Full text of Press Releases of the Board of Governors of the Federal Reserve System : Request for comment on review of open-end credit rules, Regulation Z : Attachment 1

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1217]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Advance Notice of Proposed Rulemaking
________________________________________________________________________
SUMMARY: The Board is publishing for public comment an advance notice of proposed
rulemaking (ANPR) to commence a review of the open-end (revolving) credit rules of the
Board’s Regulation Z, which implements the Truth in Lending Act. The Board
periodically reviews each of its regulations to update them, if necessary. The ANPR seeks
comment on a variety of specific issues relating to three broad categories: the format of
open-end credit disclosures, the content of the disclosures, and the substantive protections
provided under the regulation. The ANPR solicits comments on the scope of the review,
and also requests commenters to identify other issues that the Board should consider
addressing in the review.
DATES: Comments must be received on or before March 28, 2005.
ADDRESSES: You may submit comments, identified by Docket No. R-1217, by any of
the following methods:
•

Agency Web Site: http://www.federalreserve.gov. Follow the instructions for
submitting comments at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions
for submitting comments.

•

E-mail: regs.comments@federalreserve.gov. Include the docket number in the
subject line of the message.

•

FAX: 202/452-3819 or 202/452-3102.

•

Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.

2
See Supplementary Information, Section I., for further instructions on submitting
comments.
All public comments are available from the Board’s web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, except as
necessary for technical reasons. Accordingly, your comments will not be edited to remove
any identifying or contact information. Public comments may also be viewed
electronically or in paper in Room MP-500 of the Board’s Martin Building (20th and C
Streets, N.W.) between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Elizabeth A. Eurgubian, Attorney,
Dan S. Sokolov and Krista P. DeLargy, Senior Attorneys, Daniel G. Lonergan and John C.
Wood, Counsel, or Jane E. Ahrens, Senior Counsel, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System, at (202) 4523667 or 452-2412; for users of Telecommunications Device for the Deaf (“TDD”) only,
contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Form of Comment Letters
This ANPR requests data or comment on specific issues relating to Regulation Z’s
open-end credit rules. These requests are numbered consecutively. Commenters are
requested to refer to these numbers in their submitted comments, which will assist the
Board and members of the public that review comments online. Questions are presented
by subject matter as follows:
Scope of the review: Q1.
Format of Disclosures:
Account-opening disclosures, Q2 – Q3.
Periodic statements, Q4 – Q6.
Credit card application disclosures (the “Schumer box”), Q7 – Q8.
Subsequent disclosures, Q9.
Model forms and clauses, Q10 – Q12.
Content of Disclosures:
Classifying and labeling fees as “finance charges” and “other charges,” Q13 – Q20.
Over-the-credit-limit fees, Q21 – Q22.
“Effective” or “historical” annual percentage rate on periodic statements, Q23 – Q25.
Disclosures about rate changes, Q26 – Q27.
Balance calculation methods, Q28 – Q30.
Minimum payments, Q31 – Q33.
Payment allocation, Q34 – Q36.
Tolerances, Q37.
Other questions, Q38 – Q42.

3
Substantive protections:
General, Q43.
Accessing credit card accounts, Q44.
“Convenience checks,” Q45.
Unsolicited issuance of credit cards, Q46.
Prompt crediting of payments, Q47 – Q51.
Additional Issues:
Providing guidance not expressly addressed in existing rules, Q52.
Adjusting exceptions based on de minimis amounts, Q53.
Improving plain language and organization; identifying technical revisions, Q54.
Deleting obsolete rules or guidance, Q55.
Recommendations for legislative changes, Q56.
Recommendations for nonregulatory approaches, Q57.
Reviewing other aspects of Regulation Z, Q58
The Board also requests that when possible, comment letters should use a standard
typeface with a font size of 10 or 12. This enables the Board to convert text submitted in
paper form to machine-readable form through electronic scanning, and eases automated
retrieval of comments for review.
II. Background
The Congress based the Truth in Lending Act (TILA) on findings that economic
stability would be enhanced and competition among consumer credit providers would be
strengthened by the informed use of credit, which results from consumers’ awareness of
the credit’s cost. The purposes of the TILA are: (1) to provide a meaningful disclosure of
credit terms to enable consumers to compare the various credit terms available in the
marketplace more readily and avoid the uninformed use of credit; and (2) to protect
consumers against inaccurate and unfair credit billing and credit card practices. 15 U.S.C.
1601(a).
TILA’s disclosures differ somewhat depending on whether consumer credit is an
open-end (revolving) plan or a closed-end (installment) loan. TILA also contains
procedural and substantive protections for consumers, for both open-end and closed-end
transactions.
TILA is implemented by the Board’s Regulation Z. 12 CFR part 226; 15 U.S.C.
1604(a). An Official Staff Commentary interprets the requirements of Regulation Z.
12 CFR § 226 (Supp I). Creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties, or administrative
sanction. 15 U.S.C. 1640(f).

4
III. Reviewing the Open-end Credit Rules
TILA, enacted in 1968, was substantially revised by the Truth in Lending
Simplification Act of 1980. Regulation Z was revised and reorganized to implement the
new law, effective in 1982 (46 FR 20892, April 7, 1981). Since then, the regulation has
not been reviewed in its entirety, although much of it has been reviewed in individual
rulemakings, to implement new legislation, in response to congressional requests for
reports, or pursuant to public hearings.1 The Official Staff Commentary is typically
updated annually.
Scope of the Review. The Board periodically reviews it regulations to update
them. The Board plans to review Regulation Z over the next few years. The regulation is
sufficiently lengthy and complex, however, that conducting the review in stages appears to
be the most appropriate approach. The Board is proposing to focus the first stage of the
review on Regulation Z’s rules for open-end (revolving) credit accounts that are not homesecured, chiefly general-purpose credit cards and merchant-specific credit plans, although
the rules apply to open-end lines generally. Other aspects of the regulation would also be
addressed if the Board determines that it is necessary or appropriate to do so.
Accordingly, comment is also requested on other ways that Regulation Z could be
improved in Section VI, below. Plans for future stages of the review of Regulation Z are
discussed in Section VII, below. Some provisions in Regulation Z apply to both openand closed-end credit. Even though the Board is proposing to review Regulation Z in
stages, the Board will consider the need for consistency across the regulation in proposing
revisions.
Q1. The Board solicits comments on the feasibility and advisability of reviewing
Regulation Z in stages, beginning with the rules for open-end credit not home-secured.
Are some issues raised by the open-end credit rules so intertwined with other TILA rules
that other approaches should be considered? If so, what are those issues, and what other
approach might the Board take to address them?
Goals. In reviewing Regulation Z, the Board’s primary goal is to improve, if
possible, the effectiveness and usefulness of open-end disclosures and substantive
protections. Consumers’ use of open-end credit, especially lines accessed by credit cards,
has grown markedly. The ways in which consumers can access open-end lines and the
uses they can make of these lines have both expanded. Pricing has become more complex
and products increasingly diverse, especially for general purpose credit cards. Taken
together, these factors suggest it is appropriate to consider whether the open-end
disclosure rules and substantive protections of Regulation Z are achieving their intended
purposes, which are to permit consumers to make informed decisions about the use of
1

Amendments to Regulation Z have addressed adjustable-rate mortgage loans (52 FR 48665, December 24,
1987); home equity lines of credit (54 FR 24670, June 9, 1989), credit and charge card applications and
solicitations (54 FR 13855, April 6, 1989 and 65 FR 58903, October 3, 2000), and potentially abusive
mortgage lending practices (high-cost loans and reverse mortgages, 60 FR 15463, March 24, 1995, and 66
FR 65604, December 20, 2001). In connection with reports to the Congress, the Board reviewed the rules
relating to consumers’ right to rescind certain mortgage transactions (1995); finance charges (1996); home–
equity lines of credit (1996); and closed–end mortgage loans (1998).

5
credit and to protect consumers against inaccurate and unfair credit billing and credit card
practices. The review will also consider ways to address concerns about information
overload, which can adversely affect how meaningful the disclosures are to consumers.
Disclosures required under TILA are required to be clear and conspicuous; the Board
intends to study alternatives for improving the format of disclosures, including revising
the model forms and clauses published by the Board, to ensure that consumers get timely
information in a readable form.
TILA also seeks to establish uniformity in creditors’ disclosures to promote
comparison shopping. Thus, in conducting the review, the Board will consider ways that
the rules can be clarified for creditors to facilitate compliance and promote consistency in
their disclosures. Pursuant to the Board’s mandate under the Economic Growth and
Regulatory Paperwork Reduction Act, the Board also intends to consider ways to reduce
unnecessary regulatory burden consistent with the purposes and requirements of TILA.
(See 68 FR 35589, June 16, 2003; 69 FR 2852, January 21, 2004; 69 FR 43347, July 16,
2004.)
Following the ANPR, the Board may determine that proposed revisions to
Regulation Z’s open-end credit rules are appropriate, but there may be other responses to
the issues raised. For example, the Board may consider whether to recommend legislative
changes. The Board may conclude that a non-regulatory response would be the most
effective approach in addressing some issues, for example the issuance of recommended
best practices or consumer education efforts. These alternative approaches are discussed
in Section VI, below.
The Board’s Authority under TILA. TILA mandates that the Board prescribe
regulations to carry out the purposes of the act. 15 U.S.C. 1604(a). In promulgating openend credit rules to implement TILA, the Board is also authorized, among other things, to
do the following:
•

Issue regulations that contain such classifications, differentiations, or other
provisions, or provide for such adjustments and exceptions for any class of
transactions, that in the Board’s judgment are necessary or proper to effectuate the
purposes of TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).

•

Exempt from all or part of TILA any class of transactions if the Board determines
that TILA coverage does not provide a meaningful benefit to consumers in the
form of useful information or protection. The Board must consider factors
identified in the act and publish its rationale at the time a proposed exemption is
published for comment. 15 U.S.C. 1604(f).

•

Exempt from TILA certain transactions involving consumers who first provide a
written waiver of their TILA protections and whose annual earned income or net
assets at the time of the transaction exceeds a certain dollar figure ($200,000 and

6
$1,000,000, respectively), which the Board may adjust for inflation. 15 U.S.C.
1604(g).
•

Provide tolerances for numerical disclosures other than the annual percentage rate
(APR), so long as the tolerances are narrow enough to prevent disclosures that are
misleading or that circumvent TILA’s purposes. 15 U.S.C. 1631(d).

Open-end Consumer Credit in Today’s Marketplace. The principal examples of
open-end credit not home-secured are general-purpose credit cards and merchant-specific
credit plans, which may or may not involve cards. In determining how the Board’s goals
for the Regulation Z review can best be met, the Board will consider the nature and
function of open-end credit accounts, and how the market for open-end credit has
developed since the last major review of the open-end rules.
Recent studies and consumer surveys (including a 2001 survey of consumers with
general purpose credit cards discussed in the April 2002 article noted below) provide some
data on open-end credit plans and how consumers use them, particularly credit card
accounts, as follows:2
•

Increased number of cards held. In 2001, 73 percent of households had at least one
general purpose credit card with a revolving feature, compared to 43 percent in
1983. The 2001 consumer survey noted above showed that 20 percent of the
respondents obtained a new general purpose credit card within the previous year,
and that around 84 percent of those respondents did so as a result of a solicitation.
The survey also showed that nearly two-thirds of the respondents who had
acquired a new card in the previous year already held two other credit card
accounts, and over one-third of respondents with general purpose credit cards with
a revolving feature held three or more.

•

Wide range of uses. Open-end plans, credit cards in particular, are widely used in
today’s marketplace. Credit cards serve as a substitute for cash and checks for
millions of routine purchases, and allow consumers to engage in transactions such
as telephone and Internet purchases. Also, credit limits can be high, and
consumers now commonly finance the purchase of “big-ticket” items (such as
appliances and furniture) under an open-end plan rather than a closed-end
installment loan, as they did in the past. Card issuers have also developed other
access methods for consumers to use their accounts, such as by offering
“convenience checks” that may be used for purchases or to transfer balances from
other accounts. In the 2001 survey noted above, about 20 percent of respondents
having general purpose credit cards with a revolving feature had transferred
balances in the previous year.

2

Thomas A. Durkin, Credit Cards: Use and Consumer Attitudes, 1970-2000, FEDERAL RESERVE BULLETIN,
(September 2000); Thomas A. Durkin, Consumers and Credit Disclosures: Credit Cards and Credit
Insurance, FEDERAL RESERVE BULLETIN (April 2002).

7
•

More complex pricing. General purpose credit-card pricing has become more
complex. A single account may have multiple APRs for different types of credit
extensions, or that apply for limited time periods. Credit cards are available to
consumers with a much wider range of credit risks, due to improved technology
for risk-evaluation. As a result, pricing is more varied. Also, competition has
reduced “front-end” costs for general purpose credit cards as card issuers eliminate
annual fees and offer substantial discounts in initial interest rates. On the other
hand, “back-end” costs have increased through higher late fees, over-the-creditlimit fees, and the use of penalty rates for late payers. In the surveys noted above,
about 30 percent of credit card users reported paying a late fee within the previous
year.

•

Additional account features. The 2001 survey noted above showed that in making
choices about opening or replacing card accounts, consumers consider a variety of
factors, ranging from cost information about rates, annual fees, and minimum
payments, to benefits such as rebate and reward programs.

•

Consumers’ perceptions about account information. The 2001 survey of
consumers with general purpose credit cards asked the respondents about their
perceptions of information available for these accounts. Sixty-five percent said
that useful information on credit terms was either “very easy” or “somewhat easy”
to obtain, and only 6 percent thought it very difficult. But when asked questions
about consumers’ understanding and use of Truth in Lending disclosures at
account opening or on monthly bills for general purpose credit cards, nearly onethird of the respondents suggested improvements could be made regarding format
and clarity.

IV. Summary of TILA’s Rules for Open-end Credit Accounts
Under TILA, as implemented by Regulation Z, open-end credit exists when
consumer credit is extended under a plan in which (1) the creditor reasonably
contemplates repeated transactions, (2) the creditor may impose a finance charge from
time to time on an outstanding unpaid balance, and (3) the credit is replenished as it is
used, up to any limit set by the creditor. 15 U.S.C. 1602(i); 12 CFR § 226.2(a)(20). The
rules that apply to open-end credit also apply to creditors that issue “charge cards” that
typically require outstanding balances to be paid in full at the end of each billing cycle.
12 CFR § 226.2(a)(17)(iii). For purposes of this ANPR, the terms “open-end credit” and
“credit card” encompass “charge card.”
Disclosures. TILA and Regulation Z require creditors offering open-end credit
plans to disclose costs and other terms related to the plan. To summarize:
•

Disclosures must be provided with credit card applications and solicitations.
Consumers receive key cost information in an abbreviated manner, to help
consumers decide whether to apply for the card account. For direct mail
solicitations, the disclosures are presented in a highly structured table.

8
•

Disclosures provided at account-opening describe how charges associated with the
plan will be determined. Consumers receive information about the periodic rate,
disclosed as an APR, that will be applied to the outstanding balance, along with
other fees that may be assessed on the account. Consumers’ rights and
responsibilities in the case of unauthorized use or billing disputes are also
explained. Consumers must receive these disclosures before the first transaction
on the account.

•

Disclosures on periodic statements reflect the activity on the account for the
statement period. In addition to the APR based on the periodic rate, periodic
statements must also disclose the effective or “historical” APR for the billing
cycle. The effective APR includes finance charges imposed in addition to interest
(such as cash advance fees or balance transfer fees). Transactions that occurred
and any fees imposed during the cycle must be identified on the statement, along
with any time period a consumer may have to pay an outstanding balance and
avoid additional finance charges (the “grace period”).

•

Disclosures about changes in account terms and about the terms for using a new
credit feature or means of access are provided on an ad hoc basis.

Substantive and procedural protections. TILA and Regulation Z also provide
procedural and substantive protections to consumers with open-end accounts, including
special protections for credit cardholders, summarized below:
•

Consumers using an open-end credit plan may assert a billing error, which triggers
creditors’ duty to investigate the allegation within prescribed time limits.

•

Cardholders may assert against a card issuer claims or defenses arising from a
credit card purchase, if the merchant honoring the card fails to resolve any dispute
about the quality of the goods or services.

•

Cardholders’ liability for the unauthorized use of a credit card is capped at $50.

•

Credit cards may be issued to consumers only upon request. One or more credit
cards may be issued to cardholders in renewal of, or substitution for, an accepted
card, with some conditions.

•

Consumers’ payments on the account must be credited as of the date the creditor
receives the payment and creditors must refund credit balances.

•

Creditors cannot offset consumers’ credit card debt with funds held on deposit
with the card issuer except in specified circumstances.

9
V. Request for Information and Comments on TILA’s Disclosures and Protections
Under open-end plans, consumers generally control how the plan is accessed and
the amount and timing of credit extensions and payments. Because consumers’ decisions
about using their open-end credit accounts are continuous, the relevance of key account
terms to consumers’ use of the account varies over the life of the account. Thus, the
effectiveness of disclosures must be considered in light of the multiple functions they
serve.
For example, some information received at account-opening may become relevant
years later, for example, when a consumer who uses a credit card account for purchases
decides for the first time to obtain a cash advance. Information provided on periodic
statements tells consumers about account activity for the statement period, but it also
allows consumers to make ongoing credit decisions about how much credit to use and how
much of the outstanding balances to pay on various accounts. And consumers may use
existing account-opening or periodic statement disclosures to compare offers they receive
to apply for another account or transfer existing balances to another account.
A. Would format changes enhance consumers’ ability to notice and understand
disclosures by making them more clear and conspicuous?
Open-end disclosures are subject to few formatting rules. Creditors have great
flexibility in designing account-opening, periodic statement, and other open-end
disclosures. The primary exception to TILA and Regulation Z’s flexible formatting rules
for open-end credit is the abbreviated and segregated tabular disclosures required for
credit card solicitations and applications (known as the “Schumer box”). 15 U.S.C.
1637(c); 12 CFR § 226.5a(a)(2). TILA disclosures must be “clear and conspicuous,”
which is generally interpreted to be in a “reasonably understandable form.”
15 U.S.C. 1632; 12 CFR § 226.5(a)(1); comment 5(a)(1)-1.3
In June 2004, the Board withdrew regulatory proposals that would have
established a uniform standard for “clear and conspicuous” disclosures under Regulations
B, E, M, Z, and DD. 69 FR 35541, June 25, 2004. Instead of adopting general definitions
or standards that would apply across the five regulations, the Board decided to focus on
individual disclosures and to consider ways to make specific improvements to the
effectiveness of each disclosure. The Board noted that the effort to review individual
disclosures would be undertaken in connection with the Board’s periodic review of its
regulations, commencing with the issuance of an ANPR to review the rules for open-end
credit accounts under TILA and Regulation Z. Although the proposals defining “clear and
conspicuous” were withdrawn, they reflected principles that will guide the Board in
reviewing individual disclosures and revising the regulation and the Board’s model forms
and clauses.

3

For purposes of credit card application and solicitation disclosures, the “clear and conspicuous” standard is
interpreted to mean that the disclosures must also be “readily noticeable to the consumer.” See Comment
5a(a)(2)-1.

10
In the questions that follow, the Board seeks comment on ways to make the
disclosures for open-end credit accounts more understandable and noticeable.
Commenters are specifically requested to identify any particular concerns relating to the
format of electronic disclosures.
Account-opening disclosures. TILA’s account-opening disclosures are provided to
consumers before the plan is opened (or before the first transaction). 15 U.S.C. 1637(a);
12 CFR § 226.5(b)(1). Creditors typically provide the TILA disclosures in an account
agreement that also contains contract terms and state-law disclosures. The agreement is
typically a lengthy document in a small type size.
A primary purpose of the account-opening disclosures is to allow consumers to
have key information about the account before they use the plan at all. Because
consumers’ use of the plan may change over time, however, these disclosures remain
important over the life of the plan. Consumers may also refer to their account-opening
disclosures when comparing the terms of their existing account to offers subsequently
received from other card issuers. As stated above, data from a 2001 survey indicate that a
significant number of consumers respond to solicitations for new credit card accounts.
Data from the 2001 survey of consumers with general purpose credit cards reveals
that about two thirds of the respondents said that useful information on credit terms was
either “very easy” or “somewhat easy” to obtain.4 However, about three-fourths of
consumers also agree (strongly or somewhat) with the statement that TILA statements
“are complicated.” Nearly one-third suggested improvements could be made to the
format and clarity of Truth in Lending disclosures at account opening or on monthly bills
for general purpose credit cards, such as by providing information that is “clearer, simpler,
easier to understand, written in lay terms, or in larger print.”
The Board has received comments about the format of account-opening
disclosures in connection with recent rulemakings. The views of the members of the
Board’s Consumer Advisory Council (CAC) have also been solicited. Many who
commented believe that much of the information considered to be important is already
contained in the disclosures; because a lot of information is provided at account opening,
however, there is the potential for information overload, which can impair the disclosures’
effectiveness. Accordingly, in connection with the review of Regulation Z, the Board
proposes to consider ways to ease consumers’ ability to navigate through the disclosures.
Several format changes have been suggested that might assist in this regard. Some
members of the CAC believe that disclosures would be improved by including a page-one
“executive summary” paragraph or a disclosure table to highlight key features and terms
of the account, similar to the Schumer box disclosure provided with credit card
solicitations. Such an executive summary need not be limited to information included in
the Schumer box, but could incorporate other information, such as abbreviated description
of items that, based on consumer surveys, are considered to be most important to
4

Thomas A. Durkin, Consumers and Credit Disclosures: Credit Cards and Credit Insurance, FEDERAL
RESERVE BULLETIN (April 2002), p. 207.

11
consumers (e.g., an annual fee, potential rate changes, amount of credit line, minimum
monthly payment, special account benefits). Either as a part of this notion, or as a standalone change, consumers might benefit from a directory or “table of contents” box that
would highlight for readers where specific terms might be found, to assist consumers in
navigating through the document (for example, “Late fees…see paragraphs 12, 14”). This
concept addresses the anecdotal evidence that consumers often choose not to read the
entire disclosure at once, but seek out information on specific terms from time to time, at
the outset of the account relationship and subsequently.
Q2. What formatting rules would enhance consumers’ ability to notice and
understand account-opening disclosures? Are rules needed to segregate certain key
disclosures from contractual terms or other information so the disclosures are more clear
and conspicuous? Should the rules require that certain disclosures be grouped together or
appear on the same page? Are minimum type-size requirements needed, and if so, what
should the requirements be?
Q3. Are there ways to use formatting tools or other navigational aids for TILA’s
account-opening disclosures that will make the disclosures more effective for consumers
throughout the life of the account? If so, provide suggestions.
Periodic statements. TILA and Regulation Z contain few formatting rules for
disclosures provided on periodic statements. Periodic statement disclosures provide
information about account activity during the statement period; but consumers might also
use information on the statements to make decisions about payments and the future use of
their account, which affects the overall cost of credit. The Board solicits comment on the
general need for format requirements for periodic statements, including the following:
Q4. Format rules could require certain disclosures to be grouped together or
appear on the same page where it would aid consumer’s understanding. For example,
some card issuers disclose a 25-day grace period on the back of the periodic statement that
can be used to calculate the payment due date; the same card issuer might also show a
“please pay by date” on the front of the periodic statement that is based on a 20-day
period. Some consumers might assume the 20-day period reflects the due date; other
consumers may ascertain the actual due date by looking on the back of the statement.
Potential consumer confusion might be reduced by requiring creditors to disclose the
grace period or the actual due date on the first page of the statement, adjacent to the
“please pay by” date. Is such a rule desirable? Are there other disclosures that should be
grouped together on the same page?
Q5. Could the cost of credit be more effectively presented on periodic statements
if less emphasis were placed on how fees are labeled, and all fees were grouped together
on the periodic statement? Are there other approaches the Board should consider? If so,
provide suggestions.
Q6. How could the use of formatting tools or other navigational aids make the
disclosures on periodic statements more effective for consumers?

12
Credit card application disclosures (the “Schumer box”). The disclosures required
for credit card solicitations and applications have the most regimented format
requirements. TILA disclosures must be presented in a table (known as the “Schumer
box”) with headings substantially similar to those published in the Board’s model forms.
(Format requirements for “take-one” applications are quite flexible; card issuers have the
option to use the format required for direct-mail applications.)
In 2000, the Board revised the format requirements for these tabular disclosures.
65 FR 58903, October 3, 2000. The regulation’s sole type-size requirement applies to
direct-mail application disclosures; the APR for purchases must be in at least 18-point
type size. 12 CFR § 226.5a(b)(1). Also, the “clear and conspicuous” standard is
interpreted to mean that application disclosures must be “in a reasonably understandable
form and readily noticeable to the consumer.” Disclosures that are printed in a 12-point
type size have a safe harbor in the regulation under this standard. Comment 5a(a)(2)-1.
Q7. Is the “Schumer box” effective as currently designed? Are there format
issues the Board should consider? If so, provide suggestions.
Q8. Balance transfer fees and cash advance fees may be disclosed inside the
“Schumer box” or clearly and conspicuously elsewhere on or with the application.
12 CFR § 226.5a(a)(2)(i). Given the prevalence of balance transfer promotions in credit
card applications and solicitations, should balance transfer fees be included in the
Schumer box?
Subsequent disclosures. Creditors have great flexibility under TILA and
Regulation Z in disclosing changes in account terms and the terms for new credit features
or access devices offered after the account is opened.
Q9. Are there formatting tools or navigational aids that could more effectively
link information in the account-opening disclosures with the information provided in
subsequent disclosures, such as those accompanying convenience checks and balance
transfer checks? If so, provide suggestions.
Model forms and clauses. The Board publishes model forms and model clauses to
ease compliance. Creditors are not required to use these forms or clauses, but creditors
that use them properly are deemed to be in compliance with the regulation regarding those
disclosures. See 15 U.S.C. 1604(b). The Board has few model clauses and forms for
account-opening or periodic statement disclosures.
Q10. Should existing clauses and forms be revised to improve their effectiveness?
If so, provide specific suggestions.
Q11. Would additional model clauses or forms be helpful? If so, please identify
the types of new model clauses and forms that the Board should consider developing.

13
Q12. In developing any proposed revisions or additions to the model forms or
clauses, the Board plans to utilize consumer focus groups and other research. The Board
is aware of studies suggesting that, for example, bolded headings that convey a message
are helpful, but using all capital letters is not.5 Is there additional information on the
navigability and readability of different formats, and on ways in which formatting can
improve the effectiveness of disclosures?
B. How can the content of disclosures be improved or simplified to enhance
consumers’ understanding of the cost of credit?
TILA is designed to provide consumers with information about costs and terms to
enable them to make comparisons among creditors and different credit programs, or
determine whether they should use the credit line at all. In the questions that follow, the
Board solicits comment generally on how the content of disclosures can be improved to
enhance consumers’ understanding about costs and terms. In addition, comment is
specifically requested on how disclosures can be simplified while ensuring that consumers
have the information they need to make informed decisions about the use of their credit
accounts.
Can the rules for classifying and labeling fees as “finance charges” and “other charges” be
improved?
How a particular fee is classified affects when and how the fee is disclosed under
TILA. Creditors offering open-end credit must disclose fees that are “finance charges” as
well as “other charges” that are part of the credit plan.
A “finance charge” is broadly defined as any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor, as an incident to or a
condition of the extension of credit. 15 U.S.C. 1605; 12 CFR § 226.4. Interest, cash
advance fees, and balance transfer fees are examples of finance charges. Finance charges
must be disclosed in the account-opening statement. If imposed in a particular billing
cycle, finance charges must be disclosed on the periodic statement, where the fee must be
labeled as a “finance charge.” If a finance charge fee increases, a change-in-terms notice
is generally required. If imposed in a particular billing cycle, a finance charge must also
be included in the effective (or “historical”) APR, which expresses the total finance
charge, not just interest, as an annual rate. 15 U.S.C. 1606(a)(2). Non-recurring loan fees,
points, or similar finance charges related to the opening, renewing, or continuing of an
open-end account are excluded from the effective APR. 12 CFR § 226.14(c)(3), footnote
33, comment 14(c)-7.
If the fee is not a finance charge, but is significant and imposed as part of the plan,
it is an “other charge” and must be disclosed at account-opening; on each applicable
statement, though not with any particular label; and, for some but not all “other charges,”
on a change-in-terms notice when the amount of the fee increases. 15 U.S.C. 1637(a)(5),
5

Colin Wheildon, Type & Layout; How Typography and Design Can Get Your Message Across – or Get in
the Way,” Berkley: Strathmoor Press; Revised edition (March 1, 1995).

14
12 CFR §§ 226.6(b), 7(h); comment 6(b)-1. Examples of “other charges” are penalty fees
for late payment or exceeding a credit limit, and periodic membership or participation fees
that are payable whether or not the consumer actually uses the credit plan.
If the fee is neither a finance charge nor an “other charge” (for example, returned
check fees), TILA does not require that it be disclosed initially. If such a fee is charged to
the consumer and billed to the account, the fee must be disclosed on the relevant periodic
statement just as any other transaction item must be disclosed.
For the credit card industry as a whole, fee income has grown significantly in
importance. With that trend, the types of fees creditors charge on open-end consumer
credit accounts have grown in number and variety. As creditors charge new fees that are
not specifically addressed by Regulation Z, creditors are sometimes unsure if the fee
should be disclosed under TILA, and if so, whether it should be characterized as a finance
charge or “other charge.” The rules for open-end accounts provide no tolerance for errors
in disclosing the finance charge. In reviewing Regulation Z, the Board plans to consider
whether there are ways to provide more clarity for creditors as to how particular fees
should be classified.
Regulation Z follows TILA in giving the terms “finance charge” and “other
charge” broad and flexible meanings. This ensures that the rules are adaptable to
changing conditions, but also creates some degree of uncertainty. Regulation Z and the
staff commentary diminish the uncertainty somewhat by expressly identifying examples of
charges that constitute finance charges and types that do not. 15 U.S.C. 1605;
12 CFR § 226.4(b) and (c). Nevertheless, rules that specifically address every fee
generated in the marketplace are not practicable.
In response to a December 2002 staff proposal to clarify the status of two new fees
in the staff commentary, many industry commenters called for a different approach to cost
disclosures that would provide more certainty about fees’ proper classification.
67 FR 72618, December 6, 2002; 68 FR 16185, April 3, 2003. Some industry
commenters suggested that more certainty could be provided, for example, if fees were
classified as finance charges based on whether payment of the fee is required as a
condition to obtaining credit. They asserted that this standard would ease compliance and
reduce litigation risks and promote comparison shopping by decreasing the risk that
creditors might disclose the same fee differently.
Q13. How could the Board provide greater clarity on characterizing fees as
finance charges or “other charges” imposed as part of the credit plan? Under Regulation
Z, finance charges include fees imposed as a condition of the credit as well as fees
imposed “incident to” the credit. This includes “service, transaction, activity, and carrying
charges.” 12 CFR § 226.4(b)(2). What types of fees imposed in connection with open-end
accounts should be excluded from the finance charge, and why? How would these fees be
disclosed to provide uniformity in creditors’ disclosures and facilitate compliance?

15
Q14. How do consumers learn about the fees that will be imposed in connection
with services related to an open-end account, and any changes in the applicable fees?
Q15. What significance do consumers attach to the label “finance charge,” as
opposed to “fee” or “charge”?
Q16. Some industry representatives have suggested a rule that would classify fees
as finance charges only if payment of the fee is required to obtain credit. How would
creditors determine if a particular fee was optional? Would costs for certain account
features be excluded from the finance charge provided that the consumer was also offered
a credit plan without that feature? Would such a rule result in useful disclosures for
consumers? Would consumers be able to compare the cost of the different plans? Would
such a rule be practicable for creditors?
Q17. Some industry representatives have suggested a rule that would classify a
fee as a finance charge based on whether the fee affects the amount of credit available or
the material terms of the credit. How would such a standard operate in practice? For
example, how would creditors distinguish finance charges from “other charges”? What
terms of a credit plan would be considered material?
Q18. TILA requires the identification of other charges that are not finance charges
and may be imposed as part of the plan. The staff commentary interprets the rule as
applying to “significant charges” related to the plan. Has that interpretation been effective
in furthering the purposes of the statute? Would another interpretation be more effective?
Criteria that have been suggested as relevant to determining whether the Board should
identify a charge as an “other charge” include: the amount of the charge; the frequency
with which a consumer is likely to incur the charge; the proportion of consumers likely to
incur the charge; and when and how creditors disclose the charge, if at all. Are those
factors relevant? Are there other relevant factors?
Q19. What other issues should the Board consider as it addresses these questions?
For instance, in classifying fees for open-end plans generally, do home equity lines of
credit present unique issues?
Q20. How important is it that the rules used to classify fees for open-end accounts
mirror the classification rules for closed-end loans? For example, the approach of
excluding certain finance charges from the effective APR for open-end accounts is not
consistent with the approach recommended by the Board for closed-end loans. In a 1998
report to the Congress concerning reform of closed-end mortgage disclosures, the Board
endorsed an approach that would include “all required fees” in the finance charge and
APR. (The report is at www.federalreserve.gov/boarddocs/press/boardacts/1998.)
Over-the-credit-limit fees. Anecdotal evidence indicates that “penalty” fees
imposed on open-end credit accounts, such as over-the-credit-limit fees and late-payment
fees, have increased in recent years. Adequate disclosure of over-the-credit-limit fees may
be of particular importance to consumers who have low-limit credit card accounts.

16

Fees for paying late or exceeding a credit limit are disclosed with credit card
applications and solicitations; in account-opening statements; and on periodic statements
for billing cycles when the fees are imposed. Although TILA does not specifically
address the characterization of these fees, Regulation Z provides that the fees are not
“finance charges” but must be disclosed as “other charges.” 12 CFR § 226.4(c)(2);
comment 6(b)-1. In a recent case involving the disclosure of an over-the-credit-limit fee,
the United States Supreme Court upheld the Board’s regulation excluding such fees from
the finance charge. See Household Credit Services v. Pfennig, 541 U.S. 232 (2004).
Concerns have been raised about some card issuers’ practice of allowing
consumers to remain over their credit limit for multiple billing cycles. For example, a
creditor may establish an initial credit limit, but once that limit is exceeded the creditor
might not require the consumer to bring the account balance below the originally
established credit limit. As a result, the creditor may impose an over-the-credit-limit fee
on a continuing basis for each month the consumer carries a balance in excess of the
original credit limit.
Q21. The staff commentary to Regulation Z provides guidance on when a fee is
properly excluded from the finance charge as a bona fide late payment charge, and when it
is not. See Comment 4(c)(2)-1. Is there a need for similar guidance with respect to fees
imposed for exceeding a credit limit, for example, where the creditor does not require the
consumer to bring the account balance below the originally established credit limit, but
imposes an over-the-credit-limit fee each month on a continuing basis?
Q22. Because of technical limitations or other practical concerns, credit card
transactions may be authorized in circumstances that do not allow the merchant or creditor
to determine at the moment of the transaction whether the transaction will cause the
consumer to exceed the previously established credit limit. How do card issuers explain to
consumers their practice of approving transactions that might result in the consumer’s
exceeding the previously established credit limit for the account and being charged an
over-the-credit-limit fee? When are over-the credit-limit fees imposed; at the time of an
approved transaction, or later such as at the end of the billing cycle? The Board
specifically requests comments on whether additional disclosures are needed regarding the
circumstances in which over-the-credit-limit fees will be imposed.
How do consumers use the “effective” or “historical” annual percentage rate disclosed on
periodic statements?
Under TILA the finance charge is also disclosed as an annualized rate, the APR.
The APR is based on the periodic rate (interest) for purposes of credit card solicitations
and applications, account-opening disclosures, and advertisements for open-end plans.
But for periodic statements, creditors must also disclose an “effective” or “historical” APR
that includes any finance charges other than interest imposed during the billing cycle (such
as cash advance fees). TILA requires non-interest finance charges to be amortized over
one billing cycle for purposes of calculating the effective APR, and as a result, such fees

17
can result in a high double-digit (or sometimes, triple-digit) effective APR on periodic
statements. That is why under the regulation and staff commentary, non-recurring loan
fees, points, or similar finance charges related to the opening, renewing, or continuing of
an open-end account are currently excluded from the effective APR that is disclosed for a
particular billing cycle.
The utility of disclosing the effective APR, which is mandated by the statute, is
controversial. The legislative history of TILA suggests that Congress adopted the
effective APR for open-end credit to ensure that the cost of credit in the form of
transaction charges or minimum or fixed finance charges was fully and uniformly
disclosed. The history also indicates that Congress was aware that the effective APR
would vary from the nominal APR, possibly substantially, when such charges were
imposed. Moreover, in at least one hearing Congress heard testimony that an effective
APR would not be useful to consumers, and might confuse them.
Consumer advocates believe the effective APR is a key disclosure. They contend
that a sharp rise in the APR caused by the imposition of a fee makes consumers more
likely to notice the fee and, therefore, to understand that their action triggering the fee
increased the overall cost of credit. Consumer advocates have also stated that the effective
APR should be used by consumers in evaluating their credit options and how they might
avoid such charges in the future. Consumer advocates sometimes refer to this theory as
the “shock value” of the APR.
Over the years, industry representatives have provided comments questioning the
value to consumers of disclosing the effective APR on periodic statements. They believe
the effective APR could be eliminated without diminishing consumer protections because
in their view it confuses consumers who do not understand how it differs from the APR
based on the periodic interest rate. Industry representatives also assert that the effective
APR overstates the cost of cash advances because it is based on amortizing the fees over
one billing cycle even though some consumers may carry the advance for a longer period.
Q23. Have changes in the market and in consumers’ use of open-end credit since
the adoption of TILA affected the usefulness of the historical APR disclosure? If so,
how? The Board seeks data relevant to determining the extent to which consumers
understand and use the historical APR disclosed on periodic statements. Is there data on
how disclosure of the historical APR affects consumer behavior? Is it useful to consumers
to include in the historical APR transaction charges such as cash advance fees and fees to
transfer balances from other accounts?
Q24. Are there ways to improve consumers’ understanding of the effective APR,
such as by providing additional context for the disclosure? For example, should
consumers be informed that the effective APR includes fees as well as interest, and that it
assumes the fees relate to credit that was extended only for a single billing period?
Q25. Are there alternative frameworks for disclosing the costs of credit on
periodic statements that might be more effective than disclosing individual fees and the

18
effective APR? For example, would consumers benefit from a disclosure of the total
dollar amount of all account-related fees assessed during the billing cycle, or the total
dollar amount of fees by type? Would a cumulative year-to-date total for certain fees be
useful for consumers?
Disclosures about rate changes. Under Regulation Z, some changes to the terms of
an open-end plan require additional notice. (The statute does not address changes in terms
to open-end plans.) The general rule is that 15 days’ advance notice is required to increase
the finance charge (including the interest rate) or an annual fee. 12 CFR § 226.9(c)(1).
However, advance notice is not required in all cases. For example, if the interest rate or
other finance charge increases due to a consumer’s default or delinquency, notice is
required, but need not be given in advance. 12 CFR § 226.9(c)(1); comment 9(c)(1)-3.
And no change-in-terms notice is required if the creditor specifies in advance the
circumstances under which an increase to the finance charge or an annual fee will occur.
Comment 9(c)-1. For example, some credit card account agreements permit the card
issuer to increase the interest rate if the consumer pays late, or if card issuer learns the
consumer paid late on another credit account, even if the consumer has always paid the
card issuer on time. Under Regulation Z, because the circumstances are specified in
advance in the account agreement, the creditor need not provide a change-in-terms notice
15 days in advance of the increase; the new rate will appear on the periodic statement for
the cycle in which the increase occurs.
Consumer advocates have expressed concerns that consumers who have triggered
certain penalty rates may not be aware of the possibility of the increase, and thus are
unable to shop for alternative financing before the increased rate takes effect.
Q26. Is mailing a notice 15 days before the effective date of a change in interest
rates adequate to provide timely notice to consumers?
Q27. How are account-holders alerted to increased interest rates due to
consumers’ default on this account or another credit account? Are existing disclosure
rules for increases to interest rates and other finance charges adequate to enable consumers
to make timely decisions about how to manage their accounts? If not, provide
suggestions.
Do consumers need additional information about other factors that affect the cost of
credit?
In addition to rates and fees, the cost of credit can also be affected by the creditor’s
method of calculating the outstanding credit balance; the size of the consumer’s monthly
payment; and the creditor’s allocation of that payment among different charges and
transactions. As explained below, the Board seeks comment on the need for regulatory
revisions to enhance consumers’ understanding of the effect of these factors on the cost of
credit.

19
Balance calculation methods. Under TILA and Regulation Z, consumers receive
information on how account balances are calculated for open-end accounts although TILA
does not govern which calculation methods creditors must use. Creditors may identify
common balance calculation methods by name on credit card application disclosures. The
method is described in more detail in account-opening disclosures and on periodic
statements. See 15 U.S.C. 1637(a)(2), (b)(7), (c)(1)(A)(iv); 12 CFR §§ 226.5a(b)(6),
226.6(a)(3), 226.7(e). The Board has published model clauses for some common balance
calculation methods. 12 CFR 226, Appendix G-1.
The balance calculation method used by a creditor can affect the cost of credit. For
example, for purposes of assessing finance charges on unpaid balances, some creditors
include balances from the previous cycle, although some do not. Others may include
purchases made during the current cycle, although not all do.
Q28. How significantly does the balance calculation method affect the cost of
credit given typical account use patterns?
Q29. Do consumers understand that different balance calculation methods affect
the cost of credit, and do they understand which balance calculation methods are more or
less favorable for consumers? Would additional disclosures at account-opening assist
consumers and, if so, what type of disclosures would be useful?
Q30. Explanations of balance calculation methods are complex and may include
contractual terms such as rounding rules. Precise explanations are required on accountopening disclosures and on periodic statements. Should the Board permit more
abbreviated descriptions on periodic statements, along with a reference to where
consumers can obtain further information about the calculation method, such as the credit
agreement or a toll-free telephone number?
Disclosing the effects of making only minimum payments. Subject to any required
minimum payment, consumers are free to decide each billing period how much to pay on
outstanding balances. The consumer’s payment amount each period affects the overall
cost of credit, and can result in negative amortization if the payments are insufficient to
cover the accrued interest charges. Furthermore, if a consumer’s account balance exceeds
the established credit limit and the consumer’s payment is not large enough to bring the
balance below the limit, an over-the-credit-limit fee might be assessed even if the payment
satisfied the minimum amount specified by the creditor.
TILA and Regulation Z do not require disclosures associated with payment
amounts, except to require an advance notice when a change in the method of calculating
the minimum payment will increase it. 12 CFR § 226.9(c)(1). Minimum-payment
amounts are set by agreement and disclosed in the periodic statement at the creditor’s
option or because of other applicable law. The banking agencies, through the Federal
Financial Institutions Examination Council, have provided guidance to card issuers on
safety-and-soundness issues relating to minimum payments, but the guidance does not
mandate particular consumer disclosures. See the Board's Division of Banking

20
Supervision and Regulation SR 03-1, Account Management and Loss Allowance
Methodology for Credit Card Lending, January 8, 2003.
In recent years, consumer advocates have raised concerns about whether
consumers understand the effects of making only minimum payments on their open-end
accounts. Provisions in certain proposed bankruptcy reform bills before Congress would
require creditors to provide standardized examples of the time it would take to pay off an
assumed balance if the consumer makes only the minimum payment. See, for example,
Sec. 1301 of H.R. 975, 108th Congress. The bills would allow consumers to obtain an
estimate of how long it would take to pay their actual account balance by calling a tollfree telephone number established by the creditor. Industry representatives note that
disclosures based on the status of individual accounts are burdensome; they also say that
the disclosure would not be helpful to consumers because it would be based on an
unrealistic assumption that the consumer has stopped using the account for new extensions
of credit.
Consumer advocates have also expressed concerns about open-end accounts that
are specifically established to finance a single purchase that is equal to or nearly equal to
the credit limit, because consumers do not receive disclosures about the total payment
amount and the time it will take to repay the debt based on the minimum payment. But
industry representatives have noted that requiring separate disclosures at account opening
in such cases would unfairly disadvantage merchants’ credit plans because issuers of
general purpose credit cards would not provide such disclosures at the point of sale for an
identical transaction.
Q31. Is it appropriate for the Board to consider whether Regulation Z should be
amended to require: (1) periodic statement disclosures about the effects of making only
the minimum payment (such as, disclosing the amortization period for their actual account
balance assuming that the consumer makes only the minimum payment, or disclosing
when making the minimum payment will result in a penalty fee for exceeding the credit
limit); (2) account-opening disclosures showing the total of payments when the credit plan
is specifically established to finance purchases that are equal or nearly equal to the credit
limit (assuming only minimum payments are made)? Would such disclosures benefit
consumers?
Q32. Is information about the amortization period for an account readily available
to creditors based on current accounting systems, or would new systems need to be
developed? What would be the costs of implementing such a rule?
Q33. Is there data on the percentage of consumers, credit cardholders in
particular, that regularly or continually make only the minimum payments on open-end
credit plans?
Payment allocation. Some accounts that have multiple features apply different
periodic rates to particular features such as purchases, cash advances, and balance
transfers. How a consumer’s payment is allocated to the balance for each feature affects

21
the consumer’s cost of credit. For example, assume a consumer has a $100 outstanding
balance for purchases carrying a 0% promotional APR, and a $150 outstanding balance
from cash advances carrying an 18% APR. If the consumer makes a $100 payment, and
the payment is allocated first to the balance carrying the lowest rate (the purchase
balance), the consumer will pay finance charges on $150, the entire cash advance balance.
Had the creditor allocated the consumer’s payment to the cash advance, the consumer
would incur finance charges only on the remaining cash advance balance of $50.
A creditor’s method for allocating payment may be included in the credit contract,
but neither TILA nor Regulation Z requires a creditor to use a particular payment
allocation method or to disclose the method it uses. Indeed, the staff commentary
expressly indicates that disclosure of the allocation of payments is not required. Comment
6(a)(3)-2.
Q34. What are the common methods of payment allocation and how much do they
affect the cost of credit for the typical consumer?
Q35. Do creditors typically disclose their allocation methods, and if so, how?
Q36. Is it appropriate for the Board to consider whether Regulation Z should be
amended to require disclosure of the payment allocation method on the periodic
statement? Would such a disclosure materially benefit consumers? Some creditors offer a
low promotional rate, such as a 0% APR for cash advances for a limited time and a higher
APR for purchases. Creditors typically do not allocate any payments to purchases until
the entire cash advance is paid off. Are additional disclosures needed to avoid consumer
confusion or misunderstanding? What would the cost be to creditors of providing such a
disclosure? What level of detail would provide useful information while avoiding
information overload?
Tolerances
TILA authorizes the Board to permit tolerances for numerical disclosures other
than the APR. 15 U.S.C. 1631(d). Such tolerances are required to be narrow enough to
prevent the tolerance from resulting in misleading disclosures or disclosures that
circumvent the purposes of TILA.
Q37. What tolerances should the Board consider adopting pursuant to this
provision? Should the Board expressly permit an overstatement of the finance charge on
open-end credit? Would that adequately address concerns over proper disclosure of fees?
How narrow should any tolerance be to ensure TILA’s goal of uniformity is preserved?
Other questions regarding the content of disclosures
Q38. In considering changes to the disclosures required by Regulation Z, the
Board seeks data relevant to the costs and benefits of the proposed revisions.
Accordingly, commenters proposing revisions to the disclosure requirements are requested

22
to provide data estimating the cost difference in complying with the existing rules
compared to any proposed alternatives, including any one-time costs to implement the
changes.
Q39. Are there particular types of open-end credit accounts, such as subprime or
secured credit card accounts, that warrant special disclosure rules to ensure that consumers
have adequate information about these products?
Q40. Are there additional issues the Board should consider in reviewing the
content of open-end disclosures? For example, in 2000, the Board revised the
requirements for disclosures that accompany credit card applications and solicitations.
65 FR 58903, October 3, 2000. Is the information currently provided with credit card
applications and solicitations adequate and effective to assist consumers in deciding
whether or not to apply for an account?
Q41. Are there classes of transactions for which the Board should exercise its
exemption authority under 15 U.S.C. 1604(a) to effectuate TILA’s purpose, facilitate
compliance or prevent circumvention or evasion, or under 15 U.S.C. 1604(f) because
coverage does not provide a meaningful benefit to consumers in the form of useful
information or protection? If so, please address the factors that the Board is required to
consider under the statute.
Q42. Should the Board exercise its authority under 15 U.S.C. 1604(g) to provide a
waiver for certain borrowers whose income and assets exceed the specified amounts?
C. Is there a need to modify the rules that implement TILA’s substantive protections
for open-end accounts?
TILA and Regulation Z provide protections to consumers who obtain open-end
credit. Some protections apply only to transactions involving credit cards; others apply to
all extensions of credit under an open-end plan. Protections involving billing disputes
generally allow consumers to avoid paying the disputed amount while the card issuer
investigates the matter, and prohibit card issuers from assessing finance charges on the
disputed amount or reporting the amount as delinquent until the investigation is
completed. To summarize the rules:
•

Consumers using an open-end credit plan may assert a billing error, which triggers
creditors’ duty to investigate the allegation within prescribed time limits. A
“billing error” includes a periodic statement that reflects an extension of credit for
property or services: (1) not authorized by the consumer; or (2) not accepted by the
consumer, or not delivered to the consumer as agreed (for example, when clothing
is sent in the wrong size or color). A billing error also includes creditors’ failure to
credit payments or to deliver statements to a consumer’s address of record.
15 U.S.C. 1666; 12 CFR § 226.13.

23
•

A cardholder may assert against the card issuer a claim or defense for defective
goods or services purchased with a credit card, as to unpaid balances for the goods
or services, if the merchant honoring the card fails to resolve the dispute. This
right is limited to disputes exceeding $50 for purchases made in the consumer’s
home state or within 100 miles. 15 U.S.C. 1666i; 12 CFR § 226.12(c).

•

Cardholders’ liability for the unauthorized use of a credit card is capped at $50.
But cardholders have no liability for charges made after notification is given to the
card issuer, or charges made when the card itself (or other sufficient means of
identifying the cardholder) is not presented. 15 U.S.C. 1643; 12 CFR § 226.12(b).

•

Credit cards may be issued to consumers only upon request. One or more credit
cards may be issued to cardholders in renewal of, or substitution for, an accepted
card, with some conditions. 15 U.S.C. 1642; 12 CFR § 226.12(a).

•

Payments received from a consumer on an open-end credit plan must be posted
promptly to the consumer’s account. Under Regulation Z, payments generally
must be credited to a consumer’s account as of the date of receipt, except when a
delay in crediting does not result in a finance charge or “other charge” being
imposed. Creditors may specify requirements for the consumer to follow in
making payments. 15 U.S.C. 1666c; 12 CFR § 226.10.

Q43. The Board solicits comments on whether there is a need to revise the
provisions implementing TILA’s substantive protections for open-end credit accounts.
For example, are the existing rules adequate, and if not, why not? Are creditors’
responsibilities under the rules clear? Do the existing rules need to be updated to address
particular types of accounts or practices, or to address technological changes?
Accessing credit card accounts. TILA defines a credit card as “any card, plate,
coupon book or other credit device existing for the purpose of obtaining money, property,
labor, or services on credit.” 15 U.S.C. 1602(k). In addition, Regulation Z provides that a
credit card must be a device “that may be used from time to time to obtain credit.”
12 CFR § 226.2(a)(15).
It is increasingly common for consumers to access their credit card plans without
presenting the card, for example, in making purchases over the Internet and by telephone.
Credit card transactions conducted by telephone or Internet receive all of TILA’s
protections, even though the physical device is not presented to the merchant when the
account number is transmitted.
Q44. Information is requested on whether industry has developed, or is
developing, open-end credit plans that allow consumers to conduct transactions using only
account numbers and do not involve the issuance of physical devices traditionally
considered to be credit cards. If such plans exist, what policies do such creditors have for
resolving accountholder claims when disputes arise?

24
“Convenience checks.” Credit card issuers also provide account-holders with
“convenience checks” that can be used to obtain cash, purchase goods or services, or pay
the outstanding balance on another account. Convenience checks are mailed to consumers
unsolicited, sometimes with consumers’ monthly statements. The amount of each check
issued by the consumer will be billed to the consumers’ credit card account. Convenience
checks allow consumers to use their credit card account to finance the purchase of goods
or services at merchants that do not accept credit cards. Anecdotal evidence also suggests
convenience checks are used for large-dollar transactions, such as college tuition
payments.
Currently, a convenience check is not treated as a credit card under Regulation Z
because it can be used only once and not “from time to time.” Although the rules for
resolving billing errors apply to all transactions conducted under an open-end plan,
including those involving convenience checks, TILA’s protections regarding merchant
disputes, unauthorized use of the account, and the prohibition against unsolicited issuance
apply only to credit cards and do not cover transactions using convenience checks.6
In discussing the issue at the October 2003 meeting of the Board’s Consumer
Advisory Council, some members stated that Regulation Z’s protections for credit cards
should be revised to apply to all credit extended under a credit card account, whether the
card itself or another device, such as a convenience check, is used. They noted that the
Board could cover convenience checks by revising the regulation’s definition of a “credit
card” for this purpose, to eliminate the requirement that the device be usable “from time to
time.” But others stated that convenience checks should not be covered by TILA’s
protections and should be treated the same way as a check drawn on a deposit account.
Q45. Have consumers experienced problems with convenience checks relating to
unauthorized use or merchant disputes, for example? Should the Board consider
extending any of TILA’s protections for credit card transactions to other extensions on
credit card accounts and, in particular, convenience checks?
Unsolicited issuance of credit cards. Limitations on issuing unsolicited credit
cards were added to TILA in 1970 to address concerns about theft, inconvenience to
consumers, and consumers’ management of their personal finances. TILA generally
prohibits creditors from issuing credit cards except in response to a request or application
but exempts cards issued as renewals or substitutions to replace an accepted card.
15 U.S.C. 1642.
In 2003, Board staff revised the commentary to the relevant provision of
Regulation Z, § 226.12(a), to allow card issuers to replace an accepted card with more
than one card, subject to certain conditions. 68 FR 16185, April 3, 2003. Based on the
revisions, card issuers can, for example, issue credit cards using a new format or
technology to existing accountholders, even though the new card is intended to
supplement rather than replace the traditional card. Based on the public comments, staff
6

For convenience checks, the Uniform Commercial Code (UCC) provisions governing checks apply; under
the UCC a consumer generally has no liability for a forged check. UCC 4-401, 3-401.

25
stated it planned to recommend that the Board consider amending § 226.12(a) to allow the
unsolicited issuance of additional cards on an existing account even when the
accountholder’s existing card is not being replaced, under certain conditions.
Q46. Should the Board consider revising Regulation Z to allow creditors to issue
additional credit cards on an existing account at any time, even when there is no renewal
or substitution of a previously issued card? If so, what conditions or limitations should
apply? For example, should the Board require that the additional cards be sent
unactivated? If activation is required, should the Board allow issuers to use alternative
security measures in lieu of activation, such as providing advance written notice to
consumers that additional cards will be sent?
Prompt Crediting of Payments
Payments received from a consumer on an open-end credit plan must be credited to
the account as of the date the payment is received by the creditor. Creditors cannot
impose a finance charge or “other charge” if the creditor has received payment in a readily
identifiable form in the amount, manner, location, and time indicated by the creditor to
avoid the imposition of the charge. 12 CFR § 226.10(a). Creditors may specify
requirements for making payments such as setting a cut-off hour for payment to be
received, but the requirements must be reasonable and it should not be difficult for most
consumers to make conforming payments. Comments 10(b)-1, -2.
Consumer advocates have raised concerns about the reasonableness of card
issuers’ cut-off hours. They note that some creditors’ service centers are open 24 hours
7 days a week to receive mail delivery and electronic payments continuously. In addition,
questions have arisen concerning creditors’ use of third-party payments processors, and
whether the receipt of payments by the third-party is deemed to be receipt by the creditor.
Q47. What are the cut-off hours used by most issuers for receiving payments?
How do issuers determine the cut-off hours?
Q48. Do card issuers’ payment instructions and cut-off hours differ according to
whether the consumer makes the payment by check or electronic fund transfer, or by using
the telephone or Internet? What is the proportion of consumers who make payments by
mail as opposed to using expedited methods, such as electronic payments?
Q49. Do the existing rules and creditors’ current disclosure practices clearly
inform cardholders of the date and time by which card issuers must receive payment to
avoid additional fees? If not, how might disclosure requirements be improved?
Q50. Do the operating hours of third-party processors differ from those of
creditors, and if so, how? Do creditors treat payments received by a third-party processor
as if the payment was received by the creditor? What guidance, if any, is needed
concerning creditors’ obligation in posting and crediting payments when third-party
processors are used?

26

Q51. Should the Board issue a rule requiring creditors to credit payments as of the
date they are received, regardless of the time?
VI. Request for Comment on Additional Issues
In addition to responding to the Board’s request for comments on the open-end
credit issues identified above, the Board invites the public to discuss other ways that
Regulation Z might be improved and to provide specific suggestions for implementing
those changes, including:
Q52. Providing guidance not expressly addressed in existing rules. Board staff is
asked to provide informal oral advice on an ongoing basis about how Truth in Lending
rules may apply to new products and circumstances not expressly addressed in Regulation
Z and its official staff commentary. The Board invites the public to identify issues where
they believe staff’s informal advice should be formalized or addressed anew. Should such
changes be adopted after notice and public comment, they would apply prospectively and
compliance would become mandatory after an appropriate implementation period.
Q53. Adjusting exceptions based on de minimis amounts. To facilitate
compliance, the Board has provided a number of exceptions based on de minimis dollar
amounts. For example, TILA’s open-end rules require creditors to transmit periodic
statements at the end of billing cycles in which there is an outstanding balance or a finance
charge is imposed; the regulation relieves creditors of that duty if the outstanding debit or
credit balance is $1 or less (and no finance charge is imposed). 15 U.S.C. 1637(b);
12 CFR § 226.5(b)(2)(i). Similarly, the Board provides for a simplified way to calculate
the effective APR on periodic statements when a minimum finance charge is assessed and
is 50 cents or less. 12 CFR § 226.14(c)(4). Should de minimis amounts such as these be
adjusted, and if so, to what extent?
Q54. Improving plain language and organization; identifying technical revisions.
The Board is required to use “plain language” in all proposed and final rules published
after January 1, 2000. 12 U.S.C. 4809. The Board invites comments on whether the
existing rules are clearly stated and effectively organized, and how, in the upcoming
review of Regulation Z, the Board might consider making the text of Regulation Z and its
official staff commentary easier to understand. Are there technical revisions to the
regulation or commentary that should be addressed?
Q55. Deleting obsolete rules or guidance. A goal of the Regulation Z review is to
delete provisions that have become obsolete due to technological or other developments.
Are there any such provisions?
Q56. Recommendations for legislative changes. Are there any legislative changes
to TILA the Board should consider recommending to the Congress? For example, where a
rule is based on a dollar amount established by the statute, the Board seeks comment on

27
whether to recommend adjustments of those dollar amounts to the Congress, and if so, the
amount of such adjustments.
Q57. Recommendations for nonregulatory approaches. In addition to requesting
comment on suggestions for regulatory or statutory changes, the Board seeks comment on
nonregulatory approaches that may further the Board’s goal of improving the effectiveness
of TILA’s disclosures and substantive protections. Such approaches could include
guidance in the form of best practices or consumer education efforts. For example,
calculation tools are widely available on the Internet. How might the availability of those
tools be used to address concerns that consumers need better information about the effects
of making only minimum payments on their account? Are there any data that indicate the
extent to which consumers access calculation tools that are publicly available?
Q58. Reviewing other aspects of Regulation Z. Although the Board is proposing
to focus the review primarily on the rules for open-end credit, are there other areas or
particular sections of Regulation Z that should be included in this initial stage of the
review? For example:
(a) Definitions and rules of construction. Are changes needed to the definitions or
rules of construction in § 226.2 of the regulation? Unless defined in the regulation, terms
have the meaning given to them by state law or contract. Are there specific terms that are
not defined in Regulation Z that should be? For example, the Board’s staff has received
questions about § 226.20, which generally requires creditors to provide new TILA
disclosures when a closed-end loan is refinanced. Under the regulation and staff
commentary, a “refinancing” is generally deemed to occur when an existing obligation has
been satisfied and replaced by a new obligation, “based on the parties’ contract and
applicable law.” See Comment 20(a)-1. Concerns have been raised about the current
approach, and whether it results in uniform application of Regulation Z because different
states are free to draw different conclusions about when a particular set of circumstances
constitutes a "satisfaction and replacement." Courts may take a case-by-case approach to
ascertain the parties’ intent before deciding whether a new promissory note satisfied and
replaced the original note, or whether the new note merely “relates back” to the original
note that is not deemed to be extinguished. The issue raised is whether the Board should
consider adopting a definition of “refinancing” that does not rely on state law and seeks to
create a more uniform approach in determining when new disclosures are required.
(b) Exempt transactions. Section 226.3 of Regulation Z implements the
provisions of 15 U.S.C. 1603, which specifies classes of transactions not covered by
TILA. Do rules implementing 15 U.S.C. 1603 need to be updated?
VII. Plans for Reviewing Other Areas
Although the focus of this ANPR is TILA and Regulation Z’s rules for open-end
credit not secured by a home, the Board has the following plans for reviewing other areas
of Regulation Z:

28
•

Predatory mortgage lending. Issues related to predatory mortgage lending will be
examined in public hearings held pursuant to the Home Ownership and Equity
Protection Act (HOEPA), which amended TILA in 1994. HOEPA uses rate and
fee triggers to identify a class of high-cost closed-end mortgage loans, and it
provides consumers entering into these transactions with additional disclosures and
special protections. HOEPA requires that the Board periodically hold public
hearings on home-equity lending and the adequacy of protections under HOEPA.
After holding hearings in 2000, the Board amended the rules implementing
HOEPA, which became effective on October 1, 2002. Board staff plans to ask the
Board to consider holding further hearings under HOEPA during 2006.

•

Closed-end mortgage credit. From 1996 to 1998, the Board and HUD studied
possible regulatory changes to TILA and the Real Estate Settlement Procedures
Act (RESPA) to improve mortgage-related disclosures. The Board concluded that
meaningful changes to the disclosures required legislative action. The Board and
HUD submitted a joint report to the Congress outlining a framework that could be
used as a starting point for considering legislative changes. Although legislation
has not been enacted, in 2002 HUD commenced a rulemaking that sought to adopt
many of the changes recommended in the Board-HUD joint report. HUD’s
proposal was not finalized, and HUD has announced that it will issue a revised
proposal for public comment in the near future. The Board believes that
significant changes to mortgage disclosures under TILA would best be considered
in connection with HUD’s future rulemaking.

•

Home-equity lines of credit and adjustable-rate mortgage loans. Staff plans to
initiate a separate review, in 2005, of Regulation Z’s rules requiring brochures and
generic disclosures when consumers obtain applications for closed-end adjustablerate mortgages (ARMs) and open-end home-equity lines of credit (HELOCs). The
issues to be considered deal mainly with variable-rate mortgage lending, which are
distinct from issues affecting general open-end credit rules. The ARM rules would
be reviewed in consultation with the other federal agencies. Because the HELOC
and ARM rules are similar, these rules are best reviewed simultaneously to
maximize consistency.

By order of the Board of Governors of the Federal Reserve System,
December 3, 2004.
Jennifer J. Johnson
Jennifer J. Johnson
Secretary of the Board

(signed)