Full text of Federal Reserve Bank of New York Circulars : Official Staff Commentary on Regulation Z, Truth in Lending

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-ftTQR Vo 9 -^ 3
January 26, 1982

To the Addressee:
Enclosed is a copy of the Official Staff Commentary on
Regulation Z, "Truth in Lending", referred to in Circular No. 9163,
dated October 19, 1981.

Additional copies of the enclosure are

available upon request.




Circulars Division
FEDERAL RESERVE BANK OF NEW YORK

Board o f Governors o f the Federal Reserve System

Official Staff Commentary
on Regulation Z
Truth in Lending




Any inquiry relating to Regulation Z should be addressed to the Federal Reserve Bank of the
Federal Reserve District in which the inquiry arises.
December 1981



Contents

Page

Page
Introduction ........................................

1

Subpart A—G eneral............................

2

Section 226.1—Authority, purpose,
coverage, organization, enforcement
and liability......................................
Section 226.2—Definitions and rules of
construction......................................
Section 226.3—Exempt transactions ..
Section 226.4— Finance c h a rg e ..........

3
14
16

Subpart B—Open-End C re d it............

23

Section 226.5—General disclosure
requirem ents....................................
Section 226.6—Initial disclosure
statem ent..........................................
Section 226.7—Periodic statement . . .
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 of credit
balances............................................
Section 226.12—Special credit card
provisions..........................................
Section 226.13—Billing-error
resolution..........................................
Section 226.14— Determination of
annual percentage r a t e ....................
Section 226.15—Right of rescission. . .
Section 226.16—A dvertising..............
Subpart C—Closed-End C re d it..........
Section 226.17—General disclosure
requirem ents....................................
Section 226.18—Content of disclosures
Section 226.19—Certain residential
mortgage transactions......................




2

23
26
29
34
37
39
40
41
47
52
54
59
61

61
70
80

Section 226.20—Subsequent disclosure
requirem ents....................................
Section 226.21—Treatment of credit
balances............................................
Section 226.22—Determination of
annual percentage r a t e ........................
Section 226.23—Right of rescission. . .
Section 226.24— A dvertising..............

81
84
85
86
91
94

Subpart D—Miscellaneous......................
Section 226.25—Record retention . . . .
Section 226.26—Use of annual
percentage rate in oral disclosures ..
Section 226.27—Spanish language
disclosures........................................
Section 226.28—Effect on state laws ..
Section 226.29—State exemptions----

94

Appendix A—Effect on state law s----Appendix B—State exemptions..........

98
98

Appendix C—Issuance of staff
interpretations..................................
Appendix D—Multiple-advance
construction loans............................
Appendix E—Rules for card issuers
that bill on a transaction-bytransaction basis ..............................
Appendix F—Annual percentage rate
computations for certain open-end
credit plans ......................................
Appendix G—Open-end model forms
and clauses........................................
Appendix H—Closed-end model
forms and clau ses................................
Appendix I—Federal enforcement
agencies...............................................
Appendix J—Annual percentage rate
computations for closed-end credit
transactions..........................................

94
95
95
97

98
98

99

99
99
100
103

103

Official Staff Commentary
on Regulation Z

INTRODUCTION
1. Official status. This commentary is the ve­
hicle by which the staff of the Division of
Consumer and Community Affairs of the Fed­
eral Reserve Board issues official staff inter­
pretations of Regulation Z, as revised effective
April 1, 1981. Good faith compliance with
this commentary affords protection from lia­
bility under section 130(f) of the Truth in
Lending Act. Section 130(f) (15 USC 1640)
protects creditors from civil liability for any
act done or omitted in good faith in conformi­
ty with any interpretation issued by a duly
authorized official or employee of the Federal
Reserve System.
2. Procedure for requesting interpretations.
Under appendix C of the regulation, anyone
may request an official staff interpretation. In­
terpretations that are adopted will be incorpo­
rated in this commentary following publica­
tion in the Federal Register. No official staff
interpretations are expected to be issued other
than by means of this commentary.
3. Status o f previous interpretations. All state­
ments and opinions issued by the Federal Re­
serve Board and its staff interpreting previous
Regulation Z remain effective until April 1,
1982 only insofar as they interpret that regu­
lation. When compliance with revised Regula­
tion Z becomes mandatory on April 1, 1982,
the Board and staff interpretations of the pre­
vious regulation will be entirely superseded by
the revised regulation and this commentary
except with regard to liability under the previ­
ous regulation.
4. Rules o f construction, (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 of the comment.
5. Comment designations. Each comment in
the commentary is identified by a number and
the regulatory section or paragraph which it
interprets. The comments are designated with
as much specificity as possible according to
the particular regulatory provision addressed.
For example, some of the comments to section
226.18(b) are futher divided by subpara­
graph, such as comment 18(b) (1)-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 18(b)-l. This introduction may be
cited as comments 1-1 through 1-7. The ap­
pendices may be cited as comments app. A-l
through app. J-2.
6. Cross-references. The following cross-refer­
ences to related material appear at the end of
each section of the commentary: (a) “Stat­
ute”—those sections of the Truth in Lending
Act on which the regulatory provision is
based (and any other relevant statutes); (b)
“Other sections”—other provisions in the reg­
ulation necessary to understand that section;
(c) “Previous regulation”—parallel provi­
sions in previous Regulation Z; and (d) “ 1981
changes”—a brief description of 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. Transition rules, (a) Though compliance
with the revised regulation is not mandato­
ry until April 1, 1982, creditors may begin
complying as of April 1, 1981. During the
intervening year, a creditor may convert its
entire operation to the new requirements at
one time, or it may convert to the new re­
quirements in stages. In general, however, a
1

Introduction
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
for changes resulting from the conver­
sion to the revised regulation.

2



Regulation Z Official Staff Commentary
•

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
try. Thus, a U.S. resident’s use in Europe of a
credit card issued by a bank in the consumer’s
home town is covered by the regulation. The

§ 226.2

Regulation Z Official Staff Commentary
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.

The term does not include:
•

References
Statute: § 102
Other sections: None
Previous regulation: § 226.1
1981 changes: A discussion of 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) “Advertisement”
1. Coverage. 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 of 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
Price tags that contain credit information
Letters sent to customers as part of an or­
ganized solicitation of business
Messages on checking account statements
offering auto loans at a stated annual per­
centage rate




•

•

•
•

Direct personal contacts, such as follow­
up letters, cost estimates for individual
consumers, or oral or written communica­
tion relating to the negotiation of 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
News articles the use of which is con­
trolled by the news medium
Market research or educational materials
that do not solicit business

2. Persons covered. All “persons” must com­
ply with the advertising provisions in sections
226.16 and 226.24, not just those that meet
the definition of creditor in section 226.2(a)(17). Thus, home builders, merchants, and
others who are not themselves creditors must
comply with the advertising provisions of the
regulation if they advertise consumer credit
transactions. However, under section 145 of
the act, the owner and the personnel of the
medium in which an advertisement appears,
or through which it is disseminated, are not
subject to civil liability for violations.
2(a)(3) “Arranger o f Credit”
1. Coverage. An arranger of credit is an inter­
mediary between the nonprofessional extender
of credit and the consumer. There can be an
arranger only if the credit arranged involves a
finance charge or is payable by written agree­
ment in more than four installments and the
person actually extending the credit is some­
one who does not meet the definition of
“creditor.”
2. Content o f disclosures. If the arranger
makes the disclosures, the dislosures should
be based on the assumption that the arranger
and the nonprofessional extender of credit are
the same person. For example, the arranger
must disclose that a security interest is being
taken if the extender of credit takes a security
interest, even if the arranger does not. Similar­
ly, if the extender of credit is a seller, the ar­
ranger must make credit sale disclosures.
3

§ 226.2
3. Counting transactions. The definition uses
the same numerical tests—25 transactions per
year or 5 transactions per year when secured
by a dwelling—as does the definition of “cred­
itor.” See the commentary to section
226.2(a) (17) (i) for illustrations of how to
count credit extensions.
4. Attorneys When an attorney and his or her
client are considered the same person (see the
commentary to section 226.2(a) (22)), an at­
torney is not an arranger of credit as to credit
extended by the client.
5. Trusts Since a trust and its trustee are con­
sidered the same person (see the commentary
to section 226.2(a) (22)), a trustee is not an
arranger of credit as to credit extended by the
trust. See the commentary to section
226.2(a) (17) (i) for an explanation of when a
trust is a creditor.
2(a)(4) “Billing Cycle”or “Cycle”
1. Intervals In open-end credit plans, the bill­
ing cycle determines the intervals at which pe­
riodic disclosure statements must be sent;
these intervals are also used as measuring
points for other duties of the creditor. Typi­
cally, billing cycles are monthly, but they may
be more frequent or less frequent (but not less
frequent than quarterly).
2. Creditors that do not bill. The term “cycle”
is interchangeable with “billing cycle” for def­
initional purposes, since some creditors’ cycles
do not involve the sending of bills in the tradi­
tional sense but only statements of account ac­
tivity. This is commonly the case with finan­
cial institutions when periodic payments are
made through payroll deduction or through
automatic debit of the consumer’s asset
account.
3. Equal cycles Although cycles must be
equal, there is a permissible variance to ac­
count for weekends, holidays, and differences
in the number of days in months. If the actual
date of each statement does not vary by more
than four days from a fixed “day” (for exam­
ple, the third Thursday of each month) or
“date” (for example, the 15th of each month)
that the creditor regularly uses, the intervals
between statements are considered equal. The
4




Regulation Z Official Staff Commentary
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 226.9(c).)
4. Payment reminder. The sending of 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) “Business Day ”
1. Business function test. Activities that indi­
cate that the creditor is open for substantially
all of its business functions include the avail­
ability of 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 of 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. Rescission rule. 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 6103(a)) applies when the
right of rescission is involved.
2(a)(7) “Card Issuer”
1. Agent. An agent of 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 of credit cards
or data processing for others, however, does
not make one the agent of the card issuer. In
contrast, a financial institution may become
the agent of the card issuer if an agreement
between the institution and the card issuer
provides that the cardholder may use a fine of
credit with the financial institution to pay ob­
ligations incurred by use of the credit card.

Regulation Z Official Staff Commentary
2(a)(8) “Cardholder”
1. General rule. 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 of a card issued to
another.
2. Limited application o f regulation. For the
limited purposes of the rules on issuance of
credit cards and liability for unauthorized use,
a cardholder includes any person, including
an organization, to whom a card is issued for
any purpose—including a business, agricul­
tural, or commercial purpose.
3. Issuance. See the commentary to section
226.12(a).
4. Dual-purpose cards and dual-card systems.
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
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 purposes when using the card issued for
consumer use, and a cardholder only for the
limited purposes of the restrictions on issu­
ance and liability when using the card issued
for business purposes.
2(a)(9) “Cash Price”
1. Components. 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



§ 226.2
cash and credit transactions may be included
in the cash price, or they may be treated as
other amounts financed under section
226.18(b)(2).
2. Service contracts. Service contracts include
contracts for the repair or the servicing of
goods, such as mechanical breakdown cover­
age, even if such a contract is characterized as
insurance under state law.
3. Rebates. 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)(10) “Closed-end Credit”
1. General. The coverage of this term is de­
fined by exclusion. That is, it includes any
credit arrangement that does not fall within
the definition of open-end credit. Subpart C
contains the disclosure rules for closed-end
credit when the obligation is subject to a fi­
nance charge or is payable by written agree­
ment in more than four installments.
2(a)(ll) “Consumer”
1. Scope. Guarantors, endorsers, and sureties
are not generally consumers for purposes of
the regulation, but they may be entitled to re­
scind under certain circumstances and they
may have certain rights if they are obligated
on credit card plans.
2. Rescission rules. For purposes of rescission
under sections 226.15 and 226.23, a consumer
includes any natural person whose ownership
interest in his or her principal dwelling is sub­
ject to the risk of 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 of 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. Land trusts. Credit extended to land trusts,
as described in the commentary to section
226.3(a), is considered to be extended to a
natural person for purposes of the definition
of consumer.
5

§ 226.2
2(a)(12) “Consumer Credit”
1. Primary purpose. There is no precise test
for what constitutes credit offered or extended
for personal, family, or household purposes,
nor for what constitutes the primary purpose.
See, however, the discussion of business pur­
poses in the commentary to section 226.3(a).
2(a)(13) “Consummation”
1. State law governs. 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. Consummation does not occur merely
because the consumer has made some finan­
cial investment in the transaction (for exam­
ple, by paying a nonrefundable fee) unless, of
course, applicable law holds otherwise.
2. Credit v. sale. Consummation does not oc­
cur when the consumer becomes contractually
committed to a sale transaction, unless the
consumer also becomes legally obligated to
accept a particular credit arrangement. For
example, when a consumer pays a nonrefund­
able deposit to purchase an automobile, a pur­
chase contract may be created, but consum­
mation for purposes of the regulation does not
occur unless the consumer also contracts for
financing at that time.
2(a)(14) “Credit”
1. Exclusions. The following situations are not
considered credit for purposes of the regulation:
•

•

Layaway plans, unless the consumer is
contractually obligated to continue 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 of any
amounts paid towards the cash price of the
merchandise does not bring layaways
within the definition of credit.
Tax liens, tax assessments, court judg­
ments, and court approvals of reaffirma­
tion of debts in bankruptcy. However,
third-party financing of such obligations
(for example, a bank loan obtained to pay
off a tax lien) is credit for purposes of the
regulation.

6



Regulation Z Official Staff Commentary
•

Insurance premium plans that involve
payment in installments with each install­
ment representing the payment for insur­
ance coverage for a certain future period
of time, unless the consumer is contractu­
ally obligated to continue making
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 of an insurance policy or a pension ac­
count, if there is no independent obligation
to repay
• Letters of credit
• The execution of option contracts. Howev­
er, there may be an extension of credit
when the option is exercised, if there is an
agreement at that time to defer payment of
a debt.
• Investment plans in which the party ex­
tending capital to the consumer risks the
loss of the capital advanced. This includes,
for example, an arrangement with a home
purchaser in which the investor pays a
portion of the downpayment and of the pe­
riodic mortgage payments in return for an
ownership interest in the property, and
shares in any gain or loss of property
value.
• Mortgage assistance plans administered by
a government agency in which a portion of
the consumer’s monthly payment amount
is paid by the agency. No finance charge is
imposed on the subsidy amount, and that
amount is due in a lump-sum payment on
a set date or upon the occurrence of cer­
tain events. (If payment is not made when
due, a new note imposing a finance charge
may be written, which may then be subject
to the regulation.)
2(a)(15) “<
Credit Card”
1. Usable from time to time. A credit card
must be usable from time to time. Since this
involves the possibility of repeated use of a
single device, checks and similar instruments
that can be used only once to obtain a single
credit extension are not credit cards.

§ 226.2

Regulation Z Official Staff Commentary
2. Examples.
include:

Examples

of

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 of credit
• A card that accesses both a credit and an
asset account (that is, a debit-credit card)
• An identification card that permits the
consumer to defer payment on a purchase
• An identification card indicating loan 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)(16) “Credit Sale”
1. Special disclosure. 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
tion and the creditor making the disclosures is
not the seller. See the commentary to section
226.17(d).
2. Sellers who arrange credit. If the seller of
the property or services involved arranged for
financing but is not a creditor as to that sale,
the transaction is not a credit sale. Thus, if a
seller assists the consumer in obtaining a 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 finacial institution is a creditor.
3. Refinancings. 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. Incidental sales. 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. Credit extensions for educational purposes.
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)(17) “Creditor”
1. General. The definition contains five inde­
pendent tests. If any one of the tests is met,
the person is a creditor for purposes of that
particular test.
Paragraph 2(a)(17)(i)
1. Prerequisites. This test is composed of 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). First, 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.

Second, 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.
2. Assignees. If an obligation is initially pay7

§ 226.2
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 deaier 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. Numerical tests. 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. Counting transactions. For purposes of
closed-end credit, the creditor counts each
credit transaction. For open-end credit,
“transactions” means accounts, so that out­
standing accounts are counted instead of
individual credit extensions. Normally the
number of 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 of 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 of credit
in 1983 and for all extensions of 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 of the regulation in 1983. If it extends con­
sumer credit 75 times in 1984, however, it be­
comes a creditor for purposes of the regula­
tion (and must begin making disclosures)
after the 25th extension of credit in that year
and is a creditor for all extensions of consum­
er credit in 1985.
8



Regulation Z Official Staff Commentary
5. Relationship between consumer credit in
general and credit secured by a dwelling. Ex­
tensions of 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
not counted towards the number of 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.
6. Effect o f satisfying one test. Once one of the
numerical tests is satisfied, the person is also a
creditor for the other type of 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. Trusts. In the case of credit extended by
trusts, each individual trust is considered a
separate entity for purposes of applying the
criteria. For example:
•

A bank is the trustee for three trusts. Trust
A makes 15 extensions of consumer credit
annually; Trust B makes 10 extensions of
consumer credit annually; and Trust C
makes 30 extensions of consumer credit
annually. Only Trust C is a creditor for
purposes of the regulation.

With regard to the trustee’s status, see the
commentary to section 226.2(a)(3).

Paragraph 2(a)(17)(ii)
1. Arranger o f credit. A person who is an ar­
ranger of credit under section 226.2(a)(3) is
a creditor. The disclosures made by the ar­
ranger should be based on the assumption
that the arranger and the nonprofessional ex­
tender of credit are the same person. See the
commentary to section 226.2(a)(3).

§ 226.2

Regulation Z Official Staff Commentary
Paragraph 2(a)(17)(iv)
1. Card issuers subject to Subpart B. Section
226.2(a) (17) (iv) makes certain card issuers
creditors for purposes of the open-end credit
provisions of the regulation. This includes, for
example, the issuers of so-called travel and 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 of the regulation regarding such areas as
scope, definitions, determination of which
charges are finance charges, Spanish language
disclosures, record retention, and use of mod­
el forms, also apply to such card issuers.

Paragraph 2(a)(l 7)(v)
1. Card issuers subject to Subparts B and C.
Section 226.2(a) (17) (v) includes as creditors
card issuers extending closed-end credit in
which there is a finance charge or an agree­
ment to pay in more than four installments.
These card issuers are subject to the appropri­
ate provisions of subparts B and C, as well as
to the general provisions.

2(a)(18) “Downpayment”
1. Allocation. If a consumer makes a lump­
sum payment, partially to reduce the cash
price and partially to pay prepaid finance
charges, only the portion attributable to re­
ducing the cash price is part of the
downpayment.
2. Pickup payments. Creditors may treat the
deferred portion of the downpayment, often
referred to as “pickup payments,” in a num­
ber of ways. If the pickup payment is treated
as part of the downpayment:
•
•

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)

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:



•
•

ft 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) (19) “Dwelling”
1. Scope. A dwelling need not be the consum­
er’s principal 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. Use as a residence. Mobile homes, boats,
and trailers are dwellings if they are in fact
used as residences, just as are condominium
and cooperative units. Recreational vehicles,
campers, and the like not used as residences
are not dwellings.
3. Relation to exemptions. Any transaction 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)(20) “Open-End Credit”
1. General. 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
that is extended under a plan and meets all
three criteria set forth in the definition.
2. Existence o f a plan. 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
9

§ 226.2
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.
3. Repeated transactions. 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
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 of credit for the
purchase of an automobile than for an au­
tomobile dealer to sell a car under an
open-end plan.

4. Finance charge on an outstanding balance.
The requirement that a finance charge may be
computed and imposed from time to time on
the outstanding balance means that there is no
specific amount financed for the plan for
10



Regulation Z Official Staff Commentary
which the finance charge, total of payments,
and payment schedule can be calculated. A
plan does not meet this criterion if there is no
possibility that a periodic finance charge will
be imposed 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 of the balance. Thus, a plan could meet
this finance charge criterion even though the
consumer actually pays no finance charges
during the existence of the plan because the
consumer takes advantage of the option to
pay the balance (either in its entirety or in
installments) within the time necessary to
avoid finance charges.
5. Reusable line. The total amount of 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, of credit information
such as the consumer’s continued income and
employment status or of information for secu­
rity purposes). This criterion of unlimited
credit distinguishes open-end credit from a se­
ries of advances made pursuant to a closedend credit loan commitment. For example:
•

Under a closed-end commitment, the cred­
itor might agree to lend a total of $10,000
in a series of 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 of a por­
tion of the debt.

This criterion does not mean that the creditor
must establish a specific credit limit for the
line of credit or that the line of credit must
always be replenished to its original amount.
The creditor may reduce a credit limit or re­
fuse to extend new credit in a particular case

Regulation Z Official Staff Commentary
due to changes in the economy, the creditor’s
financial condition, or the consumer’s creditworthiness. While consumers should have a
reasonable expectation of obtaining credit as
long as they remain current and within any
preset credit limits, further extensions of cred­
it need not be an absolute right in order for
the plan to meet the self-replenishing criterion.
6. Open-end real estate mortgages. 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 of “open-end credit,” re­
gardless of 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.

§ 226.2
2. Attorneys An attorney and his or her client
are considered to be the same person for pur­
poses of this regulation when the attorney is
acting within the scope of the attorney-client
relationship with regard to a particular
transaction.
3. Trusts A trust and its trustee are consid­
ered to be the same person for purposes of this
regulation.
2(a) (23) “Prepaid Finance Charge ”
1. General 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 of the amount financed under sec­
tion 226.18(c).
2. Examples. Common examples of prepaid
finance charges include:

2(a)(21) “Periodic Rate”
1. Basis The periodic rate may be stated as a
percentage (for example, 1-^ percent per
month) or as a decimal equivalent (for exam­
ple, .015 monthly). It may be based on any
portion of a year the creditor chooses. Some
creditors use 1/360 of 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,
of course, disclose the true annual percent­
age rate.
Would have to apply the rate to the bal­
ance to disclose the annual percentage rate
with the degree of accuracy required in the
regulation (that is, within 1/8 of 1 per­
centage point of the rate based on the actu­
al 365 days in the year).

2. Transaction charges “Periodic rate” does
not include initial one-time transaction
charges, even if the charge is computed as a
percentage of the transaction amount.
2(a)(22) “Person ”
1. Joint ventures A joint venture is an organi­
zation and is therefore a person.



•
•
•
•
•
•

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

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.
3. Exclusions “Add-on” and “discount” fi­
nance charges are not prepaid finance charges
for purposes of this regulation. Finance
charges are not “prepaid” merely because
they are precomputed, whether or not a por­
tion of the charge will be rebated to the con­
sumer upon prepayment. See the commentary
to section 226.18(b).
2(a)(24) “Residential Mortgage Transaction ”
1. Relation to other sections This term is im­
portant in five provisions in the regulation:
•
•
•

Section 226.4(c) (7)—exclusions from the
finance charge
Section 226.15(f)—exemption from the
right of rescission
Section 226.18 (q)—whether or not the
obligation is assumable
11

§ 226.2
•
•

Section 226.19—special timing, rules
Section 226.23(f)—exemption from the
right of rescission

2. Lien status. The definition is not limited to
first hen transactions. For example, a consum­
er might assume a paid-down first mortgage
(or borrow part of the purchase price) and
borrow the balance of the purchase price from
a creditor who takes a second mortgage. The
second mortgage transaction is a “residential
mortgage transaction” if the dwelling pur­
chased is the consumer’s principal residence.
3. Principal dwelling. A consumer can have
only one 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 of construc­
tion, the new dwelling is considered the
principal dwelling for purposes of applying
this definition to a particular transaction. See
the commentary to sections 226.15(a) and
226.23(a).
4. Construction financing. If a transaction
meets the definition of a residential mortgage
transaction and the creditor chooses to dis­
close it as several transactions under section
226.17(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 of the con­
sumer’s principal dwelling, and the loan
will be disbursed in five advances. The
creditor gives six sets of 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 of 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.

2(a)(25) “Security Interest”
1. Threshold test. The threshold test is wheth­
er a particular interest in property is recog12



Regulation Z Official Staff Commentary
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. How­
ever, the regulation and the commentary do
exclude specific interests, such as afteracquired property and accessories, from the
scope of the definition regardless of their cate­
gorization under applicable law, and these
named exclusions may not be disclosed as se­
curity interests under the regulation.
2. Exclusions. The general definition of secu­
rity interest excludes three groups of interests:
incidental interests, interests in after-acquired
property, and interests that arise solely by op­
eration of 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.
3. Incidental interests. Incidental interests in
property that are not security interests in­
clude, among other things:
•
•
•
•
•

Assignment of rents
Right to condemnation proceeds
Interests in accessories and replacements
Interests in escrow accounts, such as for
taxes and insurance
Waiver of homestead or personal property
rights

The notion of an “incidental interest” does
not encompass an explicit security interest in
an insurance policy if that policy is the pri­
mary collateral for the transaction—for exam­
ple, in an insurance premium financing
transaction.
4. Operation o f law. Interests that arise solely
by operation of law are excluded from the
general definition. Also excluded are interests
arising by operation of law that are merely
repeated or referred to in the contract. How-

Regulation Z Official Staff Commentary
ever, if the creditor has an interest that arises
by operation of law, such as a vendor’s lien,
and takes an independent security interest in
the same property, such as a UCC security
interest, the latter interest is a disclosable se­
curity interest unless otherwise provided.
5. Rescission rules. Security interests that
arise solely by operation of law are security
interests for purposes of rescission. Examples
of such interests are mechanics’ and materialmen’s liens.

2(b) Rules of Construction
1. Footnotes. 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
Statute: § 103
Other sections: None
Other regulations: Regulation E (12 CFR
205.2(d))
Previous regulation: §§ 226.2, 226.8, and 226.9
1981 changes: Section 226.2 implements
amended section 103 of the act. Separate defi­
nitions for “comparative index of 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 of 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 of cred­
it,” “business day,” “closed-end credit,”
“consumer,” “consummation,” “downpay­



§ 226.2
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.
“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
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,
13

§ 226.2
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
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.

SE C T IO N 226.3— Exem pt T ransactions
3 (a ) Business, Com m ercial,
A gricultural, or O rganizational C redit
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

14



Regulation Z Official Staff Commentary

•

•

•

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
secured by the borrower’s residence or
personal property
A loan to improve a principal residence by
putting in a business office
A business account used occasionally for
consumer purposes

Examples of consumer-purpose credit include:
•

•
•

Credit extensions by a company to its 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. Non-owner-occupied rental property. Credit
extended to acquire, improve, or maintain
rental property (regardless of the number of
housing units) that is not owner-occupied is
deemed to be for business purposes. This in­
cludes, for example, the acquisition of 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 of 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. Owner-occupied rental property. If credit is
extended to acquire, improve, or maintain
rental property that is or will be owner-occu­

Regulation Z Official Staff Commentary
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 of rescission for credit extended
for purposes other than acquisition.

Neither of these rules means that an extension
of credit for property containing fewer than
the requisite number of units is necessarily
consumer credit. In such cases, the 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. Business credit later refinanced. 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. Agricultural purpose. An “agricultural pur­
pose” includes the planting, propagating, nur­
turing, harvesting, catching, storing, exhibit­
ing, marketing, transporting, processing, or
manufacturing of 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 of a farm with a homestead) if the
transaction is primarily for agricultural
purposes.
7. Organizational credit. The exemption for
transactions in which the borrower is not a
natural person applies, for example, to loans
to corporations, partnerships, associations,
churches, unions, and fraternal organizations.
The exemption applies regardless of the pur­



§ 226.3
pose of the credit extension and regardless of
the fact that a natural person may guarantee
or provide security for the credit.
8. Land trusts. Credit extended for consumer
purposes to a land trust is considered to be
credit extended to a natural person rather
than credit extended to an organization. In
some jurisdictions, a financial institution 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 capac­
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. Coverage. 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.
2. Open-end credit. 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.
15

§ 226.3
•

The initial extension of credit on the line
exceeds $25,000.

3. Refinanced obligations. 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.

Regulation Z Official Staff Commentary
is exempt from the regulation, even if a charge
to cover the billing costs is imposed.
References

Statute: §§ 103 (s) and (t) and 104
Other sections: § 226.12(a) and (b)
Previous regulation: § 226.3 and interpreta­
tions §§226.301 and 226.302.
1981 changes: The business credit exemption
has been expanded to include credit for agri­
cultural purposes. The rule of interpretation
section 226.302, concerning credit relating to
structures containing more than four housing
3 (c ) Public U tility Credit
units, has been modified and somewhat ex­
1. Examples. Examples of public utility serv­ panded by providing more exclusions for
transactions involving rental property.
ices include:
The exemption for transactions above
• Gas, water, or electrical services
$25,000 secured by real estate has been nar­
• Cable television services
rowed; all transactions secured by the con­
• Installation of new sewer lines, water lines, sumer’s principal dwelling (even if not con­
conduits, telephone poles, or metering sidered real property) are now subject to the
equipment in an area not already serviced by regulation.
the utility
The public utility exemption now covers the
financing
of the extension of a utility into an
The exemption does not apply to extensions of
area not earlier served by the utility, in addi­
credit, for example:
tion to the financing of services.
• To purchase appliances such as gas or
The securities credit exemption has been
electric ranges, grills, or telephones
extended to broker-dealers registered with the
• To finance home improvements such as CFTC as well as the SEC.
new heating or air conditioning systems.
A new exemption has been created for
home fuel budget plans.
3 (d ) Securities or Com m odities
A ccounts
1. Coverage. This exemption does not apply to
a transaction with a broker registered solely
with the state or to a separate credit extension in
which the proceeds are used to purchase
securities.
3 (e) H om e Fuel Budget Plans
1. Definition. 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

16FRASER
Digitized for


SE C T IO N 226.4— Finance Charge
4 (a ) Definition
1. Charges in comparable cash transactions.
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 of property
or services may compare charges with those
payable in a similar cash transaction by the
seller of the property or service. For example,
the following items are not finance charges:
•

Taxes, license fees, or registration fees paid
by both cash and credit customers
• Discounts that are available to cash and
credit customers, such as quantity discounts

Regulation Z Official Staff Commentary
•

Discounts available to a particular group
of consumers because they meet certain
criteria, such as being members of 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 of the group and don’t quali­
fy for the discount pay no more than the
nonmember cash customers.
• Charges for a service policy, auto club
membership, or policy of insurance against
latent defects offered to or required of both
cash and credit customers for the same
price.

In contrast, the following items are finance
charges:
•
•
•

Inspection and handling fees for the staged
disbursement of construction loan proceeds
Fees for preparing a Truth in Lending dis­
closure statement
Charges for a required maintenance or
service contract imposed only in a credit
transaction

§ 226.4
3. Charges by third parties. Charges imposed
by someone other than the creditor for serv­
ices that are not required by the creditor are
not finance charges. For example:
•

•

4. Forfeitures o f interest. 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:
•

If the charge in a credit transaction exceeds
the charge imposed in a comparable cash
transaction, only the difference is a finance
charge. For example:
•

If an escrow agent is used in both cash and
credit sales of real estate and the agent’s
charge is $100 in a cash transaction and
$150 in a credit transaction, only $50 is a
finance charge.

2. Costs o f doing business. Charges absorbed
by the creditor as a cost of doing business are
not finance charges, even though the creditor
may take such costs into consideration in de­
termining the interest rate to be charged or
the cash price of the property or service sold.
However, if the creditor separately imposes a
charge on the consumer to cover certain costs,
the charge is a finance charge if it otherwise
meets the definition. For example:
•

A discount imposed on a credit obligation
when it is assigned by a seller-creditor to
another party is not a finance charge as
long as the discount is not separately im­
posed on the consumer. (See section
226.4(b)(6).)




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)

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 entitled 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 inter17

§ 226.4
est only on the amount of the consumer’s
deposit.
• A consumer enters into a combined time
deposit/credit agreement with a financial
institution that establishes a time deposit
account and an open-end line of credit.
The line of credit may be used to borrow
against the funds in the time deposit. The
agreement provides for an interest rate on
any credit extension of, for example, 1 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).

4(b) Examples of Finance Charges
1. Relationship to other provisions. 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).

Paragraph 4(b)(2)
1. Checking account charges. 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
excludable as a participation fee. (See the
commentary to section 226.4(c)(4).)
• A service charge of $5.00 for each item

18



Regulation Z Official Staff Commentary
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.
Paragraph 4(b)(3)
1. Assumption fees. The assumption fees men­
tioned in section 226.4(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.
Paragraph 4(b)(5)
1. Credit loss insurance. Common examples
of the insurance against credit loss mentioned
in section 226.4(b)(5) are mortgage-guaranty
insurance, holder-in-due-course insurance,
and repossession insurance. Such premiums
must be included in the finance charge only
for the period that the creditor requires the
insurance to be maintained.
Paragraphs 4(b)(7) and (8)
1. Preexisting insurance policy. 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. Insurance written after consummation. 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 of 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
sures may be required for the insurance if it is
financed).

Regulation Z Official Staff Commentary
3. Substitution o f life insurance. 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 of the cost of
the credit life insurance if purchased from the
creditor or the actual cost of the policy (if
that is less than the cost of the insurance
available from the creditor). If the creditor
does not offer the required insurance, the pre­
mium to be included in the finance charge is
the cost of a policy of insurance of the type,
amount, and term required by the creditor.
4. Other insurance. Fees for required insur­
ance not of the types described in section
226.4(b)(7) and (8) are finance charges and
are not excludable. For example:
•

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.

Paragraph 4(b)(9)
1. Discounts for payment by other than credit.
The discounts to induce payment by other
than credit mentioned in section 226.4(b)(9)
include, for example, the following situation:
•

The seller of land offers individual tracts
for $10,000 each. If the purchaser pays
cash, the price is $9,000, but if the 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. Exception for cash discounts. Discounts of­
fered to induce consumers to pay for property
or services by cash, check, or other means not
involving the use of either an open-end credit
plan or a credit card (whether open-end or
closed-end credit is extended on the card)
may be excluded from the finance charge un­
der section 167(b) of the act (as amended by
Pub. L. 97-25, July 27, 1981). The discount
may be in whatever amount the seller desires,
either as a percentage of the regular price (as
defined in section 103 (z) of the act, as amend­
ed) or a dollar amount. This provision applies
only to transactions involving an open-end
credit plan or a credit card. The merchant



§ 226.4
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 of 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. None of these discounts is a finance
charge.

Section 171(c) of 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.

4(c) Charges Excluded from the Finance
Charge
Paragraph 4(c)(1)
1. Application fees. 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 of services such as credit reports, credit
investigations, and appraisals. The creditor is
free to impose the fee in only certain of its
loan programs, such as mortgage loans. How­
ever, if the fee is to be excluded from the fi­
nance charge under section 226.4(c)(1), it
must be charged to all applicants, not just to
applicants who are approved or who actually
receive credit.
Paragraph 4(c)(2)
1. Late-payment
charges.
Late-payment
charges can be excluded from the finance
charge under section 226.4(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:
19

§ 226.4
•

•

The terms of 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 of the creditor in handling
the accounts. For example, regardless of
the terms of the account, does the creditor
allow consumers to pay the accounts over
a period of 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 226.4(c)(2) applies to late-payment
charges imposed for failure to make payments
as agreed, as well as failure to pay an account
in full when due.
2. Other excluded charges. 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.
Paragraph 4(c)(3)
1. Assessing interest on an overdraft balance.
A charge on an overdraft balance computed
by applying a rate of 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.
Paragraph 4(c)(4)
1. Participation fees. The participation fees
mentioned in section 226.4(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 of 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 226.4(c)(4). (See the com­
mentary to section 226.4(b)(2).)
20




Regulation Z Official Staff Commentary
Paragraph 4(c)(5)
1. Seller's points. The seller’s points men­
tioned in section 226.4(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 of 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.
Paragraph 4(c)(6)
1. Lost interest. 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 of usury limits the
creditor must reduce the interest rate paid on
the deposit and, as a result, the consumer los­
es some of the interest that would otherwise
have been earned. Under section 226.4(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
226.4(a).)
Paragraph 4(c)(7)
1. Real estate or residential mortgage transac­
tion charges. The list of charges in section
226.4(c)(7) applies both to residential mort­
gage transactions (which may include, for ex­
ample, the purchase of a mobile home) and to
other transactions secured by real estate. The
fees are excluded from the finance charge even
if the services for which the fees are imposed
are performed by the creditor’s employees

Regulation Z Official Staff Commentary
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 in­
formation in the report. In all cases, the
charges must be bona fide and reasonable. If a
lump sum is charged for several services and
includes a charge that is not excludable (for
example, a charge for a lawyer’s attending the
closing), a portion of the total should be allo­
cated to that service and included in the fi­
nance charge.

4(d) Insurance
1. General. 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. Timing o f disclosures. 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. Premium rate increases. 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. Unit-cost disclosures. 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
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



§ 226.4
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. Required credit life insurance. 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. Other types o f voluntary insurance. 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. Signatures. 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.
8. Property insurance. 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
21

§ 226.4
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. Single-interest insurance. 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. Single-interest insurance defined. 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
included in the finance charge.

Regulation Z Official Staff Commentary
•

•

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. Itemization. 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 im­
posed. If an aggregate sum is disclosed, a gen­
eral term such as security interest fees or “fil­
ing fees” may be used.
3. Notary fees. 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. Nonfiling insurance. 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.

4(e) Certain Security Interest Charges
1. Examples. Examples of charges excludable
from the finance charge under section
226.4(e)(1) include:
22



4 (f) Prohibited Offsets
1. Earnings on deposits or investments. The
rule that the creditor shall not deduct any

Regulation Z Official Staff Commentary
earnings by the consumer on deposits or in­
vestments applies whether or not the creditor
has a security interest in the property.

References
Statute: §§ 106, 167, and 171(c)
Other sections: §§ 226.9(d) and 226.12
Previous regulation: § 226.4 and interpreta­
tions §§ 226.401 through 226.407.
1981 changes: While generally continuing the
rules under the previous regulation, section
226.4 reflects amendments to section 106 of
the act and makes certain other changes in the
rules for determining the finance charge. For
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

§ 226.5
be in a reasonably understandable form. It
does not require that disclosures be segregated
from other material or located in any particu­
lar place on the disclosure statement, or that
numerical amounts or percentages be in any
particular type size. The standard does not
prohibit:
•

Pluralizing required terminology ( “fi­
nance charge” and “annual percentage
rate” )
• Adding to the required disclosures such
items as contractual provisions, explana­
tions of contract terms, state disclosures,
and translations
• 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. Integrated document. 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:
•

SECTION 226.5—General Disclosure
Requirements
5(a) Form of Disclosures
Paragraph 5(a)(1)
1. Clear and conspicuous. The “clear and con­
spicuous” standard requires that disclosures



•

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
23

§ 226.5
Paragraph 5(a)(2)
1. When disclosures must be “more conspicu­
ous. ” The terms “finance charge” and “annual
percentage rate” must be disclosed more con­
spicuously when required to be used with a
number. For example, on the initial disclosure
statement, the annual percentage rate disclo­
sure under section 226.6(a)(2) must be
“more conspicuous.” The following apply to
the “more conspicuous” rule:
•

•

Neither term need be emphasized when
used as part of general informational ma­
terial or in textual descriptions of other
terms, although emphasis is permissible in
such cases. For example, when the terms
appear as part of the explanations required
under section 226.6(a)(3) and (4), they
may be as conspicuous as the disclosures
required under sections 226.6(a)(2) and
226.7(g).
The corresponding annual percentage rate
under section 226.7(d) may be less con­
spicuous than the disclosure of the actual
annual percentage rate (historical rate)
under section 226.7(g) when the two rates
differ. This is permitted by footnote 9 to
section 226.5(a)(2), which excepts sec­
tion 226.7(d) disclosures from the “more
conspicuous” requirement.

2. Making disclosures more conspicuous. 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

5(b) Time of Disclosures
5(b)(1) Initial disclosures
1. Disclosure before the first transaction. The
24



Regulation Z Official Staff Commentary
rule that the initial disclosure statement must
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). Delivery
of the initial disclosure statement is timely
even if a membership fee, advance, or pur­
chase already has been posted to the consum­
er’s account, so long as the consumer may,
after receiving the disclosures, reject the plan
and have no further obligation beyond return­
ing a credit card or any money or goods.
If the consumer has paid a fee and rejects
the plan after receiving the disclosures, the
creditor must refund the amount paid and
clear the consumer’s account. Initial disclo­
sures need not be given before the imposition
of an application fee under section
226.4(c)(1).
2. Reactivation o f suspended account. If an ac­
count is temporarily suspended (for example,
because the consumer has exceeded a credit
limit, or because a credit card is reported lost
or stolen) and then is reactivated, no new ini­
tial disclosures are required.
3. Reopening closed account. If an account
has been closed (for example, due to inactivi­
ty, cancellation, or expiration) and then is re­
opened, new initial disclosures are required.
4. Converting closed-end to open-end credit. 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
section 226.17 on converting open-end credit
to closed-end credit.)
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(i)
1. Periodic statements not required. Periodic
statements need not be sent in the following
cases:
•

If the creditor adjusts an account balance
so that at the end of the cycle the balance
is less than $1—so long as no finance

§ 226.5

Regulation Z Official Staff Commentary
charge has been imposed on the account
for that cycle
• If a statement was returned as undelivera­
ble. If a new address is provided, however,
within a reasonable time before the credi­
tor must send a statement, the creditor
must resume sending statements. Receiv­
ing the address at least 20 days before the
end of a cycle would be a reasonable
amount of time to prepare the statement
for that cycle. For example, if an address
is received 22 days before the end of the
June cycle, the creditor must send the pe­
riodic statement for the June cycle. (See
section 226.13(a)(7).)
2. Termination o f credit privileges. When an
open-end account is terminated without being
converted to closed-end credit under a written
agreement, the creditor must continue to pro­
vide periodic statements to those consumers
entitled to receive them under section
226.5(b) (2) (i) (for example, when an openend credit plan ends and consumers are pay­
ing off outstanding balances) and must con­
tinue to follow all of the other open-end credit
requirements and procedures in subpart B.
Paragraph 5(b)(2)(H)
1. 14-day rule. The 14-day rule for mailing or
delivering periodic statements does not apply
if charges (for example, transaction or activi­
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. Computer malfunction. Footnote 10 does
not extend to the failure to provide a periodic
statement because of computer malfunction.
3. Calling for periodic statements. 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
Estimates
1. Legal obligation. 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 normally deter­
mined by applicable state or other law.
• The fact that a contract may later be
deemed unenforceable by a court on the
basis of equity or other grounds does not,
by itself, mean that disclosures based on
that contract did not reflect the legal
obligation.
• The legal obligation normally is presumed
to be contained in the contract that evi­
dences the agreement. But this may be re­
butted if another agreement between the
parties legally modifies that contract.
2. Estimates— obtaining information. 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
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. Estimates—redisclosure. 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
25

§ 226.5
but before the consumer receives the first ad­
vance under the plan, no new disclosure is
necessary.

Regulation Z Official Staff Commentary
closures inacurrate. The creditor may, howev­
er, be required to provide a new disclosure(s)
under section 226.9(c).

1. Multiple creditors. Under section 226.5(d):

2. Use o f inserts. When changes in a creditor’s
plan affect required disclosures, the creditor
may use inserts with outdated disclosure
forms. Any insert:

•

•

5 (d ) M ultiple Creditors; M ultiple
Consum ers

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
• Each creditor in the plan is legally respon­
sible for seeing that the disclosures are
provided
• All disclosures for the open-end credit
plan must be given, even if the disclosing
creditor would not otherwise have been
obligated to make a particular disclosure
• In some open-end credit programs involv­
ing multiple creditors, the consumer has
the option (for example, at the end of a
billing cycle) to pay creditor A directly or
to transfer to creditor B all or part of the
amount owing. If the consumer elects the
latter option, the consumer no longer is
obligated to creditor A for the specific
amount(s) transferred. In such a case,
creditor A and creditor B may send sepa­
rate periodic statements that reflect the
separate obligations owed to each.
2. Multiple consumers. 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.
5 (e) Effect o f Subsequent Events
1. Events causing inaccuracies. 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 dis26



•
•

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

References
Statute: §§ 121(a) through (c), 122(a) and
(b), 124, 127(a) and (b), and 163(a)
Other sections: §§ 226.6, 226.7, and 226.9
Previous regulation: §§ 226.6(a) and (c)
through (g), and 226.7(a) through (c)
1981 changes: 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.

SE C T IO N 226.6— Initial Disclosure
Statem ent
1. Consistent terminology. 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.”

§ 226.6

Regulation Z Official Staff Commentary

6(a) Finance Charge
Paragraph 6(a)(1)
1. When finance charges accrue. 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. Free-ride periods. 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.
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 plan defined. A variable-rate
plan contemplates a series of rate changes in
accordance with an index that is readily verifi­
able by the borrower and beyond the control
of the lender (for example, the Treasury bill
rate). A contract right to increase the rate
upon any other contingency, or at the credi­
tor’s discretion, would not be a variable-rate



plan. For example, an open-end credit plan in
which the employee receives a lower rate con­
tingent upon employment, with the rate to be
increased upon termination of employment,
would not be a variable-rate plan. Similarly,
an open-end credit plan that provides for rate
increases voted by the board of directors of a
financial institution would not be a variablerate plan.
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 for 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

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

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

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
27

§ 226.6
usury or rate ceiling under state or federal
statutes or regulations need not be disclosed.
Examples of limitations that must be disclosed
include:
•
•

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

8. Variable-rate plan— effects o f increase. Ex­
amples of effects that must be disclosed
include:
•

•

Any requirement for additional collateral
if the annual percentage rate increases be­
yond a specified rate
Any increase in the scheduled minimum
periodic payment amount

9. Variable-rate plan—change-in-terms notice
not required. No notice of a change in terms is
required for a rate increase under a variablerate plan as defined in comment 6(a) (2)-2.
Paragraph 6(a)(3)
1. Explanation o f balance computation meth­
od. A shorthand phrase such as “previous bal­
ance method” does not suffice in explaining
the balance computation method. (See appen­
dix G-l for model clauses.)
2. Allocation o f payments. Disclosure about
the allocation of payments and other credits is
not required. For example, the creditor need
not disclose that payments are applied to late
charges, overdue balances, and finance
charges before being applied to the principal
balance; or in a multifeatured plan, that pay­
ments are applied first to finance charges, then
to purchases, and then to cash advances. (See
comment 7-1 for definition of multifeatured
plan.)
Paragraph 6(a)(4)
1. Finance charges. In addition to disclosing
the periodic rate(s) under section 226.6(a)(2), disclosure is required of any other type of
finance charge that may be imposed, such as
minimum, fixed, transaction, and activity
charges; required insurance; or appraisal or
credit report fees (unless excluded from the
finance charge under section 226.4(c)(7).)
28



Regulation Z Official Staff Commentary

6(b) Other Charges
1. General; examples o f other charges. Under
section 226.6(b), significant charges related to
the plan (that are not finance charges) must
also be disclosed. For example:
•

Late payment and over-the-credit-limit
charges
• Fees for providing documentary evidence
of transactions requested under section
226.13 (billing-error resolution)
• Charges imposed in connection with real
estate transactions (See section 226.4(c)(7).)
• Taxes and filing or notary fees excluded
from the finance charge under section
226.4(e)
• A tax imposed on the credit transaction by
a state or other governmental body, such
as a documentary stamp tax on cash ad­
vances (See the commentary to section
226.4(a).)
• Membership or participation fees for a
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.
2. Exclusions. The following are examples of
charges that are not “other charges”:
•

Fees charged for documentary evidence of
transactions for income tax purposes
• Amounts payable by a consumer for col­
lection activity after default; attorney’s
fees, whether or not automatically im­
posed; foreclosure costs; post-judgment in­
terest rates imposed by law; and reinstate­
ment or reissuance fees
• Premiums for voluntary credit life or dis­
ability insurance, or for property insur­
ance, that are not part of the finance
charge
• Application fees under section 226.4(c)-

(1)
•

A monthly service charge for a checking
account with overdraft protection that is
applied to all checking accounts, whether
or not a credit feature is attached

§ 226.7

Regulation Z Official Staff Commentary

6(c) Security Interests
1. General. Disclosure is not required about
the type of security interest, or about the cred­
itor’s rights with respect to that collateral. In
other words, the creditor need not expand on
the term “security interest.” Also, since no
specified terminology is required, the creditor
may designate its interests by using, for exam­
ple, “pledge,” “lien,” or “mortgage” (instead
of “security interest” ).
2. Identification o f property. 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. Spreader clause. 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
disclosed. (Such security interests may be
known as “spreader” or “dragnet” clauses, or
as “cross-collateralization” clauses.) A specif­
ic identification of that collateral is unneces­
sary, but a reminder of the interest arising
from the prior indebtedness is required. This
may be accomplished by using language such
as “collateral securing other loans with us
may also secure this loan.” At the creditor’s
option, a more specific description of the
property involved may be given.
4. Additional collateral. If collateral is re­
quired when advances reach a certain amount,
the creditor should disclose the information
available at the time of the initial disclosures.
For example, if the creditor knows that a se­
curity interest will be taken in household
goods if the consumer’s balance exceeds
$1,000, the creditor should disclose accord­
ingly. If the creditor knows that security will
be required if the consumer’s balance exceeds
$1,000, but the creditor does not know what
security will be required, the creditor must
disclose on the inital disclosure statement that
security will be required if the balance exceeds
$1,000, and the creditor must provide a
change-in-terms notice under section 226.9(c)
at the time the security is taken.
5. Collateral from third party. In certain situ­



ations, the consumer’s obligation may be se­
cured by collateral belonging to a third party.
For example, an open-end credit plan may be
secured by an interest in property owned by
the consumer’s parents. In such cases, the se­
curity interest is taken in connection with the
plan and must be disclosed, even though the
property encumbered is owned by someone
other than the consumer.

6(d) Statement of Billing Rights
See the commentary to appendix G-3.

References
Statute: § 127(a)
Other sections: §§ 226.4, 226.5, 226.7, 226.9,
226.14, and appendix G
Previous regulation: § 226.7(a) and interpre­
tation § 226.706
1981 changes: Section 226.6 implements the
amended statute which requires disclosure of
the fact that no 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.

SECTION 226.7—Periodic Statement
1. Multifeatured plans. 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.
29

§ 226.7

7(a) Previous Balance
1. Credit balances. If the previous balance is a
credit balance, it must be disclosed in such a
way so as to inform the consumer that it is a
credit balance, rather than a debit balance.
2. Multifeatured plans. 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. Accrued finance charges allocated from
payments. 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.

7(b) Identification of Transactions
1. Multifeatured plans. In identifying transac­
tions under section 226.7(b), transactions
may be grouped by feature (such as by dis­
closing sale transactions separately from cash
advance transactions) or may be arranged by
date.

Regulation Z Official Staff Commentary
3. Date. The crediting date need not be identi­
fied as “crediting date,” unless two or more
dates are disclosed for a single entry (for ex­
ample, the posting date and the crediting
date).

7(d) Periodic Rates
1. Disclosure o f periodic rates— whether or not
actually applied. 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:
•

•

2. Disclosure o f periodic rates required only if
imposition possible. With regard to the period­
ic rate disclosure (and its corresponding an­
nual percentage rate), only rates that could
have been imposed during the billing cycle re­
flected on the periodic statement need to be
disclosed. For example:
•

7(c) Credits
1. Identification—sufficiency. 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
isfy the billing-error correction notice require­
ment. (See the commentary to section
226.13(e) and (f).)
2. Format. 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.
30




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.

•

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.
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

§ 226.7

Regulation Z Official Staff Commentary

•

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. Multiple rates—same transaction. If two or
more periodic rates are applied to the same
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. Corresponding annual percentage rate. 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. Rate same as actual annual percentage
rate. 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.”
6. Ranges o f balances. See comment 6(a)( 2 ) 1.




7(e) Balance on Which Finance Charge
Computed.
1. Limitation to periodic rates. 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. Split rates applied to balance ranges. 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.
3. Monthly rate on average daily balance. 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. Daily rate on daily balance. 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
31

§ 226.7
—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
—as 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)
multiplying each of the results by the ap­
plicable daily periodic rate, and (3) add­
ing these products together. If the differ­
ent rates are due to disclosed ranges of
balances (see comment 7(e)-2), the
creditor need give only one average daily
balance together with the additional in­
formation required by this paragraph.
5. Explanation o f balance computation meth­
od. See the commentary to section
226.6(a)(3).
6. 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.
7. Nondeduction o f credits. The creditor need
32




Regulation Z Official Staff Commentary
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.” ).
8. Multifeatured plans. In a multifeatured
plan, the balance on which the finance charge
was computed must be disclosed for each fea­
ture to which a periodic rate was applied. A
total balance for the entire plan is optional.

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. Multifeatured plans. 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

Regulation Z Official Staff Commentary
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
of finance charges that have accrued since the
last payment.

7(g) Annual Percentage Rate
1. Rate same as corresponding annual per­
centage rate. See comment 7(d)-5.
2. Multifeatured plans. In a multifeatured
plan, the actual annual percentage rate that
reflects the finance charge imposed during the
cycle may be separately stated for each fea­
ture. If separate rates are given, a composite
annual percentage rate for the entire plan is
optional.

7(h) Other Charges
1. Identification. 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. Date. The date of imposing or debiting
“other charges” need not be disclosed.
3. Total. Disclosure of the total amount of
other charges is optional.

7(i) Closing Date of Billing Cycle; New
Balance
1. Credit balances. See comment 7(a)-l.
2. Multifeatured plans. 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.



§ 226.7
3. 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, the new balance need not
reflect finance charges accrued since the last
payment.

7(j) Free-Ride Period
1. Wording. 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. Wording. 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. Telephone number. 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
Statute: § 127(b)
Previous regulation: § 226.7(b)(1) and inter33

§ 226.7
pretation §§ 226.701, 226.703, 226.706, and
226.707
Or/ier sections: §§ 226.4 through 226.6, 226.8,
226.14, and appendix G
1981 changes: 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
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 serv34




Regulation Z Official Staff Commentary
ices from a merchant, whether or not the mer­
chant is the card issuer. “Sale credit” even
includes:
•

•

Premiums for voluntary credit life insur­
ance whether sold by the card issuer or
another person
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
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

§ 226.8

Regulation Z Official Staff Commentary
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.

8(a) Sale Credit
1. Date— disclosure o f only one date. 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. Date— disclosure o f month and day only.
The month and day are sufficient disclosure of
the date on which the transaction took place,
unless the posting of the transaction is delayed
so long that the year is needed for a clear dis­
closure to the consumer.
3. When transaction takes place. 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.
4. Transactions not billed in full. 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; or 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) Copy o f Credit Document Provided
1. Format. 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) Copy o f Credit Document Not
Provided— Creditor and Seller Same or
Related Person(s)
1. Property identification— sufficiency o f de­
scription. 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:
•

•

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
ficient—for example, “jewelry,” “sporting
goods.”

2. Property identification— number or symbol.
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. Property identification— additional docu­
ment. In making the “brief identification” re­
quired by section 226.8(a)(2), the creditor
may identify the property by describing the
35

§ 226.8
transaction on a document accompanying the
periodic statement (for example, on a facsimi­
le draft). (See also footnote 17.)
4. Small creditors. 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.

8(a)(3) Copy o f Credit Document Not
Provided— Creditor and Seller Not Same or
Related Person(s)
1. Seller's name. 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. Location o f transaction. The disclosure of
the location where the transaction took place
generally requires an indication of both the
city, and the state or foreign country. If the
creditor has multiple stores or branches with­
in that city, the creditor need not identify the
specific branch at which the sale occurred.
3. No fixed location. 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”

36



Regulation Z Official Staff Commentary

8(b) Nonsale Credit
1. Date o f transaction. 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. Amount o f transaction. 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. Amount— disclosure on cumulative basis. 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. Identification o f transaction type. 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
Statute: § 127(b)(2)
Previous regulation: § 226.7(k)
Other sections: §§ 226.7
1981 changes: 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.

§ 226.9

Regulation Z Official Staff Commentary

SECTION 226.9— Subsequent
Disclosure Requirements
9(a) Furnishing Statement of Billing
Rights

•

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) Annual Statement
1. General The creditor may provide the an­
nual billing rights statement:
•

By sending it in one billing period per year
to each consumer that gets a periodic
statement for that period or
• By sending a copy to all of its account
holders sometime during the calendar year
but not necessarily all in one billing period
(for example, sending the annual notice in
connection with renewal cards or when
imposing annual membership fees).

2. Substantially similar. See the commentary
to appendix G-3.
9(a)(2) Alternative Summary Statement

Paragraph 9(b)(1)
1. Same finance charge terms. If the new
means of accessing the account is subject to
the same finance charge terms as those previ­
ously disclosed, the creditor:
•

•

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.

1. Changing from long-form to short-form
statement and vice versa. 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.

Paragraph 9(b)(2)

2. Substantially similar. See the commentary
to appendix G-4.

9(c) Change in Terms

9(b) Disclosures for Supplemental Credit
Devices and Additional Features
1. Credit device—examples. “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. Credit feature—examples. A new credit
“feature” would include, for example:
•

The addition of overdraft checking to an




1. Different finance charge terms. 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.

1. “Changes” initially disclosed. No notice of
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
37

§ 226.9
for an increase (for example, when an in­
crease may occur by vote of the board of
directors).
2. State law issues. 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. Change in billing cycle. 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) Written Notice Required
1. Affected consumers. 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. Timing— effective date o f change. 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. Timing— advance notice not required. Ad­
vance notice of 15 days is not necessary—that
is, a notice of change in terms is required, but
it may be sent as late as the effective date of
the change—in two circumstances:
38

Regulation Z Official Staff Commentary




If there is an increased periodic rate or any
other finance charge attributable to the
consumer’s delinquency or default
If the consumer agrees to the particular
change (for example, an agreed-upon ad­
dition or substitution of collateral). But
the consumer’s general acceptance of the
creditor’s contract reservation of the right
to change terms, or the consumer’s use of
the account (which might imply accept­
ance of its terms under state law), is not
an “agreement” between the consumer
and the creditor for purposes of section
226.9(c)(1).

4. Form o f change-in-terms notice. 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. Security interest change—form o f notice. A
copy of the security agreement that describes
the collateral securing the consumer’s account
may be used as the notice, when the term
change is the addition of a security interest or
the addition or substitution of collateral.
9(c)(2) Notice Not Required
1. Changes not requiring notice. 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. Skip features. 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

§226.10

Regulation Z Official Staff Commentary

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 be­
cause they could result in lowered finance
charges; now, any change in the balance com­
9(d) Finance Charge Imposed at Time of putation method requires disclosure.
When a finance charge is imposed at the
Transaction
time of a transaction, section 226.9(d) only
1. Ban on credit card surcharges. 15 USC
requires disclosure of the finance charge at
1666f provides that until February 27, 1984,
point-of-sale; the amount financed and annual
no seller in any sales transaction may impose
percentage rate figured in accordance with the
a surcharge on a cardholder who elects to use
closed-end credit provisions need no longer be
a credit card instead of paying by cash, check,
disclosed. Furthermore, the finance charge
or similar means.
disclosure now may be made orally by the
person honoring the card.

reduction or upon resumption of the higher
rates if these features are explained on the ini­
tial disclosure statement (including an expla­
nation of the terms upon resumption). For ex­
ample, a merchant may allow consumers to
skip the December payment to encourage hol­
iday shopping, or a teacher’s credit union may
not require payments during summer vaca­
tion. Otherwise, the creditor must give notice
prior to resuming the original schedule or
rate, even though no notice is required prior
to the reduction.

References

Statute: § 127(a)(7)
Other sections: §§ 226.4 through 226.7 and ap­
pendix G
Previous regulation: § 226.7(d) through (f)
and (j) and interpretation §§ 226.705 and
226.708
1981 changes: 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



SECTION 226.10—Prompt Crediting of
Payments
10(a) General Rule
1. Crediting date. Section 226.10(a) does not
require the creditor to post the payment to the
consumer’s account on a particular date; the
creditor is only required to credit the payment
as o f the date of receipt.
2. Date o f receipt. 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.
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
39

§226.10

•

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).

Regulation Z Official Staff Commentary
accrue for the period between receipt and
crediting of payments.
4. Implied guidelines for payments. In the ab­
sence of specified requirements for making
payments (see section 226.10(b)):
•
•
•

10(b) Specific Requirements for
Payments
1. Payment requirements. 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. Payment requirements—limitations. 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. Acceptance o f nonconforming payments. 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
40




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
transfer if the creditor and consumer have
so agreed

References
Statute: § 164
Other sections: § 226.7
Previous regulation: § 226.7(g)
1981 changes: 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.

SECTION 226.11—Treatment of Credit
Balances
1. Timing o f refund. 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.

Regulation Z Official Staff Commentary
2. Amount o f refund. 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(b)
1. Written requests—standing orders. 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.

Paragraph 11(c)
1. Good faith effort to refund. 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. Good faith effort unsuccessful. 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
Statute: §165
Previous regulation: § 226.7(h)
1981 changes: 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.



§226.12
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.

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.)

12(a) Issuance of Credit Cards
Paragraph 12(a)(1)
1. Explicit 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 of credit
features to the card (for example, the granting
of overdraft privileges on a checking account
when the consumer already has a check guar­
antee card) constitutes issuance of 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 of the card requested may be
different when issued
The card may have features in addition to
those reflected in the request or
application

4. 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.
41

§226.12

Regulation Z Official Staff Commentary

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.

the issuer’s computer program or automated
teller machines, or by a similar program
adjustment.

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
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:

Paragraph 12(a)(2)

•

•

•

The additional cards may be imprinted in
either A’s name or in the names of B and
C.
No liability for unauthorized use (by 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); of course, liabil­
ity of up to $50 for unauthorized use of B’s
and C’s cards may be imposed on A.
Whether B and C may be held liable for
their own use, or on the account generally,
is a matter of state or other applicable law.

7. 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 of a debit card or other existing
card that had no credit privileges when issued
would be appropriate after the consumer has
specifically requested a card with credit privi­
leges. Similarly, the card issuer may add a
credit feature, for example, by reprogramming
42




1. Renewal. “Renewal” generally contem­
plates the regular replacement of existing
cards because of, for example, security rea­
sons or new technology or systems. It also in­
cludes the reissuance of cards that have been
suspended temporarily, but does not include
the opening of a new account after a previous
account was closed.
2. Substitution—examples. “Substitution” en­
compasses the replacement of 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 of 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.
(If 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
of 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 of the original issuer and issues its
own card to replace the original one). 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 of the original
card is cut off when use of the new card be­
comes possible.

Regulation Z Official Staff Commentary
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.
5. One-for-one rule. An 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 of bank credit card, for
example), the card issuer may not replace the
duplicate cards with one card A and one card
B (card B—another type of bank credit card)
unless the consumer requests card B.

12(b) 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



§226.12
holder, required disclosures should be provid­
ed to the corporation (as opposed to an
employee user).
12(b)(1) Limitation on Amount
1. Meaning o f “authority. ” Footnote 22 de­
fines unauthorized use in terms of whether the
user has “actual, implied, or apparent authori­
ty.” Whether such authority exists must be
determined under state or other applicable
law.
2. Liability limits—dollar amounts. As a gen­
eral rule, the cardholder’s liability for a series
of 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 226.12(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 of 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 of iden­
tification. Sufficient identification also does
43

§226.12
not exist if a “pool” or group card, issued to a
corporation and signed by a corporate agent
who will not be a user of the card, is intended
to be used by another employee for whom no
means of identification is provided.
3. Transactions not involving card. The card­
holder may not be held liable under section
226.12(b) when the card itself (or some other
sufficient means of identification of 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 of 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. Notice 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. Notice also may be effec­
tive even though it is not given at the address
or phone number disclosed by the card issuer
under section 226.12(b)(2)(ii).
2. Who must provide notice. Notice of loss,
theft, or possible unauthorized use need not be
initiated by the cardholder. Notice is sufficient
so long as it gives the “pertinent information,”
which would include the name or card num­
ber of the cardholder and an indication that
unauthorized use has or may have occurred.
12(b)(5) Business Use o f Credit Cards
1. Agreement for higher liability for business
use cards. The card issuer may not rely on
section 226.12(b)(5) if the business is clearly
not in a position to provide 10 or more cards
to employees (for example, if the business has
only 3 employees). On the other hand, the
issuer need not monitor the personnel prac­
tices of the business to make sure that it has at
least 10 employees at all times.
2. Unauthorized use by employee. The protec44




Regulation Z Official Staff Commentary
tion afforded to an employee against liability
for unauthorized use in excess of 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.

12(c) Right of 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 of goods, may also constitute
“billing errors” under section 226.13, that sec­
tion operates independently of 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 226.12(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. An as­
sertion that a particular transaction resulted
from unauthorized use of the card could also
be both a “defense” and a billing error.
2. Claims and defenses assemble. 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.
12(c)(1) General Rule
1. Situations excluded and included. The con­
sumer may assert claims or defenses only
when the goods or services are “purchased
with the credit card.” This could include:

§226.12

Regulation Z Official Staff Commentary
•

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

But it would exclude:
•

Use of a credit card to obtain a cash 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 of goods or services by use
of a check accessing an overdraft account
and a credit card used solely for identifica­
tion of the consumer. (On the other hand,
if the credit card is used to make partial
payment for the purchase and not merely
for identification, the right to assert claims
or defenses would apply to credit extended
via the credit card, although not to the
credit extended on the overdraft line.)
• Purchases made by use of 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 of 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
1. Scope o f prohibition. Although an amount
in dispute may not be reported as delinquent
until the matter is resolved:
•
•

That amount may be reported as disputed.
Nothing in this provision prohibits the




card issuer from undertaking its normal
collection
activities
for
delinquent
accounts.
12(c)(3) Limitations
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 of 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 limitation. 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 226.12(d)(1), unless done in the con­
text of one of the exceptions specified in sec­
tion 226.12(d)(2). For example, if the terms
of 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 of 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
45

§226.12
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
of credit, the resulting indebtedness is subject
to the offset prohibition since it is incurred
through a credit card plan, even though the
consumer did not use an associated check
guarantee or debit card.
4. 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.

Regulation Z Official Staff Commentary
ter-acquired property. Thus, a consensual se­
curity interest in deposit-account funds, in­
cluding funds deposited after the granting of
the security interest, would constitute a per­
missible exception to the prohibition on
offsets.
3. Court order. If the card issuer obtains a
judgment against the cardholder, and if state
and other applicable law and the terms of the
judgment do not so prohibit, the card issuer
may offset the indebtedness against the card­
holder’s deposit account.

Paragraph 12(d)(3)
1. Automatic payment plans—scope o f excep­
tion. With regard to automatic debit plans un­
der section 226.12(d)(3), the following rules
apply:
•

•

Paragraph 12(d)(2)
1. Security interest—limitations. In order to
qualify for the exception stated in section
226.12(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.
As used in section 226.12(d), the term “secu­
rity interest” does not exclude (as it does for
other Regulation Z purposes) interests in af46



•

The cardholder’s authorization must be in
writing and signed or initialed by the
cardholder.
The authorizing language need not appear
directly above or next to the cardholder’s
signature or initials, provided it appears on
the same document and that it clearly
spells out the terms of the automatic debit
plan.
If the cardholder has the option to accept
or reject the automatic debit feature (such
option may be required under section 913
of the Electronic Fund Transfer Act), the
fact that the option exists should be clearly
indicated.

2. Automatic payment plans— additional ex­
ceptions. The following practices are not pro­
hibited by section 226.12(d)(1):
•

•

Automatically deducting charges for par­
ticipation in a program of banking services
(one aspect of which may be a credit card
plan)
Debiting the cardholder’s deposit account
on the cardholder’s specific request rather
than on an automatic periodic basis (for
example, a cardholder might check a box
on the credit card bill stub, requesting the
issuer to debit the cardholder’s account to
pay that bill)

Regulation Z Official Staff Commentary

12(e) Prompt Notification of Returns
and Crediting of Refunds
Paragraph 12(e)(1)
1. Normal channels. The term “normal chan­
nel” refers to any network or interchange sys­
tem used for the processing of the original
charge slips (or equivalent information con­
cerning the transactions).

§226.13
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 of the regulation to Regulation E
(Electronic Fund Transfers), has been added.

Paragraph 12(e)(2)
1. Crediting account. The card issuer need not
actually post the refund to the consumer’s ac­
count within three business days after receiv­
ing the credit statement, provided that it cred­
its the account as of a date within that time
period.

References
Statute: §§ 103(1), 132, 133, 135, 162, 166,
167, 169, and 170
Other sections: § 226.13
Other regulations: Regulation E (12 CFR
205)
Previous regulation: § 226.13
1981 changes: The issuance rules in section
226.12(a) make clear that cards may be sent
to the person making the request and also to
any other person for whom a card is request­
ed, except that no liability for unauthorized
use may be imposed on persons who are only
authorized users.
The principal differences in section
226.12(b) about conditions of liability are as
follows: the requirement that the cardholder
be given a postage-paid, preaddressed card or
envelope for notification of loss or theft has
been deleted (corresponding to an amend­
ment to the act); the required disclosures of
maximum liability and of means of notifica­
tion have been simplified; and the required
provision of a means of identification has been
changed in that the issuer now may provide a
means to identify either the cardholder or the
authorized user. Finally, anyone may provide
the notification to the card issuer, not just the
cardholder.
Section 226.12(d) on offsets clarifies that
the offset prohibition does not apply to con­
sensual security interests. The separate



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) of the
Truth in Lending Act and section 701 of 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) of the act. (Any
failure to comply may also be a violation sub­
ject to the liability provisions of section 130 of
the act.)
2. Charges for 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 of the
error-resolution process (including charges
for documentation or investigation) and must
credit the consumer’s account if such a charge
was assessed pending resolution. Since the act
grants the consumer error-resolution rights,
the creditor should avoid any chilling effect
on the good faith assertion of errors that
might result if charges are assessed when no
billing error has occurred.

13(a) Definition of Billing Error
Paragraph 13(a)(1)
1. Actual, implied, or apparent authority.
Whether use of a credit card or open-end
credit plan is authorized is determined by
state or other applicable law.
47

§226.13

Regulation Z Official Staff Commentary

Paragraph 13(a)(3)

13(b) Billing-Error Notice

1. Coverage. Section 226.13(a)(3) covers dis­
putes about goods or services that are “not
accepted” or “not delivered . . . as agreed”;
for example:

1. Withdrawal. The consumer’s withdrawal
of a billing-error notice may be oral or
written.

•

•
•
•
•

The appearance on a periodic statement of
a purchase, when the consumer refused to
take delivery of goods because they did not
comply with the contract
Delivery of property or services different
from that agreed upon
Delivery of the wrong quantity
Late delivery
Delivery to the wrong location

Section 226.13(a)(3) does not apply to a dis­
pute relating to the quality of 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
226.13(a)(6), does not trigger the errorresolution procedures. For example, a request
for documentation merely for purposes such
as tax preparation or recordkeeping does not
trigger the error-resolution procedures.
48



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

§226.13

Regulation Z Official Staff Commentary
Paragraph 13(c)(2)
1. Time for resolution. The phrase “two com­
plete billing cycles” means two actual billing
cycles occurring after receipt of the billing er­
ror notice, not a measure of 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 of 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 of the transaction
(such as the date or the seller’s name) rather
than a dollar amount, the disputed amount is
the amount of the transaction or charge that
corresponds to the disputed transaction iden­
tification. If the consumer alleges a failure to
send a periodic statement under section
226.13(a)(7), the disputed amount is the en­
tire balance owing.
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. The disclosure
that payment of any disputed amount is not
required pending error-resolution need not
appear in any specific place on the periodic
statement and it need not state the specific
amount that the consumer may withhold. The
creditor may preprint on its periodic state­
ment forms a statement that payment of any
disputed amount is not required pending
resolution.
3. Imposition o f additional charges on undis­
puted amounts. The consumer’s withholding
of the disputed amount from the total bill can­
not subject the undisputed portion to the im­
position of finance or other charges. For ex­
ample, if on an account with a free-ride



period, a consumer disputes a $2 item out of a
total bill of $300 and pays $298 within the
free-ride period, the consumer would not lose
the free-ride as to the undisputed portion,
even if the creditor determines later that no
billing error occurred.
4. Automatic payment plans—coverage. The
coverage of 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 of 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 of the disputed amount that is still
outstanding and unresolved at the time of 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 of an adverse credit report is determined
by state or other applicable law.
49

§ 226.13

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 of billing error that oc­
curred. For example, a misidentified transac­
tion (or a transaction that is identified by one
of 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 of the underlying obliga­
tion incurred by the consumer.
2. Form o f correction notice. The written cor­
rection notice may take a variety of forms. It
may be sent separately, or it may be included
on or with a periodic statement that is mailed
within the time for resolution. If the periodic
statement is used, the amount of the billing
error must be specifically identified. If a 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.”

13(f) Procedures If Different Billing
Error or No Billing Error Occurred
1. Different billing error. Examples of a “dif­
ferent billing error” include:
•

•

Differences in the amount of an error (for
example, the customer asserts a $55.00 er­
ror but the error was only $53.00)
Differences in other particulars asserted by
the consumer (such as when a consumer
asserts that a particular transaction never
occurred, but the creditor determines that
only the seller’s name was disclosed
incorrectly)

2. Form o f creditor's explanation. The written
explanation (which also may notify the con­
sumer of corrections to the account) may take
a variety of forms. It may be sent separately,
or it may be included on or with a periodic
statement that is mailed within the time for
resolution. If the creditor uses the periodic
statement for the explanation and correc­
tion (s), the corrections must be specifically
identified. If a separate explanation, including
the correction notice, is provided, the en­
closed or subsequent periodic statement re­
flecting the corrected amount may simply
50




Regulation Z Official Staff Commentary
identify it as a “credit.” The explanation may
be combined with the creditor’s notice to the
consumer of amounts still owing, which is re­
quired under section 226.13(g)(1), provided
it is sent within the time limit for resolution.
(See commentary to section 226.13(e).)

13(g) Creditor’s Rights and Duties After
Resolution
Paragraph 13(g)(1)
1. Amounts owed by consumer. Amounts the
consumer still owes may include both mini­
mum periodic payments and related finance
and other charges that accrued during the res­
olution period.
2. Time o f notice. The creditor need not send
the notice of amount owed within the time
period for resolution, although it is under a
duty to send the notice promptly after resolu­
tion of the alleged error. If the creditor com­
bines the notice of the amount owed with
the explanation required under section
226.13(f)(1), the combined notice must be
provided within the time limit for resolution.
Paragraph 13(g)(2)
1. The creditor need not allow any free-ride
period disclosed under sections 226.6(a)(1)
and 226.7 (j) to pay the amount due under
section 226.13(g)(1) if no error occurred and
the consumer was not entitled to a free-ride
period at the time the consumer asserted the
error.
Paragraph 13(g)(3)
1. Time for payment. The consumer has a
minimum of 10 days to pay (measured from
the time the consumer could reasonably be ex­
pected to have received notice of the amount
owed) before the creditor may issue an ad­
verse credit report; if an initially disclosed
free-ride period allows the consumer a longer
time in which to pay, the consumer has the
benefit of that longer period.
Paragraph 13(g)(4)
1. Credit
reporting.
Under
section
226.13(g) (4) (i) and (iii) the creditor’s addi­
tional credit reporting responsibilities must be
accomplished promptly. The creditor need

Regulation Z Official Staff Commentary
not establish costly procedures to fulfill this
requirement. For example, a creditor that re­
ports to a credit bureau on scheduled updates
need not transmit corrective information by
an unscheduled computer or magnetic tape; it
may provide the credit bureau with the cor­
rect information by letter or other commer­
cially reasonable means when using the sched­
uled update would not be “prompt.” The
creditor is not responsible for ensuring that
the credit bureau corrects its information
immediately.
2. Adverse report to credit bureau. If a credi­
tor made an adverse report to a credit bureau
that disseminated the information to other
creditors, the creditor fulfills its section
226.13(g)(4)(h) 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:



§226.13
•

An error asserted with respect to the
transaction is subject, for error-resolution
purposes, to the applicable Regulation E
provisions (such as timing and notice) for
the entire transaction.
• The creditor need not provisionally credit
the consumer’s account, under 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
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
51

§226.13
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
notice is received within the 60 days for the
consumer to assert the error).

Regulation Z Official Staff Commentary
putation. For initial disclosures (under section
226.6) and for advertising (under section
226.16), the annual percentage rate is deter­
mined by multiplying the periodic rate by the
number of periods in the year. This computa­
tion reflects the fact that, in such disclosures,
the rate (known as the corresponding annual
percentage rate) is prospective and does not
involve any particular finance charge or peri­
odic balance. This computation also is used to
determine any annual percentage rate for oral
disclosures under section 226.26(a).

SECTION 226.14— Determination of
Annual Percentage Rate
14(a) General Rule
1. Tolerance. The tolerance of | of 1 percent­
age point above or below the annual percent­
age rate applies to any required disclosure of
the annual percentage rate. The disclosure of
the annual percentage rate is required in sec­
tions 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. Rounding. The regulation does not require
that the annual percentage rate be calculated
to any particular number of decimal places;
rounding is permissible within the | of 1 per­
cent tolerance. For example, an exact annual
percentage rate of 14.33333 percent may be
stated as 14.33 percent or as 14.3 percent, or
even as 14£ percent; but it could not be stated
as 14.2 percent or 14 percent, since each var­
ies by more than the permitted tolerance.
3. Periodic rates. No explicit tolerance exists
for any periodic rate as such; a disclosed peri­
odic rate may vary from precise accuracy (for
example, due to rounding) only to the extent
that its annualized equivalent is within the tol­
erance permitted by section 226.14(a). Fur­
ther, a periodic rate need not be calculated to
any particular number of decimal places.
4. Finance charges. The regulation does not
prohibit creditors from assessing finance
charges on balances that include prior, unpaid
finance charges; state or other applicable law
may do so, however.

14(b) Annual Percentage Rate for Initial
Disclosures and for Advertising Purposes
1. Corresponding annual percentage rate com52



14(c) Annual Percentage Rate for
Periodic Statements
1. General rule. Section 226.14(c) requires
disclosure of the corresponding annual per­
centage rate for each periodic rate (under sec­
tion 226.7(d)). It is figured by multiplying
each periodic rate by the number of periods
per year. This disclosure is like that provided
on the initial disclosure statement. The peri­
odic statement also must reflect (under sec­
tion 226.7(g)) the annualized equivalent of
the rate actually applied during a particular
cycle (the historical rate); this rate may differ
from the corresponding annual percentage
rate because of the inclusion of fixed, mini­
mum, or transaction charges. Sections
226.14(c)(1) through (c)(4) state the com­
putation rules for the historical rate.
2. Periodic rates. Section 226.14(c)(1) ap­
plies if the only finance charge imposed is due
to the application of a periodic rate to a bal­
ance. The creditor may compute the annual
percentage rate either:
•
•

by multiplying each periodic rate by the
number of periods in the year or
by the “quotient” method. This method
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

Regulation Z Official Staff Commentary
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
posed” figure. For further explanation and ex­
amples of how to determine the components
of this formula, see appendix F.
6. 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



§ 226.14
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.
7. 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.
8. Small finance charges. Section 226.14(c)(4) gives the creditor an alternative to section
226.14(c)(2) and (c)(3) if small (50 cents or
less) minimum or fixed fees are involved. For
example, while a monthly activity fee of 50
cents on a balance of $20 would produce an
annual percentage rate of 30 percent under
the rule in section 226.14(c)(2), the creditor
may disclose an annual percentage rate of 18
percent if the periodic rate generally applica­
ble to all balances is 1^ percent per month.
This option is consistent with the provision in
footnote 11 to sections 226.6 and 226.7 per­
mitting the creditor to disregard the effect of
minimum charges in disclosing the ranges of
balances to which periodic rates apply.

14(d) Calculations Where Daily Periodic
Rate Applied
1. Quotient method. Section 226.14(d) ad­
dresses use of a daily periodic rate(s) to deter­
mine some or all of the finance charge and use
of the quotient method to determine the annu­
al percentage rate. Since the quotient formula
in section 226.14(c)(l)(ii) does not work
when a daily rate is being applied to a series of
daily balances, section 226.14(d) gives the
creditor two alternative ways to figure the an­
nual percentage rate—either of which satisfies
the requirement in section 226.7(g).
2. Daily rate with specific transaction charge.
If the finance charge results from a charge re53

§226.14
lating to a specific transaction and the applica­
tion of a daily periodic rate, the calculation
method in section 226.14(d)(2) should be
used.

Regulation Z Official Staff Commentary

•

References
Statute: § 107
Other sections: §§ 226.6, 226.7, 226.9, 226.15,
226.16, and 226.26.
Previous regulation: § 226.5(a) and interpre­
tation §§ 226.501 and 226.506.
1981 changes: Section 226.14 reflects the stat­
utory amendment permitting a | of 1 percent
tolerance for annual percentage rates. The re­
vised regulation no longer reflects the provi­
sion dealing with finance charges imposed on
specified ranges or brackets of balances. The
revised regulation includes a footnote provid­
ing that loan fees, points, or similar charges
unrelated to any specific transaction are not
figured into the annual percentage rate
computation.

SECTION 226.15— Right of Rescission
1. Transactions not covered. Credit extensions
that are not subject to the regulation are not
covered by section 226.15 even if the custom­
er’s principal dwelling is the collateral secur­
ing the credit. For this purpose, “credit exten­
sions” also would include the occurrences
listed in comment 15(a)(1 )-l. For example,
the right of rescission does not apply to the
opening of a business-purpose credit line, even
though the loan is secured by the customer’s
principal dwelling.

2. Exceptions. Although the consumer gener­
ally has the right to rescind with each transac­
tion on the account, section 125(e) of the act
provides an exception: until March 31, 1985,
the creditor need not provide the right to re­
scind at the time of each credit extension
made under an open-end credit plan secured
by the consumer’s principal dwelling to the
extent that the credit extended is in accord­
ance with a previously established credit limit
for the plan. The consumer will have the right
to rescind each extension made after March
31, 1985 under such a secured open-end credit
plan, whether that plan was established before
or after that date.
3. Security interest arising from transaction.
In order for the right of rescission to apply,
the security interest must be retained as part
of the credit transaction. For example:
•

15(a) Consumer’s Right to Rescind
•
Paragraph 15(a)(1)
1. Occurences subject to right. Under an openend credit plan secured by the consumer’s
principal dwelling, the right of rescission gen­
erally arises with each of the following
occurrences:
•
•
•
•

Opening the account
Each credit extension
Increasing the credit limit
Adding to an existing account a security

54



interest in the consumer’s principal
dwelling
Increasing the dollar amount of the securi­
ty interest taken in the dwelling to secure
the plan. For example, a consumer may
open an account with a $10,000 credit lim­
it, $5,000 of which is initially secured by
the consumer’s principal dwelling. The
consumer has the right to rescind at that
time and (except as noted in section
226.15(a)(1)(h)) with each extension on
the account. Later, if the creditor decides
that it wants the credit line fully secured,
and increases the amount of its interest in
the consumer’s dwelling, the consumer has
the right to rescind the increase.

A security interest that is acquired by a
contractor who is also extending the credit
in the transaction
A mechanic’s or materialman’s lien that is
retained by a subcontractor or supplier of
a contractor-creditor, even when the latter
has waived its own security interest in the
consumer’s home

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

A mechanic’s or materialman’s lien is ob­
tained by a contractor who is not a party

§226.15

Regulation Z Official Staff Commentary
to the credit transaction but merely is paid
with the proceeds of the consumer’s cash
advance
• Ail security interest that may arise in con­
nection with the credit transaction are val­
idly 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 of the credit transaction
Although liens arising by operation of law are
not considered security interests for purposes
of disclosure under section 226.2, that section
specifically includes them in the definition for
purposes of the right of rescission. Thus, even
though an interest in the consumer’s principal
dwelling is not a required disclosure under
section 226.6(c), it may still give rise to the
right of rescission.
4. Consumer. To be a consumer within the
meaning of 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 enters into a secured
plan, the other spouse is a consumer if the
ownership interest of that spouse is subject to
the security interest.

new principal dwelling, any credit plan or ex­
tension secured by the equity in the consum­
er’s current principal dwelling (for example,
an advance to be used as a bridge loan) is still
subject to the right of rescission.
Paragraph 15(a)(2)
1. Consumer's exercise o f right. The consumer
must exercise the right of rescission in writ­
ing, but not necessarily on the notice supplied
under section 226.15(b). Whatever the means
of sending the notification of rescission—mail,
telegram, or other written means—the time
period for the creditor’s performance under
section 226.15(d)(2) does not begin to run
until the notification has been received. The
creditor may designate an agent to receive the
notification so long as the agent’s name and
address appear on the notice provided to the
consumer under section 226.15(b).
Paragraph 15(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to re­
scind runs for three business days from the
last of three events:
•

The occurrence that gives rise to the right
of rescission
• Delivery of all material disclosures that
are relevant to the plan
• Delivery to the consumer of the required
rescission notice

5. Principal dwelling. A consumer can only
have one 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 open-end credit line. Dwelling, as
defined in section 226.2, includes structures
that are classified as personalty under state
law. For example, a transaction secured by a
mobile home, trailer, or houseboat used as the
consumer’s principal dwelling may be
rescindable.

For example, an account is opened on Friday,
June 1, and the disclosures and notice of the
right to rescind were given on Thursday, May
31; the rescission period will expire at mid­
night of the third business day after June 1—
that is, Tuesday, June 5. In another example,
if the disclosures are given and the account is
opened on Friday, June 1, and the rescission
notice is given on Monday, June 4, the rescis­
sion period expires at midnight of the third
business day after June A— that is, Thursday,
June 7. The consumer must place the rescis­
sion 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.

6. Special rule for principal dwelling. When
the consumer is acquiring or constructing a

2. Material disclosures. Footnote 36 sets forth
the material disclosures that must be provided




55

§226.15
before the rescission period can begin to run.
The creditor must provide sufficient informa­
tion to satisfy the requirements of section
226.6 for these disclosures. A creditor may
satisfy this requirement by giving an initial
disclosure statement that complies with the
regulation. Failure to give the other required
initial disclosures (such as the billing-rights
statement) does not prevent the running of
the rescission period, although that failure
may result in civil liability or administrative
sanctions.
3. Material disclosures—variable-rate pro­
gram. For a variable-rate program, the mate­
rial disclosures also include the disclosures
listed in footnote 12 to section 226.6(a)(2):
the circumstances under which the rate may
increase; the limitations on the increase; and
the effect of an increase.
4. Unexpired right o f rescission. When the
creditor has failed to take the action necessary
to start the three-day rescission period run­
ning, the right to rescind automatically lapses
on the occurrence of the earliest of the follow­
ing three events:
•

The expiration of three years after the oc­
currence giving rise to the right of
rescission
• Transfer of all the consumer’s interest in
the property
• Sale of the consumer’s interest in the prop­
erty, including a transaction in which the
consumer sells the dwelling and takes back
legal title through a purchase money note
and mortgage
Transfer of all the consumer’s interest 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 foreclosure sale would termi­
nate an unexpired right to rescind. As provid­
ed in section 125 of the act, the three-year
limit may be extended by an administrative
proceeding to enforce the provisions of section
226.15. A partial transfer of the consumer’s
interest, such as a transfer bestowing co-own­
ership on a spouse, does not terminate the
right of rescission.
56



Regulation Z Official Staff Commentary
Paragraph 15(a)(4)
1. Joint owners. When more than one con­
sumer has the right to rescind a transaction,
any one of them may exercise that right and
cancel the transaction on behalf of all. For
example, if both a husband and wife have the
right to rescind a transaction, either spouse
acting alone may exercise the right and both
are bound by the rescission.

15(b) Notice of Right to Rescind
1. Who receives notice. Each consumer enti­
tled to rescind must be given:
•
•

Two copies of the rescission notice
The material disclosures

In a transaction involving joint owners, both
of whom are entitled to rescind, both must
receive the notice of the right to rescind and
disclosures. For example, if both spouses are
entitled to rescind a transaction, each must
receive two copies of the rescission notice and
one copy of the disclosures.
2. Format. The rescission notice may be phys­
ically separated from the material disclosures
or combined with the material disclosures, so
long as the information required to be includ­
ed on the notice is set forth in a clear and
conspicuous manner. See the model notices in
appendix G.
3. Content. The notice must include all of the
information outlined in section 226.15(b)(1)
through (5). The requirement in section
226.15(b) that the transaction or occurrence
be identified may be met by providing the date
of the transaction or occurrence. The notice
may include additional information related to
the required information, such as:
•

A description of the property subject to
the security interest
• A statement that joint owners may have
the right to rescind and that a rescission
by one is effective for all
• The name and address of an agent of the
creditor to receive notice of rescission
4. Time o f providing notice. The notice re­
quired by section 226.15(b) need not be given
before the occurrence giving rise to the right
of rescission. The creditor may deliver the no-

§226.15

Regulation Z Official Staff Commentary
tice after the occurrence, 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 credit limit was raised on May
10, the three-business-day rescission period
will run from May 15.

15(c) Delay of Creditor’s Performance
1. General rule. Until the rescission period
has expired and the creditor is reasonably sat­
isfied that the consumer has not rescinded, the
creditor must not, either directly or through a
third party:
•
•
•

Disburse advances to the consumer
Begin performing services for
consumer
Deliver materials to the consumer

3. Permissable actions. Section 226.15(c)
does not prevent the creditor from taking oth­
er steps during the delay, short of beginning
actual performance. The creditor may, for
example:
Prepare the cash advance check
Perfect the security interest
Accrue finance charges during the delay
period

4. Performance by third party. The creditor is
relieved from liability for failure to delay per­
formance if a third party with no knowledge
that the rescission right has been activated
provides materials or services, as long as any
debt incurred for materials or services ob­
tained by the consumer during the rescission
period is not secured by the security interest
in the consumer’s dwelling. For example, if a
consumer uses a bank credit card to purchase
materials from a merchant in an amount be­
low the floor limit, the merchant might not
contact the card issuer for authorization and
therefore would not know that materials
should not be provided.



•

•

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 of only one consumer, be­
cause other consumers may exercise the right.

the

2. Escrow. The creditor may disburse ad­
vances during the rescission period in a valid
escrow arrangement. The creditor may not,
however, appoint the consumer as “trustee”
or “escrow agent” and distribute funds to the
consumer in that capacity during the delay
period.

•
•
•

5. Delay beyond rescission period. 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:

15(d) Effects of Rescission
Paragraph 15(d)(1)
1. Termination o f security interest. Any secu­
rity interest giving rise to the right of rescis­
sion becomes void when the consumer exercis­
es the right of rescission. The security interest
is automatically negated, regardless of its
status and whether or not it was recorded or
perfected. Under section 226.15(d)(2), how­
ever, the creditor must take any action neces­
sary to reflect the fact that the security inter­
est no longer exists.
2. Extent o f termination. The creditor’s secu­
rity interest is void only to the extent that it is
related to the occurrence giving rise to the
right of rescission. For example, upon
rescission:
•

If the consumer’s right to rescind is acti­
vated by the opening of a plan, any securi­
ty interest in the principal dwelling is void.
• If the right arises due to an increase in the
credit limit, the security interest is void as
to the amount of credit extensions over the
prior limit, but the security interest in
amounts up to the original credit limit is
unaffected.
• If the right arises with each individual
credit extension, then the interest is void
as to that extension, and other extensions
are unaffected.
57

§226.15
Paragraph 15(d)(2)
1. Refunds to consumer. The consumer can­
not be required to pay any amount in the form
of money or property either to the creditor or
to a third party as part of the occurrence sub­
ject to the right of rescission. Any amounts of
this nature already paid by the consumer must
be refunded. “Any amount” includes finance
charges already accrued, as well as other
charges such as application and commitment
fees or fees for a title search or appraisal,
whether paid to the creditor, paid directly to a
third party, or passed on from the creditor to
the third party. It is irrelevant that these
amounts may not represent profit to the credi­
tor. For example:
•

If the occurrence is the opening of the
plan, the creditor must return any mem­
bership or application fee paid.
• If the occurrence is the increase in a credit
limit or the addition of a security interest,
the creditor must return any fee imposed
for a new credit report or filing fees.
• If the occurrence is a credit extension, the
creditors must return fees such as applica­
tion, title, and appraisal or survey fees, as
well as any finance charges related to the
credit extension.

2. Amounts not refundable to consumer.
Creditors need not return any money given by
the consumer to a third party outside of the
occurrence, such as costs incurred for a build­
ing permit or for a zoning variance. Similarly,
the term “any amount” does not apply to
money or property given by the creditor to the
consumer; those amounts must be tendered by
the consumer to the creditor under section
226.15(d)(3).
3. Reflection o f security interest termination.
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 oc­
currence rescinded by the consumer, the cred­
itor must ensure that the termination of their
security interests is also reflected. The 20-day
58




Regulation Z Official Staff Commentary
period for the creditor’s action refers to the
time within which the creditor must begin the
process. It does not require all necessary steps
to have been completed within that time, but
the creditor is responsible for seeing the proc­
ess through to completion.
Paragraph 15(d)(3)
1. Property exchange. Once the creditor has
fulfilled its obligation under section
226.15(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 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-

§226.16

Regulation Z Official Staff Commentary
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.

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
with respect to the subsequent open-end credit
extensions.

References
Statute: §§ 113, 125, and 130
Other sections: § 226.2 and appendix G
Previous regulation: § 226.9
1981 changes: Section 226.15 reflects the stat­
utory amendments of 1980, providing for a
limited right of rescission for a three-year trial
period when individual credit extensions are
made in accordance with a previously estab­
lished credit limit for an open-end credit plan.
The right to rescind applies not only to real
property used as the consumer’s principal
dwelling, but to personal property as well.
The regulation provides no specific text or for­
mat for the rescission notice.
When a consumer exercises the right to re­
scind, the creditor now has 20 days to return a
consumer’s money or property and take the
necessary action to terminate the security in­
terest. The creditor has 20 days to take posses­
sion of the money or property after the con­
sumer’s tender before the consumer may keep
it without further obligation.
Under the revised regulation, the waiver
provision has been relaxed. The lien status of
the mortgage is irrelevant for purposes of the
residential mortgage transaction exemption.
The exemption for agricultural loans from the
right to rescind has been deleted.

SECTION 226.16—Advertising
1. Clear and conspicuous standard. Section
226.16 is subject to the general “clear and
conspicuous” standard for subpart B (see sec­
tion 226.5(a)(1)) but prescribes no specific
rules for the format of the necessary disclo59

§226.16
sures. The credit terms need not be printed in
a certain type size nor need they appear in any
particular place in the advertisement.

16(a) Actually Available Terms
1. General rule. 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. Section 226.16(a) is not intended
to inhibit the promotion of new credit pro­
grams, but to bar the advertising of terms that
are not and will not be available. For example,
a creditor may advertise terms that will be of­
fered for only a limited period, or terms that
will become available at a future date.
2. Specific credit terms. “Specific credit
terms” is not limited to the disclosures re­
quired by the regulation but would include
any specific components of a credit plan, such
as the minimum periodic payment amount or
seller’s points in a plan secured by real estate.

16(b) Advertisement of Terms That
Require Additional Disclosures
1. Use o f positive terms. An advertisement
must state a credit term as a positive number
in order to trigger additional disclosures. For
example, “no annual membership fee” would
not trigger the additional disclosures required
by section 226.16(b).
2. Implicit terms. Section 226.16(b) applies
even if the triggering term is not stated explic­
itly, but may be readily determined from the
advertisement. For example, a statement that
“the equity in your home becomes spendable
with an XYZ line of credit” implicitly states
that the creditor will take a security interest in
the consumer’s home.
3. Membership fees. A membership fee is not
a triggering term nor need it be disclosed un­
der section 226.16(b)(3) if it is required for
participation in the plan whether or not an
open-end credit feature is attached. (See com­
ment 6(b)-l.)
4. Variable rate plans. An advertisement for a
variable rate plan complies with section
60




Regulation Z Official Staff Commentary
226.16(b)(2) if it discloses that “the annual
percentage rate may vary” or a similar state­
ment, but the advertisement need not include
the information required by footnote 12 to
section 226.6(a)(2).
5. Triggering terms. The following are exam­
ples of terms that trigger additional
disclosures:
•
•
•
•

“Charge it—it won’t be billed to your ac­
count until February.”
“Small monthly service charge on the re­
maining balance.”
“ 12 percent Annual Percentage Rate.”
“A $15 annual membership fee buys you
$2,000 in credit.”

16(c) Catalogs and Multiple-Page
Advertisements
1. Definition. The multiple-page advertise­
ments to which section 226.16(c) refers are
advertisements consisting of a series of se­
quentially numbered pages—for example, a
supplement to a newspaper. A mailing con­
sisting of several separate flyers or pieces of
promotional material in a single envelope does
not constitute a single multiple-page adver­
tisement for purposes of section 226.16(c).
Paragraph 16(c)(1)
1. General. Section 226.16(c)(1) permits
creditors to put credit information together in
one place in a catalog or multiple-page adver­
tisement. The rule applies only if the catalog
or multiple-page advertisement contains one
or more of the triggering terms from section
226.16(b).
Paragraph 16(c)(2)
1. Table or schedule i f credit terms depend on
outstanding balance. If the credit terms of a
plan vary depending on the amount of the bal­
ance outstanding, rather than the amount of
any property purchased, a table or schedule
complies with section 226.16(c)(2) if it in­
cludes the required disclosures for representa­
tive balances. For example, a creditor would
disclose that a periodic rate of 1.5 percent is
applied to balances of $500 or less, and a 1

I

Regulation Z Official Staff Commentary
percent rate is applied to balances greater
than $500.

References
Statute: §§ 141 and 143
Previous regulation: § 226.10(a) through (c)
and interpretation § 226.1002
Other sections: §§ 226.2 and 226.6
1981 changes: Section 226.16 reflects the stat­
utory changes to section 143 of the act which
reduce both the number of triggering terms
and the additional disclosures required by the
use of those terms. Membership or participa­
tion fees are included among the additional
disclosures required when a triggering term is
used. The substance of interpretation section
226.1002, requiring disclosure of representa­
tive amounts of credit in catalogs and multi­
ple-page advertisements, has been incorporat­
ed in simplified form in paragraph (c).

SUBPART C—CLOSED-END
CREDIT

SECTION 226.17—General Disclosure
Requirements
17(a) Form of Disclosures
Paragraph 17(a)(1)
1. Clear and conspicuous. This standard re­
quires that disclosures be in a reasonably un­
derstandable form. For example, while the
regulation requires no mathematical progres­
sion or format, the disclosures must be pre­
sented in a way that does not obscure the
relationship of the terms to each other. In ad­
dition, although no minimum type size is
mandated, the disclosures must be legible,
whether typewritten, handwritten, or printed
by computer.
2. Segregation o f disclosures. The disclosures
may be grouped together and segregated from
other information in a variety of ways. For
example, the disclosures may appear on a sep­
arate sheet of paper or may be set off from
other information on the contract or other
documents:
•

By outlining them in a box




§ 226.17
•
•
•

By bold print dividing lines
By a different color background
By a different type style

3. Location. The regulation imposes no spe­
cific location requirements on the segregated
disclosures. For example:
•
•

•
•
•

They may appear on a disclosure state­
ment separate from all other material.
They may be placed on the same docu­
ment with the credit contract or other in­
formation, so long as they are segregated
from that information.
They may be shown on the front or back
of a document.
They need not begin at the top of a page.
They may be continued from one page to
another.

4. Content o f segregated disclosures. Foot­
notes 37 and 38 contain exceptions to the re­
quirement that the disclosures under section
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 di­
rectly related to those disclosures. Footnote
38 lists the items required under section
226.18 that may be deleted from the segregat­
ed disclosures and appear elsewhere. Any one
or more of these additions or deletions may be
combined and appear either together with or
separate from the segregated disclosures. The
itemization of the amount financed under sec­
tion 226.18(c), however, must be separate
from the other segregated disclosures under
section 226.18.
5. Directly related. The segregated disclosures
may, at the creditor’s option, include any in­
formation that is directly related to those dis­
closures. Directly related information in­
cludes, for example, the following:
•

•

A description of a grace period after which
a late payment charge will be imposed.
For example, the disclosure given under
section 226.18(/) may state that a late
charge will apply to “any payment re­
ceived more than 15 days after the due
date.”
A statement that the transaction is not se­
cured. For example, the creditor may add
a category labelled “unsecured” or “not
secured” to the security interest disclo61

§ 226.17

•

•

•

•

•

sures given under section 226.18 (m).
The basis for any estimates used in making
disclosures. For example, if the maturity
date of a loan depends solely on the occur­
rence of a future event, the creditor may
indicate that the disclosures assume that
event will occur at a certain time.
The conditions under which a demand fea­
ture may be exercised. For example, in a
loan subject to demand after five years, the
disclosures may state that the loan will be­
come payable on demand in five years.
When a variable rate feature is disclosed
on other documents under footnote 43 to
section 226.18(f), a reference to the vari­
able rate feature and/or to other docu­
ments on which the variable rate disclo­
sures are made.
An explanation of the use of pronouns or
other references to the parties to the trans­
action. For example, the disclosures may
state, “ ‘You’ refers to the customer and
‘we’ refers to the creditor.”
Instructions to the creditor or its employ­
ees on the use of a multiple-purpose form.
For example, the disclosures may state,
“Check box if applicable.”

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:
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)
• The assumption policy disclosure under
section 226.18 (q)

Regulation Z Official Staff Commentary
•

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:
•

•

•

62

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.

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 required deposit disclosure under sec­
tion 226.18 (r)

•
•
•

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

17(b) Time of Disclosures
1. Consummation. As a general rule, disclo­
sures must be made before “consummation”

Regulation Z Official Staff Commentary
of the transaction. The disclosures need not be
given by any particular time before consum­
mation, except in certain mortgage transac­
tions under section 226.19. (See the commen­
tary to section 226.2(a) (13) regarding the
definition of consummation.)
2. Converting open-end to closed-end credit. If
an open-end credit account is converted to a
closed-end transaction under a written agree­
ment with the consumer, the creditor must
provide a set of closed-end credit disclosures
before consummation of the closed-end trans­
action. (See the commentary to section 226.5
regarding conversion of closed-end to openend credit.)

17(c) Basis of Disclosures and Use of
Estimates
Paragraph 17(c)(1)
1. Legal obligation. The disclosures should re­
flect the credit terms to which the parties are
legally bound at the outset of the transaction.
•

The legal obligation is normally deter­
mined by applicable state or other law, but
certain transactions are specifically ad­
dressed in this commentary. (See, for ex­
ample, the discussion of buydown transac­
tions elsewhere in the commentary to
section 226.17(c).)
• The fact that a credit contract may later be
deemed unenforceable by a court on the
basis of equity or other grounds does not,
by itself, mean that disclosures based on
that contract did not reflect the legal
obligation.
• The legal obligation normally is presumed
to be contained in the note or contract that
evidences the agreement. But this pre­
sumption is rebutted if another agreement
between the parties legally modifies that
note or contract.
2. Modification o f obligation. If the parties in­
formally agree to a modification of the legal
obligation, the modification should not be re­
flected in the disclosures unless it rises to the
level of a change in the terms of the legal obli­
gation. For example:
•

If the creditor-employer offers a preferen­




§226.17

•

•

tial employee rate, the disclosures should
reflect the terms of the legal obligation. (See
the commentary to section 226.18(f) for a
discussion of whether employee transac­
tions are variable-rate transactions.)
If the contract provides for a certain
monthly payment schedule but payments
are made on a voluntary payroll deduction
plan or an informal principal-reduction
agreement, the disclosures should reflect
the schedule in the contract.
If the contract provides for regular month­
ly payments but the creditor informally
permits the consumer to defer payments
from time to time, for instance, to take ac­
count of holiday seasons or seasonal em­
ployment, the disclosures should reflect
the regular monthly payments.

3. Third-party buydowns. In certain transac­
tions, a seller or other third party may pay an
amount, either to the creditor or to the con­
sumer, in order to reduce the consumer’s pay­
ments or buy down the interest rate for all or
a portion of the credit term. For example, a
consumer and a bank agree to a mortgage
with an interest rate of 15 percent and level
payments over 25 years. By a separate agree­
ment, the seller of the property agrees to sub­
sidize the consumer’s payments for the first
two years of the mortgage, giving the consum­
er an effective rate of 12 percent for that
period.
•

If the lower rate is reflected in the credit
contract between the consumer and the
bank, the disclosures must take the buy­
down into account. For example, the an­
nual percentage rate must be a composite
rate that takes account of both the lower
initial rate and the higher subsequent rate,
and the payment schedule disclosures
must reflect the two payment levels. How­
ever, the amount paid by the seller would
not be specifically reflected in the disclo­
sures given by the bank, since that amount
constitutes seller’s points and thus is not
part of the finance charge.
• If the lower rate is not reflected in the
credit contract between the 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
63

Regulation Z Official Staff Commentary

§226.17
not reflect the seller buydown 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 buy down
the interest rate on the transaction. Consumer
buydowns must be reflected in the disclosures
given for that transaction. To illustrate, in a
mortgage transaction, the creditor and con­
sumer agree to a note specifying a 14 percent
interest rate. However, in a separate docu­
ment, the consumer agrees to pay four points
to the creditor at consummation, in return for
a reduction in the interest rate to 12 percent
for a portion of the mortgage term. In the dis­
closures given for the mortgage, the creditor
must reflect the terms of the buydown agree­
ment. For example:
•

The four points are prepaid finance
charges (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 charges.
• 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
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 266.17(c).)
6. Wraparound financing. Wraparound trans­
actions, usually loans, involve the creditor’s
wrapping the outstanding balance on an exist 64



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. Morris Plan transactions. When a deposit
account is created for the sole purpose of ac­
cumulating payments and then is applied to
satisfy entirely the consumer’s obligation in
the transaction, each deposit made into the
account is considered the same as a payment
on a loan for purposes of making disclosures.
9. Number o f transactions. Creditors have
flexibility in handling credit extensions that
may be viewed as multiple transactions. For
example:
•

•

When a creditor finances the credit sale of
a radio and a television on the same day,
the creditor may disclose the sales as ei­
ther one or two credit sale transactions.
When a creditor finances a loan along with
a credit sale of health insurance, the credi-

§226.17

Regulation Z Official Staff Commentary

•

tor may disclose in one of several ways: a
single credit sale transaction, a single loan
transaction, or a loan and a credit sale
transaction.
The separate financing of a downpayment
in a credit sale transaction may, but need
not, be disclosed as two transactions (a
credit sale and a separate transaction for
the financing of the downpayment).

unknown, the creditor must label the finance
charge as an estimate and may also label as
estimates the total of payments and the pay­
ment schedule. When many disclosures are
estimates, the creditor may use a general
statement, such as “all numerical disclosures
except the late payment disclosure are esti­
mates,” as a method to label those disclosures
as estimates.

Paragraph 17(c)(2)

Paragraph 17(c)(3)

1. Basis for estimates. Disclosures may be es­
timated when the exact information is un­
known at the time disclosures are made. In­
formation is unknown if it is not reasonably
available to the creditor at the time the disclo­
sures are made. The “reasonably available”
standard requires that the creditor, acting in
good faith, exercise due diligence in obtaining
information. For example, the creditor must
at a minimum utilize generally accepted cal­
culation tools but need not invest in the most
sophisticated computer program to make a
particular type of calculation. The creditor
normally may rely on the representations of
other parties in obtaining information. For ex­
ample, the creditor might look to the consum­
er for the time of consummation, to insurance
companies for the cost of insurance, or to real­
tors for taxes and escrow fees. The creditor
may utilize estimates in making disclosures
even though the creditor knows that more
precise information will be available by the
point of consummation. However, new disclo­
sures may be required under section 226.17(f)
or 226.19.

1. Minor variations. Section 226.17(c)(3) al­
lows creditors to disregard certain factors in
calculating and making disclosures. For
example:

2. Labelling estimates. Estimates must be des­
ignated as such in the segregated disclosures.
Even though other disclosures are based on
the same assumption on which a specific esti­
mated disclosure was based, the creditor has
some flexibility in labelling the estimates.
Generally, only the particular disclosure for
which the exact information is unknown is la­
belled as an estimate. However, when several
disclosures are affected because of the un­
known information, the creditor has the op­
tion of labelling either every affected disclo­
sure or only the disclosure primarily affected.
For example, when the finance charge is un­
known because the date of consummation is



•

Creditors may ignore the effects of collect­
ing payments in whole cents. Because pay­
ments cannot be collected in fractional
cents, it is often difficult to amortize exact­
ly an obligation with equal payments; the
amount of the last payment may require
adjustment to account for the rounding of
the other payments to whole cents.
• Creditors may base their disclosures on
calculation tools that assume that all
months have an equal number of days,
even if their practice is to take account of
the variations in months for purposes of
collecting interest. For example, a creditor
may use a calculation tool based on a 360day year, when it in fact collects interest
by applying a factor of 1/365 of the annual
rate to 365 days. This rule does not, how­
ever, authorize creditors to ignore, for dis­
closure purposes, the effects of applying
1/360 of an annual rate to 365 days.

Paragraph 17(c)(4)
1. Payment schedule irregularities. When one
or more payments in a transaction differ from
the others because of a long or short first peri­
od, the variations may be ignored in disclosing
the payment schedule, finance charge, annual
percentage rate, and other terms. For
example:
•

A 36-month auto loan might be consum­
mated on June 8 with payments due on
July 1 and the first of each succeeding
month. The creditor may base its calcula­
tions on a payment schedule that assumes
65

§226.17

Regulation Z Official Staff Commentary

36 equal intervals and 36 equal installment
payments, even though a precise computa­
tion would produce slightly different
amounts because of the shorter first
period.
By contrast, in the same example, if the
first payment were not scheduled until Au­
gust 1, the irregular first period would ex­
ceed the limits in section 226.17(c)(4);
the creditor could not use the special rule
and could not ignore the extra days in the
first period in calculating its disclosures.

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).

2. Measuring odd periods. In determining
whether a transaction may take advantage of
the rule in section 226.17(c)(4), the creditor
must measure the variation against a regular
period. For purposes of that rule:

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 (FNM A) 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).

•

•

The first period is the period from the date
on which the finance charge begins to be
earned to the date of the first payment.
• The term is the period from the date on
which the finance charge begins to be
earned to the date of the final payment.
• The regular period is the most common
interval between payments in the
transaction.

In transactions involving regular periods that
are monthly, semimonthly, or multiples of a
month, the length of the irregular and regular
periods may be calculated on the basis of ei­
ther the actual number of days or an assumed
30-day month. In other transactions, the
length of the periods is based on the actual
number of days.
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.
66



4. Balloon mortgages. Balloon payment mort­
gages, with payments based on a long-term
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

§ 226.17

Regulation Z Official Staff Commentary
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
accept both construction and permanent fi­
nancing from the outset. If the consumer is
obligated on both phases and the creditor
chooses to give two sets of disclosures, both
sets must be given to the consumer initially,
because both transactions would be consum­
mated at that time. (Appendix D provides a
method of calculating the annual percentage
rate and other disclosures for construction
loans, which may be used, at the creditor’s
option, in disclosing construction financing.)
3. Multiple-advance construction loans. Sec­
tion 226.17(c) (6) (i) and (ii) are not mutual­
ly exclusive. For example, in a transaction
that finances the construction of a dwelling



that may be permanently financed by the same
creditor, the construction phase may consist
of a series of advances under an agreement to
extend credit up to a certain amount. In these
cases, the creditor may disclose the construc­
tion phase as either one or more than one
transaction and also disclose the permanent
financing as a separate transaction.
4. Residential mortgage transaction. See the
commentary to section 226.2(a) (24) for a
discussion of the effect of section 226.17(c)(6) on the definition of a residential mortgage
transaction.
5. Allocation o f points. When a creditor uti­
lizes the special rule in section 226.17(c)(6)
to disclose credit extensions as multiple trans­
actions, buyer’s points or similar amounts im­
posed on the consumer must be allocated for
purposes of calculating disclosures. While
such amounts should not be taken into ac­
count more than once in making calculations,
they may be allocated between the transac­
tions in any manner the creditor chooses. For
example, if a construction-permanent loan is
subject to five points imposed on the consum­
er and the creditor chooses to disclose the two
phases separately, the five points may be allo­
cated entirely to the construction loan, entire­
ly to the permanent loan, or divided in any
manner between the two. However, the entire
five points may not be applied twice, that is, to
both the construction and the permanent
phases.

17(d) Multiple Creditors; Multiple
Consumers
1. Multiple creditors. If a credit transaction
involves more than one creditor:
•

The 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.
• Each creditor in the transaction is legally
responsible for seeing that the disclosures
are provided.
• All disclosures for the transaction must be
given, even if the disclosing creditor would
not otherwise have been obligated to make
a particular disclosure. For example, if one
67

Regulation Z Official Staff Commentary

§226.17
of the creditors is the seller, the total sale
price disclosure under section 226.18 (j)
must be made, even though the disclosing
creditor is not the seller.
2. Multiple consumers. When two consumers
are joint obligors with primary liability on an
obligation, the disclosures may be given to ei­
ther one of them. If one consumer is merely a
surety or guarantor, the disclosures must be
given to the principal debtor. In rescindable
transactions, however, separate disclosures
must be given to each consumer who has the
right to rescind under section 226.23.

17(e) Effect of Subsequent Events
1. Events causing inaccuracies. Inaccuracies
in disclosures are not violations if attributable
to events occurring after the disclosures are
made. For example, when the consumer fails
to fulfill a prior commitment to keep the col­
lateral 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 make new disclosures under
sections 226.17(0 or 226.19 if the events oc­
curred between disclosure and consummation
or under section 226.20 if the events occurred
after consummation.

17(f) Early Disclosures
1. Change in rate. No redisclosure is required
for changes that occur between the time dis­
closures are made and consummation, unless
the annual percentage rate in the consummat­
ed transaction exceeds the limits prescribed in
section 226.22(a) ( | of 1 percentage point in
regular transactions and £ of 1 percentage
point in irregular transactions). To illustrate:
•

If disclosures are made in a regular trans­
action on July 1, the transaction is con­
summated on July 15, and the actual an­
nual percentage rate varies by more than §
of 1 percentage point from the disclosed
annual percentage rate, the creditor must
either redisclose the changed terms or fur­
nish a complete set of new disclosures be­
fore consummation. Redisclosure is re­
quired even if the disclosures made on July

68



1 are based on estimates and marked as
such.
2. Variable rate. The addition of a variable
rate feature to the credit terms, after early dis­
closures are given, requires new disclosures.
3. Content o f new disclosures. If redisclosure
is required, the creditor has the option of ei­
ther providing a complete set of new disclo­
sures or providing disclosures of only the
terms that vary from those originally dis­
closed. (See the commentary to section
226.19(b).)
4. Special rules. In residential mortgage trans­
actions subject to section 226.19, the creditor
must redisclose if, between the delivery of the
required early disclosures and consummation,
the annual percentage rate changes by more
than a stated tolerance. When subsequent
events occur after consummation, new disclo­
sures are required only if there is a refinancing
or an assumption within the meaning of sec­
tion 226.20.

17(g) Mail or Telephone Orders—Delay
in Disclosures
1. Conditions for use. When the creditor re­
ceives a mail or telephone request for credit,
the creditor may delay making the disclosures
until the first payment is due if the following
conditions are met:
•

The credit request is initiated without
face-to-face or direct telephone solicita­
tion. (Creditors may, however, use the
special rule when credit requests are solic­
ited by mail.)
• The creditor has supplied the specified
credit information about its credit terms
either to the individual consumer or to the
public generally. That information may be
distributed through advertisements, cata­
logs, brochures, special mailers, or similar
means.

2. Insurance. The location requirements for
the insurance disclosures under section
226.18 (n) permit them to appear apart from
the other disclosures. Therefore, a creditor
may mail an insurance authorization to the
consumer and then prepare the other disclo­
sures to reflect whether or not the authoriza­
tion is completed by the consumer. Creditors

§226.17

Regulation Z Official Staff Commentary
may also disclose the insurance cost on a unitcost basis, if the transaction meets the require­
ments of section 226.17(g).

17(h) Series of Sales—Delay in
Disclosures
1. Applicability. The creditor may delay the
disclosures for individual credit sales in a se­
ries of such sales until the first payment is due
on the current sale, assuming the two condi­
tions in this paragraph are met. If those condi­
tions are not met, the general timing rules in
section 226.17(b) apply.

17(i) Interim Student Credit Extensions
1. Definition. Student credit plans involve ex­
tensions of credit for education purposes
where the repayment amount and schedule
are not known at the time credit is advanced.
Creditors in interim student credit extensions
need not disclose the terms set forth in this
paragraph at the time the credit is actually
extended but must make complete disclosures
at the time the creditor and consumer agree
upon the repayment schedule for the total ob­
ligation. At that time, a new set of disclosures
must be made of all applicable items under
section 226.18.
2. Basis o f disclosures. The disclosures given
at the time of execution of the interim note
should reflect two annual percentage rates,
one for the interim period and one for the re­
payment period. Interest subsidies, such as
payments made by either a state or the federal
government on an interim loan, must be ex­
cluded in computing the annual percentage
rate on the interim obligation, when the con­
sumer has no contingent liability for payment
of those amounts. A loan guarantee fee that is
paid separately by the student at the outset or
withheld from the proceeds of the loan is a
prepaid finance charge. That sum is deducted
from the loan proceeds to determine the
amount financed and included in the calcula­
tion of the finance charge.
3. Consolidation. Consolidation of the interim
student credit extensions through a renewal
note with a set repayment schedule is treated
as a new transaction with disclosures made as
they would be for a refinancing. Any un­



earned portion of the finance charge must be
reflected in the new finance charge and annual
percentage rate, and is not added to the new
amount financed. In itemizing the amount fi­
nanced under section 226.18(c), the creditor
may combine the principal balances remain­
ing on the interim extensions at the time of
consolidation and categorize them as the
amount paid on the consumer’s account.
4. Origination fee disclosure. Public Law 9735 (August 13, 1981) amended the Higher
Education Act of 1965 to permit lenders to
charge up to a 5 percent origination fee on
certain student credit extensions, such as fed­
erally guaranteed student loans. On credit ex­
tended before August 1, 1982, creditors are
not to take those fees into account in calculat­
ing and disclosing the annual percentage rate.
Moreover, the origination fee need not be tak­
en into account for purposes of any other
Truth in Lending calculations and disclosures
(for example, amount financed, prepaid fi­
nance charge, and prepayment disclosures)
on such credit extended before August 1,
1982.

References
Statute: §§ 121, 122, 124, and 128, and the
Higher Education Act of 1965 (20 USC
1071) as amended by Public Law 97-35, Au­
gust 13, 1981
Other sections: § 226.2 and appendix H
Previous regulation: §§ 226.6 and 226.8
1981 changes: With few exceptions, the disclo­
sures must now appear apart from all other
information and may not be interspersed with
that information. The disclosures must be
based on the legal obligation between the par­
ties, rather than any side agreement.
The assumed maturity period for demand
loans has been increased from six months to
one year. Any alternate maturity date must be
stated in the legal obligation rather than in­
ferred from the documents, in order to form a
basis for disclosures.
In multiple-advance transactions, a series of
advances up to a certain amount and con­
struction loans that may be permanently fi­
nanced may be disclosed, at the creditor’s op­
tion, as either a single transaction or several
transactions. Appendix D is applicable only to
69

Regulation Z Official Staff Commentary

§226.17
multiple advances for the construction of a
dwelling, whereas its predecessor, interpreta­
tion section 226.813, could be used for all
multiple-advance transactions.
If disclosures are made before the date of
consummation, the creditor need not provide
updated disclosures at consummation unless
the annual percentage rate has changed be­
yond certain limits or a variable rate feature
has been added.

making the disclosures must be identified.
This disclosure may, at the creditor’s option,
appear apart from the other disclosures. Use
of the creditor’s name is sufficient, but the
creditor may also include an address and/or
telephone number. In transactions with multi­
ple creditors, any one of them may make the
disclosures; the one doing so must be
identified.

18(b) Amount Financed
SECTION 226.18—Content of
Disclosures
1. As applicable. The disclosures required by
this section need be made only as applicable.
Any disclosure not relevant to a particular
transaction may be eliminated entirely. For
example:

1. Disclosure required. The net amount of
credit extended must be disclosed using the
term “amount financed” and a descriptive ex­
planation similar to the phrase in the
regulation.

Where the amounts of several numerical dis­
closures are the same, the “as applicable” lan­
guage also permits creditors to combine the
terms, so long as it is done in a clear and con­
spicuous manner. For example:

2. Rebates and loan premiums. In a loan
transaction, the creditor may offer a premium
in the form of cash or merchandise to pro­
spective borrowers. Similarly, in a credit sale
transaction, a seller’s or manufacturer’s rebate
may be offered to prospective purchasers of
the creditor’s goods or services. At the credi­
tor’s option, these amounts may be either re­
flected in the Truth in Lending disclosures or
disregarded in the disclosures. If the creditor
chooses to reflect them in the section 226.18
disclosures, rather than disregard them, they
may be taken into account in any manner as
part of those disclosures.

•

Paragraph 18(b)(1)

•
•

•

In a loan transaction, the creditor may de­
lete disclosure of the total sale price.
In a credit sale requiring disclosure of the
total sale price under section 226.18 (j),
the creditor may delete any reference to a
downpayment where no downpayment is
involved.

In a transaction in which the amount fi­
nanced equals the total of payments, the
creditor may disclose “amount financed/
total of payments,” together with descrip­
tive language, followed by a single
amount.
However, if the terms are separated on the
disclosure statement and separate space is
provided for each amount, both disclo­
sures must be completed, even though the
same amount is entered in each space.

2. Format. See the commentary to section
226.17 and appendix H for a discussion of the
format to be used in making these disclosures,
as well as acceptable modifications.

18(a) Creditor
1. Identification o f creditor. The creditor
70




1. Downpayments. A downpayment is defined
in section 226.2(a) (18) to include, at the
creditor’s option, certain deferred downpay­
ments or pickup payments. A deferred downpayment that meets the criteria set forth in
the definition may be treated as part of the
downpayment, at the creditor’s option.
•

•

Deferred downpayments that are not
treated as part of the downpayment (ei­
ther because they do not meet the defini­
tion or because the creditor simply chooses
not to treat them as downpayments) are
included in the amount financed.
Deferred downpayments that are treated
as part of the downpayment are not part
of the amount financed under section
226.18(b)(1).

Regulation Z Official Staff Commentary
Paragraph 18(b)(2)
1. Adding other amounts. Fees or other
charges that are not part of the finance charge
and that are financed rather than paid sepa­
rately at consummation of the transaction are
included in the amount financed. Typical ex­
amples are real estate settlement charges and
premiums for voluntary credit life and disabil­
ity insurance excluded from the finance
charge under section 226.4. This paragraph
does not include any amounts already ac­
counted for under section 226.18(b)(1), such
as taxes, tag and title fees, or the costs of ac­
cessories or service policies that the creditor
includes in the cash price.
Paragraph 18(b)(3)
1. Prepaid finance charges. Prepaid finance
charges, as defined in section 226.2, must be
deducted in calculating the amount financed.
Under section 226.2, add-on and discount
charges are not considered prepaid finance
charges. Other types of finance charges added
to the face amount of the note, such as loan
fees financed by the creditor, need not be
treated as prepaid finance charges. The com­
putational step called for by this paragraph
should not duplicate any subtraction account­
ed for under section 226.18(b)(1). To
illustrate:
•

A consumer applies for a loan of $2,500,
subject to simple interest, with a $40 loan
fee. The creditor assesses the $40 loan fee
by increasing the face amount of the obli­
gation to $2,540. If the creditor chooses
not to treat the loan fee as a prepaid fi­
nance charge, the principal for purposes of
section 226.18(b)(1) is $2,500 and no
amounts are deducted under section
226.18(b)(3). If the creditor chooses to
treat the loan fee as a prepaid finance
charge, the principal for purposes of sec­
tion 226.18(b)(1) is $2,540 and $40 is de­
ducted under section 266.18(b)(3).

2. Add-on or discount charges. All finance
charges must be deducted from the amount of
credit in calculating the amount financed. If
the principal loan amount reflects finance
charges that meet the definition of a prepaid
finance charge in section 226.2, those charges



§ 226.18
are included in the section 226.18(b)(1)
amount and deducted under section
226.18(b)(3). However, if the principal loan
amount includes finance charges that do not
meet the definition of a prepaid finance
charge, the section 226.18(b)(1) amount
must exclude those finance charges. The fol­
lowing examples illustrate the application of
section 226.18(b) to these types of transac­
tions. Each example assumes a loan request of
$1,000 for one year, subject to a 6 percent pre­
computed interest rate, with a $10 loan fee
paid separately at consummation.
•

The creditor assesses add-on interest of
$60 which is added to the $1,000 in loan
proceeds for an obligation with a face
amount of $1,060. The principal for pur­
poses of section 226.18(b)(1) is $1,000,
no amounts are added under section
226.18(b)(2), and the $10 loan fee is a
prepaid finance charge to be deducted un­
der section 226.18(b)(3). The amount fi­
nanced is $990.
• The creditor assesses discount interest of
$60 and distributes $940 to the consumer,
who is liable for an obligation with a face
amount of $1,000. The principal under
section 226.18(b)(1) is $940, which re­
sults in an amount financed of $930, after
deduction of the $10 prepaid finance
charge under section 226.18(b)(3).
• The creditor assesses $60 in discount inter­
est by increasing the face amount of the
obligation to $1,060, with the consumer
receiving $1,000. The principal under sec­
tion 226.18(b)(1) is thus $1,000 and the
amount financed $990, after deducting the
$10 prepaid finance charge under section
226.18(b)(3).

18(c) Itemization of Amount Financed
1. Disclosure required. The creditor has two
alternatives in complying with section
226.18(c):
•

The creditor may inform the consumer, on
the segregated disclosures, that a written
itemization of the amount financed will be
provided on request, furnishing the itemi­
zation only if the customer in fact requests
it.
71

Regulation Z Official Staff Commentary

§226.18
•

The creditor may provide an itemization
as a matter of course, without notifying
the consumer of the right to receive it or
waiting for a request.

Whether given as a matter of course or only
on request, the itemization must be provided
at the same time as the other disclosures re­
quired by section 226.18, although separate
from those disclosures.
2. Additional information. Section 226.18(c)
establishes only a minimum standard for the
material to be included in the itemization of
the amount financed. Creditors have consider­
able flexibility in revising or supplementing
the information listed in section 226.18(c)
and shown in model form H-3, although no
changes are required. The creditor may, for
example, do one or more of the following:
•

•

•

•

•

•

Include amounts that reflect payments not
part of the amount financed. For example,
escrow items and certain insurance premi­
ums may be included, as discussed in the
commentary to section 226.18(g).
Organize the categories in any order. For
example, the creditor may rearrange the
terms in a mathematical progression that
depicts the arithmetic relationship of the
terms.
Add categories. For example, in a credit
sale, the creditor may include the cash
price and the downpayment.
Further itemize each category. For exam­
ple, the amount paid directly to the con­
sumer may be subdivided into the amount
given by check and the amount credited to
the consumer’s savings account.
Label categories with different language
from that shown in section 226.18(c). For
example, an amount paid on the consum­
er’s account may be revised to specifically
identify the account as “your auto loan
with us.”
Delete, leave blank, mark “N /A ” or oth­
erwise note inapplicable categories in the
itemization. For example, in a credit sale
with no prepaid finance charges or
amounts paid to others, the amount fi­
nanced may consist of only the cash price
less downpayment. In this case, the itemi­
zation may be composed of only a single

72



category and all other categories may be
eliminated.
3. Amounts appropriate to more than one cate­
gory. When an amount may appropriately be
placed in any of several categories and the
creditor does not wish to revise the categories
shown in section 226.18(c), the creditor has
considerable flexibility in determining where
to show the amount. For example:
•

In a credit sale, the portion of the pur­
chase price being financed by the creditor
may be viewed as either an amount paid to
the consumer or an amount paid on the
consumer’s account.

4. RESPA transactions. The Real Estate Set­
tlement Procedures Act (RESPA) requires
creditors to provide good faith estimates of
closing costs. Transactions subject to RESPA
are exempt from the requirements of section
226.18(c), when the creditor complies with
the good faith estimates requirement of RES­
PA. The itemization of the amount financed
need not be given, even though the content
and timing of the good faith estimates under
RESPA differ from the section 226.18(c)
requirement.
Paragraph 18(c)(l)(i)
1. Amounts paid to consumer. This encom­
passes funds given to the consumer in the
form of cash or a check, including joint pro­
ceeds checks, as well as funds placed in an
asset account. It may include money in an in­
terest-bearing account even if that amount is
considered a required deposit under section
226.18 (r). For example, in a transaction with
total loan proceeds of $500, the consumer re­
ceives a check for $300 and $200 is required
by the creditor to be put into an interest-bear­
ing account. Whether or not the $200 is a re­
quired deposit, it is part of the amount fi­
nanced. At the creditor’s option, it may be
broken out and labelled in the itemization of
the amount financed.
Paragraph 18(c)(1)(H)
1. Amounts credited to consumer's account.
The term “consumer’s account” refers to an
account in the nature of a debt with that cred­
itor. It may include, for example, an unpaid
balance on a prior loan, a credit sale balance

Regulation Z Official Staff Commentary
or other amounts owing to that creditor. It
does not include asset accounts of the con­
sumer such as savings or checking accounts.
Paragraph 18(c) (l)(iii)
1. Amounts paid to others. This includes, for
example, tag and title fees; amounts paid to
insurance companies for insurance premiums;
security interest fees, and amounts paid to
credit bureaus, appraisers or public officials.
When several types of insurance premiums
are financed, they may, at the creditor’s op­
tion, be combined and listed in one sum, la­
belled “insurance” or similar term. This in­
cludes, but is not limited to, different types of
insurance premiums paid to one company and
different types of insurance premiums paid to
different companies. Except for insurance
companies and other categories noted in foot­
note 40, third parties must be identified by
name.
Paragraph 18(c)(l)(iv)
1. Prepaid finance charge. The prepaid fi­
nance charges must be shown as a total
amount but may, at the creditor’s option, also
be further itemized and described. All
amounts must be reflected in this total, even if
portions of the prepaid finance charge are also
reflected elsewhere. For example, if at con­
summation the creditor collects interim inter­
est of $30 and a credit report fee of $10, a
total prepaid finance charge of $40 must be
shown. At the creditor’s option, the credit re­
port fee paid to a third party may also be
shown elsewhere as an amount included in
section 226.18(c)(l)(iii). The creditor may
also further describe the two components of
the prepaid finance charge, although no itemi­
zation of this element is required by section
226.18(c)(l)(iv).

18(d) Finance Charge
1. Disclosure required. The creditor must dis­
close the finance charge as a dollar amount,
using the term “finance charge,” and must in­
clude a brief description similar to that in sec­
tion 226.18(d). The creditor may, but need
not, further modify the descriptor for vari­
able-rate transactions with a phrase such as
“which is subject to change.” The finance



§226.18
charge must be shown on the disclosures only
as a total amount; the elements of the finance
charge must not be itemized in the segregated
disclosures, although the regulation does not
prohibit their itemization elsewhere.
2. Tolerance. A tolerance for the finance
charge is provided in footnote 41.

18(e) Annual Percentage Rate
1. Disclosure required. The creditor must dis­
close the cost of the credit as an annual rate,
using the term “annual percentage rate,” plus
a brief descriptive phrase comparable to that
used in section 226.18(e). For variable-rate
transactions, the descriptor may be further
modified with a phrase such as “which is sub­
ject to change.” Under section 226.17(a), the
terms “annual percentage rate” and “finance
charge” must be more conspicuous than the
other required disclosures.
2. Exception. Footnote 42 provides an excep­
tion for certain transactions in which no an­
nual percentage rate disclosure is required.

18(f) Variable Rate
1. Coverage. The requirements of section
226.18(f) apply to all transactions in which
the terms of the legal obligation allow the
creditor to increase the rate originally dis­
closed to the consumer. The provisions, how­
ever, do not apply to increases resulting from
delinquency (including late payment), de­
fault, assumption, acceleration or transfer of
the collateral.
2. Basis for disclosures. For transactions sub­
ject to the requirements of section 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 a variable-rate transaction with
either a seller buydown that is reflected in the
credit contract or a consumer buydown, dis­
closures should not be based solely on the ini­
tial terms. In those transactions, the disclosed
annual percentage rate should be a 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 section
73

§226.18

Regulation Z Official Staff Commentary

226.17(c) for a discussion of buydown
transactions.)
3. Terms used in disclosure. In describing the
variable-rate feature, the creditor need not use
any prescribed terminology. For example,
limitations and hypothetical examples may be
described in terms of interest rates rather than
annual percentage rates. The model forms in
appendix H provide examples of ways in
which the variable-rate disclosures may be
made.
4. Other variable-rate regulations. Transac­
tions in which the creditor is required to com­
ply with and has complied with variable-rate
regulations of other federal agencies are ex­
empt from the requirements of this section, by
virtue of footnote 43. Those variable-rate reg­
ulations include the adjustable mortgage loan
instrument regulation issued by the Federal
Home Loan Bank Board (12 CFR 545.64 (a)), the graduated payment adjustable
mortgage loan instrument regulation issued
by the Federal Home Loan Bank Board (12
CFR 545.6-4(b)), and the adjustable-rate
mortgage regulation issued by the Comptrol­
ler of the Currency (12 CFR 29). The excep­
tion in footnote 43 is also available to institu­
tions that are required by state law to comply
with the federal variable-rate regulations not­
ed above.
5. Examples o f variable-rate transactions. The
following transactions constitute variable rate
transactions:
Renegotiable rate mortgage instruments
that involve a series of short-term loans
secured by a long-term obligation, where
the lender is obligated to renew the short­
term loans at the consumer’s option. At
the time of renewal, the lender has the op­
tion of increasing the interest rate. Disclo­
sures must be given for the longer term of
the obligation, with all disclosures calcu­
lated on the basis of the rate in effect at the
time of consummation of the transaction.
• “Shared equity” or “shared appreciation”
mortgages that have a fixed rate of interest
and an appreciation share based on the
consumer’s equity in the mortgaged prop­
erty. The appreciation share is payable in a
lump sum at a specified time. Disclosures

•

Graduated-payment mortgages and step-rate
transactions without a variable-rate feature
are not considered variable-rate transactions.
Paragraph 18(f)(1)
1. Circumstances. The circumstances under
which the rate may increase include identifica­
tion of any index to which the rate is tied, as
well as any conditions or events on which the
increase is contingent.
•

•

•

74



must be based on the fixed interest rate.
The shared appreciation feature, including
the conditions for its imposition, the time
at which it would be collected, and the
limitation on the creditor’s share, must be
described under section 226.18(f). (As
discussed in section 226.2, other types of
shared-equity arrangements are not con­
sidered “credit” and are not subject to
Regulation Z.)
Preferred-rate employee loans where the
terms of the legal obligation provide that
the rate will increase only if the employee
leaves the employ of the creditor and the
note reflects the preferred rate. The disclo­
sures are to be based on that rate, with the
hypothetical example based on the in­
crease from the preferred rate.

•

When no specific index is used, any identi­
fiable factors used to determine whether to
increase the rate must be disclosed.
When the increase in the rate is purely dis­
cretionary, the fact that any increase is
within the creditor’s discretion must be
disclosed.
When the index is internally defined (for
example, by that creditor’s prime rate),
the creditor may comply with this require­
ment by either a brief description of that
index or a statement that any increase is in
the discretion of the creditor. An external­
ly defined index, however, must be
identified.

Paragraph 18(f)(2)
1. Limitations. This includes any maximum
imposed on the amount of an increase in the
rate at any time, as well as any maximum on
the total increase over the life of the transac­
tion. When there are no limitations, the credi­

Regulation Z Official Staff Commentary

§226.18

tor may, but need not, disclose that fact. Limi­
tations do not include legal limits in the
nature of usury or rate ceilings under state or
federal statutes or regulations.

be disclosed as part of the payment schedule,
at the creditor’s option.

Paragraph 18(f)(3)

1. Demand obligations. In demand obliga­
tions with no alternate maturity date, the
creditor has the option of disclosing only the
due dates or periods of scheduled interest pay­
ments in the first year (for example, “interest
payable quarterly” or “interest due the first of
each month”). The amounts of the interest
payments need not be shown.

1. Effects. Disclosure of the effect of an in­
crease refers to an increase in the number or
amount of payments or an increase in the final
payment. If the effect cannot be determined,
the creditor must provide a statement of the
possible effects. For example, if the exercise of
the variable-rate feature may result in either
more or larger payments, both possibilities
must be noted.
Paragraph 18(f)(4)
1. Hypothetical example. The example may,
at the creditor’s option, appear apart from the
other disclosures. The creditor may provide
either a standard example that represents the
general type of credit offered by that creditor
or an example that directly reflects the terms
and conditions of the particular transaction.
2. Demand obligations. In demand obliga­
tions with no alternate maturity date, the
creditor need not provide a hypothetical
example.

18(g) Payment Schedule
1. Amounts included in repayment schedule.
The repayment schedule should reflect all
components of the finance charge, not merely
the portion attributable to interest. The pay­
ments may include amounts beyond the
amount financed and finance charge. For ex­
ample, the disclosed payments may, at the
creditor’s option, reflect certain insurance pre­
miums where the premiums are not part of
either the amount financed or the finance
charge, as well as real estate escrow amounts
such as taxes added to the payment in mort­
gage transactions.
2. Deferred downpayments. As discussed in
the commentary to section 226.2(a) (18), de­
ferred downpayments or pickup payments
that meet the conditions set forth in the defini­
tion of downpayment may be treated as part
of the downpayment. Even if treated as a
downpayment, that amount may nevertheless



Paragraph 18(g)(1)

Paragraph 18(g)(2)
1. Abbreviated disclosure. The creditor may
disclose an abbreviated payment schedule
when the amount of each regularly scheduled
payment (other than the first or last pay­
ment) includes an equal amount to be applied
on principal and a finance charge computed
by application of a rate to the decreasing un­
paid balance. This option is also available
when mortgage-guarantee insurance premi­
ums, paid either monthly or annually, cause
variations in the amount of the scheduled pay­
ments, reflecting the continual decrease in the
premium due. The creditor using this alterna­
tive must disclose the dollar amount of the
highest and lowest payments and make refer­
ence to the variation in payments.
2. Combined payment-schedule disclosures.
Creditors may combine the option in this par­
agraph with the general payment-schedule
requirements in transactions where only a
portion of the payment schedule meets the
conditions of section 226.18(g)(2). For ex­
ample, in a graduated-payment mortgage
where payments rise sharply for five years and
then decline over the next 25 years because of
decreasing mortgage insurance premiums, the
first five years would be disclosed under the
general rule in section 226.18(g) and the next
25 years according to the abbreviated sched­
ule in section 226.18(g)(2).
3. Effect on other disclosures. Section
226.18(g)(2) applies only to the payment
schedule disclosure. The actual amounts of
payments must be taken into account in calcu­
lating and disclosing the finance charge and
the annual percentage rate.
75

§226.18

18(h) Total of Payments
1. Disclosure required. The total of payments
must be disclosed using that term, along with
a descriptive phrase similar to the one in the
regulation. The descriptive explanation may
be revised to reflect a variable-rate feature
with a brief phrase such as “based on the cur­
rent annual percentage rate which may
change.”
2. Calculation o f total o f payments. The total
of payments is the sum of the payments dis­
closed under section 226.18(g). For example,
if the creditor disclosed a deferred portion of
the downpayment as part of the payment
schedule, that payment must be reflected in
the total disclosed under this paragraph.
3. Exception. Footnote 44 permits creditors
to omit disclosure of the total of payments in
single-payment transactions. This exception
does not apply to a transaction calling for a
single payment of principal combined with pe­
riodic payments of interest.
4. Demand obligations. In demand obliga­
tions with no alternate maturity date, the
creditor may omit disclosure of payment
amounts under section 226.18(g)(1). In
those transactions, the creditor need not dis­
close the total of payments.

18 (i) Demand Feature
1. Disclosure requirements. The disclosure re­
quirements of this provision apply not only to
transactions payable on demand from the out­
set, but also to transactions that are not pay­
able on demand at the time of consummation
but convert to a demand status after a stated
period. In demand obligations in which the
disclosures are based on an assumed maturity
of one year under section 226.17(c)(5), that
fact must also be stated. Appendix H contains
model clauses that may be used in making this
disclosure.
2. Covered demand features. The type of de­
mand feature triggering the disclosures re­
quired by section 226.18 (i) includes only
those demand features contemplated by the
parties as part of the legal obligation. For ex­
ample, this provision does not apply to trans76



Regulation Z Official Staff Commentary
actions that convert to a demand status as a
result of the consumer’s default.
3. Relationship to payment schedule disclo­
sures. As provided in section 226.18(g)(1), in
demand obligations with no alternate maturi­
ty date, the creditor need only disclose the due
dates or payment periods of any scheduled in­
terest payments for the first year. If the de­
mand obligation states an alternate maturity,
however, the disclosed payment schedule
must reflect that stated term; the special rule
in section 226.18(g)(1) is not available.

18(j) Total Sale Price
1. Disclosure required. In a credit sale trans­
action, the “total sale price” must be disclosed
using that term, along with a descriptive ex­
planation similar to the one in the regulation.
For variable-rate transactions, the descriptive
phrase may, at the creditor’s option, be modi­
fied to reflect the variable-rate feature. For ex­
ample, the descriptor may read: “The total
cost of your purchase on credit, which is sub­
ject to change, including your downpayment
of . . . . ” The reference to a downpayment
may be eliminated in transactions calling for
no downpayment.
2. Calculation o f total sale price. The figure to
be disclosed is the sum of the cash price, other
charges added under section 226.18(b)(2),
and the finance charge disclosed under section
226.18(d).

18(k) Prepayment
1. Disclosure required. The creditor must give
a definitive statement of whether or not a pen­
alty will be imposed or a rebate will be given.
•

•

The fact that no penalty will be imposed
may not simply be inferred from the ab­
sence of a penalty disclosure; the creditor
must indicate that prepayment will not re­
sult in a penalty.
If a penalty or refund is possible for one
type of prepayment, even though not for
all, a positive disclosure is required. This
applies to any type of prepayment, wheth­
er voluntary or involuntary as in the
case of prepayments resulting from
acceleration.

Regulation Z Official Staff Commentary
•

Any difference in rebate or penalty policy,
depending on whether prepayment is vol­
untary or not, must not be disclosed with
the segregated disclosures.

2. Rebate-penalty disclosure. A single transac­
tion may involve both a precomputed finance
charge and a finance charge computed by ap­
plication of a rate to the unpaid balance (for
example, simple interest student loans with
loans fees and mortgages with mortgage-guar­
antee insurance). In these cases, disclosures
about both prepayment rebates and penalties
are required. Sample form H-15 in appendix
H illustrates a mortgage transaction in which
both rebate and penalty disclosures are
necessary.
Paragraph 18(k)(l)
1. Penalty. This applies only to those transac­
tions in which the interest calculation takes
account of each reduction in principal. The
term “penalty” as used here encompasses only
those charges that are assessed strictly be­
cause of the prepayment in full of a simple-in­
terest obligation, as an addition to all other
amounts. Items which are not penalties in­
clude, for example:
•

•
•

Prepaid finance charges collected at the
outset of the transaction, such as points in
a mortgage loan
Loan guarantee fees
Interim interest on a student loan

However, a minimum finance charge is a pen­
alty in a simple-interest transaction.
Paragraph 18(h)(2)
1. Rebate o f finance charge. This applies to
any finance charges that do not take account
of each reduction in the principal balance of
an obligation. This category includes, for
example:
•

Precomputed finance charges such as add­
on charges
• Charges that take account of some but not
all reductions in principal, such as mort­
gage guarantee insurance assessed on the
basis of an annual declining balance, when
the principal is reduced on a monthly basis
• Prepaid finance charges, such as points or



§226.18
loan fees collected at the outset of the
transaction
No description of the method of computing
earned or unearned finance charges is re­
quired or permitted as part of the segregated
disclosures under this section, although such
information may be provided elsewhere in the
contract.

18(/) Late Payment
1. Definition. This paragraph requires a dis­
closure only if charges are added to individual
delinquent installments by a creditor who oth­
erwise considers the transaction ongoing on
its original terms. Late payment charges do
not include:
•
•

•
•

The right of acceleration
Fees imposed for actual collection costs,
such as repossession charges or attorney’s
fees
Deferral and extension charges
The continued accrual of simple interest at
the contract rate after the payment due
date. However, an increase in the interest
rate is a late payment charge to the extent
of the increase.

2. Content o f disclosure. Many state laws au­
thorize the calculation of late charges on the
basis of either a percentage or a specified dol­
lar amount and permit imposition of the lesser
or greater of the two charges. The disclosure
made under section 226.18 (/) may reflect this
alternative. For example, stating that the
charge in the event of a late payment is 5 per­
cent of the late amount, not to exceed $5.00, is
sufficient. Many creditors also permit a grace
period during which no late charge will be as­
sessed; this fact may be disclosed as directly
related information. (See the commentary to
section 226.17(a).)

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,
section 226.18(m) requires only a general
identification such as “the property purchased
in this transaction.” The creditor may give a
more specific identification of the collateral,
77

§226.18
although only the abbreviated disclosure is
necessary. Any transaction in which the credit
is being used to purchase the collateral is con­
sidered a purchase money transaction and the
abbreviated property identification may be
used, whether the obligation is treated as a
loan or a credit sale.
2. Nonpurchase money transactions. In non­
purchase money transactions, the property
subject to the security interest must be identi­
fied by item or type. This disclosure is satisfied
by a general disclosure of the category of
property subject to the security interest, such
as “household goods,” “motor vehicles,” or
“securities.” At the creditor’s option, howev­
er, a more precise identification of the proper­
ty or goods may be provided.
3. Mixed collateral. In some transactions in
which the credit is used to purchase the collat­
eral, the creditor may also take other property
of the consumer as security. In those cases, a
combined disclosure must be provided, con­
sisting of the abbreviated property identifica­
tion for the purchase money collateral (al­
though more detail may be given, at the
creditor’s option) and a more specific identifi­
cation of the other collateral.
4. After-acquired property. An after-acquired
property clause is not a security interest to be
disclosed under section 226.18 (m).
5. Spreader clause. The fact that collateral for
preexisting credit with the institution is being
used to secure the present obligation consti­
tutes a security interest and must be disclosed.
(Such security interests may be known as
“spreader” or “dragnet” clauses, or as “crosscollateralization” clauses.) A specific identifi­
cation of that collateral is unnecessary but a
reminder of the interest arising from the prior
indebtedness is required. The disclosure may
be made by using language such as “collateral
securing other loans with us may also secure
this loan.” At the creditor’s option, a more
specific description of the property involved
may be given.
6. Terms used in disclosure. No specified ter­
minology is required in disclosing a security
interest. Although the disclosure may, at the
creditor’s option, use the term “security inter78




Regulation Z Official Staff Commentary
est,” the creditor may designate its interest by
using, for example, “pledge,” “lien,” or
“mortgage.”
7. Collateral from third party. 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 of 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.

18(n) Insurance
1. Location. 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.

18(o) Certain Security Interest Charges
1. Format. No special format is required for
these disclosures; under section 226.4(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
Act is sufficient disclosure for purposes of
Truth in Lending.

18(p) Contract Reference
1. Content. Creditors may substitute, for the
phrase “appropriate contract document,” a
reference to specific transaction documents in
which the additional information is found,
such as “promissory note” or “retail install­
ment sale contract.” A creditor may, at its

§226.18

Regulation Z Official Staff Commentary
option, delete inapplicable items in the con­
tract reference, as for example when the con­
tract documents contain no information re­
garding the right of acceleration.

18(q) Assumption Policy
1. Policy statement. 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 of the criteria or conditions for
assumability.
2. Original terms. The phrase “original
terms” for purposes of section 226.18 (q) does
not preclude the imposition of an assumption
fee, but a modification of the basic credit
agreement, such as a change in the contract
interest rate, represents different terms.

deposit is held by the creditor or by a third
party.
4. Morris Plan transactions. A deposit under a
Morris Plan, in which a deposit account is
created for the sole purpose of accumulating
payments and this is applied to satisfy entirely
the consumer’s obligation in the transaction,
is not a required deposit.
5. Examples o f amounts excluded. The fol­
lowing are among the types of deposits that
need not be treated as required deposits:
•

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 of 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 of condominium fees
• Escrow of loan proceeds to be released
when the repairs are completed

18(r) Required Deposit
1. Disclosure required. 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. Escrow accounts. 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 nonrealty transaction. (See the commentary to
section 226.17(c)(1) regarding the use of es­
crow accounts in consumer buydown
transactions.)
3. Interest-bearing accounts. 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



References
Statute: § 128, and the Real Estate Settlement
Procedures Act (12 USC 2602)
Other sections: §§ 226.2, 226.17, and appendix
H
Other regulations: 12 CFR 545.6-4(a) and
(b), and 12 CFR 29
Previous regulation: §§ 226.4 and 226.8
1981 changes: Five of 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 of 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 of pre79

§226.18
payment have been modified and combined.
The requirement of an explanation of 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 of the type of security interest and a
reduction in the property description require­
ment. The disclosure of the required deposit is
limited to a statement that the annual percent­
age rate does not reflect the required deposit;
the presence of 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.

SECTION 226.19— Certain Residential
Mortgage Transactions
19(a) Time of Disclosure
1. Coverage. This section requires early dis­
closure of credit terms in residential mortgage
transactions that are also subject to the Real
Estate Settlement Procedures Act (RESPA)
and its implementing Regulation X, adminis­
tered by the Department of Housing and Ur­
ban Development (HUD). To be covered by
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
3500.5(b)), and is subject to any interpreta­
tions by HUD.
2. Timing and use o f estimates. 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 of settlement costs. If the
creditor does not know the precise credit
80



Regulation Z Official Staff Commentary
terms, the creditor must base the disclosures
on the best information reasonably available
and indicate that the disclosures are estimates
under section 226.17(c)(2). If many of 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 of 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
226.17(c)(2).) The creditor may provide ex­
planatory material concerning the estimates
and the contingencies that may affect the ac­
tual terms, either on a separate document or
on the same document (but separate from the
required disclosures).
3. Written application. Creditors may rely on
RESPA and Regulation X (including any in­
terpretations issued by HUD) 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
3500.6(a)). An application is received when
it reaches the creditor in any of the ways ap­
plications are normally transmitted—by mail,
hand delivery, or through an intermediary
agent or broker.
4. Exceptions. 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

Regulation Z Official Staff Commentary

§ 226.20

terms. But the amended application is a new
application subject to this section.

annual percentage rate, and no variable rate
feature has been added.

5. Itemization o f amount financed. In many
residential mortgage transactions, the itemiza­
tion of 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 of the amount financed, either with the
disclosures provided within three days after
application or with the disclosures given at
consummation or settlement.

3. Timing. Redisclosures, when necessary,
must be given no later than “consummation
or settlement.” “Consummation” is defined in
section 226.2(a). “Date of settlement” is de­
fined in Regulation X (24 CFR 3500.2(a))
and is subject to any interpretations issued un­
der RESPA and Regulation X.

19(b) Redisclosure Required
1. Conditions for redisclosure. Creditors must
make new disclosures if the annual percentage
rate at consummation differs from the esti­
mate originally disclosed by more than £ of 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.
2. Content o f new disclosures. If redisclosure
is required, the creditor may provide a com­
plete set of new disclosures, or may redisclose
only the terms that vary from those originally
disclosed. If the creditor chooses to provide a
complete set of 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 of 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 only
inaccuracies involve estimates other than the



References
Statute: § 128(b)(2) and the Real Estate Set­
tlement Procedures Act (12 USC 2602)
Other sections: §§ 226.2, 226.17, and 226.22
Other regulations: Regulation X (24 CFR
3500.2(a), 3500.5(b), and 3500.6(a))
Previous regulation: None
1981 changes: This section implements section
128(b)(2), a new provision that requires ear­
ly disclosure of credit terms in certain mort­
gage transactions.

SECTION 226.20—Subsequent
Disclosure Requirements
20(a) Refinancings
1. Definition. A refinancing is a new transac­
tion requiring a complete new set of disclo­
sures. Whether a refinancing has occurred is
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 of several existing obligations, dis­
bursement of new money to the consumer or
on the consumer’s behalf, or the rescheduling
of payments under an existing obligation. In
any form, the new obligation must completely
replace the prior one.
•

•

Changes in the terms of an existing
obligation, such as the deferral of individu­
al installments, will not constitute a
refinancing unless accomplished by the
cancellation of that obligation and the sub­
stitution of a new obligation.
A substitution of agreements that meets
the refinancing definition will require new
disclosures, even if the substitution does
81

§ 226.20
not substantially alter the prior credit
terms.
2. Exceptions. A transaction is subject to sec­
tion 226.20(a) only if it meets the general def­
inition of a refinancing. Section 226.20(a)(1)
through (5) lists five events that are not treat­
ed as refinancings, even if they are accom­
plished by cancellation of the old obligation
and substitution of a new one.
3. Variable 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, if the variable rate feature
was not previously disclosed, a later change in
the rate results in a new transaction subject to
new disclosures.
4. Unearned finance charge. In a transaction
involving precomputed finance charges, the
creditor must include in the finance charge on
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.
Paragraph 20(a)(1)
1. Renewal. This exception applies both to
obligations with a single payment of principal
and interest and to obligations with periodic
payments of interest and a final payment of
principal. In determining whether a new obli­
gation replacing an old one is a renewal of the
original terms or a refinancing, the creditor
may consider it a renewal even if:
82



Regulation Z Official Staff Commentary
•
•

•

Accrued unpaid interest is added to the
principal balance
Changes are made in the terms of renewal
resulting from the factors listed in section
226.17(c)(3)
The principal at renewal is reduced by a
curtailment of the obligation

Paragraph 20(a)(2)
1. Annual percentage rate reduction. 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 of pay­
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.
Paragraph 20(a)(3)
1. Court agreements. This exception includes,
for example, agreements such as reaffirma­
tions of 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.” )
Paragraph 20(a)(4)
1. Workout agreements. 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.
Paragraph 20(a)(5)
1. Insurance renewal. 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 of the insurance.

20(b) Assumptions
1. General definition. An assumption as de-

§ 226.20

Regulation Z Official Staff Commentary
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:

tion. However, if neither party is designated
as the primary obligor but the creditor accepts
payment from the subsequent consumer, an
assumption exists for purposes of section
226.20(b).

•
•

5. Status o f parties. 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 of a
corporation.

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

2. Existing residential mortgage transaction.
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:
• 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. Express agreement. “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 of creditworthiness
• Notification of a change in records
• Mailing of a coupon book to the subse­
quent consumer
• Acceptance of payments from the new
consumer
4. Retention o f original consumer. The reten­
tion of 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 of a guarantor to an obligation
for which the original consumer remains pri­
marily liable does not give rise to an assump­



6. Change in terms. A change in terms de­
stroys the existing obligation and the transac­
tion is treated as a new transaction under the
regulation, not as an assumption. A change in
terms includes, for example:
•

•
•

A change in the contract interest rate un­
less the change is in accordance with a
variable-rate feature that was properly dis­
closed in the existing obligation
A change in the length of the term
The addition of points

Minor changes that do not destroy the exist­
ing obligation include, for example:
•
•
•

Assumption fees for processing loan
documents
Insurance fees
Credit report fees

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

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 of a percentage
rate to an unpaid balance, in determining
the amount of 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 of
83

§ 226.20

Regulation Z Official Staff Commentary

the assumption, those sums are prepaid fi­
nance charges as to that consumer, unless
exempt from the finance charge under sec­
tion 226.4.

with any rights the creditor may have under
the contract or under state law with respect to
set-off, cross-collateralization, or similar
provisions.

If a transaction involves add-on or discount
finance charges, the creditor may make abbre­
viated disclosures, as outlined in section
226.20(b)(1) through (5).

2. Total balance due. 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.

References
Statute: None
Other sections: § 226.2
Previous regulations: § 226.8(j) through (/),
and interpretation §§ 226.807, 226.811,
226.814, and 226.817
1981 changes: 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 of section 226.8 (k) and interpretation
section 226.807 of the previous regulation, but
limits its scope to residential mortgage
transactions.

SECTION 226.21—Treatment of Credit
Balances
1. Credit balance. 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 of 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 of 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
84




3. Timing o f refund. 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. Written requests—standing orders. 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.

Paragraph 21(c)
1. Good faith effort to refund. 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. Good faith effort unsuccessful. 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
Statute: § 165

Regulation Z Official Staff Commentary
Other sections: None.
Previous regulation: None
1981 changes: This section implements section
165 of 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
Paragraph 22(a)(1)
1. Calculation method. The regulation recog­
nizes both the actuarial method and the
United States Rule Method (U.S. Rule) as
measures of an exact annual percentage rate.
Both methods yield the same annual percent­
age rate when payment intervals are equal.
They differ in their treatment of unpaid ac­
crued interest.
2. Actuarial method. 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.
3. U.S. Rule. The U.S. Rule produces no
compounding of 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.
4. Basis for calculations. When a transaction
involves “step rates” or “split rates”—that is,
different rates applied at different times or to
different portions of the principal balance—a
single composite annual percentage rate must
be calculated and disclosed for the entire
transaction.



§ 226.22
Paragraph 22(a)(2)
1. Regular transactions. The annual percent­
age rate for a regular transaction is considered
accurate if it varies in either direction by not
more than g of 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.
Paragraph 22(a)(3)
1. Irregular transactions. The annual percent­
age rate for an irregular transaction is consid­
ered accurate if it varies in either direction by
not more than \ 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 of equal payments at equal
intervals. The \ of 1 percentage point toler­
ance may be used, for example, in a construc­
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 of 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 of the loan, even
though payments may later change because of
the variable-rate feature.

22(b) Computation Tools
Paragraph 22(b)(1)
1. Board tables. Volumes I and II of 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:
85

§ 226.22
•

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.

Paragraph 22(b)(2)
1. Other calculation 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 \ of 1 percentage
point, as applicable, of the precise actuarial or
U.S. Rule annual percentage rate.

22(c) Single Add-On Rate Transactions
1. General 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 of the transac­
tion. Creditors utilizing this provision must
show the highest of those rates. For example:
•

An add-on rate of 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 of 21 months.

22(d) Certain Transactions Involving
Ranges of Balances
1. General rule. Creditors applying a fixed
dollar finance charge to all balances within a
specified range of balances may understate the
annual percentage rate by up to 8 percent of
86



Regulation Z Official Staff Commentary
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 of $9 applies to all bal­
ances between $91 and $100, an annual
percentage rate of 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.

References
Statute: § 107
Other sections: § 226.17(c)(4) and appendix J
Previous regulation: § 226.5(b) through (e)
1981 changes: The section now provides a
larger tolerance (£ of 1 percentage point) for
irregular transactions. It also eliminates, as of
April 1, 1982, the regulatory provision that
protects creditors against liability for using
faulty calculation tools.

SECTION 226.23—Right of Rescission
1. Transactions not 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 of rescission
does not apply to a business-purpose loan,
even though the loan is secured by the cus­
tomer’s principal dwelling.

23(a) Consumer’s Right to Rescind
Paragraph 22(a)(1)
1. Security interest arising from transaction.
In order for the right of rescission to apply,
the security interest must be retained as part
of the credit transaction. For example:
•

•

A security interest that is acquired by a
contractor who is also extending the credit
in the transaction
A mechanic’s or materialman’s lien that is
retained by a subcontractor or supplier of
the contractor-creditor, even when the lat-

Regulation Z Official Staff Commentary
ter has waived its own security interest in
the consumer’s home
The security interest is not part of the credit
transaction and therefore the transaction is
not subject to the right of rescission when, for
example:
•

A mechanic’s or materialman’s lien is 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
• All security interests that may arise in
connection with the credit transaction are
validly waived
• The creditor obtains a lien and completion
bond that in effect satisfies all liens against
the consumer’s principal dwelling as a re­
sult of the credit transaction

Although liens arising by operation of law are
not considered security interests for purposes
of disclosure under section 226.2, that section
specifically includes them in the definition for
purposes of the right of rescission. Thus, even
though an interest in the consumer’s principal
dwelling is not a required disclosure under
section 226.18 (m ), it may still give rise to the
right of rescission.
2. Consumer. To be a consumer within the
meaning of 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 of that spouse is subject to the
security interest.
3. Principal dwelling. A consumer can only
have one 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



§ 226.23
is considered the principal dwelling when it
secures the acquisition or construction loan.
“Dwelling,” 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. Special rule for principal dwelling. When
the consumer is acquiring or constructing a
new principal dwelling, any loan secured by
the equity in the consumer’s current principal
dwelling (for example, a bridge loan) is still
subject to the right of rescission regardless of
the purpose of that loan.
5. Addition o f a security interest. Under foot­
note 47, the addition of 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 of the notice.
Paragraph 23(a)(2)
1. Consumer's exercise 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 226.23(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).
Paragraph 23(a)(3)
1. Rescission period. The period within which
the consumer may exercise the right to re­
scind runs for three business days from the
last of three events:
•
•
•

Consummation of the transaction
Delivery of all material disclosures
Delivery to the consumer of the required
rescission notice
87

§ 226.23
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 of 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 Mon­
day, June 4, the rescission period expires at
midnight of the third business day after June
4—that is, Thursday, June 7. The consumer
must place the rescission notice in the mail,
file it for telegraphic transmission, or deliver it
to the creditor’s place of business within that
period in order to exercise the right.
2. Material disclosures. 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 of the rescission period, although that
failure may result in civil liability or adminis­
trative sanctions.
3. Unexpired right 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 of the earliest of the
following three events:
•

The expiration of three years after con­
summation of the transaction
• Transfer of all the consumer’s interest in
the property
• Sale of the consumer’s interest in the prop­
erty, including a transaction in which the
consumer sells the dwelling and takes back
legal title through a purchase money note
and mortgage
Transfer of all the consumer’s interest 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. As provid­
ed in section 125 of the act, the three-year
limit may be extended by an administrative
88




Regulation Z Official Staff Commentary
proceeding to enforce the provisions of this
section. A partial transfer of the consumer’s
interest, such as a transfer bestowing co-own­
ership on a spouse, does not terminate the
right of rescission.
Paragraph 23(a)(4)
1. Joint owners. When more than one con­
sumer has the right to rescind a transaction,
any one of them may exercise that right and
cancel the transaction on behalf of all. For
example, if both 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.

23(b) Notice of Right to Rescind
1. Who receives notice. Each consumer enti­
tled to rescind must be given:
•
•

Two copies of the rescission notice
The material disclosures

In a transaction involving joint owners, both
of whom are entitled to rescind, both must
receive the notice of the right to rescind and
disclosures. For example, if both spouses are
entitled to rescind a transaction, each must
receive two copies of the rescission notice and
one copy of the disclosures.
2. Format. The notice must be on a separate
piece of paper but may appear with other in­
formation such as the itemization of 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.
3. Content. The notice must include all of the
information outlined in section 226.23(b)(1)
through (5). The requirement in section
226.23(b) that the transaction be identified
may be met by providing the date of the trans­
action. The creditor may provide a separate
form that the consumer may use to exercise
the right of 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:

Regulation Z Official Staff Commentary
•

§ 226.23

A description of the property subject to
the security interest
• A statement that joint owners may have
the right to rescind and that a rescission
by one is effective for all
• The name and address of an agent of the
creditor to receive notice of rescission

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:

4. Time o f providing 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.

•

•

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 of only one consumer, be­
cause other consumers may exercise the right.

23(d) Effects of Rescission
Paragraph 23(d)(1)

23(c) Delay of Creditor’s Performance
1. General rule. Until the rescission period
has expired and the creditor is reasonably sat­
isfied that the consumer has not rescinded, the
creditor must not, either directly or through a
third party:
•
•
•

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

2. Escrow. 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. Permissible actions. Section 226.23(c) does
not prevent the creditor from taking other
steps during the delay, short of 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. Delay beyond rescission period. The credi­



1. Termination o f security interest. Any secu­
rity interest giving rise to the right of rescis­
sion becomes void when the consumer exercis­
es the right of rescission. The security interest
is automatically negated regardless of its
status and whether or not it was recorded or
perfected. Under section 226.23(d)(2), how­
ever, the creditor must take any action neces­
sary to reflect the fact that the security inter­
est no longer exists.
Paragraph 23(d)(2)
1. Refunds to consumer. The consumer can­
not be required to pay any amount in the form
of money or property either to the creditor or
to a third party as part of the credit transac­
tion. Any amounts of 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. Amounts not refundable to consumer.
Creditors need not return any money given by
the consumer to a third party outside of the
credit transaction, such as costs incurred for a
building permit or for a zoning variance. Simi89

§ 226.23
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 226.23(d)(3).
3. Reflection o f security interest termination.
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 of 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.

Paragraph 23(d)(3)
1. Property exchange. Once the creditor has
fulfilled its obligations under section
226.23(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 of 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. Money already given to the
consumer must be tendered at the creditor’s
place of business.
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.
90



Regulation Z Official Staff Commentary
Paragraph 23(d)(4)
1. Modifications. The procedures outlined in
section 226.23(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.

23(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.

23(f) Exempt Transactions
1. Residential mortgage transaction. Any
transaction to construct or acquire a principal
dwelling, whether considered real or personal
property, is exempt. (See the commentary to
section 226.23(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. Lien status. The lien status of the mortgage
is irrelevant for purposes of the exemption in
section 226.23(0(1); the fact that a loan has
junior lien status does not by itself preclude
application of this exemption. For example, a
home buyer may assume the existing first
mortgage and create a second mortgage to fi­
nance the balance of the purchase price. Such
a transaction would not be rescindable.
3. Combined-purpose transaction. A loan to

Regulation Z Official Staff Commentary
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 of 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 of that dwelling is
exempt.
4. New advances. The exemption in section
226.23(f)(2) applies only to refinancings or
consolidations by the original creditor. If the
transaction involves the advance of new mon­
ey, then only the amount of the new money is
rescindable. For example, if the sum of 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 of that $1,000 would be re­
scindable. A model rescission notice applica­
ble to transactions involving new money ap­
pears in appendix H.
5. State creditors. Cities and other political
subdivisions of states acting as creditors are
not exempted from this section.
6. Multiple advances. 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
of 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 226.17(c)(6), the credi­
tor makes a single set of disclosures at the
beginning of the construction period, rather
than separate disclosures for each advance.
The right of 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. Spreader clauses. When the creditor holds
a n Jrtgage or deed of trust on the consumer’s
principal dwelling and that mortgage or deed
of trust contains a “spreader clause,” subse­
quent loans made are separate transactions
and are subject to the right of rescission.



§ 226.24
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
Statute: §§ 113, 125, and 130
Other sections: § 226.2 and appendix H
Previous regulation: § 226.9
1981 changes: 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.

SECTION 226.24— Advertising
1. Clear and conspicuous standard. 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 of the
necessary disclosures. The credit terms need
not be printed in a certain type size nor need
they appear in any particular place in the ad­
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 of the tag, so
long as each side is accessible.

24(a) Actually Available Terms
1. General rule. 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 of 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.

24(b) Advertisement of Rate of Finance
Charge
1. Annual percentage rate. Advertised rates
must be stated in terms of an “annual percent­
age rate,” as defined in section 226.22. Even
91

§ 226.24

Regulation Z Official Staff Commentary

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 the an­
nual percentage rate under section 226.18(e),
the advertised annual percentage rate need
not include a descriptive explanation of 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
of 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.

or “this buydown arrangement will reduce
your monthly payments for the first three
years of the mortgage term by $150.”

2. Simple or periodic 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
than) the annual percentage rate. For
example:

Paragraph 24(c)(1)

•

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. Buydowns. When a third party (such as a
seller) or a creditor wishes to promote the
availability of 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 of 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 of the term. The adver­
tisement may also show the effect of 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 of the mortgage term will be only $350”
92



24(c) Advertisement of Terms That
Require Additional Disclosures
1. General rule. Under section 226.24(c)(1),
whenever certain triggering terms appear in
credit advertisements, the additional credit
terms enumerated in section 226.24(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.

1. Downpayment. The dollar amount of a
downpayment or a statement of the downpay­
ment as a percentage of the price requires fur­
ther information. By virtue of the definition of
“downpayment” in section 226.2, this trigger­
ing term is limited to credit sale transactions.
It includes such statements as:
•
•
•

“Only 5 percent down”
“As low as $100 down”
“Total move-in costs of $800”

This provision applies only if a downpayment
is actually required; statements such as “no
downpayment” or “no trade-in required” do
not trigger the additional disclosures under
this paragraph.
2. Payment period. The number of payments
required or the total period of repayment in­
cludes such statements as:
•
•
•

“48-month payment terms”
“30-year mortgage”
“Repayment in as many as 36 monthly
installments”

But it does not include such statements as
“pay weekly,” “monthly 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. Payment amount. The dollar amount of
any payment includes statements such as:

Regulation Z Official Staff Commentary
•
•
•

“Payable in installments of $103”
“$25 weekly”
“$1,200 balance payable in 10 equal
installments”

In the last example, the amount of 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. Finance charge. The dollar amount of the
finance charge or any portion of it includes
statements such as:
•
•
•

“$500 total cost of 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 of the an­
nual percentage rate or statements that there
is no particular charge for credit (such as “no
closing costs” ) are not triggering terms under
this paragraph.
Paragraph 24(c)(2)
1. Disclosure o f downpayment. The total
downpayment as a dollar amount or percent­
age must be shown, but the word “downpay­
ment” 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. Disclosure o f repayment terms. While the
phrase “terms of 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.”




§ 226.24
•

In an advertisement for credit secured by a
dwelling, when any series of payments var­
ies because of a graduated payment feature
or because of the inclusion of mortgage in­
surance premiums, a creditor may state
the number and timing of payments, the
amounts of the largest and smallest of
those payments, and the fact that other
payments will vary between those
amounts.

3. Annual percentage rate. The advertisement
must also state, if applicable, that the annual
percentage rate is subject to increase after
consummation.
4. Use o f examples. Footnote 49 authorizes
the use of illustrative credit transactions to
make the necessary disclosures under section
226.24(c) (2). That is, where a range of possi­
ble combinations of credit terms is offered, the
advertisement may use examples of typical
transactions, so long as each example contains
all of the applicable terms required by section
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.

24(d) Catalogs and Multiple-Page
Advertisements
1. Definition. The multiple-page advertise­
ments to which this section refers are adver­
tisements consisting of a series of sequentially
numbered pages—for example, a supplement
to a newspaper. A mailing consisting of sever­
al separate flyers or pieces of promotional ma­
terial in a single envelope does not constitute a
single multiple-page advertisement for pur­
poses of section 226.24(d).
2. General. 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 of the triggering terms from section
226.24(c)(1). A list of different annual per­
centage rates applicable to different balances,
for example, does not trigger further disclo­
sures under section 226.24(c)(2) and so is
not covered by section 226.24(d).
93

§ 226.24
3. Representative examples. The table or
schedule must state all the necessary informa­
tion for a representative sampling of amounts
of credit. This must reflect amounts of 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 of more expensive goods or serv­
ices. The range of transactions shown in the
table or schedule in a particular catalog or
multiple-page advertisement need not exceed
the range of transactions actually offered in
that advertisement.

References
Statute: §§ 141, 142, and 144
Other sections: §§ 226.2, 226.4, and 226.22
Previous regulation: §226.10(a), (b), and (d)
1981 changes: This section retains the adver­
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 FHA 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 of representative amounts of 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.

SUBPART D—MISCELLANEOUS

SECTION 226.25— Record Retention
25 (a) General Rule
1. Evidence o f required actions. The creditor
must retain evidence that it performed the re94




Regulation Z Official Staff Commentary
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 of credit balances under sections 226.11
and 226.21.
2. Methods o f retaining evidence. Adequate
evidence of compliance does not necessarily
mean actual paper copies of 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
Statute: §§ 105 and 108
Other sections: Appendix I
Previous regulation: § 226.6(i)
1981 changes: 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 of required actions.

SECTION 226.26— Use of Annual
Percentage Rate in Oral Disclosures
1. Application o f rules. The restrictions of sec­
tion 226.26 apply only if the creditor chooses
to respond orally to the consumer’s request
for credit cost information. Nothing 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.

Regulation Z Official Staff Commentary

26(a) Open-End Credit
1. Information that may be given. 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 of periods in a year,
as described in sections 226.6(a)(2) and
226.7(d)). In such cases, the creditor may,
but need not, also give the consumer informa­
tion about other finance charges and other
charges.

26(b) Closed-End Credit
1. Information that may be given. 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 of a simple interest
rate, for example, but not an add-on, discount,
or similar rate. If the creditor cannot give a
precise annual percentage rate in its oral re­
sponse because of 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 of 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
Statute: § 146
Other sections: §§ 226.6(a)(2) and 226.7(d)
Previous regulation: Interpretation § 226.101
1981 changes: This section implements
amended section 146 of the act, which added
a provision dealing with oral disclosures, and
incorporates interpretation section 226.101.



§ 226.28

SECTION 226.27—Spanish Language
Disclosures
1. Subsequent disclosures. 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. Permissible uses. If a creditor other than in
Puerto Rico provides translations of 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 226.17(a)(1).

References
Statute: None
Other sections: None
Previous regulation: § 226.6(a)
1981 changes: No substantive change

SECTION 226.28—Effect on State Laws
28(a) Inconsistent Disclosure
Requirements
1. General. There are three sets of preemption
criteria; one applies to the general disclosure
and advertising rules of the regulation, and
two apply to the credit-billing provisions. Sec­
tion 226.28 also provides for Board determi­
nations of preemption.
2. Rules for chapters 1, 2, and 3. The standard
for judging whether state laws that cover the
types of requirements in chapters 1 (General
Provisions), 2 (Credit Transactions), and 3
(Credit Advertising) of the act are inconsist­
ent and therefore preempted, is contradiction
of the federal law. Examples of laws that
would be preempted include:
•

A state law that requires use of the term
95

§ 226.28

•

“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. Laws not contradictory to chapters 1, 2, and
3. Generally, state law requirements that call
for the disclosure of items of information not
covered by the federal law, or that require
more detailed disclosures, do not contradict
the federal requirements. Examples of laws
that are not preempted include:
•

•

A state law that requires disclosure of 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. Do not sign if any spaces
are left blank. You are entitled to a copy of
this contract.”

Similarly, a state law that requires itemization
of 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 of the amount financed in the
segregated closed-end credit disclosures is in­
consistent, and this location requirement
would be preempted.
4. Creditor's options. 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 226.17(a)(1).
This ability to give state disclosures re­

96




Regulation Z Official Staff Commentary
lieves any uncertainty that the creditor
might have prior to Board determinations
of inconsistency.
As 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 of state
law if the creditor chooses not to make state
disclosures and the Board later determines
that the state law is not preempted.
5. Rules for correction o f billing errors and
regulation o f credit 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 of billing
errors and regulation of 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,
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 of billing error within 60 days after trans­
mittal of 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. Any 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:
•
•
•

A state law that has a narrower or broader
definition of “billing error”
A state law that requires the creditor to
take different steps to resolve errors
A state law that provides different timing
rules for error resolution (subject to the
exception discussed above)

6. Rules for other fair credit billing provisions.
The second part of the criteria for fair credit
billing relates to the other rules implementing
chapter 4 of the act (addressed in sections

§ 226.29

Regulation Z Official Staff Commentary
226.4(c)(8), 226.5(b) (2) (ii), 226.6(d),
226.7(k), 226.9(a), 226.10, 226.11, 226.12(c)
through (f), 226.13, and 226.21). Section
226.28(a) (2) (ii) provides that the test of in­
consistency is whether the creditor can com­
ply with state law without violating federal
law. For example:
•

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 more than 14 days before
the end of 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 of section 226.12(c)
(3) (ii) would not be preempted.

In the last two cases, compliance with state
law would involve no violation of the federal
law.
7. Who may receive a chapter 4 determination.
Only states (through their authorized offi­
cials) may request and receive determinations
on inconsistency with respect to the fair credit
billing provisions.

28(b) Equivalent Disclosure
Requirements
1. General A state disclosure may be substi­
tuted for a federal disclosure only after the
Board has made a finding of substantial simi­
larity. Thus, the creditor may not unilaterally
choose to make a state disclosure in place of 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 of these terms may be substitut­
ed for the federal provision.

References
Statute: §§111 and 171(a) and (c)
Other sections: Appendix A



Previous regulation: § 226.6(b) and (c), and
interpretation § 226.604
1981 changes: Section 226.28 implements
amended section 111 of the act. The test for
preemption of state laws relating to disclosure
and advertising is now whether the state law
“contradicts” the federal, rather than whether
state requirements are “different.”
The revised regulation contains no counter­
part to section 226.6(c) of the previous regu­
lation concerning placement of 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.

SECTION 226.29—State Exemptions
29(a) General Rule
1. Classes eligible. The state determines the
classes of transactions for which it will request
an exemption and makes its application for
those classes. Classes might be, for example,
all open-end credit transactions, all open-end
and closed-end transactions, or all transac­
tions in which the creditor is a bank.
2. Substantial similarity. The “substantially
similar” standard requires that state statutory
or regulatory provisions and state interpreta­
tions of 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 of the act. A state will be
eligible for an exemption even if its law covers
classes of 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. Adequate enforcement. 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 agen97

§ 226.29
cies. Furthermore, state law must make ade­
quate provision for enforcement of the reim­
bursement rules.

29(b) Civil Liability
1. Not eligible for exemption. The provision
that an exemption may not extend to sections
130 and 131 of 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
Statute: §§ 108, 123, and 171(b)
Other sections: Appendix B
Previous regulation: § 226.12
1981 changes: The procedures that states must
follow to seek exemptions are now located in
an appendix. Exemptions under the previous
regulation will be automatically revoked on
April 1, 1982, when compliance with the new
regulation is mandatory.

APPENDIX A—Effect on State Laws
1. Who may make requests Appendix A sets
forth the procedures for preemption determi­
nations. As discussed in section 226.28, which
contains the standards for preemption, a re­
quest for a determination of whether a state
law is inconsistent with the requirements of
chapters 1, 2, or 3 may be made by creditors,
states, or any interested party. However, only
states may request and receive determinations
in connection with the fair credit billing provi­
sions of chapter 4.

References
Statute: §§111 and 171(a)
Other sections: § 226.28
Previous regulation: §§ 226.6(b) and 226.70
(supplement V, § II)
1981 changes: The procedures in appendix A
were largely adapted from supplement V, sec­
tion II of the previous regulation (§ 226.70),
with changes made to streamline the
procedures.
98



Regulation Z Official Staff Commentary

APPENDIX B—State Exemptions
1. General. 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
Statute: §§ 123 and 171(b)
Other sections: § 226.29
Previous regulation: §§ 226.12, 226.50 (sup­
plement II), 226.60 (supplement IV), and
226.70 (supplement V, § I)
1981 changes: The procedures in appendix B
represent a combination and streamlining of
the procedures set forth in the supplements to
the previous regulation.

APPENDIX C— Issuance of Staff
Interpretations
1. General. This commentary is the vehicle
for providing official staff interpretations. In­
dividual interpretations generally will not be
issued separately from the commentary.

References
Statute: §§ 105 and 130(f)
Other sections: None
Previous regulation: § 226.1 (d)
1981 changes: Appendix C reflects the Board’s
intention that this commentary serve as the
vehicle for interpreting the regulation, rather
than individual interpretive letters.

APPENDIX D—Multiple-Advance
Construction Loans
1. General 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 and timing of advances are unknown
at consummation of the transaction. This ap­
pendix 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 G

Regulation Z Official Staff Commentary

References
Statute: None
Other sections: §§ 226.17 and 226.22
Previous regulation: Interpretation § 226.813
1981 changes: The use of appendix D is limit­
ed to multiple-advance loans for construction
purposes.

APPENDIX E—Rules for Card Issuers
That Bill on a Transaction-byTransaction Basis
Statute: None
Previous regulation: Interpretation § 226.709
Other sections: §§ 226.6 through 226.13, and
226.15
1981 changes: 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 of
subpart B.

APPENDIX F—Annual Percentage
Rate Computations for Certain OpenEnd Credit Plans
Statute: § 107
Previous regulation: § 226.5(a) (3) (ii), foot­
note 5(a)
Other sections: § 226.14
1981 changes: This appendix incorporates a
sixth example in which the transaction
amount exceeds the amount of the balance
subject to the periodic rate.

APPENDIXES G A N D H—Open-End
and Closed-End Model Forms and
Clauses
1. Permissible changes. 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 of 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 of the model
forms and clauses may not be so extensive as



to affect the substance, clarity, or meaningful
sequence of the forms and clauses. Creditors
making revisions with that effect will lose
their protection from civil liability. Accept­
able changes include, for example:
•

Using the first person, instead of the sec­
ond person, in referring to the borrower
• Using “borrower” and “creditor” instead
of pronouns
• Rearranging the sequences of the
disclosures
• Not 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 of 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 verticle, rather than a horizontal,
fcmiat for the boxes in the closed-end
disclosures

APPENDIX G—Open-End Model
Forms and Clauses
1. Model 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. As is clear from the models
given, “shorthand” descriptions of 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 bal­
ance, that fact must be stated so that the dis­
closure of the computation method is accu­
rate. Only model G -l(b) contains a final
sentence appearing in brackets which reflects
the total dollar amount of payments and cred­
its received during the billing cycle. The other
99

Appendix G
models do not contain this language because
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 of the dollar amount
as in model G -l(b ) or an indication of 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
226.7(e).)
2. Model G-2. This model contains the notice
of liability for unauthorized use of a credit
card.
3. Models G-3 and 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 of 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 of a billing error must be submitted on
something other than the payment ticket
or other material accompanying the peri­
odic disclosures

100




Regulation Z Official Staff Commentary
•

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 of 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. Models G-5 through G-9. These models set
out notices of the right to rescind that would
be used at different times in an open-end plan.
The last paragraph of each of the rescission
model forms contains a blank for the date by
which the consumer’s notice of cancellation
must be sent or delivered. A parenthetical is
included to address the situation in which the
consumer’s right to rescind the transaction ex­
ists beyond three business days following the
date of the transaction, for example, when the
notice or material disclosures are delivered
late or when the date of the transaction in
paragraph 1 of the notice is an estimate. The
language of the parenthetical is not optional.

APPENDIX H—Closed-End Model
Forms and Clauses
1. Models H -l and H-2. Creditors may make
several types of changes to closed-end model
forms H -l (credit sale) and H-2 (loan) and
still be deemed to be in compliance with the
regulation, provided that the required 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 of 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”

Regulation Z Official Staff Commentary

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
226.18(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.)
• Rearranging the sequence or location of
the disclosures—for instance, by placing
the descriptive phrases outside the boxes
containing the corresponding disclosures,
or by grouping the descriptors together as
a glossary of terms in a separate section of
the segregated disclosures; by placing the
payment schedule at the top of the form;
or by changing the order of the disclosures
in the boxes, including the annual percent­
age rate and finance charge boxes
• Using brackets, instead of checkboxes, to
indicate inapplicable disclosures
• Using a line for the consumer to initial,
rather than a checkbox, to indicate an
election to receive an itemization of the
amount financed
• Deleting captions for disclosures
• Using a symbol, such as an asterisk, for
estimated disclosures, instead of an “e”
• Adding a signature fine 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. Model H-3. Creditors have considerable
flexibility in filling out model H-3 (itemiza­
tion of 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 of protection from civil lia­
bility for proper use of the model forms.
3. Models H-4 through H-7. The model claus­
es are not included in the model forms al­
though they are mandatory for certain trans­



Appendix H
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. Model 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 of an increase may be
given in terms of the contract interest rate or
the annual percentage rate. Clauses are shown
for hypothetical examples based on the specif­
ic amount of 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 of 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 of 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 of $850.
5. Model H-5. This contains the demand fea­
ture clause.
6. Model H-6. This contains the assumption
clause.
7. Model H-7. This contains the requireddeposit clause.
8. Models H-8 and H-9. These models con­
tain the rescission notices for a typical closedend transaction and a refinancing, respective­
ly. The last paragraph of each model form
contains a blank for the date by which the
consumer’s notice of cancellation must be sent
or delivered. A parenthetical is included to
address the situation in which the consumer’s
right to rescind the transaction exists beyond
three business days following the date of the
transaction, for example, where the notice or
material disclosures are delivered late or
where the date of the transaction in paragraph
101

Appendix H
1 of the notice is an estimate. The language of
the parenthetical is not optional.
9. Sample forms. The sample forms (H-10
through H-15) serve a different purpose than
the model forms. The samples illustrate vari­
ous ways of 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. As a result, the sam­
ples do not provide the general protection
from civil liability provided by the model
forms and clauses.
10. Sample H-10. This sample illustrates an
automobile credit sale. The cash price is
$7,500 with a downpayment of $1,500. There
is an 8 percent add-on interest rate and a term
of 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. Sample H -ll. This sample illustrates an
installment loan. The amount of the loan is
$5,000. There is a 12 percent simple interest
rate and a term of two years. The date of the
transaction is expected to be April 15, 1981,
with the first payment due on June 1, 1981.
The first payment amount is labelled as an 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. Sample H-12. This sample illustrates a re­
financing and consolidation loan. The amount
of the loan is $5,000. There is a 15 percent
simple interest rate and a term of three years.
The date of the transaction is April 1, 1981,
with the first payment due on May 1, 1981.
The first 35 monthly payments are equal, with
an odd final payment. The credit disability in­
surance premium is financed. In calculating
the annual percentage rate, the U.S. Rule has
been used. Since an itemization of the amount
financed is included with the disclosures, the
statement regarding the consumer’s option to
receive an itemization is deleted.
13. Samples H-13 through H-15. These sam102



Regulation Z Official Staff Commentary
pies illustrate various mortgage transactions.
They assume that the mortgages are subject to
the Real Estate Settlement Procedures Act
(RESPA). As a result, no option regarding
the itemization of the amount financed has
been included in the samples, because provid­
ing the good faith estimates of settlement
costs required by RESPA satisfies Truth in
Lending’s amount-financed itemization re­
quirement. (See footnote 39 to section
226.18(c).)
14. Sample H-13. 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 of 14.75
percent. The 15 days of interim interest
($294.34) is collected as a prepaid finance
charge at the time of consummation of the
loan (April 15, 1981). In calculating the dis­
closure amounts, the minor-irregularities pro­
vision in section 226.17(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
(FNM A) in states where due-on-sale clauses
are prohibited.
15. Sample H-14. This sample illustrates a
variable-rate mortgage. The loan amount is
$44,900, payable in 360 monthly installments
at an initial interest rate of 14.75 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 of 5 percent over the term of the
mortgage. The interest rate may not vary
more frequently than once a year and may not
increase by more than 1 percent annually.
Rate fluctuations will be reflected in the
monthly payment amount.
16. Sample H-15. This sample illustrates a
graduated payment mortgage with a five-year
graduation period and a 7j percent yearly in­
crease in payments. The loan amount is
$44,900, payable in 360 monthly installments
at a simple interest rate of 14.75 percent. Two
points ($898), as well as an initial mortgage

Appendix J

Regulation Z Official Staff Commentary
guarantee insurance premium of $225.00, are
included in the prepaid finance charge. The
mortgage-guarantee insurance premiums are
calculated on the basis of £ of 1 percent of the
outstanding principal balance under an annu­
al reduction plan. The abbreviated disclosure
permitted under section 226.18(g)(2) is used
for the payment schedule for years 6 through
30. The prepayment disclosure refers to both
penalties and rebates because information
about penalties is required for the simple-in­
terest portion of the obligation and informa­
tion about rebates is required for the mortgage
insurance portion of the obligation.

References
Statute: §§ 105 and 130
Other sections: §§ 226.6, 226.7, 226.9, 226.12,
226.15, 226.18, and 226.23
Previous regulation: None
1981 changes: The model forms and clauses
have no counterpart in the previous
regulation.

APPENDIX I—Federal Enforcement
Agencies
Statute: § 108
Other sections: None
Previous regulation: § 226.1 (b)
1981 changes: None

APPENDIX J—Annual Percentage Rate
Computations for Closed-End Credit
Transactions
1. Use o f appendix J. Appendix J sets forth
the actuarial equations and instructions for




calculating the annual percentage rate in
closed-end credit transactions. While 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. Relation to Board tables. The Board’s An­
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 of the tables may be used for credit
transactions
involving
equal
payment
amounts and periods, as well as for transac­
tions involving any of the following irregulari­
ties: odd first period, odd first payment and
odd last payment. Volume II of the tables
may be used for transactions that involve any
type of irregularities. These tables may be ob­
tained from any Federal Reserve Bank or
from the Board in Washington, D.C. 20551,
upon request.

References
Statute: § 107
Other sections: § 226.22
Previous regulation: § 226.40 (supplement I)
1981 changes: Paragraph (b)(2) has been re­
vised to clarify that the term of the transac­
tion never begins earlier than consummation
of the transaction. Paragraph (b)(5)(vi) has
been revised to permit creditors in all cases
where the transaction term equals a whole
number of months, to use either the 12-month
method or the 365-day method to compute
the number of unit periods per year.

103