §§ 226.401 through 226.407.
prohibit:
1 9 8 1 c h a n g e s : While generally continuing the
rules under the previous regulation, section ° Pluralizing required terminology (“fi
nance charge” and “annual percentage
226.4 reflects amendments to section 106 of
rate”)
the act and makes certain other changes in the
rules for determining the finance charge. For ° Adding to the required disclosures such
24

§ 226.5

Regulation Z Commentary

items as contractual provisions, explana
tions of contract terms, state disclosures,
and translations
o Sending promotional material with the re
quired disclosures
° Using commonly accepted or readily un
derstandable 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 bal
ance), so long as a legend or description of
the code or symbol is provided on the dis
closure statement
2. In te g r a te d d o c u m e n t. 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 dis
closure pages provided to the consumer at dif
ferent times or disclosures interspersed on the
same page with promotional material. An in
tegrated document would include, for
example:
° Multiple pages provided in the same enve
lope 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, and electronic fund
transfer features

does not so require. The following examples
illustrate these rules:
° In disclosing the annual percentage rate as
required by section 226.6(a)(2), the term
“annual percentage rate” is subject to the
“more conspicuous” rule.
° In disclosing the amount of the finance
charge, required by section 226.7(f), the
term “finance charge” is subject to the
“more conspicuous” rule.
° Although neither “finance charge” nor
“annual percentage rate” need be em
phasized when used as part of general
informational material or in textual de
scriptions of other terms, emphasis is per
missible in such cases. For example, when
the terms appear as part of the explana
tions required under section 226.6(a)(3)
and (4), they may be equally conspicuous
as the disclosures required under sections
226.6(a)(2) and 226.7(g).
2. M a k in g d is c lo s u re s m o re c o n s p ic u o u 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 empha
sized. The disclosures may be made more con
spicuous by, for example:
° Capitalizing the words when other disclo
sures 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
3.

P a ra g ra p h 5 (a ) ( 2 )

1. W h e n d is c lo s u re s m u s t b e “ m o re c o n s p ic u

” The terms “finance charge” and “annual
percentage rate”, when required to be used
with a number, must be disclosed more con
spicuously than other required disclosures, ex
cept in the two cases provided in footnote 9.
At the creditor’s option, “finance charge” and
“annual percentage rate” may also be dis
closed more conspicuously than the other re
quired disclosures even when the regulation
o u s.

D is c lo s u re o f fig u r e s — e x c e p tio n

“ m o re

The terms “annual percent
age rate” and “finance charge” need not be
more conspicuous than figures (including, for
example, numbers, percentages, and dollar
signs).
c o n s p ic u o u s ” r u le .

5(b) Time of Disclosures
5 ( b ) ( 1 ) I n i t i a l d is c lo s u re s

1. D is c lo s u re b e fo re th e f i r s t tra n s a c tio n . The
rule that the initial disclosure statement must
25

§ 226.5

be furnished “before the first transaction” re
quires delivery of the initial disclosure state
ment before the consumer becomes obligated
on the plan (for example, before the consumer
makes the first purchase, receives the first ad
vance, or pays a fee under the plan).

Regulation Z Commentary

4. C o n v e rtin g c lo s e d -e n d to o p e n -e n d c r e d it. If
a closed-end credit transaction is converted to
an open-end credit account under a written
agreement with the consumer, the initial dis
closures under section 226.6 must be given be
fore the consumer becomes obligated on the
open-end credit plan. (See the commentary to
° If the consumer pays a membership fee be section 226.17 on converting open-end credit
fore receiving the Truth in Lending disclo to closed-end credit.)
sures, or the consumer agrees to the impo
sition of a membership fee at the time of
application and the Truth in Lending dis 5 ( b ) ( 2 ) P e r io d ic S ta te m e n ts
closure statement is not given at that time,
disclosures are timely as long as the con P a ra g ra p h 5 ( b ) ( 2 ) ( i)
sumer, after receiving the disclosures, can 1. P e r io d ic s ta te m e n ts n o t re q u ire d . Periodic
reject the plan. The creditor must refund statements need not be sent in the following
the membership fee if it has been paid, or cases:
clear the account if it has been debited to
° If the creditor adjusts an account balance
the consumer’s account.
so that at the end of the cycle the balance
° If the consumer receives a cash advance
is less than $1—so long as no finance
check at the same time the Truth in Lend
charge has been imposed on the account
ing disclosures are provided, disclosures
for that cycle
are still timely if the consumer can, after
°
If a statement was returned as undelivera
receiving the disclosures, return the cash
ble. If a new address is provided, however,
advance check to the creditor without ob
within a reasonable time before the credi
ligation (for example, without paying fi
tor must send a statement, the creditor
nance charges).
must resume sending statements. Receiv
° Initial disclosures need not be given before
ing the address at least 20 days before the
the imposition of an application fee under
end of a cycle would be a reasonable
section 226.4(c)(1).
amount of time to prepare the statement
° If, after receiving the disclosures, the con
for that cycle. For example, if an address
sumer uses the account, pays a fee, or ne
is received 22 days before the end of the
gotiates a cash advance check, the creditor
June cycle, the creditor must send the pe
may consider the account not rejected for
riodic statement for the June cycle. (See
purposes of this section.
section 226.13(a)(7).)
2. R e a c tiv a tio n o f s u s p e n d e d a c c o u n t. If an ac
count is temporarily suspended (for example, 2. T e r m in a tio n o f c r e d it p riv ile g e s . When an
because the consumer has exceeded a credit open-end account is terminated without being
limit, or because a credit card is reported lost converted to closed-end credit under a written
or stolen) and then is reactivated, no new ini agreement, the creditor must continue to pro
vide periodic statements to those consumers
tial disclosures are required.
entitled to receive them under section
3. R e o p e n in g c lo s e d a c c o u n t. If an account 226.5(b) (2) (i) (for example, when an openhas been closed (for example, due to inactivi end credit plan ends and consumers are pay
ty, cancellation, or expiration) and then is re ing off outstanding balances) and must con
opened, new initial disclosures are required. tinue to follow all of the other open-end credit
No new initial disclosures are required, how requirements and procedures in subpart 33.
ever, when the account is closed merely to as
sign it a new number (for example, when a P a ra g ra p h 5 (b ) ( 2 ) ( H )
credit card is reported lost or stolen) and the 1. 1 4 -d a y r u le . The 14-day rule for mailing or
“new” account then continues on the same delivering periodic statements does not apply
if charges (for example, transaction or activi
terms.
26

Regulation Z Commentary

ty charges) are imposed regardless of the tim
ing of a periodic statement. The 14-day rule
does apply, for example:
° If current debits retroactively become sub
ject 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 pay
ment charges or charges for exceeding a
credit limit)
2. C o m p u te r m a lfu n c tio n . Footnote 10 does
not extend to the failure to provide a periodic
statement because of computer malfunction.
3. C a llin g f o r p e r io d ic s ta te m e n ts . The credi
tor may permit consumers to call for their pe
riodic 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 ac
cordance with the 14-day rule.

5(c) Basis of Disclosures and Use of
Estimates1
1. L e g a l o b lig a tio n . The disclosures should re
flect the credit terms to which the parties are
legally bound at the time of giving the
disclosures.
• The legal obligation is determined by ap
plicable state or other law.
° The fact that a term or 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 term or contract did not reflect the
legal obligation.
° The legal obligation normally is presumed
to be contained in the contract that evi
dences the agreement. But this may be re
butted if another agreement between the
parties legally modifies that contract.
2. E s tim a te s — o b ta in in g in fo r m a tio n . Disclo
sures may be estimated when the exact infor
mation is unknown at the time disclosures are
made. Information is unknown if it is not rea
sonably available to the creditor at the time
disclosures are made. The “reasonably avail
able” standard requires that the creditor, act

§ 226.5

ing in good faith, exercise due diligence in ob
taining 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 repre
sentations of other parties in obtaining infor
mation. For example, the creditor might look
to insurance companies for the cost of
insurance.
3. E s tim a te s — re d is c lo s u 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 ad
vance under the plan, no new disclosure is
necessary.

5(d) Multiple Creditors; Multiple
Consumers
1.

M u lt ip le c re d ito rs .

Under section 226.5(d):

o Creditors must choose which of them will
make the disclosures
° A single, complete set of disclosures must
be provided, rather than partial disclo
sures from several creditors
° 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
2. M u lt ip le c o n s u m e rs . Disclosures may be
made to either obligor on a joint account. Dis
closure responsibilities are not satisfied by giv
ing 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
section 226.15.
27

Regulation Z Commentary

§ 226.5

5(e) Effect of Subsequent Events
1. E v e n ts c a u s in g in a c c u ra c ie s . Inaccuracies
in disclosures are not violations if attributable
to events occurring after disclosures are made.
For example, when the consumer fails to ful
fill 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 dis
closures inaccurate. The creditor may, howev
er, be required to provide a new disclosure(s)
under section 226.9(c).
2. U se o f in s e rts . 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 pro
vision it replaces
° Need not be physically attached or affixed
to the basic disclosure statement
° May be used only until the supply of out
dated forms is exhausted

SECTION 226.6—Initial Disclosure
Statement
1. C o n s is te n t te rm in o lo g y . Language on the
initial and periodic disclosure statements must
be close enough in meaning to enable the con
sumer to relate the two sets of disclosures;
however, the language need not be identical.
For example, in making the disclosure under
section 226.6(a)(3), the creditor may refer to
the “outstanding balance at the end of the bill
ing cycle,” while the disclosure for section
226.7(i) refers to the “ending balance” or
“new balance.”
2. S e p a ra te in it ia l d is c lo s u re s p e r m itte d . In a
certain open-end credit program involving
more than one creditor—a card issuer of travel-and-entertainment cards and a financial in
stitution—the consumer has the option to pay
the card issuer directly or to transfer to the
financial institution all or part of the amount
owing. In this case, the creditors may send
separate initial disclosure statements.

6(a) Finance Charge
References
§§ 121(a) through (c), 122(a) and
(b), 124, 127(a) and (b), and 163(a)
O th e r s e c tio n s : §§ 226.6, 226.7, and 226.9
P re v io u s r e g u la tio n : §§ 226.6(a) and (c)
through (g), and 2 2 6 .1 ( a ) through (c)
1981
c h a n g e s : 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 multipage, 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 disclo
sures need be made to only one primarily lia
ble consumer.

S ta tu te :

P a ra g ra p h 6 ( a ) ( 1 )

1. W h e n fin a n c e c h a rg e s a c c ru e . Creditors
may provide a general explanation about fi
nance charges beginning to run and need not
disclose a specific date. For example, a disclo
sure that the consumer has 30 days from the
closing date to pay the new balance before fi
nance charges will accrue on the account
would describe when finance charges begin to
run.
2. F re e -r id e p e rio d 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 fi
nance charge begins on the date the transac
tion is posted to your account” adequately
discloses that no free-ride period exists. In the
same fashion, 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.

Regulation Z Commentary
Paragraph 6(a)(2)

1. Range o f balances. 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 exam
ple, cash advances), even though the bal
ance for another feature (purchases) may
be subject to two rates (a 1.5 percent peri
odic rate on purchase balances of $0-$500,
while balances above $500 are subject to a
1 percent periodic rate). Of course, the
creditor must give a range of balances dis
closure for the purchase feature.
2. Variable-rate disclosures—coverage. This
section covers open-end credit plans under
which rate changes are part of the plan and
are tied to an index or formula. A creditor
would use variable-rate disclosures (and thus
be excused from the requirement of giving a
change-in-terms notice when rate increases
occur as disclosed) for plans involving rate
changes such as the following:

§ 226.6

3. Variable-rate plan—rate(s) in effect. In dis
closing the rate(s) in effect at the time of the
initial disclosures (as is required by section
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 disclo
sure from time to time, for example, each cal
endar month; or may disclose an estimated
rate under section 226.5(c).
4. Variable-rate plan— additional disclosures
required. 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. Variable-rate plan —index. 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 instruc
tions for obtaining it.
6. Variable-rate plan— circumstances fo r in
crease. Circumstances under which the
rate(s) may increase include, for example:
° An increase in the Treasury bill rate
° An increase in the Federal Reserve dis
count rate

« Rate changes that are tied to the rate the
creditor pays on its six-month money mar
ket certificates
» Rate changes that are tied to Treasury bill
rates
• Rate changes that are tied to changes in
the creditor’s commercial lending rate

The creditor must disclose when the increase
will take effect; for example:

In contrast, the creditor’s contract reservation
to increase the rate without reference to such
an index or formula (for example, a plan that
simply provides that the creditor reserves the
right to raise its rates) would not be consid
ered a variable-rate plan for Truth in Lending
disclosure purposes. Moreover, an open-end
credit plan in which the employee receives a
lower rate contingent upon employment (that
is, with the rate to be increased upon termina
tion of employment) is not a variable-rate
plan. (With regard to such employee prefer
ential-rate plans, however, see comment 9(c)1, which provides that if the specific change
that would occur is disclosed on the initial
disclosure statement, no notice of a change in
terms need be given when the term later
changes as disclosed.)

7. Variable-rate plan— limitations on increase.
In disclosing any limitations on rate increases,
limitations such as the maximum increase per
year or the maximum increase over the dura
tion 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:

° “An increase will take effect on the day
that the Treasury bill rate increases,” or
° “An increase in the Federal Reserve dis
count rate will take effect on the first day
of the creditor’s billing cycle.”

° “The rate on the plan will not exceed 25
percent annual percentage rate.”
° “Not more than \ percent increase in the
29

§ 226.6

annual percentage rate per year will
occur.”

Regulation Z Commentary
Paragraph 6(a)(3)

1. Explanation o f balance computation meth

A shorthand phrase such as “previous bal
8. Variable-rate plan— effects o f increase. Ex od.
ance
method” does not suffice in explaining
amples of effects that must be disclosed the balance
computation method. (See appen
include:
dix G-l for model clauses.)
° Any requirement for additional collateral 2. Allocation o f payments. Disclosure about
if the annual percentage rate increases be the allocation of payments and other credits is
not required. For example, the creditor need
yond a specified rate
° Any increase in the scheduled minimum not disclose that payments are applied to late
charges, overdue balances, and finance
periodic payment amount
charges before being applied to the principal
9. Variable-rate plan —change-in-terms notice balance; or in a multifeatured plan, that pay
not required. No notice of a change in terms is ments are applied first to finance charges, then
required for a rate increase under a variable- to purchases, and then to cash advances. (See
comment 7-1 for definition of multifeatured
rate plan as defined in comment 6(a) (2)-2.
plan.)
10. Discounted variable-rate plans. In some
variable-rate plans, creditors may set an initial
interest rate that is not determined by the in Paragraph 6(a)(4)
dex or formula used to make later interest rate
adjustments. Typically, this initial rate is low 1. Finance charges. In addition to disclosing
er than the rate would be if it were calculated the periodic rate(s) under section 226.6(a)(2), disclosure is required of any other type of
using the index or formula.
finance charge that may be imposed, such as
° For example, a creditor may calculate in minimum, fixed, transaction, and activity
terest rates according to a formula using charges; required insurance; or appraisal or
the six-month Treasury bill rate plus a 2 credit report fees (unless excluded from the
percent margin. If the current Treasury finance charge under section 226.4(c)(7).)
bill rate is 10 percent, the creditor may
forgo the 2 percent spread and charge only
10 percent for a limited time, instead of 6(b) Other Charges
setting an initial rate of 12 percent, or the 1. General; examples o f other charges. Under
creditor may disregard the index or formu section 226.6(b), significant charges related to
la and set the initial rate at 9 percent.
plan (that are not finance charges) must
° When creditors use an initial rate that is the
also
be disclosed. For example:
not calculated using the index or formula
for later rate adjustments, the initial dis ° Late payment and over-the-credit-limit
closure statement should reflect: (1) the
charges
initial rate (expressed as a periodic rate ° Fees for providing documentary evidence
and a corresponding annual percentage
of transactions requested under section
226.13 (billing-error resolution)
rate), together with a statement of how
long it will remain in effect; (2) the cur ° Charges imposed in connection with real
estate transactions (See section 226.4(c)rent rate that would have been applied us
(7).)
ing the index or formula (also expressed as
a periodic rate and a corresponding annual ° Taxes and filing or notary fees excluded
from the finance charge under section
percentage rate); and (3) the other vari
able-rate information required by footnote
226.4(e)
° A tax imposed on the credit transaction by
12 to section 226.6(a)(2).
a state or other governmental body, such
° In disclosing the current periodic and an
as a documentary stamp tax on cash ad
nual percentage rates that would be ap
vances (See the commentary to section
plied using the index or formula, the credi
tor may use any of the disclosure options
226.4(a).)
° Membership or participation fees for a
described in comment 6(a) (2)-3.
30

Regulation Z Commentary

package of services that includes an openend credit feature, unless the fee is re
quired whether or not the open-end credit
feature is included. For example, a mem
bership fee to join a credit union would
not be an “other charge,” even if member
ship is required to apply for credit.
° Automated teller machine (ATM)
charges described in comment 4(a)-5 that
are not finance charges.

§ 226.6

2. Id e n tific a tio n o f p ro p e r ty . Identification of
the collateral by type is satisfied by stating, for
example, “motor vehicle” or “household ap
pliances.” The creditor may, at its option,
provide a more specific identification (for ex
ample, a model and serial number.)

3. S p re a d e r c la u s e . The fact that collateral for
preexisting credit extensions with the institu
tion is being used to secure the present obliga
tion constitutes a security interest and must be
2. E x c lu s io n s . The following are examples of disclosed. (Such security interests may be
known as “spreader” or “dragnet” clauses, or
charges that are not “other charges”:
as “cross-collateralization” clauses.) A specif
ic
identification of that collateral is unneces
° Fees charged for documentary evidence of
sary, but a reminder of the interest arising
transactions for income tax purposes
« Amounts payable by a consumer for col from the prior indebtedness is required. This
lection activity after default; attorney’s may be accomplished by using language such
fees, whether or not automatically im as “collateral securing other loans with us
posed; foreclosure costs; post-judgment in may also secure this loan.” At the creditor’s
terest rates imposed by law; and reinstate option, a more specific description of the
property involved may be given.
ment or reissuance fees
° Premiums for voluntary credit life or dis 4. A d d itio n a l c o lla te r a l. If collateral is re
ability insurance, or for property insur quired when advances reach a certain amount,
ance, that are not part of the finance the creditor should disclose the information
charge
available at the time of the initial disclosures.
° Application fees under section 226.4(c)- For example, if the creditor knows that a se
curity interest will be taken in household
( 1)
° A monthly service charge for a checking goods if the consumer’s balance exceeds
account with overdraft protection that is $1,000, the creditor should disclose accord
applied to all checking accounts, whether ingly. If the creditor knows that security will
be required if the consumer’s balance exceeds
or not a credit feature is attached
° Charges for submitting as payment a $1,000, but the creditor does not know what
check that is later returned unpaid (see security will be required, the creditor must
disclose on the inital disclosure statement that
commentary to section 226.4(c)(2).
° Charges imposed on a cardholder by an security will be required if the balance exceeds
institution other than the card issuer for $1,000, and the creditor must provide a
the use of the other institution’s ATM in a change-in-terms notice under section 226.9(c)
shared or interchange system. (See also at the time the security is taken.
comment 7(b)-2).
5. C o lla te r a l fr o m t h ir d p a r ty . In certain situ
ations, the consumer’s obligation may be se
cured by collateral belonging to a third party.
6(c) Security Interests
For example, an open-end credit plan may be
1. G e n e ra l. Disclosure is not required about secured by an interest in property owned by
the type of security interest, or about the cred the consumer’s parents. In such cases, the se
itor’s rights with respect to that collateral. In curity interest is taken in connection with the
other words, the creditor need not expand on plan and must be disclosed, even though the
the term “security interest.” Also, since no property encumbered is owned by someone
other than the consumer.
specified terminology is required, the creditor
may designate its interests by using, for exam
6(d) Statement of Billing Rights
ple, “pledge,” “lien,” or “mortgage” (instead
of “security interest”).
See the commentary to appendix G-3.

Regulation Z Commentary

§ 226.6

References
§ 127(a)
§§ 226.4, 226.5, 226.7, 226.9,
226.14, and appendix G
P re v io u s r e g u la tio n : § 226.7(a) and interpre
tation § 226.706
1 9 8 1 c h a n g e s : 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 disabili
ty insurance, required property insurance pre
miums, default charges, or fees for collection
activity. Disclosures for variable rate plans are
now required by the regulation, replacing in
terpretation section 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 ta tu te :

O th e r s e c tio n s :

SECTION 226.7—Periodic Statement
1. M u ltife a tu r e d p la n s . Some plans involve a
number of different features, such as purchas
es, cash advances, or overdraft checking.
Groups of transactions subject to different fi
nance charge terms because of the dates on
which the transactions took place are treated
like different features for purposes of disclo
sures on the periodic statements. The com
mentary includes some special rules for multi
featured plans.
2. S e p a ra te p e r io d ic s ta te m e n ts p e r m itte d . In a
certain open-end credit program involv
ing more than one creditor—a card issuer of
travel-and-entertainment cards and a financial
institution—the consumer has the option to
pay the card issuer directly or to transfer to
the financial institution all or part of the
amount owing. In this case, the creditors may
send separate periodic statements that reflect
the separate obligations owed to each.

way so as to inform the consumer that it is a
credit balance, rather than a debit balance.
2. M u ltife a tu r e d p la n 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 sep
arate balances are disclosed, a total previous
balance is optional.
3.

A c c ru e d

fin a n c e

c h a rg e s

a llo c a te d

fr o m

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 bal
ance need not reflect finance charges accrued
since the last payment.

p a y m e n ts .

7(b) Identification of Transactions
1. M u ltife a tu r e d p la n s . In identifying transac
tions under section 226.7(b) for multifeatured
plans, creditors may, for example, choose to
arrange transactions by feature (such as dis
closing sale transactions separately from cash
advance transactions) or in some other clear
manner, such as by arranging the transactions
in general chronological order.
2.

A u to m a te d te lle r m a c h in e

( A T M ) c h a rg e s

im p o s e d b y o th e r in s titu tio n s in s h a re d o r in te r
s y s te m s . A charge imposed on the
cardholder by an institution other than the
card issuer for the use of the other institu
tion’s ATM in a shared or interchange system
and included by the terminal-operating insti
tution in the amount of the transaction need
not be separately disclosed on the periodic
statement.

change

7(c) Credits

1. Id e n tific a tio n — s u ffic ie n c y . The creditor
need not describe each credit by type (re
turned merchandise, rebate of finance charge,
etc.)—“credit” would suffice—except if the
creditor is using the periodic statement to sat
7(a) Previous Balance
isfy the billing-error correction notice require
1. C r e d it b a la n c e s . If the previous balance is a ment. (See the commentary to section
credit balance, it must be disclosed in such a 226.13(e) and (f).)
32

Regulation Z Commentary

2. F o r m a t. A creditor may list credits relating
to credit extensions (payments, rebates, etc.)
together with other types of credits (such as
deposits to a checking account), as long as the
entries are identified so as to inform the con
sumer which type of credit each entry
represents.
3. D a te . If only one date is disclosed (that is,
the crediting date as required by the regula
tion), no further identification of that date is
necessary. More than one date may be dis
closed for a single entry, as long as it is clear
which date represents the date on which cred
it was given.

7(d) Periodic Rates
1. D is c lo s u re o f p e r io d ic ra te s — w h e th e r o r n o t
a c tu a lly a p p lie d . 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 applied dur
ing the billing cycle. For example:

o If the consumer’s account has both a pur
chase 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 bill
ing cycle.
° If the rate varies (such as when it is tied to
a particular index), the creditor must dis
close each rate in effect during the cycle
for which the statement was issued.
2.

D is c lo s u re o f p e r io d ic ra te s r e q u ir e d o n ly i f

With regard to the period
ic rate disclosure (and its corresponding an
nual percentage rate), only rates that c o u ld
h a v e been imposed during the billing cycle re
flected on the periodic statement need to be
disclosed. For example:
im p o s itio n p o s s ib le .

° If the creditor is changing rates effective
during the next billing cycle (either be
cause it is changing terms or because of a
variable-rate plan), the rates required to
be disclosed under section 226.7(d) are
only those in effect during the billing cycle
reflected on the periodic statement. For
example, if the monthly rate applied dur
ing May was 1.5 percent, but the creditor
will increase the rate to 1.8 percent effec
tive June 1, 1.5 percent (and its corre
sponding annual percentage rate) is the
only required disclosure under section
226.7(d) for the periodic statement re
flecting the May account activity.

§ 226.7

° If the consumer has an overdraft line that
might later be expanded upon the consum
er’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 ac
cess 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 dis
close the old rate for those consumers that
have no outstanding balances to which
that rate could be applied.
3. M u lt ip le ra te s — s a m e tra n s a c tio n . If two or
more periodic rates are applied to the s a m e
balance for the same type of transaction (for
example, if the finance charge consists of a
monthly periodic rate of 1.5 percent applied
to the outstanding balance and a required
credit life insurance component calculated at
0.1 percent per month on the same outstand
ing balance), the creditor may do either of the
following:
° Disclose each periodic rate, the range of
balances to which it is applicable, and the
corresponding annual percentage rate for
each (for example, 1.5 percent monthly,
18 percent annual percentage rate; 0.1 per
cent monthly, 1.2 percent annual percent
age rate)
• Disclose one composite periodic rate (that
is, 1.6 percent per month) along with the
applicable range of balances and corre
sponding annual percentage rate
4. C o rre s p o n d in g a n n u a l p e rc e n ta g e ra te . In
disclosing the annual percentage rate that cor
responds to each periodic rate, the creditor
may use “corresponding annual percentage
rate,” “nominal annual percentage rate,”
“corresponding nominal annual percentage
rate,” or similar phrases.
5.

R a te

sam e

a c tu a l a n n u a l p e rc e n ta g e

When the corresponding rate is the same
as the actual annual percentage rate (histori
cal rate) required to be disclosed (§
226.7(g)), the creditor need disclose only one
annual percentage rate, but must use the
phrase “annual percentage rate.”
ra te .

R a n g e s o f b a la n c e s .

See comment 6(a)-

( 2 ) 1.

§ 226.7

7(e) Balance on Which Finance Charge
Computed.
1. L im ita tio n to p e r io d ic ra te s . Section
226.7(e) only requires disclosure of the bal
ance (s) to which a periodic rate was applied
and does not apply to balances on which other
kinds of finance charges (such as transaction
charges) were imposed. For example, if a con
sumer obtains a $1,500 cash advance subject
to both a 1 percent transaction fee and a 1
percent monthly periodic rate, the creditor
need only disclose the balance subject to the
monthly rate (which might include portions
of earlier cash advances not paid off in previ
ous cycles).
2. S p lit ra te s a p p lie d to b a la n c e ra n g e s . If split
rates were applied to a balance because differ
ent portions of the balance fall within two or
more balance ranges, the creditor need not
separately disclose the portions of the balance
subject to such different rates since the range
of balances to which the rates apply has been
separately disclosed. For example, a creditor
could disclose a balance of $700 for purchases
even though a monthly periodic rate of 1.5
percent applied to the first $500, and a month
ly periodic rate of 1 percent to the remainder.
This option to disclose a combined balance
does not apply when the finance charge is
computed by applying the split rates to each
day’s balance (in contrast, for example, to ap
plying the rates to the average daily balance).
In that case, the balances must be disclosed
using any of the options that are available if
two or more daily rates are imposed. (See
comment 7(e)-5.)
3. M o n th ly r a te o n a v e ra g e d a ily b a la n c e . If a
creditor computes a finance charge on the av
erage daily balance by application of a month
ly periodic rate or rates, the balance is ade
quately disclosed if the statement gives the
amount of the average daily balance on which
the finance charge was computed and also
states how the balance is determined.
4. M u ltife a tu r e d p la n s . In a multifeatured
plan, the creditor must disclose a separate bal
ance (or balances, as applicable) to which a
periodic rate was applied for each feature or
group of features subject to different periodic
rates or different balance computation meth34

Regulation Z Commentary

ods. Separate balances are not required, how
ever, merely because a “free-ride” period is
available for some features but not others. A
total balance for the entire plan is optional.
This does not affect how many balances the
creditor must disclose—or may disclose—
within each feature. (See, for example, com
ment 7(e)-5.)
5. D a ily r a te o n d a ily b a la n c e . If the finance
charge is computed on the balance each day
by application of one or more daily periodic
rates, the balance on which the finance charge
was computed may be disclosed in any of the
following ways for each feature:
° If a single daily periodic rate is imposed,
the balance to which it is applicable may
be stated as:
—a balance for each day in the billing
cycle
—a balance for each day in the billing cy
cle on which the balance in the account
changes
—the sum of the daily balances during the
billing cycle
—the average daily balance during the bill
ing cycle, in which case the creditor
shall explain that the average daily bal
ance is or can be multiplied by the num
ber of days in the billing cycle and the
periodic rate applied to the product to
determine the amount of the finance
charge
° If two or more daily periodic rates may be
imposed, the balances to which the rates
are applicable may be stated as:
—a balance for each day in the billing
cycle
—a balance for each day in the billing cy
cle on which the balance in the account
changes
—two or more average daily balances,
each applicable to the daily periodic
rates imposed for the time that those
rates were in effect, as long as the credi
tor explains that the finance charge is or
may be determined by (1) multiplying
each of the average balances by the
number of days in the billing cycle (or if
the daily rate varied during the cycle, by
multiplying by the number of days the
applicable rate was in effect), (2) multi

§ 226.7

Regulation Z Commentary

plying each of the results by the applica
ble daily periodic rate, and (3) adding
these products together.
6. Explanation o f balance-computation meth
See the commentary to section
226.6(a)(3).
od.

7. Information to compute balance. In con
nection with disclosing the finance charge bal
ance, the creditor need not give the consumer
all of the information necessary to compute
the balance if that information is not other
wise 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.
8. Nondeduction o f credits. 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 accom
plished by listing the credits (§ 226.7(c)) and
indicating which credits will not be deducted
in determining the balance (for example,
“Credits after the 15th of the month are not
deducted in computing the finance charge.”).
9. Use o f one balance-computation method ex
planation when multiple balances disclosed.
Sometimes the creditor will disclose more
than one balance to which a periodic rate was
applied, even though each balance was com
puted using the same balance-computation
method. For example, if a plan involves pur
chases and cash advances that are subject to
different rates, more than one balance must be
disclosed, even though the same computation
method is used for determining the balance
for each feature. In these cases, one explana
tion of the balance-computation method is
sufficient. Sometimes the creditor separately
discloses the portions of the balance that are
subject to different rates because different por
tions of the balance fall within two or more
balance ranges, even when a combined bal
ance disclosure would be permitted under
comment 7(e)-2. In these cases, one explana
tion of the balance-computation method is
also sufficient (assuming, of course, that all
portions of the balance were computed using
the same method).

7 (f) Amount of Finance Charge
1. Total. A total finance charge amount for
the plan is not required.
2. Itemization— types o f finance charges. 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, in
dividually or as a total. For example, five
transaction charges of $1 may be listed sepa
rately or as $5.
3. Itemization— different periodic
rates.
Whether different periodic rates are applicable
to different types of transactions or to differ
ent 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 percent per
month on the first $500 of a balance and 1
percent 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 l t i f e a t u r e d p l a n s . In a multifeatured
plan, in disclosing the amount of the finance
charge attributable to the application of peri
odic rates no total periodic rate disclosure for
the entire plan need be given.
5. Finance charges not added to account. 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
shown on the periodic statement as a finance
charge.
6. Finance charges other than periodic rates.
See comment 6(a)(4)-l for examples.
7. Accrued finance charges allocated from
payments. Some 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
therefore reflected as an increase in the obliga
tion. In such a plan, no disclosure is required
35

Regulation Z Commentary

§ 226.7

of finance charges that have accrued since the
last payment.

7 (g) Annual Percentage Rate
1. R a te s a m e a s c o rre s p o n d in g a n n u a l p e r
c e n ta g e ra te .

See comment 7(d)-5.

2. M u ltife a tu r e d p la n s . In a multifeatured
plan, the actual annual percentage rate that
reflects the finance charge imposed during the
cycle may be separately stated for each feature
or may be described as a composite for the
whole plan.

7 (h) Other Charges
1. Id e n tific a tio n . In identifying any “other
charges” actually imposed during the billing
cycle, the type is adequately described as “late
charge” or “membership fee,” for example.
(See comment 6(b)-l for examples of “other
charges.”)
2. D a te . The date of imposing or debiting
“other charges” need not be disclosed.
3. T o ta l. Disclosure of the total amount of
other charges is optional.

7(i) Closing Date of Billing Cycle; New
Balance
1.

C r e d it b a la n c e s .

See comment 7(a)-l.

2. M u ltife a tu r e d p la n s . In a multifeatured
plan, the new balance may be disclosed for
each feature or for the plan as a whole. If sep
arate new balances are disclosed, a total new
balance is optional.
3.

A c c ru e d

fin a n c e

c h a rg e s

a llo c a te d

fr o m

Some 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
therefore reflected as an increase in the obliga
tion. In such a plan, the new balance need not
reflect finance charges accrued since the last
payment.

p a y m e n ts .

7(j) Free-Ride Period
1.
36

W o rd in g .

Although the creditor is required

to indicate any time period the consumer may
have to pay the balance outstanding without
incurring additional finance charges, no spe
cific wording is required, so long as the lan
guage used is consistent with that used on the
initial disclosure statement. For example, “To
avoid additional finance charges, pay the new
balance before_______ ” would suffice.

7 (k) Address for Notice of Billing Errors
1. W o rd in g . The periodic statement must
contain the address for consumers to use in
asserting billing errors under section 226.13.
Since all disclosures must be “clear,” the
statement should indicate the general purpose
for the address, although no elaborate expla
nation or particular wording is required.
2. T e le p h o n e n u m b e r. A telephone number
may be included, but the address for billingerror inquiries, which is the required disclo
sure, must be clear and conspicuous. One way
to ensure that the address is clear and con
spicuous is to include a precautionary instruc
tion that telephoning will not preserve the
consumer’s billing-error rights. Both of the
billing rights statements in appendix G con
tain such a precautionary instruction, so that
a creditor could, by including either of these
statements with each periodic statement, en
sure that the required address is provided in a
clear and conspicuous manner.

References
S ta tu te :

§ 127(b)

§ 226.7(b)(1) and inter
pretation §§ 226.701, 226.703, 226.706, and
226.707
O th e r s e c tio n s : §§ 226.4 through 226.6, 226.8,
226.14, and appendix G
1 9 8 1 c h a n g e s : Under § 226.7, required termi
nology is no longer mandated except for the
terms “finance charge” and “annual percent
age rate.” The requirement in the previous
regulation about the location of disclosures
has been deleted.
Under the revised section 226.7, disclosure
of credits to the account no longer have to
indicate the type of credit. A short disclosure
for variable-rate plans must be included on

P re v io u s r e g u la tio n :

Regulation Z Commentary

the periodic statement. Disclosures relating to
multifeatured accounts have been clarified.
Section 226.7 now specifically requires a pe
riodic statement disclosure of “other charges”
(nonfinance charges related to the plan) that
are actually imposed during the billing cycle.
Disclosures about minimum charges that
might be imposed on the account and about
the Comparative Index of Credit Cost have
been deleted.

SECTION 226.8—Identification of
Transactions
1. Application o f identification rules. Section
226.8 deals with the requirement (imposed by
section 226.7(b)) for identification of each
credit transaction made during the billing cy
cle. The rules for identifying transactions on
periodic statements vary, depending on
whether:
° The transaction involves sale credit (pur
chases) or nonsale credit (cash advances,
for example)
• An actual copy of the credit document re
flecting 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 re
lated persons
2. Sale credit. The term “sale credit” refers to
a purchase in which the consumer uses a cred
it card or otherwise directly accesses an openend line of credit (see comment 8-3 if access is
by means of a check) to obtain goods or serv
ices from a merchant, whether or not the mer
chant is the card issuer. “Sale credit” even
includes:
o Premiums for voluntary credit life insur
ance whether sold by the card issuer or
another person
s The purchase of funds-transfer services
(such as telegrams) from an intermediary
3. Nonsale credit. The term “nonsale credit”
refers to any form of loan credit including, for
example:
° Cash advances
° Overdraft checking

§ 226.8

• 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. Actual copy. An actual copy does not in
clude a recreated document. It includes, for
example, a duplicate, carbon, or photographic
copy, but does not include a so-called “fac
simile draft” in which the required informa
tion 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. Same or related persons. The term “same
or related persons” refers to, for example:
° Franchised or licensed sellers of a credi
tor’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 con
sumer to use the credit only in transac
tions with that seller
A person is not related to the creditor merely
because, for example:
° The person and the creditor have an agree
ment by which the person is authorized to
honor the creditor’s credit card under the
terms specified in the agreement
° The person and the creditor have a corpo
rate 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. Transactions resulting from promotional
material. 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 “nonrelated” sellers and creditors.
7. Credit insurance offered through the credi
tor. When credit insurance that is not part of
the finance charge (for example, voluntary
37

§ 226.8

credit life insurance) is offered to the consum
er through the creditor but is actually provid
ed by another company, the creditor has the
option of identifying the premiums in one of
two ways on the periodic statement. The cred
itor may describe the premiums using either
the rule in section 226.8(a)(2) for “related”
sellers and creditors, or the rule in section
226.8(a)(3) for “nonrelated” sellers and
creditors. This means, therefore, that the
creditor may identify the insurance either by
providing, under section 226.8(a)(2), a brief
identification of the services provided (for ex
ample, “credit life insurance”), or by disclos
ing, under section 226.8(a)(3), the name and
address of the company providing the insur
ance (for example, ABC Insurance Company,
New York, New York). In either event, the
creditor would, of course, also provide the
amount and the date of the transaction.

8(a) Sale Credit
1. D a te — d is c lo s u re o f o n ly o n e d a te . If only
the required date is disclosed for a transac
tion, the creditor need not identify it as the
“transaction date.” If the creditor discloses
more than one date (for example, the transac
tion date and the posting date), the creditor
must identify each.
2. D a te — d is c lo s u re o f m o n th a n d d a y o n ly .
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 dis
closure to the consumer.
3. W h e n tr a n s a c tio n ta k e s p la c e . If the con
sumer conducts the transaction in person, the
date of the transaction is the calendar date on
which the consumer made the purchase or or
der, or secured the advance. For transactions
billed to the account on an ongoing basis
(other than installments to pay a precomput
ed 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.
38

Regulation Z Commentary

4. T ra n s a c tio n s n o t b ille d in f u l l . If sale trans
actions 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 install
ment 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 section 226.8(a)
(such as the seller’s name and address in a
three-party situation) or other appropriate
identifying information relating the transac
tion 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 o p y o f C r e d it D o c u m e n t P ro v id e d

1. F o r m a t. The information required by sec
tion 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 o p y o f C r e d it D o c u m e n t N o t
P ro v id e d — C r e d ito r a n d S e lle r S a m e o r
R e la te d P e rs o n (s )

1. P r o p e rty

id e n tific a tio n — s u ffic ie n c y

o f de

The “brief identification” provision
in section 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:

s c r ip tio n .

° While item-by-item descriptions are not
necessary, reasonable precision is required.
For example, “merchandise,” “miscellane
ous,” “second-hand goods,” or “promo
tional items” would not suffice.
° A reference to a department in a sales es
tablishment that accurately conveys the
identification of the types of property or
services available in the department is suf-

§ 226.8

Regulation Z Commentary

ficient—for example, “jewelry,” “sporting
goods.”
2. P ro p e rty id e n tific a tio n — n u m b e r o r s y m b o l.
The “brief identification” may be made by dis
closing on the periodic statement a number or
symbol that is related to an identification list
printed elsewhere on the statement.
3.

P ro p e rty

id e n tific a tio n — a d d itio n a l

docu

In making the “brief identification” re
quired by section 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 facsimi
le draft). (See also footnote 17.)
m e n t.

4. S m a ll c re d ito rs . Under footnote 18, which
provides a further identification alternative to
a creditor with fewer than 15,000 accounts,
the creditor need count only its own accounts
and not others serviced by the same data proc
essor or other shared-service provider.
5. D a te o f tr a n s a c tio n — fo r e ig n tra n s a c tio n s .
In a foreign transaction, the debiting date may
be considered the transaction date.
8 ( a ) ( 3 ) C o p y o f C r e d it D o c u m e n t N o t
P ro v id e d — C r e d ito r a n d S e lle r N o t S a m e o r
R e la te d P e rs o n (s )

1. S e lle r ’s n a m e . The requirement contem
plates that the seller’s name will 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 re
ceipt 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 o c a tio n o f tra n s a c tio n . 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

seller has multiple stores or branches within
that city, the creditor need not identify the
specific branch at which the sale occurred.
3. N o f ix e d lo c a tio n . When no meaningful ad
dress 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 desig
nation, such as “aboard plane,” “ABC
Airways Flight,” “customer’s home,”
“telephone order,” or “mail order”
4. D a te o f tr a n s a c tio n — fo r e ig n
See comment 8(a) (2)-5.

tra n s a c tio n s .

S(b) Nonsale Credit
1. D a te o f tra n s a c tio n . If only one of the re
quired 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 credi
tor must identify each.
2. A m o u n t o f tra n s a c tio n . 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. A m o u n t— d is c lo s u re o n c u m u la tiv e b a s is . 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 cu
mulative daily basis, rather than the amount
attributable to each check or each use of the
debit/credit card.
4. Id e n tific a tio n o f tr a n s a c tio n ty p e . The cred
itor 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
§ 127(b)(2)
§ 226.7(k)
s e c tio n s : § 226.7

S ta tu te :

P re v io u s r e g u la tio n :
O th e r

§ 226.8

Regulation Z Commentary

1 9 8 1 c h a n g e s : Section 226.8 has been stream
lined and reorganized to facilitate its use.
Technical detail has been deleted from the
regulation for inclusion in the commentary.
The regulation implements the amended sec
tion 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 re
sponsibilities for certain small creditors. For
descriptive billing of nonsale transactions, the
regulation now permits the use of the debiting
date in all cases.

9(b) Disclosures for Supplemental Credit
Devices and Additional Features
1. C r e d it d e v ic e — e x a m p le s . “Credit device”
includes, for example, a blank check, payeedesignated check, blank draft or order, or au
thorization form for issuance of a check; it
does not include a check issued payable to a
consumer representing loan proceeds or the
disbursement of a cash advance.

2. C r e d it fe a tu r e — e x a m p le s . A new credit
“feature” would include, for example:

9(a) Furnishing Statement of Billing
Rights

° The addition of overdraft checking to an
existing account (although the regular
checks that could trigger the overdraft fea
ture 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

9 ( a ) ( 1 ) A n n u a l S ta te m e n t

P a ra g ra p h 9 (b ) ( 1 )

1. G e n e ra l. The creditor may provide the an
nual billing rights statement:

1. S a m e fin a n c e c h a rg e te rm s . If the new
means of accessing the account is subject to
the same finance charge terms as those previ
ously disclosed, the creditor:

SECTION 226.9—Subsequent
Disclosure Requirements

° 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 b s ta n tia lly s im
to appendix G-3.

ila r .

See the commentary

° Need only provide a reminder that the
new device or, feature is covered by the
earlier disclosures (For example, in mail
ing special checks that directly access the
credit line, the creditor might give a dis
closure such as “Use this as you would
your XYZ card to obtain a cash advance
from our bank”) or
° May remake the section 226.6(a) finance
charge disclosures.

9 (a ) ( 2 ) A lte r n a tiv e S u m m a ry S ta te m e n t
P a ra g ra p h 9 (b ) ( 2 )

1. C h a n g in g fr o m

lo n g -fo r m

s h o r t- fo r m

If the creditor has
been sending the long-form annual statement,
and subsequently decides to use the alterna
tive 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 long-form
statement must be sent no later than 12
months after the last summary statement.

s ta te m e n t a n d v ic e ve rsa .

2. S u b s ta n tia lly s im
to appendix G-4.
40

ila r .

See the commentary

1. D iffe r e n t fin a n c e c h a rg e te rm s . If the fi
nance 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 de
vice or feature.

9(c) Change in Terms
1. “ C h a n g e s '’ in it ia lly d is c lo s e d .

No notice of

§ 226.9

Regulation Z Commentary

a change in terms need be given if the specific
change is set forth initially, such as: rate in
creases under a properly disclosed variablerate 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 cer
tain balance in a savings account in order to
keep a particular rate and the account balance
falls below the specified minimum. In con
trast, notice must be given if the contract al
lows the creditor to increase the rate at its
discretion but does not include specific terms
for an increase (for example, when an in
crease may occur under the creditor’s con
tract reservation right to increase the periodic
rate.
2. S ta te la w issu e s. Examples of issues not ad
dressed by section 226.9(c) because they are
controlled by state or other applicable law
include:
° The types of changes a creditor may make
• How changed terms affect existing bal
ances, 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 h a n g e in b illin g c y c le . Whenever the cred
itor 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 section 226.6 or increas
es the minimum payment, unless an exception
under section 226.9(c)(2) applies; for exam
ple, 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 r itte n N o tic e R e q u ire d

1. A ffe c te d c o n s u m e rs . Change-in-terms no
tices 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.

T im in g — e ffe c tiv e d a te o f c h a n g e .

The rule

that the notice of the change in terms be pro
vided at least 15 days before the change takes
effect permits midcycle changes when there is
clearly no retroactive effect, such as the impo
sition 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. T im in g — a d v a n c e n o tic e n o t re q u ire d . Ad
vance notice of 15 days is not necessary—that
is, a notice of change in terms is required, but
it may be mailed or delivered as late as the
effective date of the change—in two
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. This provision is intended for use
in the unusual instance when a consumer
substitutes collateral or when the creditor
can advance additional credit only if a
change relatively unique to that consumer
is made, such as the consumer’s providing
additional security or paying an increased
minimum-payment amount. Therefore,
the following are not “agreements” be
tween the consumer and the creditor for
purposes of section 226.9(c)(1): the con
sumer’s general acceptance of the credi
tor’s contract reservation of the right to
change terms; the consumer’s use of the
account (which might imply acceptance of
its terms under state law); and the con
sumer’s acceptance of a unilateral term
change that is not particular to that con
sumer, but rather is of general applicabili
ty to consumers with that type of account.
4. F o rm o f c h a n g e -in -te rm s n o tic e . A com
plete new set of the initial disclosures contain
ing the changed term complies with section
226.9(c) if the change is highlighted in some
way on the disclosure statement, or if the dis
closure statement is accompanied by a letter
or some other insert that indicates or draws
attention to the term change.
5. S e c u r ity in te re s t c h a n g e — fo r m o f n o tic e . A
copy of the security agreement that describes
the collateral securing the consumer’s account
41

§ 226.9

may be used as the notice, when the term
change is the addition of a security interest or
the addition or substitution of collateral.

9 (c ) ( 2 ) N o tic e N o t R e q u ire d

1. C h a n g e s n o t r e q u ir in g n o tic e . 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 consum
er sells the car
2. S k ip fe a tu r e s . If a credit program allows
consumers to skip or reduce one or more pay
ments 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 or payments if these features are ex
plained on the initial disclosure statement
(including an explanation of the terms upon
resumption). For example, a merchant may
allow consumers to skip the December pay
ment to encourage holiday shopping, or a
teacher’s credit union may not require pay
ments during summer vacation. Otherwise,
the creditor must give notice prior to resum
ing the original schedule or rate, even though
no notice is required prior to the reduction.
The change-in-terms notice may be combined
with the notice offering the reduction. For ex
ample, the periodic statement reflecting the
reduction or skip feature may also be used to
notify the consumer of the resumption of the
original schedule or rate, either by stating ex
plicitly when the higher payment or charges
resume or by indicating the duration of the
skip option. Language such as “You may skip
your October payment,” or “We will waive
your finance charges for January” may serve
as the change-in-terms notice.
42

Regulation Z Commentary

9 (d ) Finance Charge Imposed at Time of
Transaction
1. R a n o n c r e d it c a r d s u rc h a rg e s . 15 USC
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
§ 127(a)(7)
§§ 226.4 through 226.7 and ap
pendix G
P re v io u s r e g u la tio n : § 226.7(d) through (f)
and (j) and interpretation §§ 226.705 and
226.708
1 9 8 1 c h a n g e s : Section 226.9(a) implements
the statutory change that the long-form state
ment 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 verbatim text of
the annual statement is no longer required;
creditors may use any version “substantially
similar” to the one in appendix G. If the cred
itor elects to use the alternative summary
statement, the new regulation no longer re
quires that the long-form statement be sent
upon receiving a billing-error notice and at
the consumer’s request. The rules in section
226.708 on switching the type of billing-rights
statement used have been modified.
Under section 226.9(b) disclosure require
ments have been streamlined when supple
mental 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-in-terms dis
closures 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 re
duced: change-in-terms notices are no longer
required for the types of changes described in
section 226.9(c) (2). But the provision revers
es interpretation section 226.705, which indi
cated that certain changes in the balance com
putation method did not require disclosure
because they could result in lowered finance
S ta tu te :

O th e r s e c tio n s :

§226.10

Regulation Z Commentary

charges; now, any change in the balance com
putation method requires disclosure.
When a finance charge is imposed at the
time of a transaction, section 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.

SECTION 226.10—Prompt Crediting of
Payments
10(a) General Rule
1. C r e d itin g d a te . 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
a s o f the date of receipt.
2. D a te o f re c e ip 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 funds are

collected.
o 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 fi
nancial institution, through a preauthor
ized payment or telephone bill-payment
arrangement, payment is received when
the creditor gets the third-party 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 section 226.10(b).

10(b) Specific Requirements for
Payments
1. P a y m e n t re q u ire m e n ts . The creditor may
specify requirements for making payments,
such as:
° Requiring that payments be accompanied
by the account number or the payment
stub
® Setting a cut-off hour for payment to be
received, or set different hours for pay
ment by mail and payments made in
person
° Specifying that only checks or money or
ders should be sent by mail
° Specifying that payment is to be made in
U.S. dollars
° Specifying one particular address for re
ceiving payments, such as a post office box
The creditor may be prohibited, however,
from specifying payment for preauthorized
electronic fund transfer. (See section 913 of
the Electronic Fund Transfer Act.)
2. P a y m e n t r e q u ire m e n ts — lim ita tio n s . Re
quirements for making payments must be rea
sonable; 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 c c e p ta n c e o f n o n c o n fo r m in g p a y m e n ts . If
the creditor accepts a nonconforming pay
ment (for example, payment at a branch of
fice, when it had specified that payment be
sent to headquarters), finance charges may
accrue for the period between receipt and
crediting of payments.
4. Im p lie d g u id e lin e s f o r p a y m e n ts . In the ab
sence of specified requirements for making
payments (see section 226.10(b)):
° Payments may be made at any location
where the creditor conducts business
° Payments may be made any time during
the creditor’s normal business hours
° Payment may be by cash, money order,
draft, or other similar instrument in prop
erly negotiable form, or by electronic fund
43

§226.10

Regulation Z Commentary

transfer if the creditor and consumer have
so agreed

References
S ta tu te :

§ 164

§ 226.7
§ 226.7(g)
1 9 8 1 c h a n g e s : Much of the explanatory detail
of the previous regulation is now in the com
mentary. The revised regulation gives the
creditor five days in which to credit noncon
forming payments, whereas the previous regu
lation required the crediting of such payments
promptly, with an outside limit of five days.
The five days in which to credit are available
whenever the creditor accepts payment that
does not conform to the creditor’s disclosed
specifications, in contrast to the previous reg
ulation, which only allowed deferred crediting
for payments made at the wrong location.

Paragraph 11(b)
1. W r itte n
re q u e s ts — s ta n d in g
o rd e rs .
The
creditor is not required to honor standing or
ders requesting refunds of any credit balance
that may be created on the consumer’s
account.

O th e r s e c tio n s :

P re v io u s r e g u la tio n :

SECTION 226.11—Treatment of Credit
Balances
1. T im in g o f r e fu n d . The creditor may also
fulfill its obligations under section 226.11 by:
° Refunding any credit balance to the con
sumer immediately
° Refunding any credit balance prior to re
ceiving a written request (under section
226.11
(b)) from the consumer
° Making a good faith effort to refund any
credit balance before six months have
passed. If that attempt is unsuccessful, the
creditor need not try again to refund the
credit balance at the end of the six-month
period.
2. A m o u n t o f r e fu n d . The phrase “any part of
the credit balance remaining in the account”
in section 226.11(b) and (c) means the
amount of the credit balance at the time the
creditor is required to make the refund. The
creditor may take into consideration interven
ing purchases or other debits to the consum
er’s account (including those that have not
yet been reflected on a periodic statement)
that decrease or eliminate the credit balance.

Paragraph 11(c)
1. G o o d f a it h e ffo r t to r e fu n d . The creditor
must take positive steps to return any credit
balance that has remained in the account for
over six months. This includes, if necessary,
attempts to trace the consumer through the
consumer’s last known address or telephone
number, or both.
2. G o o d f a it h e ffo r t u n s u c c e s s fu l. Section
226.11 imposes no further duties on the credi
tor if a good faith effort to return the balance
is unsuccessful. The ultimate disposition of
the credit balance (or any credit balance of $1
or less) is to be determined under other appli
cable law.

References
S ta tu te :

§165

§ 226.7(h)
Under the previous regulation,
the creditor’s duty to refund credit balances
applied only to “excess payments”; section
226.11 of the revised regulation implements
the amendments to section 165 of the statute
which impose refunding duties on the creditor
whatever the source of the credit balance. The
revised regulation permits the creditor, in
computing the refund, to take account of in
tervening debits, not just the difference be
tween the previous balance and the overpay
ment as is provided in the previous regulation.
The revised regulation gives the creditor seven
business days in which to make the refund af
ter receiving the consumer’s written request,
whereas the previous regulation required the
creditor to make the refund promptly, with an
outside limit of five business days. This provi
sion also implements the amended statute by
requiring a good faith effort to refund the
credit balance after six months.

P re v io u s r e g u la tio n :
1981 changes:

§226.12

Regulation Z Commentary

SECTION 226.12—Special Credit Card
Provisions
1. Scope. Sections 226.12(a) and (b) deal
with the issuance and liability rules for credit
cards, whether the card is intended for con
sumer, business, or any other purposes. Sec
tions 226.12(a) and (b) are exceptions to the
general rule that the regulation applies only to
consumer credit. (See sections 226.1 and
226.3.)

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 cir
cumstances, the following rules apply:
°

12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. E xplicit request. A request or application
for a card must be explicit. For example, a
request for overdraft privileges on a checking
account does not constitute an application for
a credit card with overdraft checking features.
2. Addition o f credit features. If the consumer
has a non-credit card, the addition o f credit
features to the card (for example, the granting
o f overdraft privileges on a checking account
when the consumer already has a check guar
antee card) constitutes issuance o f a credit
card.
3. Variance o f card from request. The request
or application need not correspond exactly to
the card that is issued. For example:
°
°

The name o f the card requested may be
different when issued
The card may have features in addition to
those reflected in the request or
application

4. Permissible form o f request. The request or
application may be oral (in response to a tele
phone solicitation by a card issuer, for exam
ple) or written.
5. Time o f issuance. A credit card may be is
sued 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.

Persons to whom cards may be issued. A

card issuer may issue a credit card to the per
son who requests it and to anyone else for
whom that person requests a card and who

The additional cards may be imprinted in
either A ’s name or in the names o f B and
C.
N o liability for unauthorized use (by per
sons 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 section 226.2 and
used in section 226.12(b); o f course, liabil
ity o f up to $50 for unauthorized use o f 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 o f state or other applicable law.

7. Issuance o f non-credit cards. 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
reencoding o f 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 privi
leges. 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.

Paragraph 12(a)(2)
1. Renewal. “Renewal” generally contem
plates the regular replacement o f existing
cards because of, for example, security rea45

Regulation Z Commentary

§226.12
sons or new technology or systems. It also in
cludes the reissuance o f cards that have been
suspended temporarily, but does not include
the opening o f a new account after a previous
account was closed.
2. Substitution—examples. “Substitution” en
compasses the replacement o f one card with
another because the underlying account rela
tionship has changed in some way— such as
when the card issuer has:
°
°
°

Changed its name
Changed the name o f the card
Changed the credit or other features avail
able on the account. For example, the
original card could be used to make pur
chases and obtain cash advances at teller
windows. The substitute card might be us
able, in addition, for obtaining cash ad
vances through automated teller machines.
(I f the substitute card constitutes an ac
cess 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 sub
stitute card for the cardholder’s name ap
pearing on the original card
Changed the merchant base. However, the
new card must be honored by at least one
o f the persons that honored the original
card.

3. Substitution— successor card issuer. “Sub
stitution” also occurs when a successor card
issuer replaces the original card issuer (for ex
ample, when a new card issuer purchases the
accounts o f the original issuer and issues its
own card to replace the original o n e ). A per
missible substitution exists even if the original
issuer retains the existing receivables and the
new card issuer acquires the right only to fu
ture receivables, provided use o f the original
card is cut off when use o f the new card be
comes possible.
4. Substitution—non-credit-card plan. A cred
it card that replaces a retailer’s open-end cred
it plan not involving a credit card is not con
sidered a substitute for the retailer’s plan—
even if the consumer used the retailer’s plan.
A credit card cannot be issued in these cir
cumstances without a request or application.
46

5. One-for-one rule. A n accepted card may be
replaced by no more than one renewal or sub
stitute 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 . One-for-one rule —exception. The regula
tion does not prohibit the card issuer from re
placing a debit/credit card with a credit card
and another card with only debit functions
(or debit functions plus an associated over
draft capability), since the latter card could
be issued on an unsolicited basis under Regu
lation E.

7. Methods o f terminating replaced 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 . Incomplete replacement. If a consumer has
duplicate credit cards on the same account
(card A — one type o f bank credit card, for
exam ple), the card issuer may not replace the
duplicate cards with one card A and one card
B (card B— another type o f bank credit card)
unless the consumer requests card B.

12(b) Liability of Cardholder for
Unauthorized Use
1. Meaning o f “cardholder\ ” For purposes of
this provision, “cardholder” includes any per
son (including organizations) to whom a
credit card is issued for any purpose, includ
ing business. When a corporation is the card
holder, required disclosures should be provid
ed to the corporation (as opposed to an
employee user).

12(b)(1) Lim itation on Amount
1. Meaning o f “authority. ” Footnote 22 de
fines unauthorized use in terms o f whether the

Regulation Z Commentary
user has “actual, implied, or apparent authori
ty.” Whether such authority exists must be
determined under state or other applicable
law.
2. L iability lim its— dollar amounts. As a gen
eral rule, the cardholder’s liability for a series
o f unauthorized uses cannot exceed either $50
or the value obtained through the unautho
rized use before the card issuer is notified,
whichever is less.

12(b)(2) Conditions o f Liability
1. Issuer's option not to comply. 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.

Paragraph 12(b)(2)(H)

1. Disclosure o f liability and means o f notify
ing issuer. The disclosures referred to in
section 2 2 6 .1 2 (b )(2 )(ii) may be given, for
example, with the initial disclosures under
section 226.6, on the credit card itself, or on
periodic statements. They may be given at any
time preceding the unauthorized use o f the
card.

Paragraph 12(b)(2)(iii)
1. Means o f identifying cardholder or user. To
fulfill the condition set forth in section
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 me
chanical confirmation.
2. Identification by magnetic strip. Unless a
magnetic strip (or similar device not readable
without physical aids) must be used in con
junction with a secret code or the like, it
would not constitute sufficient means o f iden
tification. 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 o f identification is provided.
3. Transactions not involving card. The card

§226.12
holder may not be held liable under section
226.12(b) when the card itself (or some other
sufficient means o f identification o f the card
holder) is not presented. Since the issuer has
not provided a means to identify the user
under these circumstances, the issuer has not
fulfilled one o f the conditions for imposing
liability. For example, when merchandise is
ordered by telephone by a person without au
thority 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) Notification to Card Issuer
1. How notice must be provided. N otice given
in a normal business manner— for example,
by mail, telephone, or personal visit— is effec
tive even though it is not given to, or does not
reach, some particular person within the is
suer’s organization. N otice also may be effec
tive even though it is not given at the address
or phone number disclosed by the card issuer
under section 2 2 6 .1 2 (b )( 2 ) (ii).
2. Who must provide notice. N otice o f loss,
theft, or possible unauthorized use need not be
initiated by the cardholder. N otice is sufficient
so long as it gives the “pertinent information,”
which would include the name or card num
ber o f the cardholder and an indication that
unauthorized use has or may have occurred.
3. Relationship to section 226.13. The liability
protections afforded to cardholders in section
226.12 do not depend upon the cardholder’s
following the error-resolution procedures in
section 226.13. For example, the written-noti
fication and time-limit requirements o f section
226.13 do not affect the section 226.12
protections.

12(b)(5) Business Use o f Credit Cards

1. Agreement fo r higher liability fo r business
use cards. The card issuer may not rely on
section 2 2 6 .1 2 (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 em ployees). On the other hand, the
issuer need not monitor the personnel prac
tices o f the business to make sure that it has at
least 10 employees at all times.
47

§226.12
2. Unauthorized use by employee. The protec
tion afforded to an employee against liability
for unauthorized use in excess o f the limits set
in section 226.12(b) applies only to unautho
rized use by someone other than the employ
ee. If the employee uses the card in an unau
thorized manner, the regulation sets no
restriction on the employee’s potential liabili
ty for such use.

Regulation Z Commentary
when the goods or services are “purchased
with the credit card.” This could include:
°

But it would exclude:
°

12(c) Right o f Cardholder to Assert Claims or
Defenses Against Card Issuer
1. Relationship to section 226.13. The section
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 de
fense conseming property or services pur
chased with a credit card, if the merchant has
been unwilling to resolve the dispute. Even
though certain merchandise disputes, such as
nondelivery o f goods, may also constitute
“billing errors” under section 226.13, that sec
tion operates independently o f section
226.12(c). The cardholder whose asserted
billing error involves undelivered goods may
institute the error-resolution procedures of
section 226.13; but whether or not the card
holder has done so, the cardholder may assert
claims or defenses under section 2 2 6 .1 2 (c).
Conversely, the consumer may pay a disputed
balance and thus have no further right to as
sert claims and defenses, but still may assert a
billing error if notice of that billing error is
given in the proper time and manner. A n as
sertion that a particular transaction resulted
from unauthorized use o f the card could also
be both a “defense” and a billing error.
2. Claims and defenses assertible. 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 mer
chant; this determination must be made under
state or other applicable law.

Mail or telephone orders, if the purchase is
charged to the credit card account

U se o f a credit card to obtain a cash ad
vance, 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 o f goods or services by use
o f a check accessing an overdraft account
and a credit card used solely for identifica
tion o f 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.)
Purchases made by use o f a check-guaran
tee card in conjunction with a cash-ad
vance 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 o f either a check
guarantee card or a debit card when used
to draw on overdraft credit lines (see foot
note 24). The debit card exemption ap
plies 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 defenses when used as
an ordinary credit card, but not when used
as a check-guarantee or debit card.

12(c)(2) Adverse Credit Reports Prohibited
12(c)(1) General Rule
1. Situations excluded and included. The con
sumer may assert claims or defenses only

1. Scope o f prohibition. Although an amount
in dispute may not be reported as delinquent
until the matter is resolved:

§226.12

Regulation Z Commentary
•
°

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) Lim itations
Paragraph 12(c)(3)(i)
1. Resolution with merchant. 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 o f the
goods involved. When the merchant is in
bankruptcy proceedings, the consumer is not
required to file a claim in those proceedings.

Paragraph 12(c)(3)(H)
1. Geographic lim itation. The question of
where a transaction occurs (as in the case of
mail or telephone orders, for example) is to be
determined under state or other applicable
law.
2. Merchant honoring card. The exceptions
(stated in footnote 26) to the amount and ge
ographic limitations do not apply if the mer
chant merely honors, or indicates through
signs or advertising that it honors, a particular
credit card.

12(d) Offsets by Card Issuer Prohibited
Paragraph 12(d)(1)
1. “Holds” on accounts. “Freezing” or plac
ing a hold on funds in the cardholder’s deposit
account is the functional equivalent of an off
set and would contravene the prohibition in
section 2 2 6 .1 2 (d )(1 ), unless done in the con
text o f one o f the exceptions specified in sec
tion 2 2 6 .1 2 (d )(2 ). For example, if the terms
o f a security agreement permitted the card is
suer to place a hold on the funds, the hold
would not violate the offset prohibition. Simi
larly, if an order o f a bankruptcy court re
quired the card issuer to turn over deposit ac
count 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 intended as deposits. If the consumer
tenders funds as a deposit (to a checking ac
count, for example), the card issuer may not
apply the funds to repay indebtedness on the
consumer’s credit card account.
3. Types o f indebtedness; overdraft accounts.
The offset prohibition applies to any indebted
ness arising from transactions under a credit
card plan, including accrued finance charges
and other charges on the account. The prohi
bition 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
o f 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. When prohibition applies in case o f termina
tion o f account. The offset prohibition applies
even after the card issuer terminates the card
holder’s credit card privileges, if the indebted
ness was incurred prior to termination. If the
indebtedness was incurred after termination,
the prohibition does not apply.

Paragraph 12(d)(2)
1. Security interest—limitations. In order to
qualify for the exception stated in section
2 2 6 .1 2 (d )(2 ), a security interest must be af
firmatively agreed to by the consumer, must
be disclosed in the issuer’s initial disclosures
under section 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 in
debtedness. Another example of a permissible
security interest in deposit account funds
would be one granted by the consumer in re
turn for an incentive offered by the issuer (for
example, lower rates on the credit card
account).
2. Security interest—after-acquired property.
49

§226.12

Regulation Z Commentary

As used in section 226.12(d), the term “secu
issuer to debit the cardholder’s account to
pay that bill)
rity interest” does not exclude (as it does for
other Regulation Z purposes) interests in af
ter-acquired property. Thus, a consensual se
curity interest in deposit-account funds, in 12(e) Prompt Notification of Returns
cluding funds deposited after the granting of and Crediting of Refunds
the security interest, would constitute a per
missible exception to the prohibition -on Paragraph 12(e)(1)
offsets.
1. Normal channels. The term “normal chan
nel” refers to any network or interchange sys
3. Court order. If the card issuer obtains a tem used for the processing of the original
judgment against the cardholder, and if state charge slips (or equivalent information con
and other applicable law and the terms of the cerning the transactions).
judgment do not so prohibit, the card issuer
may offset the indebtedness against the card Paragraph 12(e)(2)
holder’s deposit account.
1. Crediting account. The card issuer need not
actually post the refund to the consumer’s ac
Paragraph 12(d)(3)
count within three business days after receiv
1. Automatic payment plans— scope o f excep ing the credit statement, provided that it cred
tion. With regard to automatic debit plans un its the account as of a date within that time
der section 226.12(d)(3), the following rules period.
apply:
• The cardholder’s authorization must be in References
writing and signed or initialed by the Statute: §§ 103(1), 132, 133, 135, 162, 166,
167, 169, and 170
cardholder.
c The authorizing language need not appear Other sections: § 226.13
directly above or next to the cardholder’s Other regulations: Regulation E (12 CFR
signature or initials, provided it appears on 205)
the same document and that it clearly Previous regulation: § 226.13
spells out the terms of the automatic debit 1981 changes: The issuance rules in section
226.12(a) make clear that cards may be sent
plan.
• If the cardholder has the option to accept to the person making the request and also to
or reject the automatic debit feature (such any other person for whom a card is request
option may be required under section 913 ed, except that no liability for unauthorized
of the Electronic Fund Transfer Act), the use may be imposed on persons who are only
fact that the option exists should be clearly authorized users.
The principal differences in section
indicated.
226.12(b) about conditions of liability are as
2. Automatic payment plans— additional ex follows: the requirement that the cardholder
ceptions. The following practices are not pro be given a postage-paid, preaddressed card or
envelope for notification of loss or theft has
hibited by section 226.12(d)(1):
been deleted (corresponding to an amend
° Automatically deducting charges for par ment to the act); the required disclosures of
ticipation in a program of banking services maximum liability and of means of notifica
(one aspect of which may be a credit card tion have been simplified; and the required
plan)
provision of a means of identification has been
° Debiting the cardholder’s deposit account changed in that the issuer now may provide a
on the cardholder’s specific request rather means to identify either the cardholder or the
than on an automatic periodic basis (for authorized user. Finally, anyone may provide
example, a cardholder might check a box the notification to the card issuer, not just the
on the credit card bill stub, requesting the cardholder.
50

Regulation Z Commentary
Section 226.12(d) on offsets clarifies that
the offset prohibition does not apply to con
sensual security interests. The separate
promptness standard which used to apply in
addition to the seven-business-day and threebusiness-day standards has been deleted from
section 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 rela
tionship o f the regulation to Regulation E
(Electronic Fund Transfers), has been added.

SECTION 226.13—Billing-Error
Resolution
1. General prohibitions. Footnote 27 prohibits
a creditor from responding to a consumer’s
billing-error allegation by accelerating the
debt or closing the account, and reflects pro
tections authorized by section 161(d) o f the
Truth in Lending A ct and section 701 o f the
Equal Credit Opportunity Act. The footnote
also alerts creditors that failure to comply
with the error resolution procedures may re
sult in the forfeiture of disputed amounts as
prescribed in section 161(e) o f the act. (A ny
failure to comply may also be a violation sub
ject to the liability provisions o f section 130 of
the act.)
2. Charges fo r error resolution. If a billing er
ror occurred, whether as alleged or in a differ
ent amount or manner, the creditor may not
impose a charge related to any aspect o f 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 o f errors that
might result if charges are assessed when no
billing error has occurred.

13(a) Definition of Billing Error
Paragraph 13(a)(1)

1. Actual, implied, or apparent authority.
Whether use o f a credit card or open-end

§226.13
credit plan is authorized is determined by
state or other applicable law.

Paragraph 13(a)(3)
1. Coverage. Section 2 2 6 .1 3 (a )(3 ) covers dis
putes 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 o f goods because they did not
comply with the contract
Delivery o f property or services different
from that agreed upon
Delivery of the wrong quantity
Late delivery
Delivery to the wrong location

Section 2 2 6 .1 3 (a )(3 ) does not apply to a dis
pute relating to the quality o f property or
services that the consumer accepts. Whether
acceptance occurred is determined by state or
other applicable law.

Paragraph 13(a)(5)
1. Computational errors. In periodic state
ments that are combined with other informa
tion, the error-resolution procedures are
triggered only if the consumer asserts a com
putational 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 trans
actions with the consumer’s monthly
checking statement, a computational error
in the checking account portion of the
combined statement is not a billing error.

Paragraph 13(a)(6)
1. Documentation requests. A request for doc
umentation such as receipts or sales slips,
unaccompanied by an allegation of an error
under section 226.13(a) or a request for
additional
clarification
under
section
2 2 6 .1 3 (a )(6 ), does not trigger the errorresolution procedures. For example, a request
for documentation merely for purposes such
51

§226.13
as tax preparation or recordkeeping does not
trigger the error-resolution procedures.

Regulation Z Commentary
with all other applicable provisions. If a credi
tor follows this procedure, no presumption is
created that a billing error occurred.

13(b) Billing-Error Notice
1. Withdrawal. The consumer’s withdrawal
o f a billing-error notice may be oral or
written.

Paragraph 13(b)(1)

1. Failure to send periodic statement—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 er
rors reflected on it.
2. Failure to reflect credit—timing. If the peri
odic statement fails to reflect a credit to the
account, the 60-day period runs from trans
mittal of the statement on which the credit
should have appeared.
3. Transmittal. If a consumer has arranged
for periodic statements to be held at the finan
cial institution until called for, the statement
is “transmitted” when it is first made available
to the consumer.

Paragraph 13(c)(2)
1. Time fo r resolution. The phrase “two com
plete billing cycles” means two actual billing
cycles occurring after receipt o f the billing er
ror notice, not a measure o f time equal to two
billing cycles. For example, if a creditor on a
monthly billing cycle receives a billing error
notice mid-cycle, it has the remainder o f that
cycle plus the next two full billing cycles to
resolve the error.

13(d) Rules Pending Resolution
1. Disputed amount. “Disputed amount” is
the dollar amount alleged by the consumer to
be in error. When the allegation concerns the
description or identification o f the transaction
(such as the date or the seller’s name) rather
than a dollar amount, the disputed amount is
the amount o f the transaction or charge that
corresponds to the disputed transaction iden
tification. If the consumer alleges a failure to
send a periodic statement under section
2 2 6 .1 3 (a )(7 ), the disputed amount is the en
tire balance owing.

Paragraph 13(b)(2)

1. Identity o f the consumer. 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) Time for Resolution; General
Procedures
1. Temporary or provisional corrections. A
creditor may temporarily correct the consum
er’s account in response to a billing-error no
tice but is not excused from complying with
the remaining error-resolution procedures
within the time limits for resolution.
2. Correction 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,
52

13(d)(1) Consumer's Right to Withhold
Disputed Amount; Collection Action Prohibited
1. Prohibited collection actions. During the er
ror-resolution period, the creditor is prohibit
ed from trying to collect the disputed amount
from the consumer. Prohibited collection ac
tions include, for example, instituting court
action, taking a lien, or instituting attachment
proceedings.
2. Right to withhold payment. If the creditor
reflects any disputed amount or related fi
nance or other charges on the periodic state
ment, and is therefore required to make the
disclosure under footnote 30, the creditor may
comply with that disclosure requirement by
indicating that payment o f any disputed
amount is not required pending resolution.
Making a disclosure that only refers to the
disputed amount would, o f course, in no way
affect the consumer’s right under section

Regulation Z Commentary
2 2 6 .1 3 (d )(1 ) to withhold related finance and
other changes. The disclosure under footnote
30 need not appear in any specific place on the
periodic statement, need not state the specific
amount that the consumer may withhold, and
may be preprinted on the periodic statement.
3. Imposition o f additional charges on undis
puted amounts. The consumer’s withholding
o f the disputed amount from the total bill can
not subject undisputed balances (including
new purchases or cash advances made during
the present or subsequent cycles) to the impo
sition o f finance or other charges. For exam
ple, if on an account with a free-ride period
(that is, an account in which paying the new
balance in full allows the consumer to avoid
the imposition o f additional finance charges),
a consumer disputes a $2 item out o f a total
bill o f $300 and pays $298 within the free-ride
period, the consumer would not lose the freeride as to any undisputed amounts, even if the
creditor determines later that no billing error
occurred. Furthermore, finance or other
charges may not be imposed on any new pur
chases or advances that, absent the unpaid
disputed balance, would not have finance or
other charges imposed on them. Finance or
other charges that would have been incurred
even if the consumer had paid the disputed
amount would not be affected.

4. Automatic payment plans—coverage. The
coverage o f this provision is limited to the
card issuer’s intrainstitutional payment plans.
It does not apply to:
°

Interinstitutional payment plans that per
mit a cardholder to pay automatically any
credit card indebtedness from an asset ac
count not held by the card issuer receiving
payment
Intrainstitutional
automatic
payment
plans offered by financial institutions that
are not credit card issuers

5. Automatic payment plans— time o f notice.
While the card issuer does not have to restore
or prevent the debiting o f a disputed amount
if the billing-error notice arrives after the
three-business-day cut-off, the card issuer
must, however, prevent the automatic debit of
any part o f the disputed amount that is still

§226.13
outstanding and unresolved at the time o f the
next scheduled debit date.

13(d)(2) Adverse Credit Reports Prohibited
1. Report o f dispute. Although the creditor
must not issue an adverse credit report be
cause 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. “Person. ” During the error-resolution peri
od, 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. Creditor’s agent. Whether an agency rela
tionship exists between a creditor and an is
suer o f an adverse credit report is determined
by state or other applicable law.

13(e) Procedures if Billing Error
Occurred as Asserted
1. Correction o f error. The phrase “as applica
ble” means that the necessary corrections
vary with the type o f billing error that oc
curred. For example, a misidentified transac
tion (or a transaction that is identified by one
o f the alternative methods in section 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 o f the underlying obliga
tion incurred by the consumer.
2. Form o f correction notice. The written cor
rection notice may take a variety o f 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 o f the billing
error must be specifically identified. If a sepa
rate billing-error correction notice is provid
ed, the accompanying or subsequent periodic
statement reflecting the corrected amount
may simply identify it as “credit.”

§226.13

13(f) Procedures if Different Billing
Error or No Billing Error Occurred
1. D iffe r e n t b illin g e rro r. E xam ples o f a “d if
ferent billing error” include:
°

D ifferences in the am ount o f an error (for
exam ple, the custom er asserts a $55.00 er
ror but the error was only $53 .0 0 )
D ifferences in other particulars asserted by
the consum er (su ch as w hen a consum er
asserts that a particular transaction never
occurred, but the creditor determ ines that
on ly the seller’s nam e w as disclosed
incorrectly)

2. F o r m o f c r e d ito r 's e x p la n a tio n . T he w ritten
explanation (w h ich also m ay notify the co n
sum er o f corrections to the accou n t) m ay take
a variety o f form s. It m ay be sent separately,
or it m ay be included on or w ith a periodic
statem ent that is m ailed w ithin the tim e for
resolution. I f the creditor uses the periodic
statem ent for the explanation and correc
tion ( s ) , the corrections m ust be specifically
identified. I f a separate explanation, including
the correction notice, is provided, the en
closed or subsequent periodic statem ent re
flecting the corrected am ount m ay sim ply
identify it as a “credit.” T he explanation m ay
be com bined w ith the creditor’s notice to the
consum er o f am ounts still ow ing, w h ich is re
quired under section 2 2 6 .1 3 ( g ) ( 1 ) , provided
it is sent w ithin the tim e lim it for resolution.
(S ee com m entary to section 2 2 6 .1 3 (e ).)

13(g) Creditor’s Rights and Duties After
Resolution
P a ra g ra p h 1 3 (g ) (1 )

1. A m o u n ts o w e d b y c o n s u m e r. A m ou n ts the
consum er still ow es m ay include both m ini
m um periodic paym ents and related finance
and other charges that accrued during the
resolution period. A s explained in the co m
m entary to section 2 2 6 .1 3 ( d ) ( 1 ) , even if the
creditor later determ ines that no billing error
occurred, the creditor m ay n ot include finance
or other charges that are im posed on undis
puted balances solely as a result o f a con su m
er’s w ithholding paym ent o f a disputed
am ount.

Regulation Z Commentary
2. T im e o f n o tic e . T he creditor need n ot send
the notice o f am ount ow ed w ithin the tim e
period for resolution, although it is under a
duty to send the notice prom ptly after resolu
tion o f the alleged error. I f the creditor com
bines the notice o f the am ount ow ed w ith
th e explanation required under section
2 2 6 .1 3 ( f ) ( 1 ) , th e com bined notice m ust be
provided w ith in the tim e lim it for resolution.

P a ra g ra p h 1 3 (g ) (2 )

1. T h e creditor need n ot allow any free-ride
period d isclosed under sections 2 2 6 .6 ( a ) ( 1 )
and 226.7 (j) to pay the am ount due under
section 2 2 6 .1 3 ( g ) ( 1 ) if no error occurred and
th e consum er w as n ot entitled to a free-ride
period at the tim e th e consum er asserted the
error.

P a ra g ra p h 1 3 (g ) (3 )

1. T im e f o r p a y m e n t. T he consum er has a
m inim um o f 10 days to pay (m easured from
the tim e the consum er cou ld reasonably be ex
pected to have received notice o f the am ount
ow ed ) before the creditor m ay issue an ad
verse credit report; if an initially disclosed
free-ride period allow s th e consum er a longer
tim e in w h ich to pay, the consum er has the
benefit o f that longer period.

P a ra g ra p h 1 3 (g ) (4 )

1. C r e d it
re p o r tin g .
U nder
section
2 2 6 .1 3 (g ) (4 ) (i) and (iii) the creditor’s addi
tional credit reporting responsibilities m ust be
accom plished prom ptly. T h e creditor need
n ot establish costly procedures to fulfill this
requirem ent. F or exam ple, a creditor that re
ports to a credit bureau on scheduled updates
need n ot transm it corrective inform ation by
an unscheduled com puter or m agnetic tape; it
m ay provide the credit bureau w ith the cor
rect inform ation by letter or other com m er
cially reasonable m eans w hen using th e sch ed
uled update w ou ld n ot be “prom pt.” T he
creditor is n ot responsible for ensuring that
the credit bureau corrects its inform ation
im m ediately.
2. A d v e rs e r e p o r t to c r e d it b u re a u . I f a credi
tor m ade an adverse report to a credit bureau

Regulation Z Commentary
that disseminated the information to other
creditors, the creditor fulfills its section
226.13(g) (4) (ii) obligations by providing the
consumer with the name and address of the
credit bureau.

13 (i) Relation to Electronic Fund
Transfer Act and Regulation E
1. Coverage. 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. Incidental credit under agreement. Credit
extended incident to an electronic fund trans
fer under an agreement between the consumer
and the financial institution is governed by
section 226.13 (i), which provides that certain
error resolution procedures in both this regu
lation and Regulation E apply. Incidental
credit that is not extended under an agree
ment between the consumer and the financial
institution is governed solely by the error-reso
lution 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.
3. Application to debit/credit transactions—
examples. 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.
o The creditor need not provisionally credit
the consumer’s account, under section
205.11(c) (2) (i) of Regulation E, for any
portion of the unpaid extension of credit.
° The creditor must credit the consumer’s

§226.13
account under section 205.11(e) with any
finance or other charges incurred as a re
sult of the alleged error.
° The provision of section 226.13(d) and
(g) apply only to the credit portion of the
transaction.

References
Statute: §§161 and 162
Other sections: §§ 226.6 through 226.8
Other regulations: Regulation E (12 CFR
205)
Previous regulation: §§ 226.2(j) and (cc), and
226.14
1981 changes: Section 226.13 reflects several
substantive changes from the previous regula
tion and a complete restructuring of the errorresolution provisions. The new organization,
for example, arranges the creditor’s responsi
bilities in chronological sequence.
Section 226.13(a)(7) implements amended
section 161(b) of the act and provides that
the creditor’s failure to send a periodic state
ment to the consumer’s current address is a
billing error, unless the creditor received writ
ten 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 two days after receiving a bill
ing-error notice; these provisions are deleted
from the revised regulation. The revised regu
lation no longer requires placement “on the
face” of the periodic statement of the disclo
sure 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 dis
puted amount if it receives a billing-error no
tice within 16 days after transmitting the peri
odic 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
55

Regulation Z Commentary

§226.13
notice is received w ithin the 60 days for the
consum er to assert the error).

S E C T IO N 226.14— D e te rm in a tio n o f
A n n u a l P ercen tag e R ate

it. G enerally, the footn ote is available only for
errors directly attributable to the calculation
tool itself, including softw are programs; it is
n ot intended to absolve a creditor o f liability
for its ow n errors, or for errors arising from
im proper use o f the tool, from incorrect data
entry, or from m isapplication o f the law.

1 4 (a ) G en eral R u le
1. T o le ra n c e . T h e tolerance o f ^ o f 1 percent
age point above or below the annual percent
age rate applies to any required disclosure o f
the annual percentage rate. T he disclosure o f
the annual percentage rate is required in sec
tions 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. R o u n d in g . T he regulation does n ot require
that the annual percentage rate be calculated
to any particular number o f decim al places;
rounding is perm issible w ithin the § o f 1 per
cent tolerance. For exam ple, an exact annual
percentage rate o f 14.33333 percent m ay be
stated as 14.33 percent or as 14.3 percent, or
even as 1 4 | percent; but it cou ld n ot be stated
as 14.2 percent or 14 percent, since each var
ies by m ore than the perm itted tolerance.
3. P e r io d ic ra te s . N o explicit tolerance exists
for any periodic rate as such; a disclosed peri
odic rate m ay vary from precise accuracy (for
exam ple, due to rounding) only to the extent
that its annualized equivalent is w ithin the to l
erance perm itted by section 2 2 6 .1 4 (a ). F ur
ther, a periodic rate need n ot be calculated to
any particular num ber o f decim al places.
4. F in a n c e c h a rg e s . The regulation does n ot
prohibit creditors from assessing finance
charges on balances that include prior, unpaid
finance charges; state or other applicable law
m ay do so, how ever.
5.

G o o d f a it h

re lia n c e

o n f a u lt y

c a lc u la tio n

F ootn ote 31a absolves a creditor o f lia
bility for an error in the annual percentage
rate or finance charge that resulted from a
corresponding error in a calculation tool used
in good faith by the creditor. W hether or not
to o ls .

the creditor’s use o f th e to o l w as in good faith
m ust be determ ined on a case-by-case basis,
but the creditor m ust in any case have taken
reasonable steps to verify the accuracy o f the
tool, including any instructions, before using

1 4 (b ) A n n u a l P ercen tag e R a te fo r In itia l
D isclo su res an d fo r A d v ertisin g P u rp o ses
1. C o rre s p o n d in g a n n u a l p e rc e n ta g e r a te c o m

F or initial disclosures (under section
2 2 6 .6 ) and for advertising (under section
2 2 6 .1 6 ), the annual percentage rate is deter
m ined by m ultiplying the periodic rate by the
num ber o f periods in the year. T his com puta
tion reflects the fact that, in such disclosures,
the rate (k n ow n as the corresponding annual
percentage rate) is prospective and does not
involve any particular finance charge or peri
od ic balance. T his com putation also is used to
determ ine any annual percentage rate for oral
disclosures under section 2 2 6 .2 6 (a ).

p u ta tio n .

1 4 (c ) A n n u a l P ercen tag e R a te fo r
P erio d ic S tatem en ts
1. G e n e ra l r u le . Section 2 2 6 .1 4 (c ) requires
disclosure o f the corresponding annual per
centage rate for each periodic rate (under sec
tion 2 2 6 .7 ( d ) ) . It is figured by m ultiplying
each periodic rate by the num ber o f periods
per year. T his disclosure is like that provided
on the initial disclosure statem ent. T he peri
odic statem ent also m ust reflect (under sec
tion 2 2 6 .7 (g ) ) the annualized equivalent o f
the rate actually applied during a particular
cycle (th e historical rate); this rate m ay differ
from the corresponding annual percentage
rate because o f the inclusion o f fixed, m ini
m um , or transaction charges. Sections
2 2 6 .1 4 ( c ) ( 1 ) through ( c ) ( 4 ) state the com
putation rules for the historical rate.
2. P e r io d ic ra te s . Section 2 2 6 .1 4 ( c ) ( 1 ) ap
plies if the only finance charge im posed is due
to the application o f a periodic rate to a bal
ance. T he creditor m ay com pute the annual
percentage rate either:
°

by m ultiplying each periodic rate by the
num ber o f periods in the year or

by the “quotient” m ethod. T his m ethod

Regulation Z Commentary
refers to a composite annual percentage
rate when different periodic rates apply to
different balances. For example, a particu
lar plan may involve a periodic rate of 1|
percent on balances up to $500, and 1 per
cent on balances over $500. If, in a given
cycle, the consumer has a balance of $800,
the finance charge would consist of $7.50
(500 x .015) plus $3.00 (300 x .01), for a
total finance charge of $10.50. The annual
percentage rate for this period may be dis
closed either as 18 percent on $500 and 12
percent on $300, or as 15.75 percent on a
balance of $800 (the quotient of $10.50 di
vided by $800, multiplied by 12).
3. Charges not based on periodic rates. Section
226.14(c) (2) applies if the finance charge im
posed includes a charge not due to the appli
cation of a periodic rate (other than a charge
relating to a specific transaction). For exam
ple, if the creditor imposes a minimum $1 fi
nance charge on all balances below $50, and
the consumer’s balance was $40 in a particu
lar cycle, the creditor would disclose an annu
al percentage rate of 30 percent (1/40 x 12).
4. No balance. Footnote 32 to section
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 fi
nance charge with no account balance.
5. Transaction charges. Section 226.14(c)(3)
transaction charges include, for example:
° A loan fee of $10 imposed on a particular
advance
° A charge of 3 percent of the amount of
each 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 and in the “other
amounts on which a finance charge was im

§226.14
posed” figure. For further explanation and ex
amples of how to determine the components
of this formula, see appendix F.
6. Daily rate with specific transaction charge.
Section 226.14(c)(3) sets forth an acceptable
method for calculating the annual percentage
rate if the finance charge results from a charge
relating to a specific transaction and the appli
cation of a daily periodic rate. This section
includes the requirement that the creditor fol
low the rules in appendix F in calculating the
annual percentage rate, especially footnote 1
to appendix F, which addresses the daily rate/
transaction charge situation by providing that
the “average of daily balances” shall be used
instead of the “sum of the balances.”
7. Charges related to opening account. Foot
note 33 is applicable to section 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 percent
age rate and delivery of a possibly misleading
disclosure to consumers. The rule in footnote
33 applies even if the loan fee, points, or simi
lar charges are billed on a subsequent periodic
statement or withheld from the proceeds of
the first advance on the account.
8. Classification o f charges. If the finance
charge includes a charge not due to the appli
cation of a periodic rate, the creditor must de
termine the proper annual percentage rate
computation method according to the type of
charge imposed. If the charge is tied to a spe
cific transaction (for example, 3 percent of the
amount of each transaction), then the method
in section 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 section 226.14(c)(2) is
appropriate.
9. Small finance charges. Section 226.14(c)(4) gives the creditor an alternative to section
226.14(c)(2) and (c)(3) if small finance
charges (50 cents or less) are involved; that
is, if the finance charge includes minimum or
fixed fees not due to the application of a peri
odic rate and the total finance charge for the
57

§226.14

Regulation Z Commentary

cycle does n ot exceed 50 cents. F or exam ple,
w hile a m onthly activity fee o f 50 cents on a
balance o f $ 2 0 w ould produce an annual per
centage rate o f 30 percent under the rule in
section 2 2 6 .1 4 ( c ) ( 2 ) , the creditor m ay dis
close an annual percentage rate o f 18 percent
if the periodic rate generally applicable to all
balances is I 5 percent per m onth. T his option
is consistent w ith the provision in footn ote 11
to sections 226.6 and 226.7 perm itting the
creditor to disregard the effect o f m inim um
charges in disclosing the ranges o f balances to
w h ich periodic rates apply.

14(d) Calculations Where Daily Periodic
Rate Applied
1. Q u o tie n t m e th o d . Section 2 2 6 .1 4 (d ) ad
dresses use o f a daily periodic r a te (s) to deter
m ine som e or all o f the finance charge and use
o f th e quotient m ethod to determ ine the annu
al percentage rate. Since the quotient form ula
in section 2 2 6 .1 4 (c ) (1 ) (ii) does not work
w hen a daily rate is being applied to a series o f
daily balances, section 2 2 6 .1 4 (d ) gives the
creditor tw o alternative w ays to figure the an
nual percentage rate— either o f w hich satisfies
the requirem ent in section 226.7 ( g ) .
2. D a ily r a te w ith s p e c ific tr a n s a c tio n c h a rg e .
I f the finance charge results from a charge re
lating to a specific transaction and the applica
tion o f a daily periodic rate, see com m ent
1 4 ( c ) -6 for guidance on an appropriate calcu
lation m ethod.

References
S ta tu te :

§ 107

O th e r s e c tio n s :

§§ 226.6, 226.7, 226.9, 226.15,

226.16, and 226.26.
§ 2 2 6 .5 (a ) and interpre
tation §§ 226.501 and 226.506.
1 9 8 1 c h a n g e s : Section 226.14 reflects the stat
utory am endm ent perm itting a ^ o f 1 percent
tolerance for annual percentage rates. T he re
vised regulation no longer reflects the provi
sion dealing w ith finance charges im posed on
specified ranges or brackets o f balances. The
revised regulation includes a footn ote provid
ing that loan fees, points, or sim ilar charges
unrelated to any specific transaction are not
P re v io u s r e g u la tio n :

figured into
com putation.

the

annual

percentage

rate

SECTION 226.15—Right of Rescission
1. T ra n s a c tio n s n o t c o v e re d . C redit extensions
that are not subject to the regulation are not
covered by section 226.15 even if th e cu stom
er’s principal dw elling is the collateral secur
ing the credit. F or this purpose, “credit exten
sion s” also w ould include the occurrences
listed in com m en t 1 5 (a ) (1 )-1 . F or exam ple,
the right o f rescission does n ot apply to the
opening o f a business-purpose credit line, even
though the loan is secured by the custom er’s
principal dw elling.

15(a) Consumer’s Right to Rescind
P a ra g ra p h 1 5 (a ) (1 )

1. O c c u rre n c e s s u b je c t to r ig h t. U n der an
open-end credit plan secured by the con su m
er’s principal dw elling, the right o f rescission
generally arises w ith each o f the follow ing
occurrences:
°
°
0

O pening the account
Each credit extension
Increasing th e credit lim it
A dd in g to an existing account a security
interest in the consum er’s principal
dw elling
Increasing the dollar am ount o f the securi
ty interest taken in the dw elling to secure
the plan. For exam ple, a consum er m ay
open an account w ith a $ 1 0 ,0 0 0 credit lim
it, $5,000 o f w hich is initially secured by
the consum er’s principal dw elling. The
consum er has the right to rescind at that
tim e and (excep t as noted in section
2 2 6 . 1 5 ( a ) ( l ) ( i i ) ) w ith each extension on
the account. Later, if the creditor decides
that it w ants the credit line fully secured,
and increases the am ount o f its interest in
the consum er’s dw elling, the consum er has
the right to rescind the increase.

2. E x c e p tio n s . A lth ou gh the consum er gener
ally has the right to rescind w ith each transac
tion on the account, section 1 2 5 (e ) o f the act
provides an exception: until Septem ber 30,
1985, the creditor need not provide the right

§226.15

Regulation Z Commentary
to rescind at the tim e o f each credit extension
m ade under an open-end credit plan secured
by the consum er’s principal dw elling to the
extent that the credit extended is in accord
ance w ith a previously established credit lim it
for the plan. T his lim ited rescission option is
available w hether or not the plan existed prior
to the effective date o f the act. T he consum er
w ill have the right to rescind each extension
m ade after Septem ber 30, 1985 under such a
secured open-end credit plan, w hether that
plan w as established before or after that date.
3. S e c u r ity in te re s t a r is in g fr o m tra n s a c tio n .
In order for the right o f rescission to apply,
the security interest m ust be retained as part
o f the credit transaction. For example:
°

A security interest that is acquired by a
contractor w h o is also extending the credit
in the transaction
A m echanic’s or m aterialm an’s lien that is
retained by a subcontractor or supplier o f
a contractor-creditor, even w hen the latter
has w aived its ow n security interest in the
consum er’s hom e

T he security interest is not part o f the credit
transaction, and therefore the transaction is
not subject to the right o f rescission when, for
example:
°

A m echanic’s or m aterialm an’s lien is ob
tained by a contractor w ho is not a party
to the credit transaction but m erely is paid
w ith the proceeds o f the consum er’s cash
advance
A ll security interests that m ay arise in
conn ection w ith the credit transaction are
validly waived
T he creditor obtains a lien and com pletion
bond that in effect satisfies all liens against
the consum er’s principal dw elling as a re
sult o f the credit transaction

A lth ou gh liens arising by operation o f law are
not considered security interests for purposes
o f disclosure under section 226.2, that section
specifically includes them in the definition for
purposes o f the right o f rescission. T hus, even
though an interest in the consum er’s principal
dw elling is not a required disclosure under
section 2 2 6 .6 (c ), it m ay still give rise to the
right o f rescission.

4. C o n s u m e r. T o be a consum er w ithin the
m eaning o f section 226.2, that person m ust at
least have an ow nership interest in th e d w ell
ing that is encum bered by th e creditor’s secu
rity interest, although that person need n ot be
a signatory to the credit agreem ent. F or exam
ple, if only one spouse enters into a secured
plan, the other spouse is a consum er if the
ow nership interest o f that spouse is subject to
the security interest.
5. P r in c ip a l d w e llin g . A consum er can only
have o n e principal d w elling at a tim e. A vaca
tion or other second h om e w ou ld n ot be a
principal dw elling. A transaction secured by a
second hom e (su ch as a vacation h o m e) that
is n ot currently being used as the consum er’s
principal dw elling is n ot rescindable, even if
the consum er intends to reside there in the
future. W hen a consum er buys or builds a
new d w elling that w ill becom e th e consum er’s
principal dw elling w ithin one year or upon
com p letion o f construction, the new dw elling
is considered the principal d w elling w hen it
secures the open-end credit line. D w ellin g, as
defined in section 226.2, includes structures
that are classified as personalty under state
law. F or exam ple, a transaction secured by a
m obile hom e, trailer, or houseboat used as the
consum er’s principal dw elling m ay be
rescindable.
6 . S p e c ia l r u le f o r p r in c ip a l d w e llin g . W hen
the consum er is acquiring or constructing a
new principal dw elling, a n y credit plan or ex
tension secured by the equity in the con su m
er’s current principal d w elling (fo r exam ple,
an advance to be used as a bridge loan ) is still
subject to the right o f rescission.
P a ra g ra p h 1 5 (a ) (2 )

1. C o n s u m e r's e x e rc is e o f r ig h t. T he consum er
m ust exercise the right o f rescission in w rit
ing, but not necessarily on the notice supplied
under section 2 2 6 .1 5 (b ). W hatever the m eans
o f sending the notification o f rescission— m ail,
telegram , or other w ritten m eans— the tim e
period for the creditor’s perform ance under
section 2 2 6 .1 5 (d ) (2 ) does n ot begin to run
until the notification has been received. The
creditor m ay designate an agent to receive the
notification so long as the agent’s nam e and

Regulation Z Commentary

§226.15
address appear on the notice provided to the
consum er under section 2 2 6 .1 5 (b ).

P a ra g ra p h 1 5 (a ) (3 )

1. R e s c is s io n p e rio d . The period w ithin w hich
the consum er m ay exercise the right to re
scind runs for three business days from the
last o f three events:
°
°
o

T he occurrence that gives rise to the right
o f rescission
D elivery o f a ll material disclosures that
are relevant to the plan
D elivery to the consum er o f th e required
rescission notice

F or exam ple, an account is opened on Friday,
June 1, and the disclosures and notice o f the
right to rescind were given on Thursday, M ay
31; the rescission period w ill expire at m id
night o f the third business day after June 1—
that is, Tuesday, June 5. In another exam ple,
if the disclosures are given and the account is
opened on Friday, June 1, and the rescission
notice is given on M onday, June 4, the rescis
sion period expires at m idnight o f the third
business day after June 4— that is, Thursday,
June 7. T he consum er m ust place the rescis
sion notice in the m ail, file it for telegraphic
transm ission, or deliver it to the creditor’s
place o f business w ithin that period in order
to exercise the right.
2. M a te r ia l d is c lo s u re s . F ootn ote 36 sets forth
the m aterial disclosures that m ust be provided
before the rescission period can begin to run.
T he creditor m ust provide sufficient inform a
tion to satisfy the requirem ents o f section
226.6 for these disclosures. A creditor m ay
satisfy this requirem ent by giving an initial
disclosure statem ent that com plies w ith the
regulation. Failure to give the other required
initial disclosures (such as the billing-rights
statem ent) does not prevent the running o f
the rescission period, although that failure
m ay result in civil liability or adm inistrative
sanctions.
3.

M a te r ia l

d is c lo s u re s — v a r ia b le - ra te

p ro

F or a variable-rate program, the m ate
rial disclosures also include the disclosures
listed in footnote 12 to section 2 2 6 .6 (a ) (2 ):

g ra m .

the circum stances under w hich the rate m ay
60

increase; the lim itations on the increase; and
the effect o f an increase.
4. U n e x p ire d r ig h t o f re s c is s io n . W hen the
creditor has failed to take the action necessary
to start the three-day rescission period run
ning, the right to rescind autom atically lapses
on the occurrence o f the earliest o f the follow
ing three events:
°

T he expiration o f three years after the o c
currence giving rise to the right o f
rescission
® Transfer o f all the consum er’s interest in
the property
° Sale o f the consum er’s interest in the prop
erty, including a transaction in w hich the
consum er sells the dw elling and takes back
a purchase m oney note and m ortgage or
retains legal title through a device such as
an installm ent sale contract
Transfer o f all the consum er’s interest in
cludes such transfers as bequests and gifts. A
sale or transfer o f the property need not be
voluntary to term inate the right to rescind.
F or exam ple, a foreclosure sale w ould term i
nate an unexpired right to rescind. A s provid
ed in section 125 o f the act, the three-year
lim it m ay be extended by an adm inistrative
proceeding to enforce the provisions o f section
226.15. A partial transfer o f the consum er’s
interest, such as a transfer bestow ing co-ow n
ership on a spouse, does n ot term inate the
right o f rescission.
P a ra g ra p h 1 5 (a ) (4 )

J o in t o w n e rs .

W hen m ore than one con

sum er has the right to rescind a transaction,
any one o f them m ay exercise that right and
cancel the transaction on b eh alf o f all. For
exam ple, if b oth a husband and w ife have the
right to rescind a transaction, either spouse
acting alone m ay exercise the right and both
are bound by the rescission.

1 5 (b ) N o tice o f R ig h t to R escin d
1. W h o re c e iv e s n o tic e . Each consum er enti
tled to rescind m ust be given:

T w o copies o f the rescission notice
T he m aterial disclosures

§226.15

Regulation Z Commentary
In a transaction involving join t ow ners, both
o f w hom are entitled to rescind, both m ust
receive the notice o f the right to rescind and
disclosures. F or exam ple, if both spouses are
entitled to rescind a transaction, each m ust
receive tw o copies o f the rescission notice and
one copy o f the disclosures.
2. F o r m a t. T he rescission notice m ay be phys
ically separated from the m aterial disclosures
or com bined w ith the m aterial disclosures, so
long as the inform ation required to be includ
ed on the notice is set forth in a clear and
conspicuous m anner. See the m odel notices in
appendix G.
3. C o n te n t. T he notice m ust include all o f the
inform ation outlined in section 2 2 6 .1 5 (b ) (1 )
through ( 5 ) . T he requirem ent in section
2 2 6 .1 5 (b ) that the transaction or occurrence
be identified m ay be m et by providing the date
o f the transaction or occurrence. T he notice
m ay include additional inform ation related to
the required inform ation, such as:
°
°

A description o f the property subject to
the security Interest
A statem ent that joint ow ners m ay have
the right to rescind and that a rescission
by one is effective for all
The nam e and address o f an agent o f the
creditor to receive notice o f rescission

4. T im e o f p r o v id in g n o tic e . The notice re
quired by section 2 2 6 .1 5 (b ) need not be given
before the occurrence giving rise to the right
o f rescission. T he creditor m ay deliver the n o
tice after the occurrence, but the rescission pe
riod w ill not begin to ran until the notice is
given. F or exam ple, if the creditor provides
the notice on M ay 15, but disclosures were
given and the credit lim it was raised on M ay
10 , the three-business-day rescission period
w ill run from M ay 15.

°
°

3. P e rm is s ib le a c tio n s . Section 2 2 6 .1 5 (c ) does
n ot prevent the creditor from taking other
steps during the delay, short o f beginning ac
tual perform ance. T h e creditor m ay, for
example:
°
°
°

G e n e ra l r u le .

5. D e la y b e y o n d re s c is s io n p e rio d . T he credi
tor m ust w ait until it is reasonably satisfied
that the consum er has n ot rescinded. F or ex
am ple, the creditor m ay satisfy itse lf by doing
one o f the follow ing:

U n til the rescission period

third party:
°

D isburse advances to the consum er

Prepare the cash advance check
Perfect the security interest
A ccru e finance charges during the delay
period

4. P e rfo rm a n c e b y t h ir d p a r ty . T he creditor is
relieved from liability for failure to delay per
form ance if a third party w ith no know ledge
that the rescission right has been activated
provides m aterials or services, as long as any
debt incurred for m aterials or services ob
tained by the consum er during the rescission
period is n ot secured by th e security interest
in the consum er’s dw elling. F or exam ple, if a
consum er uses a bank credit card to purchase
m aterials from a m erchant in an am ount be
low the floor lim it, th e m erchant m ight not
con tact the card issuer for authorization and
therefore w ould n ot know that m aterials
should n ot be provided.

°
1.

the

2. E s c ro w . T h e creditor m ay disburse ad
vances during the rescission period in a valid
escrow arrangement. T he creditor m ay not,
how ever, appoint the consum er as “trustee”
or “escrow agent” and distribute funds to the
consum er in that capacity during the delay
period.

1 5 (c) D elay o f C re d ito r’s P erfo rm an ce
has expired and the creditor is reasonably sat
isfied that the consum er has n ot rescinded, the
creditor m ust not, either directly or through a

B egin
perform ing
services
for
consum er
D eliver m aterials to the consum er

W aiting a reasonable tim e after expiration
o f the rescission period to allow for deliv
ery o f a m ailed notice
O btaining a w ritten statem ent from the
consum er that the right has not been
exercised.

W hen m ore than one consum er has the right
to rescind, the creditor cannot reasonably rely

Regulation Z Commentary

§ 226.15
on the assurance o f only one consum er, be
cause other consum ers m ay exercise the right.

am ounts m ay n ot represent profit to the credi
tor. F or example:
°

15(d) Effects of Rescission
P a ra g ra p h 1 5 (d ) (1 )

1. T e r m in a tio n o f s e c u rity in te re s t. A n y secu
rity interest giving rise to the right o f rescis
sion becom es void w hen the consum er exercis
es the right o f rescission. T he security interest
is autom atically negated, regardless o f its
status and w hether or not it w as recorded or
perfected. U nder section 2 2 6 .1 5 ( d ) ( 2 ) , h ow
ever, th e creditor m ust take any action neces
sary to reflect the fact that the security inter
est no longer exists.
2. E x te n t o f te rm in a tio n . T he creditor’s secu
rity interest is void only to the extent that it is
related to the occurrence giving rise to the
right o f rescission. For exam ple, upon
rescission:
°

I f th e consum er’s right to rescind is acti
vated by the opening o f a plan, any securi
ty interest in the principal d w elling is void.
I f the right arises due to an increase in the
credit lim it, the security interest is void as
to the am ount o f credit extensions over the
prior lim it, but the security interest in
am ounts up to the original credit lim it is
unaffected.
I f the right arises w ith each individual
credit extension, then the interest is void
as to that extension, and other extensions
are unaffected.

P a ra g ra p h 1 5 (d ) (2 )

1. R e fu n d s to c o n s u m e r. T he consum er can
not be required to pay any am ount in the form
o f m oney or property either to the creditor or
to a third party as part o f the occurrence sub
ject to the right o f rescission. A n y am ounts o f
this nature already paid by the consum er m ust
be refunded. “A n y am ount” includes finance
charges already accrued, as w ell as other
charges such as application and com m itm ent
fees or fees for a title search or appraisal,
w hether 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

I f the occurrence is the opening o f the
plan, the creditor m ust return any m em
bership or application fee paid.
I f the occurrence is the increase in a credit
lim it or the addition o f a security interest,
the creditor m ust return any fee im posed
for a new credit report or filing fees.
I f the occurrence is a credit extension, the
creditors m ust return fees such as applica
tion, title, and appraisal or survey fees, as
w ell as any finance charges related to the
credit extension.

2. A m o u n ts n o t r e fu n d a b le to c o n s u m e r.
C reditors need n ot return any m oney given by
the consum er to a third party outside o f the
occurrence, such as costs incurred for a build
ing perm it or for a zoning variance. Sim ilarly,
the term “any am ount” does n ot apply to
m oney or property given by the creditor to the
consum er; th ose am ounts m ust be tendered by
the consum er to th e creditor under section
2 2 6 .1 5 ( d ) ( 3 ) .
3. R e fle c tio n o f s e c u rity in te re s t te r m in a tio n .
T he creditor m ust take w hatever steps are
necessary to indicate that the security interest
is term inated. T h ose steps include the cancel
lation o f docum ents creating the security in
terest, and the filing o f release or term ination
statem ents in the public record. In a transac
tion involving subcontractors or suppliers that
also hold security interests related to the o c
currence rescinded by the consum er, the cred
itor m ust ensure that the term ination o f their
security interests is also reflected. T he 20-day
period for the creditor’s action refers to the
tim e w ithin w hich the creditor m ust begin the
process. It does n ot require all necessary steps
to have been com pleted w ithin that tim e, but
the creditor is responsible for seeing the proc
ess through to com pletion.
P a ra g ra p h 1 5 ( d ) ( 3 )

1. P r o p e rty e x c h a n g e . O nce the creditor has
fulfilled
its
obligation
under
section
2 2 6 .1 5 ( d ) ( 2 ) , the consum er m ust tender to
the creditor any property or m oney the credi
tor has already delivered to the consum er. A t

Regulation Z Commentary
the consumer’s option, property may be ten
dered at the location of the property. For ex
ample, if fixtures or furniture have been deliv
ered 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 credi
tor’s premises. Money already given to the
consumer must be tendered at the creditor’s
place of business. For purpose of property ex
change, 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 pur
chase with the money.
° In a three-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 ad
vances 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 ex
ercises the unexpired right to rescind after
using a three-party credit card for one
year, the consumer would tender the
amount of the purchase price for the items
charged to the account, rather than ten
dering the items themselves to the
creditor.
2. Reasonable value. If returning the property
would be extremely burdensome to the con
sumer, the consumer may offer the creditor its
reasonable value rather than returning the
property itself. For example, if building mate
rials have already been incorporated into the
consumer’s dwelling, the consumer may pay
their reasonable value.

Paragraph 15(d)(4)
1. Modifications. The procedures outlined in
section 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 modi
fication might be made.

§226.15

15(e) Consumer’s Waiver of Right to
Rescind
1. Need for waiver. To waive the right to re
scind, 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. Procedure. 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 signa
tures of both spouses.

15(f) Exempt Transactions
1. Residential mortgage transaction. Al
though residential mortgage transactions
would seldom be made on bona fide open-end
credit plans (under which repeated transac
tions 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 ad
vance for the downpayment would be exempt
from the rescission right.
2. State creditors. Cities and other political
subdivisions of states acting as creditors are
not exempt from section 226.15.
3. Spreader clause. When the creditor holds a
mortgage or deed of trust on the consumer’s
principal dwelling and that mortgage or deed
of trust contains a “spreader clause” (also
known as a “dragnet” or cross-collateraliza
tion clause), subsequent occurrences such as
the opening of a plan or individual credit ex
tensions 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
63

Regulation Z Commentary

§226.15
w ith respect to the subsequent open-end credit
extensions.

References
§§ 113, 125, and 130
§ 226.2 and appendix G
P re v io u s r e g u la tio n : § 226.9
1 9 8 1 c h a n g e s : Section 226.15 reflects the stat
utory am endm ents o f 1980, providing for a
lim ited right o f rescission for a three-year trial
period w hen individual credit extensions are
m ade in accordance w ith a previously estab
lished credit lim it for an open-end credit plan.
T h e right to rescind applies not only to real
property used as the consum er’s principal
dw elling, but to personal property as well.
T h e regulation provides n o specific text or for
m at for the rescission notice.
W hen a consum er exercises the right to re
scind, the creditor now has 2 0 days to return a
consum er’s m oney or property and take the
necessary action to term inate the security in
terest. T h e creditor has 20 days to take posses
sion o f th e m oney or property after th e con
sum er’s tender before the consum er m ay keep
it w ithout further obligation.
U nder the revised regulation, the w aiver
provision has been relaxed. T he lien status o f
the m ortgage is irrelevant for purposes o f the
residential m ortgage transaction exem ption.
T he exem ption for agricultural loans from the
right to rescind has been deleted.

S ta tu te :

O th e r s e c tio n s :

SECTION 226.16—Advertising
1. C le a r a n d c o n s p ic u o u s s ta n d a rd . Section
226.16 is subject to the general “clear and
conspicuous” standard for subpart B (see sec
tion 2 2 6 .5 ( a ) ( 1 ) ) but prescribes n o specific
rules for the form at o f the necessary d isclo
sures. T he credit term s need not be printed in
a certain type size nor need they appear in any
particular place in the advertisem ent.
2.

E x p re s s in g

th e a n n u a l p e rc e n ta g e

r a te

W henever the annual per
centage rate is used in an advertisem ent for
open-end credit, it m ay be expressed using a
readily understandable abbreviation such as
APR.

a b b re v ia te d fo r m .

16(a) Actually Available Terms
1. G e n e ra l r u le . T o the extent that an adver
tisem ent m entions specific credit term s, it m ay
state only those term s that the creditor is ac
tually prepared to offer. F or exam ple, a credi
tor m ay not advertise a very low annual per
centage rate that w ill n ot in fact be available
at any time. Section 2 2 6 .1 6 (a ) is n ot intended
to inhibit the prom otion o f new credit pro
grams, but to bar the advertising o f term s that
are not and w ill not be available. F or exam ple,
a creditor m ay advertise term s that w ill be of
fered for only a lim ited period, or term s that
w ill becom e available at a future date.
2 . S p e c ific c r e d it te rm s .
“Specific credit
term s” is not lim ited to the disclosures re
quired by the regulation but w ould include
any specific com ponents o f a credit plan, such
as th e m inim um periodic paym ent am ount or
seller’s points in a plan secured by real estate.

16(b) Advertisement of Terms That
Require Additional Disclosures
1. U s e o f p o s i t i v e t e r m s . A n advertisem ent
m ust state a credit term as a p ositive num ber
in order to trigger additional disclosures. For
exam ple, “n o annual m em bership fee” w ould
n ot trigger the additional disclosures required
by section 2 2 6 .1 6 (b ).
2. I m p lic it te rm s . Section 2 2 6 .1 6 (b ) applies
even if the triggering term is not stated explic
itly, but m ay be readily determ ined from the
advertisem ent. F or exam ple, a statem ent that
“the equity in your hom e becom es spendable
w ith an X Y Z line o f credit” im plicitly states
that the creditor w ill take a security interest in
the consum er’s hom e.
3. M e m b e rs h ip fe e s . A m em bership fee is not
a triggering term nor need it be disclosed un
der section 2 2 6 .1 6 (b ) (3 ) if it is required for
participation in the plan w hether or not an
open-end credit feature is attached. (S ee com
m ent 6 ( b ) - l .)
4.

V a r ia b le - r a te p la n s .

In d isclosing the annu

al percentage rate in an advertisem ent for a
variable-rate plan, as required by section
2 2 6 .1 6 ( b ) ( 2 ) , the creditor m ay u se an insert
show ing the current rate, m ay give the rate

Regulation Z Commentary
as o f a specified recent date, or m ay disclose
an estim ated rate under section 2 2 6 .5 (c ).
T he additional requirem ent in section
2 2 6 .1 6 (b ) ( 2 ) to d isclose the variable-rate fea
ture m ay be satisfied by d isclosing that “the
annual percentage rate m ay vary” or a sim ilar
statem ent, but the advertisem ent need n ot in
clude the inform ation required by footnote 12
to section 2 2 6 .6 ( a ) ( 2 ) .
5. D iscounted variable-rate plans— disclosure
o f the annual percentage rates. T he advertised
annual percentage rates for discounted vari
able-rate plans m ust, in accordance w ith com
m ent 6 (a ) ( 2 ) - 10 , include both the initial rate
(w ith the statem ent o f h ow long it w ill rem ain
in effect) and the current indexed rate (w ith
the statem ent that this second rate m ay v a r y ).
T he options listed in com m ent 1 6 ( b ) - 4 m ay
be used in disclosing the current indexed rate.
6 . Triggering terms. T he follow in g are exam
ples o f term s that trigger additional
disclosures:

o
°
°

“ Sm all m on th ly service charge on the re
m aining b alance.”
“ 12 percent A nnual Percentage R ate.”
“A $15 annual m em bership fee buys you
$ 2 ,0 0 0 in credit.”

7. M in im u m , fixed , transaction, activity, or
sim ilar charge. T h e charges to be disclosed
under section 2 2 6 .1 6 (b ) ( 1 ) are those that are
considered finance charges under section
226.4.

1 6 (c ) C atalogs a n d M ultiple-P age
A d v e rtisem en ts
1. Definition. T he m ultiple-page advertise
m ents to w h ich section 2 2 6 .1 6 (c ) refers are
advertisem ents consisting o f a series o f se
quentially num bered pages— for exam ple, a
supplem ent to a newspaper. A m ailing con
sisting o f several separate flyers or pieces o f
prom otional m aterial in a single envelope does
n ot constitute a single m ultiple-page adver
tisem ent for purposes o f section 2 2 6 .1 6 (c ).

§226.17
one place in a catalog or m ultiple-page adver
tisem ent. T he rule applies only if the catalog
or m ultiple-page advertisem ent contains one
or m ore o f the triggering term s from section
2 2 6 .1 6 (b ).

Paragraph 16(c)(2)
1. Table or schedule i f credit term s depend on
outstanding balance. I f the credit term s o f a
plan vary depending on the am ount o f the bal
ance outstanding, rather than the am ount o f
any property purchased, a table or schedule
com plies w ith section 2 2 6 .1 6 ( c ) ( 2 ) if it in
cludes the required disclosures for representa
tive balances. F or exam ple, a creditor w ould
disclose that a periodic rate o f 1.5 percent is
applied to balances o f $500 or less, and a 1
percent rate is applied to balances greater
than $500.

R eferences
Statute: § § 1 4 1 and 143
Previous regulation: § 2 2 6 .1 0 (a ) through (c )
and interpretation § 226.1002
O ther sections: §§ 226.2 and 226.6
1981 changes: Section 226.16 reflects the stat
utory changes to section 143 o f the act w hich
reduce both the num ber o f triggering term s
and the additional disclosures required by the
use o f those term s. M em bership or participa
tion fees are included am ong th e additional
disclosures required w hen a triggering term is
used. T he substance o f interpretation section
226.1002, requiring disclosure o f representa
tive am ounts o f credit in catalogs and m u lti
ple-page advertisem ents, has been incorporat
ed in sim plified form in paragraph ( c ) .

S U B P A R T C— C L O S E D -E N D
C R E D IT

S E C T IO N 226.17— G e n e ra l D isclo su re
R eq u irem en ts
1 7 (a ) F o rm o f D isclo su res

Paragraph 16(c)(1)
1. General. Section 2 2 6 .1 6 ( c ) ( 1 ) perm its
creditors to put credit inform ation together in

Paragraph 17(a)(1)
1. Clear a n d conspicuous. T h is standard re65

§ 226.17

Regulation Z Commentary

quires that disclosures be in a reasonably u n
derstandable form. For exam ple, w h ile the
regulation requires no m athem atical progres
sion or form at, the disclosures m ust be pre
sented in a w ay that does n ot obscure the
relationship o f the term s to each other. In ad
dition, although no m inim um type size is
m andated, the disclosures m ust be legible,
w hether typew ritten, handw ritten, or printed
by com puter.
2. S e g re g a tio n o f d is c lo s u re s . T he disclosures
m ay be grouped together and segregated from
other inform ation in a variety o f w ays. For
exam ple, the disclosures m ay appear on a sep
arate sheet o f paper or m ay be set off from
other inform ation on the contract or other
docum ents:
°
°
°
°
3.

By
By
By
By

outlining them in a box
bold print dividing lines
a different color background
a different type style

L o c a tio n .

°
°
°

5. D ir e c tly r e la te d . T he segregated disclosures
m ay, at the creditor’s option, include any in
form ation that is directly related to th ose dis
closures. D irectly related inform ation in
cludes, for exam ple, the follow ing:
°

A description o f a grace period after w hich
a late paym ent charge w ill be im posed.
F or exam ple, the disclosure given under
section 226.18(7) m ay state that a late
charge w ill apply to “any paym ent re
ceived m ore than 15 days after the due
d ate.”

A statem ent that the transaction is n ot se
cured. F or exam ple, the creditor m ay add
a category labelled “unsecured” or “not
secured” to the security interest d isclo
sures given under section 226.18 (m ).

T he basis for any estim ates used in m aking
disclosures. F or exam ple, if the m aturity
date o f a loan depends solely on the occur
rence o f a future event, the creditor m ay
indicate that the disclosures assum e that
event w ill occur at a certain time,
T he cond ition s under w hich a dem and fea
ture m ay be exercised. F or exam ple, in a
loan subject to dem and after five years, the
disclosures m ay state that the loan w ill be
com e payable on dem and in five years.
W hen a variable-rate feature is disclosed
on other docum ents under footn ote 43 to
section 2 2 6 .1 8 (f), a reference to the vari
able rate feature a n d /o r to other docu
m ents on w hich the variable-rate d isclo
sures are made.
A n explanation o f the use o f pronouns or
other references to the parties to the trans
action. F or exam ple, th e disclosures m ay
state, “ ‘Y o u ’ refers to the custom er and
‘w e’ refers to the creditor.”
Instructions to the creditor or its em ploy
ees on the use o f a m ultiple-purpose form.
F or exam ple, the disclosures m ay state,
“C heck box if applicable.”
A statem ent that the borrow er m ay pay a

T he regulation im poses no spe

cific location requirem ents on the segregated
disclosures. F or example:
°

com bined and appear either together w ith or
separate from the segregated disclosures. T he
item ization o f the am ount financed under sec
tion 2 2 6 .1 8 (c ), how ever, m ust be separate
from the other segregated disclosures under
section 226.18.

T h ey m ay appear on a disclosure state
m ent separate from all other m aterial,
T hey m ay be placed on the sam e d ocu
m ent w ith the credit contract or other in
form ation, so long as they are segregated
from that inform ation.
T hey m ay be show n on the front or back
o f a docum ent.
T hey need n ot begin at the top o f a page.

T hey m ay be continued from one page to
another.

4. C o n te n t o f s e g re g a te d d is c lo s u re s . F o o t
notes 37 and 38 contain exceptions to th e re
quirem ent that the disclosures under section
226.18 be segregated from m aterial that is n ot
directly related to those disclosures. F ootn ote
37 lists the item s that m ay be added to the
segregated disclosures, even though n ot d i
rectly related to th ose disclosures. F ootn ote
38 lists the item s required under section
226.18 that m ay be deleted from the segregat
ed disclosures and appear elsew here. A n y one
or m ore o f these additions or deletions m ay be

Regulation Z Commentary
minimum finance charge upon prepay
ment in a simple-interest transaction. For
example, when state law prohibits penal
ties, but would allow a minimum finance
charge in the event of prepayment, the
creditor
may
make
the
section
226.18( k ) ( l) disclosure by stating, “You
may be charged a minimum finance
charge.”
° A brief reference to negative amortization
in variable-rate transactions. For example,
in the variable-rate disclosure, the creditor
may include a short statement such as
“Unpaid interest will be added to princi
pal.” (See the commentary to section
226.18(f)(3).)
° A brief caption identifying the disclosures.
For example, the disclosures may bear a
general title such as “Federal Truth in
Lending Disclosures” or a descriptive title
such as “Real Estate Loan Disclosures.”
° A statement that a due-on-sale clause is
contained in the loan document. For ex
ample, the disclosure given under section
226.18 (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.”

§226.17
° The assumption policy disclosure under
section 226.18 (q)
° The required deposit disclosure under sec
tion 226.18 (r)
Paragraph 17(a)(2)
1. When disclosures must be more conspicu
ous. The following rules apply to the require
ment 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 disclo
sures under section'226.18. For example,
when the disclosures are included on the
contract document, those two terms need
not be more conspicuous as compared to
the heading on the contract document or
information required by state law.
° The terms need not be more conspicuous
except as part of the finance charge and
annual percentage rate disclosures under
section 226.18(d) and (e), although they
may, at the creditor’s option, be highlight
ed wherever used in the required disclo
sures. For example, the terms may, but
need not, be highlighted when used in dis
closing a prepayment penalty under sec
tion 226.18 (k) or a required deposit under
section 226.18 (r).
° The creditor’s identity under section
226.18(a) may, but need not, be more
prominently displayed than the finance
charge and annual percentage rate.
° The terms need not be more conspicuous
than figures (including, for example, num
bers, percentages, and dollar signs).

6. Multiple-purpose forms. 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 section 226.18 (except the
itemization of the amount financed under sec
tion 226.18(c)) may be included on a stan
dard disclosure statement even though not all
of the creditor’s transactions include those
features. For example, the statement may
include:

2. Making disclosures more conspicuous. The
terms “finance charge” and “annual percent
age rate” may be made more conspicuous in
any way that highlights them in relation to
the other required disclosures. For example,
they may be:

° The variable-rate disclosure under section
226.18(f)
° The demand feature disclosure under sec
tion 226.18 (i)
° A reference to the possibility of a security
interest arising from a spreader clause, un
der section 226.18 (m)

° Capitalized when other disclosures are
printed in capital and lower case
° Printed in larger type, bold print or differ
ent type face
° Printed in a contrasting color
° Underlined
° Set off with asterisks

Regulation Z Commentary

§226.17
1 7 (b ) T im e o f D isclosures
1. Consum mation. A s a general rule, d isclo
sures m ust be m ade before “con su m m ation ”
o f th e transaction. T he disclosures need n ot be
given by any particular tim e before con su m
m ation, except in certain m ortgage transac
tions under section 226.19. (S ee the com m en
tary to section 2 2 6 .2 (a ) (1 3 ) regarding the
definition o f consum m ation.)
2. Converting open-end to closed-end credit. I f
an open-end credit account is converted to a
closed-end transaction under a w ritten agree
m ent w ith the consum er, the creditor m ust
provide a set o f closed-end credit disclosures
before consum m ation o f the closed-end trans
action. I f consum m ation o f the closed-end
transaction occurs at the sam e tim e as the
consum er enters into the open-end agreem ent,
the closed-end credit disclosures m ay be given
at the tim e o f conversion. (S ee the com m en
tary to section 226.5 regarding conversion o f
closed-end to open-end credit.)

1 7 (c ) B asis o f D isclosures a n d U se o f
E stim ates
Paragraph 17(c)(1)
1. L egal obligation. T he disclosures should re
flect the credit term s to w hich the parties are
legally bound at th e outset o f the transaction.
T he legal obligation is determ ined by applica
ble state law or other law. (C ertain transac
tions are specifically addressed in this com
m entary. See, for exam ple, the discussion o f
buydow n transactions elsewhere in the co m
m entary to section 2 2 6 .1 7 (c ).)

inform ally agree to a m odification o f th e legal
obligation, the m odification should n ot be re
flected in the disclosures unless it rises to the
level o f a change in the term s o f the legal obli
gation. F or example:
°

I f the creditor-em ployer offers a preferen
tial em ployee rate, the disclosures should
reflect the term s o f the legal obligation. (See
the com m entary to section 2 2 6 .1 8 (f) for an
exam ple o f a preferred-rate em ployee trans
action that is a variable-rate transaction.
If the contract provides for a certain
m on th ly paym ent schedule but paym ents
are m ade on a voluntary payroll deduction
plan or an inform al principal-reduction
agreem ent, the disclosures should reflect
the schedule in the contract.
I f the contract provides for regular m on th
ly paym ents but the creditor inform ally
perm its the consum er to defer paym ents
from tim e to tim e, for instance, to take ac
cou n t o f holiday seasons or seasonal em
p loym ent, the disclosures should reflect
the regular m on th ly paym ents.

3. Third-party buydowns. In certain transac
tions, a seller or other third party m ay pay an
am ount, either to the creditor or to the con
sum er, in order to reduce the consum er’s pay
m ents or buy dow n the interest rate for all or
a portion o f the credit term. F or exam ple, a
consum er and a bank agree to a m ortgage
w ith an interest rate o f 15 percent and level
paym ents over 25 years. B y a separate agree
m ent, th e seller o f the property agrees to sub
sidize the consum er’s paym ents for the first
tw o years o f the m ortgage, giving the con su m
er an effective rate o f 12 percent for that
period.

T h e fact that a term or contract m ay later
be deem ed unenforceable by a court on the
basis o f equity or other grounds does not,
by itself, m ean that disclosures based on
that term or contract did not reflect the
legal obligation.

2. M odification o f obligation. T h e legal obliga
tion norm ally is presum ed to be contained in
the note or contract that evidences the agree
m ent. B ut this presum ption is rebutted if an
other agreem ent betw een the parties legally
m odifies that note or contract. I f the parties

I f the low er rate is reflected in the credit
contract betw een the consum er and the
bank, the disclosures m ust take the buy
dow n into account. For exam ple, the an
nual percentage rate m ust be a com posite
rate that takes account o f both the low er
initial rate and the higher subsequent rate,
and the paym ent schedule disclosures
m ust reflect the tw o paym ent levels. H o w
ever, the am ount paid by the seller w ould
n ot be specifically reflected in the d isclo
sures given by the bank, since that am ount

Regulation Z Commentary
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 consumer and
the bank and the consumer is legally
bound to the 15 percent rate from the out
set, the disclosures given by the bank must
not reflect the seller buydov/n in any way.
For example, the annual percentage rate
and payment schedule would not take into
account the reduction in the interest rate
and payment level for the first two years
resulting from the buydown.
4. Consumer buydowns. In certain transac
tions, the consumer may pay an amount to the
creditor to reduce the payments or obtain a
lower interest rate on the transaction. Con
sumer buydowns must be reflected in the dis
closures given for that transaction. To illus
trate, in a mortgage transaction, the creditor
and consumer agree to a note specifying a 14
percent interest rate. However, in a separate
document, the consumer agrees to pay an
amount to the creditor at consummation, in
return for a reduction in the interest rate to 12
percent for a portion of the mortgage term.
The amount paid by the consumer may be de
posited in an escrow account or may be re
tained by the creditor. Depending upon the
buydown plan, the consumer’s prepayment of
the obligation may or may not result in a por
tion of the amount being credited or refunded
to the consumer. In the disclosures given for
the mortgage, the creditor must reflect the
terms of the buydown agreement. For
example:
° The amount paid by the customer is a pre
paid finance charge (even if deposited in
an escrow account).
° A composite annual percentage rate must
be calculated, taking into account both in
terest rates, as well as the effect of the pre
paid finance charge.
° The payment schedule must reflect the
multiple payment levels resulting from the
buydown.
5. Split buydowns. In certain transactions, a
third party (such as a seller) and a consumer
both pay an amount to the creditor to reduce
the interest rate. The creditor must include

§226.17
the portion paid by the consumer in the fi
nance charge and disclose the corresponding
multiple payment levels and composite annual
percentage rate. The portion paid by the third
party and the corresponding reduction in in
terest rate, however, should not be reflected in
the disclosures unless the lower rate is reflect
ed in the credit contract. (See the discussion
on third-party and consumer buydown trans
actions elsewhere in the commentary to sec
tion 226.17(c).)
6. Wraparound financing. Wraparound trans
actions, usually loans, involve the creditor’s
wrapping the outstanding balance on an exist
ing loan and advancing additional funds to
the consumer. The preexisting loan, which is
wrapped, may be to the same consumer or to
a different consumer. In either case, the con
sumer makes a single payment to the new
creditor, who makes the payments on the
preexisting loan to the original creditor. Wrap
around loans or sales are considered new sin
gle-advance transactions, with an amount fi
nanced equalling the sum of the new funds
advanced by the wrap creditor and the re
maining principal owed to the original credi
tor on the preexisting loan. In disclosing the
itemization of the amount financed, the credi
tor may use a label such as “the amount that
will be paid to creditor X” to describe the re
maining principal balance on the preexisting
loan. This approach to Truth in Lending cal
culations has no effect on calculations re
quired by other statutes, such as state usury
laws.
7. Wraparound financing with balloon pay
ments. For wraparound transactions involving
a large final payment of the new funds before
the maturity of the preexisting loan, the
amount financed is the sum of the new funds
and the remaining principal on the preexisting
loan. The disclosures should be based on the
shorter term of the wrap loan, with a large
final payment of both the new funds and the
total remaining principal on the preexisting
loan (although only the wrap loan will actual
ly be paid off at that time.)
8. Graduated-payment adjustable-rate mort
gages. These mortgages involve both a vari
able interest rate and scheduled variations in
69

Regulation Z Commentary

§226.17
paym ent am ounts during the loan term. For
exam ple, under these plans, a series o f gradu
ated paym ents m ay be scheduled before rate
adjustm ents affect paym ent am ounts, or the
initial scheduled paym ent m ay rem ain con
stant for a set period before rate adjustm ents
affect the paym ent am ount. In any case, the
initial paym ent am ount m ay be insufficient to
cover the scheduled interest, causing negative
am ortization from the outset o f the transac
tion. In these transactions, the disclosures
should treat these features as follow s:
°

°
°

•

T he finance charge includes the am ount o f
negative am ortization based on the as
sum ption that the rate in effect at con su m
m ation rem ains unchanged.
T he am ount financed does n ot include the
am ount o f negative am ortization.
A s in any variable-rate transaction, the an
nual percentage rate is based on the term s
in effect at consum m ation.
T he schedule o f paym ents discloses the
am ount o f any scheduled initial paym ents
follow ed by an adjusted level o f paym ents
based on the initial interest rate. Since
som e m ortgage plans contain lim its on the
am ount o f the paym ent adjustm ent, the
paym ent schedule may require several dif
ferent levels o f paym ents, even w ith the as
sum ption that the original interest rate
does n ot increase.

9. M o r r is P la n tra n s a c tio n s . W hen a deposit
account is created for the sole purpose o f ac
cum ulating paym ents and then is applied to
satisfy entirely the consum er’s obligation in
the transaction, each deposit m ade into the
account is considered the sam e as a paym ent
on a loan for purposes o f m aking disclosures.
10. N u m b e r o f tra n s a c tio n s . Creditors have
flexibility in handling credit extensions that
m ay be view ed as m ultiple transactions. For
example:
°

W hen a creditor finances the credit sale o f
a radio and a television on the sam e day,
the creditor m ay disclose the sales as ei
ther one or tw o credit sale transactions.
W hen a creditor finances a loan along w ith
a credit sale o f health insurance, the credi
tor m ay disclose in one o f several ways: a
single credit sale transaction, a single loan

transaction, or a loan and a credit sale
transaction.
T h e separate financing o f a dow npaym ent
in a credit sale transaction m ay, but need
not, be disclosed as tw o transactions (a
credit sale and a separate transaction for
the financing o f the d ow n p aym en t).

P a ra g ra p h 1 7 (c ) ( 2 )

1. B a s is f o r e s tim a te s . D isclosu res m ay be es
tim ated w hen the exact inform ation is un
know n at the tim e disclosures are m ade. In
form ation is unknow n if it is n ot reasonably
available to the creditor at the tim e the d isclo
sures are made. T he “reasonably available”
standard requires that the creditor, acting in
good faith, exercise due diligence in obtaining
inform ation. F or exam ple, the creditor m ust
at a m inim um utilize generally accepted cal
culation tools but need n ot invest in th e m ost
sophisticated com puter program to m ake a
particular type o f calculation. T h e creditor
norm ally m ay rely on the representations o f
other parties in obtaining inform ation. F or ex
am ple, the creditor m ight look to the con su m
er for the tim e o f consum m ation, to insurance
com panies for the cost o f insurance, or to real
tors for taxes and escrow fees. T h e creditor
m ay utilize estim ates in m aking disclosures
even though the creditor know s that m ore
precise inform ation w ill be available by the
point o f consum m ation. H ow ever, new d isclo
sures m ay be required under section 2 2 6 .1 7 (f)
or 226.19.
2.

L a b e llin g e s tim a te s .

E stim ates m ust be d es

ignated as such in the segregated disclosures.
Even though other disclosures are based on
the sam e assum ption on w hich a specific esti
m ated disclosure was based, the creditor has
som e flexibility in labelling the estim ates.
G enerally, only the particular disclosure for
w hich the exact inform ation is unknow n is la
belled as an estim ate. H ow ever, w hen several
disclosures are affected because o f the u n
know n inform ation, the creditor has the op
tion o f labelling either every affected d isclo
sure or only the disclosure prim arily affected.
F or exam ple, w hen the finance charge is u n
know n because the date o f consum m ation is
unknow n, the creditor m ust label the finance
charge as an estim ate and m ay also label as

Regulation Z Commentary
estim ates th e total o f paym ents and th e pay
m ent schedule. W hen m any disclosures are
estim ates, th e creditor m ay u se a general
statem ent, such as “all num erical disclosures
except the late paym ent disclosure are esti
m ates,” as a m ethod to label those disclosures
as estim ates.

§ 226.17
°

P a ra g ra p h 1 7 (c ) ( 3 )

1. M in o r v a ria tio n s . Section 2 2 6 .1 7 ( c ) ( 3 ) al
low s creditors to disregard certain factors in
calculating and m aking disclosures. F or
example:
°

C reditors m ay ignore the effects o f collect
ing paym ents in w h ole cents. B ecause pay
m ents cannot be collected in fractional
cents, it is often difficult to am ortize exact
ly an obligation w ith equal paym ents; the
am ount o f the last paym ent m ay require
adjustm ent to account for the rounding o f
the other paym ents to w h ole cents.
C reditors m ay base their disclosures on
calculation tools that assum e that all
m onths have an equal num ber o f days,
even if their practice is to take accou n t o f
the variations in m onths for purposes o f
collectin g interest. For exam ple, a creditor
m ay use a calculation tool based on a 360day year, w hen it in fact collects interest
by applying a factor o f 1 /3 6 5 o f th e annual
rate to 365 days. T his rule does not, h o w
ever, authorize creditors to ignore, for dis
closure purposes, the effects o f applying
1 /3 6 0 o f an annual rate to 365 days.

2. U se o f s p e c ia l ru le s . A creditor m ay utilize
the special rules in section 2 2 6 .1 7 ( c ) ( 3 ) for
purposes o f calculating and m aking all d isclo
sures for a transaction or m ay, at its option,
use the special rules for som e disclosures and
n ot others.

A 36-m onth auto loan m ight be consum
m ated on June 8 w ith paym ents due on
July 1 and th e first o f each succeeding
m onth. T he creditor m ay base its calcula
tions on a paym ent schedule that assum es
36 equal intervals and 36 equal installm ent
paym ents, even thou gh a precise com puta
tion w ould produce slightly different
am ounts because o f th e shorter first
period.
B y contrast, in th e sam e exam ple, if the
first paym ent w ere n ot scheduled until A u
gust 1, the irregular first period w ould ex
ceed the lim its in section 2 2 6 .1 7 (c ) (4 );
the creditor cou ld n ot use the special rule
and could n ot ignore the extra days in the
first period in calculating its disclosures.

2. M e a s u r in g o d d p e rio d s . In determ ining
w hether a transaction m ay take advantage o f
the rule in section 2 2 6 .1 7 ( c ) ( 4 ) , th e creditor
m ust m easure th e variation against a regular
period. F or purposes o f that rule:
°

•

T he first period is th e period from the date
on w hich th e finance charge begins to be
earned to th e date o f th e first paym ent.
T he term is th e period from the date on
w hich the finance charge begins to be
earned to the date o f th e final paym ent.
T he regular period is the m ost com m on
interval
betw een
paym ents
in
the
transaction.

In transactions involvin g regular periods that
are m onthly, sem im onthly, or m ultiples o f a
m onth, th e length o f th e irregular and regular
periods m ay be calculated on th e basis o f ei
ther the actual num ber o f days or an assum ed
30-day m onth. In other transactions, the
length o f the periods is based on the actual
num ber o f days.

P a ra g ra p h 1 7 (c ) ( 4 )

3. U se o f s p e c ia l ru le s . A creditor m ay utilize
the special rules in section 2 2 6 .1 7 ( c ) ( 4 ) for

1. P a y m e n t s c h e d u le ir r e g u la r itie s . W hen one
or m ore paym ents in a transaction differ from
the others because o f a lon g or short first peri
od, th e variations m ay be ignored in d isclosing
the paym ent schedule, finance charge, annual
percentage rate, and other term s. F or
exam ple:

purposes o f calculating and m aking som e dis
closures but m ay elect n ot to do so for all o f
the disclosures. F or exam ple, th e variations
m ay be ignored in calculating and disclosing
the annual percentage rate but taken into ac
count in calculating and d isclosing the finance
charge and paym ent schedule.

Regulation Z Commentary

§226.17
Paragraph 17(c)(5)
1. Demand disclosures. Disclosures for de
mand obligations are based on an assumed
one-year term, unless an alternate maturity
date is stated in the legal obligation. Whether
an alternate maturity date is stated in the legal
obligation is determined by applicable law. An
alternate maturity date is not inferred from an
informal principal reduction agreement or a
similar understanding between the parties.
However, when the note itself specifies a prin
cipal reduction schedule (for example, “pay
able on demand or $2,000 plus interest quar
terly”), an alternate maturity is stated and the
disclosures must reflect that date.
2. Future event as maturity date. An obliga
tion whose maturity date is determined solely
by a future event, as for example a loan pay
able only on the sale of property, is not a de
mand obligation. Because no demand feature
is contained in the obligation, demand disclo
sures under section 226.18 (i) are inapplicable.
The disclosures should be based on the credi
tor’s estimate of the time at which the speci
fied event will occur, and may indicate the ba
sis for the creditor’s estimate, as noted in the
commentary to section 226.17(a).
3. Demand after stated period. Most demand
transactions contain a demand feature that
may be exercised at any point during the
term, but certain transactions convert to de
mand status only after a fixed period. For
example, in states prohibiting due-on-sale
clauses, the Federal National Mortgage Asso
ciation (FNMA) requires mortgages that it
purchases to include a call option rider that
may be exercised after 7 years. These mort
gages are generally written as long-term obli
gations but contain a demand feature that
may be exercised only within a 30-day period
at 7 years. The disclosures for these transac
tions should be based upon the legally agreedupon maturity date. Thus, if a mortgage con
taining the 7-year FNMA call option is
written as a 20-year obligation, the disclosures
should be based on the 20-year term, with the
demand feature disclosed under section
226.18 (i).
4. Balloon mortgages. Balloon payment mort
gages, with payments based on a long-term
72

amortization schedule and a large final pay
ment due after a shorter term, are not demand
obligations unless a demand feature is specifi
cally contained in the contract. For example,
a mortgage with a term of 5 years and a pay
ment schedule based on 20 years would not be
treated as a mortgage with a demand feature,
in the absence of any contractual demand pro
visions. In this type of mortgage, disclosures
should be based on the 5-year term.
Paragraph 17(c)(6)
1. Series o f advances. Section 226.17(c)(6) (i) deals with a series of advances under
an agreement to extend credit up to a certain
amount. A creditor may treat all of the ad
vances as a single transaction or disclose each
advance as a separate transaction. If these ad
vances are treated as one transaction and the
timing and amounts of advances are un
known, creditors must make disclosures based
on estimates, as provided in section
226.17(c)(2). If the advances are disclosed
separately, disclosures must be provided
before each advance occurs, with the disclo
sures for the first advance provided by
consummation.
2. Construction loans. Section 226.17(c)(6) (ii) provides a flexible rule for disclosure
of construction loans that may be permanent
ly financed. These transactions have two dis
tinct phases, similar to two separate transac
tions. The construction loan may be for initial
construction or subsequent construction, such
as rehabilitation or remodelling. The con
struction period usually involves several dis
bursements of funds at times and in amounts
that are unknown at the beginning of that pe
riod, with the consumer paying only accrued
interest until construction is completed. Un
less the obligation is paid at that time, the
loan then converts to permanent financing in
which the loan amount is amortized just as in
a standard mortgage transaction. Section
226.17(c)(6)(ii) permits the creditor to give
either one combined disclosure for both the
construction financing and the permanent fi
nancing, or a separate set of disclosures for
the two phases. This rule is available whether
the consumer is initially obligated to accept
construction financing only or is obligated to

Regulation Z Commentary
accept both construction and perm anent fi
nancing from the outset. I f the consum er is
obligated on both phases and the creditor
ch ooses to give tw o sets o f disclosures, both
sets m ust be given to the consum er initially,
because both transactions w ould be con su m
m ated at that tim e. (A p p en d ix D provides a
m ethod o f calculating the annual percentage
rate and other disclosures for construction
loans, w hich m ay be used, at the creditor’s
option, in disclosing construction financing.)

3. M u ltip le - a d v a n c e c o n s tru c tio n lo a n s . Sec
tion 2 2 6 .1 7 (c ) ( 6 ) (i) and (ii) are n ot m utual
ly exclusive. F or exam ple, in a transaction
that finances the construction o f a dw elling
that m ay be perm anently financed by the sam e
creditor, the construction phase m ay consist
o f a series o f advances under an agreem ent to
extend credit up to a certain am ount. In these
cases, the creditor m ay disclose the construc
tion phase as either one or m ore than one
transaction and also disclose the perm anent
financing as a separate transaction.

4. R e s id e n tia l m o rtg a g e tra n s a c tio n . See the
com m entary to section 2 2 6 .2 (a ) (2 4 ) for a
discussion o f the effect o f section 2 2 6 .1 7 (c )( 6 ) on the definition o f a residential m ortgage
transaction.

5. A llo c a tio n o f p o in ts . W hen a creditor u ti
lizes the special rule in section 2 2 6 .1 7 (c ) (6 )
to d isclose credit extensions as m ultiple trans
actions, buyer’s points or sim ilar am ounts im
posed on the consum er m ust be allocated for
purposes o f calculating disclosures. W hile
such am ounts should n ot be taken into ac
count m ore than once in m aking calculations,
they m ay be allocated betw een the transac
tions in any m anner the creditor chooses. For
exam ple, if a construction-perm anent loan is
subject to five points im posed on the con su m
er and the creditor chooses to d isclose the tw o
phases separately, the five points m ay be allo
cated entirely to the construction loan, entire
ly to the perm anent loan, or divided in any
m anner betw een the two. H ow ever, the entire
five points m ay n ot be applied tw ice, that is, to
both the construction and the perm anent
phases.

§226.17
1 7 (d ) M u ltip le C red ito rs; M u ltip le
C onsu m ers
1. M u lt ip le c re d ito rs . I f a credit transaction
involves m ore than one creditor:
°
°

T he creditors m ust ch oose w h ich o f them
w ill m ake the disclosures.
A single, com plete set o f disclosures m ust
be provided, rather than partial d isclo
sures from several creditors.
A ll disclosures for the transaction m ust be
given, even if the disclosing creditor w ould
n ot otherw ise have been obligated to m ake
a particular disclosure. F or exam ple, if one
o f th e creditors is the seller, the total sale
price disclosure under section 226.18 (j)
m ust be m ade, even th ou gh the disclosing
creditor is n ot the seller.

2. M u lt ip le c o n s u m e rs . W hen tw o consum ers
are jo in t obligors w ith prim ary liability on an
obligation, the disclosures m ay be given to ei
ther on e o f them . I f o n e consum er is m erely a
surety or guarantor, the disclosures m ust be
given to the principal debtor. In rescindable
transactions, how ever, separate disclosures
m ust be given to each consum er w ho has the
right to rescind under section 226.23.

17 (e) Effect o f S u b seq u en t E v en ts
1. E v e n ts c a u s in g in a c c u ra c ie s . Inaccuracies
in disclosures; are n ot violations if attributable
to events occurring after the disclosures are
m ade. F or exam ple, w hen the consum er fails
to fulfill a prior com m itm en t to keep the co l
lateral insured and the creditor then provides
the coverage and charges th e consum er for it,
such a change does n ot m ake the original dis
closures inaccurate. T he creditor m ay, h ow ev
er, be required to m ake new disclosures under
sections 2 2 6 .1 7 (f) or 226.19 if the events o c
curred betw een disclosure and consum m ation
or under section 226.20 if the events occurred
after consum m ation.

1 7 (f) E arly D isclo su res
1. C h a n g e in ra te . N o redisclosure is required
for changes that occur betw een the tim e dis
closures are m ade and consum m ation, unless
the annual percentage rate in the consum m at-

§226.17
ed transaction exceeds the lim its prescribed in
section 2 2 6 .2 2 (a ) (§ o f 1 percentage point in
regular transactions and \ o f 1 percentage
point in irregular transactions). T o illustrate:
°

I f disclosures are m ade in a regular trans
action on July 1, the transaction is con
sum m ated on July 15, and the actual an
nual percentage rate varies by m ore than §
o f 1 percentage point from the disclosed
annual percentage rate, the creditor m ust
either redisclose the changed term s or fur
nish a com plete set o f new disclosures be
fore consum m ation. R edisclosure is re
quired even if the disclosures m ade on July
1 are based on estim ates and m arked as
such.

2. V a ria b le ra te . T he addition o f a variablerate feature to the credit term s, after early dis
closures are given, requires new disclosures.
3. C o n te n t o f n e w d is c lo s u re s . I f redisclosure
is required, the creditor has the option o f ei
ther providing a com plete set o f new d isclo
sures or providing disclosures o f only the
term s that vary from those originally dis
closed. (S ee the com m entary to section
2 2 6 .1 9 (b ).)
4. S p e c ia l ru le s . In residential m ortgage trans
actions subject to section 226.19, the creditor
m ust redisclose if, betw een the delivery o f the
required early disclosures and consum m ation,
the annual percentage rate changes by m ore
than a stated tolerance. W hen subsequent
events occur a fte r consum m ation, new d isclo
sures are required only if there is a refinancing
or an assum ption w ithin the m eaning o f sec
tion 226.20.

Regulation Z Commentary

2. In s u ra n c e . T he location requirem ents for
the insurance disclosures under section
226.18 (n ) perm it them to appear apart from
the other disclosures. Therefore, a creditor
m ay m ail an insurance authorization to the
consum er and then prepare the other d isclo
sures to reflect w hether or n ot the authoriza
tion is com pleted by the consum er. C reditors
m ay also d isclose the insurance cost on a unitcost basis, if the transaction m eets the require
m ents o f section 2 2 6 .1 7 (g ).

17(h) Series of Sales—Delay in
Disclosures
1. A p p lic a b ility . T he creditor m ay delay the
disclosures for individual credit sales in a se
ries o f such sales until the first paym ent is due
on the current sale, assum ing the tw o con d i
tions in this paragraph are m et. I f those con d i
tions are not m et, the general tim ing rules in
section 2 2 6 .1 7 (b ) apply.
2. B a s is o f d is c lo s u re s . C reditors structuring
disclosures for a series o f sales under section
2 2 6 .1 7 (h ) m ay com pute the total sale price as
either:
°

17(g) Mail or Telephone Orders—Delay
in Disclosures
1. C o n d itio n s f o r use. W hen the creditor re
ceives a mail or telephone request for credit,
the creditor m ay delay m aking the disclosures
until the first paym ent is due if the follow ing
conditions are met:

T he credit request is initiated w ithout
face-to-face or direct telephone solicita
tion. (C reditors m ay, how ever, use the

special rule w hen credit requests are solic
ited by m ail.)
T he creditor has supplied the specified
credit inform ation about its credit term s
either to the individual consum er or to the
public generally. T hat inform ation m ay be
distributed through advertisem ents, cata
logs, brochures, special m ailers, or sim ilar
means.

T he cash price for the sale plus that por
tion o f the finance charge and other
charges applicable to that sale; or
T he cash price for the sale, other charges
applicable to the sale, and the total finance
charge and outstanding principal.

17 (i) Interim Student Credit Extensions
1. D e fin itio n . Student credit plans involve ex
tensions o f credit for education purposes
w here the repaym ent am ount and schedule
are not know n at the tim e credit is advanced.
T hese plans include loans m ade under any
student credit plan, w hether governm ent or

§226.18

Regulation Z Commentary
private, w here the repaym ent period does n ot
begin im m ediately. (C ertain student credit
plans that m eet this definition are exem pt
from R egulation Z. See section 2 2 6 .3 (f).
C reditors in interim student credit extensions
need n ot d isclose the term s set forth in this
paragraph at the tim e the credit is actually
extended but m ust m ake com plete disclosures
at the tim e the creditor and consum er agree
upon the repaym ent schedule for the total ob
ligation. A t that tim e, a new set o f disclosures
m ust be m ade o f all applicable item s under
section 226.18.
2. B a s is o f d is c lo s u re s . T he disclosures given
at the tim e o f execution o f the interim note
should reflect tw o annual percentage rates,
one for the interim period and one for the re
paym ent period. T h e use o f section 2 2 6 .1 7 (i)
in m aking disclosures does not, by itself, m ake
those disclosures estim ates. A n y portion o f
the finance charge, such as statutory interest,
that is attributable to the interim period and is
paid by the student (either as a prepaid fi
nance charge, periodically during the interim
period, in one paym ent at the end o f the inter
im period, or capitalized at the beginning o f
the repaym ent p eriod) m ust be reflected in
the interim annual percentage rate. Interest
subsidies, such as paym ents m ade by either a
state or the federal governm ent on an interim
loan, m ust be excluded in com puting the an
nual percentage rate on the interim obligation,
w hen the consum er has no contingent liability
for paym ent o f those am ounts. A n y finance
charges that are paid separately by the student
at the outset or w ithheld from the proceeds o f
the loan are prepaid finance charges. A n ex
am ple o f this type o f charge is the loan guar
antee fee. T h e sum o f the prepaid finance
charges is deducted from the loan proceeds to
determ ine the am ount financed and included
in the calculation o f the finance charge.
3. C o n s o lid a tio n . C onsolidation o f the interim
student credit extensions through a renewal
note w ith a set repaym ent schedule is treated
as a new transaction w ith disclosures m ade as
they w ould be for a refinancing. A n y un
earned portion o f the finance charge m ust be
reflected in the new finance charge and annual
percentage rate, and is not added to the new
am ount financed. In item izing the am ount fi

nanced under section 2 2 6 .1 8 (c ), the creditor
m ay com bine the principal balances rem ain
ing on the interim extensions at th e tim e o f
consolidation and categorize them as the
am ount paid on the consum er’s account.
4 . A p p ro v e d s tu d e n t c r e d it fo r m s . See the
com m entary to appendix H regarding d isclo
sure form s approved for use in certain student
credit programs.

R eferences
§§ 121, 122, 124, and 128, and the
H igher E ducation A c t o f 1965 (2 0 U SC
1071) as am ended by P ublic Law 97-35, A u
gust 13, 1981
O th e r s e c tio n s : § 226.2 and appendix H
P re v io u s r e g u la tio n : §§ 226.6 and 226.8
1 9 8 1 c h a n g e s : W ith few exceptions, the d isclo
sures m ust now appear apart from all other
inform ation and m ay not be interspersed w ith
that inform ation. T he disclosures m ust be
based on the legal obligation betw een the par
ties, rather than any side agreem ent.
T he assum ed m aturity period for dem and
loans has been increased from six m onths to
on e year. A n y alternate m aturity date m ust be
stated in the legal obligation rather than in
ferred from title docum ents, in order to form a
basis for disclosures.
In m ultiple-advance transactions, a series o f
advances up to a certain am ount and con
struction loans that m ay be perm anently fi
nanced m ay lie disclosed, at the creditor’s op
tion, as either a single transaction or several
transactions. A ppendix O is applicable only to
m ultiple advances for the construction o f a
dw elling, whereas its predecessor, interpreta
tion section 226.813, cou ld be used for all
m ultiple-advance transactions.
I f disclosures are m ade before the date o f
consum m ation, the creditor need not provide
updated disclosures at consum m ation unless
the annual percentage rate has changed be
yond certain lim its or a variable rate feature
has been added.
S ta tu te :

S E C T IO N 226.18— C o n te n t o f
D isclosu res
1.

A s a p p lic a b le .

T he disclosures required by

§226.18
this section need be m ade only as applicable.
A n y disclosure n ot relevant to a particular
transaction m ay be elim inated entirely. For
example:
°
•

In a loan transaction, the creditor m ay de
lete disclosure o f the total sale price.
In a credit sale requiring disclosure o f the
total sale price under section 226.18 (j),
th e creditor m ay delete any reference to a
dow npaym ent where no dow npaym ent is
involved.

W here the am ounts o f several num erical dis
closures are the sam e, the “as applicable” lan
guage also perm its creditors to com bine the
term s, so long as it is done in a clear and co n
spicuous m anner. For example:
«

•

In a transaction in w hich the am ount fi
nanced equals the total o f paym ents, the
creditor m ay disclose “am ount fin a n ced /
total o f paym ents,” together w ith descrip
tive language, follow ed by a single
am ount.
H ow ever, if the term s are separated on the
disclosure statem ent and separate space is
provided for each am ount, both d isclo
sures m ust be com pleted, even though the
sam e am ount is entered in each space.

Regulation Z Commentary
planation sim ilar
regulation.

1 8 (b ) A m o u n t F in an ced
1. D is c lo s u re re q u ire d . T he net am ount o f
credit extended m ust be d isclosed using the
term “am ount financed” and a descriptive ex-

phrase

the

P a ra g ra p h 1 8 (b ) (1 )

1. D o w n p a y m e n ts . A dow npaym ent is defined
in section 2 2 6 .2 (a ) (1 8 ) to include, at the
creditor’s option, certain deferred dow npay
m ents or pickup paym ents. A deferred dow npaym ent that m eets th e criteria set forth in
the definition m ay be treated as part o f the
dow npaym ent, at the creditor’s option.
°

1. Id e n tific a tio n o f c r e d ito r . T he creditor
m aking the disclosures m ust be identified.
T his disclosure m ay, at the creditor’s option,
appear apart from the other disclosures. U se
o f the creditor’s nam e is sufficient, but the
creditor m ay also include an address a n d /o r
telephone number. In transactions w ith m u lti
ple creditors, any one o f them m ay m ake the
disclosures; the one doing so m ust be
identified.

the

2. R e b a te s a n d lo a n p re m iu m s . In a loan
transaction, the creditor m ay offer a prem ium
in the form o f cash or m erchandise to pro
spective borrowers. Sim ilarly, in a credit sale
transaction, a seller’s or m anufacturer’s rebate
m ay be offered to prospective purchasers o f
the creditor’s goods or services. A t the credi
tor’s option, these am ounts m ay be either re
flected in the Truth in L ending disclosures or
disregarded in the disclosures. I f the creditor
ch ooses to reflect them in the section 226.18
disclosures, rather than disregard them , they
m ay be taken into account in any m anner as
part o f those disclosures.

2. F o r m a t. See the com m entary to section
226.17 and appendix H for a discussion o f the
form at to be used in m aking these disclosures,
as w ell as acceptable m odifications.

1 8 (a ) C re d ito r

D eferred dow npaym ents that are not
treated as part o f the dow npaym ent (e i
ther because they do not m eet the defini
tion or because the creditor sim ply chooses
n ot to treat them as d ow npaym ents) are
included in the am ount financed.
D eferred dow npaym ents that are treated
as part o f the dow npaym ent are n ot part
o f the am ount financed under section
2 2 6 .1 8 (b ) (1 ).

P a ra g ra p h 1 8 (b ) (2 )

1. A d d in g o th e r a m o u n ts . F ees or other
charges that are not part o f the finance charge
and that are financed rather than paid sepa
rately at consum m ation o f the transaction are
included in the am ount financed. T ypical ex
am ples are real estate settlem ent charges and
prem ium s for voluntary credit life and disabil
ity insurance excluded from the finance
charge under section 226.4. T h is paragraph
does n ot include any am ounts already ac
counted for under section 2 2 6 .1 8 ( b ) ( 1 ) , such
as taxes, tag and title fees, or the costs o f ac-

Regulation Z Commentary
cessories or service policies that the creditor
includes in the cash price.

§226.18
com puted interest rate, w ith a $ 1 0 loan fee
paid separately at consum m ation.
°

P a ra g ra p h 1 8 (b ) (3 )

1. P re p a id fin a n c e c h a rg e s . Prepaid finance
charges, as defined in section 226.2, m ust be
deducted in calculating the am ount financed.
U nder section 226.2, add-on and discount
charges are not considered prepaid finance
charges. Other types o f finance charges added
to the face am ount o f the note, such as loan
fees financed by the creditor, need n ot be
treated as prepaid finance charges. T he com
putational step called for by this paragraph
should not duplicate any subtraction accou n t
ed for under section 2 2 6 .1 8 (b ) (1 ). T o
illustrate:
°

A consum er applies for a loan o f $2,500,
subject to sim ple interest, w ith a $40 loan
fee. T he creditor assesses the $40 loan fee
by increasing the face am ount o f the obli
gation to $2,540. I f the creditor chooses
n ot to treat the loan fee as a prepaid fi
nance charge, the principal for purposes o f
section 2 2 6 .1 8 (b ) (1 ) is $2,500 and no
am ounts are deducted under section
2 2 6 .1 8 ( b ) ( 3 ) . I f the creditor ch ooses to
treat the loan fee as a prepaid finance
charge, the principal for purposes o f sec
tion 2 2 6 .1 8 (b ) (1 ) is $2,540 and $40 is de
ducted under section 2 2 6 .1 8 (b ) (3 ).

2. A d d - o n o r d is c o u n t c h a rg e s . A ll finance
charges m ust be deducted from the am ount o f
credit in calculating the am ount financed. I f
the principal loan am ount reflects finance
charges that m eet the definition o f a prepaid
finance charge in section 226.2, those charges
are included in th e section 2 2 6 .1 8 (b ) (1 )
am ount
and
deducted
under
section
2 2 6 .1 8 ( b ) ( 3 ) . H ow ever, if the principal loan
am ount includes finance charges that do not
m eet the definition o f a prepaid finance
charge, the section 2 2 6 .1 8 (b ) (1 ) am ount
m ust exclude those finance charges. T he fo l
low ing exam ples illustrate the application o f
section 2 2 6 .1 8 (b ) to these types o f transac
tions. E ach exam ple assum es a loan request o f
$ 1 ,0 0 0 for one year, subject to a 6 percent pre

T he crediitor assesses add-on interest o f
$60 w hich is added to the $ 1 ,0 0 0 in loan
proceeds for an obligation w ith a face
am ount o f $1,060. T h e principal for pur
poses o f section 2 2 6 .1 8 (b ) (1 ) is $ 1, 0 0 0 ,
no am ounts are added under section
2 2 6 .1 8 ( b ) ( 2 ) , and th e $ 1 0 loan fee is a
prepaid finance charge to be deducted un
der section 2 2 6 .1 8 ( b ) ( 3 ) . T he am ount fi
nanced is $990.
° T h e creditor assesses discou n t interest o f
$60 and distributes $940 to the consum er,
w h o is liable for an obligation w ith a face
am ount o f $1,000. T h e principal under
section 2 2 6 .1 8 (b ) (1 ) is $940, w hich re
sults in an am ount financed o f $930, after
deduction o f the $ 1 0 prepaid finance
charge under section 2 2 6 .1 8 (b ) (3 ).
® T h e creditor assesses $60 in discount inter
est by increasing the face am ount o f the
obligation to $1,060, w ith the consum er
receiving $1,000. T he principal under sec
tion 2 2 6 .1 8 (b ) (1 ) is thus $ 1,0 0 0 and the
am ount financed $990, after deducting the
$ 1 0 prepaid finance charge under section
2 2 6 .1 8 ( b ) ( 3 ) .

18(c) Itemization of Amount Financed
1. D is c lo s u re re q u ire d . T he creditor has tw o
alternatives in com p lyin g w ith section
2 2 6 .1 8 (c ):
°

T he creditor m ay inform th e consum er, on
the segregated disclosures, that a w ritten
item ization o f the am ount financed w ill be
provided on request, furnishing the item i
zation only if the cu stom er in fact requests
it.
T he creditor m ay provide an item ization
as a m atter o f course, w ith ou t notifying
the consum er o f the right to receive it or
w aiting for a request.

W hether given as a m atter o f course or only
on request, the item ization m ust be provided
at the sam e tim e as the other disclosures re
quired by section 226.18, although separate
from those disclosures.

Regulation Z Commentary

§226.18
2. A d d itio n a l in fo r m a tio n . Section 2 2 6 .1 8 (c )
establishes only a m inim um standard for the
m aterial to be included in the item ization o f
the am ount financed. Creditors have consider
able flexibility in revising or supplem enting
the inform ation listed in section 2 2 6 .1 8 (c )
and show n in m odel form H -3, although no
changes are required. The creditor m ay, for
exam ple, do one or more o f the follow ing:
•

•

Include am ounts that reflect paym ents not
part o f the am ount financed. F or exam ple,
escrow item s and certain insurance prem i
um s m ay be included, as discussed in the
com m entary to section 2 2 6 .1 8 (g ).
O rganize the categories in any order. For
exam ple, the creditor m ay rearrange the
term s in a m athem atical progression that
depicts the arithm etic relationship o f the
terms.
A d d categories. For exam ple, in a credit
sale, the creditor m ay include the cash
price and the dow npaym ent.
Further item ize each category. F or exam
ple, the am ount paid directly to the co n
sum er m ay be subdivided into the am ount
given by check and the am ount credited to
the consum er’s savings account.
Label categories w ith different language
from that show n in section 2 2 6 .1 8 (c ). For
exam ple, an am ount paid on the con su m
er’s account m ay be revised to specifically
identify the account as “your auto loan
w ith u s.”
D elete, leave blank, mark “N / A ” or o th
erw ise note inapplicable categories in the
item ization. F or exam ple, in a credit sale
w ith no prepaid finance charges or
am ounts paid to others, the am ount fi
nanced m ay consist o f only the cash price
less dow npaym ent. In this case, the item i
zation m ay be com posed o f on ly a single
category and all other categories m ay be
elim inated.

A m o u n ts a p p ro p r ia te to m o re th a n o n e c a te

W hen an am ount m ay appropriately be
placed in any o f several categories and the
creditor does not w ish to revise the categories
show n in section 2 2 6 .1 8 (c ), the creditor has
considerable flexibility in determ ining where
to show the am ount. For example:

g o ry .

In a credit sale, the portion o f the pur
chase price being financed by the creditor
m ay be view ed as either an am ount paid to
the consum er or an am ount paid on the
consum er’s account.

4. R E S P A tra n s a c tio n s . T he R eal E state Set
tlem ent Procedures A ct (R E S P A ) requires
creditors to provide good faith estim ates o f
closing costs. Transactions subject to R E S P A
are exem pt from the requirem ents o f section
2 2 6 .1 8 (c ), w hen the creditor com plies w ith
the good faith estim ates requirem ent o f R E S
P A . T he item ization o f the am ount financed
need n ot be given, even though the content
and tim ing o f the good faith estim ates under
R E S P A differ from the section 2 2 6 .1 8 (c )
requirem ent.
P a ra g ra p h 1 8 (c ) ( l ) ( i )

1. A m o u n ts p a id to c o n s u m e r. T his en com
passes funds given to the consum er in the
form o f cash or a check, including join t pro
ceeds checks, as w ell as funds placed in an
asset account. It m ay include m oney in an in
terest-bearing accou n t even if that am ount is
considered a required deposit under section
226.18 (r ). F or exam ple, in a transaction w ith
total loan proceeds o f $500, the consum er re
ceives a ch eck for $300 and $200 is required
by the creditor to be put into an interest-bear
ing account. W hether or n ot the $200 is a re
quired deposit, it is part o f the am ount fi
nanced. A t the creditor’s option, it m ay be
broken out and labelled in the item ization o f
the am ount financed.
P a ra g ra p h 1 8 (c )(1 )(H )

A m o u n ts

c r e d ite d

c o n s u m e r’s a c c o u n t.

T he term “consum er’s accou n t” refers to an
account in the nature o f a debt w ith that cred
itor. It m ay include, for exam ple, an unpaid
balance on a prior loan, a credit sale balance
or other am ounts ow ing to that creditor. It
does not include asset accounts o f the con
sum er such as savings or checking accounts.
P a ra g ra p h 1 8 (c ) ( l ) ( i i i )

1. A m o u n ts p a id to o th e rs . T his includes, for
exam ple, tag and title fees; am ounts paid to
insurance com panies for insurance premiums;

Regulation Z Commentary
security interest fees, and am ounts paid to
credit bureaus, appraisers or public officials.
W hen several types o f insurance prem ium s
are financed, they may, at the creditor’s op
tion, be com bined and listed in one sum , la
belled “insurance” or sim ilar term. T his in
cludes, but is n ot lim ited to, different types o f
insurance prem ium s paid to one com pany and
different types o f insurance prem ium s paid to
different com panies. Except for insurance
com panies and other categories noted in foot
note 40, third parties m ust be identified by
name.
P a ra g ra p h 1 8 ( c ) ( l) ( iv )

§226.18
18(e) A nnual Percentage R ate
1. D is c lo s u re re q u ire d . T he creditor m ust dis
close the cost o f the credit as an annual rate,
using the term “annual percentage rate,” plus
a brief descriptive phrase com parable to that
used in section 2 2 6 .1 8 (e ). F or variable-rate
transactions, the descriptor m ay be further
m odified w ith a phrase such as “w hich is sub
ject to change.” U n der section 2 2 6 .1 7 (a ), the
term s “annual percentage rate” and “finance
charge” m ust be m ore conspicuous than the
other required disclosures.
2. E x c e p tio n . F ootn ote 42 provides an excep
tion for certain transactions in w hich no an
nual percentage rate disclosure is required.

1. P re p a id fin a n c e c h a rg e . T he prepaid fi
nance charges m ust be show n as a total
18(f) Variable R ate
am ount but m ay, at the creditor’s option, also
1. C o v e ra g e . T he requirem ents o f section
be further item ized and described. A ll
2 2 6 .1 8 (f) apply to all transactions in w hich
am ounts m ust be reflected in this total, even if
the term s o f the legal obligation allow the
portions o f the prepaid finance charge are also
creditor to increase the rate originally dis
reflected elsewhere. For exam ple, if at co n
closed to the consum er. It includes n ot only
sum m ation the creditor collects interim inter
increases in the interest rate but also increases
est o f $30 and a credit report fee o f $10, a
in other com ponents, such as the rate o f re
total prepaid finance charge o f $40 m ust be
quired credit life insurance. T he provisions,
show n. A t the creditor’s option, the credit re
how ever, do n ot apply to increases resulting
port fee paid to a third party m ay also be
from delinquency (in clu d in g late p aym en t),
show n elsew here as an am ount included in
default, assum ption, acceleration or transfer
section 2 2 6 .1 8 ( c ) ( l ) ( i i i ) . The creditor m ay
o f the collateral.
also further describe the tw o com ponents o f
the prepaid finance charge, although no item i
2. B a s is f o r d is c lo s u re s . F or transactions sub
zation o f this elem ent is required by section
ject to the requirem ents o f section 2 2 6 .1 8 (f),
2 2 6 .1 8 (c ) ( l ) ( i v ) .
the disclosures m ust be given for the full term
o f the transaction and m ust be based on the
18(d) Finance Charge
term s in effect at the tim e o f consum m ation.
1. D is c lo s u re re q u ire d . T he creditor m ust dis
H ow ever, in a variable-rate transaction w ith
close the finance charge as a dollar am ount,
either a seller buydow n that is reflected in the
using the term “finance charge,” and m ust in
credit contract or a consum er buydow n, dis
clude a brief description sim ilar to that in sec
closures should n ot be based solely on the ini
tion 2 2 6 .1 8 (d ). T he creditor m ay, but need
tial terms. In those transactions, the disclosed
not, further m odify the descriptor for vari
annual percentage rate should be a com posite
able-rate transactions w ith a phrase such as
rate based on the low er rate for the buydow n
“w hich is subject to change.” The finance
period and the rate that is the basis o f the
charge m ust be show n on the disclosures only
variable rate: feature for the rem ainder o f the
as a total amount; the elem ents o f the finance
term. (S ee the com m entary to section
charge m ust not be item ized in the segregated
2 2 6 .1 7 (c ) for a discussion o f buydow n
disclosures, although the regulation does not
transactions.)
prohibit their item ization elsewhere.
3. U se o f e s tim a te s . T he variable-rate feature
does not, b y itself, m ake the disclosures esti
2. T o le ra n c e . A tolerance for the finance
m ates. (S ee the com m entary to section
charge is provided in footnote 41.

Regulation Z Commentary

§226.18
2 2 6 .1 7 (c ) for a discussion o f basis for esti
m ates.)

4. T e rm s u s e d in d is c lo s u re . In describing the
variable-rate feature, the creditor need n ot use
any prescribed term inology. For exam ple,
lim itations and hypothetical exam ples m ay be
described in term s o f interest rates rather than
annual percentage rates. T he m odel form s in
appendix H provide exam ples o f w ays in
w hich the variable-rate disclosures m ay be
made.
5. O th e r v a ria b le - ra te re g u la tio n s . Transac
tions in w hich the creditor is required to com
ply w ith and has com plied w ith variable-rate
regulations o f other federal agencies are ex
em pt from the requirem ents o f section
2 2 6 .1 8 (f), by virtue o f footnote 43. T hose
variable-rate regulations include the adjusta
ble m ortgage loan instrum ent regulation is
sued by the Federal H om e Loan Bank Board
(1 2 C F R 5 4 5 .6 -2 (a )) and the adjustable-rate
m ortgage regulation issued by the C om ptrol
ler o f the Currency (1 2 C F R 2 9 ). T h e excep
tion in footn ote 43 is also available to credi
tors that are required by state law to com ply
with the federal variable-rate regulations n ot
ed above and to creditors that are authorized
by title V III o f the D epository Institutions
A ct o f 1982 (P ub. L. 9 7 -3 2 0 ) to m ake loans
in accordance w ith those regulations. C redi
tors using this exception should com ply w ith
the tim ing requirem ents o f those regulations
rather than the tim ing requirem ents o f R egu
lation Z in m aking the variable-rate
disclosures.
6 . E x a m p le s o f v a ria b le - ra te tra n s a c tio n s . The
follow ing transactions constitute variable rate
transactions:

R enegotiable rate m ortgage instrum ents
that involve a series o f short-term loans
secured by a long-term obligation, w here
the lender is obligated to renew the short
term loans at the consum er’s option. A t
the tim e o f renewal, the lender has the op
tion o f increasing the interest rate. D isc lo
sures m ust be given for the longer term o f
the obligation, w ith all disclosures calcu
lated on the basis o f the rate in effect at the

tim e o f consum m ation o f the transaction.
“Shared equity” or “shared appreciation”
m ortgages that have a fixed rate o f interest
and an appreciation share based on the
consum er’s equity in the m ortgaged prop
erty. T he appreciation share is payable in a
lum p sum at a specified tim e. D isclosures
m ust be based on the fixed interest rate.
T he shared appreciation feature, including
the conditions for its im position, the tim e
at w hich it w ould be collected, and the
lim itation on the creditor’s share, m ust be
described under section 2 2 6 .1 8 (f). (A s
discussed in section 226.2, other types o f
shared-equity arrangem ents are n ot co n
sidered “credit” and are n ot subject to
R egulation Z .)
Preferred-rate em ployee loans w here the
term s o f the legal obligation provide that
the rate w ill increase only if the em ployee
leaves the em ploy o f the creditor and the
note reflects the preferred rate. T he d isclo
sures are to be based on that rate, w ith the
h ypothetical exam ple based on the in
crease from the preferred rate.

G raduated-paym ent m ortgages and step-rate
transactions w ithout a variable-rate feature
are n ot considered variable-rate transactions.

7. G ro w th e q u ity m o rtg a g e s . A lso referred to
as paym ent-escalated m ortgages, these m ort
gage plans involve scheduled paym ent in
creases to prem aturely am ortize the loan. T he
initial paym ent am ount is determ ined as for a
long-term loan w ith a fixed interest rate. P ay
m ent increases are scheduled periodically,
based on changes in an index. T he larger pay
m ents result in accelerated am ortization o f the
loan. In disclosing these m ortgage plans, cred
itors m ay either:
°

E stim ate the am ount o f paym ent increas
es, based on the best inform ation reason
ably available; or
D isclose by analogy to the variable-rate
disclosures, indicating that the paym ents
are subject to increase, describing the cir
cum stances under w hich the paym ents
w ould increase, together w ith lim itations
on the increase, and providing an exam ple
o f the increase.

Regulation Z Commentary

§226.18

(T h is discussion does not apply to grow th eq
uity m ortgages in w hich the am ount o f pay
m ent increases can be accurately determ ined
at the tim e o f disclosure. F or these m ortgages,
as for graduated-paym ent m ortgages, d isclo
sures should reflect the scheduled increases in
paym ents.)

prepaid finance charges and rates deter
m ined by the Treasury bill rate plus 2
percent. R ate and paym ent adjustm ents
are m ade annually. A lth ou gh the Trea
sury bill rate at the tim e o f consum m a
tion is 10 percent, the creditor sets the
rate for on e year at 9 percent, instead o f
12 percent according to the form ula.
T he disclosures should reflect a com p os
ite annual percentage rate o f 11.63 per
cent based on 9 percent for on e year and
12 percent for 29 years. R eflecting those
tw o rate levels, the paym ent schedule
should sh ow 12 paym ents o f $804.62
and 348 paym ents o f $1,025.31. T he fi
nance charge should be $266,463.32 and
the total o f paym ents $366,463.32.
— Sam e loan as above, except w ith a 2 per
cent Kite cap on periodic adjustments.
T he disclosures should reflect a com p os
ite annual percentage rate o f 11.53 per
cent based on 9 percent for the first
year, 11 percent for th e second year, and
12 percent for the rem aining 28 years.
R eflecting th ose three rate levels, the
paym ent schedule should show 12 pay
m ents o f $804.62, 12 paym ents o f
$950.09,
and
336
paym ents
of
$1,024. 34. T he finance charge should be
$265,234.76, and the total o f paym ents
$365,234.76.

8 . D iscounted variable-rate transactions. In
som e variable-rate transactions, creditors m ay
set an initial interest rate that is n ot deter
m ined by the index or form ula used to m ake
later interest rate adjustments. Typically, this
initial rate is low er than the rate w ould be if it
w ere calculated using the index or form ula.
F or exam ple, a creditor m ay calculate interest
rates according to a form ula using the sixm onth Treasury bill rate plus a 2 percent m ar
gin. I f the current Treasury bill rate is 10 per
cent, the creditor m ay forgo th e 2 percent
spread and charge only 10 percent for a lim it
ed tim e, instead o f setting an initial rate o f 12
percent.

W hen creditors use an initial rate that is
n ot calculated using the index or form ula
for later rate adjustm ents, the disclosures
should reflect a com posite annual percent
age rate based on the initial rate for as long
as it is applied and, for the remainder o f
the term, the rate that w ould have been
applied using the index or form ula at the
tim e o f consum m ation.
The effect o f the m ultiple rates m ust also
be reflected in the calculation and d isclo
sure o f the finance charge, total o f pay
m ents, and paym ent schedule.
I f a loan contains a rate or paym ent cap
that w ould prevent the initial rate or pay
m ent, at the tim e o f the first adjustment,
from changing to the rate determ ined by
the index or form ula at consum m ation, the
effect o f that rate or paym ent cap should
be reflected in the disclosures.
Because these transactions involve irregu
lar paym ent am ounts, an annual percent
age rate tolerance o f | o f 1 percent applies,
in accordance w ith section 2 2 6 .2 2 (a ) (3 )
o f the regulation.
E xam ples o f discounted variable-rate
transactions include—
— A 30-year loan for $100,000 w ith no

Paragraph 18(f)(1)
1. Circumstances. T he circum stances under
w hich the rate m ay increase include identifica
tion o f any index to w hich the rate is tied, as
w ell as any conditions or events on w hich the
increase is contingent.
6

W hen no specific index is used, any identi
fiable factors used to determ ine w hether to
increase the rate m ust be disclosed.
W hen the increase in th e rate is purely d is
cretionary, the fact that any increase is
w ithin the creditor’s discretion m ust be
disclosed.
W hen the index is internally defined (for
exam ple, by that creditor’s prim e rate),
the creditor m ay com ply w ith this require
m ent by either a brief description o f that
index or a statem ent that any increase is in
81

Regulation Z Commentary

§226.18
the discretion o f the creditor. A n external
ly defined index, how ever, m ust be
identified.

P a ra g ra p h 1 8 ( f) ( 2 )

1. L im ita tio n s . T his includes any m axim um
im posed on the am ount o f an increase in the
rate at any tim e, as w ell as any m axim um on
the total increase over the life o f the transac
tion. W hen there are no lim itations, the credi
tor m ay, but need not, disclose that fact. L im i
tations do not include legal lim its in the
nature o f usury or rate ceilings under state or
federal statutes or regulations.

P a ra g ra p h 1 8 ( f) ( 3 )

1. E ffe c ts . D isclosure o f the effect o f an in
crease refers to an increase in the num ber or
am ount o f paym ents or an increase in the final
paym ent. In addition, the creditor m ay m ake
a brief reference to negative am ortization that
m ay result from a rate increase. (See the com
m entary to section 2 2 6 .1 7 (a ) (1 ) regarding
directly related inform ation.) I f the effect can
not be determ ined, the creditor m ust provide
a statem ent o f the possible effects. For exam
ple, if the exercise o f the variable-rate feature
m ay result in either m ore or larger paym ents,
both possibilities m ust be noted.

P a ra g ra p h 1 8 ( f) ( 4 )

1. H y p o th e tic a l e x a m p le . The exam ple may,
at the creditor’s option, appear apart from the
other disclosures. T he creditor m ay provide
either a standard exam ple that illustrates the
term s and conditions o f that type o f credit of
fered by that creditor or an exam ple that di
rectly reflects the term s and conditions o f the
particular transaction.
2. H y p o th e tic a l e x a m p le n o t re q u ire d . The
creditor need not provide a hypothetical ex
am ple in the follow ing transactions w ith a
variable-rate feature:
«
6

D em an d obligations w ith no alternate m a
turity date
Interim student credit extensions
M ultiple-advance construction loans dis
closed pursuant to appendix D , part I

18(g) Payment Schedule
1. A m o u n ts in c lu d e d in re p a y m e n t s c h e d u le .

T he repaym ent schedule should reflect all
com ponents o f the finance charge, n ot m erely
the portion attributable to interest. A prepaid
finance charge, how ever, should n ot be show n
in the repaym ent schedule as a separate pay
m ent. T he paym ents m ay include am ounts be
yond the am ount financed and finance charge.
F or exam ple, the disclosed paym ents m ay, at
the creditor’s option, reflect certain insurance
prem ium s w here the prem ium s are not part o f
either the am ount financed or the finance
charge, as w ell as real estate escrow am ounts
such as taxes added to the paym ent in m ort
gage transactions.
2. D e fe rr e d d o w n p a y m e n ts . A s discussed in
the com m entary to section 2 2 6 .2 (a ) (1 8 ) , de
ferred dow npaym ents or pickup paym ents
that m eet the conditions set forth in the defini
tion o f dow npaym ent m ay be treated as part
o f the dow npaym ent. Even if treated as a
dow npaym ent, that am ount m ay nevertheless
be disclosed as part o f the paym ent schedule,
at the creditor’s option.
3. T o ta l n u m b e r o f p a y m e n ts . In disclosing
the num ber o f paym ents for transactions w ith
m ore than one paym ent level, creditors m ay
but need not d isclose as a single figure the to
tal num ber o f paym ents for all levels. F or ex
ample, in a transaction calling for 108 pay
m ents o f $350, 240 paym ents o f $335, and 12
paym ents o f $330, the creditor need not state
that there w ill be a total o f 360 paym ents.

P a ra g ra p h 1 8 (g ) (1 )

1. D e m a n d o b lig a tio n s . In dem and obliga
tions w ith no alternate m aturity date, the
creditor has the option o f disclosing only the
due dates or periods o f scheduled interest pay
m ents in the first year (for exam ple, “interest
payable quarterly” or “interest due the first o f
each m on th ” ). T he am ounts o f the interest
paym ents need not be show n.

P a ra g ra p h 1 8 (g ) (2 )

1. A b b re v ia te d d is c lo s u re . The creditor m ay
disclose an abbreviated paym ent schedule
w hen the am ount o f each regularly scheduled

Regulation Z Commentary
paym ent (oth er than th e first or last pay
m en t) includes an equal am ount to be applied
on principal and a finance charge com puted
by application o f a rate to the decreasing un
paid balance. T his option is also available
w hen m ortgage-guarantee insurance prem i
um s, paid either m onthly or annually, cause
variations in the am ount o f the scheduled pay
m ents, reflecting the continual decrease or in
crease in the prem ium due. T he creditor using
this alternative m ust d isclose the dollar
am ount o f the highest and low est paym ents
and m ake reference to the variation in pay
m ents.
2. C o m b in e d p a y m e n t-s c h e d u le d is c lo s u re s .
C reditors m ay com bine the option in this par
agraph w ith the general paym ent-schedule
requirem ents in transactions w here only a
portion o f the paym ent schedule m eets the
conditions o f section 2 2 6 .1 8 ( g ) ( 2 ) . For ex
am ple, in a graduated-paym ent m ortgage
w here paym ents rise sharply for five years and
then decline over the next 25 years because o f
decreasing m ortgage insurance prem ium s, the
first five years w ould be disclosed under the
general rule in section 2 2 6 .1 8 (g ) and the next
25 years according to the abbreviated sched
ule in section 2 2 6 .1 8 (g ) (2 ).
3. E f f e c t
on
o th e r
d is c lo s u r e s .
Section
2 2 6 .1 8 (g ) (2 ) applies only to the paym ent
schedule disclosure. T he actual am ounts o f
paym ents m ust be taken into account in calcu
lating and disclosing the finance charge and
the annual percentage rate.

18(h) Total of Payments
1. D is c lo s u re re q u ire d . T he total o f paym ents
m ust be disclosed using that term, along w ith
a descriptive phrase sim ilar to the one in the
regulation. T he descriptive explanation m ay
be revised to reflect a variable-rate feature
w ith a brief phrase such as “based on the cur
rent annual percentage rate w hich m ay
chan ge.”
2. C a lc u la tio n o f to ta l o f p a y m e n ts . T he total
o f paym ents is the sum o f the paym ents dis
closed under section 2 2 6 .1 8 (g ). For exam ple,
if the creditor disclosed a deferred portion o f
the dow npaym ent as part o f the paym ent

§226.18
schedule, that paym ent m u st be reflected in
the total disclosed under this paragraph.
3. E x c e p tio n . F ootn ote 4 4 perm its creditors
to om it disclosure o f th e total o f paym ents in
single-paym ent transactions. T his exception
does not apply to a transaction calling for a
single paym ent o f principal com bined w ith pe
riodic paym ents o f interest.
4. D e m a n d o b lig a tio n s . In dem and obliga
tions w ith no alternate m aturity date, the
creditor m ay om it disclosure o f paym ent
am ounts under section 2 2 6 .1 8 ( g ) ( 1 ) . In
those transactions, the creditor need n ot dis
close the total o f paym ents.

18 (i) Demand Feature
1. D is c lo s u re re q u ire m e n ts . T he disclosure re
quirem ents o f this provision apply not only to
transactions payable on dem and from the ou t
set, but also to transactions that are n ot pay
able on dem and at the tim e o f consum m ation
but convert to a dem and status after a stated
period. In dem and obligations in w hich the
disclosures are based on an assum ed m aturity
o f one year under section 2 2 6 .1 7 ( c ) ( 5 ) , that
fact m ust also be stated. A ppendix H contains
m odel clause s that m ay be used in m aking this
d is c lo s u r e .

2. C o v e re d d e m a n d fe a tu r e s . T he type o f de
m and feature triggering th e disclosures re
quired by section 226.18 ( i ) includes only
those dem and features contem plated by the
parties as part o f the legal obligation. F or ex
am ple, this provision does not apply to trans
actions that convert to a dem and status as a
result o f the consum er’s default. A due-onsale clause is n ot considered a dem and
feature.
3.

R e la tio n s h ip

to p a y m e n t s c h e d u le

d is c lo

A s provided in section 2 2 6 .1 8 ( g ) ( 1 ) , in
dem and obligations w ith no alternate m aturi
ty date, the creditor need only d isclose the due
dates or paym ent periods o f any scheduled in
terest paym ents for the first year. I f the de
m and obligation states an alternate m aturity,
how ever, the disclosed paym ent schedule
m ust reflect that stated term; the special rule
in section 2 2 6 .1 8 (g ) (1 ) is not available.

s u re s .

Regulation Z Commentary

§226.18

18(j) Total Sale Price
1. D is c lo s u re re q u ire d . In a credit sale trans
action, the “total sale price” m ust be disclosed
using that term, along w ith a descriptive ex
planation similar to the one in the regulation.
F or variable-rate transactions, the descriptive
phrase m ay, at the creditor’s option, be m od i
fied to reflect the variable-rate feature. F or ex
am ple, the descriptor m ay read: “T he total
cost o f your purchase on credit, w hich is sub
ject to change, including your dow npaym ent
o f . . . . ” The reference to a dow npaym ent
m ay be elim inated in transactions calling for
no dow npaym ent.
2. C a lc u la tio n o f to ta l s a le p ric e . T he figure to
be disclosed is the sum o f the cash price, other
charges added under section 2 2 6 .1 8 (b ) (2 ),
and the finance charge disclosed under section
2 2 6 .1 8 (d ).

H illustrates a m ortgage transaction in w hich
both rebate and penalty disclosures are
necessary.
3. P r e p a id fin a n c e c h a rg e . T he existence o f a
prepaid finance charge in a transaction does
not, by itself, require a disclosure under sec
tion 226.18 (k ) . A prepaid finance charge is
not considered a penalty under section
2 2 6 .1 8 ( k ) ( l ) , nor does it require a disclosure
under section 226.18 (k ) (2 ) . A t its option,
how ever, a creditor m ay consider a prepaid
finance
charge
to
be
under
section
226.18 (k ) (2 ) . I f a disclosure is m ade under
section 2 2 6 .1 8 (k ) (2 ) w ith respect to a pre
paid finance charge or other finance charge,
the creditor m ay further identify that finance
charge. For exam ple, the disclosure m ay state
that the borrower “w ill not be entitled to a
refund o f the prepaid finance charge” or som e
other term that describes the finance charge.

18 (k) Prepayment

P a ra g ra p h 1 8 ( k ) ( l)

1. D is c lo s u re re q u ire d . The creditor m ust give
a definitive statem ent o f w hether or n ot a pen
alty w ill be im posed or a rebate w ill be given.

1. P e n a lty . T his applies only to those transac
tions in w hich the interest calculation takes
account o f all scheduled reductions in princi
pal, as w ell as transactions in w hich interest
calculations are m ade daily. T he term “penal
ty ” as used here encom passes only those
charges that are assessed strictly because o f
the prepaym ent in full o f a sim ple-interest ob
ligation, as an addition to all other am ounts.
Item s w hich are not penalties include, for
example:

T he fact that no penalty w ill be im posed
m ay n ot sim ply be inferred from the ab
sence o f a penalty disclosure; the creditor
m ust indicate that prepaym ent w ill n ot re
sult in a penalty.
If a penalty or refund is possible for one
type o f prepaym ent, even though not for
all, a positive disclosure is required. This
applies to any type o f prepaym ent, w heth
er voluntary or involuntary as in the
case o f prepaym ents resulting from
acceleration.
A n y difference in rebate or penalty policy,
depending on whether prepaym ent is vo l
untary or not, m ust not be disclosed w ith
the segregated disclosures.

2. R e b a te -p e n a lty d is c lo s u re . A single transac
tion m ay involve both a precom puted finance
charge and a finance charge com puted by ap
plication o f a rate to the unpaid balance (for
exam ple, sim ple-interest student loans w ith
loan fees and m ortgages w ith m ortgage-guar
antee insurance). In these cases, disclosures
about both prepaym ent rebates and penalties
are required. Sam ple form H -15 in appendix

°
°

Loan guarantee fees
Interim interest on a student loan

H ow ever, a m inim um finance charge is a pen
alty in a sim ple-interest transaction. (S ee the
com m entary to section 2 2 6 .1 7 (a ) (1 ) regard
ing the disclosure o f a m inim um finance
charge as directly related inform ation.)
P a ra g ra p h 1 8 (h ) (2 )

1. R e b a te o f fin a n c e c h a rg e . T his applies to
any finance charges that do not take account
o f each reduction in the principal balance o f
an obligation. T his category includes, for
example:
«

Precom puted finance charges such as add
on charges

Regulation Z Commentary
°

Charges that take account o f som e but not
all reductions in principal, such as m ort
gage guarantee insurance assessed on the
basis o f an annual declining balance, w hen
the principal is reduced on a m onthly basis

N o description o f the m ethod o f com puting
earned or unearned finance charges is re
quired or perm itted as part o f the segregated
disclosures under this section.

18 (/) Late Payment
1. D e fin itio n . T his paragraph requires a dis
closure only if charges are added to individual
delinquent installm ents by a creditor w ho o th
erw ise considers the transaction ongoing on
its original terms. Late paym ent charges do
not include:
°
°

°
°

T he right o f acceleration
F ees im posed for actual collection costs,
such as repossession charges or attorney’s
fees
D eferral and extension charges
T he continued accrual o f sim ple interest at
the contract rate after the paym ent due
date. H ow ever, an increase in the interest
rate is a late paym ent charge to the extent
o f the increase.

2. C o n te n t o f d is c lo s u re . M any state law s au
thorize the calculation o f late charges on the
basis o f either a percentage or a specified d o l
lar am ount and perm it im position o f the lesser
or greater o f the tw o charges. T he disclosure
m ade under section 226.18 (7) m ay reflect this
alternative. F or exam ple, stating that the
charge in the event o f a late paym ent is 5 per
cent o f the late am ount, n ot to exceed $5.00, is
sufficient. M any creditors also permit a grace
period during w hich no late charge w ill be as
sessed; this fact m ay be d isclosed as directly
related inform ation. (See the com m entary to
section 2 2 6 .1 7 (a ).)

18(m) Security Interest
1. P u rc h a s e m o n e y tra n s a c tio n s . W hen the
collateral is the item purchased as part of, or
w ith the proceeds of, the credit transaction,
section 226.18 (m ) requires only a general
identification such as “the property purchased
in this transaction.” The creditor m ay give a

§ 226.18
m ore specific identification o f the collateral,
although only the abbreviated disclosure is
necessary. A n y transaction in w h ich the credit
is being used to purchase the collateral is con
sidered a purchase m oney transaction and the
abbreviated property identification m ay be
used, w hether the obligation is treated as a
loan or a credit sale.
2. N o n p u rc h a s e m o n e y tra n s a c tio n s . In nonpurchase m oney transactions, the property
subject to the security interest m ust be identi
fied by item or type. T his disclosure is satisfied
by a general disclosure o f the category o f
property subject to the security interest, such
as “household g ood s,” “m otor vehicles,” or
“securities.” A t the creditor’s option, h ow ev
er, a m ore precise identification o f the proper
ty or good s m ay be provided.
3. M ix e d c o lla te r a l. In som e transactions in
w hich the credit is used to purchase the collat
eral, the creditor m ay also take other property
o f the consum er as security. In those cases, a
com bined disclosure m ust be provided, con
sisting o f the abbreviated property identifica
tion for the purchase m oney collateral (a l
though m ore detail m ay be given, at the
creditor’s op tion ) and a m ore specific identifi
cation o f the other collateral.
4. A fte r - a c q u ir e d p ro p e r ty . A n after-acquired
property clause is not a security interest to be
disclosed under section 2 2 6 .1 8 (m ).
5. S p re a d e r c la u s e . T he fact that collateral for
preexisting credit w ith the institution is being
used to secure th e present obligation con sti
tutes a securi ty interest and m ust be disclosed.
(Such security interests m ay be know n as
“spreader” or “dragnet” clauses, or as “crosscollateralization” clau ses.) A specific identifi
cation o f that collateral is unnecessary but a
rem inder o f the interest arising from the prior
indebtedness is required. T he disclosure may
be m ade by using language such as “collateral
securing other loans w ith us m ay also secure
this loan .” A t the creditor’s option, a m ore
specific description o f the property involved
may be given.
6 . T e rm s u s e d in d is c lo s u re . N o specified ter
m inology is required in d isclosing a security

§ 226.18
interest. Although the disclosure may, at the
creditor’s option, use the term “security inter
est,” the creditor may designate its interest by
using, for example, “pledge,” “lien,” or
“mortgage.”
7. C o lla te r a l f r o m th ir d p a r ty . In certain
transactions, the consumer’s obligation may
be secured by collateral belonging to a third
party. For example, a loan to a student may
be secured by an interest in the property o f the
student’s parents. In such cases, the security
interest is taken in connection with the trans
action and must be disclosed, even though the
property encumbered is owned by someone
other than the consumer.

1 8 (n ) Insurance
1. L o c a tio n . This disclosure may, at the credi
tor’s option, appear apart from the other
disclosures. It may appear with any other in
formation, including the amount-financed
itemization, any information prescribed by
state law, or other supplementary material.
When this information is disclosed with the
other segregated disclosures, however, no ad
ditional explanatory material may be
included.

1 8 (o ) Certain Security Interest Charges
1. F o rm a t. N o special format is required for
these disclosures; under section 2 2 6 .4 (e), tax
es and fees paid to government officials with
respect to a security interest may be aggregat
ed, or may be broken down by individual
charge. For example, the disclosure could be
labelled “filing fees and taxes,” and all funds
disbursed for such purposes may be aggregat
ed in a single disclosure. This disclosure may
appear, at the creditor’s option, apart from
the other required disclosures. The inclusion
of this information on a statement required
under the Real Estate Settlement Procedures
A ct is sufficient disclosure for purposes of
Truth in Lending.

18 (p ) Contract Reference
1. C o n te n t. Creditors may substitute, for the
phrase “appropriate contract document,” a
reference to specific transaction documents in
which the additional information is found,
86

Regulation Z Commentary
such as “promissory note” or “retail install
ment sale contract.” A creditor may, at its
option, delete inapplicable items in the con
tract reference, as for example when the con
tract documents contain no information re
garding the right o f acceleration.

18 (q ) A ssum ption Policy
1. P o lic y s ta te m e n t. Because a creditor’s as
sumption 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 section 226.18 (q ). The provision re
quires only that the consumer be told whether
or not a subsequent purchaser might be al
lowed to assume the obligation on its original
terms and does not contemplate any explana
tion o f the criteria or conditions for assumability. However, the creditor may state that a
due-on-sale clause is contained in the loan
document. (See comment 17(a) (1 ) -5 regard
ing directly related information.)
2. O r ig in a l term s. The phrase “original
terms” for purposes o f section 226.18 (q ) does
not preclude the imposition o f an assumption
fee, but a modification o f the basic credit
agreement, such as a change in the contract
interest rate, represents different terms.

18(r) Required D eposit
1. D isc lo su re req u ired . The creditor must in
form the consumer of the existence of a re
quired deposit. (Appendix H provides a mod
el clause that may be used in making that dis
closure.) Footnote 45 describes three types of
deposits that need not be considered required
deposits. Use of the phrase “need not” per
mits creditors to include the disclosure even in
cases where there is doubt as to whether the
deposit constitutes a required deposit.
2. P le d g e d a c c o u n t m o rtg a g es. In these trans
actions, a consumer pledges as collateral
funds that the consumer deposits in an ac
count held by the creditor. The creditor with
draws sums from that account to supplement
the consumer’s periodic payments. Creditors
may treat these pledged accounts as required
deposits or they may treat them as consumer

Regulation Z Commentary
buydowns in accordance with the commen
tary to section 2 2 6 .1 7 (c )(1 ).
3. E s c r o w a c co u n ts. The escrow exception in
footnote 45 applies, for example, to accounts
for such items as maintenance fees, repairs, or
improvements, whether in a realty or a non
realty transaction. (See the commentary to
section 2 2 6 .1 7 (c )(1 ) regarding the use o f es
crow accounts in consumer buydown
transactions.)
4. In te r e s t-b e a r in g a c co u n ts. When a deposit
earns at least 5 percent interest per year, no
disclosure
is
required
under
section
226.18 (r). This exception applies whether the
deposit is held by the creditor or by a third
party.
5. M o r r is P la n tra n sa c tio n s. A deposit under a
Morris Plan, in which a deposit account is
created for the sole purpose o f accumulating
payments and this is applied to satisfy entirely
the consumer’s obligation in the transaction,
is not a required deposit.

6. E x a m p le s o f a m o u n ts e x c lu d e d . The fol
lowing are among the types o f deposits that
need not be treated as required deposits:
°

°
°
o
°

°
°

Requirement that a borrower be a custom
er or a member even if that involves a fee
or a minimum balance
Required property insurance escrow on a
mobile home transaction
Refund o f interest when the obligation is
paid in full
Deposits that are immediately available to
the consumer
Funds deposited with the creditor to be
disbursed (for example, for construction)
before the loan proceeds are advanced
Escrow o f condominium fees
Escrow o f loan proceeds to be released
when the repairs are completed

§226.19
O th e r re g u la tio n s: 12 CFR 545.6-2(a) and 12

CFR 29
P re v io u s re g u la tio n : §§ 226.4 and 226.8
1 9 8 1 c h a n g es: Five o f the required disclosures
must be explained to the consumer in a man
ner similar to the descriptive phrases shown in
the regulation. A written itemization o f the
amount financed need not be provided unless
the consumer requests it. The finance charge
must be provided in all transactions, including
real estate transactions, but must be shown
only as a total amount. The disclosed finance
charge is considered accurate if it is within a
specified range.

The variable-rate hypothetical is required in
all variable-rate transactions and may be ei
ther general or transaction-specific. The pen
alty and rebate disclosures in the event o f pre
payment have been modified and combined.
The requirement o f an explanation o f how the
rebates or penalties are computed has been
eliminated. The late payment disclosure has
also been narrowed to include only charges
imposed before maturity for late payments.
The information required in the security in
terest disclosure has been decreased by the de
letion o f the type o f security interest and a
reduction in the property description require
ment. The disclosure o f the required deposit is
limited to a statement that the annual percent
age rate does not reflect the required deposit;
the presence o f a required deposit has no effect
on the annual percentage rate.
Two disclosure requirements have been
added: a reference to the contract documents
for additional information and, in a residential
mortgage transaction, a statement of the cred
itor’s assumption policy.

SE C T IO N 226.19— Certain Residential
M ortgage Transactions
19(a) Tim e o f D isclosure

References
S ta tu te : § 128, the Garn-St. Germain D eposi

tory Institutions A ct of 1982 (Pub. L 97-320)
and the Real Estate Settlement Procedures
A ct (12 USC 2602)
O th e r sectio n s: §§ 226.2, 226.17, and appendix
H

1. C overage. This section requires early dis
closure o f credit terms in residential mortgage
transactions that are also subject to the Real
Estate Settlement Procedures A ct (R E SPA )
and its implementing Regulation X, adminis
tered by the Department o f Housing and U r
ban Development (H U D ). To be covered by

§226.19
this section, a transaction must be both a resi
dential mortgage transaction under section
226.2(a) and a federally related mortgage
loan under RESPA. “Federally related mort
gage loan” is defined under RESPA (12
USC 2602) and Regulation X (24 CFR
3 5 0 0 .5 (b )), and is subject to any interpreta
tions by H U D .
2. T i m i n g a n d u se o f e stim a te s. Truth in
Lending disclosures must be given (a) before
consummation or (b) within three business
days after the creditor receives the consumer’s
written application, whichever is earlier. The
three-day period for disclosing credit terms
coincides with the time period within which
creditors subject to RESPA must provide
good faith estimates o f settlement costs. If the
creditor does not know the precise credit
terms, the creditor must base the disclosures
on the best information reasonably available
and indicate that the disclosures are estimates
under section 2 2 6 .1 7 (c )(2 ). If many o f the
disclosures are estimates, the creditor may in
clude a statement to that effect (such as “all
numerical disclosures except the late-payment
disclosure are estimates”) instead o f separate
ly labelling each estimate. In the alternative,
the creditor may label as an estimate only the
items primarily affected by unknown informa
tion. (See the commentary to section
2 2 6 .1 7 (c )(2 ).) The creditor may provide ex
planatory material concerning the estimates
and the contingencies that may affect the ac
tual terms, in accordance with the commen
tary to section 2 2 6 .1 7 (a )(1 ).)
3. W r itte n a p p lic a tio n . Creditors may rely on
RESPA and Regulation X (including any in
terpretations issued by H U D ) in deciding
whether a “written application” has been re
ceived. In general, Regulation X requires dis
closures “to every person from whom the
Lender receives or for whom it prepares a
written application on an application form or
forms normally used by the Lender for a Fed
erally Related Mortgage Loan” (24 CFR
3 5 0 0 .6 (a )). An application is received when
it reaches the creditor in any o f the ways ap
plications are normally transmitted— by mail,
hand delivery, or through an intermediary
agent or broker. If an application reaches the

Regulation Z Commentary
creditor through an intermediary agent or
broker, the application is received when it
reaches the creditor, rather than when it
reaches the agent or broker.
4. E x c e p tio n s . The creditor may determine
within the three-day period that the applica
tion will not or cannot be approved on the
terms requested, as, for example, when a con
sumer applies for a type or amount of credit
that the creditor does not offer, or the con
sumer’s application cannot be approved for
some other reason. In that case, the creditor
need not make the disclosures under this sec
tion. If the creditor fails to provide early dis
closures and the transaction is later consum
mated on the original terms, the creditor will
be in violation of this provision. If, however,
the consumer amends the application because
of the creditor’s unwillingness to approve it on
its original terms, no violation occurs for not
providing disclosures based on the original
terms. But the amended application is a new
application subject to this section.
5. I t e m iz a ti o n o f a m o u n t fin a n c e d . In many
residential mortgage transactions, the itemiza
tion o f the amount financed required by sec
tion 226.18(c) will contain items, such as
origination fees or points, that also must be
disclosed as part of the good faith estimates of
settlement costs required under RESPA.
Creditors furnishing the RESPA good faith
estimates need not give consumers any itemi
zation o f the amount financed, either with the
disclosures provided within three days after
application or with the disclosures given at
consummation or settlement.

19(b ) R edisclosure Required
1. C o n d itio n s f o r red isclo su re. Creditors must
make new disclosures if the annual percentage
rate at consummation differs from the esti
mate originally disclosed by more than g o f 1
percentage point in regular transactions or \
of 1 percentage point in irregular transactions,
as defined in section 226.22. The creditor
must also redisclose if a variable rate feature is
added to the credit terms after the original
disclosures have been made. The creditor has
the option of redisclosing information under
other circumstances, if it wishes to do so.

Regulation Z Commentary

§ 226.20

2. C o n te n t o f n e w d isclosures. If redisclosure
is required, the creditor may provide a com
plete set o f new disclosures, or may redisclose
only the terms that vary from those originally
disclosed. If the creditor chooses to provide a
complete set o f new disclosures, the creditor
may but need not highlight the new terms,
provided that the disclosures comply with the
format requirements of section 226.17(a). If
the creditor chooses to disclose only the new
terms, all the new terms must be disclosed.
For example, a different annual percentage
rate will almost always produce a different fi
nance charge, and often a new schedule of
payments; all o f these changes would have to
be disclosed. If, in addition, unrelated terms
such as the amount financed or prepayment
penalty vary from those originally disclosed,
the accurate terms must be disclosed. Howev
er, no new disclosures are required if the o n ly
inaccuracies involve estimates other than the
annual percentage rate, and no variable rate
feature has been added.

determined by reference to whether the origi
nal obligation has been satisfied or extin
guished and replaced by a new obligation,
based on the parties’ contract and applicable
law. The refinancing may involve the consoli
dation o f several existing obligations, dis
bursement o f new money to the consumer or
on the consumer’s behalf, or the rescheduling
o f payments under an existing obligation. In
any form, the new obligation must completely
replace the prior one.

3. T im in g . Redisclosures, when necessary,
must be given no later than “consummation
or settlement.” “Consummation” is defined in
section 226.2(a). “Date o f settlement” is de
fined in Regulation X (24 CFR 350 0 .2 (a ))
and is subject to any interpretations issued un
der RESPA and Regulation X.

2. E x c e p tio n s . A transaction is subject to sec
tion 226.20(a) only if it meets the general def
inition o f a refinancing. Section 2 2 6 .2 0 (a )(1 )
through (5 ) lists five events that are not treat
ed as refinancings, even if they are accom
plished by cancellation o f the old obligation
and substitution o f a new one.

References
S ta tu te : § 1 2 8 (b )(2 ) and the Real Estate Set

tlement Procedures A ct (12 USC 2602)
O th e r sectio n s: §§ 226.2, 226.17, and 226.22
O th e r re g u la tio n s: Regulation X (24 CFR
3500.2(a), 3500.5(b), and 35 0 0 .6 (a ))
P re vio u s re g u la tio n : None
1 9 8 1 c h a n g es: This section implements section
1 2 8 (b )(2 ), a new provision that requires ear
ly disclosure o f credit terms in certain mort
gage transactions.

3. V a ria b le rate. If a variable-rate feature was
properly disclosed under the regulation, a rate
change in accord with those disclosures is not
a refinancing. For example, a renegotiable rate
mortgage that was disclosed as a variable-rate
transaction is not subject to new disclosure re
quirements when the variable-rate feature is
invoked. However, even if it is not accom
plished by the cancellation o f the old obliga
tion and substitution o f a new one, a new
transaction subject to new disclosures results
if the creditor either:
°

SE C T IO N 226.20— Subsequent
D isclosure Requirements
°

2 0 (a ) Refinancings
1. D e fin itio n . A refinancing is a new transac
tion requiring a complete new set o f disclo
sures. Whether a refinancing has occurred is

Changes in the terms o f an existing
obligation, such as the deferral o f individu
al installments, will not constitute a
refinancing unless accomplished by the
cancellation o f that obligation and the sub
stitution o f a new obligation.
A substitution o f agreements that meets
the refinancing definition will require new
disclosures, even if the substitution does
not substantially alter the prior credit
terms.

Increases the rate based on a variable-rate
feature that was not previously disclosed,
or
Adds a variable-rate feature to the
obligation.

4. U n e a r n e d f i n a n c e charge. In a transaction
involving precomputed finance charges, the
creditor must include in the finance charge on

Regulation Z Commentary

§ 226.20
the refinanced obligation any unearned por
tion of the original finance charge that is not
rebated to the consumer or credited against
the underlying obligation. For example, in a
transaction with an add-on finance charge, a
creditor advances new money to a consumer
in a fashion that extinguishes the original obli
gation and replaces it with a new one. The
creditor neither refunds the unearned finance
charge on the original obligation to the con
sumer nor credits it to the remaining balance
on the old obligation. Under these circum
stances, the unearned finance charge must be
included in the finance charge on the new ob
ligation and reflected in the annual percentage
rate disclosed on refinancing. Accrued but un
paid finance charges are included in the
amount financed in the new obligation.
5. C overage. Section 226.20(a) applies only
to refinancings undertaken by the original
creditor or a holder or servicer of the original
obligation. A “refinancing” by any other per
son is a new transaction under the regulation,
not a financing under this section.
P a ra g ra p h 2 0 (a )(1 )

1. R e n e w a l. This exception applies both to
obligations with a single payment o f principal
and interest and to obligations with periodic
payments o f interest and a final payment of
principal. In determining whether a new obli
gation replacing an old one is a renewal o f the
original terms or a refinancing, the creditor
may consider it a renewal even if:
°
°

Accrued unpaid interest is added to the
principal balance
Changes are made in the terms o f renewal
resulting from the factors listed in section
2 2 6 .1 7 (c )(3 )
The principal at renewal is reduced by a
curtailment o f the obligation

ments. If the annual percentage rate is subse
quently increased (even though it remains be
low its original level) and the increase is
effected in such a way that the old obligation
is satisfied and replaced, new disclosures must
then be made.
P a ra g ra p h 2 0 (a )(3 )

1. C o u r t a g re e m e n ts. This exception includes,
for example, agreements such as reaffirma
tions o f debts discharged in bankruptcy, set
tlement agreements, and post-judgment agree
ments. (See the commentary to section
226.2(a) (14) for a discussion of court-ap
proved agreements that are not considered
“credit.” )
P a ra g ra p h 2 0 (a )(4 )

1. W o r k o u t a g re e m e n ts. A workout agree
ment is not a refinancing unless the annual
percentage rate is increased or additional
credit is advanced beyond amounts already
accrued plus insurance premiums.
P a ra g ra p h 2 0 (a )(5 )

1. I n s u r a n c e ren ew a l. The renewal of optional
insurance added to an existing credit transac
tion is not a refinancing, assuming that appro
priate Truth in Lending disclosures were pro
vided for the initial purchase o f the insurance.

2 0 (b ) A ssum ptions
1. G e n e r a l d e fin itio n . An assumption as de
fined in section 226.20(b) is a new transaction
and new disclosures must be made to the sub
sequent consumer. An assumption under the
regulation requires the following three
elements:
°
°

A residential mortgage transaction
A n express acceptance of the subsequent
consumer by the creditor
A written agreement

P a ra g ra p h 2 0 (a )(2 )

1. A n n u a l p e r c e n ta g e ra te re d u c tio n . A reduc
tion in the annual percentage rate with a cor
responding change in the payment schedule is
not a refinancing. A corresponding change in
the payment schedule could include, for ex
ample, a change in the maturity or a reduction
in the payment amount or the number o f pay-

The assumption o f a nonexempt consumer
credit obligation requires no disclosures un
less all three elements are present. For exam
ple, an automobile dealer need not provide
Truth in Lending disclosures to a customer
who assumes an existing obligation secured by
an automobile. However, a residential mort

Regulation Z Commentary
gage transaction with the elements described
in section 226.20(b) is an assumption that
calls for new disclosures; the disclosures must
be given whether or not the assumption is ac
companied by changes in the terms o f the ob
ligation. (See comment 2 (a )(2 4 )-5 for a dis
cussion o f assumptions that are not consid
ered residential mortgage transactions.)

§ 226.20
as the primary obligor but the creditor accepts
payment from the subsequent consumer, an
assumption exists for purposes o f section
226.20(b ).
5. S t a tu s o f p a rtie s . Section 226.20(b ) applies
only if the previous debtor was a consumer
and the obligation is assumed by another con
sumer. It does not apply, for example, when
an individual takes over the obligation o f a
corporation.

2. E x is t i n g r e s id e n tia l m o r tg a g e tra n sa c tio n .
A transaction may be a residential mortgage
transaction as to one consumer and not to the
other consumer. In that case, the creditor
must look to the assuming consumer in deter
mining whether a residential mortgage trans
action exists. To illustrate:

6. D isclosures. For transactions that are as
sumptions within this provision, the creditor
must make disclosures based on the “remain
ing obligation.” For example:

•

The original consumer obtained a mort
gage to purchase a home for vacation pur
poses. The loan was not a residential mort
gage transaction as to that consumer. The
mortgage is assumed by a consumer who
will use the home as a principal dwelling.
As to that consumer, the loan is a residen
tial mortgage transaction. For purposes of
section 226.20(b), the assumed loan is an
“existing residential mortgage transac
tion” requiring disclosures, if the other
criteria for an assumption are met.

3. E x p r e s s a g re e m e n t. “Expressly agrees”
means that the creditor’s agreement must re
late specifically to the new debtor and must
unequivocally accept that debtor as a primary
obligor. The following events are not con
strued to be express agreements between the
creditor and the subsequent consumer:
°
°
•
°

Approval o f creditworthiness
Notification o f a change in records
Mailing o f a coupon book to the subse
quent consumer
Acceptance o f payments from the new
consumer

4. R e te n tio n o f o r ig in a l c o n su m e r. The reten
tion o f the original consumer as an obligor in
some capacity does not prevent the change
from being an assumption, provided the new
consumer becomes a primary obligor. But the
mere addition o f a guarantor to an obligation
for which the original consumer remains pri
marily liable does not give rise to an assump
tion. However, if neither party is designated

The amount financed is the remaining
principal balance plus any arrearages or
other accrued charges from the original
transaction.
If the finance charge is computed from
time to time by application o f a percentage
rate to an unpaid balance, in determining
the amount o f the finance charge and the
annual percentage rate to be disclosed, the
creditor should disregard any prepaid fi
nance charges paid by the original obligor
but must include in the finance charge any
prepaid finance charge imposed in connec
tion with the assumption.
If the creditor requires the assuming con
sumer to pay any charges as a condition o f
the assumption, those sums are prepaid fi
nance chairges as to that consumer, unless
exempt from the finance charge under sec
tion 226.4.

If a transaction involves add-on or discount
finance charges, the creditor may make abbre
viated disclosures, as outlined in section
2 2 6 .2 0 (b )(1 ) through (5 ).
7. A b b r e v ia te d d isclo su res. The abbreviated
disclosures permitted for assumptions of
transactions involving add-on or discount fi
nance charges; must be made clearly and con
spicuously in writing in a form that the con
sumer may keep. However, the creditor need
not comply with the segregation requirement
o f section 2 2 6 .1 7 (a )(1 ). The terms “annual
percentage rate” and “total o f payments,”
when
disclosed
according
to
section
2 2 6 .2 0 (b )(4 ) and (5 ), are not subject to the

Regulation Z Commentary

§ 226.20
description requirements of section 226.18(e)
and (h ). The term “annual percentage rate”
disclosed under section 2 2 6 .2 0 (b )(4 ) need
not be more conspicuous than other
disclosures.

References
S ta tu te : N one
O th e r se c tio n s: § 226.2
P re v io u s re g u la tio n s: § 226.8 (j) through (/),

and interpretation §§ 226.807, 226.811,
226.814, and 226.817
1 9 8 1 c h a n g es: While the previous regulation
treated virtually any change in terms as a refi
nancing requiring new disclosures, this regu
lation limits refinancings to transactions in
which the entire original obligation is extin
guished and replaced by a new one. Redisclo
sure is no longer required for deferrals or
extensions.
The assumption provision retains the sub
stance o f section 226.8(k ) and interpretation
section 226.807 o f the previous regulation, but
limits its scope to residential mortgage
transactions.

SECTION 226.21—Treatment of Credit
Balances
1. C r e d it b a la n ce . A credit balance arises
whenever the creditor receives or holds funds
in an account in excess of the total balance
due from the consumer on that account. A
balance might result, for example, from the
debtor’s paying off a loan by transmitting
funds in excess o f the total balance owed on
the account, or from the early payoff of a loan
entitling the consumer to a rebate of insurance
premiums and finance charges. However, sec
tion 226.21 does not determine whether the
creditor in fact owes or holds sums for the
consumer. For example, if a creditor has no
obligation to rebate any portion o f precom
puted finance charges on prepayment, the
consumer’s early payoff would not create a
credit balance with respect to those charges.
Similarly, nothing in this provision interferes
with any rights the creditor may have under
the contract or under state law with respect to

set-off, cross-collateralization,
provisions.

similar

2. T o ta l b a la n c e d u e. The phrase “total bal
ance due” refers to the total outstanding bal
ance. Thus, this provision does not apply
where the consumer has simply paid an
amount in excess of the payment due for a
given period.
3. T i m i n g o f r e fu n d . The creditor may also
fulfill its obligation under this section by:
°
°
°

Refunding any credit balance to the con
sumer immediately
Refunding any credit balance prior to a
written request from the consumer
Making a good faith effort to refund any
credit balance before six months have
passed. If that attempt is unsuccessful, the
creditor need not try again to refund the
credit balance at the end of the six-month
period.

Paragraph 21(b)
1. W r itte n re q u e sts— s ta n d in g orders. The
creditor is not required to honor standing or
ders requesting refunds o f any credit balance
that may be created on the consumer’s
account.

Paragraph 21(c)
1. G o o d f a i t h e ffo r t to r e fu n d . The creditor
must take positive steps to return any credit
balance that has remained in the account for
over six months. This includes, if necessary,
attempts to trace the consumer through the
consumer’s last known address or telephone
number, or both.
2. G o o d f a i t h e ffo r t u n su c c e ss fu l. Section
226.21 imposes no further duties on the credi
tor if a good faith effort to return the balance
is unsuccessful. The ultimate disposition of
the credit balance (or any credit balance of $1
or less) is to be determined under other appli
cable law.

References
S ta tu te : § 165
O th e r sectio n s: None.

Regulation Z Commentary
P re vio u s r e g u la tio n : None
1 9 8 1 c h a n g es: This section implements section

165 o f the act, which was expanded by the
1980 statutory amendments to apply to
closed-end as well as open-end credit.

SECTION 226.22—Determination of the
Annual Percentage Rate
22(a) Accuracy of the Annual
Percentage Rate
P a ra g ra p h 2 2 (a )(1 )

1. C a lc u la tio n m e th o d . The regulation recog
nizes both the actuarial method and the
United States Rule Method (U.S. R ule) as
measures o f an exact annual percentage rate.
Both methods yield the same annual percent
age rate when payment intervals are equal.
They differ in their treatment o f unpaid ac
crued interest.
2. A c tu a r ia l m e th o d . When no payment is
made, or when the payment is insufficient to
pay the accumulated finance charge, the actu
arial method requires that the unpaid finance
charge be added to the amount financed and
thereby capitalized. Interest is computed on
interest since in succeeding periods the inter
est rate is applied to the unpaid balance in
cluding the unpaid finance charge. Appendix
J provides instructions and examples for cal
culating the annual percentage rate using the
actuarial method.

§ 226.22
and 14 percent for year 5. The monthly pay
ments are $210.71 during the first two years of
the term, $220.25 for years 3 and 4, and
$222.59 for year 5. The composite annual per
centage rate,, using a calculator with a “dis
counted cash flow analysis” or “internal rate
o f return” function, is 10.75 percent.
5. G o o d f a i t h r e lia n c e on f a u l t y c a lc u la tio n
tools. Footnote 45a absolves a creditor o f lia

bility for an error in the annual percentage
rate or finance charge that resulted from a
corresponding error in a calculation tool used
in good faith by the creditor. Whether or not
the creditor’s use o f the tool was in good faith
must be determined on a case-by-case basis,
but the creditor must in any case have taken
reasonable steps to verify the accuracy o f the
tool, including any instructions, before using
it. Generally, the footnote is available only for
errors directly attributable to the calculation
tool itself, including software programs; it is
not intended to absolve a creditor o f liability
for its own errors, or for errors arising from
improper use o f the tool, from incorrect data
entry, or from misapplication o f the law.

P a ra g ra p h 2 2 (a )(2 )

1. R e g u la r tra n sa c tio n s. The annual percent
age rate for a regular transaction is considered
accurate if it varies in either direction by not
more than § o f 1 percentage point from the
actual annual percentage rate. For example,
when the exact annual percentage rate is de
termined to be 10| percent, a disclosed annual
percentage rate from 10 percent to 10| per
cent, or the decimal equivalent, is deemed to
comply with the regulation.

3. U .S. R u le . The U.S. Rule produces no
compounding o f interest in that any unpaid
accrued interest is accumulated separately
and is not added to principal. In addition, un
der the U.S. Rule, no interest calculation is
made until a payment is received.

P a ra g ra p h 2 2 (a )(3 )

4. B a s is f o r c a lc u la tio n s. When a transaction
involves “step rates” or “split rates”— that is,
different rates applied at different times or to
different portions o f the principal balance— a
single composite annual percentage rate must
be calculated and disclosed for the entire
transaction. Assume, for example, a step-rate
transaction in which a $ 10,000 loan is repaya
ble in five years at 10 percent interest for the
first two years, 12 percent for years 3 and 4,

1. I r r e g u la r tra n sa c tio n s. The annual percent
age rate for an irregular transaction is consid
ered accurate if it varies in either direction by
not more than 5 of 1 percentage point from
the actual annual percentage rate. This toler
ance is intended for more complex transac
tions that do not call for a single advance and
a regular series o f equal payments at equal
intervals. The \ o f 1 percentage point toler
ance may be used, for example, in a construc-

Regulation Z Commentary

§ 226.22
tion loan where advances are made as con
struction progresses, or in a transaction where
payments vary to reflect the consumer’s sea
sonal income. It may also be used in transac
tions with graduated payment schedules
where the contract commits the consumer to
several series o f payments in different
amounts. It does not apply, however, to loans
with variable-rate features where the initial
disclosures are based on a regular amortiza
tion schedule over the life o f the loan, even
though payments may later change because of
the variable-rate feature.

2 2 (c ) Single A dd-O n R ate Transactions
1. G e n e r a l rule. Creditors applying a single
add-on rate to all transactions up to 60
months in length may disclose the same annu
al percentage rate for all those transactions,
although the actual annual percentage rate
varies according to the length o f the transac
tion. Creditors utilizing this provision must
show the highest o f those rates. For example:
°

2 2 (b ) C om putation Tools
P a ra g ra p h 2 2 (b )(1 )

1. B o a r d tables. Volumes I and II o f the
Board’s Annual Percentage Rate Tables pro
vide a means of calculating annual percentage
rates for regular and irregular transactions,
respectively. An annual percentage rate com
puted in accordance with the instructions in
the tables is deemed to comply with the regu
lation, even where use of the tables produces a
rate that falls outside the general standard of
accuracy. To illustrate:
°

Volume I may be used for single-advance
transactions with completely regular pay
ment schedules or with payment schedules
that are regular except for an odd first pay
ment, odd first period or odd final pay
ment. When used for a transaction with a
large final balloon payment, volume I may
produce a rate that is considerably higher
than the exact rate produced using a com
puter program based directly on appendix
J. However, the volume I rate— produced
using certain adjustments in that vol
ume— is considered to be in compliance.

An add-on rate o f 10 percent converted to
an annual percentage rate produces the
following actual annual percentage rates at
various maturities: at 3 months, 14.94 per
cent; at 21 months, 18.18 percent; and at
60 months, 17.27 percent. The creditor
must disclose an annual percentage rate of
18.18 percent (the highest annual percent
age rate) for any transaction up to five
years, even though that rate is precise only
for a transaction o f 21 months.

2 2 (d ) Certain Transactions Involving
R anges o f Balances
1. G e n e r a l rule. Creditors applying a fixed
dollar finance charge to all balances within a
specified range o f balances may understate the
annual percentage rate by up to 8 percent of
that rate by disclosing for all those balances
the annual percentage rate computed on the
median balance within that range. For
example:
°

If a finance charge o f $9 applies to all bal
ances between $91 and $100, an annual
percentage rate o f 10 percent (the rate on
the median balance) may be disclosed as
the annual percentage rate for all balances,
even though a $9 finance charge applied to
the lowest balance ($91) would actually
produce an annual percentage rate of 10.7
percent.

P a ra g ra p h 2 2 (b )(2 )

1. O th e r c a lc u la tio n tools. Creditors need not
use the Board tables in calculating the annual
percentage rates. Any computation tools may
be used, so long as they produce annual per
centage rates within ^ or £ o f 1 percentage
point, as applicable, o f the precise actuarial or
U.S. Rule annual percentage rate.

References
S ta tu te : § 107
O th e r se c tio n s: § 226.17(c) (4 ) and appendix J
P re v io u s re g u la tio n : § 226.5(b ) through (e)
1 9 8 1 ch a n g es: The section now provides a
larger tolerance (5 o f 1 percentage point) for
irregular transactions.

Regulation Z Commentary
SE C T IO N 226.23— R ight o f R escission
1. T r a n s a c tio n s n o t covered. Credit extensions
that are not subject to the regulation are not
covered by section 226.23 even if a customer’s
principal dwelling is the collateral securing
the credit. For example, the right o f rescission
does not apply to a business-purpose loan,
even though the loan is secured by the cus
tomer’s principal dwelling.

2 3 (a ) Consum er’s R ight to R escind
P a ra g ra p h 2 3 (a )(1 )

1. S e c u r ity in te r e s t a r isin g f r o m tra n sa c tio n .
In order for the right o f rescission to apply,
the security interest must be retained as part
o f 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
the contractor-creditor, even when the lat
ter has waived its own security interest in
the consumer’s home

The security interest is not part o f the credit
transaction and therefore the transaction is
not subject to the right o f rescission when, for
example:
°

A mechanic’s or materialman’s lien is ob
tained by a contractor who is not a party
to the credit transaction but is merely paid
with the proceeds of the consumer’s unse
cured bank loan
A ll 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 re
sult o f the credit transaction

Although liens arising by operation of law are
not considered security interests for purposes
o f disclosure under section 226.2, that section
specifically includes them in the definition for
purposes o f the right of rescission. Thus, even
though an interest in the consumer’s principal
dwelling is not a required disclosure under

§ 226.23
section 226.18 (m ), it may still give rise to the
right o f rescission.
2. C o n su m er. To be a consumer within the
meaning o f section 226.2, that person must at
least have an ownership interest in the dwell
ing that is encumbered by the creditor’s secu
rity interest, although that person need not be
a signatory to the credit agreement. For exam
ple, if only one spouse signs a credit contract,
the other spouse is a consumer if the owner
ship interest o f that spouse is subject to the
security interest.
3. P r in c ip a l d w e llin g . A consumer can only
have o n e principal dwelling at a time. A vaca
tion 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 acquisition or construction loan.
“D welling,” as defined in section 226.2, in
cludes structures that are classified as person
alty under state law. For example, a transac
tion secured by a mobile home, trailer or
houseboat used as the consumer’s principal
dwelling may be rescindable.
4. S p e c ia l r u le f o r p r in c ip a l d w e llin g . When
the consumer is acquiring or constructing a
new principal dwelling, a n y loan secured by
the equity in the consumer’s current principal
dwelling (for example, a bridge loan) is still
subject to the right o f rescission regardless of
the purpose o f that loan.
5. A d d itio n o f a s e c u r ity in terest. Under foot
note 47, the addition o f a security interest to a
preexisting obligation is rescindable. The right
of rescission applies only to the added security
interest, however, and not to the original obli
gation. In those situations, only the section
226.23(b) notice need be delivered, not new
material disclosures; the rescission period will
begin to run from the delivery o f the notice.

Regulation Z Commentary

§ 226.23
P a ra g ra p h 2 3 (a )(2 )

1. C o n s u m e r ’s e x e rc ise o f right. The consumer
must exercise the right of rescission in writing
but not necessarily on the notice supplied un
der section 226.23(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
section 2 2 6 .2 3 (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 section 226.23(b ).

failure may result in civil liability or adminis
trative sanctions.
3. U n e x p ir e d r ig h t o f rescission. When the
creditor has failed to take the action necessary
to start the three-business day rescission peri
od running, the right to rescind automatically
lapses on the occurrence o f the earliest o f the
following three events:
°
°
°

P a ra g ra p h 2 3 (a )(3 )

1. R e s c iss io n p e rio d . The period within which
the consumer may exercise the right to re
scind runs for three business days from the
last o f three events:
°
°
°

Consummation o f the transaction
Delivery o f all material disclosures
Delivery to the consumer o f the required
rescission notice

For example, if a transaction is consummated
on Friday, June 1, and the disclosures and no
tice of the right to rescind were given on
Thursday, May 31, the rescission period will
expire at midnight o f the third business day
after June 1— that is, Tuesday, June 5. In an
other example, if the disclosures are given and
the transaction consummated on Friday, June
1, and the rescission notice is given on M on
day, June 4, the rescission period expires at
midnight o f 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 a te r ia l d isclo su res. Footnote 48 sets forth
the material disclosures that must be provided
before the rescission period can begin to run.
Failure to provide information regarding the
annual percentage rate also includes failure to
inform the consumer of the existence of a vari
able-rate feature. Failure to give the other re
quired disclosures does not prevent the run
ning o f the rescission period, although that
96

The expiration o f three years after con
summation o f the transaction
Transfer o f all the consumer’s interest in
the property
Sale o f the consumer’s interest in the prop
erty, including a transaction in which the
consumer sells the dwelling and takes back
a purchase money note and mortgage or
retains legal title through a device such as
an installment sale contract

Transfer of all the consumer’s interest in
cludes such transfers as bequests and gifts. A
sale or transfer of the property need not be
voluntary to terminate the right to rescind.
For example, a foresclosure sale would termi
nate an unexpired right to rescind. A s provid
e d in s e c t io n

1 2 5 o f t h e a c t , t h e th r e e - y e a r

limit may be extended by an administrative
proceeding to enforce the provisions o f this
section. A partial transfer o f the consumer’s
interest, such as a transfer bestowing co-own
ership on a spouse, does not terminate the
right of rescission.

P a ra g ra p h 2 3 (a ) ( 4 )

1. J o in t ow ners. When more than one con
sumer has the right to rescind a transaction,
any one o f them may exercise that right and
cancel the transaction on behalf o f all. For
example, if both 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.

2 3 (b ) N otice o f R ight to R escind
1. W h o receives notice. Each consumer enti
tled to rescind must be given:
°
°

Two copies o f the rescission notice
The material disclosures

Regulation Z Commentary

§ 226.23

In a transaction involving joint owners, both
o f whom are entitled to rescind, both must
receive the notice o f the right to rescind and
disclosures. For example, if both spouses are
entitled to rescind a transaction, each must
receive two copies o f the rescission notice and
one copy o f the disclosures.

isfied that the consumer has not rescinded, the
creditor must not, either directly or through a
third party:

2. F o rm a t. The notice must be on a separate
piece o f paper but may appear with other in
formation such as the itemization o f the
amount financed. The material must be clear
and conspicuous, but no minimum type size
or other technical requirements are imposed.
The notices in appendix H provide models
that creditors may use in giving the notice.

2. E scrow . The creditor may disburse loan
proceeds during the rescission period in a val
id 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. C o n ten t. The notice must include all o f the
information outlined in section 2 2 6 .2 3 (b )(1 )
through (5 ). The requirement in section
226.23(b) that the transaction be identified
may be met by providing the date o f the trans
action. The creditor may provide a separate
form that the consumer may use to exercise
the right o f rescission, or that form may be
combined with the other rescission disclo
sures, as illustrated in appendix H. The notice
may include additional information related to
the required information, such as:
°
°

A description o f 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 o f an agent o f the
creditor to receive notice o f rescission

4. T im e o f p r o v id in g notice. The notice re
quired by section 226.23(b) need not be given
before consummation of the transaction. The
creditor may deliver the notice after the trans
action is consummated, but the rescission pe
riod 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 transaction was consummated
on May 10, the three-business day rescission
period will run from May 15.

23 (c ) D elay o f Creditor’s Performance
1. G e n e r a l ru le. Until the rescission period
has expired and the creditor is reasonably sat

°
°
°

Disburse loan proceeds to the consumer
Begin
performing services for the
consumer
Deliver materials to the consumer

3. P e r m issib le a ctio n s. Section 226.23(c) does
not prevent the creditor from taking other
steps during the delay, short o f beginning ac
tual performance. The creditor may, for
example:
°
°
°
°

Prepare the loan check
Perfect the security interest
Prepare to discount or assign the contract
to a third party
Accrue finance charges during the delay
period

4. D e la y b e y o n d rescission p e rio d . The credi
tor must wait until it is reasonably satisfied
that the consumer has not rescinded. For ex
ample, the creditor may satisfy itself by doing
one of the following:
°

Waiting a reasonable time after expiration
of the rescission period to allow for deliv
ery 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 o f only one consumer, be
cause other consumers may exercise the right.

2 3 (d ) Effects o f R escission
P a ra g ra p h 2 3 (d ) (1)

§ 226.23
is automatically negated regardless o f its
status and whether or not it was recorded or
perfected. Under section 2 2 6 .2 3 (d )(2 ), how
ever, the creditor must take any action neces
sary to reflect the fact that the security inter
est no longer exists.
P a ra g ra p h 2 3 ( d ) ( 2 )

1. R e f u n d s to c o n su m e r. The consumer can
not be required to pay any amount in the form
o f money or property either to the creditor or
to a third party as part o f the credit transac
tion. A ny amounts o f this nature already paid
by the consumer must be refunded. “Any
amount” includes finance charges already ac
crued, as well as other charges such as appli
cation and commitment fees or fees for a title
search or appraisal, whether paid to the credi
tor, paid directly to a third party, or passed on
from the creditor to the third party. It is irrel
evant that these amounts may not represent
profit to the creditor.
2. A m o u n t s n o t r e fu n d a b le to c o n su m e r.
Creditors need not return any money given by
the consumer to a third party outside o f the
credit transaction, such as costs incurred for a
building permit or for a zoning variance. Simi
larly, the term “any amount” does not apply
to any money or property given by the credi
tor to the consumer; those amounts must be
tendered by the consumer to the creditor un
der section 2 2 6 .2 3 (d )(3 ).
3. R e fle c tio n o f se c u r ity in te r e s t te r m in a tio n .
The creditor must take whatever steps are
necessary to indicate that the security interest
is terminated. Those steps include the cancel
lation of documents creating the security in
terest, and the filing of release or termination
statements in the public record. In a transac
tion involving subcontractors or suppliers that
also hold security interests related to the cred
it transaction, the creditor must ensure that
the termination o f their security interests is
also reflected. The 20-day period for the credi
tor’s action refers to the time within which the
creditor must begin the process. It does not
require all necessary steps to have been com
pleted within that time, but the creditor is re
sponsible for seeing the process through to
completion.

Regulation Z Commentary
P a ra g ra p h 2 3 ( d ) ( 3 )

1. P ro p e rty e x c h a n g e . Once the creditor has
fulfilled
its
obligations
under
section
2 2 6 .2 3 (d )(2 ), the consumer must tender to
the creditor any property or money the credi
tor has already delivered to the consumer. At
the consumer’s option, property may be ten
dered at the location o f the property. For ex
ample, if lumber or fixtures have been deliv
ered 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 credi
tor’s premises. M oney already given to the
consumer m u s t be tendered at the creditor’s
place o f business.
2. R e a s o n a b le value. If returning the property
would be extremely burdensome to the con
sumer, the consumer may offer the creditor its
reasonable value rather than returning the
property itself. For example, if building mate
rials have already been incorporated into the
consumer’s dwelling, the consumer may pay
their reasonable value.
P a ra g ra p h 2 3 ( d ) ( 4 )

1. M o d ific a tio n s . The procedures outlined in
section 2 2 6 .2 3 (d )(2 ) and (3 ) may be modi
fied by a court. For example, when a consum
er is in bankruptcy proceedings and prohibit
ed from returning anything to the creditor, or
when the equities dictate, a modification
might be made.

2 3 (e ) C onsum er’s W aiver o f R ight to
R escind
1. N e e d f o r w aiver. To waive the right to re
scind, the consumer must have a bona fide
personal financial emergency that must be met
before the end of the rescission period. The
existence o f the consumer’s waiver will not, of
itself, automatically insulate the creditor from
liability for failing to provide the right of
rescission.
2. P ro c ed u 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

Regulation Z Commentary
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 signa
tures o f both spouses.

2 3 (f) Exem pt Transactions
1. R e s id e n tia l m o r tg a g e tra n sa c tio n . Any
transaction to construct or acquire a principal
dwelling, whether considered real or personal
property, is exempt. (See the commentary to
section 2 26.23(a).) For example, a credit
transaction to acquire a mobile home or
houseboat to be used as the consumer’s princi
pal dwelling would not be rescindable.
2. L ie n sta tu s. The lien status o f the mortgage
is irrelevant for purposes o f the exemption in
section 2 2 6 .2 3 (f)(1 ); the fact that a loan has
junior lien status does not by itself preclude
application o f this exemption. For example, a
home buyer may assume the existing first
mortgage and create a second mortgage to fi
nance the balance o f the purchase price. Such
a transaction would not be rescindable.
3. C o m b in e d -p u r p o s e tra n sa c tio n . A loan to
acquire a principal dwelling and make im
provements to that dwelling is exempt if treat
ed as one transaction. If, on the other hand,
the loan for the acquisition o f the principal
dwelling and the subsequent advances for im
provements are treated as more than one
transaction, then only the transaction that fi
nances the acquisition o f that dwelling is
exempt.
4. N e w a d v a n ce s. The exemption in section
2 2 6 .2 3 (f)(2 ) applies only to refinancings or
consolidations by the original creditor. If the
transaction involves the advance o f new mon
ey, then only the amount o f the new money is
rescindable. For example, if the sum o f the
outstanding principal balance plus the earned
finance charge is $ 1,000 and the new amount
financed is $ 1,000 , then the refinancing would
be exempt. On the other hand, if the new
amount financed exceeds $ 1,000 , then the
amount in excess o f that $ 1,000 would be re
scindable. A model rescission notice applica
ble to transactions involving new money ap
pears in appendix H.

§ 226.24
5. S ta te creditors. Cities and other political
subdivisions o f states acting as creditors are
not exempted from this section.

6 . M u ltip le a d v a n ce s. Just as new disclosures
need not be made for subsequent advances
when treated as one transaction, no new re
scission rights arise so long as the appropriate
notice and disclosures are given at the outset
o f the transaction. For example, the creditor
extends credit for home improvements se
cured by the consumer’s principal dwelling,
with advances, made as repairs progress. As
permitted by section 2 2 6 .1 7 (c )(6 ), the credi
tor makes a single set o f disclosures at the
beginning o f the construction period, rather
than separate disclosures for each advance.
The right o f rescission does not arise with
each advance. However, if the advances are
treated as separate transactions, the right of
rescission applies to each advance.
7. S p r e a d e r clauses. When the creditor holds
a mortgage or deed o f trust on the consumer’s
principal dwelling and that mortgage or deed
o f trust contains a “spreader clause,” subse
quent loans made are separate transactions
and are subject to the right o f rescission.
Those loans are rescindable unless the credi
tor effectively waives its security interest un
der the spreader clause with respect to the
subsequent transactions.

References
S ta tu te : §§ 113, 125, and 130
O th e r sectio n s: § 226.2 and appendix H
P re vio u s re g u la tio n : § 226.9
1 9 8 1 c h a n g es: 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 notice of the right to rescind.

SEC TIO N 226.24— Advertising
1. C le a r a n d c o n sp ic u o u s s ta n d a r d . This sec
tion is subject to the general “clear and con
spicuous” standard for this subpart but pre
scribes no specific rules for the format o f 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 ad99

§ 226.24
vertisement. For example, a merchandise tag
that is an advertisement under the regulation
complies with this section if the necessary
credit terms are on both sides o f the tag, so
long as each side is accessible.

2 4 (a ) A ctually Available Terms
1. G e n e r a l ru le. To the extent that an adver
tisement mentions specific credit terms, it may
state only those terms that the creditor is ac
tually prepared to offer. For example, a credi
tor may not advertise a very low annual per
centage rate that will not in fact be available
at any time. This provision is not intended to
inhibit the promotion of new credit programs,
but to bar the advertising o f terms that are not
and will not be available. For example, a cred
itor may advertise terms that will be offered
for only a limited period, or terms that will
become available at a future date.

2 4 (b ) Advertisem ent o f R ate o f Finance
Charge
1. A n n u a l p e r c e n ta g e rate. Advertised rates
must be stated in terms o f an “annual percent
age rate,” as defined in section 226.22. Even
though state or local law permits the use of
add-on, discount, time-price differential, or
other methods o f stating rates, advertisements
must state them as annual percentage rates.
Unlike the transactional disclosure o f the an
nual percentage rate under section 2 2 6 .18(e),
the advertised annual percentage rate need
not include a descriptive explanation o f the
term. The advertisement must state that the
rate is subject to increase after consummation
if that is the case, but the advertisement need
not describe the rate increase, its limits, or
how it would affect the payment schedule. As
under section 226.18(f), relating to disclosure
o f a variable rate, the rate increase disclosure
requirement in this provision does not apply
to any rate increase due to delinquency (in
cluding late payment), default, acceleration,
assumption, or transfer of collateral.
2. S i m p l e o r p e r io d ic rates. The advertisement
may not simultaneously state any other rate,
except that a simple annual rate or periodic
rate applicable to an unpaid balance may ap
pear along with (but not more conspicuously
100

Regulation Z Commentary
than) the
example:
°

annual

percentage

rate.

For

In an advertisement for real estate, a sim
ple interest rate may be shown in the same
type size as the annual percentage rate for
the advertised credit.

3. B u y d o w n s . When a third party (such as a
seller) or a creditor wishes to promote the
availability o f reduced interest rates (consum
er or seller buydowns), the advertised annual
percentage rate must be determined in accord
ance with the rules in the commentary to sec
tion 226.17(c) regarding the basis o f transac
tional disclosures for buydowns. The seller or
creditor may advertise the reduced simple in
terest rate, provided the advertisement shows
the limited term to which the reduced rate
applies and states the simple interest rate ap
plicable to the balance o f the term. The adver
tisement may also show the effect o f the buy
down agreement on the payment schedule for
the buydown period without triggering the ad
ditional disclosures under section 226.24(c)
(2 ). For example, the advertisement may
state that “with this buydown arrangement,
your monthly payments for the first three
years o f the mortgage term will be only $350”
or “this buydown arrangement will reduce
your monthly payments for the first three
years o f the mortgage term by $150.”
4. E ffe c tiv e rates. In some transactions the
consumer’s payments may be based upon an
interest rate lower than the rate at which in
terest is accruing. The lower rate may be re
ferred to as the effective rate, payment rate, or
qualifying rate. A creditor or seller may ad
vertise such rates by stating the term of the
reduced payment schedule, the interest rate
upon which the reduced payments are calcu
lated, the rate at which the interest is in fact
accruing, and the annual percentage rate. The
advertised annual percentage rate that must
accompany this rate must take into account
the interest that will accrue but will not be
paid during this period. For example, an ad
vertisement may state, “An effective first-year
interest rate o f 10 percent. Interest being
earned at 14 percent. Annual percentage rate
15 percent.”

Regulation Z Commentary
5. D is c o u n te d v a ria b le -ra te tra n sa c tio n s. The
advertised annual percentage rate for dis
counted variable-rate transactions must be de
termined in accordance with comment
1 8 (f)- 8 regarding the basis o f transactional
disclosures for such financing. A creditor or
seller may promote the availability o f the ini
tial rate reduction in such transactions by ad
vertising the reduced initial rate, provided the
advertisement shows the limited term to
which the reduced rate applies.
® Limits or caps on periodic rate or payment
adjustments need not be stated. To illus
trate using the second example in com
ment 1 8 (f)—8, the fact that the rate is pre
sumed to be 11 percent in the second year
and 12 percent for the remaining 28 years
need not be included in the advertisement.
° The advertisement may also show the ef
fect o f the discount on the payment sched
ule for the discount period without trigger
ing the additional disclosures under
section 226.24(c). For example, the adver
tisement may state that “with this dis
count, your monthly payments for the first
year o f the mortgage term will be only
$577” or “this discount will reduce your
monthly payments for the first year of
mortgage term by $223.”

2 4 (c ) A dvertisem ent o f Term s That
Require A dditional D isclosures
1. G e n e r a l ru le. Under section 2 2 6 .2 4 (c )(1 ),
whenever certain triggering terms appear in
credit advertisements, the additional credit
terms enumerated in section 2 2 6 .2 4 (c )(2 )
must also appear. These provisions apply even
if the triggering term is not stated explicitly
but may be readily determined from the ad
vertisement. For example, an advertisement
may state “ 80 percent financing available,”
which is in fact indicating that a 20 percent
downpayment is required.
P a ra g ra p h 2 4 (c )(1 )

1. D o w n p a y m e n t. The dollar amount o f a
downpayment or a statement o f the downpay
ment as a percentage of the price requires fur
ther information. By virture o f the definition
of “downpayment” in section 226.2, this trig

§ 226.24
gering term is limited to credit sale transac
tions. It includes such statements as:
°
°
°

“Only 5 percent down”
“A s low as $100 down”
“Total move-in costs o f $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.
2. P a y m e n t p e r io d . The number o f payments
required or the total period o f repayment in
cludes such statements as:
°
°

“48-month payment terms”
“30-year mortgage”
8 “Repayment in as many as 36 monthly
installments”
But it does not include such statements as
“pay weekly,” “m onthly payment terms ar
ranged,” or “take years to repay,” since these
statements do not indicate a time period over
which a loan may be financed.
3. P a y m e n t a m o u n t. The dollar amount o f
any payment includes statements such as:

8 “Payable in installments o f $103”
°

“ $ 2 5 w e e k ly ”

“$ 1,200 balance
installments”

payable

10 equal

In the last example, the amount o f each pay
ment is readily determinable, even though not
explicitly stated. But statements such as
“monthly payments to suit your needs” or
“regular monthly payments” are not covered.
4. F in a n c e ch arge. The dollar amount o f the
finance charge or any portion o f it includes
statements such as:
°
°
°

“$500 total cost o f credit”
“ $2 monthly carrying charge”
“$50,000 mortgages, two points to the
borrower”

In the last example, the $1,000 prepaid fi
nance charge can be readily determined from
the information given. Statements o f the an
nual percentage rate or statements that there
is no particular charge for credit (such as “no
101

Regulation Z Commentary

§ 226.24
closing costs” ) are not triggering terms under
this paragraph.
P a ra g ra p h 2 4 (c )(2 )

1. D isc lo su re o f d o w n p a y m e n t. The total
downpayment as a dollar amount or percent
age must be shown, but the word “downpay
m ent” need not be used in making this disclo
sure. For example, “ 10 percent cash required
from buyer” or “credit terms require mini
mum $100 trade-in” would suffice.
2. D isc lo su re o f r e p a y m e n t term s. While the
phrase “terms o f repayment” generally has
the same meaning as the “payment schedule”
required to be disclosed under section
226.18(g), section 226.24(c) (2 ) (ii) provides
greater flexibility to creditors in making this
disclosure for advertising purposes. Repay
ment terms may be expressed in a variety of
ways in addition to an exact repayment sched
ule; this is particularly true for advertisements
that do not contemplate a single specific trans
action. For example:
°

A creditor may use a unit-cost approach in
making the required disclosure, such as
“48 monthly payments of $27.83 per
$ 1,000 borrowed.”
In an advertisement for credit secured by a
dwelling, when any series o f payments var
ies because o f a graduated payment feature
or because o f the inclusion of mortgage in
surance premiums, a creditor may state
the number and timing of payments, the
amounts o f the largest and smallest of
those payments, and the fact that other
payments will vary between those
amounts.

3. A n n u a l p e r c e n ta g e rate. The advertisement
must also state, if applicable, that the annual
percentage rate is subject to increase after
consummation.
4. Use o f e x a m p le s . Footnote 49 authorizes
the use o f illustrative credit transactions to
make the necessary disclosures under section
226.24(c) (2 ). That is, where a range o f possi
ble combinations o f credit terms is offered, the
advertisement may use examples of typical
transactions, so long as each example contains
all o f the applicable terms required by section
102

226.24(c). The examples must be labelled as
such and must reflect representative credit
terms that are made available by the creditor
to present and prospective customers.

2 4 (d ) Catalogs and M ultiple-Page
Advertisem ents
1. D e fin itio n . The multiple-page advertise
ments to which this section refers are adver
tisements consisting o f a series o f sequentially
numbered pages— for example, a supplement
to a newspaper. A mailing consisting o f sever
al separate flyers or pieces o f promotional ma
terial in a single envelope does not constitute a
single multiple-page advertisement for pur
poses o f section 226.24(d ).
2. G eneral. Section 226.24(d ) permits credi
tors to put credit information together in one
place in a catalog or multiple-page advertise
ment. The rule applies only if the catalog or
multiple-page advertisement contains one or
more o f the triggering terms from section
2 2 6 .2 4 (c )(1 ). A list o f different annual per
centage rates applicable to different balances,
for example, does not trigger further disclo
sures under section 2 2 6 .2 4 (c )(2 ) and so is
not covered by section 226.24(d ).
3. R e p r e s e n ta tiv e e x a m p le s. The table or
schedule must state all the necessary informa
tion for a representative sampling o f amounts
of credit. This must reflect amounts o f credit
the creditor actually offers, up to and includ
ing the higher-priced items. This does not
mean that the chart must make the disclo
sures for the single most expensive item the
seller offers, but only that the chart cannot be
limited to information about less expensive
sales when the seller commonly offers a dis
tinct level o f more expensive goods or serv
ices. The range o f transactions shown in the
table or schedule in a particular catalog or
multiple-page advertisement need not exceed
the range o f transactions actually offered in
that advertisement.

References
S ta tu te : §§ 141, 142, and 144
O th e r sectio n s: §§ 226.2, 226.4, and 226.22
P re v io u s r e g u la tio n : §226.10(a), (b ), and (d )
198 1 c h a n g es: This section retains the adver

Regulation Z Commentary
tising rules in a form very similar to the previ
ous regulation, but with certain changes to
reflect the 1980 statutory amendments. For
example, if triggering terms appear in any
advertisement, the additional disclosures
required no longer include the cash price. The
special rule for F H A section 235 financing has
been eliminated, as well as the rule for adver
tising credit payable in more than four install
ments with no identified finance charge.
Interpretation section 226.1002, requiring dis
closure o f representative amounts o f credit in
catalogs and multiple-page advertisements,
has been incorporated in simplified form in
section 226.24(d).
Unlike the previous regulation, if the adver
tised annual percentage rate is subject to in
crease, that fact must now be disclosed.

SU B P A R T D — M ISC E L L A N E O U S
SE C T IO N 226.25— R ecord R etention
2 5 (a ) General R ule
1. E v id e n c e o f r e q u ir e d actio n s. The creditor
must retain evidence that it performed the re
quired actions as well as made the required
disclosures. This includes, for example, evi
dence that the creditor properly handled ad
verse credit reports in connection with
amounts subject to a billing dispute under sec
tion 226.13, and properly handled the refund
ing o f credit balances under sections 226.11
and 226.21.
2. M e th o d s o f r e ta in in g evidence. Adequate
evidence o f compliance does not necessarily
mean actual paper copies o f disclosure state
ments or other business records. The evidence
may be retained on microfilm, microfiche, or
by any other method that reproduces records
accurately (including computer programs).
The creditor need retain only enough infor
mation to reconstruct the required disclosures
or other records. Thus, for example, the credi
tor need not retain each open-end periodic
statement, so long as the specific information
on each statement can be retrieved.

References
S ta tu te : §§ 105 and 108

§ 226.26
O th e r se c tid n s: Appendix I
P re v io u s re g u la tio n : § 2 2 6 .6 (i)
1 9 8 1 c h a n g es: Section 226.25 substitutes a
uniform two-year record-retention rule for the
previous requirement that certain creditors re
tain records through at least one compliance
examination. It also states more explicitly that
the record-retention requirements apply to ev
idence o f required actions.

SE C T IO N 226.26— U se o f A nnual
Percentage R ate in Oral D isclosures
1. A p p lic a tio n o f rules. The restrictions o f sec
tion 226.26 apply only if the creditor chooses
to respond orally to the consumer’s request
for credit cost information. N othing in the
regulation requires the creditor to supply rate
information orally. If the creditor volunteers
information (including rate information)
through oral solicitations directed generally to
prospective customers, as through a telephone
solicitation, those communications may be ad
vertisements subject to the rules in sections
226.16 and 226.24.

2 6 (a ) O pen-End Credit
1. I n f o r m a t i o n th a t m a y b e g iven . The credi
tor may state periodic rates in addition to the
required annual percentage rate, but it need
not do so. If the annual percentage rate is un
known because transaction charges, loan fees,
or similar finance charges may be imposed,
the creditor must give the corresponding an
nual percentage rate (that is, the periodic rate
multiplied by the number o f periods in a year,
as described in sections 2 2 6 .6 (a )(2 ) and
2 2 6 .7 (d )). In such cases, the creditor may,
but need not, also give the consumer informa
tion about other finance charges and other
charges.

2 6 (b ) Closed-End Credit
1. I n f o r m a t i o n th a t m a y b e g iven . The credi
tor may state other annual or periodic rates
that are applied to an unpaid balance, along
with the required annual percentage rate. This
rule permits disclosure o f a simple interest
rate, for example, but not an add-on, discount,
or similar rate. If the creditor cannot give a

103

§ 226.26
precise annual percentage rate in its oral re
sponse because o f variables in the transaction,
it must give the annual percentage rate for a
comparable sample transaction; in this case,
other cost information may, but need not, be
given. For example, the creditor may be un
able to state a precise annual percentage rate
for a mortgage loan without knowing the ex
act amount to be financed, the amount o f loan
fees or mortgage insurance premiums, or simi
lar factors. In this situation, the creditor
should state an annual percentage rate for a
sample transaction; it may also provide infor
mation about the consumer’s specific case,
such as the contract interest rate, points, other
finance charges, and other charges.

References
S ta tu te : § 146
O th e r se c tio n s: §§ 2 2 6 .6 (a )(2 ) and 226.7(d )
P re v io u s re g u la tio n : Interpretation § 226.101
1981
ch a n g es: This section implements
amended section 146 of the act, which added
a provision dealing with oral disclosures, and
incorporates interpretation section 226.101.

Regulation Z Commentary
R eferences
S ta tu te : N one
O th e r se c tio n s: N one
P re v io u s re g u la tio n : § 226.6(a)
1 9 8 1 c h a n g es: N o substantive change

SE C T IO N 226.28— Effect on State Laws
2 8 (a ) Inconsistent D isclosure
Requirem ents
1. G en era l. There are three sets o f preemption
criteria; one applies to the general disclosure
and advertising rules o f the regulation, and
two apply to the credit-billing provisions. Sec
tion 226.28 also provides for Board determi
nations o f preemption.
2. R u l e s f o r c h a p te r s 1, 2, a n d 3. The standard
for judging whether state laws that cover the
types o f requirements in chapters 1 (General
Provisions), 2 (Credit Transactions), and 3
(Credit Advertising) o f the act are inconsist
ent and therefore preempted, is contradiction
o f the federal law. Examples o f laws that
would be preempted include:
°

SE C T IO N 226.27— Spanish Language
D isclosures
1. S u b s e q u e n t d isclo su res. If a creditor in
Puerto Rico provides initial disclosures in
Spanish, subsequent disclosures need not be in
Spanish. For example, if the creditor gave
Spanish-language initial disclosures, periodic
statements and change-in-terms notices may
be made in English.
2. P e r m is s ib le uses. If a creditor other than in
Puerto Rico provides translations o f the re
quired disclosures— either because it is re
quired to do so by state, federal, or local law,
or because it chooses to do so— the transla
tions are not inconsistent per se with the dis
closures under this regulation, and they may
be provided as additional information. In both
cases, the English language disclosures re
quired by this regulation must be clear and
conspicuous, and the closed-end disclosures in
English must be properly segregated in ac
cordance with section 2 2 6 .1 7 (a )(1 ).

104

A state law that requires use o f the term
“finance charge” but defines the term to
include fees that the federal law excludes
or to exclude fees the federal law includes
A state law that requires a label such as
“nominal annual interest rate” to be used
for what the federal law calls the “annual
percentage rate”

3. L a w s n o t c o n tr a d ic to r y to c h a p te r s 1, 2, a n d
3. Generally, state law requirements that call

for the disclosure o f items o f information not
covered by the federal law, or that require
more detailed disclosures, do not contradict
the federal requirements. Examples o f laws
that are not preempted include:
o

A state law that requires disclosure o f the
minimum periodic payment for open-end
credit, even though not required by section
226.7.
A state law that requires contracts to con
tain warnings such as: “Read this contract
before you sign. D o not sign if any spaces
are left blank. You are entitled to a copy o f
this contract.”

Regulation Z Commentary
Similarly, a state law that requires itemization
o f the amount financed does not automatically
contradict the permissive itemization under
section 226.18(c). However, a state law re
quirement that the itemization appear with
the disclosure o f the amount financed in the
segregated closed-end credit disclosures is in
consistent, and this location requirement
would be preempted.
4. C r e d ito r ’s o p tio n s. Before the Board makes
a determination about a specific state law, the
creditor has certain options. Since the prohibi
tion against giving the state disclosures does
not apply until the Board makes its determi
nation, the creditor may choose to give state
disclosures until the Board formally deter
mines that the state law is inconsistent. (The
Board will provide sufficient time for creditors
to revise forms and procedures as necessary to
conform to its determinations.)
°

Under this first approach, as in all cases,
the federal disclosures must be clear and
conspicuous, and the closed-end disclo
sures must be properly segregated in ac
cordance with section 2 2 6 .1 7 (a )(1 ).
This ability to give state disclosures re
lieves any uncertainty that the creditor
might have prior to Board determinations
o f inconsistency.

A s a second option, the creditor may apply
the preemption standards to a state law, con
clude that it is inconsistent, and choose not to
give the state-required disclosures. However,
nothing in section 226.28(a) provides the
creditor with immunity for violations o f state
law if the creditor chooses n o t to make state
disclosures and the Board later determines
that the state law is not preempted.

§ 226.28
however, for state laws that allow the con
sumer to inquire about an account and require
the creditor to respond to such inquiries be
yond the time limits in the federal law. Such a
state law is not preempted with respect to the
extra time period. For example, section 226.13
requires the consumer to submit a written no
tice o f billing error within 60 days after trans
mittal o f the periodic statement showing the
alleged error. If a state law allows the con
sumer 90 days to submit a notice, the state
law remains in effect to provide the extra 30
days. A ny state law disclosures concerning
this extended state time limit must reflect the
qualifications and conform to the format spec
ified in section 226.28(a) (2 ) (i). Examples of
laws that would be preempted include:
°
°
°

6 . R u l e s f o r o th e r f a i r c r e d it b illin g p ro visio n s.
The second part o f the criteria for fair credit
billing relates to the other rules implementing
chapter 4 o f the act (addressed in sections
2 2 6 .4 (c )(8 ),
226.5(b ) (2 ) (ii),
2 2 6 .6 (d ),
2 2 6 .7 (k ), 2 2 6 .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 o f in
consistency is whether the creditor can com
ply with state law without violating federal
law. For example:
°

5. R u le s f o r c o rre ctio n o f b illin g e rro rs a n d
re g u la tio n o f c r e d it reports. The preemption

criteria for the fair credit billing provisions set
forth in section 226.28 have two parts. With
respect to the rules on correction o f billing
errors and regulation o f credit reports (which
are in section 226.13), section 226.28(a)
( 2 ) (i) provides that a state law is inconsistent
and preempted if its requirements are different
from the federal law. An exception is made,

A state law that has a narrower or broader
definition o f “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)

A state law that allows the card issuer to
offset the consumer’s credit-card indebted
ness against funds held by the card issuer
would be preempted, since section
226.12(d ) prohibits such action.
A state law that requires periodic state
ments to be sent m o r e than 14 days before
the end o f a free-ride period would not be
preempted.
A state law that permits consumers to as
sert claims and defenses against the card
issuer without regard to the $50 and 100mile limitations o f section 226.12(c)
(3 ) (ii) would not be preempted.
105

Regulation Z Commentary

§ 226.28
In the last two cases, compliance with state
law would involve no violation o f the federal
law.
7. W h o m a y receive a c h a p te r 4 d e te r m in a tio n .
Only states (through their authorized offi
cials) may request and receive determinations
on inconsistency with respect to the fair credit
billing provisions.

8. P r e e m p tio n d e te r m in a tio n — A r iz o n a . Effec
tive October 1, 1983, the Board has deter
mined that the following provisions in the
state law o f Arizona are preempted by the fed
eral law:
°

Section 44-287 B.5— Disclosure o f final
cash price balance. This provision is pre
empted in those transactions in which the
amount o f the final cash price balance is
the same as the federal amount financed,
since in such transactions the state law re
quires the use o f a term different from the
federal term to represent the same
amount.
Section 44—287 B. 6— Disclosure o f finance
charge. This provision is preempted in
those transactions in which the amount of
the finance charge is different from the
amount o f the federal finance charge, since
in such transactions the state law requires
the use o f the same term as the federal law
to represent a different amount.
Section 44—287 B.7— Disclosure o f the
time balance. The time balance disclosure
provision is preempted in those transac
tions in which the amount is the same as
the amount o f the federal total o f pay
ments, since in such transactions the state
law requires the use of a term different
from the federal term to represent the
same amount.

9. P r e e m p tio n d e te r m in a tio n — F lo rid a . Effec
tive October 1, 1983, the Board has deter
mined that the following provisions in the
state law o f Florida are preempted by the fed
eral law:•
•

Sections 520.07(2) (f) and 520.34(2) ( f ) —
Disclosure o f amount financed. This dis
closure is preempted in those transactions
in which the amount is different from the

106

federal amount financed, since in such
transactions the state law requires the use
o f the same term as the federal law to rep
resent a different amount.
Sections 520.07(2) (g ), 5 2 0 .3 4 (2 )(g ), and
5 2 0 .3 5 (2 )(d ) — Disclosure o f
finance
charge and a description o f its com po
nents. The finance charge disclosure is pre
empted in those transactions in which the
amount o f the finance charge is different
from the federal amount, since in such
transactions the state law requires the use
of the same term as the federal law to rep
resent a different amount. The require
ment to describe or itemize the compo
nents of the finance charge, which is also
included in these provisions, is not
preempted.
Sections
520.07(2) (h )
and
520.34
( 2 ) ( h ) — Disclosure o f total o f payments.
The total o f payments disclosure is pre
empted in those transactions in which the
amount differs from the amount o f the fed
eral total o f payments, since in such trans
actions the state law requires the use o f the
same term as the federal law to represent a
different amount from the federal law.
Sections 520.07(2) (i) and 520.34(2) ( i) —
Disclosure o f deferred payment price. This
disclosure is preempted in those transac
tions in which the amount is the same as
the federal total sale price, since in such
transactions the state law requires the use
o f a different term from the federal law to
represent the same amount as the federal
law.

10. P r e e m p tio n d e te r m in a tio n — M isso u r i. Ef
fective October 1, 1983, the Board has deter
mined that the following provisions in the
state law o f Missouri are preempted by the
federal law:
°

Sections 365.0 7 0 -6 (9 ) and 408.2605 ( 6 ) — Disclosure o f principal balance.
This disclosure is preempted in those
transactions in which the amount o f the
principal balance is the same as the federal
amount financed, since in such transac
tions the state law requires the use o f a
term different from the federal term to rep
resent the same amount.

Regulation Z Commentary
°

Sections 365.070-6(10) and 408.2605 ( 7 ) — Disclosure o f time price differential
and time charge, respectively. These dis
closures are preempted in those transac
tions in which the amount is the same as
the federal finance charge, since in such
transactions the state law requires the use
o f a term different from the federal law to
represent the same amount.
Sections 365.070-2 and 408.260-2— Use
o f the terms “time price differential” and
“time charge” in certain notices to the
buyer. In those transactions in which the
state disclosure o f the time price differen
tial or time charge is preempted, the use o f
the terms in this notice also is preempted.
The notice itself is not preempted.
Sections 365.070-6(11) and 408.2605 ( 8 ) — Disclosure of time balance. The
time balance disclosure is preempted in
those transactions in which the amount is
the same as the amount o f the federal total
o f payments, since in such transactions the
state law requires the use o f a different
term from the federal law to represent the
same amount.
Sections 365.070-6(12) and 408.2605 (9 )— Disclosure of time sale price. This
disclosure is preempted in those transac
tions in which the amount is the same as
t h e f e d e r a l t o t a l s a le p r ic e , s in c e in s u c h

transactions the state law requires the use
o f a different term from the federal law to
represent the same amount.
11. P r e e m p tio n d e te r m in a tio n — M ississip p i.
Effective October 1, 1984, the Board has de
termined that the following provision in the
state law o f Mississippi is preempted by the
federal law:
°

Section 63-19-31 (2) (g ) — Disclosure o f
finance charge. This disclosure is preempt
ed in those cases in which the term “fi
nance charge” would be used under state
law to describe a different amount than the
finance charge disclosed under federal law.

12. P r e e m p tio n d e te r m in a tio n — S o u th C a ro li
n a. Effective October 1, 1984, the Board has

determined that the following provision in the
state law o f South Carolina is preempted by
the federal law:

§ 226.29
°

Section 3 7 -1 0 -1 0 2 (c )— Disclosure o f dueon-sale clause. This provision is preempt
ed, 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
preempted.

2 8 (b ) Equivalent D isclosure
Requirem ents
1. G en era l. A state disclosure may be substi
tuted for a federal disclosure only a f te r the
Board has made a finding o f substantial simi
larity. Thus, the creditor may not unilaterally
choose to make a state disclosure in place o f a
federal disclosure, even if it believes that the
state disclosure is substantially similar. Since
the rule stated in section 226.28(b ) does not
extend to any requirement relating to the fi
nance charge or annual percentage rate, no
state provision on computation, description,
or disclosure o f these terms may be substitut
ed for the federal provision.

References
S ta tu t e : § § 1 1 1 and 171(a) and (c)
O th e r se c tio n s: Appendix A

§ 226.6(b ) and (c ), and
interpretation § 226.604
1 9 8 1 ch a n g es: Section 226.28 implements
amended section 111 o f the act. The test for
preemption o f 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 counter
part to section 2 2 6 .6 (c) o f the previous regu
lation concerning placement o f inconsistent
disclosures. It also reflects the statutory
amendment providing that once the Board de
termines that a state-required disclosure is in
consistent with federal law, the creditor may
not make the state disclosure.
P r e v io u s r e g u la tio n :

SE C T IO N 226.29— State Exem ptions
2 9 (a ) G eneral R ule
1. C la sses eligible. The state determines the
classes o f transactions for which it will request

107

§ 226.29
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 transac
tions in which the creditor is a bank.
2. S u b s t a n t ia l sim ila r ity . The “substantially
similar” standard requires that state statutory
or regulatory provisions and state interpreta
tions o f those provisions be generally the same
as the federal act and Regulation Z. This in
cludes the requirement that state provisions
for reimbursement to consumers for over
charges be at least equivalent to those re
quired in section 108 o f the act. A state will be
eligible for an exemption even if its law covers
classes o f transactions not covered by the fed
eral law. For example, if a state’s law covers
agricultural credit, this will not prevent the
Board from granting an exemption for con
sumer credit, even though agricultural credit
is not covered by the federal law.
3. A d e q u a t e e n fo r c e m e n t. The standard re
quiring adequate provision for enforcement
generally means that appropriate state officials
must be authorized to enforce the state law
through procedures and sanctions comparable
to those available to federal enforcement agen
cies. Furthermore, state law must make ade
quate provision for enforcement o f the reim
bursement rules.
4. E x e m p t io n s g r a n te d . Effective October 1,
1982, the Board has granted the following ex
emptions from portions of the revised Truth
in Lending Act:
« M a in e . Credit or lease transactions subject
to the Maine Consumer Credit Code and
its implementing regulations are exempt
from chapters 2, 4 and 5 o f the federal act.
(The exemption does not apply to transac
tions in which a federally chartered insti
tution is a creditor or lessor.)
° C o n n e c tic u t. Credit transactions subject to
the Connecticut Truth in Lending A ct are
exempt from chapters 2 and 4 o f the feder
al act. (The exemption does not apply to
transactions in which a federally chartered
institution is a creditor.)
° M a ss a c h u s e tts . Credit transactions subject
to the Massachusetts Truth in Lending
A ct are exempt from chapters 2 and 4 o f
108

Regulation Z Commentary

the federal act. (The exemption does not
apply to transactions in which a federally
chartered institution is a creditor.)
O k la h o m a . Credit or lease transactions
subject to the Oklahoma Consumer Credit
Code are exempt from chapters 2 and 5 of
the federal act. (The exemption does not
apply to sections 132 through 135 o f the
federal act, nor does it apply to transac
tions in which a federally chartered insti
tution is a creditor or lessor.)
W y o m in g . Credit transactions subject to
the W yoming Consumer Credit Code are
exempt from chapter 2 o f the federal act.
(The exemption does not apply to transac
tions in which a federally chartered insti
tution is a creditor.)

2 9 (b ) Civil Liability
1. N o t e lig ib le f o r e x e m p tio n . The provision
that an exemption may not extend to sections
130 and 131 o f the act assures that consumers
retain access to both federal and state courts
in seeking damages or civil penalties for viola
tions, while creditors retain the defenses speci
fied in those sections.

References
S ta tu te : §§ 108, 123, and 171(b)
O th e r se c tio n s: Appendix B
P re v io u s r e g u la tio n : § 226.12
1 9 8 1 ch a n 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.

A P P E N D IX A — Effect on State Laws
1. W h o m a y m a k e requests. Appendix A sets
forth the procedures for preemption determi
nations. A s discussed in section 226.28, which
contains the standards for preemption, a re
quest for a determination o f 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

Regulation Z Commentary
in connection with the fair credit billing provi
sions o f chapter 4.

References
S ta tu te : §§1 1 1 and 171(a)
O th e r se c tio n s: § 226.28
P re v io u s r e g u la tio n : §§ 226.6(b ) and 226.70

(supplement V, § II)
1 9 8 1 c h a n g es: The procedures in appendix A

were largely adapted from supplement V, sec
tion II o f the previous regulation (§ 226.70),
with changes made to streamline the
procedures.

A P P E N D IX B— State Exem ptions
1. G en era l. Appendix B sets forth the proce
dures for exemption applications. The exemp
tion standards are found in section 226.29 and
are discussed in the commentary to that
section.

References

Appendix D
A P P E N D IX D — M ultiple-A dvance
Construction Loans
1. G e n e r a l rule. Appendix D provides a spe
cial procedure that creditors may use, at their
option, to estimate and disclose the terms of
multiple-advance construction loans when the
amounts or timing o f advances is unknown at
consummation o f the transaction. This appen
dix reflects the approach taken in section
226.17(c) ( 6 ) (ii), which permits creditors to
provide separate or combined disclosures for
the construction period and for the permanent
financing, if any; i.e., the construction phase
and the permanent phase may be treated as
one transaction or more than one transaction.
Appendix D may also be used in multiple-ad
vance transactions other than construction
loans, when the amounts or timing o f ad
vances is unknown at consummation.
2. V a ria b le -ra te m u ltip le - a d v a n c e loans. The
hypothetical disclosure required in most vari
able-rate transactions by section 2 2 6 .1 8 (f)(4 )
is not required for multiple-advance loans dis
closed pursuant to appendix D , part I.

S ta tu te : §§ 123 and 171(b)
O th e r se c tio n s: § 226.29
P re vio u s re g u la tio n : §§ 226.12, 226.50 (sup

plement II), 226.60 (supplement IV ), and
226.70 (supplement V, § I)
1 9 8 1 c h a n g es: The procedures in appendix B
represent a combination and streamlining of
the procedures set forth in the supplements to
the previous regulation.

A P P E N D IX C— Issuance o f Staff
Interpretations
1. G en era l. This commentary is the vehicle
for providing official staff interpretations. In
dividual interpretations generally will not be
issued separately from the commentary.

3. C a lc u la tio n o f th e t o ta l o f p a y m e n ts . When
disclosures are made pursuant to appendix D,
the total o f payments may reflect either the
sum o f the payments or the sum o f the
amount financed and the finance charge.
4. A n n u a l p e r c e n ta g e rate. Appendix D does
not require the use o f volume I o f the Board’s
Annual Percentage Rate Tables for calcula
tion o f the annual percentate rate. Creditors
utilizing appendix D in making calculations
and disclosures may use other computation
tools to determine the estimated annual per
centage rate, based on the finance charge and
payment schedule obtained by use o f the
appendix.

R eferences
S ta tu te : § § 1 0 5 and 130(f)
O th e r se c tio n s: N one

References
S ta tu te : N one

P re v io u s re g u la tio n : § 226.1 (d )

O th e r se c tio n s: §§ 226.17 and 226.22

1 9 8 1 ch a n g es: Appendix C reflects the Board’s

P re v io u s r e g u la tio n : Interpretation § 226.813

intention that this commentary serve as the
vehicle for interpreting the regulation, rather
than individual interpretive letters.

19 8 1 c h a n g es: The use o f appendix D is limit
ed to multiple-advance loans for construction
purposes or analogous types o f transactions.

109

Regulation Z Commentary

Appendix E
A P P E N D IX E— R ules for Card Issuers
That Bill on a Transaction-byTransaction Basis
S ta tu te : N one
P re vio u s re g u la tio n : Interpretation § 226.709

sequence o f the forms and clauses. Creditors
making revisions with that effect will lose
their protection from civil liability. A ccept
able changes include, for example:
°

O th e r sectio n s: §§ 226.6 through 226.13, and

226.15

1 9 8 1 ch a n g es: The rules in this appendix have

been streamlined and clarified to indicate how
certain card issuers that bill on a transaction
basis may comply with the requirements o f
subpart B.

o
°
°
°

A P P E N D IX F — A nnual Percentage
R ate C om putations for Certain OpenEnd Credit Plans
1. D a ily r a te w ith sp ecific tra n sa c tio n charge.
If the finance charge results from a charge re
lating to a specific transaction and the applica
tion o f a daily periodic rate, see comment
1 4(c)-6 for guidance on an appropriate calcu
lation method.

References
S ta tu te : § 107

Using the first person, instead o f the sec
ond person, in referring to the borrower
Using “borrower” and “creditor” instead
o f pronouns
Rearranging
the sequences o f the
disclosures
N ot using bold type for headings
Incorporating certain state “plain En
glish” requirements
Deleting inapplicable disclosures by whit
ing out, blocking out, filling in “N / A ”
(not applicable) or “ 0 ,” crossing out, leav
ing blanks, checking a box for applicable
items, or circling applicable items. (This
should permit use o f multipurpose stan
dard forms.)
Substituting appropriate references, such
as “bank,” “we,” or a specific name, for
“creditor”
in
the initial
open-end
disclosures
Using a vertical, rather than a horizontal,
format for the boxes in the closed-end
disclosures

P re v io u s re g u la tio n : § 226.5(a) (3 ) (ii), foot

note 5 (a)
O th e r se c tio n s: § 226.14
1 9 8 1 c h a n g es: This appendix incorporates a

sixth example in which the transaction
amount exceeds the amount o f the balance
subject to the periodic rate.

A P P E N D IX E S G A N D H — Open-End
and Closed-End M odel Form s and
Clauses
1. P e r m is s ib le c h a n g es. Although use of the
model forms and clauses is not required, cred
itors using them properly will be deemed to be
in compliance with the regulation with regard
to those disclosures. Creditors may make cer
tain changes in the format or content o f the
forms and clauses and may delete any disclo
sures that are inapplicable to a transaction or
a plan without losing the act’s protection from
liability. The rearrangement o f the model
forms and clauses may not be so extensive as
to affect the substance, clarity, or meaningful
110

A P P E N D IX G — Open-End M odel
Form s and Clauses
1. M o d e l G - l. The model disclosures in G -l
(different balance computation methods) may
be used in both the initial disclosures under
section 226.6 and the periodic disclosures un
der section 226.7. A s is clear from the models
given, “shorthand” descriptions o f the balance
computation methods are not sufficient. The
phrase “a portion o f ’ the finance charge
should be included if the total finance charge
includes other amounts, such as transaction
charges, that are not due to the application of
a periodic rate. In addition, if unpaid finance
charges are subtracted in calculating the
balance, that fact must be stated so that the
disclosure o f the computation method is accu
rate. Only model G -l(b ) contains a final
sentence appearing in brackets which reflects
the total dollar amount o f payments and cred
its received during the billing cycle. The other
models do not contain this language because

Regulation Z Commentary
they reflect plans in which payments and
credits received during the billing cycle are
subtracted. If this is not the case, however, the
language relating to payments and credits
should be changed, and the creditor should
add either the disclosure o f the dollar amount
as in model G -l(b ) or an indication o f which
credits (disclosed elsewhere on the periodic
statement) will not be deducted in determin
ing the balance. (Such an indication may also
substitute for the bracketed sentence in model
G - l( b ) .) (See the commentary to section
2 2 6 .7 (e).)
2. M o d e l G-2. This model contains the notice
o f liability for unauthorized use o f a credit
card.
3. M o d e ls G -2 a n d G-4. These set out models
for the long-form billing-error rights state
ment (for use with the initial disclosures and
as an annual disclosure or, at the creditor’s
option, with each periodic statement) and the
alternative billing-error rights statement (for
use with each periodic statement), respective
ly. Creditors must provide the billing-error
rights statements in a form substantially simi
lar to the models in order to comply with the
regulation. The model billing-rights state
ments may be modified in any o f the ways set
forth in the first paragraph to the commentary
on appendixes G and H. The models may, fur
thermore, be modified by deleting inapplicable
information, such as:
°

The paragraph concerning stopping a deb
it in relation to a disputed amount, if the
creditor does not have the ability to debit
automatically the consumer’s savings or
checking account for payment
The rights stated in the special rule for
credit card purchases and any limitations
on those rights

The model billing rights statements also con
tain optional language that creditors may use.
For example, the creditor may:
°

Include a statement to the effect that no
tice o f a billing error must be submitted on
something other than the payment ticket
or other material accompanying the peri
odic disclosures

Appendix H
°

Insert its address or refer to the address
that appears elsewhere on the bill

Additional information may be included on
the statements as long as it does not detract
from the required disclosures. For instance,
information concerning the reporting o f errors
in connection with a checking account may be
included on a combined statement as long as
the disclosures required by the regulation re
main clear and conspicuous.
4. M o d e ls G -5 th r o u g h G-9. These models set
out notices o f the right to rescind that would
be used at different times in an open-end plan.
The last paragraph o f each o f the rescission
model forms contains a blank for the date by
which the consumer’s notice o f cancellation
must be sent or delivered. A parenthetical is
included to address the situation in which the
consumer’s right to rescind the transaction ex
ists beyond three business days following the
date o f the transaction, for example, when the
notice or material disclosures are delivered
late or when the date o f the transaction in
paragraph 1 o f the notice is an estimate. The
language o f the parenthetical is not optional.

APPENDIX H—Closed-End Model
Forms and Clauses
1. M o d e ls H - l a n d H -2 . Creditors may make
several types o f 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 disclo
sures are made clearly and conspicuously.
Permissible changes include the addition of
the information permitted by footnote 37 to
section 226.17 and “directly related” informa
tion as set forth in the commentary to section
226.17(a).
The creditor may also delete or, on multi
purpose forms, indicate inapplicable disclo
sures, such as:
°
°
°
°

The itemization o f the amount financed
option (See samples H - l2 through H - l5.)
The credit life and disability insurance dis
closures (See samples H - ll and H - l2.)
The property insurance disclosures (See
samples H-10 through H - l2, and H - l4.)
The “filing fees” and “nonfiling insurance”
111

Appendix H

disclosures (See samples H - ll and H -12.)
The prepayment penalty or rebate disclo
sures (See samples H-12 and H -14.)
The total sale price (See samples H - ll
through H-15.)

Other permissible changes include:
°

Adding the creditor’s address or telephone
number (See the commentary to section
2 26.18(a).)
° Combining required terms where several
numerical disclosures are the same, for in
stance, if the “total of payments” equals
the “total sale price” (See the commentary
to section 226.18.)
8 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 o f terms in a separate section of
the segregated disclosures; by placing the
payment schedule at the top o f the form;
or by changing the order o f the disclosures
in the boxes, including the annual percent
age rate and finance charge boxes.
° Using brackets, instead o f 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 o f the
amount financed
° Deleting captions for disclosures
8 Using a symbol, such as an asterisk, for
estimated disclosures, instead of an “e”
8 Adding a signature line to the insurance
disclosures to reflect joint policies
° Separately itemizing the filing fees
° Revising the late charge disclosure in ac
cordance with the commentary to section
226.18(7)

2. M o d e l H -3 . Creditors have considerable
flexibility in filling out model H-3 (item iza
tion o f the amount financed). Appropriate re
visions, such as those set out in the commen
tary to section 226.18(c), may be made to this
form without loss o f protection from civil lia
bility for proper use o f the model forms.
3. M o d e ls H - 4 th r o u g h H -7 . The model claus
es are not included in the model forms al
112

Regulation Z Commentary
though they are mandatory for certain trans
actions. 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 o d e l H -4 . This model contains the vari
able 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 o f an increase may be
given in terms o f the contract interest rate or
the annual percentage rate. Clauses are shown
for hypothetical examples based on the specif
ic amount o f the transaction and based on a
representative amount. Creditors may pre
print the variable-rate disclosures based on a
representative amount for similar types of
transactions, instead o f constructing an indi
vidualized example for each transaction. In
both representative examples and transactionspecific examples, creditors may refer either to
the incremental change in rate, payment
amount, or number o f payments, or to the re
sulting rate, payment amount, or number of
payments. For example, creditors may state
that the rate will increase by 2 percent, with a
corresponding $150 increase in the payment,
or creditors may state that the rate will in
crease to 16 percent, with a corresponding
payment o f $850.
5. M o d e l H -5 . This contains the demand fea
ture clause.

6 . M o d e l H -6 . This contains the assumption
clause.
7. M o d e l H -7 . This contains the requireddeposit clause.

8. M o d e ls H - 8 a n d H -9 . These models con
tain the rescission notices for a typical closedend transaction and a refinancing, respective
ly. The last paragraph o f 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
three business days following the date o f the
transaction, for example, where the notice or
material disclosures are delivered late or

Regulation Z Commentary
where the date o f the transaction in paragraph
1 o f the notice is an estimate. The language o f
the parenthetical is not optional.
9. S a m p l e f o r m s . The sample forms (IT-10
through H -15) serve a different purpose than
the model forms. The samples illustrate vari
ous ways o f adapting the model forms to the
individual transactions described in the com
mentary to appendix H. The deletions and re
arrangements shown relate only to the specific
transactions described. A s a result, the sam
ples do not provide the general protection
from civil liability provided by the model
forms and clauses.
10. S a m p le H -1 0 . This sample illustrates an
automobile credit sale. The cash price is
$7,500 with a downpayment o f $1,500. There
is an 8 percent add-on interest rate and a term
o f three years, with 36 equal monthly pay
ments. 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 a m p l e H - l l . This sample illustrates an
installment loan. The amount o f the loan is
$5,000. There is a 12 percent simple interest
rate and a term o f two years. The date o f 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 es
timate since the transaction date is uncertain.
The odd days’ interest ($26.67) is collected
with the first payment. The remaining 23
monthly payments are equal.
12. S a m p l e H -1 2 . This sample illustrates a re
financing and consolidation loan. The amount
o f the loan is $5,000. There is a 15 percent
simple interest rate and a term o f three years.
The date o f 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 in
surance premium is financed. In calculating
the annual percentage rate, the U.S. Rule has
been used. Since an itemization o f the amount
financed is included with the disclosures, the
statement regarding the consumer’s option to
receive an itemization is deleted.

Appendix H
13. S a m p le s H - 1 3 th r o u g h H -1 5 . These sam
ples illustrate various mortgage transactions.
They assume that the mortgages are subject to
the Real Estate Settlement Procedures A ct
(R E SP A ). A s a result, no option regarding
the itemization o f the amount financed has
been included in the samples, because provid
ing the good faith estimates o f settlement
costs required by RESPA satisfies Truth in
Lending’s amount-financed itemization re
quirement. (See footnote 39 to section
2 2 6 .1 8 (c ).)
14. S a m p le H -1 3 . This sample illustrates a
mortgage with a demand feature. The loan
amount is $44,900, payable in 360 monthly
installments at a simple interest rate o f 14.75
percent. The 15 days o f interim interest
($294.34) is collected as a prepaid finance
charge at the time o f consummation o f the
loan (April 15, 1981). In calculating the dis
closure amounts, the minor-irregularities pro
vision in section 2 2 6 .1 7 (c )(4 ) has been used.
The property insurance premiums are not in
cluded in the payment schedule. This disclo
sure statement could be used for notes with
the seven-year call option required by the
Federal National Mortgage Association
(F N M A ) in states where due-on-sale clauses
are prohibited.
15. S a m p l e H -1 4 . This sample illustrates a
variable-rate mortgage. The loan amount is
$44,900, payable in 360 monthly installments
at an initial interest rate o f 14.75 percent. 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 lend
er’s prime rate, with a maximum permissible
increase o f 5 percent over the term o f the
mortgage. The interest rate may not vary
more frequently than once a year and may not
increase by more than 1 percent annually.
Rate fluctuations will be reflected in the
monthly payment amount.
16. S a m p l e H -1 5 . This sample illustrates a
graduated payment mortgage with a five-year
graduation period and a 1 \ percent yearly in
crease in payments. The loan amount is
$44,900, payable in 360 monthly installments
at a simple interest rate o f 14.75 percent. Two
113

Regulation Z Commentary

Appendix H
points ($898), as well as an initial mortgage
guarantee insurance premium o f $225.00, are
included in the prepaid finance charge. The
mortgage-guarantee insurance premiums are
calculated on the basis o f \ o f 1 percent o f the
outstanding principal balance under an annu
al reduction plan. The abbreviated disclosure
permitted under section 2 2 6 .1 8 (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-in
terest portion o f the obligation and informa
tion about rebates is required for the mortgage
insurance portion o f the obligation.
17. H R S A - 5 0 0 - 1 9 -8 2 . Pursuant to section
113(a) o f the Truth in Lending Act, Form
H R S A -500-1 9-82 issued by the U.S. Depart
ment o f Health and Human Services for cer
tain student loans has been approved. The
form may be used for all Health Education
Assistance Loans (H E A L ) with a variable in
terest rate that are interim student credit ex
tensions as defined in Regulation Z.
18. H R S A - 5 0 0 - 2 9 -8 2 . Pursuant to section
113(a) o f the Truth in Lending Act, Form
H R S A -500-2 9-82 issued by the U.S. Depart
ment o f Health and Human Services for cer
tain student loans has been approved. The
form may be used for all H EAL loans with a
fixed interest rate that are interim student
credit extensions as defined in Regulation Z.
19. H R S A - 5 0 2 - 1 9 -8 2 . Pursuant to section
113(a) o f the Truth in Lending Act, Form
H R SA -502-1 9-82 issued by the U.S. Depart
ment o f Health and Human Services for cer
tain student loans has been approved. The
form may be used for all HEAL loans with a
variable interest rate in which the borrower
has reached prepayment status and is making
payments o f both interest and principal.
20. H R S A - 5 0 2 - 2 9 -8 2 . Pursuant to section
113(a) o f the Truth in Lending Act, Form
H R S A -502-2 9-82 issued by the U.S. Depart
ment o f Health and Human Services for cer
tain student loans has been approved. The
form may be used for all H EAL loans with a
fixed interest rate in which the borrower has
114

reached repayment status and is making pay
ments o f both interest and principal.

References
S ta tu te : § § 1 0 5 and 130
O th e r se c tio n s: §§ 226.6, 226.7, 226.9, 226.12,
226.15, 226.18, and 226.23
P re v io u s re g u la tio n : N one
1 9 8 1 c h a n g es: The model forms and clauses
have no counterpart in the previous
regulation.

A P P E N D IX I— Federal Enforcem ent
A gencies
S ta tu te : § 108
O th e r se c tio n s: N one
P re v io u s r e g u la tio n : § 226.1 (b)
1 9 8 1 c h a n g es: N one

A P P E N D IX J— A nnual Percentage R ate
C om putations for Closed-End Credit
Transactions
1. U se o f a p p e n d ix J. Appendix J sets forth
the actuarial equations and instructions for
calculating the annual percentage rate in
closed-end credit transactions. W hile the for
mulas contained in this appendix may be di
rectly applied to calculate the annual percent
age rate for an individual transaction, they
may also be utilized to program calculators
and computers to perform the calculations.
2. R e la tio n to B o a r d tables. The Board’s A n
nual Percentage Rate Tables also provide
creditors with a calculation tool that applies
the technical information in appendix J. An
annual percentage rate computed in accord
ance with the instructions in the tables is
deemed to comply with the regulation. Vol
ume I o f the tables may be used for credit
transactions
involving
equal
payment
amounts and periods, as well as for transac
tions involving any o f the following irregulari
ties: odd first period, odd first payment and
odd last payment. Volume II o f the tables
may be used for transactions that involve any
type o f irregularities. These tables may be ob
tained from any Federal Reserve Bank or

Regulation Z Commentary
from the Board in Washington, D.C. 20551,
upon request.

References
S ta tu te : § 107
O th e r se c tio n s: § 226.22
P re v io u s re g u la tio n : § 226.40 (supplement I)
1 9 8 1 ch a n g es: Paragraph (b ) (2 ) has been re

Appendix J
vised to clarify that the term o f the transac
tion never begins earlier than consummation
o f the transaction. Paragraph ( b ) ( 5 ) ( v i) has
been revised to permit creditors in all cases
where the transaction term equals a whole
number o f months, to use either the 12-month
method or the 365-day method to compute
the number o f unit periods per year.

115

Full text of Federal Reserve Bank of New York Circulars : 9775. Regulations Z and E

FRASER