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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 99 7 1 1
December 18, 1985 J
REGULATIONS E AND Z
Request for Comment on Proposed Changes
in the Official Staff Commentaries
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
The following statement has been issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has issued for public comment proposed changes to the official staff commentary to
Regulation E (Electronic Fund Transfers) and Regulation Z (Truth in Lending).
These proposed revisions address questions that have arisen about the regulations. Comment is requested by
February 7, 1986.
Printed below is the text of the proposals, which have been reprinted from the Federal Registers of
December 11 and 12, 1985. Comments thereon should be submitted by February 7, 1986, and may be sent to our
Regulations Division.
E.
G
erald
C o r r ig a n ,
President.
FEDERAL RESERVE SYSTEM
12 CFR Fart 20S
[Reg. E; E FT -2]
Electronic Fund Transfers; Proposed
Update to Official Staff Commentary
Board of Governors of the
Federal Reserve System.
AST80W: Proposed official staff
interpretation.
ASENCV:
The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
E (Electronic Fund Transfers). The
commentary applies and interprets the
SUMMARY:
requirements of Regulation E and is a
substitute for individual staff
interpretations of the.regulation. The
proposed revisions address questions
that have arisen about the regulation.
date : Comments must be received on or
before February 7,1986.
address : Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, DC 20551, or
delivered to Room B-2223, 20th and C
Streets NW., Washington, DC between
8:45 a.m. and 5:15 p.m. weekdays.
Comments should include a reference to
EFT-2. Comments may be inspected in
Room B-1122 between 8:45 a.m. and 5:15
p.m. weekdays.
f © r f u r t h e r iw forrm tsom s o o t a c t :
Gerald P. Hurst or John C. Wood, Senior
Attorneys, Division of Consumer and
Community Affairs, Board of Governors
of the Federal Reserve System,
Washington, DC 20551, (202) 452-3667 or
(202) 452-2412, or Joy W. O’Connell,
Telecommunications Device for the Deaf
(TDD) at (202) 452-3224.
SUPPLESflEOTARY 8MF©RMAT8©M: (1)
General. The Electronic Fund Transfer
Act (15 U.S.C. 1693 et seq.) governs any
transfer of funds that is electronically
initiated and that debits or credits a
consumer’s account. This statute is
implemented by the Board’s Regulation
E (12 CFR Part 205). Effective September
24,1981, an official staff commentary
(EFT-2, Supp. II to 12 CFR Part 205) was
published to interpret the regulation.
The commentary is designed to provide
guidance to financial institutions in
applying the regulation to specific
situations. The commentary is updated
periodically to address significant
questions that arise. There have been
three updates so far; these were
published on April 6,1983 (48 FR 14880),
October 18,1984 (49 FR 40794), and April
3,1985 (50 FR 13180). This notice
contains the proposed fourth update. It
is expected.that it will be adopted in
final form in March 1986.
(2)
Proposed revisions. Proposed
question 3-7.5 responds to several
inquiries as to whether requiring
payment by preauthorized electronic
fund transfers (EFTs) as part of a
biweekly mortgage program would
violate the compulsory use prohibition
in section 913 of the Electronic Fund
Transfer Act (15 U.S.C. 1693k(l)).
Question 3-7.5 would make clear that
such a program does riot violate the
compulsory use prohibition when the
program is not the only credit option
offered by the creditor and the program
provides a cost-related incentive for
repayment by EFTs.
Proposed question 10-18.75 responds
to numerous requests that the staff
further clarify the statutory and
regulatory provisions requiring
preauthorized EFTs to be "authorized by
the consumer only in writing.” (15 U.S.C.
1693e(a) and 12 CFR 205.10(b)).
Specifically, the staff has been asked
whether the requirement is met by a
payee signing a w ritten authorization as
the consumer’s agent, based on the
consumer’s oral authorization of the
preauthorized EFTs during a taped
telephone conversation. Although the
staff believes that existing question 1018.5 can be viewed as addressing this
situation, question 10-18.75 would be
added to make clear that this procedure
does not comply with the requirement
that preauthorized EFTs be authorizedin writing by the consumer.
List of Subjects in 12 CFR Part 2®§
Banks, Banking, Consumer protection,
Electronic fund transfers, Federal
Reserve System, Penalties.
(3) Text o f revisions. The proposed
revisions to the Official Staff
Commentary on Regulation E (EFT-2,
Supp. II to 12 CFR Part 205) read as
follows;
William W. Wiles,
Secretary of the Board.
[FR Doc. 85-29302 Filed 12-10-85; 8:45 am]
BILLING CODE 6210-01-D3
Section 205.3— Exemptions
Q 3-7.5: Compulsory use—biweekly loan
programs. A lender offers consumers the
option of a mortgage loan involving biweekly
payments, which results in the repayment of
the loan in a shorter time and in a lower total
finance charge that a loan involving monthly
payments. An integral part of this option is a
requirement that consumers make the
biweekly payments by preauthorized
electronic fund transfers. Does this automatic
transfer requirement violate the act’s
prohibition against compulsory use of
electronic fund transfers?
A: No, it does not, given that the lower
finance charge provides a cost-related
incentive to consumers. (Section 205.3(d)(3),
section 913)
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Section 205.10— Preauthorized Transfers
Q 10-18.75: Preauthorized debits—
authorization by agent. A telemarketing
FEDERA L RESERVE SYSTEM
12 CFR Part 226
(Reg. 2; TIL-1]
Truth in Lending; Proposed U pdate to
O fficial S taff C o m m en tary
aoencv: Board of Governors of the
Federal Reserve System.
ACTION: Proposed official staff
interpretation.
SUMMARY: The Board is publishing for
comment proposed changes to the
official staff commentary to Regulation
Z (Truth in Lending); The commentary
applies and interprets the requirements
of Regulation Z and is a substitute for
individual staff interpretations of the
regulation. The proposed revisions
address a variety of questions that have
arisen about the regulation, and include
new material and changes in existing
material.
date : Comments must be received on or
before February 7,1986.
ADDRESS: Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, DC 20551, or
delivered to Room B-2223, 20th and C
Streets, NW„ Washington, DC between
8:45 a.m. and 5:15 p.m. weekdays.
Comments should include a reference to
TIL-1. Comments may be inspected in
Room B-1122 between 8:45 and 5:15 p.m.
weekdays.
FOR FURTHER INFORMATION:
company (directly or through an agent) asks
consumers to make the monthly payments for
their purchases by preauthorized electronic
fund transfers. If a consumer agrees, the
company obtains the consumer’s bank
account number and completes a written
authorization based on the telephone
conversation (which the company records).
The company signs the authorization as the
consumer’s agent, sends the authorization to
the consumer’s account-holding financial
institution, and sends the consumer a written
confirmation of the transaction. Does this
procedure satisfy the requirement of the act
and regulation that preauthorized EFTs may
be authorized by the consumer only in
writing?
A: No. The requirement that preauthorized
EFTs may be authorized by the consumer
only in writing cannot be met by a payee
signing a written authorization on the
consumer’s behalf, with only an oral
authorization from the consumer. (Nor does
the tape recording of the telephone
conversation constitute an authorization by
the consumer “in writing” for purposes of the
requirement.) To allow a payee to complete a
written authorization for preauthorized
EFTs as the consumer’s agent based on a
telephone authorization would render the
statutory and regulatory requirement
meaningless. (Section 202.10(b))
*
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Subpart A—Adrienne Hurt
Subpart B—Gerald Hurst, Susan Kraeger
Subpart C—Michael Bylsma, Leonard
Chanin, Adrienne Hurt
or Joy W. O’Connell,
Telecommunication Device for the Deaf
(TDD) at (202) 452-3244.
Board of Governors of the Federal Reserve
System, December 5,1985.
SUFFLSMENYAfaV INFORMATION: (1)
General. The Truth in Lending Act (15
2
Contact the following attorneys in the
Division of Consumer and Community
Affairs, Board of Governors of the
Federal Reserve System, Washington,
DC 20551, at (202) 452-3667 or (202) 4523867:
U.S.C. 1601 et seq.) governs consumer
credit transactions and is implemented
by the Board’s Regulation Z (12 CFR
Part 226). Effective October 13,1981, an
official staff commentary (TIL-1, Supp. I
to 12 CFR Part 226) was published to
interpret the regulation. The
commentary is designed to provide
guidance to creditors in applying the
regulation to specific transactions. The
commentary is updated periodically to
address significant questions that arise.
There have been four general updates so
far—the first in September 1982 (47 FR
41338), the second in April 1983 (48 FR
14882), the third in April 1984 (49 FR
13482), and the fourth in April 1985 (50
FR 13181). There was also a limited
update concerning fees for the use of
automated teller machines, which was
adopted in October 1984 (49 FR 40560).
This notice contains the proposed fifth
general update. It is expected that it will
be adopted in final form in March 1986
with optional compliance until the
uniform effective date of October 1 for
mandatory compliance.
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language that would be
deleted is set off with brackets.
(2)
Proposed revisions. Following is
brief description of the proposed
revisions to the commentary:
Subpart A—-General
Section 226.4—Finance charge
4(b) Examples of Finance Charges
Paragraph 4(b)(5). Comment 4(b)(5)—2
would be added to explain the
situations in which premiums or other
charges for residual value insurance
obtained by a creditor or consumer are
includable in the finance charge. In
certain credit transactions, most notably
automobile balloon payment financing,
such insurance guarantees the estimated
residual value of the property purchased
based on the term of the agreement; that
estimated value usually is equivalent to
the final balloon payment due.
Subpart B—Open-End Credit
Section 226.7—Periodic statem ent
7(c) Credits
Comment 7(c)-4 would be added to
make clear that, where the creditor
provides the dates and amounts of any
credits madq to the account during the
billing cycle, the regulation does not
require that the creditor also disclose a
total for each particular type of credit
made to the account (for example,
payments); nor does the regulation
require that the creditor provide a total
figure for all credits made to the account
during the billing cycle.
Section 226.8—Identification o f
transactions
In comment 8-5 certain material
would be deleted; the deleted material
would be incorporated in new comment
8-8. Comment 8-8 would be added to
clarify the identification of transaction
requirements for transaction in which a
creditor and a seller have a corporate
connection. Comment 8-8 would make
clear that in certain instances creditors
may describe transactions involving
sellers with whom they have a corporate
connection using the identification
requirements for unrelated creditors and
sellers (§ 226.8(a)(3)), instead of the
identification requirements for related
creditors and sellers ( | 226.8(a)(2)).
Creditors may use the rules in
§ 226.8(a)(3) when (1) the transactions
occur under a credit plan that wras
established primarily for use with sellers
that do not have a corporate connection
a with the creditor, or (2) the transactions
involve a seller whose connection with
the creditor would not be known to the
consumer (for example, where the
creditor’s and seller’s names are not
similar, and the periodic statements are
issued only in the creditor's name). The
second situation is currently addressed
by comment 8-5; as indicated above,
that material has been deleted from
comment 8-5 and incorporated in new
comment 8-8. Staff believes that, in the
circumstances described in comment 88, the information provided to
consumers under | 226.8(a)(3) would be
at least as useful as that provided under
§ 226.8(a)(2).
Section 226.12—Special credit card
provisions
12(d) Offsets by Card Issuer Prohibited
Paragraph 12(d)(2). Comment
12(d)(2)-l would be revised to clarify
the security interest exception to the
prohibition on a credit card issuer’s
offsetting a cardholder’s indebtedness
against funds of the cardholder that are
3
on deposit with the card issuer. The
comment would make clear that the
exception does not include any security
interest that may result from a card
issuer’s routinely including language in
its credit card agreements with
consumers providing for such security
interests. Comment 12(d)(2)—2 would be
deleted since it would be inconsistent
with the requirements of comment
12(d)(2)—1 as revised. Comment 12(d)(2)3 would be redesignated comment
12(d)(2)—2.
Section 226.16—Advertising
16(b) Advertisement of Terms That
Require Additional Disclosures
A new comment 16(b)—
1 would be
added to indicate that, in an
advertisement, the disclosures required
by § 226.16(b)(1)—(3) need be made only
when the advertisement reflects one or
more of the disclosure terms contained
in § 226.6(a) or 226.6(b). In light of this
new comment, comment 16(b)-2 would
be redesignated comment 16(b)—3 and
would be revised to delete the example
indicating that the implicit disclosure of
a security interest requires that the
additional advertising disclosures of
§ 226.16(b)(1)—(3) be made. Present
comment 16{b)-l would be redesignated
comment 16(b)—2, and comments 16(b)-3
through 16(b)-7 would be redesignated
comments 16(b)—
4 through 16(b)-8.
Subpart C—Closed-End Credit
Section 226.17—General disclosure
requirements
17(a) Form of Disclosures
Paragraph 17(a)(1). Comment 17(a)(1)4 would be revised to clarify the
disclosure of certain security interest
charges under sections § § 226.4(e) and
226.18(o). Footnote 38 gives creditors the
option of making this disclosure either
with the segregated disclosures or
elsewhere. The revised comment would
make clear that if a creditor chooses to
list security interest charges in the
itemization of the amount financed, no
further disclosure of those charges
would be necessary.
Comment 17(a)(l)-7 would be added
to clarify the disclosure of balloon
payment financing, having some
characteristics of both a lease
transaction subject to Regulation M and
a credit transaction subject to
Regulation Z. Such hybrid types of
financing are increasingly being offered,
particularly in the area of automobile
financing. In these transactions where
ownership rights to the property subject
to the transaction vest in the consumer
upon consummation, creditors must
comply with the disclosure requirements
of this regulation. Therefore, additional
information, such as options that a
borrower may choose in lieu of making a
large final payment, should not be
included in the segregated Truth in
Lending disclosures.
Paragraph 17(c)(2). Comment 17(c)(2)3 would be added to clarify the use of
estimated disclosures in simple-interest
transactions. Creditors should not label
disclosures as estimates if the only
reason for the designation is the fact
that consumers may make payments on
other than scheduled due dates.
Creditors should assume that all
payments will be timely in making their
disclosure calculations.
Section 226.23—Right o f rescission
Section 226.18— Content o f disclosures
23(f) Exempt Transactions
18(f) Variable Rate
Comment 23(f)—8 would be revised to
clarify the application of the right of
rescission to an account that converts
from an open-end to a closed-end
transaction. In some cases, creditors
delay closed-end disclosures until
conversion of an account even if
consummation of the closed-end
transaction occurs when the account is
opened, as permitted by comment 17(b)—
2. Comment 23(f)-8 would be amended
to provide that no new right of
rescission arises at conversion,
regardless of a creditor’s compliance
with rescission provisions at the
opening of an account.
Comment 18(f)—2 would be revised to
address the basis for final disclosures in
transactions for which creditors must
give early disclosures three days after
application under § 226.19. If creditors
choose to redisclose at settlement,
rather than at consummation,
disclosures may be based on the terms
in effect at settlement, rather than at
consummation.
Comment 18(f)-6 would be expanded
to cover mortgages containing an option
permitting consumers to convert an
adjustable-rate mortgage to a fixed-rate
mortgage. This type of option is a
variable-rate feature that must be
disclosed. Creditors must disclose the
limits on an increase upon conversion
and the effects of an increase. However,
no example of payment terms tnat could
result once a consumer exercises the
option would be required.
made at a date earlier than maturity. For
example, under regulations of the
Department of Housing and Urban
Development (24 CFR Parts 203, 213, 222
and 234), a lender who accepts
prepayment in full on a date other than
the installment due date may assess a
charge for interest to the end of the
month. The revision would make clear
that the interest charge assessed from
the date of prepayment in full until the
end of the month is a prepayment
penalty.
18(m) Security Interest
Comments 18(m)-l and 18(m)-3 would
be amended to clarify acceptable
descriptions of security interests for
transactions in which the proceeds, or a
portion of the proceeds, are used to
purchase the collateral. The revision
would make clear that creditors may
identify the collateral generally as “the
property purchased” or, instead, may
identify the collateral by item or type, in
accordance with § 226.18(m){2).
Section 226.24—Advertising
Comments 24(b)-l and 24(c)(2)—3
would be amended to permit the
abbreviation “APR” to be used instead
of the term "annual percentage rate” in
advertisements. This change would
make more consistent the advertising of
18(k) Prepayment
annual percentage rates for open-end
Paragraph 18(k)(l). Comment 18(k)(l)- and closed-end credit.
1 would be revised to clarify that
List of Subjects in 12 CFR Part 226
prepayment penalties include interest
Advertising, Banks, Banking,
charges assessed for any period of time
Consumer protection, Credit, Federal
after the date prepayment in full is
made. Such charges are assessed strictly Reserve System, Finance, Penalties,
because prepayment in full has been
Truth in lending.
4
PAR T 226— [AMEW OED]
(3)
Text o f Revisions. The proposed
revisions to the commentary (TIL-1,
Supplement 1 to 12 CFR Part 226) read
as follows. Arrows indicate new
language; brackets indicate language to
be removed.
SUPPLEM ENT I— OFFICIAL STAFF
COM M ENTARY— TIL-1
Subpart A — G eneral
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Section 226.4—Finance charge
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4(b) Examples o f Finance Charges.
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Paragraph 4(b)(5).
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t>2. Residual value insurance. W here a
creditor requires a consum er to m aintain
residual value insurance or w h ere a creditor
is a b en eficiary of such insurance, the
prem ium s m ust be included in the finan ce
charge for the period that the insu ran ce is to
be m aintained. <g
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Subpart B— O pen-End Credit
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Section 226.7—Periodic statem ent
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7(c) Credits.
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> 4 . Totals. W here the creditor provid es
the d ates and am ounts of credits m ade to the
accou n t during the billing cycle, the creditor
n eed not d isclo se total figures for the
am ounts c r e d ite d .o
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Section 226.8—Identification o f transactions
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Same or reluted persons. o F o r purposes
o f identifying transactions, the<s
5.
[ T h e J term “sam e or related p erso n s”
refers to, for exam ple:
° Franchised or licen sed sellers o f a
creditor’s product or service
° Sellers w h o assign or sell op en -end sa les
accou n ts to a creditor or arrange for such
credit under a plan that a llo w s the consum er
to u se the credit only in tran saction s w ith the
seller
| A person is not related to the creditor
m erely b ecau se, for exam ple:
0 The person and the creditor h a v e an
agreem ent by w h ich the person is authorized
to honor the creditor’s credit card under the
term s sp ecified in the agreem ent
0 The person and the creditor h ave a
corporate con n ection , such a s subsidiaryparent, if that con n ection is not ob viou s from
the names they use. For example, if XYZ card
issuer owns the ABC hotel, the card issuer
and the hotel are not “related."]]
t>A seller is not related to the creditor
when the only connection between the seller
and the creditor is an agreement by which the
seller is authorized to honor the creditor's
credit card under the terms specified in the
agreement. <3
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*
Transactions involving creditors and
sellers with corporate connections. In a
>8.
credit card plan established for use primarily
with sellers that have no corporation
connection with the creditor, the creditor may
describe all transactions under the plan using
the rules in § 226.8(a)(3)— creditor and seller
not same or related persons—including
transactions involving a seller that has a
corporate connection with the creditor. In
other credit card plans, the creditor may
describe transactions involving a seller that
has a corporate connection with the creditor,
such as subsidiary-parent, using the rules in
§ 226.8(a)(3) if the circumstances are such
that it is unlikely that the consumer would
know of the corporate connection between
the creditor and the seller— for example,
where the names of the creditor and the
seller are not similar, and the periodic
statement is issued in the name of the
creditor only. <3
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Section 226.12—Special credit card
provisions.
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12(d) Offsets by Card Issuer Prohibited.
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Paragraph 12(d)(2).
1. Security interest—limitations. In order to
qualify for the exception stated in
§ 226.12(d)(2), a security interest must be
affirmatively agreed to by the consumer
> (fo r example, by signing a separate security
agreement) <3 , must be disclosed in the
issuer’s initial disclosures under section
226,6, e>must be specific in amount , <3 and
must be obtained and enforced only through
procedures equally available to other
creditors. t>An example of a permissible
security interest in deposit account funds
would be one in w hich <3 [F or exam ple,! the
consumer [m a y offer]] c> offerso a savings
account (as an alternative to other personal
property, such as an automobile) as security
[for credit card indebtedness.) > in order to
qualify for a credit card line . <3 Another
example of a permissible security interest in
deposit account funds would be one granted
by the consumer in return for an incentive
offered by the issuer (for example, lower
rates on the credit card account). oR outinely
including in agreements contract language
that indicates that consumers are giving a
security interest in any deposit accounts held
by the issuer does not come within the
security interest exception of § 226.12(d)(2).<3
[2 . Security interest— after-acquired
property. As used in § 226.12(d), the term
"security interest" does not exclude (as it
does for other Regulation Z purposes)
interests in after-acquired property. Thus, a
consensual security interest in depositaccount funds, including funds deposited
after the granting of the security interest,
would constitute a permissible exception to
the prohibition on offsets.!
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Comment 12(d)(2)—3 is redesignated
12(d)(2)—2.
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Section 226.16—Advertising
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16(b) Advertisement of Terms That Require
Additional Disclosures.
> 1 . Terms requiring additional
disclosures. In § 226.16(b) the phrase “the
terms required to be disclosed under § 226.6"
refers to the terms in § 226.6(a) and (b). <3
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Comments 16(b)—1 redesignated comment
16(b)-2.
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[2 .3 e> 3 .< Implicit terms. Section 226.16(b)
applies even if the triggering term is not
stated explicitly, but may be readily
determined from the advertisement. [For
example, a statement that "the equity in your
home becomes spendable with an XYZ line
of credit” implicitly states that the creditor
will take a security interest in the consumer’s
hom e.!
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Comments 16(b)-3 through 16(b)—7 are
redesignated comments 16(b)-4 through
16{b)-8.
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Subpart C—Closed-End Credit
Section 226.17—General disclosure
requirements.
17(a) Form of Disclosures.
Paragraph 17(a)(1).
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4.
Content of segregated disclosures.
Footnotes 37 and 38 contain exceptions to the
requirement that the disclosures under
§ 226.18 be segregated from material that is
not directly related to those disclosures.
Footnote 37 lists the items that may be added
to the segregated disclosures, even though
not directly related to those disclosures.
Footnote 38 lists the items required under
§ 226.18 that may be deleted from the
segregated disclosures and appear elsewhere.
Any one or more of these additions or
deletions may be combined and appear either
together with or separate from the segregated
disclosures. The itemization of the amount
5
financed under § 226.18(c), however, must be
separate from the other segregated
disclosures under § 226.18. t> If a creditor
chooses to include in the amount financed
itemization the security interest charges
required to be itemized under §§ 226.4(e) hnd
226.18(o), the creditor need not list these
charges elsewhere. <3
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e>7. Balloon payment financing with
leasing characteristics. In certain credit
sale
or loan transactions, a consumer may reduce
the dollar amount of the payments to be
made during the course of the transaction by
agreeing to make a large final payment based”
upon the residual value of the property
purchased at end of the loan term. The
consumer may have a number of options with
respect to the final payment, including,
among other things, retaining the property
and making the final payment, refinancing
that payment, or transferring the property to
the creditor in lieu of the final payment. Such
transactions may have some of the
characteristics of lease transactions subject
to Regulation M, but are considered credit
transactions where title to the property vests
in the consumer upon consummation. These
transactions are governed by the disclosure
requirements of this regulation instead of
Regulation M. Therefore, creditors should not
include in the segregated Truth in Lending
disclosures additional information.
Disclosures should show the large final
payment in the payment schedule without
mentioning, for example, other options
available to a borrower at maturity. <3
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17(c) Basis of Disclosures and Use of
Estimates.
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*
Paragraph 17(c)(2).
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> 3 . Simple-interest transactions. If
consumers do not make timely payments in a
simple-interst transaction, some of the
amounts calculated for the disclosures will
differ from amounts that consumers will
actually pay over the term of the transaction.
Creditors should not label disclosures as
estim ates in these transactions if the only
reason for uncertainty about the amounts
disclosed is the fact that payments may be
late. For example, although the finance
charge and total of payments may be larger
than disclosed if consumers habiturally make
late payments, creditors should not label
these amounts as estimates. All disclosures
should be based on the assumption that
payments will be made on time. <3
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Section 226.18—Content of disclosures
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19(f) Variable Rate.
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2. Basis for disclosures. For transactions
subject to the requirements of § 226.18(f), the
disclosures must be given for the full term of
the transaction and must be based on the
terms in effect at the time of consummation.
However, [in]]
> ° In < a variable-rate transactions with
either a seller buydown that is reflected in
the credit contract or a consumer buydown,
disclosures should not be based solely on the
initial terms. In those transactions, the
disclosed annual percentage rate should be
composite rate based on the lower rate for
the buydown period and the rate that is the
basis of the variable rate feature for the
remainder of the term. (See the commentary
to § 226.17(c) for a discussion of buydown
transactions.)
> ° In a variable-rate transaction in which
a creditor rediscloses after giving disclosures
three days after application, as required by
section 226.19, the final disclosures need not
be based on the terms if effect at the time of
consummation. If, as permitted by § 226.19(b),
creditors delay redisclosure until settlement,
creditors may base their disclosures on the
terms in effect at settlement, rather than
those in effect at consummation. <a
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penalty in a simple-interest transaction. (See
the commentary to § 226.17(a)(1) regarding
the disclosure of minimum finance charge as
directly related information.)]]
E> § Item s w h ich are p en alties include, for
exam ple:
0 Interest charges for any period after
prepayment in full is made.
0 A minimum finance charge in a simpleinterest transaction (See the commentary to
§ 226.17(a)(1) regarding the disclosure of a
minimum finance charge as directly related
information.)
Item s w h ich are not p en alties include, for
exam ple:
0 Loan guarantee fees.
0 Interim interest on a student loan. <3
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18(m) Security Interest.
1. Purchase money transactions. When the
collateral is the item purchased as part of, or
with the proceeds of, the credit transaction,
i 226.18(m) requires only a general
identification such as “the property
purchased in this transaction.” [The]]
D>However, th e o creditor may [g iv e a more
specific indentification of the collateral,
although only the abbreviated disclosure is
necessary.]] E>identify the property by item or
6.
Examples of variable-rate transactions. type consistent with § 226.18(m)(2), instead of
The following transactions constitute
identifying it as "the property purchased in
variable rate transactions: * * *
this transaction." <a Any transaction in which
D>° Variable-rate transactions with an
the credit is being used to purchase the
collateral is considered a purchase money
option permitting consumers to convert at a
transaction and the abbreviated property
later time to a fixed-rade loan. The
conversion option is a variable-rate feature
identification may be used, whether the
thqt should be disclosed. Creditors should
obligation is treated as a loan or credit sale.
disclose any limitations on a rate increase
3. Mixed collateral. In some transactions in
resulting from conversion, along with the
which the credit is used to purchase the
effects of an increase. An example of an
collateral, the creditor may also take other
increase resulting from a consumer’s
property of the consumer as security. In those
exercising the conversion feature need not be
cases, a combined disclosure must be
included. <a
provided, consisting of the abbreviated
* * * * *
property identification o o r an identification
consistent with § 226.18(m)(2)<] for the
18(k) Prepayment.
purchase money collateral [(although more
* * * * *
detail may be given, at the creditor’s option)!
Paragraph 18(k)(l).
and a [m o r e ! specific identification of the
1. Penalty, this applies only to those
other collateral.
transactions in which the interest calculation
* * * * *
takes account of all scheduled reductions in
principal, as well as transactions in which
Section 226.23—Right of rescission
interest calculations are made daily. The
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term "penalty” as used here encom passes
23(f)
Exempt
Transactions.
only those charges that are assessed strictly
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because of the prepayment in full of a simple8.
Converting
open-end
to closed-end
interest obligation, as an addition to all other
credit. Under certain state laws,
amounts. [Item s which are not penalties
consummation of a closed-end credit
include for example:
transaction may occur at the time a consumer
0 Loan guarantee fees.
enters into the initial open-end credit
0 Interim interest on a student loan.
agreement. As provided in the commentary to
However, minimum finance charge is a
6
§ 226.17(b), closed-end credit disclosures may
be delayed under these circumstances until
the conversion of the open-end account to a
closed-end transaction. In accounts secured
by the consumer’s principal dwelling, no new
right of rescission arises at the time of
conversion s.<a [ , assuming that the right of
rescission w as previously provided on the
open-end account pursuant to § 226.15.J
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Section 226.24—Advertising
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24(b) Advertisement of Rate of Finance
Charge.
1. Annual percentage rate. Advertised rates
must be stated in terms of an "annual
percentage rate,” as defined in § 226.22. Even
though state or local law permits the use of
add-on, discount, time-price differential, or
other methods of stating rates,
advertisements must state them as annual
percentage rates. Unlike the transactional
disclosure of an annual percentage rate under
§ 226.18(e), the advertised annual percentage
rate need not include a descriptive
explaination of the term [.]] > a n d may be
expressed using the abbreviation “APR ." < 3
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. A s under
§ 226.18(f), relating to disclosure of a variable
rate, the rate increase disclosure requirement
in this provision does not apply to any rate
increase due to delinquency (including late
payment), default, acceleration, assumption,
or transfer of collateral.
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24(c) Advertisement of Terms That Require
Additional Disclosures.
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Paragraph 24(c)(2).
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3. Annual percentage rate. c>The
advertised annual percent rate may be
expressed using the abbreviation "APR.”
<3
The advertisement must also state, if
applicable, that the annual percentage rate is
subject to increase after consummation.
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Board of Governors of the Federal Reserve
System, December 5,1985.
William W. W iles,
Secretary of the Board.
[FR Doc. 85-29301 Filed 12-11-85; 8:45 am]
BILLING CODE 6210-01-M
@FedFRASER