[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR226.36]
[Page 298-497]
TITLE 12--BANKS AND BANKING
CHAPTER II--FEDERAL RESERVE SYSTEM
PART 226--TRUTH IN LENDING (REGULATION Z)--Table of Contents
Subpart F--Electronic Communication
Sec. 226.36 Requirements for electronic communication.
(a) Definition. ``Electronic communication'' means a message
transmitted electronically between a creditor and a consumer in a format
that allows visual text to be displayed on equipment, for example, a
personal computer monitor.
(b) General rule. In accordance with the Electronic Signatures in
Global and National Commerce Act (the E-Sign Act) (15 U.S.C. 7001 et
seq.) and the rules of this part, a creditor may provide by electronic
communication any disclosure required by this part to be in writing.
(c) When consent is required. Under the E-Sign Act, a creditor is
required to obtain a consumer's affirmative consent when providing
disclosures related to a transaction. For purposes of this requirement,
the disclosures required under Secs. 226.5a, 226.5b(d) and 226.5b(e),
226.16, 226.17(g)(1) through (5), 226.19(b) and 226.24 are deemed not to
be related to a transaction.
(d) Address or location to receive electronic communication. A
creditor that uses electronic communication to provide disclosures
required by this part shall:
(1) Send the disclosure to the consumer's electronic address; or
(2) Make the disclosure available at another location such as an
Internet web site; and
(i) Alert the consumer of the disclosure's availability by sending a
notice to the consumer's electronic address (or to a postal address, at
the creditor's option). The notice shall identify the account involved
and the address of the Internet web site or other location where the
disclosure is available; and
(ii) Make the disclosure available for at least 90 days from the
date the disclosure first becomes available or from the date of the
notice alerting the consumer of the disclosure, whichever comes later.
(3) Exceptions. A creditor need not comply with paragraphs (d)(2)(i)
and (ii) of this section for the disclosures required under
Secs. 226.5a, 226.5b(d) and 226.5b(e), 226.16, 226.17(g)(1) through (5),
226.19(b) and 226.24.
(e) Redelivery. When a disclosure provided by electronic
communication is returned to a creditor undelivered, the creditor shall
take reasonable steps to attempt redelivery using information in its
files.
(f) Electronic signatures. An electronic signature as defined under
the E-Sign satisfies any requirement under this part for a consumer's
signature or initials.
[Reg. Z, 66 FR 17339, Mar. 30, 2001]
Appendix A to Part 226--Effect on State Laws
Request for Determination
A request for a determination that a State law is inconsistent or
that a State law is substantially the same as the Act and regulation
shall be in writing and addressed to the Secretary, Board of Governors
of the Federal Reserve System, Washington, DC 20551. The request shall
be made pursuant to the procedures herein and the Board's Rules of
Procedure (12 CFR Part 262).
Supporting Documents
A request for a determination shall include the following items:
(1) The text of the State statute, regulation, or other document
that is the subject of the request.
(2) Any other statute, regulation, or judicial or administrative
opinion that implements, interprets, or applies the relevant provision.
(3) A comparison of the State law with the corresponding provision
of the Federal law, including a full discussion of the basis for the
requesting party's belief that the State provision is either
inconsistent or substantially the same.
(4) Any other information that the requesting party believes may
assist the Board in its determination.
Public Notice of Determination
Notice that the Board intends to make a determination (either on
request or on its own motion) will be published in the Federal Register,
with an opportunity for public comment, unless the Board finds that
notice and opportunity for comment would be impracticable, unnecessary,
or contrary to the public interest and publishes its reasons for such
decision.
Subject to the Board's Rules Regarding Availability of Information
(12 CFR Part
[[Page 299]]
261), all requests made, including any documents and other material
submitted in support of the requests, will be made available for public
inspection and copying.
Notice After Determination
Notice of a final determination will be published in the Federal
Register, and the Board will furnish a copy of such notice to the party
who made the request and to the appropriate State official.
Reversal of Determination
The Board reserves the right to reverse a determination for any
reason bearing on the coverage or effect of State or Federal law.
Notice of reversal of a determination will be published in the
Federal Register and a copy furnished to the appropriate State official.
[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]
Appendix B to Part 226--State Exemptions
Application
Any State may apply to the Board for a determination that a class of
transactions subject to State law is exempt from the requirements of the
Act and this regulation. An application shall be in writing and
addressed to the Secretary, Board of Governors of the Federal Reserve
System, Washington, DC 20551, and shall be signed by the appropriate
State official. The application shall be made pursuant to the procedures
herein and the Board's Rules of Procedure (12 CFR Part 262).
Supporting Documents
An application shall be accompanied by:
(1) The text of the State statute or regulation that is the subject
of the application, and any other statute, regulation, or judicial or
administrative opinion that implements, interprets, or applies it.
(2) A comparison of the State law with the corresponding provisions
of the Federal law.
(3) The text of the State statute or regulation that provides for
civil and criminal liability and administrative enforcement of the State
law.
(4) A statement of the provisions for enforcement, including an
identification of the State office that administers the relevant law,
information on the funding and the number and qualifications of
personnel engaged in enforcement, and a description of the enforcement
procedures to be followed, including information on examination
procedures, practices, and policies. If an exemption application extends
to federally chartered institutions, the applicant must furnish evidence
that arrangements have been made with the appropriate Federal agencies
to ensure adequate enforcement of State law in regard to such creditors.
(5) A statement of reasons to support the applicant's claim that an
exemption should be granted.
Public Notice of Application
Notice of an application will be published, with an opportunity for
public comment, in the Federal Register, unless the Board finds that
notice and opportunity for comment would be impracticable, unnecessary,
or contrary to the public interest and publishes its reasons for such
decision.
Subject to the Board's Rules Regarding Availability of Information
(12 CFR Part 261), all applications made, including any documents and
other material submitted in support of the applications, will be made
available for public inspection and copying. A copy of the application
also will be made available at the Federal Reserve Bank of each district
in which the applicant is situated.
Favorable Determination
If the Board determines on the basis of the information before it
that an exemption should be granted, notice of the exemption will be
published in the Federal Register, and a copy furnished to the applicant
and to each Federal official responsible for administrative enforcement.
The appropriate State official shall inform the Board within 30 days
of any change in its relevant law or regulations. The official shall
file with the Board such periodic reports as the Board may require.
The Board will inform the appropriate State official of any
subsequent amendments to the Federal law, regulation, interpretations,
or enforcement policies that might require an amendment to State law,
regulation, interpretations, or enforcement procedures.
Adverse Determination
If the Board makes an initial determination that an exemption should
not be granted, the Board will afford the applicant a reasonable
opportunity to demonstrate further that an exemption is proper. If the
Board ultimately finds that an exemption should not be granted, notice
of an adverse determination will be published in the Federal Register
and a copy furnished to the applicant.
Revocation of Exemption
The Board reserves the right to revoke an exemption if at any time
it determines that the standards required for an exemption are not met.
[[Page 300]]
Before taking such action, the Board will notify the appropriate
State official of its intent, and will afford the official such
opportunity as it deems appropriate in the circumstances to demonstrate
that revocation is improper. If the Board ultimately finds that
revocation is proper, notice of the Board's intention to revoke such
exemption will be published in the Federal Register with a reasonable
period of time for interested persons to comment.
Notice of revocation of an exemption will be published in the
Federal Register. A copy of such notice will be furnished to the
appropriate State official and to the Federal officials responsible for
enforcement. Upon revocation of an exemption, creditors in that State
shall then be subject to the requirements of the Federal law.
Appendix C to Part 226--Issuance of Staff Interpretations
Official Staff Interpretations
Officials in the Board's Division of Consumer and Community Affairs
are authorized to issue official staff interpretations of this
regulation. These interpretations provide the protection afforded under
section 130(f) of the Act. Except in unusual circumstances, such
interpretations will not be issued separately but will be incorporated
in an official commentary to the regulation which will be amended
periodically.
Requests for Issuance of Official Staff Interpretations
A request for an official staff interpretation shall be in writing
and addressed to the Director, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, Washington,
DC 20551. The request shall contain a complete statement of all relevant
facts concerning the issue, including copies of all pertinent documents.
Scope of Interpretations
No staff interpretations will be issued approving creditors' forms,
statements, or calculation tools or methods. This restriction does not
apply to forms, statements, tools, or methods whose use is required or
sanctioned by a government agency.
Appendix D to Part 226--Multiple Advance Construction Loans
Section 226.17(c)(6) permits creditors to treat multiple advance
loans to finance construction of a dwelling that may be permanently
financed by the same creditor either as a single transaction or as more
than one transaction. If the actual schedule of advances is not known,
the following methods may be used to estimate the interest portion of
the finance charge and the annual percentage rate and to make
disclosures. If the creditor chooses to disclose the construction phase
separately, whether interest is payable periodically or at the end of
construction, part I may be used. If the creditor chooses to disclose
the construction and the permanent financing as one transaction, part II
may be used.
Part I--Construction Period Disclosed Separately
A. If interest is payable only on the amount actually advanced for
the time it is outstanding:
1. Estimated interest--Assume that one-half of the commitment amount
is outstanding at the contract interest rate for the entire construction
period.
2. Estimated annual percentage rate--Assume a single payment loan
that matures at the end of the construction period. The finance charge
is the sum of the estimated interest and any prepaid finance charge. The
amount financed for computation purposes is determined by subtracting
any prepaid finance charge from one-half of the commitment amount.
3. Repayment schedule--The number and amounts of any interest
payments may be omitted in disclosing the payment schedule under
Sec. 226.18(g). The fact that interest payments are required and the
timing of such payments shall be disclosed.
4. Amount financed--The amount financed for disclosure purposes is
the entire commitment amount less any prepaid finance charge.
B. If interest is payable on the entire commitment amount without
regard to the dates or amounts of actual disbursement:
1. Estimated interest--Assume that the entire commitment amount is
outstanding at the contract interest rate for the entire construction
period.
2. Estimated annual percentage rate--Assume a single payment loan
that matures at the end of the construction period. The finance charge
is the sum of the estimated interest and any prepaid finance charge. The
amount financed for computation purposes is determined by subtracting
any prepaid finance charge from one-half of the commitment amount.
3. Repayment schedule--Interest payments shall be disclosed in
making the repayment schedule disclosure under Sec. 226.18(g).
[[Page 301]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.000
[[Page 302]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.001
[[Page 303]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.002
Appendix E to Part 226--Rules For Card Issuers That Bill on a
Transaction-By-Transaction Basis
The following provisions of Subpart B apply if credit cards are
issued and (1) the card issuer and the seller are the same or related
persons; (2) no finance charge is imposed; (3) consumers are billed in
full for each use of the card on a transaction-by-transaction basis, by
means of an invoice or other statement reflecting each use of the card;
and (4) no cumulative account is maintained which reflects the
transactions by each consumer during a period of time, such as a month:
Section 226.6(d), and, as applicable, Sec. 226.6(b) and (c). The
disclosure required by Sec. 226.6(b) shall be limited to those charges
that are or may be imposed as a result of the deferral of payment by use
of the card, such as late payment or delinquency charges.
Section 226.7(b) and Sec. 226.7(k). Creditors may comply by placing
the required disclosures on the invoice or statement sent to the
consumer for each transaction.
Section 226.9(a). Creditors may comply by mailing or delivering the
statement required by Sec. 226.6(d) (See appendix G-3) to each consumer
receiving a transaction invoice during a one-month period chosen by the
card issuer or by sending either the statement prescribed by
Sec. 226.6(d) or an alternative billing error rights statement
substantially similar
[[Page 304]]
to that in appendix G-4, with each invoice sent to a consumer.
Section 226.9(c).
Section 226.10.
Section 226.11. This section applies when a card issuer receives a
payment or other credit that exceeds by more than $1 the amount due, as
shown on the transaction invoice. The requirement to credit amounts to
an account may be complied with by other reasonable means, such as by a
credit memorandum. Since no periodic statement is provided, a notice of
the credit balance shall be sent to the consumer within a reasonable
period of time following its occurrence unless a refund of the credit
balance is mailed or delivered to the consumer within 7 business days of
its receipt by the card issuer.
Section 226.12 including Sec. 226.12(c) and (d), as applicable.
Section 226.12(e) is inapplicable.
Section 226.13, as applicable. All references to periodic statement
shall be read to indicate the invoice or other statement for the
relevant transaction. All actions with regard to correcting and
adjusting a consumer's account may be taken by issuing a refund or a new
invoice, or by other appropriate means consistent with the purposes of
the section.
Section 226.15, as applicable.
[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 60190, Dec. 9,
1981]
Appendix F to Part 226--Annual Percentage Rate Computations for Certain
Open-End Credit Plans
In determining the denominator of the fraction under
Sec. 226.14(c)(3), no amount will be used more than once when adding the
sum of the balances \1\ subject to periodic rates to the sum of the
amounts subject to specific transaction charges. In every case, the full
amount of transactions subject to specific transaction charges shall be
included in the denominator. Other balances or parts of balances shall
be included according to the manner of determining the balance subject
to a periodic rate, as illustrated in the following examples of accounts
on monthly billing cycles:
---------------------------------------------------------------------------
\1\ Where a portion of the finance charge is determined by
application of one or more daily periodic rates, the phrase sum of the
balances shall also mean the average of daily balances.
---------------------------------------------------------------------------
1. Previous balance--none.
A specific transaction of $100 occurs on the first day of the
billing cycle. The average daily balance is $100. A specific transaction
charge of 3% is applicable to the specific transaction. The periodic
rate is 1\1/2\% applicable to the average daily balance. The numerator
is the amount of the finance charge, which is $4.50. The denominator is
the amount of the transaction (which is $100), plus the amount by which
the balance subject to the periodic rate exceeds the amount of the
specific transactions (such excess in this case is 0), totaling $100.
The annual percentage rate is the quotient (which is 4\1/2\%)
multiplied by 12 (the number of months in a year), i.e., 54%.
2. Previous balance--$100.
A specific transaction of $100 occurs at the midpoint of the billing
cycle. The average daily balance is $150. A specific transaction charge
of 3% is applicable to the specific transaction. The periodic rate is
1\1/2\% applicable to the average daily balance. The numerator is the
amount of the finance charge which is $5.25. The denominator is the
amount of the transaction (which is $100), plus the amount by which the
balance subject to the periodic rate exceeds the amount of the specific
transaction (such excess in this case is $50), totaling $150. As
explained in example 1, the annual percentage rate is 3\1/2\% x 12 =
42%.
3. If, in example 2, the periodic rate applies only to the previous
balance, the numerator is $4.50 and the denominator is $200 (the amount
of the transaction, $100, plus the balance subject only to the periodic
rate, the $100 previous balance). As explained in example 1, the annual
percentage rate is 2\1/4\% x 12 = 27%.
4. If, in example 2, the periodic rate applies only to an adjusted
balance (previous balance less payments and credits) and the consumer
made a payment of $50 at the midpoint of the billing cycle, the
numerator is $3.75 and the denominator is $150 (the amount of the
transaction, $100, plus the balance subject to the periodic rate, the
$50 adjusted balance). As explained in example 1, the annual percentage
rate is 2\1/2\% x 12 = 30%.
5. Previous balance--$100.
A specific transaction (check) of $100 occurs at the midpoint of the
billing cycle. The average daily balance is $150. The specific
transaction charge is $.25 per check. The periodic rate is 1\1/2\%
applied to the average daily balance. The numerator is the amount of the
finance charge, which is $2.50 and includes the $.25 check charge and
the $2.25 resulting from the application of the periodic rate. The
denominator is the full amount of the specific transaction (which is
$100) plus the amount by which the average daily balance exceeds the
amount of the specific transaction (which in this case is $50), totaling
$150. As explained in example 1, the annual percentage rate would be
1\2/3\% x 12 = 20%.
6. Previous balance--none.
A specific transaction of $100 occurs at the midpoint of the billing
cycle. The average daily balance is $50. The specific transaction charge
is 3% of the transaction amount or
[[Page 305]]
$3.00. The periodic rate is 1\1/2\% per month applied to the average
daily balance. The numerator is the amount of the finance charge, which
is $3.75, including the $3.00 transaction charge and $.75 resulting from
application of the periodic rate. The denominator is the full amount of
the specific transaction ($100) plus the amount by which the balance
subject to the periodic rate exceeds the amount of the transaction ($0).
Where the specific transaction amount exceeds the balance subject to the
periodic rate, the resulting number is considered to be zero rather than
a negative number ($50-$100=-$50). The denominator, in this case, is
$100. As explained in example 1, the annual percentage rate is 3\3/4\% x
12 = 45%.
Appendix G to Part 226--Open-End Model Forms and Clauses
G-1 Balance-Computation Methods Model Clauses (Secs. 226.6 and 226.7)
G-2 Liability for Unauthorized Use Model Clause (Sec. 226.12)
G-3 Long-Form Billing-Error Rights Model Form (Secs. 226.6 and 226.9)
G-4 Alternative Billing-Error Rights Model Form (Sec. 226.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit)
(Sec. 226.15)
G-8 Rescission Model Form (When Adding a Security Interest)
(Sec. 226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec. 226.15)
G-10(A) Applications and Solicitations Model Forms (Credit Cards)
(Sec. 226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Card)
(Sec. 226.5a(b))
G-10(C) Applications and Solicitations Model Form (Charge Cards)
(Sec. 226.5a(b))
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 226.5a(e))
G-12 Charge Card Model Clause (When Access to Plan Offered by Another)
(Sec. 226.5a(f))
G-13(A) Change in Insurance Provider Model Form (Combined Notice)
(Sec. 226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
G-14A Home Equity Sample
G-14B Home Equity Sample
G-15 Home Equity Model Clauses
[[Page 306]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.003
[[Page 307]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.004
[[Page 308]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.005
[GRAPHIC] [TIFF OMITTED] TC27SE91.006
[[Page 309]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.007
[[Page 310]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.008
[[Page 311]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.009
[[Page 312]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.010
[[Page 313]]
[GRAPHIC] [TIFF OMITTED] TR03OC00.007
[[Page 314]]
[GRAPHIC] [TIFF OMITTED] TR03OC00.008
[GRAPHIC] [TIFF OMITTED] TR20AU01.011
[[Page 315]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.013
[[Page 316]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.014
[[Page 317]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.015
[[Page 318]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.016
[[Page 319]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.017
[[Page 320]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.018
[[Page 321]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.019
[[Page 322]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.020
[[Page 323]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.021
[[Page 324]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.022
[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 60191, Dec. 9,
1981; 54 FR 13868, Apr. 6, 1989; 54 FR 24689, June 9, 1989; 55 FR 38312,
Sept. 18, 1990; 65 FR 58908, Oct. 3, 2000]
Appendix H to Part 226--Closed-End Model Forms and Clauses
H-1--Credit Sale Model Form (Sec. 226.18)
H-2--Loan Model Form (Sec. 226.18)
H-3--Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B)--Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C)--Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D)--Variable-Rate Model Clauses (Sec. 226.20(c))
H-5--Demand Feature Model Clauses (Sec. 226.18(I))
H-6--Assumption Policy Model Clause (Sec. 226.18(q))
H-7--Required Deposit Model Clause (Sec. 226.18(r))
H-8--Rescission Model Form (General) (Sec. 226.23)
H-9--Rescission Model Form (Refinancing With Original Creditor)
(Sec. 226.23)
H-10--Credit Sale Sample
H-11--Installment Loan Sample
H-12--Refinancing Sample
H-13--Mortgage with Demand Feature Sample
H-14--Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15--Graduated Payment Mortgage Sample
H-16--Mortgage Sample (Sec. 226.32)
[[Page 325]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.023
[[Page 326]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.024
[[Page 327]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.025
[GRAPHIC] [TIFF OMITTED] TC27SE91.026
[[Page 328]]
H-4(C)--Variable-Rate Model Clauses
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on [an index plus a
margin] [a formula].
Your payment will be based on the interest rate, loan
balance, and loan term.
--[The interest rate will be based on (identification of index) plus our
margin. Ask for our current interest rate and margin.]
--[The interest rate will be based on (identification of formula). Ask
us for our current interest rate.]
--Information about the index [formula for rate adjustments] is
published [can be found] ----------------.
--[The initial interest rate is not based on the (index) (formula) used
to make later adjustments. Ask us for the amount of current interest
rate discounts.]
How Your Interest Rate Can Change
Your interest rate can change (frequency).
[Your interest rate cannot increase or decrease more than
------ percentage points at each adjustment.]
Your interest rate cannot increase [or decrease] more than
------ percentage points over the term of the loan.
How Your Payment Can Change
Your payment can change (frequency) based on changes in the
interest rate.
[Your payment cannot increase more than (amount or
percentage) at each adjustment.]
You will be notified in writing -------- days before the
due date of a payment at a new level. This notice will contain
information about your interest rates, payment amount, and loan balance.
[You will be notified once each year during which interest
rate adjustments, but no payment adjustments, have been made to your
loan. This notice will contain information about your interest rates,
payment amount, and loan balance.]
[For example, on a $10,000 [term] loan with an initial
interest rate of -------- [(the rate shown in the interest rate column
below for the year 19 --------)] [(in effect (month) (year)], the
maximum amount that the interest rate can rise under this program is --
------ percentage points, to --------%, and the monthly payment can rise
from a first-year payment of $-------- to a maximum of $-------- in the
---------- year. To see what your payments would be, divide your
mortgage amount by $10,000; then multiply the monthly payment by that
amount. (For example, the monthly payment for a mortgage amount of
$60,000 would be: $60,000 / $10,000 = 6; 6 x -------- = $-------- per
month.)]
[Example
The example below shows how your payments would have changed under
this ARM program based on actual changes in the index from 1982 to 1996.
This does not necessarily indicate how your index will change in the
future.
The example is based on the following assumptions:
Amount................................... $10,000
Term..................................... ----------
Change date.............................. ----------
Payment adjustment....................... (frequency)
Interest adjustment...................... (frequency)
[Margin] *............................... --------
Caps -------- [periodic interest rate
cap]
-------- [lifetime interest rate cap
-------- [payment cap]
[Interest rate carryover]
[Negative amortization]
[Interest rate discount] **
Index.......(identification of index or
formula)
* This is a margin we have used recently, your margin may be different.
** This is the amount of a discount we have provided recently; your loan
may be discounted by a different amount.]
----------------------------------------------------------------------------------------------------------------
Margin
Year Index (%) (Percentage Interest Monthly Remaining
points) Rate (%) Payment ($) Balance ($)
----------------------------------------------------------------------------------------------------------------
1982...................................... ............ ............ ............ ............ ............
1983...................................... ............ ............ ............ ............ ............
1984...................................... ............ ............ ............ ............ ............
1985...................................... ............ ............ ............ ............ ............
1986...................................... ............ ............ ............ ............ ............
1987...................................... ............ ............ ............ ............ ............
1988...................................... ............ ............ ............ ............ ............
1989...................................... ............ ............ ............ ............ ............
1990...................................... ............ ............ ............ ............ ............
1991...................................... ............ ............ ............ ............ ............
1992...................................... ............ ............ ............ ............ ............
[[Page 329]]
1993...................................... ............ ............ ............ ............ ............
1994...................................... ............ ............ ............ ............ ............
1995...................................... ............ ............ ............ ............ ............
1996...................................... ............ ............ ............ ............ ............
----------------------------------------------------------------------------------------------------------------
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
of $60,000 taken out in 1982 would be: $60,000/$10,000=6; 6x--------=$-------- per month.)
[GRAPHIC] [TIFF OMITTED] TC27SE91.029
[[Page 330]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.030
[[Page 331]]
H-9--Rescission Model Form (Refinancing with Original Creditor)
NOTICE OF RIGHT TO CANCEL
Your Right to Cancel
You are entering into a new transaction to increase the amount of
credit previously provided to you. Your home is the security for this
new transaction. You have a legal right under federal law to cancel this
new transaction, without cost, within three business days from whichever
of the following events occurs last:
(1) the date of this new transaction, which is ----------------; or
(2) the date you received your new Truth in Lending disclosures; or
(3) the date you received this notice of your right to cancel.
If you cancel this new transaction, it will not affect any amount
that you presently owe. Your home is the security for that amount.
Within 20 calendar days after we receive your notice of cancellation of
this new transaction, we must take the steps necessary to reflect the
fact that your home does not secure the increase of credit. We must also
return any money you have given to us or anyone else in connection with
this new transaction.
You may keep any money we have given you in this new transaction
until we have done the things mentioned above, but you must then offer
to return the money at the address below.
If we do not take possession of the money within 20 calendar days of
your offer, you may keep it without further obligation.
How To Cancel
If you decide to cancel this new transaction, you may do so by
notifying us in writing, at
________________________________________________________________________
(Creditor's name and business address).
You may use any written statement that is signed and dated by you
and states your intention to cancel, or you may use this notice by
dating and signing below. Keep one copy of this notice because it
contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no later
than midnight of
________________________________________________________________________
(Date)__________________________________________________________________
(or midnight of the third business day following the latest of the three
events listed above).
If you send or deliver your written notice to cancel some other way,
it must be delivered to the above address no later than that time.
I WISH TO CANCEL
________________________________________________________________________
Consumer's Signature
________________________________________________________________________
Date
[[Page 332]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.031
[[Page 333]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.032
[[Page 334]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.033
[[Page 335]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.034
H-14--Variable-Rate Mortgage Sample
This disclosure describes the features of the adjustable-rate
mortgage (ARM) program you are considering. Information on other ARM
programs is available upon request.
How Your Interest Rate and Payment Are Determined
Your interest rate will be based on an index rate plus a
margin.
Your payment will be based on the interest rate, loan
balance, and loan term.
--The interest rate will be based on the weekly average yield on United
States Treasury securities adjusted to a constant maturity of 1 year
(your index), plus our margin. Ask us for our current interest rate and
margin.
--Information about the index rate is published weekly in the Wall
Street Journal.
Your interest rate will equal the index rate plus our
margin unless your interest rate ``caps'' limit the amount of change in
the interest rate.
How Your Interest Rate Can Change
Your interest rate can change yearly.
Your interest rate cannot increase or decrease more than 2
percentage points per year.
Your interest rate cannot increase or decrease more than 5
percentage points over the term of the loan.
[[Page 336]]
How Your Monthly Payment Can Change
Your monthly payment can increase or decrease substantially
based on annual changes in the interest rate.
[For example, on a $10,000, 30-year loan with an initial
interest rate of 12.41 percent in effect in July 1996, the maximum
amount that the interest rate can rise under this program is 5
percentage points, to 17.41 percent, and the monthly payment can rise
from a first-year payment of $106.03 to a maximum of $145.34 in the
fourth year. To see what your payment is, divide your mortgage amount by
$10,000; then multiply the monthly payment by that amount. (For example,
the monthly payment for a mortgage amount of $60,000 would be: $60,000/
$10,000=6; 6x106.03=$636.18 per month.)
You will be notified in writing 25 days before the annual
payment adjustment may be made. This notice will contain information
about your interest rates, payment amount and loan balance.]
[Example
The example below shows how your payments would have changed under
this ARM program based on actual changes in the index from 1982 to 1996.
This does not necessarily indicate how your index will change in the
future. The example is based on the following assumptions:
Amount................................. $10,000
Term................................... 30 years
Payment adjustment..................... 1 year
Interest adjustment.................... 1 year
Margin................................. 3 percentage points
Caps-------- 2 percentage points annual interest rate
-------- 5 percentage points lifetime interest rate
Index-------- Weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of one year.
----------------------------------------------------------------------------------------------------------------
Margin*
Year (as of 1st week ending in July) Index (%) (percentage Interest Monthly Remaining
points) Rate (%) Payment ($) Balance ($)
----------------------------------------------------------------------------------------------------------------
1982...................................... 14.41 3 17.41 145.90 9,989.37
1983...................................... 9.78 3 **15.41 129.81 9,969.66
1984...................................... 12.17 3 15.17 127.91 9,945.51
1985...................................... 7.66 3 **13.17 112.43 9,903.70
1986...................................... 6.36 3 ***12.41 106.73 9,848.94
1987...................................... 6.71 3 ***12.41 106.73 9,786.98
1988...................................... 7.52 3 ***12.41 106.73 9,716.88
1989...................................... 7.97 3 ***12.41 106.73 9,637.56
1990...................................... 8.06 3 ***12.41 106.73 9,547.83
1991...................................... 6.40 3 ***12.41 106.73 9,446.29
1992...................................... 3.96 3 ***12.41 106.73 9,331.56
1993...................................... 3.42 3 ***12.41 106.73 9,201.61
1994...................................... 5.47 3 ***12.41 106.73 9,054.72
1995...................................... 5.53 3 ***12.41 106.73 8,888.52
1996...................................... 5.82 3 ***12.41 106.73 8,700.37
----------------------------------------------------------------------------------------------------------------
*This is a margin we have used recently; your margin may be different.
**This interest rate reflects a 2 percentage point annual interest rate cap.
***This interest rate reflects a 5 percentage point lifetime interest rate cap.
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
of $60,000 taken out in 1982 would be: $60,000/$10,000=6; 6x$106.73=$640.38.)
You will be notified in writing 25 days before the annual
payment adjustment may be made. This notice will contain information
about your interest rates, payment amount and loan balance.]
[[Page 337]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.037
[[Page 338]]
[GRAPHIC] [TIFF OMITTED] TR20DE01.000
[46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1, 1981; 52
FR 52 FR 48671, Dec. 24, 1987; 53 FR 467, Jan. 7, 1988; Reg. Z, 60 FR
15473, Mar. 24, 1995; 61 FR 49247, Sept. 19, 1996; 62 FR 63444, 63445,
Dec. 1, 1997; 62 FR 66179, Dec. 17, 1997; Reg. Z, 63 FR 2723, Jan. 16,
1998; 66 FR 65618, Dec. 20, 2001]
[[Page 339]]
Appendix I to Part 226--Federal Enforcement Agencies
The following list indicates which federal agency enforces
Regulation Z for particular classes of businesses. Any questions
concerning compliance by a particular business should be directed to the
appropriate enforcement agency. Terms that are not defined in the
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning
given to them in the International Banking Act of 1978 (12 U.S.C. 3101).
National banks and federal branches and federal agencies of foreign
banks
District office of the Office of the Comptroller of the Currency for
the district in which the institution is located.
State member banks, branches and agencies of foreign banks (other than
federal branches, federal agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A of
the Federal Reserve Act
Federal Reserve Bank serving the district in which the institution
is located.
Non-member insured banks and insured state branches of foreign banks
Federal Deposit Insurance Corporation Regional director for the
region in which the institution is located.
Savings institutions insured under the Savings Association Insurance
Fund of the FDIC and federally chartered savings banks insured under the
Bank Insurance Fund of the FDIC (but not including state-chartered
savings banks insured under the Bank Insurance Fund).
Office of Thrift Supervision Regional Director for the region in
which the institution is located.
Federal Credit Unions
Regional office of the National Credit Union Administration serving
the area in which the Federal credit union is located.
Air Carriers
Assistant General Counsel for Aviation Enforcement and Proceedings,
Department of Transportation, 400 Seventh Street, SW., Washington, DC
20590.
Creditors Subject to Packers and Stockyards Act
Nearest Packers and Stockyards Administration area supervisor.
Federal Land Banks, Federal Land Bank Associations, Federal Intermediate
Credit Banks and Production Credit Associations.
Farm Credit Administration, 490 L'Enfant Plaza, SW., Washington, DC
20578.
Retail, Department Stores, Consumer Finance Companies, All Other
Creditors, and All Nonbank Credit Card Issuers (Creditors operating on a
local or regional basis should use the address of the FTC Regional
Office in which they operate.)
Division of Credit Practices, Bureau of Consumer Protection, Federal
Trade Commission, Washington, DC 20580.
[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 50 FR 8708, Mar. 5,
1985; 54 FR 53539, Dec. 29, 1989; 56 FR 51322, Oct. 11, 1991; 57 FR
20400, May 13, 1992]
Appendix J to Part 226--Annual Percentage Rate Computations for Closed-
End Credit Transactions
(a) Introduction
(1) Section 226.22(a) of Regulation Z provides that the annual
percentage rate for other than open end credit transactions shall be
determined in accordance with either the actuarial method or the United
States Rule method. This appendix contains an explanation of the
actuarial method as well as equations, instructions and examples of how
this method applies to single advance and multiple advance transactions.
(2) Under the actuarial method, at the end of each unit-period (or
fractional unit-period) the unpaid balance of the amount financed is
increased by the finance charge earned during that period and is
decreased by the total payment (if any) made at the end of that period.
The determination of unit-periods and fractional unit-periods shall be
consistent with the definitions and rules in paragraphs (b) (3), (4) and
(5) of this section and the general equation in paragraph (b)(8) of this
section.
(3) In contrast, under the United States Rule method, at the end of
each payment period, the unpaid balance of the amount financed is
increased by the finance charge earned during that payment period and is
decreased by the payment made at the end of that payment period. If the
payment is less than the finance charge earned, the adjustment of the
unpaid balance of the amount financed is postponed until the end of the
next payment period. If at that time the sum of the two payments is
still less than the total earned finance charge for the two payment
periods, the adjustment of the unpaid balance of the amount financed is
postponed still another payment period, and so forth.
[[Page 340]]
(b) Instructions and Equations for the Actuarial Method
(1) General Rule
The annual percentage rate shall be the nominal annual percentage
rate determined by multiplying the unit-period rate by the number of
unit-periods in a year.
(2) Term of the Transaction
The term of the transaction begins on the date of its consummation,
except that if the finance charge or any portion of it is earned
beginning on a later date, the term begins on the later date. The term
ends on the date the last payment is due, except that if an advance is
scheduled after that date, the term ends on the later date. For
computation purposes, the length of the term shall be equal to the time
interval between any point in time on the beginning date to the same
point in time on the ending date.
(3) Definitions of Time Intervals
(i) A period is the interval of time between advances or between
payments and includes the interval of time between the date the finance
charge begins to be earned and the date of the first advance thereafter
or the date of the first payment thereafter, as applicable.
(ii) A common period is any period that occurs more than once in a
transaction.
(iii) A standard interval of time is a day, week, semimonth, month,
or a multiple of a week or a month up to, but not exceeding, 1 year.
(iv) All months shall be considered equal. Full months shall be
measured from any point in time on a given date of a given month to the
same point in time on the same date of another month. If a series of
payments (or advances) is scheduled for the last day of each month,
months shall be measured from the last day of the given month to the
last day of another month. If payments (or advances) are scheduled for
the 29th or 30th of each month, the last day of February shall be used
when applicable.
(4) Unit-period
(i) In all transactions other than a single advance, single payment
transaction, the unit-period shall be that common period, not to exceed
1 year, that occurs most frequently in the transaction, except that
(A) If 2 or more common periods occur with equal frequency, the
smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-period
shall be that period which is the average of all periods rounded to the
nearest whole standard interval of time. If the average is equally near
2 standard intervals of time, the lower shall be the unit-period.
(ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1
year.
(5) Number of Unit-periods Between 2 Given Dates
(i) The number of days between 2 dates shall be the number of 24-
hour intervals between any point in time on the first date to the same
point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-periods
between 2 dates shall be the number of months measured back from the
later date. The remaining fraction of a unit-period shall be the number
of days measured forward from the earlier date to the beginning of the
first full unit-period, divided by 30. If the unit-period is a month,
there are 12 unit-periods per year.
(iii) If the unit-period is a semimonth or a multiple of a month not
exceeding 11 months, the number of days between 2 dates shall be 30
times the number of full months measured back from the later date, plus
the number of remaining days. The number of full unit-periods and the
remaining fraction of a unit-period shall be determined by dividing such
number of days by 15 in the case of a semimonthly unit-period or by the
appropriate multiple of 30 in the case of a multimonthly unit-period. If
the unit-period is a semimonth, the number of unit-periods per year
shall be 24. If the number of unit-periods is a multiple of a month, the
number of unit-periods per year shall be 12 divided by the number of
months per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a week,
the number of full unit-periods and the remaining fractions of a unit-
period shall be determined by dividing the number of days between the 2
given dates by the number of days per unit-period. If the unit-period is
a day, the number of unit-periods per year shall be 365. If the unit-
period is a week or a multiple of a week, the number of unit-periods per
year shall be 52 divided by the number of weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-periods
between 2 dates shall be the number of full years (each equal to 12
months) measured back from the later date. The remaining fraction of a
unit-period shall be
(A) The remaining number of months divided by 12 if the remaining
interval is equal to a whole number of months, or
(B) The remaining number of days divided by 365 if the remaining
interval is not equal to a whole number of months.
(vi) In a single advance, single payment transaction in which the
term is less than a year and is equal to a whole number of months, the
number of unit-periods in the
[[Page 341]]
term shall be 1, and the number of unit-periods per year shall be 12
divided by the number of months in the term or 365 divided by the number
of days in the term.
(vii) In a single advance, single payment transaction in which the
term is less than a year and is not equal to a whole number of months,
the number of unit-periods in the term shall be 1, and the number of
unit-periods per year shall be 365 divided by the number of days in the
term.
(6) Percentage Rate for a Fraction of a Unit-period
The percentage rate of finance charge for a fraction (less than 1)
of a unit-period shall be equal to such fraction multiplied by the
percentage rate of finance charge per unit-period.
[GRAPHIC] [TIFF OMITTED] TC27SE91.038
[[Page 342]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.039
[[Page 343]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.040
[[Page 344]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.041
[[Page 345]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.042
[[Page 346]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.043
[[Page 347]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.044
[[Page 348]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.045
[[Page 349]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.046
[[Page 350]]
[GRAPHIC] [TIFF OMITTED] TC27SE91.047
[[Page 351]]
[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1,
1981]
Appendix K to Part 226--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
(a) Introduction. Creditors are required to disclose a series of
total annual loan cost rates for each reverse mortgage transaction. This
appendix contains the equations creditors must use in computing the
total annual loan cost rate for various transactions, as well as
instructions, explanations, and examples for various transactions. This
appendix is modeled after Appendix J of this part (Annual Percentage
Rates Computations for Closed-end Credit Transactions); creditors should
consult Appendix J of this part for additional guidance in using the
formulas for reverse mortgages.
(b) Instructions and equations for the total annual loan cost rate.
(1) General rule. The total annual loan cost rate shall be the
nominal total annual loan cost rate determined by multiplying the unit-
period rate by the number of unit-periods in a year.
(2) Term of the transaction. For purposes of total annual loan cost
disclosures, the term of a reverse mortgage transaction is assumed to
begin on the first of the month in which consummation is expected to
occur. If a loan cost or any portion of a loan cost is initially
incurred beginning on a date later than consummation, the term of the
transaction is assumed to begin on the first of the month in which that
loan cost is incurred. For purposes of total annual loan cost
disclosures, the term ends on each of the assumed loan periods specified
in Sec. 226.33(c)(6).
(3) Definitions of time intervals.
(i) A period is the interval of time between advances.
(ii) A common period is any period that occurs more than once in a
transaction.
(iii) A standard interval of time is a day, week, semimonth, month,
or a multiple of a week or a month up to, but not exceeding, 1 year.
(iv) All months shall be considered to have an equal number of days.
(4) Unit-period.
(i) In all transactions other than single-advance, single-payment
transactions, the unit-period shall be that common period, not to exceed
one year, that occurs most frequently in the transaction, except that:
(A) If two or more common periods occur with equal frequency, the
smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-period
shall be that period which is the average of all periods rounded to the
nearest whole standard interval of time. If the average is equally near
two standard intervals of time, the lower shall be the unit-period.
(ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed one
year.
(5) Number of unit-periods between two given dates.
(i) The number of days between two dates shall be the number of 24-
hour intervals between any point in time on the first date to the same
point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-periods
between two dates shall be the number of months. If the unit-period is a
month, the number of unit-periods per year shall be 12.
(iii) If the unit-period is a semimonth or a multiple of a month not
exceeding 11 months, the number of days between two dates shall be 30
times the number of full months. The number of full unit-periods shall
be determined by dividing the number of days by 15 in the case of a
semimonthly unit-period or by the appropriate multiple of 30 in the case
of a multimonthly unit-period. If the unit-period is a semimonth, the
number of unit-periods per year shall be 24. If the number of unit-
periods is a multiple of a month, the number of unit-periods per year
shall be 12 divided by the number of months per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a week,
the number of full unit-periods shall be determined by dividing the
number of days between the two given dates by the number of days per
unit-period. If the unit-period is a day, the number of unit-periods per
year shall be 365. If the unit-period is a week or a multiple of a week,
the number of unit-periods per year shall be 52 divided by the number of
weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-periods
between two dates shall be the number of full years (each equal to 12
months).
(6) Symbols. The symbols used to express the terms of a transaction
in the equation set forth in paragraph (b)(8) of this appendix are
defined as follows:
Aj=The amount of each periodic or lump-sum advance to the
consumer under the reverse mortgage transaction.
i=Percentage rate of the total annual loan cost per unit-period,
expressed as a decimal equivalent.
j=The number of unit-periods until the jth advance.
n=The number of unit-periods between consummation and repayment of the
debt.
Pn=Min (Baln, Valn). This is the
maximum amount that the creditor can be repaid at the specified loan
term.
Baln=Loan balance at time of repayment, including all costs
and fees incurred by the consumer (including any shared appreciation or
shared equity amount) compounded
[[Page 352]]
to time n at the creditor's contract rate of interest.
Valn=Val0 (1 + [sigma])\y\, where Val0
is the property value at consummation, [sigma] is the assumed annual
rate of appreciation for the dwelling, and y is the number of years in
the assumed term. Valn must be reduced by the amount of any
equity reserved for the consumer by agreement between the parties, or by
7 percent (or the amount or percentage specified in the credit
agreement), if the amount required to be repaid is limited to the net
proceeds of sale.
[sigma] = The summation operator.
Symbols used in the examples shown in this appendix are defined as
follows:
[GRAPHIC] [TIFF OMITTED] TR24MR95.015
[GRAPHIC] [TIFF OMITTED] TR24MR95.007
w=The number of unit-periods per year.
I=wi x 100=the nominal total annual loan cost rate.
(7) General equation. The total annual loan cost rate for a reverse
mortgage transaction must be determined by first solving the following
formula, which sets forth the relationship between the advances to the
consumer and the amount owed to the creditor under the terms of the
reverse mortgage agreement for the loan cost rate per unit-period (the
loan cost rate per unit-period is then multiplied by the number of unit-
periods per year to obtain the total annual loan cost rate I; that is, I
= wi):
[GRAPHIC] [TIFF OMITTED] TR24MR95.008
(8) Solution of general equation by iteration process. (i) The
general equation in paragraph (b)(7) of this appendix, when applied to a
simple transaction for a reverse mortgage loan of equal monthly advances
of $350 each, and with a total amount owed of $14,313.08 at an assumed
repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR24MR95.009
Using the iteration procedures found in steps 1 through 4 of (b)(9)(i)
of Appendix J of this part, the total annual loan cost rate, correct to
two decimals, is 48.53%.
(ii) In using these iteration procedures, it is expected that
calculators or computers will be programmed to carry all available
decimals throughout the calculation and that enough iterations will be
performed to make virtually certain that the total annual loan cost rate
obtained, when rounded to two decimals, is correct. Total annual loan
cost rates in the examples below were obtained by using a 10-digit
programmable calculator and the iteration procedure described in
Appendix J of this part.
(9) Assumption for discretionary cash advances. If the consumer
controls the timing of advances made after consummation (such as in a
credit line arrangement), the creditor must use the general formula in
paragraph (b)(7) of this appendix. The total annual loan cost rate shall
be based on the assumption that 50 percent of the principal loan amount
is advanced at closing, or in the case of an open-end transaction, at
the time the consumer becomes obligated under the plan. Creditors shall
assume the advances are made at the interest rate then in effect and
that no further advances are made to, or repayments made by, the
consumer during the term of the transaction or plan.
(10) Assumption for variable-rate reverse mortgage transactions. If
the interest rate for a reverse mortgage transaction may increase during
the loan term and the amount or timing is not known at consummation,
creditors shall base the disclosures on the initial interest rate in
effect at the time the disclosures are provided.
(11) Assumption for closing costs. In calculating the total annual
loan cost rate, creditors shall assume all closing and other consumer
costs are financed by the creditor.
(c) Examples of total annual loan cost rate computations.
(1) Lump-sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer at
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P10 = Min (103,385.84, 137,662.72)
[[Page 353]]
[GRAPHIC] [TIFF OMITTED] TR29SE95.004
i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
(2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer at
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.011
Total annual loan cost rate (100(.009061140 x 12))=10.87%
(3) Lump sum advance at consummation and monthly advances
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer at
age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.012
Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
(d) Reverse mortgage model form and sample form.
(1) Model form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:
Initial Loan Charges
Closing costs:
Mortgage insurance premium:
Annuity cost:
Monthly Loan Charges
Servicing fee:
Other Charges:
Mortgage insurance:
Shared Appreciation:
Repayment Limits
[[Page 354]]
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
---------------------------------------------------
Assumed annual appreciation 2-year loan [ ]-year [ ]-year [ ]-year
term loan term] loan term loan term
----------------------------------------------------------------------------------------------------------------
0%.......................................................... [ ]
4%.......................................................... [ ]
8%.......................................................... [ ]
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you keep
the loan and how much your house appreciates in value. Generally, the
longer you keep a reverse mortgage, the lower the total annual loan cost
rate will be.
This table shows the estimated cost of your reverse mortgage loan,
expressed as an annual rate. It illustrates the cost for three [four]
loan terms: 2 years, [half of life expectancy for someone your age,]
that life expectancy, and 1.4 times that life expectancy. The table also
shows the cost of the loan, assuming the value of your home appreciates
at three different rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically include
principal, interest, closing costs, mortgage insurance premiums, annuity
costs, and servicing costs (but not costs when you sell the home).
The rates in this table are estimates. Your actual cost may differ
if, for example, the amount of your loan advances varies or the interest
rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not Require
You To Complete This Loan
(2) Sample Form.
Total Annual Loan Cost Rate
Loan Terms
Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000
Initial Loan Charges
Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None
Monthly Loan Charges
Servicing fee: None
Other Charges
Mortgage insurance: None
Shared Appreciation: None
Repayment Limits
Net proceeds estimated at 93% of projected home sale
----------------------------------------------------------------------------------------------------------------
Total annual loan cost rate
---------------------------------------------------
Assumed annual appreciation 2-year loan [6-year 12-year 17-year
term loan term] loan term loan term
----------------------------------------------------------------------------------------------------------------
0%.......................................................... 39.00% [14.94%] 9.86% 3.87%
4%.......................................................... 39.00% [14.94%] 11.03% 10.14%
8%.......................................................... 39.00% [14.94%] 11.03% 10.20%
----------------------------------------------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you keep
the loan and how much your house appreciates in value. Generally, the
longer you keep a reverse mortgage, the lower the total annual loan cost
rate will be.
This table shows the estimated cost of your reverse mortgage loan,
expressed as an annual rate. It illustrates the cost for three [four]
loan terms: 2 years, [half of life expectancy for someone your age,]
that life expectancy, and 1.4 times that life expectancy. The table also
shows the cost of the loan, assuming the value of your home appreciates
at three different rates: 0%,4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically include
principal, interest, closing costs, mortgage insurance premiums, annuity
costs, and servicing costs (but not disposition costs--costs when you
sell the home).
The rates in this table are estimates. Your actual cost may differ
if, for example, the amount of your loan advances varies or the interest
rate on your mortgage changes.
[[Page 355]]
Signing an Application or Receiving These Disclosures Does Not Require
You To Complete This Loan
[Reg. Z, 60 FR 15474, Mar. 24, 1995, as amended at 60 FR 50400, Sept.
29, 1995]
Appendix L to Part 226--Assumed Loan Periods for Computations of Total
Annual Loan Cost Rates
(a) Required tables. In calculating the total annual loan cost rates
in accordance with Appendix K of this part, creditors shall assume three
loan periods, as determined by the following table.
(b) Loan periods.
(1) Loan Period 1 is a two-year loan period.
(2) Loan Period 2 is the life expectancy in years of the youngest
borrower to become obligated on the reverse mortgage loan, as shown in
the U.S. Decennial Life Tables for 1979-1981 for females, rounded to the
nearest whole year.
(3) Loan Period 3 is the life expectancy figure in Loan Period 3,
multiplied by 1.4 and rounded to the nearest full year (life expectancy
figures at .5 have been rounded up to 1).
(4) At the creditor's option, an additional period may be included,
which is the life expectancy figure in Loan Period 2, multiplied by .5
and rounded to the nearest full year (life expectancy figures at .5 have
been rounded up to 1).
----------------------------------------------------------------------------------------------------------------
Loan period
Loan period [Optional 2 (life Loan period
Age of youngest borrower 1 (in loan period expectancy) 3 (in
years) (in years)] (in years) years)
----------------------------------------------------------------------------------------------------------------
62.......................................................... 2 [11] 21 29
63.......................................................... 2 [10] 20 28
64.......................................................... 2 [10] 19 27
65.......................................................... 2 [9] 18 25
66.......................................................... 2 [9] 18 25
67.......................................................... 2 [9] 17 24
68.......................................................... 2 [8] 16 22
69.......................................................... 2 [8] 16 22
70.......................................................... 2 [8] 15 21
71.......................................................... 2 [7] 14 20
72.......................................................... 2 [7] 13 18
73.......................................................... 2 [7] 13 18
74.......................................................... 2 [6] 12 17
75.......................................................... 2 [6] 12 17
76.......................................................... 2 [6] 11 15
77.......................................................... 2 [5] 10 14
78.......................................................... 2 [5] 10 14
79.......................................................... 2 [5] 9 13
80.......................................................... 2 [5] 9 13
81.......................................................... 2 [4] 8 11
82.......................................................... 2 [4] 8 11
83.......................................................... 2 [4] 7 10
84.......................................................... 2 [4] 7 10
85.......................................................... 2 [3] 6 8
86.......................................................... 2 [3] 6 8
87.......................................................... 2 [3] 6 8
88.......................................................... 2 [3] 5 7
89.......................................................... 2 [3] 5 7
90.......................................................... 2 [3] 5 7
91.......................................................... 2 [2] 4 6
92.......................................................... 2 [2] 4 6
93.......................................................... 2 [2] 4 6
94.......................................................... 2 [2] 4 6
95 and over................................................. 2 [2] 3 4
----------------------------------------------------------------------------------------------------------------
[60 FR 15476, Mar. 24, 1995]
Supplement I to Part 226--Official Staff Interpretations
Introduction
1. Official status. This commentary is the vehicle by which the
staff of the Division of Consumer and Community Affairs of the Federal
Reserve Board issues official staff interpretations of Regulation Z, as
revised effective April 1, 1981. Good faith compliance with this
commentary affords protection from liability under 130(f) of the Truth
in Lending Act. Section 130(f) (15 U.S.C. 1640) protects creditors from
civil liability for any act done or omitted in good faith in conformity
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.
[[Page 356]]
Interpretations that are adopted will be incorporated in this commentary
following publication in the Federal Register. No official staff
interpretations are expected to be issued other than by means of this
commentary.
3. Status of previous interpretations. All statements and opinions
issued by the Federal Reserve Board and its staff interpreting previous
Regulation Z remain effective until October 1, 1982, only insofar as
they interpret that regulation. When compliance with revised Regulation
Z becomes mandatory on October 1, 1982, the Board and staff
interpretations of the previous regulation will be entirely superseded
by the revised regulation and this commentary except with regard to
liability under the previous regulation.
4. Rules of 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 regulation, reference to the
regulation should be construed to refer to revised Regulation Z, unless
the context indicates that a reference to previous Regulation Z is also
intended.
(c) Throughout the commentary, reference to ``this section'' or
``this paragraph'' means the section or paragraph in the regulation 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 Sec. 226.18(b) are further divided by
paragraph, such as Comment 18(b)(1)-1 and Comment 18(b)(2)-1. In other
cases, comments have more general application and are designated, for
example, as Comment 18-1 or Comment 18(b)-1. This introduction may be
cited as Comments I-1 through I-7. Comments to the appendices may be
cited, for example, as Comment app. A-1.
6. Cross-references. The following cross-references to related
material appear at the end of each section of the commentary:
(a) ``Statute''--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 regulation necessary
to understand that section;
(c) ``Previous regulation''--parallel provisions in previous
Regulation Z; and
(d) ``1981 changes''--a brief description of the major changes made
by the 1981 revisions to Regulation Z.
Where appropriate a fifth category (``Other regulations'') provides
cross-references to other regulations.
7. Transition rules. (a) Though compliance with the revised
regulation is not mandatory 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 requirements in stages. In general, however, a
creditor may not mix the regulatory requirements when making disclosures
for a particular closed-end transaction or open-end account; all the
disclosures for a single closed-end transaction (or open-end account)
must be made in accordance with the previous regulation, or all the
disclosures 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 followed 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
requirements of the revised regulation to indicate its conversion to the
revised regulation.
(b) The revised regulation may be relied on to determine if any
disclosures are required for a particular transaction or to determine 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, layaway 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 creditor is making other
disclosures under the previous regulation. The new rules governing
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, applicable to both open-end and
closed-end credit, the following guidelines are relevant to open-end
credit:
The creditor need not remake initial disclosures that were
made under the previous regulation, even if the revised periodic
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 conversion to the revised regulation.
The previous billing rights statements are substantially
similar to the revised billing rights statements and may continue to be
used, except that, if the creditor has an automatic debit program, it
must use the revised automatic debit provision.
[[Page 357]]
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 semi-annual statement in June 1981, and converts to the
new regulation 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 created 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 (including resident
aliens) of any state as defined in Sec. 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 regulation. 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 country. 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 regulation does
not apply to a foreign branch of a U.S. bank when the foreign branch
extends credit to a U.S. citizen residing or visiting abroad or to a
foreign national abroad.
References
Statute: Section 102.
Other sections: None.
Previous regulation: Sec. 226.1.
1981 changes: A discussion of coverage has been added to Sec. 226.1
so that the reader will understand from the start what is subject to the
regulation. Language has also been added to explain the reorganization
of the regulation into subparts that group together the provisions
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 part 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 requiring disclosures are advertisements. Messages
inviting, offering, or otherwise announcing generally to prospective
customers the availability of credit transactions, whether in visual,
oral, or print media, are covered by Regulation Z (12 CFR part 226).
i. Examples include:
A. Messages in a newspaper, magazine, leaflet, promotional flyer, or
catalog.
B. Announcements on radio, television, or public address system.
C. On-line messages, such as on the Internet.
D. Direct mail literature or other printed material on any exterior
or interior sign.
E. Point-of-sale displays.
F. Telephone solicitations.
G. Price tags that contain credit information.
H. Letters sent to customers as part of an organized solicitation of
business.
I. Messages on checking account statements offering auto loans at a
stated annual percentage rate.
J. Communications promoting a new open-end plan or closed-end
transaction.
ii. The term does not include:
A. Direct personal contacts, such as follow-up letters, cost
estimates for individual consumers, or oral or written communication
relating to the negotiation of a specific transaction.
B. Informational material, for example, interest rate and loan term
memos, distributed only to business entities.
C. 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.
D. News articles the use of which is controlled by the news medium.
E. Market research or educational materials that do not solicit
business.
F. Communications about an existing credit account (for example, a
promotion encouraging additional or different uses of an existing credit
card account).
2. Persons covered. All persons must comply with the advertising
provisions in Secs. 226.16 and 226.24, not just those that meet the
definition of creditor in Sec. 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) [Reserved]
2(a)(4) Billing cycle or cycle.
[[Page 358]]
1. Intervals. In open-end credit plans, the billing cycle determines
the intervals for which periodic disclosure statements are required;
these intervals are also used as measuring points for other duties of
the creditor. Typically, 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 definitional purposes, since some creditors'
cycles do not involve the sending of bills in the traditional sense but
only statements of account activity. This is commonly the case with
financial 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 account 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 4 days from a fixed day (for example, 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 requirement that cycles be equal
applies even if the creditor applies a daily periodic rate to determine
the finance charge. The requirement 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
statement day or date. (See the commentary to Sec. 226.9(c).)
4. Payment reminder. The sending of a regular payment reminder
(rather than a late payment notice) establishes a cycle for which the
creditor must send periodic statements.
2(a)(6) Business day.
1. Business function test. Activities that indicate that the
creditor is open for substantially all of its business functions include
the availability of personnel to make loan disbursements, to open new
accounts, and to handle credit transaction inquiries. Activities that
indicate that the creditor is not open for substantially all of its
business functions include a retailer merely accepting credit cards for
purchases or a bank having its customer-service windows open only for
limited purposes such as deposits and withdrawals, bill paying, and
related services.
2. Rescission rule. A more precise rule for what is a business day
(all calendar days except Sundays and the federal legal holidays listed
in 5 U.S.C. 6103(a)) applies when the right of rescission or mortgages
subject to Sec. 226.32 are involved. (See also comment 31(c)(1)-1.) Four
federal legal holidays are identified in 5 U.S.C. 6103(a) by a specific
date: New Year's Day, January 1; Independence Day, July 4; Veterans Day,
November 11; and Christmas Day, December 25. When one of these holidays
(July 4, for example) falls on a Saturday, federal offices and other
entities might observe the holiday on the preceding Friday (July 3). The
observed holiday (in the example, July 3) is a business day for purposes
of rescission or the delivery of disclosures for certain high-cost
mortgages covered by Sec. 226.32.
2(a)(7) Card issuer.
1. Agent. An agent of a card issuer is considered a card issuer.
Because agency relationships are traditionally defined by contract and
by state or other applicable law, the regulation does not define agent.
Merely providing services 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 line of credit with the
financial institution to pay obligations incurred by use of the credit
card.
2(a)(8) Cardholder.
1. General rule. A cardholder is a natural person at whose request a
card is issued for consumer credit purposes or who is a co-obligor or
guarantor for such a card issued to another. The second category does
not include an employee who is a co-obligor or guarantor on a card
issued to the employer for business purposes, nor does it include a
person who is merely the authorized user of a card issued to another.
2. Limited application of 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,
agricultural, or commercial purpose.
3. Issuance. See the commentary to Sec. 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 purposes.
If a card is issued to an individual for consumer purposes, the fact
that an organization 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 consumer
purchases does not subject the card issuer to the provisions on periodic
statements, billing error resolution, and other protections afforded to
consumer credit. Some card issuers offer dual-card systems--that is,
they issue two cards to the same individual, one intended for business
use, the other for consumer or personal use. With such a system, the
same person may be a cardholder for general purposes when using the card
issued for consumer use, and a cardholder only for the limited purposes
of the restrictions on issuance and liability when using the card issued
for business purposes.
[[Page 359]]
2(a)(9) Cash price.
1. Components. This amount is a starting point in computing the
amount financed and the total sale price under Sec. 226.18 for credit
sales. Any charges imposed equally in cash and credit transactions may
be included in the cash price, or they may be treated as other amounts
financed under Sec. 226.18(b)(2).
2. Service contracts. Service contracts include contracts for the
repair or the servicing of goods, such as mechanical breakdown coverage,
even if such a contract is characterized as insurance under state law.
3. Rebates. The creditor has complete flexibility in the way it
treats rebates for purposes of disclosure and calculation. See the
commentary to Sec. 226.18(b).
2(a)(10) Closed-end credit.
1. General. The coverage of this term is defined 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 finance charge
or is payable by written agreement in more than 4 installments.
2(a)(11) Consumer.
1. Scope. Guarantors, endorsers, and sureties are not generally
consumers for purposes of the regulation, but they may be entitled to
rescind 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 Secs. 226.15
and 226.23, a consumer includes any natural person whose ownership
interest in his or her principal dwelling is subject to the risk of
loss. Thus, if a security interest is taken in A's ownership interest in
a house and that house is A's principal dwelling, A is a consumer for
purposes of rescission, 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 inchoate rights,
such as dower.
3. Land trusts. Credit extended to land trusts, as described in the
commentary to Sec. 226.3(a), is considered to be extended to a natural
person for purposes of the definition of consumer.
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 purposes in the commentary to Sec. 226.3(a).
2(a)(13) Consummation.
1. State law governs. When a contractual obligation on the
consumer's part is created is a matter to be determined under applicable
law; Regulation Z does not make this determination. A contractual
commitment agreement, for example, that under applicable law binds the
consumer to the credit terms would be consummation. Consummation,
however, does not occur merely because the consumer has made some
financial investment in the transaction (for example, by paying a
nonrefundable fee) unless, of course, applicable law holds otherwise.
2. Credit v. sale. Consummation does not occur 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 nonrefundable deposit
to purchase an automobile, a purchase contact may be created, but
consummation 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 making payments. Whether the consumer is so
obligated is a matter to be determined under applicable law. The fact
that the consumer 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 judgments, and court
approvals of reaffirmation 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.
Insurance premium plans that involve payment in
installments with each installment representing the payment for
insurance coverage for a certain future period of time, unless the
consumer is contractually obligated to continue making payments.
Home improvement transactions that involve 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 value of an insurance
policy or a pension account, if there is no independent obligation to
repay.
Letters of credit.
The execution of option contracts. However, 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 extending 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 periodic mortgage payments in
return for an ownership interest in the property, and shares in any gain
or loss of property value.
[[Page 360]]
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 certain 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. Payday loans; deferred presentment. Credit includes a transaction
in which a cash advance is made to a consumer in exchange for the
consumer's personal check, or in exchange for the consumer's
authorization to debit the consumer's deposit account, and where the
parties agree either that the check will not be cashed or deposited, or
that the consumer's deposit account will not be debited, until a
designated future date. This type of transaction is often referred to as
a ``payday loan'' or ``payday advance'' or ``deferred presentment
loan.'' A fee charged in connection with such a transaction may be a
finance charge for purposes of Sec. 226.4, regardless of how the fee is
characterized under state law. Where the fee charged constitutes a
finance charge under Sec. 226.4 and the person advancing funds regularly
extends consumer credit, that person is a creditor and is required to
provide disclosures consistent with the requirements of Regulation Z.
See Sec. 226.2(a)(17).
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.
2. Examples. i. Examples of credit cards include:
A. A card that guarantees checks or similar instruments, if the
asset account is also tied to an overdraft line or if the instrument
directly accesses a line of credit.
B. A card that accesses both a credit and an asset account (that is,
a debit-credit card).
C. An identification card that permits the consumer to defer payment
on a purchase.
D. An identification card indicating loan approval that is presented
to a merchant or to a lender, whether or not the consumer signs a
separate promissory note for each credit extension.
E. A card or device that can be activated upon receipt to access
credit, even if the card has a substantive use other than credit, such
as a purchase-price discount card. Such a card or device is a credit
card notwithstanding the fact that the recipient must first contact the
card issuer to access or activate the credit feature.
ii. In contrast, a credit card does not include, for example:
A. A check-guarantee or debit card with no credit feature or
agreement, even if the creditor occasionally honors an inadvertent
overdraft.
B. Any card, key, plate, or other device that is used in order to
obtain petroleum products for business purposes from a wholesale
distribution facility or to gain access to that facility, and that is
required to be used without regard to payment terms.
3. Charge card. Generally, charge cards are cards used in connection
with an account on which outstanding balances cannot be carried from one
billing cycle to another and are payable when a periodic statement is
received. Under the regulation, a reference to credit cards generally
includes charge cards. The term charge card is, however, distinguished
from credit card in Secs. 226.5a, 226.9(e), 226.9(f), and 226.28(d), and
appendices G-10 through G-13. When the term credit card is used in those
provisions, it refers to credit cards other than charge cards.
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 Sec. 226.18(j)) must be
given. This applies even if there is more than one creditor in the
transaction and the creditor making the disclosures is not the seller.
See the commentary to Sec. 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 direct loan from a financial
institution and the consumer's note is payable to the financial
institution, the transaction is a loan and only the financial
institution is a creditor.
3. Refinancings. Generally, when a credit sale is refinanced within
the meaning of Sec. 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 transaction.
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 transaction; if the
latter approach is taken, either loan or credit sale disclosures may be
made. See the commentary to Sec. 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
creditor may be treated as either a credit sale or a loan, regardless of
whether the
[[Page 361]]
funds are given directly to the student, credited to the student'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 transaction
is treated as a loan.
2(a)(17) Creditor.
1. General. The definition contains four independent 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 2 requirements, both of
which must be met in order for a particular credit extension to be
subject to the regulation and for the credit extension to count towards
satisfaction of the numerical tests mentioned in footnote 3 to
Sec. 226.2(a)(17). First, there must be either or both of the following:
A written (rather than oral) agreement to pay in more than
4 installments. A letter 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 considered a creditor. If an obligation is made
payable to bearer, the creditor is the one who initially accepts the
obligation.
2. Assignees. If an obligation is initially payable to one person,
that person is the creditor even if the obligation by its terms is
simultaneously assigned to another person. For example:
An auto dealer and a bank have a business relationship in
which the bank supplies the dealer with credit sale contracts that are
initially made payable to the dealer and provide for the immediate
assignment of the obligation to the bank. The dealer and purchaser
execute the contract only after the bank approves the creditworthiness
of the purchaser. Because the obligation is initially payable on its
face to the dealer, the dealer is the only creditor in the transaction.
3. Numerical tests. The examples below illustrate how the numerical
tests of footnote 3 are applied. The examples assume that consumer
credit with a finance charge or written agreement for more than 4
installments was extended 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 outstanding accounts are counted
instead of individual credit extensions. Normally the number of
transactions is measured by the preceding calendar year; if the
requisite number 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 preceding year, the number of transactions is measured
by the current calendar year. For example, 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 business
begins in 1983 and extends consumer credit 20 times, it is not a
creditor for purposes of the regulation in 1983. If it extends consumer
credit 75 times in 1984, however, it becomes a creditor for purposes of
the regulation (and must begin making disclosures) after the 25th
extension of credit in that year and is a creditor for all extensions of
consumer credit in 1985.
5. Relationship between consumer credit in general and credit
secured by a dwelling. Extensions of credit secured by a dwelling are
counted towards the 25-extensions test. For example, if in 1983 a person
extends unsecured 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 extensions secured by a dwelling.
For example, if in 1983 a person extends credit not secured by a
dwelling 8 times and credit secured by a dwelling 3 times, it is not a
creditor.
6. Effect of satisfying one test. Once one of the numerical tests is
satisfied, the person is also a creditor for the other type of credit.
For example, in 1983 a person extends consumer credit secured by a
dwelling 5 times. That person is a creditor for all succeeding credit
extensions, whether they involve credit secured 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 3 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.
8. Loans from employee savings plan. Some employee savings plans
permit participants to borrow money up to a certain percentage of their
account balances, and use a trust to administer the receipt and
disbursement of funds. Unless each participant's account is an
individual plan and trust, the creditor should apply the numerical tests
to the plan as a whole rather than to the individual account, even if
the loan amount is determined by reference to the balance in the
individual account and the repayments are credited to the individual
account. The person to whom the obligation is originally made payable
(whether the plan, the trust, or the trustee)
[[Page 362]]
is the creditor for purposes of the act and regulation.
Paragraph 2(a)(17)(ii). [Reserved]
Paragraph 2(a)(17)(iii).
1. Card issuers subject to Subpart B. Section 226.2(a)(17)(iii)
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 entertainment 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 provisions of the regulation regarding such
areas as scope, definitions, determination of which charges are finance
charges, Spanish language disclosures, record retention, and use of
model forms, also apply to such card issuers.
Paragraph 2(a)(17)(iv).
1. Card issuers subject to Subparts B and C. Section
226.2(a)(17)(iv) includes as creditors card issuers extending closed-end
credit in which there is a finance charge or an agreement to pay in more
than 4 installments. These card issuers are subject to the appropriate
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 reducing the cash price is part of the
downpayment. (See the commentary to Sec. 226.2(a)(23).)
2. Pick-up payments. Creditors may treat the deferred portion of the
down-payment, often referred to as pick-up payments, in a number of
ways. If the pick-up payment is treated as part of the downpayment:
It is subtracted in arriving at the amount financed under
Sec. 226.18(b).
It may, but need not, be reflected in the payment schedule
under Sec. 226.18(g).
If the pick-up payment does not meet the definition (for example, if
it is payable after the second regularly scheduled payment) or if the
creditor chooses not to treat it as part of the downpayment:
It must be included in the amount financed.
It must be shown in the payment schedule.
Whichever way the pick-up payment is treated, the total of payments
under Sec. 226.18(h) must equal the sum of the payments disclosed under
Sec. 226.18(g).
3. Effect of existing liens. i. No cash payment. In a credit sale,
the ``downpayment'' may only be used to reduce the cash price. For
example, when a trade-in is used as the downpayment and the existing
lien on an automobile to be traded in exceeds the value of the
automobile, creditors must disclose a zero on the downpayment line
rather than a negative number. To illustrate, assume a consumer owes
$10,000 on an existing automobile loan and that the trade-in value of
the automobile is only $8,000, leaving a $2,000 deficit. The creditor
should disclose a downpayment of $0, not -$2,000.
ii. Cash payment. If the consumer makes a cash payment, creditors
may, at their option, disclose the entire cash payment as the
downpayment, or apply the cash payment first to any excess lien amount
and disclose any remaining cash as the downpayment. In the above
example:
A. If the downpayment disclosed is equal to the cash payment, the
$2,000 deficit must be reflected as an additional amount financed under
Sec. 226.18(b)(2).
B. If the consumer provides $1,500 in cash (which does not
extinguish the $2,000 deficit), the creditor may disclose a downpayment
of $1,500 or of $0.
C. If the consumer provides $3,000 in cash, the creditor may
disclose a downpayment of $3,000 or of $1,000.
2(a)(19) Dwelling.
1. Scope. A dwelling need not be the consumer's principal residence
to fit the definition and thus a vacation or second home could be a
dwelling. However, for purposes of the definition of residential
mortgage transaction and the right to rescind, a dwelling must be the
principal residence of the consumer. See the commentary to
Secs. 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 involving 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 Sec. 226.3(b) for credit extensions over $25,000.
2(a)(20) Open-end credit.
1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are
contained in Subpart B), as distinct from closed-end credit. Open-end
credit is consumer credit that is extended under a plan and meets all 3
criteria set forth in the definition.
2. Existence of a plan. The definition requires that there be a
plan, which connotes a contractual arrangement between the creditor and
the consumer. Some creditors offer programs containing a number of
different credit features. The consumer has a single account with the
institution that can be accessed repeatedly via a number of sub-accounts
established for the different program features and rate structures. Some
features of the program might be used repeatedly (for example, an
overdraft line) while others
[[Page 363]]
might be used infrequently (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, multi-featured plan.
3. Repeated transactions. Under this criterion, the creditor must
reasonably contemplate repeated transactions. This means that the credit
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 consumers
under the credit plan as a whole and need not believe a consumer will
reuse a particular feature of the plan. The determination of whether a
creditor can reasonably contemplate repeated transactions requires an
objective analysis. Information that much of the creditor's customer
base with accounts under the plan make repeated transactions over some
period of time is relevant to the determination, particularly when the
plan is opened primarily for the financing of infrequently purchased
products or services. A standard based on reasonable belief by a
creditor necessarily includes some margin for judgmental error. The fact
that particular consumers do not return for further credit extensions
does not prevent a plan from having been properly characterized as open-
end. For example, if much of the customer base of a clothing store makes
repeat purchases, the fact that some consumers use the plan only once
would not affect the characterization of the store's plan as open-end
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 its customers. For example:
i. It would be more reasonable for a thrift institution chartered
for the benefit of its members to contemplate repeated transactions with
a member than for a seller of aluminum siding to make the same
assumption about its customers.
ii. It would be more reasonable for a financial institution to make
advances from a line of credit for the purchase of an automobile than
for an automobile 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 which the finance charge, total of payments, and payment
schedule can be calculated. A plan may meet the definition of open-end
credit even though a finance charge is not normally imposed, provided
the creditor has the right, under the plan, to impose a finance charge
from time to time on the outstanding balance. For example, in some
plans, such as certain china club plans, a finance charge is not imposed
if the consumer pays all or a specified portion of the outstanding
balance within a given time period. Such a plan could meet the finance
charge criterion, if the creditor has the right to impose a finance
charge, 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 full 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 available
credit is generally replenished as earlier advances are repaid. A line
of credit is self-replenishing even though the plan itself has a fixed
expiration date, as long as during the plan's existence the consumer may
use the line, repay, and reuse the credit. The creditor may verify
credit information such as the consumer's continued income and
employment status or information for security purposes. This criterion
of unlimited credit distinguishes open-end credit from a series of
advances made pursuant to a close-end credit loan commitment. For
example:
Under a closed-end commitment, the creditor might agree to
lend a total of $10,000 in a series of advances as needed by the
consumer. When a consumer has borrowed the full $10,000, no more is
advanced under that particular agreement, even if there has been
repayment of a portion 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 refuse to extend new credit in a particular
case due to changes in the economy, the creditor's financial condition,
or the consumer's creditworthiness. (The rules in Sec. 226.5b(f),
however, limit the ability of a creditor to suspend credit advances for
home equity plans.) 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 credit need not be an absolute
right in order for the plan to meet the self-replenishing criterion.
6. Open-end real estate mortgages. Some credit plans call for
negotiated advances under so-called open-end real estate mortgages. Each
such plan must be independently measured against the definition of open-
end credit, regardless of the terminology used in the industry to
describe the plan. The fact that a particular plan is called an open-end
real estate mortgage, for example, does not, by itself, mean that it is
open-end credit under the regulation.
2(a)(21) Periodic rate.
[[Page 364]]
1. Basis. The periodic rate may be stated as a percentage (for
example, 1\1/2\% per month) or as a decimal equivalent (for example,
.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 periodic 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 percentage
rate.
Would have to apply the rate to the balance to disclose the
annual percentage rate with the degree of accuracy required in the
regulation (that is, within \1/8\ of 1 percentage point of the rate
based on the actual 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 organization and is
therefore a person.
2. Attorneys. An attorney and his or her client are considered to be
the same person for purposes 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 considered 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
Sec. 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. 226.18(c).
2. Examples. Common examples of prepaid finance charges include:
Buyer's points.
Service fees.
Loan fees.
Finder's fees.
Loan guarantee insurance.
Credit investigation fees.
However, in order for these or any other finance charges to be
considered prepaid, they must be either paid separately in cash or check
or withheld from the proceeds. Prepaid finance charges include any
portion of the finance charge paid prior to or at closing or settlement.
3. Exclusions. Add-on and discount finance 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 portion of
the charge will be rebated to the consumer upon prepayment. See the
commentary to Sec. 226.18(b).
4. Allocation of lump-sum payments. In a credit sale transaction
involving a lump-sum payment by the consumer and a discount or other
item that is a finance charge under Sec. 226.4, the discount or other
item is a prepaid finance charge to the extent the lump-sum payment is
not applied to the cash price. For example, a seller sells property to a
consumer for $10,000, requires the consumer to pay $3,000 at the time of
the purchase, and finances the remainder as a closed-end credit
transaction. The cash price of the property is $9,000. The seller is the
creditor in the transaction and therefore the $1,000 difference between
the credit and cash prices (the discount) is a finance charge. (See the
commentary to Secs. 226.4(b)(9) and 226.4(c)(5).) If the creditor
applies the entire $3,000 to the cash price and adds the $1,000 finance
charge to the interest on the $6,000 to arrive at the total finance
charge, all of the $3,000 lump-sum payment is a downpayment and the
discount is not a prepaid finance charge. However, if the creditor only
applies $2,000 of the lump-sum payment to the cash price, then $2,000 of
the $3,000 is a downpayment and the $1,000 discount is a prepaid finance
charge.
2(a)(24) Residential mortgage transaction.
1. Relation to other sections. This term is important in six
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.
Section 226.19--special timing rules.
Section 226.20(b)--disclosure requirements for assumptions.
Section 226.23(f)--exemption from the right of rescission.
2. Lien status. The definition is not limited to first lien
transactions. For example, a consumer 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 purchased is the consumer's principal residence.
3. Principal dwelling. A consumer can only have 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 become the consumer's principal dwelling within a year or upon
the completion of construction, the new dwelling is considered the
principal dwelling for purposes of applying this definition to a
particular transaction. See the commentary to Secs. 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
[[Page 365]]
disclose it as several transactions under Sec. 226.17(c)(6), each one is
considered to be a residential mortgage transaction, even if different
creditors are involved. For example:
The creditor makes a construction loan to finance the
initial construction of the consumer's principal dwelling, and the loan
will be disbursed in 5 advances. The creditor gives 6 sets of
disclosures (5 for the construction phase and 1 for the permanent
phase). Each one is a residential mortgage transaction.
One creditor finances the initial construction of the
consumer's principal dwelling and another creditor makes a loan to
satisfy the construction loan and provide permanent financing. Both
transactions are residential mortgage transactions.
5. Acquisition. i. A residential mortgage transaction finances the
acquisition of a consumer's principal dwelling. The term does not
include a transaction involving a consumer's principal dwelling if the
consumer had previously purchased and acquired some interest to the
dwelling, even though the consumer had not acquired full legal title.
ii. Examples of new transactions involving a previously acquired
dwelling include the financing of a balloon payment due under a land
sale contract and an extension of credit made to a joint owner of
property to buy out the other joint owner's interest. In these
instances, disclosures are not required under Sec. 226.18(q) or
Sec. 226.19(a) (assumability policies and early disclosures for
residential mortgage transactions). However, the rescission rules of
Secs. 226.15 and 226.23 do apply to these new transactions.
iii. In other cases, the disclosure and rescission rules do not
apply. For example, where a buyer enters into a written agreement with
the creditor holding the seller's mortgage, allowing the buyer to assume
the mortgage, if the buyer had previously purchased the property and
agreed with the seller to make the mortgage payments, Sec. 226.20(b)
does not apply (assumptions involving residential mortgages).
6. Multiple purpose transactions. A transaction meets the definition
of this section if any part of the loan proceeds will be used to finance
the acquisition or initial construction of the consumer's principal
dwelling. For example, a transaction to finance the initial construction
of the consumer's principal dwelling is a residential mortgage
transaction even if a portion of the funds will be disbursed directly to
the consumer or used to satisfy a loan for the purchase of the land on
which the dwelling will be built.
7. Construction on previously acquired vacant land. A residential
mortgage transaction includes a loan to finance the construction of a
consumer's principal dwelling on a vacant lot previously acquired by the
consumer.
2(a)(25) Security interest.
1. Threshold test. The threshold test is whether a particular
interest in property is recognized as a security interest under
applicable law. The regulation does not determine whether a particular
interest is a security interest under applicable law. If the creditor is
unsure whether a particular interest is a security interest under
applicable law (for example, 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.
However, the regulation and the commentary do exclude specific
interests, such as after-acquired property and accessories, from the
scope of the definition regardless of their categorization under
applicable law, and these named exclusions may not be disclosed as
security interests under the regulation. (But see the discussion of
exclusions elsewhere in the commentary to Sec. 226.2(a)(25).)
2. Exclusions. The general definition of security interest excludes
three groups of interests: Incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law.
These interests may not be disclosed with the disclosures required under
Sec. 226.18, but the creditor is not precluded from preserving these
rights elsewhere in the contract documents, or invoking and enforcing
such rights, if it is otherwise lawful to do so. If the creditor is
unsure whether a particular interest is one of the excluded interests,
the creditor may, at its option, consider such interests as security
interests for Truth in Lending purposes.
3. Incidental interests. Incidental interests in property that are
not security interests include, 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 primary
collateral for the transaction--for example, in an insurance premium
financing transaction.
4. Operation of 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. However, 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 security interest unless otherwise
provided.
[[Page 366]]
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.
6. Specificity of disclosure. A creditor need not separately
disclose multiple security interests that it may hold in the same
collateral. The creditor need only disclose that the transaction is
secured by the collateral, even when security interests from prior
transactions remain of record and a new security interest is taken in
connection with the transaction. In disclosing the fact that the
transaction is secured by the collateral, the creditor also need not
disclose how the security interest arose. For example, in a closed-end
credit transaction, a rescission notice need not specifically state that
a new security interest is ``acquired'' or an existing security interest
is ``retained'' in the transaction.
The acquisition or retention of a security interest in the
consumer's principal dwelling instead may be disclosed in a rescission
notice with a general statement such as the following: ``Your home is
the security for the new transaction.''
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: Section 103.
Other sections: None.
Other regulations: Regulation E (12 CFR 205.2(d)).
Previous regulation: Sections 226.2, 226.8, and 226.9.
1981 changes: Section 226.2 implements amended section 103 of the
act. Separate definitions for comparative index of credit cost,
discount, organization, period, real property, real property
transaction, regular price, and surcharge have been deleted. The
definitions relating specifically to consumer leases are now found in
the separate consumer leasing regulation, Regulation M (12 CFR Part
213).
Several terms are now defined elsewhere in the regulation or
commentary rather than in Sec. 226.2. For example, finance charge is
described and explained in Sec. 226.4, and agricultural purpose is
discussed in the commentary to Sec. 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 credit, business day, closed-end credit,
consumer, consummation, downpayment, prepaid finance charge, and
residential mortgage transaction.
The major changes in the definitions are as follows:
Arranger of credit has a significantly different meaning. It
reflects the statutory amendment that limits arrangers to those who
regularly arrange credit extensions for persons who are not themselves
creditors. This definition was deleted effective October 1, 1982.
Billing cycle largely restates the prior definition, but requires
cycles to be regular, and allows the four-day variance to be measured
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 general
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 inclusion 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 statutory exemption for
agricultural credit.
Consummation is a significant departure from longstanding
interpretations of the previous definition. It now focuses only on the
time the consumer becomes contractually obligated, rather than the time
the consumer pays a nonrefundable fee or suffers an economic penalty for
failing to go forward with the credit transaction.
Credit generally parallels the previous definition, but modifies the
previous interpretations of the definition by excluding more
transactions.
Creditor reflects the statutory amendments to the act that were
intended to eliminate 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 4
installments if no finance charge is imposed. Finally, the obligation
must be initially payable to a person for that person to be the
creditor.
Dwelling reflects the statutory amendment 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 consumer to have the privilege of
paying either in installments or in full.
[[Page 367]]
Periodic rate combines the previous definitions 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 legislative history of the simplification amendments,
incidental interests are expressly excluded from the definition. Except
for purposes of rescission, interests that arise solely by operation of
law are also excluded.
Section 226.3--Exempt Transactions
3(a) Business, commercial, agricultural, or organizational credit.
1. Primary purposes. A creditor must determine in each case if the
transaction is primarily 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 disclosures 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, antiques, or art--is primarily for business or
commercial purposes (as opposed to a consumer 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 personally manage the
acquisition. The more personal involvement there is, the more likely it
is to be business purpose.
The ratio of income from the acquisition to the total
income of the borrower. The higher the ratio, the more likely it is to
be business purpose.
The size of the transaction. The larger the transaction,
the more likely it is to be business 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 employees 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 includes, for example, the acquisition of a warehouse
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
considered 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, however, 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-occupied
within the coming year, different rules apply:
Credit extended to acquire the rental property is deemed to
be for business purposes if it contains more than 2 housing units.
Credit extended to improve or maintain the rental property
is deemed to be for business purposes if it contains more than 4 housing
units. Since the amended statute defines dwelling to include 1 to 4
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 determination of whether
it is business or consumer credit should be made by considering the
factors listed in Comment 3(a)-2.
5. Business credit later refinanced. Business-purpose credit that is
exempt from the regulation may later be rewritten for consumer purposes.
Such a transaction is consumer credit requiring disclosures only if the
existing obligation is satisfied and replaced by a new obligation made
for consumer purposes undertaken by the same obligor.
6. Agricultural purpose. An agricultural purpose includes the
planting, propagating, nurturing, harvesting, catching, storing,
exhibiting, 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, poultry, bees, or wildlife. The exemption also applies 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.
[[Page 368]]
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 purpose
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 financing 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 executed by the financial
institution in its capacity as trustee and payment is secured by a trust
deed, reflecting title in the financial institution as trustee. In some
instances, the consumer 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 trustee
has no personal liability on the note. Assuming the transactions are for
personal, family, 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
Sec. 226.2(a)(19), this exemption does not apply to a credit extension
secured by a mobile home used or expected to be used as the principal
dwelling of the consumer, even if the credit exceeds $25,000. A loan
commitment for closed-end credit in excess 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
Sec. 226.3(b) (unless secured by real property or personal property used
or expected to be used as the consumer's principal dwelling) if either
of the following conditions is met:
The creditor makes a firm commitment to lend over $25,000
with no requirement of additional credit information for any advances.
The initial extension of credit on the line exceeds
$25,000.
If a security interest is taken at a later time in any real property, or
in personal property used or expected to be used as the consumer's
principal dwelling, the plan would no longer be exempt. The creditor
must comply with all of the requirements of the regulation including,
for example, providing the consumer with an initial disclosure
statement. If the security interest being added is in the consumer's
principal dwelling, the creditor must also give the consumer the right
to rescind the security interest. (See the commentary to Sec. 226.15
concerning the right of rescission.)
3. Closed-end credit--subsequent changes. A closed-end loan for over
$25,000 may later be rewritten for $25,000 or less, or a security
interest in real property or in personal property used or expected to be
used as the consumer's principal dwelling 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 purposes undertaken by
the same obligor. (See the commentary to Sec. 226.23(a)(1) regarding the
right of rescission when a security interest in a consumer's principal
dwelling is added to a previously exempt transaction.)
3(c) Public utility credit.
1. Examples. Examples of public utility services include:
Gas, water, or electrical services.
Cable television services.
Installation of new sewer lines, water lines, conduits,
telephone poles, or metering equipment in an area not already serviced
by the utility.
The exemption does not apply to extensions of credit, for example:
To purchase appliances such as gas or electric ranges,
grills, or telephones.
To finance home improvements such as new heating or air
conditioning systems.
3(d) Securities or commodities accounts.
1. 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) Home fuel budget plans.
1. Definition. Under a typical home fuel budget 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 actual
cost of the fuel. Fuel is delivered as needed, no finance charge is
assessed, and the customer may withdraw from the plan at any time. Under
these circumstances, the arrangement is exempt from the regulation, even
if a charge to cover the billing costs is imposed.
3(f) Student loan programs.
1. Coverage. This exemption applies to the Guaranteed Student Loan
program (administered by the Federal government, State, and private non-
profit agencies), the Auxiliary Loans to Assist Students (also known as
PLUS) program, and the National Direct Student Loan program.
[[Page 369]]
References
Statute: Sections 103 (s) and (t) and 104.
Other sections: Section 226.12 (a) and (b).
Previous regulation: Section 226.3 and Interpretations Secs. 226.301
and 226.302.
1981 changes: The business credit exemption has been expanded to
include credit for agricultural purposes. The rule of Interpretation
Sec. 226.302, concerning credit relating to structures containing more
than 4 housing units, has been modified and somewhat expanded by
providing more exclusions for transactions involving rental property.
The exemption for transactions above $25,000 secured by real estate
has been narrowed; all transactions secured by the consumer's principal
dwelling (even if not considered real property) are now subject to the
regulation.
The public utility exemption now covers the financing of the
extension of a utility into an area not earlier served by the utility,
in addition to the financing of services.
The securities credit exemption has been extended to broker-dealers
registered with the CFTC as well as the SEC.
A new exemption has been created for home fuel budget plans.
Section 226.4--Finance Charge
4(a) Definition.
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges. In
determining whether an item is a finance charge, the creditor should
compare the credit transaction in question with a similar cash
transaction. 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.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash and
credit customers.
B. Discounts that are available to cash and credit customers, such
as quantity discounts.
C. Discounts available to a particular group of consumers because
they meet certain criteria, such as being members of an organization or
having accounts at a particular financial institution. This is the case
even if an individual must pay cash to obtain the discount, provided
that credit customers who are members of the group and do not qualify
for the discount pay no more than the nonmember cash customers.
D. 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.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement, if
permitted by law (for example, the Real Estate Settlement Procedures Act
prohibits such charges in certain transactions secured by real
property).
C. Charges for a required maintenance or service contract imposed
only in a credit transaction.
iii. 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:
A. 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 of 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 determining 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 imposed on the consumer. (See
Sec. 226.4(b)(6).)
A tax imposed by a state or other governmental body on a
creditor is not a finance charge if the creditor absorbs the tax as a
cost of doing business and does not separately impose the tax on the
consumer. (For additional discussion of the treatment of taxes, see
other commentary to Sec. 226.4(a).)
3. Forfeitures of interest. If the creditor reduces the interest
rate it pays or stops paying interest on the consumer's deposit account
or any portion of it for the term of a credit transaction (including,
for example, an overdraft on a checking account or a loan secured by a
certificate of deposit), the interest lost is a finance charge. (See the
commentary to Sec. 226.4(c)(6).) For example:
A consumer borrows $5,000 for 90 days and secures it with a
$10,000 certificate of deposit paying 15% interest. The creditor charges
the consumer an interest rate of 6% 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:
[[Page 370]]
A consumer wishes to buy from a financial institution a
$10,000 certificate of deposit paying 15% interest but has only $4,000.
The financial institution offers to lend the consumer $6,000 at an
interest rate of 6%, but will pay the 15% 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
agreement with the financial institution to interest 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%. In
addition, the agreement states that the creditor will pay 0% interest on
the amount of the time deposit that corresponds to the amount of the
credit extension(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. Treatment of fees for use of automated teller machines. Any
charge imposed on a cardholder by a card issuer for the use of an
automated teller machine (ATM) to obtain a cash advance (whether in a
proprietary, shared, interchange, or other system) is not a finance
charge to the extent that it does not exceed the charge imposed by the
card issuer on its cardholders for using the ATM to withdraw cash from a
consumer asset account, such as a checking or savings account. (See the
commentary to Sec. 226.6(b).)
5. Taxes. i. Generally, a tax imposed by a state or other
governmental body solely on a creditor is a finance charge if the
creditor separately imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if the tax is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the law
is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or any
other state or local tax imposed on the consumer, or on the credit
transaction, is not a finance charge even if the tax is collected by the
creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by an other provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
4(a)(1) Charges by third parties.
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to choose
the insurer.
2. Annuities associated with reverse mortgages. Some creditors offer
annuities in connection with a reverse mortgage transaction. The amount
of the premium is a finance charge if the creditor requires the purchase
of the annuity incident to the credit. Examples include the following:
i. The credit documents reflect the purchase of an annuity from a
specific provider or providers.
ii. The creditor assesses an additional charge on consumers who do
not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some future
date.
4(a)(2) Special rule; closing agent charges.
1. General. This rule applies to charges by a third party serving as
the closing agent for the particular loan. An example of a closing agent
charge included in the finance charge is a courier fee where the
creditor requires the use of a courier.
2. Required closing agent. If the creditor requires the use of a
closing agent, fees charged by the closing agent are included in the
finance charge only if the creditor requires the particular service,
requires the imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 226.4. For example, a fee
that would be paid in a comparable cash transaction may be excluded
under Sec. 226.4(a). A charge for conducting or attending a closing is a
finance charge and may be excluded only if the charge is included in and
is incidental to a lump-sum closing fee excluded under Sec. 226.4(c)(7).
4(a)(3) Special rule; mortgage broker fees.
1. General. A fee charged by a mortgage broker is excluded from the
finance charge if it is the type of fee that is also excluded when
charged by the creditor. For example, to exclude an application fee from
the finance charge under Sec. 226.4(c)(1), a mortgage broker must charge
the fee to all applicants for credit, whether or not credit is extended.
2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction secured
by real property or a dwelling.
[[Page 371]]
3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an agreement
is not included as a separate component of a consumer's total finance
charge (although this compensation may be reflected in the finance
charge if it comes from amounts paid by the consumer to the creditor
that are finance charges, such as points and interest).
4(b) Examples of finance charges.
1. Relationship to other provisions. Charges or fees shown as
examples of finance charges in Sec. 226.4(b) may be excludable under
Sec. 226.4(c), (d), or (e). For example:
Premiums for credit life insurance, shown as an example of
a finance charge under Sec. 226.4(b)(7), may be excluded if the
requirements of Sec. 226.4(d)(1) are met.
Appraisal fees mentioned in Sec. 226.4(b)(4) are excluded
for real property or residential mortgage transactions under
Sec. 226.4(c)(7).
Paragraph 4(b)(2).
1. Checking account charges. A checking or transaction account
charge imposed in connection with a credit feature is a finance charge
under Sec. 226.4(b)(2) to the extent the charge exceeds the charge for a
similar account without a credit feature. If a charge for an account
with a credit feature does not exceed the charge for an account without
a credit feature, the charge is not a finance charge under
Sec. 226.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without a
credit feature; the $2 difference is a finance charge. (If the
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to
Sec. 226.4(c)(4).)
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a similar
account without a credit feature; the $5 charge is not a finance charge.
Paragraph 4(b)(3).
1. Assumption fees. The assumption fees mentioned in
Sec. 226.4(b)(3) are finance charges only when the assumption occurs and
the fee is imposed on the new buyer. The assumption 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 Sec. 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.
2. Residual value insurance. Where a creditor requires a consumer to
maintain residual value insurance or where the creditor is a beneficiary
of a residual value insurance policy written in connection with an
extension of credit (as is the case in some forms of automobile balloon
payment financing, for example), the premiums for the insurance must be
included in the finance charge for the period that the insurance is to
be maintained. If a creditor pays for residual value insurance and
absorbs the payment as a cost of doing business, such costs are not
considered finance charges. (See comment 4(a)-2.)
Paragraphs 4(b) (7) and (8).
1. Pre-existing insurance policy. The insurance discussed in
Sec. 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 in connection with a transaction. Insurance
sold after consummation in closed-end credit transactions or after the
opening of a plan in open-end credit transactions is not ``written in
connection with'' the credit transaction if the insurance is written
because of the consumer's default (for example, by failing to obtain or
maintain required property insurance) or because the consumer requests
insurance after consummation or the opening of a plan (although credit
sale disclosures may be required for the insurance sold after
consummation if it is financed).
3. Substitution of life insurance. The premium for a life insurance
policy purchased and assigned to satisfy a credit life insurance
requirement 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 premium 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 insurance not of the types
described in Sec. 226.4(b) (7) and (8) are finance charges and are not
excludable. For example:
The premium for a hospitalization insurance policy, if it
is required to be purchased
[[Page 372]]
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 Sec. 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
purchaser 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 offered 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 under 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 amended) or a
dollar amount. This provision applies only to transactions involving an
open-end credit plan or a credit card. The merchant must offer the
discount to prospective buyers whether or not they are cardholders or
members of the open-end credit plan. The merchant may, however, make
other distinctions. For example:
The merchant may limit the discount to payment by cash, and
not offer it for payment by check or by use of a debit card.
The merchant may establish a discount plan that allows a
15% discount for payment by cash, a 10% discount for payment by check,
and a 5% discount 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.
3. Determination of the regular price. The regular price is critical
in determining whether the difference between the price charged to cash
customers and credit customers is a discount or a surcharge, as these
terms are defined in amended section 103 of the Act. The regular price
is defined in section 103 of the Act as--
. . . the tag or posted price charged for the property or service if
a single price is tagged or posted, or the price charged for the
property or service when payment is made by use of an open-end credit
account or a credit card if either (1) no price is tagged or posted, or
(2) two prices are tagged or posted. . . .
For example, in the sale of motor vehicle fuel, the tagged or posted
price is the price displayed at the pump. As a result, the higher price
(the open-end credit or credit card price) must be displayed at the
pump, either alone or along with the cash price. Service station
operators may designate separate pumps or separate islands as being for
either cash or credit purchases and display only the appropriate prices
at the various pumps. If a pump is capable of displaying on its meter
either a cash or a credit price depending upon the consumer's means of
payment, both the cash price and the credit price must be displayed at
the pump. A service station operator may display the cash price of fuel
by itself on a curb sign, as long as the sign clearly indicates that the
price is limited to cash purchases.
4(b)(10) Debt cancellation fees.
1. Definition. Debt cancellation coverage provides for payment or
satisfaction of all or part of a debt when a specified event occurs. The
term includes guaranteed automobile protection or ``GAP'' agreements,
which pay or satisfy the remaining debt after property insurance
benefits are exhausted.
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, However, if the fee is to be excluded
from the finance charge under Sec. 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 Sec. 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 consumer. In
determining whether a charge is for actual unanticipated late payment on
a 30-day account, for example, factors to be considered include:
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
payment in full or taking other action to collect? If no effort is made
to collect the full amount due, the charge may be a finance charge.
[[Page 373]]
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 ``delinquency, default, or a
similar occurrence'' include, for example, charges for reinstatement of
credit privileges or for summitting as payment 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
institution agrees in writing that it will pay such items.
Paragraph 4(c)(4).
1. Participation fees--periodic basis. The participation fees
mentioned in Sec. 226.4(c)(4) do not necessarily 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
imposed separately on individual closed-end transactions. The fee may be
charged on a monthly, annual, or other periodic basis; a one-time, non-
recurring fee imposed at the time an account is opened is not a fee that
is charged on a periodic basis, and may not be treated as a
participation fee.
2. Participation fees--exclusions. Minimum monthly charges, charges
for non-use of a credit card, and other charges based on either account
activity or the amount of credit available under the plan are not
excluded from the finance charge by Sec. 226.4(c)(4). Thus, for example,
a fee that is charged and then refunded to the consumer based on the
extent to which the consumer uses the credit available would be a
finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see
comment 14(c)-7 for treatment of certain types of fees excluded in
determining the annual percentage rate for the periodic statement.)
Paragraph 4(c)(5).
1. Seller's points. The seller's points mentioned in
Sec. 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 agencies. A commitment fee paid by a non-creditor seller
(such as a real estate developer) to the creditor should be treated as
seller's points. Buyer's points (that is, points charged to the buyer by
the creditor), however, are finance charges.
2. Other seller-paid amounts. Mortgage insurance premiums and other
finance charges are sometimes paid at or before consummation or
settlement on the borrower's behalf by a noncreditor seller. The
creditor should treat the payment made by the seller as seller's points
and exclude it from the finance charge if, based on the seller's
payment, the consumer is not legally bound to the creditor for the
charge. A creditor who gives disclosures before the payment has been
made should base them on the best information reasonably available.
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 loses some of the interest
that would otherwise have been earned. Under Sec. 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 limit precludes compliance by any other
means. If the creditor imposes a differential that exceeds that
required, only the lost interest attributable to the excess amount is a
finance charge. (See the commentary to Sec. 226.4(a).)
Paragraph 4(c)(7).
1. Real estate or residential mortgage transaction charges. The list
of charges in Sec. 226.4(c)(7) applies both to residential mortgage
transactions (which may include, for example, 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 rather than by a
third party. In addition, the cost of verifying or confirming
information connected to the item is also excluded. For example, credit
report fees cover not only the cost of the report, but also the cost of
verifying information in the report. In all cases, charges excluded
under Sec. 226.4(c)(7) must be bona fide and reasonable.
2. Lump sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total should
be allocated to that service and included in the finance charge.
However, a lump sum charged for conducting or attending a closing (for
example, by a lawyer or a title company) is excluded from the finance
charge if the charge is primarily for services related to items listed
in Sec. 226.4(c)(7) (for example, reviewing or completing documents),
even if other incidental services such as explaining various documents
or disbursing funds for
[[Page 374]]
the parties are performed. The entire charge is excluded even if a fee
for the incidental services would be a finance charge if it were imposed
separately.
3. Charges assessed during the loan term. Real estate or residential
mortgage transaction charges excluded under Sec. 226.4(c)(7) are those
charges imposed solely in connection with the initial decision to grant
credit. This would include, for example, a fee to search for tax liens
on the property or to determine if flood insurance is required. The
exclusion does not apply to fees for services to be performed
periodically during the loan term, regardless of when the fee is
collected. For example, a fee for one or more determinations during the
loan term of the current tax lien status or flood insurance requirements
is a finance charge, regardless of whether the fee is imposed at
closing, or when the service is performed. If a creditor is uncertain
about what portion of a fee to be paid at consummation or loan closing
is related to the initial decision to grant credit, the entire fee may
be treated as a finance charge.
4(d) Insurance and debt cancellation coverage.
1. General. Section 226.4(d) permits insurance premiums and charges
and debt-cancellation charges to be excluded from the finance charge.
The required disclosures must be made in writing. The rules on location
of insurance and debt-cancellation disclosures for closed-end
transactions are in Sec. 226.17(a). For purposes of Sec. 226.4(d), all
references to insurance also include debt cancellation coverage unless
the context indicates otherwise.
2. Timing of disclosures. If disclosures are given early, for
example under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not
redisclose if the actual premium is different at the time of
consummation. If insurance disclosures are not given at the time of
early disclosure and insurance is in fact written in connection with the
transaction, the disclosures under Sec. 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 designate 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 redisclosure
in order to exclude the additional premium from treatment as a finance
charge.
4. Unit-cost disclosures. i. Open-end credit. The premium or fee for
insurance or debt cancellation for the initial term of coverage may be
disclosed on a unit-cost basis in open-end credit transactions. The cost
per unit should be based on the initial term of coverage, unless one of
the options under comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions 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 covered by a plan of credit life
insurance coverage with a maximum of $10,000. The consumer requests an
additional $4,000 loan to be covered 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 premium or
charges to be excluded from the finance charge. Whether the insurance is
in fact required 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 consumer is required to elect one of several options--such as to
purchase credit life insurance, or to assign an existing life insurance
policy, or to pledge security such as a certificate of deposit--and the
consumer purchases the credit life insurance policy, the premium must be
included in the finance charge. (If the consumer assigns a preexisting
policy or pledges security instead, no premium is included in the
finance charge. The security interest would be disclosed under
Sec. 226.6(c) or Sec. 226.18(m). See the commentary to Sec. 226.4(b) (7)
and (8).)
6. Other types of voluntary insurance. Insurance is not credit life,
accident, health, or loss-of-income insurance if the creditor or the
credit account of the consumer is not the beneficiary of the insurance
coverage. If such insurance is not required by the creditor as an
incident to or a condition of credit, it is not covered by Sec. 226.4.
7. Signatures. If the creditor offers a number of insurance options
under Sec. 226.4(d), the creditor may provide a means for the consumer
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. 226.2(a)(11),
or by an authorized user on a credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the consumer to
choose the insurer and disclose that fact. This disclosure must be made
whether or not the property insurance is available from or through the
creditor. The requirement that an option be given does not
[[Page 375]]
require that the insurance be readily available from other sources. 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 specific 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 Sec. 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 repossession insurance and holder-in-due-
course insurance. These types of coverage do not constitute single-
interest insurance for purposes of the regulation, and premiums for them
do not qualify for exclusion from the finance charge under
Sec. 226.4(d). If a policy that is primarily VSI also provides coverages
that are not VSI or other property insurance, a portion of the premiums
must be allocated to the nonexcludable coverages and included in the
finance charge. However, such allocation is not required if the total
premium in fact attributable to all of the non-VSI coverages included in
the policy is $1.00 or less (or $5.00 or less in the case of a multi-
year policy).
11. Initial term. i. The initial term of the insurance or debt
cancellation coverage determines the period for which a premium amount
or fee must be disclosed, unless one of the options discussed under
comment 4(d)-12 is available. For purposes of Sec. 226.4(d), the initial
term is the period for which the insurer or creditor is obligated to
provide coverage, even though the consumer may be allowed to cancel the
coverage or coverage may end due to nonpayment before that term expires.
ii. For example:
A. The initial term of a property insurance policy on an automobile
that is written for one year is one year even though premiums are paid
monthly and the term of the credit transaction is four years.
B. The initial term of an insurance policy is the full term of the
credit transaction if the consumer pays or finances a single premium in
advance.
12. Initial term; alternative. i. General. A creditor has the option
of providing cost disclosures on the basis of an assumed initial term of
one year of insurance or debt-cancellation coverage instead of a longer
initial term (provided the premium or fee is clearly labeled as being
for one year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium or fee that is assessed
periodically but the consumer is under no obligation to continue the
coverage, whether or not the consumer has made an initial payment.
ii. Open-end plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period that
is less than one year if the consumer has agreed to pay a premium or fee
that is assessed periodically, for example monthly, but the consumer is
under no obligation to continue the coverage.
iii. Examples. To illustrate:
A. A credit life insurance policy providing coverage for a 30-year
mortgage loan has an initial term of 30 years, even though premiums are
paid monthly and the consumer is not required to continue the coverage.
Disclosures may be based on the initial term, but the creditor also has
the option of making disclosures on the basis of coverage for an assumed
initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance mentioned
in Sec. 226.4(d) includes involuntary unemployment insurance, which
provides that some or all of the consumer's payments will be made if the
consumer becomes unemployed involuntarily.
4(d)(3) Voluntary debt cancellation fees.
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3)
rather than according to Sec. 226.4(d)(2) for property insurance.
2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation coverage whether
or not the coverage is considered insurance. Creditors may use the model
credit insurance disclosures only if the debt cancellation coverage
constitutes insurance under state law.
4(e) Certain security interest charges.
1. Examples.
i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under Sec. 226.4(e) (1)
and (3). Examples are charges or other fees required for filing or
recording security agreements, mortgages, continuation statements,
termination statements, and similar documents, as well as intangible
property or
[[Page 376]]
other taxes even when the charges or fees are imposed by the state
solely on the creditor and charged to the consumer (if the tax must be
paid to record a security interest). (See comment 4(a)-5 regarding the
treatment of taxes, generally.)
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or other
fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar documents
relating to that obligation are not excludable from the finance charge
under this section.
2. Itemization. The various charges described in Sec. 226.4(e) (1)
and (3) may be totaled and disclosed as an aggregate sum, or they may be
itemized by the specific fees and taxes imposed. If an aggregate sum is
disclosed, a general term such as security interest fees or filing fees
may be used.
3. Notary fees. In order for a notary fee to be excluded under
Sec. 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 under applicable
law.
The amount of the fee is set or authorized by law.
4. Non-filing insurance. The exclusion in Sec. 226.4(e)(2) is
available only if non-filing insurance is purchased. If the creditor
collects and simply retains a fee as a sort of self-insurance against
non-filing it may not be excluded from the finance charge. If the non-
filing insurance premium exceeds the amount of the fees excludable from
the finance charge under Sec. 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 non-filing insurance. Only $8.00 of the $10.00 is excludable
from the finance charge.
4(f) Prohibited offsets.
1. Earnings on deposits or investments. The rule that the creditor
shall not deduct any earnings by the consumer or deposits or investments
applies whether or not the creditor has a security interest in the
property.
References
Statute: Sections 106, 167, and 171(c).
Other sections: Sections 226.9(d) and 226.12.
Previous regulation: Section 226.4 and Interpretations Secs. 226.401
through 226.407.
1981 changes: While generally continuing the rules under the
previous regulation, Sec. 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, Sec. 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 exclusions from
the finance charge: application fees imposed on all applicants are no
longer finance 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 exclusions for real estate transactions apply to
all residential mortgage transactions.
The simplified rules for excluding insurance from the finance charge
allow unit-cost disclosure in certain closed-end credit transactions;
permit initials as well as signatures on the authorization; permit any
consumer to authorize insurance for other consumers; and delete the
requirement that the authorization be separately dated.
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
5(a) Form of disclosures.
Paragraph 5(a)(1).
1. Clear and conspicuous. The clear and conspicuous standard
requires that disclosures be in a reasonably understandable form. Except
where otherwise provided, the standard does not require that disclosures
be segregated from other material or located in any particular place on
the disclosure statement, or that numerical amounts or percentages be in
any particular type size. (But see comments 5a(a)(2)-1 and -2 for
special rules concerning Sec. 226.5a disclosures for credit card
applications and solicitations.) The standard does not prohibit:
Pluralizing required terminology (finance charge and annual
percentage rate).
Adding to the required disclosures such items as
contractual provisions, explanations of contract terms, state
disclosures, and translations.
Sending promotional material with the required disclosures.
Using commonly accepted or readily understandable
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 balance), so long as a
legend or description of the code or symbol is provided on the
disclosure statement.
2. Integrated document. The creditor may make both the initial
disclosures (Sec. 226.6) and the periodic statement disclosures
(Sec. 226.7) on more than one page, and use both the front
[[Page 377]]
and the reverse sides, so long as the pages constitute an integrated
document. An integrated document would not include disclosure pages
provided to the consumer at different times or disclosures interspersed
on the same page with promotional material. An integrated document would
include, for example:
Multiple pages provided in the same envelope 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.
Paragraph 5(a)(2).
1. When disclosures must be more conspicuous. The term finance
charge and annual percentage rate, when required to be used with a
number, must be disclosed more conspicuously than other required
disclosures, except in the cases provided in footnote 9. At the
creditor's option, finance charge and annual percentage rate may also be
disclosed more conspicuously than the other required disclosures even
when the regulation does not so require. The following examples
illustrate these rules:
In disclosing the annual percentage rate as required by
Sec. 226.6(a)(2), the term annual percentage rate is subject to the more
conspicuous rule.
In disclosing the amount of the finance charge, required by
Sec. 226.7(f), the term finance charge is subject to the more
conspicuous rule.
Although neither finance charge nor annual percentage rate
need be emphasized when used as part of general informational material
or in textual descriptions of other terms, emphasis is permissible in
such cases. For example, when the terms appear as part of the
explanations required under Sec. 226.6(a) (3) and (4), they may be
equally conspicuous as the disclosures required under Secs. 226.6(a)(2)
and 226.7(g).
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 emphasized. The disclosures may be made more
conspicuous by, for example:
Capitalizing the words when other disclosures are printed
in lower case.
Putting them in bold print or a contrasting color.
Underlining them.
Setting them off with asterisks.
Printing them in larger type.
3. Disclosure of figures--exception to more conspicuous rule. The
terms annual percentage rate and finance charge need not be more
conspicuous than figures (including, for example, numbers, percentages,
and dollar signs).
5(b) Time of disclosures.
5(b)(1) Initial disclosures.
1. Disclosure before the first transaction. The rule that the
initial disclosure statement must be furnished ``before the first
transaction'' requires delivery of the initial disclosure statement
before the consumer becomes obligated on the plan. For example, the
initial disclosures must be given before the consumer makes the first
purchase (such as when a consumer opens a credit plan and makes
purchases contemporaneously at a retail store), receives the first
advance, or pays any fees or charges under the plan other than an
application fee or refundable membership fee (see below). The
prohibition on the payment of fees other than application or refundable
membership fees before initial disclosures are provided does not apply
to home equity plans subject to Sec. 226.5b. See the commentary to
Sec. 226.5b(h) regarding the collection of fees for home equity plans
covered by Sec. 226.5b.
If the consumer pays a membership fee before receiving the
Truth in Lending disclosures, or the consumer agrees to the imposition
of a membership fee at the time of application and the Truth in Lending
disclosure statement is not given at that time, disclosures are timely
as long as the consumer, after receiving the disclosures, can reject the
plan. The creditor must refund the membership fee if it has been paid,
or clear the account if it has been debited to the consumer's account.
If the consumer receives a cash advance check at the same
time the Truth in Lending disclosures are provided, disclosures are
still timely if the consumer can, after receiving the disclosures,
return the cash advance check to the creditor without obligation (for
example, without paying finance charges).
Initial disclosures need not be given before the imposition
of an application fee under Sec. 226.4(c)(1).
If, after receiving the disclosures, the consumer uses the
account, pays a fee, or negotiates a cash advance check, the creditor
may consider the account not rejected for purposes of this section.
2. Reactivation of suspended account. If an account 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 initial disclosures are required.
3. Reopening closed account. If an account has been closed (for
example, due to inactivity, cancellation, or expiration) and then
[[Page 378]]
is reopened, new initial disclosures are required. No new initial
disclosures are required, however, when the account is closed merely to
assign it a new number (for example, when a credit card is reported lost
or stolen) and the new account then continues on the same terms.
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 disclosures under Sec. 226.6
must be given before the consumer becomes obligated on the open-end
credit plan. (See the commentary to Sec. 226.17 on converting open-end
credit to closed-end credit.)
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new open-
end plan must comply with Sec. 226.6 before the balance transfer occurs.
Card issuers that are subject to the requirements of Sec. 226.5a may
establish procedures that comply with both sections in a single
disclosure statement.
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
charge has been imposed on the account for that cycle.
If a statement was returned as undeliverable. If a new
address is provided, however, within a reasonable time before the
creditor must send a statement, the creditor must resume sending
statements. Receiving 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 periodic statement for
the June cycle. (See Sec. 226.13(a)(7).)
2. Termination of 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 provide periodic statements to
those consumers entitled to receive them under Sec. 226.5(b)(2)((i) (for
example, when an open-end credit plan ends and consumers are paying off
outstanding balances) and must continue to follow all of the other open-
end credit requirements and procedures in subpart B.
Paragraph 5(b)(2)(ii).
1. 14-day rule. The 14-day rule for mailing or delivering periodic
statements does not apply if charges (for example, transaction or
activity charges) are imposed regardless of the timing of a periodic
statement. The 14-day rule does apply, for example:
If current debits retroactively become subject 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 payment
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. When the consumer initiates a
request, the creditor may permit, but may not require, consumers to pick
up their periodic statements. If the consumer wishes to pick up the
statement and the plan has a free-ride period, the statement must be
made available in accordance with the 14-day rule. If the consumer
wishes to receive the statement by electronic communication, the
creditor must comply with the consumer consent requirements as provided
in Sec. 226.36(b).
5(c) Basis of disclosures and use of estimates.
1. Legal obligation. The disclosures should reflect the credit terms
to which the parties are legally bound at the time of giving the
disclosures.
The legal obligation is determined by applicable state or
other law.
The fact that a term or contract may later be deemed
unenforceable by a court on the basis of equity or other grounds does
not, by itself, mean that disclosures based on that term or contract did
not reflect the legal obligation.
The legal obligation normally is presumed to be contained
in the contract that evidences the agreement. But this may be rebutted
if another agreement between the parties legally modifies that contract.
2. Estimates--obtaining information. Disclosures may be estimated
when the exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the creditor
at the time disclosures are made. The reasonably available standard
requires that the creditor, acting in good faith, exercise due diligence
in obtaining 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 representations of other parties in obtaining
information. 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
[[Page 379]]
estate, the creditor may estimate the appraisal fees to be charged; such
an estimate might reasonably be based on the prevailing market rates for
similar appraisals. If the exact appraisal fee is determinable after the
estimate is furnished but before the consumer receives the first advance
under the plan, no new disclosure is necessary.
4. Deferred payment transactions. See comment 7-3(iv).
5(d) Multiple creditors; multiple consumers.
1. Multiple creditors. Under Sec. 226.5(d):
Creditors must choose which of them will make the
disclosures.
A single, complete set of disclosures must be provided,
rather than partial disclosures from several creditors.
All disclosures for the open-end credit plan must be given,
even if the disclosing creditor would not otherwise have been obligated
to make a particular disclosure.
In some open-end credit programs involving 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 separate periodic statements that reflect the separate
obligations owed to each.
2. Multiple consumers. Disclosures may be made to either obligor on
a joint account. Disclosure responsibilities are not satisfied by giving
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 Sec. 226.15.
5(e) Effect of 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 fulfill 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 disclosures inaccurate. The creditor may, however, be
required to provide a new disclosure(s) under Sec. 226.9(c).
2. Use of inserts. When changes in a creditor's plan affect required
disclosures, the creditor may use inserts with outdated disclosure
forms. Any insert:
Should clearly refer to the disclosure provision it
replaces.
Need not be physically attached or affixed to the basic
disclosure statement.
May be used only until the supply of outdated forms is
exhausted.
References
Statute: Sections 121 (a) through (c), 122 (a) and (b), 124, 127 (a)
and (b), and 163(a).
Other sections: Sections 226.6, 226.7, and 226.9.
Previous regulation: Sections 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 multi-page, 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
disclosures need be made to only one primarily liable consumer.
Section 226.5a Credit and Charge Card Applications and Solicitations
1. General. Section 226.5a generally requires that credit
disclosures be contained in application forms and preapproved
solicitations initiated by a card issuer to open a credit or charge card
account. (See the commentary to Sec. 226.5a(a)(3) and (e) for
exceptions; see also Sec. 226.2(a)(15) and accompanying commentary for
the definition of charge card.)
2. Combining disclosures. The initial disclosures required by
Sec. 226.6 do not substitute for the disclosures required by
Sec. 226.5a; however, a card issuer may establish procedures so that a
single disclosure statement meets the requirements of both sections. For
example, if a card issuer in complying with Sec. 226.5a(e)(2) provides
all the applicable disclosures required under Sec. 226.6, in a form that
the consumer may keep and in accordance with the other format and timing
requirements for that section, the issuer satisfies the initial
disclosure requirements under Sec. 226.6 as well as the disclosure
requirements of Sec. 226.5a(e)(2). Or if, in complying with
Sec. 226.5a(c) or Sec. 226.5a(d)(2), a card issuer provides an
integrated document that the consumer may keep, and provides the
Sec. 226.5a disclosures (in a tabular format) along with the additional
disclosures required under Sec. 226.6 (presented outside of the table),
the card issuer satisfies the requirements of both Secs. 226.5a and
226.6.
5a(a) General Rules
5a(a)(2) Form of Disclosures
1. Clear and conspicuous standard. For purposes of Sec. 226.5a
disclosures, clear and conspicuous means in a reasonably understandable
form and readily noticeable to the consumer. As to type size,
disclosures in 12-
[[Page 380]]
point type are deemed to be readily noticeable for purposes of
Sec. 226.5a. Disclosures printed in less than 12-point type do not
automatically violate the standard; however, disclosures in less than 8-
point type would likely be too small to satisfy the standard.
Disclosures that are transmitted by electronic communication are judged
for purposes of the clear and conspicuous standard based on the form in
which they are provided even though they may be viewed by the consumer
in a different form.
2. Prominent location. i. Generally. Certain of the required
disclosures provided on or with an application or solicitation must be
prominently located. Disclosures are deemed to be prominently located,
for example, if the disclosures are on the same page as an application
or solicitation reply form. If the disclosures appear elsewhere, they
are deemed to be prominently located if the application or solicitation
reply form contains a clear and conspicuous reference to the location of
the disclosures and indicates that they contain rate, fee, and other
cost information, as applicable. Disclosures required by Sec. 226.5a(b)
that are placed outside the table must begin on the same page as the
table but need not end on the same page.
ii. Electronic disclosures. Electronic disclosures are deemed to be
prominently located if:
A. They are posted on a web site and the application or solicitation
reply form is linked to the disclosures in a manner that prevents the
consumer from by-passing the disclosures before submitting the
application or reply form; or
B. They are located on the same page as an application or
solicitation reply form, that contains a clear and conspicuous reference
to the location of the disclosures and indicates that they contain rate,
fee, and other cost information, as applicable.
3. Multiple accounts or varying terms. If a tabular format is
required to be used, card issuers offering several types of accounts may
disclose the various terms for the accounts in a single table or may
provide a separate table for each account. Similarly, if rates or other
terms vary from state to state, card issuers may list the states and the
various disclosures in a single table or in separate tables.
4. Additional information. The table containing the disclosures
required by Sec. 226.5a should contain only the information required or
permitted by this section. (See the commentary to Sec. 226.5a(b) for
guidance on information permitted in the table.) Other credit
information may be presented on or with an application or solicitation,
provided such information appears outside the required table.
5. Location of certain disclosures. A card issuer has the option of
disclosing any of the fees in Sec. 226.5a(b) (8) through (10) in the
required table or outside the table.
6. Terminology. In general, Sec. 226.5a(a)(2)(iv) requires that the
terminology used for the disclosures specified in Sec. 226.5a(b) be
consistent with that used in the disclosures under Secs. 226.6 and
226.7. This standard requires that the Sec. 226.5a(b) disclosures be
close in meaning to those under Secs. 226.6 and 226.7; however, the
terminology used need not be identical. In addition,
Sec. 226.5a(a)(2)(i) requires that the headings, content, and format of
the tabular disclosures be substantially similar, but need not be
identical, to the tables in Appendix G. A special rule applies to the
grace period disclosure, however: the term grace period must be used,
either in the heading or in the text of the disclosure.
7. Deletion of inapplicable disclosures. Generally, disclosures need
only be given as applicable. Card issuers may, therefore, delete
inapplicable headings and their corresponding boxes in the table. For
example, if no transaction fee is imposed for purchases, the disclosure
form may contain the heading Transaction fee for purchases and a box
showing none, or the heading and box may be deleted from the table.
There is an exception for the grace period disclosure, however: even if
no grace period exists, that fact must be stated.
8. Timing of disclosures for electronic applications or
solicitations. In all cases, a consumer must be able to access the
disclosures at the time the blank application or reply form is made
available by electronic communication, such as on a card issuer's
Internet web site. Card issuers have flexibility in satisfying this
requirement. For example, if a link is not used, the application or
reply form must clearly and conspicuously refer to the fact that rate,
fee, and other cost information either precedes or follows the
application or reply form. Alternatively, card issuers may provide a
link to electronic disclosures on or with the application (or reply
form) as long as consumers cannot bypass the disclosures before
submitting the application or reply form. Or the disclosures could
automatically appear on the screen when the application or reply form
appears. A card issuer need not confirm that the consumer has read the
disclosures.
5a(a)(3) Exceptions
1. Coverage. Certain exceptions to the coverage of Sec. 226.5a are
stated in Sec. 226.5a(a)(3); in addition, the requirements of
Sec. 226.5a do not apply to the following:
Lines of credit accessed solely by account numbers
Addition of a credit or charge card to an existing open-end
plan
2. Noncoverage of consumer initiated requests. Applications provided
to a consumer upon request are not covered by Sec. 226.5a, even if the
request is made in response to the card issuer's invitation to apply for
a card account. To illustrate, if a card issuer invites
[[Page 381]]
consumers to call a toll-free number or to return a response card to
obtain an application, the application sent in response to the
consumer's request need not contain the disclosures required under
Sec. 226.5a. Similarly, if the card issuer invites consumers to call and
make an oral application on the telephone, Sec. 226.5a does not apply to
the application made by the consumer. If, however, the card issuer calls
a consumer or initiates a telephone discussion with a consumer about
opening a card account and contemporaneously takes an oral application,
such applications are subject to Sec. 226.5a, specifically
Sec. 226.5a(d).
3. General purpose applications. The requirements of this section do
not apply to general purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a credit
or charge card account.
5a(a)(5) Certain Fees that Vary by State
1. Manner of disclosing range. If the card issuer discloses a range
of fees instead of disclosing the amount of the fee imposed in each
state, the range may be stated as the lowest authorized fee (zero, if
there are one or more states where no fee applies) to the highest
authorized fee.
5a(b) Required Disclosures
5a(b)(1) Annual Percentage Rate
1. Periodic rate. The periodic rate, expressed as such, may be
disclosed in the table in addition to the required disclosure of the
corresponding annual percentage rate.
2. Variable-rate accounts--definition. For purposes of
Sec. 226.5a(b)(1), a variable-rate account exists when rate changes are
part of the plan and are tied to an index or formula. (See the
commentary to Sec. 226.6(a)(2) for examples of variable-rate plans.)
3. Variable-rate accounts--rates in effect. For variable-rate
disclosures in direct mail applications and solicitations subject to
Sec. 226.5a(c), and in applications and solicitations made available to
the general public subject to Sec. 226.5a(e), the rules concerning
accuracy of the annual percentage rate are stated in
Sec. 226.5a(b)(1)(ii). For variable-rate disclosures in telephone
applications and solicitations subject to Sec. 226.5a(d), the card
issuer must provide an annual percentage rate currently applicable when
oral disclosures are provided under Sec. 226.5a(d)(1). For the alternate
disclosures under Sec. 226.5a(d)(2), the card issuer must provide the
annual percentage rate in effect at the time the disclosures are mailed
or delivered. A rate in effect also includes the rate as of a specified
date (which rate is then updated from time to time, for example, each
calendar month) or an estimated rate provided in accordance with
Sec. 226.5(c).
4. Variable-rate accounts--other disclosures. In describing how the
applicable rate will be determined, the card issuer must identify the
index or formula and disclose any margin or spread added to the index or
formula in setting the rate. The card issuer may disclose the margin or
spread as a range of the highest and lowest margins that may be
applicable to the account. A disclosure of any applicable limitations on
rate increases or decreases may also be included in the table.
5. Introductory rates--discounted rates. If the initial rate is
temporary and is lower than the rate that will apply after the temporary
rate expires, the card issuer must disclose the annual percentage rate
that would otherwise apply to the account. In a fixed-rate account, the
card issuer must disclose the rate that will apply after the
introductory rate expires. In a variable-rate account, the card issuer
must disclose a rate based on the index or formula applicable to the
account in accordance with the rules in Sec. 226.5a(b)(1)(ii) and
comment 5a(b)(1)-3. An initial discounted rate may be provided in the
table along with the rate required to be disclosed if the card issuer
also discloses the time period during which the introductory rate will
remain in effect.
6. Introductory rates--premium rates. If the initial rate is
temporary and is higher than the permanently applicable rate, the card
issuer must disclose the initial rate in the table. The initial rate
must be in at least 18-point type unless the issuer also discloses in
the table the permanently applicable rate. The issuer may disclose in
the table the permanently applicable rate that would otherwise apply if
the issuer also discloses the time period during which the initial rate
will remain in effect. In that case, the permanently applicable rate
must be in at least 18-point type.
7. Increased penalty rates. If the initial rate may increase upon
the occurrence of one or more specific events, such as a late payment or
an extension of credit that exceeds the credit limit, the card issuer
must disclose in the table the initial rate and the increased penalty
rate that may apply. If the penalty rate is based on an index and an
increased margin, the issuer must also disclose in the table the index
and the margin as well as the specific event or events that may result
in the increased rate, such as ``applies to accounts 60 days late.'' If
the penalty rate cannot be determined at the time disclosures are given,
the issuer must provide an explanation of the specific event or events
that may result in imposing an increased rate. In describing the
specific event or events that may result in an increased rate, issuers
need not be as detailed as for the disclosures required under
Sec. 226.6(a)(2). For issuers using a tabular format, the specific event
or events must be placed outside the table and an asterisk or other
means shall be used to direct
[[Page 382]]
the consumer to the additional information. At its option, the issuer
may include in the explanation of the penalty rate the period for which
the increased rate will remain in effect, such as ``until you make three
timely payments.'' The issuer need not disclose an increased rate that
is imposed when credit privileges are permanently terminated.
5a(b)(2) Fees for Issuance or Availability
1. Membership fees. Membership fees for opening an account must be
disclosed under this paragraph. A membership fee to join an organization
that provides a credit or charge card as a privilege of membership must
be disclosed only if the card is issued automatically upon membership.
Such a fee need not be disclosed if membership results merely in
eligibility to apply for an account.
2. Enhancements. Fees for optional services in addition to basic
membership privileges in a credit or charge card account (for example,
travel insurance or card-registration services) should not be disclosed
in the table if the basic account may be opened without paying such
fees.
3. One-time fees. Disclosure of non-periodic fees is limited to fees
related to opening the account, such as one-time membership fees. The
following are examples of fees that should not be disclosed in the
table:
Fees for reissuing a lost or stolen card
Statement reproduction fees
Application fees described in Sec. 226.4(c)(1)
4. Waived or reduced fees. If fees required to be disclosed are
waived or reduced for a limited time, the introductory fees or the fact
of fee waivers may be provided in the table in addition to the required
fees if the card issuer also discloses how long the fees or waivers will
remain in effect.
5. Fees stated as annual amount. Fees imposed periodically must be
stated as an annual total. For example, if a fee is imposed quarterly,
the disclosures would state the total amount of the fees for one year.
(See, however, the commentary to Sec. 226.9(e) with regard to disclosure
of such fees in renewal notices.)
5a(b)(4) Transaction Charges
1. Charges imposed by person other than card issuer. Charges imposed
by a third party, such as a seller of goods, would not be disclosed
under this section; the third party would be responsible for disclosing
the charge under Sec. 226.9(d)(1).
5a(b)(5) Grace Period
1. How disclosure is made. The card issuer may, but need not, refer
to the beginning or ending point of any grace period and briefly state
any conditions on the applicability of the grace period. For example,
the grace period disclosure might read ``30 days'' or ``30 days from the
date of the periodic statement (provided you have paid your previous
balance in full by the due date).''
5a(b)(6) Balance Computation Method
1. Form of disclosure. In cases where the card issuer uses a balance
calculation method that is identified by name in the regulation, the
card issuer may only disclose the name of the method in the table. In
cases where the card issuer uses a balance computation method that is
not identified by name in the regulation, the disclosure in the table
should clearly explain the method in as much detail as set forth in the
descriptions of balance methods in section 226.5a(g). The explanation
need not be as detailed as that required for the disclosures under
Sec. 226.6(a)(3). (See the commentary to Sec. 226.5a(g) for guidance on
particular methods.)
2. Determining the method. In determining the appropriate balance
computation method for purchases for disclosure purposes, the card
issuer must assume that a purchase balance will exist at the end of any
grace period. Thus, for example, if the average daily balance method
will include new purchases or cover two billing cycles only if purchase
balances are not paid within the grace period, the card issuer would
disclose the name of the average daily balance method that includes new
purchases or covers two billing cycles, respectively. The card issuer
should not assume the existence of a purchase balance, however, in
making other disclosures under Sec. 226.5a(b).
5a(b)(7) Statement on Charge Card Payments
1. Applicability and content. The disclosure that charges are
payable upon receipt of the periodic statement is applicable only to
charge card accounts. In making this disclosure, the card issuer may
make such modifications as are necessary to more accurately reflect the
circumstances of repayment under the account. For example, the
disclosure might read, ``Charges are due and payable upon receipt of the
periodic statement and must be paid no later than 15 days after receipt
of such statement.''
5a(b)(8) Cash Advance Fee
1. Applicability. The card issuer must disclose only those fees it
imposes for a cash advance that are finance charges under Sec. 226.4.
For example, a charge for a cash advance at an automated teller machine
(ATM) would be disclosed under Sec. 226.5a(b)(8) if no similar charge is
imposed for ATM transactions not involving an extension of credit. (See
comment 4(a)-5 for a description of such a fee.)
5a(b)(9) Late Payment Fee
1. Applicability. The disclosure of the fee for a late payment
includes only those fees that will be imposed for actual, unanticipated
[[Page 383]]
late payments. (See the commentary to Sec. 226.4(c)(2) for additional
guidance on late payment fees.)
5a(b)(10) Over-the-Limit Fee
1. Applicability. The disclosure of fees for exceeding a credit
limit does not include fees for other types of default or for services
related to exceeding the limit. For example, no disclosure is required
of fees for reinstating credit privileges or fees for the dishonor of
checks on an account that, if paid, would cause the credit limit to be
exceeded.
5a(c) Direct Mail Applications and Solicitations
1. Accuracy. In general, disclosures in direct mail applications and
solicitations must be accurate as of the time of mailing. (An accurate
variable annual percentage rate is one in effect within 60 days before
mailing.)
2. Mailed publications. Applications or solicitations contained in
generally available publications mailed to consumers (such as
subscription magazines) are subject to the requirements applicabIe to
take-ones in Sec. 226.5a(e), rather than the direct mail requirements of
Sec. 226.5a(c). However, if a primary purpose of a card issuer's mailing
is to offer credit or charge card accounts--for example, where a card
issuer ``prescreens'' a list of potential cardholders using credit
criteria, and then mails to the targeted group its catalog containing an
application or a solicitation for a card account--the direct mail rules
apply. In addition, a card issuer may use a single application form as a
take-one (in racks in public locations, for example) and for direct
mailings, if the card issuer complies with the requirements of
Sec. 226.5a(c) even when the form is used as a take-one--that is, by
presenting the required Sec. 226.5a disclosures in a tabular format.
When used in a direct mailing, the credit term disclosures must be
accurate as of the mailing date whether or not the Sec. 226.5a(e)(1)
(ii) and (iii) disclosures are included; when used in a take-one, the
disclosures must be accurate for as long as the take-one forms remain
available to the public if the Sec. 226.5a(e)(1) (ii) and (iii)
disclosures are omitted. (If those disclosures are included in the take-
one, the credit term disclosures need only be accurate as of the
printing date.)
5a(d) Telephone Applications and Solicitations
1. Coverage. This paragraph applies if:
A telephone conversation between a card issuer and consumer
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not require
any application (that is, a preapproved telephone solicitation).
The card issuer initiates the contact and at the same time
takes application information over the telephone.
This paragraph does not apply to:
Telephone applications initiated by the consumer.
Situations where no card will be issued--because, for
example, the consumer indicates that he or she does not want the card,
or the card issuer decides either during the telephone conversation or
later not to issue the card.
5a(e) Applications and Solicitations Made Available to General Public
1. Coverage. Applications and solicitations made available to the
general public include what are commonly referred to as take-one
applications typically found at counters in banks and retail
establishments, as well as applications contained in catalogs, magazines
and other generally available publications. In the case of credit
unions, this paragraph applies to applications and solicitations to open
card accounts made available to those in the general field of
membership.
2. Cross-selling. If a card issuer invites a consumer to apply for a
credit or charge card (for example, where the issuer engages in cross-
selling), an application provided to the consumer at the consumer's
request is not considered an application made available to the general
public and therefore is not subject to Sec. 226.5a(e). For example, the
following are not covered:
A consumer applies in person for a car loan at a financial
institution and the loan officer invites the consumer to apply for a
credit or charge card account; the consumer accepts the invitation.
An employee of a retail establishment, in the course of
processing a sales transaction using a bank credit card, asks a customer
if he or she would like to apply for the retailer's credit or charge
card; the customer responds affirmatively.
3. Toll-free telephone number. If a card issuer, in complying with
any of the disclosure options of Sec. 226.5a(e), provides a telephone
number for consumers to call to obtain credit information, the number
must be toll-free for nonlocal calls made from an area code other than
the one used in the card issuer's dialing area. Alternatively, a card
issuer may provide any telephone number that allows a consumer to call
for information and reverse the telephone charges.
5a(e)(1) Disclosure of Required Credit Information
1. Date of printing. Disclosure of the month and year fulfills the
requirement to disclose the date an application was printed.
2. Form of disclosures. The disclosures specified in
Sec. 226.5a(e)(1) (ii) and (iii) may appear
[[Page 384]]
either in or outside the table containing the required credit
disclosures.
5a(e)(2) Inclusion of Certain Initial Disclosures
1. Accuracy of disclosures. The disclosures required by
Sec. 226.5a(e)(2) generally must be current as of the time they are made
available to the public. Disclosures are considered to be made available
at the time they are placed in public locations (in the case of take-
ones) or mailed to consumers (in the case of publications).
2. Accuracy--exception. If a card issuer discloses all the
information required by Sec. 226.5a(e)(1)(ii) on the application or
solicitation, the disclosures under Sec. 226.5a(e)(2) need only be
current as of the date of printing. (A current variable annual
percentage rate would be one in effect within 30 days before printing.)
5a(e)(3) No Disclosure of Credit Information
1. When disclosure option available. A card issuer may use this
option only if the issuer does not include on or with the application or
solicitation any statement that refers to the credit disclosures
required by Sec. 226.5a(b). Statements such as no annual fee, low
interest rate, favorable rates, and low costs are deemed to refer to the
required credit disclosures and, therefore, may not be included on or
with the solicitation or application, if the card issuer chooses to use
this option.
5a(e)(4) Prompt Response to Requests for Information
1. Prompt disclosure. Information is promptly disclosed if it is
given within 30 days of a consumer's request for information but in no
event later than delivery of the credit or charge card.
2. Information disclosed. When a consumer requests credit
information, card issuers need not provide all the required credit
disclosures in all instances. For example, if disclosures have been
provided in accordance with Sec. 226.5a(e) (1) or (2) and a consumer
calls or writes a card issuer to obtain information about changes in the
disclosures, the issuer need only provide the items of information that
have changed from those previously disclosed on or with the application
or solicitation. If a consumer requests information about particular
items, the card issuer need only provide the requested information. If,
however, the card issuer has made disclosures in accordance with the
option in Sec. 226.5a(e)(3) and a consumer calls or writes the card
issuer requesting information about costs, all the required disclosure
information must be given.
3. Manner of response. A card issuer's response to a consumer's
request for credit information may be provided orally or in writing,
regardless of the manner in which the consumer's request is received by
the issuer. Furthermore, the card issuer may provide the information
listed in either Sec. 226.5a(e) (1) or (2). Information provided in
writing need not be in a tabular format.
5a(f) Special Charge Card Rule--Card Issuer and Person Extending Credit
Not the Same Person
1. Duties of charge card issuer. Although the charge card issuer is
not required to disclose information about the underlying open-end
credit plan if the card issuer meets the conditions set forth in
Sec. 226.5a(f), the card issuer must disclose the information relating
to the charge card plan itself.
2. Duties of creditor maintaining open-end plan. Section 226.5a does
not impose disclosure requirements on the creditor that maintains the
underlying open-end credit plan. This is the case even though the
creditor offering the open-end credit plan may be considered an agent of
the charge card issuer. (See comment 2(a)(7)-1.)
3. Form of disclosures. The disclosures required by Sec. 226.5a(f)
may appear either in or outside the table containing the required credit
disclosures in circumstances where a tabular format is required.
5a(g) Balance Computation Methods Defined
1. Daily balance method. Card issuers using the daily balance method
may disclose it using the name average daily balance (including new
purchases) or average daily balance (excluding new purchases), as
appropriate. Alternatively, such card issuers may explain the method.
(See comment 7(e)-5 for a discussion of the daily balance method.)
2. Two-cycle average daily balance methods. The two-cycle average
daily balance methods described in Sec. 226.5a(g)(2) (i) and (ii)
include those methods in which the average daily balances for two
billing cycles may be added together to compute the finance charge. Such
methods also include those in which a periodic rate is applied
separately to the balance in each cycle, and the resulting finance
charges are added together. The method is a two-cycle average daily
balance even if the finance charge is based on both the current and
prior cycle balances only under certain circumstances, such as when
purchases during a prior cycle were carried over into the current cycle
and no finance charge was assessed during the prior cycle. Furthermore,
the method is a two-cycle average daily balance method if the balances
for both the current and prior cycles are average daily balances, even
if those balances are figured differently. For example, the name two-
cycle average daily balance (excluding new purchases) should be used to
describe a method in which the finance charge for the current cycle,
figured on an average daily balance excluding new purchases, will be
added to the finance
[[Page 385]]
charge for the prior cycle, figured on an average daily balance of only
new purchases during that prior cycle.
Section 226.5b Requirements for Home Equity Plans
1. Coverage. This section applies to all open-end credit plans
secured by the consumer's dwelling, as defined in Sec. 226.2(a)(19), and
is not limited to plans secured by the consumer's principal dwelling.
(See the commentary to Sec. 226.3(a), which discusses whether
transactions are consumer or business-purpose credit, for guidance on
whether a home equity plan is subject to Regulation Z.)
2. Changes to home equity plans entered into on or after November 7,
1989. Section 226.9(c) applies if, by written agreement under
Sec. 226.5b(f)(3)(iii), a creditor changes the terms of a home equity
plan--entered into on or after November 7, 1989--at or before its
scheduled expiration, for example, by renewing a plan on different
terms. A new plan results, however, if the plan is renewed (with or
without changes to the terms) after the scheduled expiration. The new
plan is subject to all open-end credit rules, including Secs. 226.5b,
226.6, and 226.15.
3. Transition rules and renewals of preexistinq plans. The
requirements of this section do not apply to home equity plans entered
into before November 7, 1989. The requirements of this section also do
not apply if the original consumer, on or after November 7, 1989, renews
a plan entered into prior to that date (with or without changes to the
terms). If, on or after November 7, 1989, a security interest in the
consumer's dwelling is added to a line of credit entered into before
that date, the substantive restrictions of this section apply for the
remainder of the plan, but no new disclosures are required under this
section.
4. Disclosure of repayment phase--applicability of requirements.
Some plans provide in the initial agreement for a period during which no
further draws may be taken and repayment of the amount borrowed is made.
All of the applicable disclosures in this section must be given for the
repayment phase. Thus, for example, a creditor must provide payment
information about the repayment phase as well as about the draw period,
as required by Sec. 226.5b(d)(5). If the rate that will apply during the
repayment phase is fixed at a known amount, the creditor must provide an
annual percentage rate under Sec. 226.5b(d)(6) for that phase. If,
however, a creditor uses an index to determine the rate that will apply
at the time of conversion to the repayment phase--even if the rate will
thereafter be fixed--the creditor must provide the information in
Sec. 226.5b(d)(12), as applicable.
5. Payment terms--applicability of closed-end provisions and
substantive rules. All payment terms that are provided for in the
initial agreement are subject to the requirements of subpart B and not
subpart C of the regulation. Payment terms that are subsequently added
to the agreement may be subject to subpart B or to subpart C, depending
on the circumstances. The following examples apply these general rules
to different situations:
If the initial agreement provides for a repayment phase or
for other payment terms such as options permitting conversion of part or
all of the balance to a fixed rate during the draw period, these terms
must be disclosed pursuant to Secs. 226.5b and 226.6, and not under
subpart C. Furthermore, the creditor must continue to provide periodic
statements under Sec. 226.7 and comply with other provisions of subpart
B (such as the substantive requirements of Sec. 226.5b(f)) throughout
the plan, including the repayment phase.
If the consumer and the creditor enter into an agreement
during the draw period to repay all or part of the principal balance on
different terms (for example, with a fixed rate of interest) and the
amount of available credit will be replenished as the principal balance
is repaid, the creditor must continue to comply with subpart B. For
example, the creditor must continue to provide periodic statements and
comply with the substantive requirements of Sec. 226.5b(f) throughout
the plan.
If the consumer and creditor enter into an agreement during
the draw period to repay all or part of the principal balance and the
amount of available credit will not be replenished as the principal
balance is repaid, the creditor must give closed-end credit disclosures
pursuant to subpart C for that new agreement. In such cases, subpart B,
including the substantive rules, does not apply to the closed-end credit
transaction, although it will continue to apply to any remaining open-
end credit available under the plan.
6. Spreader clause. When a creditor holds a mortgage or deed of
trust on the consumer's dwelling and that mortgage or deed of trust
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the opening of
an open-end plan are subject to the rules applicable to home equity
plans to the same degree as if a security interest were taken directly
to secure the plan, unless the creditor effectively waives its security
interest under the spreader clause with respect to the subsequent open-
end credit extensions.
5b(a) Form of Disclosures
5b(a)(1) General
1. Written disclosures. The disclosures required under this section
must be clear and conspicuous and in writing, but need not be in a form
the consumer can keep. (See the commentary to Sec. 226.6(e) for special
rules when disclosures required under Sec. 226.5b(d) are given in a
retainable form.)
2. Disclosure of annual percentage rate--more conspicuous
requirement. As provided in
[[Page 386]]
Sec. 226.5(a)(2), when the term annual percentage rate is required to be
disclosed with a number, it must be more conspicuous than other required
disclosures.
3. Segregation of disclosures. While most of the disclosures must be
grouped together and segregated from all unrelated information, the
creditor is permitted to include information that explains or expands on
the required disclosures, including, for example:
Any prepayment penalty
How a substitute index may be chosen
Actions the creditor may take short of terminating and
accelerating an outstanding balance
Renewal terms
Rebate of fees
An example of information that does not explain or expand on the
required disclosures and thus cannot be included is the creditor's
underwriting criteria, although the creditor could provide such
information separately from the required disclosures.
4. Method of providing disclosures. A creditor may provide a single
disclosure form for all of its home equity plans, as long as the
disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all such options must be
disclosed. (See, however, the commentary to Sec. 226.5b(d)(5)(iii) and
(d)(12) (x) and (xi) for disclosure requirements relating to these
provisions.) If any aspects of a plan are linked together, the creditor
must disclose clearly the relationship of the terms to each other. For
example, if the consumer can only obtain a particular payment option in
conjunction with a certain variable-rate feature, this fact must be
disclosed. A creditor has the option of providing separate disclosure
forms for multiple options or variations in features. For example, a
creditor that offers different payment options for the draw period may
prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement on
each disclosure form that the consumer should ask about the creditor's
other home equity programs. (This disclosure is required only for those
programs available generally to the public. Thus, if the only other
programs available are employee preferred-rate plans, for example, the
creditor would not have to provide this statement.) A creditor that
receives a request for information about other available programs must
provide the additional disclosures as soon as reasonably possible.
5b(a)(2) Precedence of Certain Disclosures
1. Precedence rule. The list of conditions provided at the
creditor's option under Sec. 226.5b(d)(4)(iii) need not precede the
other disclosures.
5b(b) Time of Disclosures
1. Mail and telephone applications. If the creditor sends
applications through the mail, the disclosures and a brochure must
accompany the application. If an application is taken over the
telephone, the disclosures and brochure may be delivered or mailed
within three business days of taking the application. If an application
is mailed to the consumer following a telephone request, however, the
creditor also must send the disclosures and a brochure along with the
application.
2. General purpose applications. The disclosures and a brochure need
not be provided when a general purpose application is given to a
consumer unless (1) the application or materials accompanying it
indicate that it can be used to apply for a home equity plan or (2) the
application is provided in response to a consumer's specific inquiry
about a home equity plan. On the other hand, if a general purpose
application is provided in response to a consumer's specific inquiry
only about credit other than a home equity plan, the disclosures and
brochure need not be provided even if the application indicates it can
be used for a home equity plan, unless it is accompanied by promotional
information about home equity plans.
3. Publicly-available applications. Some creditors make applications
for home equity plans, such as take-ones, available without the need for
a consumer to request them. These applications must be accompanied by
the disclosures and a brochure, such as by attaching the disclosures and
brochure to the application form.
4. Response cards. A creditor may solicit consumers for its home
equity plan by mailing a response card which the consumer returns to the
creditor to indicate interest in the plan. If the only action taken by
the creditor upon receipt of the response card is to send the consumer
an application form or to telephone the consumer to discuss the plan,
the creditor need not send the disclosures and brochure with the
response card.
5. Denial or withdrawal of application. In situations where footnote
10a permits the creditor a three-day delay in providing disclosures and
the brochure, if the creditor determines within that period that an
application will not be approved, the creditor need not provide the
consumer with the disclosures or brochure. Similarly, if the consumer
withdraws the application within this three-day period, the creditor
need not provide the disclosures or brochure.
6. Intermediary agent or broker. In determining whether or not an
application involves an intermediary agent or broker as discussed in
footnote 10a, creditors should consult the provisions in comment 19(b)-
3.
7. Applications available by electronic communication. In all cases,
a consumer must be
[[Page 387]]
able to access the disclosures (including the brochure) at the time the
blank application or reply form is made available by electronic
communication, such as on a creditor's Internet web site. Creditors have
flexibility in satisfying this requirement. For example, if a link is
not used, the application or reply form must clearly and conspicuously
refer the consumer to the fact that rate, fee, and other cost
information either precedes or follows the application or reply form.
Alternatively, creditors may provide a link to electronic disclosures as
long as consumers cannot bypass the disclosures before submitting the
application or reply form. Or the disclosures could automatically appear
on the screen when the application or reply form appears. A creditor
need not confirm that the consumer has read the disclosures or brochure.
5b(c) Duties of Third Parties
1. Disclosure requirements. Although third parties who give
applications to consumers for home equity plans must provide the
brochure required under Sec. 226.5b(e) in all cases, such persons need
provide the disclosures required under Sec. 226.5b(d) only in certain
instances. A third party has no duty to obtain disclosures about a
creditor's home equity plan or to create a set of disclosures based on
what it knows about a creditor's plan. If, however, a creditor provides
the third party with disclosures along with its application form, the
third party must give the disclosures to the consumer with the
application form. The duties under this section are those of the third
party; the creditor is not responsible for ensuring that a third party
complies with those obligations. If an intermediary agent or broker
takes an application over the telephone or receives an application
contained in a magazine or other publication, footnote 10a permits that
person to mail the disclosures and brochure within three business days
of receipt of the application. (See the commentary to Sec. 226.5b(h)
about imposition of nonrefundable fees.)
5b(d) Content of Disclosures
1. Disclosures given as applicable. The disclosures required under
this section need be made only as applicable. Thus, for example, if
negative amortization cannot occur in a home equity plan, a reference to
it need not be made.
2. Duty to respond to requests for information. If the consumer,
prior to the opening of a plan, requests information as suggested in the
disclosures (such as the current index value or margin), the creditor
must provide this information as soon as reasonably possible after the
request.
5b(d)(1) Retention of Information
1. When disclosure not required. The creditor need not disclose that
the consumer should make or otherwise retain a copy of the disclosures
if they are retainable--for example, if the disclosures are not part of
an application that must be returned to the creditor to apply for the
plan.
5b(d)(2) Conditions for Disclosed Terms
Paragraph 5b(d)(2)(i)
1. Guaranteed terms. The requirement that the creditor disclose the
time by which an application must be submitted to obtain the disclosed
terms does not require the creditor to guarantee any terms. If a
creditor chooses not to guarantee any terms, it must disclose that all
of the terms are subject to change prior to opening the plan. The
creditor also is permitted to guarantee some terms and not others, but
must indicate which terms are subject to change.
2. Date for obtaining disclosed terms. The creditor may disclose
either a specific date or a time period for obtaining the disclosed
terms. If the creditor discloses a time period, the consumer must be
able to determine from the disclosure the specific date by which an
application must be submitted to obtain any guaranteed terms. For
example, the disclosure might read, ``To obtain the following terms, you
must submit your application within 60 days after the date appearing on
this disclosure,'' provided the disclosure form also shows the date.
Paragraph 5b(d)(2)(ii)
1. Relation to other provisions. Creditors should consult the rules
in Sec. 226.5b(g) regarding refund of fees.
5b(d)(4) Possible Actions by Creditor
Paragraph 5b(d)(4)(i)
1. Fees imposed upon termination. This disclosure applies only to
fees (such as penalty or prepayment fees) that the creditor imposes if
it terminates the plan prior to normal expiration. The disclosure does
not apply to fees that are imposed either when the plan expires in
accordance with the agreement or if the consumer terminates the plan
prior to its scheduled maturity. In addition, the disclosure does not
apply to fees associated with collection of the debt, such as attorneys
fees and court costs, or to increases in the annual percentage rate
linked to the consumer's failure to make payments. The actual amount of
the fee need not be disclosed.
2. Changes specified in the initial agreement. If changes may occur
pursuant to Sec. 226.5b(f)(3)(i), a creditor must state that certain
changes will be implemented as specified in the initial agreement.
[[Page 388]]
Paragraph 5b(d)(4)(iii)
1. Disclosure of conditions. In making this disclosure, the creditor
may provide a highlighted copy of the document that contains such
information, such as the contract or security agreement. The relevant
items must be distinguished from the other information contained in the
document. For example, the creditor may provide a cover sheet that
specifically points out which contract provisions contain the
information, or may mark the relevant items on the document itself. As
an alternative to disclosing the conditions in this manner, the creditor
may simply describe the conditions using the language in
Secs. 226.5b(f)(2)(i)-(iii), 226.5b(f)(3)(i) (regarding freezing the
line when the maximum annual percentage rate is reached), and
226.5b(f)(3)(vi) or language that is substantially similar. The
condition contained in Sec. 226.5b(f)(2)(iv) need not be stated. In
describing specified changes that may be implemented during the plan,
the creditor may provide a disclosure such as ``Our agreement permits us
to make certain changes to the terms of the line at specified times or
upon the occurrence of specified events.''
2. Form of disclosure. The list of conditions under
Sec. 226.5b(d)(4)(iii) may appear with the segregated disclosures or
apart from them. If the creditor elects to provide the list of
conditions with the segregated disclosures, the list need not comply
with the precedence rule in Sec. 226.5b(a)(2).
5b(d)(5) Payment Terms
Paragraph 5b(d)(5)(i)
1. Length of the plan. The combined length of the draw period and
any repayment period need not be stated. If the length of the repayment
phase cannot be determined because, for example, it depends on the
balance outstanding at the beginning of the repayment period, the
creditor must state that the length is determined by the size of the
balance. If the length of the plan is indefinite (for example, because
there is no time limit on the period during which the consumer can take
advances), the creditor must state that fact.
2. Renewal provisions. If, under the credit agreement, a creditor
retains the right to review a line at the end of the specified draw
period and determine whether to renew or extend the draw period of the
plan, the possibility of renewal or extension--regardless of its
likelihood--should be ignored for purposes of the disclosures. For
example, if an agreement provides that the draw period is five years and
that the creditor may renew the draw period for an additional five
years, the possibility of renewal should be ignored and the draw period
should be considered five years. (See the commentary accompanying
Sec. 226.9(c)(1) dealing with change in terms requirements.)
Paragraph 5b(d)(5)(ii)
1. Determination of the minimum periodic payment. This disclosure
must reflect how the minimum periodic payment is determined, but need
only describe the principal and interest components of the payment.
Other charges that may be part of the payment (as well as the balance
computation method) may, but need not, be described under this
provision.
2. Fixed rate and term payment options during draw period. If the
home equity plan permits the consumer to repay all or part of the
balance during the draw period at a fixed rate (rather than a variable
rate) and over a specified time period, this feature must be disclosed.
To illustrate, a variable-rate plan may permit a consumer to elect
during a ten-year draw period to repay all or a portion of the balance
over a three-year period at a fixed rate. The creditor must disclose the
rules relating to this feature including the period during which the
option can be selected, the length of time over which repayment can
occur, any fees imposed for such a feature, and the specific rate or a
description of the index and margin that will apply upon exercise of
this choice. For example, the index and margin disclosure might state:
``If you choose to convert any portion of your balance to a fixed rate,
the rate will be the highest prime rate published in the `Wall Street
Journal' that is in effect at the date of conversion plus a margin.'' If
the fixed rate is to be determined according to an index, it must be one
that is outside the creditor's control and is publicly available in
accordance with Sec. 226.5b(f)(1). The effect of exercising the option
should not be reflected elsewhere in the disclosures, such as in the
historical example required in Sec. 226.5b(d)(12)(xi).
3. Balloon payments. In programs where the occurrence of a balloon
payment is possible, the creditor must disclose the possibility of a
balloon payment even if such a payment is uncertain or unlikely. In such
cases, the disclosure might read, ``Your minimum payments may not be
sufficient to fully repay the principal that is outstanding on your
line. If they are not, you will be required to pay the entire
outstanding balance in a single payment.'' In programs where a balloon
payment will occur, such as programs with interest-only payments during
the draw period and no repayment period, the disclosures must state that
fact. For example, the disclosure might read, ``Your minimum payments
will not repay the principal that is outstanding on your line. You will
be required to pay the entire outstanding balance in a single payment.''
In making this disclosure, the creditor is not required to use the
[[Page 389]]
term ``balloon payment.'' The creditor also is not required to disclose
the amount of the balloon payment. (See, however, the requirement under
Sec. 226.5b(d)(5)(iii).) The balloon payment disclosure does not apply
in cases where repayment of the entire outstanding balance would occur
only as a result of termination and acceleration. The creditor also need
not make a disclosure about balloon payments if the final payment could
not be more than twice the amount of other minimum payments under the
plan.
Paragraph 5b(d)(5)(iii)
1. Minimum periodic payment example. In disclosing the payment
example, the creditor may assume that the credit limit as well as the
outstanding balance is $10,000 if such an assumption is relevant to
calculating payments. (If the creditor only offers lines of credit for
less than $10,000, the creditor may assume an outstanding balance of
$5,000 instead of $10,000 in making this disclosure.) The example should
reflect the payment comprised only of principal and interest. Creditors
may provide an additional example reflecting other charges that may be
included in the payment, such as credit insurance premiums. Creditors
may assume that all months have an equal number of days, that payments
are collected in whole cents, and that payments will fall on a business
day even though they may be due on a non-business day. For variable-rate
plans, the example must be based on the last rate in the historical
example required in Sec. 226.5b(d)(12)(xi), or a more recent rate. In
cases where the last rate shown in the historical example is different
from the index value and margin (for example, due to a rate cap),
creditors should calculate the rate by using the index value and margin.
A discounted rate may not be considered a more recent rate in
calculating this payment example for either variable- or fixed-rate
plans.
2. Representative examples. In plans with multiple payment options
within the draw period or within any repayment period, the creditor may
provide representative examples as an alternative to providing examples
for each payment option. The creditor may elect to provide
representative payment examples based on three categories of payment
options. The first category consists of plans that permit minimum
payment of only accrued finance charges (interest only plans). The
second category includes plans in which a fixed percentage or a fixed
fraction of the outstanding balance or credit limit (for example, 2% of
the balance or \1/180\th of the balance) is used to determine the
minimum payment. The third category includes all other types of minimum
payment options, such as a specified dollar amount plus any accrued
finance charges. Creditors may classify their minimum payment
arrangements within one of these three categories even if other features
exist, such as varying lengths of a draw or repayment period, required
payment of past due amounts, late charges, and minimum dollar amounts.
The creditor may use a single example within each category to represent
the payment options in that category. For example, if a creditor permits
minimum payments of 1%, 2%, 3% or 4% of the outstanding balance, it may
pick one of these four options and provide the example required under
Sec. 226.5b(d)(5)(iii) for that option alone.
The example used to represent a category must be an option commonly
chosen by consumers, or a typical or representative example. (See the
commentary to Sec. 226.5b(d)(12) (x) and (xi) for a discussion of the
use of representative examples for making those disclosures. Creditors
using a representative example within each category must use the same
example for purposes of the disclosures under Sec. 226.5b (d)(5)(iii)
and (d)(12) (x) and (xi).) Creditors may use representative examples
under Sec. 226.5b(d)(5) only with respect to the payment example
required under paragraph (d)(5)(iii). Creditors must provide a full
narrative description of all payment options under Sec. 226.5b(d)(5) (i)
and (ii).
3. Examples for draw and repayment periods. Separate examples must
be given for the draw and repayment periods unless the payments are
determined the same way during both periods. In setting forth payment
examples for any repayment period under this section (and the historical
example under Sec. 226.5b(d)(12)(xi)), creditors should assume a $10,000
advance is taken at the beginning of the draw period and is reduced
according to the terms of the plan. Creditors should not assume an
additional advance is taken at any time, including at the beginning of
any repayment period.
4. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, in addition to permitting
the consumer to obtain advances, may involve the disbursement of monthly
advances to the consumer for a fixed period or until the occurrence of
an event such as the consumer's death. Repayment of the reverse mortgage
(generally a single payment of principal and accrued interest) may be
required to be made at the end of the disbursements or, for example,
upon the death of the consumer. In disclosing these plans, creditors
must apply the following rules, as applicable:
If the reverse mortgage has a specified period for advances
and disbursements but repayment is due only upon occurrence of a future
event such as the death of the consumer, the creditor must assume that
disbursements will be made until they are scheduled to end. The creditor
must assume repayment will occur when disbursements end (or within a
period following the final
[[Page 390]]
disbursement which is not longer than the regular interval between
disbursements). This assumption should be used even though repayment may
occur before or after the disbursements are scheduled to end. In such
cases, the creditor may include a statement such as ``The disclosures
assume that you will repay the line at the time the draw period and our
payments to you end. As provided in your agreement, your repayment may
be rquired at a different time.'' The single payment should be
considered the ``minimum periodic payment'' and consequently would not
be treated as a balloon payment. The example of the minimum payment
under Sec. 226.5b(d)(5)(iii) should assume a single $10,000 draw.
If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these terms
will be determined solely by reference to future events, including the
consumer's death, the creditor may assume that the draws and
disbursements will end upon the consumer's death (estimated by using
actuarial tables, for example) and that repayment will be required at
the same time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events which
do not include the consumer's death, the creditor must base the
disclosures upon the occurrence of the event estimated to be most likely
to occur first.)
In making the disclosures, the creditor must assume that
all draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater than
the value of the house, the creditor must nonetheless assume that the
full amount to be drawn or disbursed will be repaid. In this case,
however, the creditor may include a statement such as ``The disclosures
assume full repayment of the amount advanced plus accrued interest,
although the amount you may be required to pay is limited by your
agreement.''
Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the appreciation
feature, including describing how the creditor's share will be
determined, any limitations, and when the feature may be exercised.
5b(d)(6) Annual Percentage Rate
1. Preferred-rate plans. If a creditor offers a preferential fixed-
rate plan in which the rate will increase a specified amount upon the
occurrence of a specified event, the creditor must disclose the specific
amount the rate will increase.
5b(d)(7) Fees Imposed by Creditor
1. Applicability. The fees referred to in Sec. 226.5b(d)(7) include
items such as application fees, points, annual fees, transaction fees,
fees to obtain checks to access the plan, and fees imposed for
converting to a repayment phase that is provided for in the original
agreement. This disclosure includes any fees that are imposed by the
creditor to use or maintain the plan, whether the fees are kept by the
creditor or a third party. For example, if a creditor requires an annual
credit report on the consumer and requires the consumer to pay this fee
to the creditor or directly to the third party, the fee must be
specifically stated. Third party fees to open the plan that are
initially paid by the consumer to the creditor may be included in this
disclosure or in the disclosure under Sec. 226.5b(d)(8).
2. Manner of describing fees. Charges may be stated as an estimated
dollar amount for each fee, or as a percentage of a typical or
representative amount of credit. The creditor may provide a stepped fee
schedule in which a fee will increase a specified amount at a specified
date. (See the discussion contained in the commentary to
Sec. 226.5b(f)(3)(i).)
3. Fees not required to be disclosed. Fees that are not imposed to
open, use, or maintain a plan, such as fees for researching an account,
photocopying, paying late, stopping payment, having a check returned,
exceeding the credit limit, or closing out an account do not have to be
disclosed under this section. Credit report and appraisal fees imposed
to investigate whether a condition permitting a freeze continues to
exist--as discussed in the commentary to Sec. 226.5b(f)(3)(vi)--are not
required to be disclosed under this section or Sec. 226.5b(d)(8).
4. Rebates of closing costs. If closing costs are imposed they must
be disclosed, regardless of whether such costs may be rebated later (for
example, rebated to the extent of any interest paid during the first
year of the plan).
5. Terms used in disclosure. Creditors need not use the terms
finance charge or other charge in describing the fees imposed by the
creditor under this section or those imposed by third parties under
Sec. 226.5b(d)(8).
5b(d)(8) Fees Imposed by Third Parties to Open a Plan
1. Applicability. Section 226.5b(d)(8) applies only to fees imposed
by third parties to open the plan. Thus, for example, this section does
not require disclosure of a fee imposed by a government agency at the
end of a plan to release a security interest. Fees to be disclosed
include appraisal, credit report, government agency, and attorneys fees.
In cases
[[Page 391]]
where property insurance is required by the creditor, the creditor
either may disclose the amount of the premium or may state that property
insurance is required. For example, the disclosure might state, ``You
must carry insurance on the property that secures this plan.''
2. Itemization of third-party fees. In all cases creditors must
state the total of third-party fees as a single dollar amount or a range
except that the total need not include costs for property insurance if
the creditor discloses that such insurance is required. A creditor has
two options with regard to providing the more detailed information about
third party fees. Creditors may provide a statement that the consumer
may request more specific cost information about third party fees from
the creditor. As an alternative to including this statement, creditors
may provide an itemization of such fees (by type and amount) with the
early disclosures. Any itemization provided upon the consumer's request
need not include a disclosure about property insurance.
3. Manner of describing fees. A good faith estimate of the amount of
fees must be provided. Creditors may provide, based on a typical or
representative amount of credit, a range for such fees or state the
dollar amount of such fees. Fees may be expressed on a unit cost basis,
for example, $5 per $1,000 of credit.
4. Rebates of third party fees. Even if fees imposed by third
parties may be rebated, they must be disclosed. (See the commentary to
Sec. 226.5b(d)(7).)
5b(d)(9) Negative Amortization
1. Disclosure required. In transactions where the minimum payment
will not or may not be sufficient to cover the interest that accrues on
the outstanding balance, the creditor must disclose that negative
amortization will or may occur. This disclosure is required whether or
not the unpaid interest is added to the outstanding balance upon which
interest is computed. A disclosure is not required merely because a loan
calls for non-amortizing or partially amortizing payments.
5b(d)(10) Transaction Requirements
1. Applicability. A limitation on automated teller machine usage
need not be disclosed under this paragraph unless that is the only means
by which the consumer can obtain funds.
5b(d)(12) Disclosures for Variable-Rate Plans
1. Variable-rate provisions. Sample forms in appendix G-14 provide
illustrative guidance on the variable-rate rules.
Paragraph 5b(d)(12)(iv)
1. Determination of annual percentage rate. If the creditor adjusts
its index through the addition of a margin, the disclosure might read,
``Your annual percentage rate is based on the index plus a margin.'' The
creditor is not required to disclose a specific value for the margin.
Paragraph 5b(d)(12)(viii)
1. Preferred-rate provisions. This paragraph requires disclosure of
preferred-rate provisions, where the rate will increase upon the
occurrence of some event, such as the borrower-employee leaving the
creditor's employ or the consumer closing an existing deposit account
with the creditor.
2. Provisions on conversion to fixed rates. The commentary to
Sec. 226.5b(d)(5)(ii) discusses the disclosure requirements for options
permitting the consumer to convert from a variable rate to a fixed rate.
Paragraph 5b(d)(12)(ix)
1. Periodic limitations on increases in rates. The creditor must
disclose any annual limitations on increases in the annual percentage
rate. If the creditor bases its rate limitation on 12 monthly billing
cycles, such a limitation should be treated as an annual cap. Rate
limitations imposed on less than an annual basis must be stated in terms
of a specific amount of time. For example, if the creditor imposes rate
limitations on only a semiannual basis, this must be expressed as a rate
limitation for a six-month time period. If the creditor does not impose
periodic limitations (annual or shorter) on rate increases, the fact
that there are no annual rate limitations must be stated.
2. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed under each payment option over the
term of the plan (including the draw period and any repayment period
provided for in the initial agreement) must be provided. The creditor
may disclose this rate as a specific number (for example, 18%) or as a
specific amount above the initial rate. For example, this disclosure
might read, ``The maximum annual percentage rate that can apply to your
line will be 5 percentage points above your initial rate.'' If the
creditor states the maximum rate as a specific amount above the initial
rate, the creditor must include a statement that the consumer should
inquire about the rate limitations that are currently available. If an
initial discount is not taken into account in applying maximum rate
limitations, that fact must be disclosed. If separate overall
limitations apply to rate increases resulting from events such as the
exercise of a fixed-rate conversion option or leaving the creditor's
employ,
[[Page 392]]
those limitations also must be stated. Limitations do not include legal
limits in the nature of usury or rate ceilings under state or federal
statutes or regulations.
3. Form of disclosures. The creditor need not disclose each periodic
or maximum rate limitation that is currently available. Instead, the
creditor may disclose the range of the lowest and highest periodic and
maximum rate limitations that may be applicable to the creditor's home
equity plans. Creditors using this alternative must include a statement
that the consumer should inquire about the rate limitations that are
currently available.
Paragraph 5b(d)(12)(x)
1. Maximum rate payment example. In calculating the payment
creditors should assume the maximum rate is in effect. Any discounted or
premium initial rates or periodic rate limitations should be ignored for
purposes of this disclosure. If a range is used to disclose the maximum
cap under Sec. 226.5b(d)(12)(ix), the highest rate in the range must be
used for the disclosure under this paragraph. As an alternative to
making disclosures based on each payment option, the creditor may choose
a representative example within the three categories of payment options
upon which to base this disclosure. (See the commentary to
Sec. 226.5b(d)(5).) However, separate examples must be provided for the
draw period and for any repayment period unless the payment is
determined the same way in both periods. Creditors should calculate the
example for the repayment period based on an assumed $10,000 balance.
(See the commentary to Sec. 226.5b(d)(5) for a discussion of the
circumstances in which a creditor may use a lower outstanding balance.)
2. Time the maximum rate could be reached. In stating the date or
time when the maximum rate could be reached, creditors should assume the
rate increases as rapidly as possible under the plan. In calculating the
date or time, creditors should factor in any discounted or premium
initial rates and periodic rate limitations. This disclosure must be
provided for the draw phase and any repayment phase. Creditors should
assume the index and margin shown in the last year of the historical
example (or a more recent rate) is in effect at the beginning of each
phase.
Paragraph 5b(d)(12)(xi)
1. Index movement. Index values and annual percentage rates must be
shown for the entire 15 years of the historical example and must be
based on the most recent 15 years. The example must be updated annually
to reflect the most recent 15 years of index values as soon as
reasonably possible after the new index value becomes available. If the
values for an index have not been available for 15 years, a creditor
need only go back as far as the values have been available and may start
the historical example at the year for which values are first available.
2. Selection of index values. The historical example must reflect
the method of choosing index values for the plan. For example, if an
average of index values is used in the plan, averages must be used in
the example, but if an index value as of a particular date is used, a
single index value must be shown. The creditor is required to assume one
date (or one period, if an average is used) within a year on which to
base the history of index values. The creditor may choose to use index
values as of any date or period as long as the index value as of this
date or period is used for each year in the example. Only one index
value per year need be shown, even if the plan provides for adjustments
to the annual percentage rate or payment more than once in a year. In
such cases, the creditor can assume that the index rate remained
constant for the full year for the purpose of calculating the annual
percentage rate and payment.
3. Selection of margin. A value for the margin must be assumed in
order to prepare the example. A creditor may select a representative
margin that it has used with the index during the six months preceding
preparation of the disclosures and state that the margin is one that it
has used recently. The margin selected may be used until the creditor
annually updates the disclosure form to reflect the most recent 15 years
of index values.
4. Amount of discount or premium. In reflecting any discounted or
premium initial rate, the creditor may select a discount or premium that
it has used during the six months preceding preparation of the
disclosures, and should disclose that the discount or premium is one
that the creditor has used recently. The discount or premium should be
reflected in the example for as long as it is in effect. The creditor
may assume that a discount or premium that would have been in effect for
any part of a year was in effect for the full year for purposes of
reflecting it in the historical example.
5. Rate limitations. Limitations on both periodic and maximum rates
must be reflected in the historical example. If ranges of rate
limitations are provided under Sec. 226.5b(d)(12)(ix), the highest rates
provided in those ranges must be used in the example. Rate limitations
that may apply more often than annually should be treated as if they
were annual limitations. For example, if a creditor imposes a 1% cap
every six months, this should be reflected in the example as if it were
a 2% annual cap.
6. Assumed advances. The creditor should assume that the $10,000
balance is an advance taken at the beginning of the first billing cycle
and is reduced according to the terms
[[Page 393]]
of the plan, and that the consumer takes no subsequent draws. As
discussed in the commentary to Sec. 226.5b(d)(5), creditors should not
assume an additional advance is taken at the beginning of any repayment
period. If applicable, the creditor may assume the $10,000 is both the
advance and the credit limit. (See the commentary to Sec. 226.5b(d)(5)
for a discussion of the circumstances in which a creditor may use a
lower outstanding balance.)
7. Representative payment options. The creditor need not provide an
historical example for all of its various payment options, but may
select a representative payment option within each of the three
categories of payments upon which to base its disclosure. (See the
commentary to Sec. 226.5b(d)(5).)
8. Payment information. The payment figures in the historical
example must reflect all significant program terms. For example,
features such as rate and payment caps, a discounted initial rate,
negative amortization, and rate carryover must be taken into account in
calculating the payment figures if these would have applied to the plan.
The historical example should include payments for as much of the length
of the plan as would occur during a 15-year period. For example:
If the draw period is 10 years and the repayment period is
15 years, the example should illustrate the entire 10-year draw period
and the first 5 years of the repayment period.
If the length of the draw period is 15 years and there is a
15-year repayment phase, the historical example must reflect the
payments for the 15-year draw period and would not show any of the
repayment period. No additional historical example would be required to
reflect payments for the repayment period.
If the length of the plan is less than 15 years, payments
in the historical example need only be shown for the number of years in
the term. In such cases, however, the creditor must show the index
values, margin and annual percentage rates and continue to reflect all
significant plan terms such as rate limitations for the entire 15 years.
A creditor need show only a single payment per year in the example, even
though payments may vary during a year. The calculations should be based
on the actual payment computation formula, although the creditor may
assume that all months have an equal number of days. The creditor may
assume that payments are made on the last day of the billing cycle, the
billing date or the payment due date, but must be consistent in the
manner in which the period used to illustrate payment information is
selected. Information about balloon payments and remaining balance may,
but need not, be reflected in the example.
9. Disclosures for repayment period. The historical example must
reflect all features of the repayment period, including the appropriate
index values, margin, rate limitations, length of the repayment period,
and payments. For example, if different indices are used during the draw
and repayment periods, the index values for that portion of the 15 years
that reflect the repayment period must be the values for the appropriate
index.
10. Reverse mortgages. The historical example for reverse mortgages
should reflect 15 years of index values and annual percentage rates, but
the payment column should be blank until the year that the single
payment will be made, assuming that payment is estimated to occur within
15 years. (See the commentary to Sec. 226.5b(d)(5) for a discussion of
reverse mortgages.)
5b(e) Brochure
1. Substitutes. A brochure is a suitable substitute for the Board's
home equity brochure if it is, at a minimum, comparable to the Board's
brochure in substance and comprehensiveness. Creditors are permitted to
provide more detailed information than is contained in the Board's
brochure.
2. Effect of third party delivery of brochure. If a creditor
determines that a third party has provided a consumer with the required
brochure pursuant to Sec. 226.5b(c), the creditor need not give the
consumer a second brochure.
5b(f) Limitations on Home Equity Plans
1. Coverage. Section 226.5b(f) limits both actions that may be taken
and language that may be included in contracts, and applies to any
assignee or holder as well as to the original creditor. The limitations
apply to the draw period and any repayment period, and to any renewal or
modification of the original agreement.
Paragraph 5b(f)(1)
1. External index. A creditor may change the annual percentage rate
for a plan only if the change is based on an index outside the
creditor's control. Thus, a creditor may not make rate changes based on
its own prime rate or cost of funds and may not reserve a contractual
right to change rates at its discretion. A creditor is permitted,
however, to use a published prime rate, such as that in the Wall Street
Journal, even if the bank's own prime rate is one of several rates used
to establish the published rate.
2. Publicly available. The index must be available to the public. A
publicly available index need not be published in a newspaper, but it
must be one the consumer can independently obtain (by telephone, for
example) and use to verify rates imposed under the plan.
[[Page 394]]
3. Provisions not prohibited. This paragraph does not prohibit rate
changes that are specifically set forth in the agreement. For example,
stepped-rate plans, in which specified rates are imposed for specified
periods, are permissible. In addition, preferred-rate provisions, in
which the rate increases by a specified amount upon the occurrence of a
specified event, also are permissible.
Paragraph 5b(f)(2)
1. Limitations on termination and acceleration. In general,
creditors are prohibited from terminating and accelerating payment of
the outstanding balance before the scheduled expiration of a plan.
However, creditors may take these actions in the four circumstances
specified in Sec. 226.5b(f)(2). Creditors are not permitted to specify
in their contracts any other events that allow termination and
acceleration beyond those permitted by the regulation. Thus, for
example, an agreement may not provide that the balance is payable on
demand nor may it provide that the account will be terminated and the
balance accelerated if the rate cap is reached.
2. Other actions permitted. If an event permitting termination and
acceleration occurs, a creditor may instead take actions short of
terminating and accelerating. For example, a creditor could temporarily
or permanently suspend further advances, reduce the credit limit, change
the payment terms, or require the consumer to pay a fee. A creditor also
may provide in its agreement that a higher rate or higher fees will
apply in circumstances under which it would otherwise be permitted to
terminate the plan and accelerate the balance. A creditor that does not
immediately terminate an account and accelerate payment or take another
permitted action may take such action at a later time, provided one of
the conditions permitting termination and acceleration exists at that
time.
Paragraph 5b(f)(2)(i)
1. Fraud or material misrepresentation. A creditor may terminate a
plan and accelerate the balance if there has been fraud or material
misrepresentation by the consumer in connection with the plan. This
exception includes fraud or misrepresentation at any time, either during
the application process or during the draw period and any repayment
period. What constitutes fraud or misrepresentation is determined by
applicable state law and may include acts of omission as well as overt
acts, as long as any necessary intent on the part of the consumer
exists.
Paragraph 5b(f)(2)(ii)
1. Failure to meet repayment terms. A creditor may terminate a plan
and accelerate the balance when the consumer fails to meet the repayment
terms provided for in the agreement. However, a creditor may terminate
and accelerate under this provision only if the consumer actually fails
to make payments. For example, a creditor may not terminate and
accelerate if the consumer, in error, sends a payment to the wrong
location, such as a branch rather than the main office of the creditor.
If a consumer files for or is placed in bankruptcy, the creditor may
terminate and accelerate under this provision if the consumer fails to
meet the repayment terms of the agreement. This section does not
override any state or other law that requires a right-to-cure notice, or
otherwise places a duty on the creditor before it can terminate a plan
and accelerate the balance.
Paragraph 5b(f)(2)(iii)
1. Impairment of security. A creditor may terminate a plan and
accelerate the balance if the consumer's action or inaction adversely
affects the creditor's security for the plan, or any right of the
creditor in that security. Action or inaction by third parties does not,
in itself, permit the creditor to terminate and accelerate.
2. Examples. A creditor may terminate and accelerate, for example,
if:
The consumer transfers title to the property or sells the
property without the permission of the creditor
The consumer fails to maintain required insurance on the
dwelling
The consumer fails to pay taxes on the property
The consumer permits the filing of a lien senior to that
held by the creditor
The sole consumer obligated on the plan dies
The property is taken through eminent domain
A prior lienholder forecloses
By contrast, the filing of a judgment against the consumer would permit
termination and acceleration only if the amount of the judgment and
collateral subject to the judgment is such that the creditor's security
is adversely affected. If the consumer commits waste or otherwise
destructively uses or fails to maintain the property such that the
action adversely affects the security, the plan may be terminated and
the balance accelerated. Illegal use of the property by the consumer
would permit termination and acceleration if it subjects the property to
seizure. If one of two consumers obligated on a plan dies the creditor
may terminate the plan and accelerate the balance if the security is
adversely affected. If the consumer moves out of the dwelling that
secures the plan and that action adversely affects the security, the
creditor may terminate a plan and accelerate the balance.
[[Page 395]]
Paragraph 5b(f)(3)
1. Scope of provision. In general, a creditor may not change the
terms of a plan after it is opened. For example, a creditor may not
increase any fee or impose a new fee once the plan has been opened, even
if the fee is charged by a third party, such as a credit reporting
agency, for a service. The change of terms prohibition applies to all
features of a plan, not only those required to be disclosed under this
section. For example, this provision applies to charges imposed for late
payment, although this fee is not required to be disclosed under
Sec. 226.5b(d)(7).
2. Charges not covered. There are three charges not covered by this
provision. A creditor may pass on increases in taxes since such charges
are imposed by a governmental body and are beyond the control of the
creditor. In addition, a creditor may pass on increases in premiums for
property insurance that are excluded from the finance charge under
Sec. 226.4(d)(2), since such insurance provides a benefit to the
consumer independent of the use of the line and is often maintained
notwithstanding the line. A creditor also may pass on increases in
premiums for credit insurance that are excluded from the finance charge
under Sec. 226.4(d)(1), since the insurance is voluntary and provides a
benefit to the consumer.
Paragraph 5b(f)(3)(i)
1. Changes provided for in agreement. A creditor may provide in the
initial agreement that further advances will be prohibited or the credit
line reduced during any period in which the maximum annual percentage
rate is reached. A creditor also may provide for other specific changes
to take place upon the occurrence of specific events. Both the
triggering event and the resulting modification must be stated with
specificity. For example, in home equity plans for employees, the
agreement could provide that a specified higher rate or margin will
apply if the borrower's employment with the creditor ends. A contract
could contain a stepped-rate or stepped-fee schedule providing for
specified changes in the rate or the fees on certain dates or after a
specified period of time. A creditor also may provide in the initial
agreement that it will be entitled to a share of the appreciation in the
value of the property as long as the specific appreciation share and the
specific circumstances which require the payment of it are set forth. A
contract may permit a consumer to switch among minimum payment options
during the plan.
2. Prohibited provisions. A creditor may not include a general
provision in its agreement permitting changes to any or all of the terms
of the plan. For example, creditors may not include ``boilerplate''
language in the agreement stating that they reserve the right to change
the fees imposed under the plan. In addition, a creditor may not include
any ``triggering events'' or responses that the regulation expressly
addresses in a manner different from that provided in the regulation.
For example, an agreement may not provide that the margin in a variable-
rate plan will increase if there is a material change in the consumer's
financial circumstances, because the regulation specifies that
temporarily freezing the line or lowering the credit limit is the
permissible response to a material change in the consumer's financial
circumstances. Similarly a contract cannot contain a provision allowing
the creditor to freeze a line due to an insignificant decline in
property value since the regulation allows that response only for a
significant decline.
Paragraph 5b(f)(3)(ii)
1. Substitution of index. A creditor may change the index and margin
used under the plan if the original index becomes unavailable, as long
as historical fluctuations in the original and replacement indices were
substantially similar, and as long as the replacement index and margin
will produce a rate similar to the rate that was in effect at the time
the original index became unavailable. If the replacement index is newly
established and therefore does not have any rate history, it may be used
if it produces a rate substantially similar to the rate in effect when
the original index became unavailable.
Paragraph 5b(f)(3)(iii)
1. Changes by written agreement. A creditor may change the terms of
a plan if the consumer expressly agrees in writing to the change at the
time it is made. For example, a consumer and a creditor could agree in
writing to change the repayment terms from interest-only payments to
payments that reduce the principal balance. The provisions of any such
agreement are governed by the limitations in Sec. 226.5b(f). For
example, a mutual agreement could not provide for future annual
percentage rate changes based on the movement of an index controlled by
the creditor or for termination and acceleration under circumstances
other than those specified in the regulation. By contrast, a consumer
could agree to a new credit limit for the plan, although the agreement
could not permit the creditor to later change the credit limit except by
a subsequent written agreement or in the circumstances described in
Sec. 226.5b(f)(3)(vi).
2. Written agreement. The change must be agreed to in writing by the
consumer. Creditors are not permitted to assume consent because the
consumer uses an account, even if use of an account would otherwise
constitute
[[Page 396]]
acceptance of a proposed change under state law.
Paragraph 5b(f)(3)(iv)
1. Beneficial changes. After a plan is opened, a creditor may make
changes that unequivocally benefit the consumer. Under this provision, a
creditor may offer more options to consumers, as long as existing
options remain. For example, a creditor may offer the consumer the
option of making lower monthly payments or could increase the credit
limit. Similarly, a creditor wishing to extend the length of the plan on
the same terms may do so. Creditors are permitted to temporarily reduce
the rate or fees charged during the plan (though a change in terms
notice may be required under Sec. 226.9(c) when the rate or fees are
returned to their original level). Creditors also may offer an
additional means of access to the line, even if fees are associated with
using the device, provided the consumer retains the ability to use prior
access devices on the original terms.
Paragraph 5b(f)(3)(v)
1. Insignificant changes. A creditor is permitted to make
insignificant changes after a plan is opened. This rule accommodates
operational and similar problems, such as changing the address of the
creditor for purposes of sending payments. It does not permit a creditor
to change a term such as a fee charged for late payments.
2. Examples of insignificant changes. Creditors may make minor
changes to features such as the billing cycle date, the payment due date
(as long as the consumer does not have a diminished grace period if one
is provided), and the day of the month on which index values are
measured to determine changes to the rate for variable-rate plans. A
creditor also may change its rounding practice in accordance with the
tolerance rules set forth in Sec. 226.14 (for example, stating an exact
APR of 14.3333 percent as 14.3 percent, even if it had previously been
stated as 14.33 percent). A creditor may change the balance computation
method it uses only if the change produces an insignificant difference
in the finance charge paid by the consumer. For example, a creditor may
switch from using the average daily balance method (including new
transactions) to the daily balance method (including new transactions).
Paragraph 5b(f)(3)(vi)
1. Suspension of credit privileges or reduction of credit limit. A
creditor may prohibit additional extensions of credit or reduce the
credit limit in the circumstances specified in this section of the
regulation. In addition, as discussed under Sec. 226.5b(f)(3)(i), a
creditor may contractually reserve the right to take such actions when
the maximum annual percentage rate is reached. A creditor may not take
these actions under other circumstances, unless the creditor would be
permitted to terminate the line and accelerate the balance as described
in Sec. 226.5b(f)(2). The creditor's right to reduce the credit limit
does not permit reducing the limit below the amount of the outstanding
balance if this would require the consumer to make a higher payment.
2. Temporary nature of suspension or reduction. Creditors are
permitted to prohibit additional extensions of credit or reduce the
credit limit only while one of the designated circumstances exists. When
the circumstance justifying the creditor's action ceases to exist,
credit privileges must be reinstated, assuming that no other
circumstance permitting such action exists at that time.
3. Imposition of fees. If not prohibited by state law, a creditor
may collect only bona fide and reasonable appraisal and credit report
fees if such fees are actually incurred in investigating whether the
condition permitting the freeze continues to exist. A creditor may not,
in any circumstances, impose a fee to reinstate a credit line once the
condition has been determined not to exist.
4. Reinstatement of credit privileges. Creditors are responsible for
ensuring that credit privileges are restored as soon as reasonably
possible after the condition that permitted the creditor's action ceases
to exist. One way a creditor can meet this responsibility is to monitor
the line on an ongoing basis to determine when the condition ceases to
exist. The creditor must investigate the condition frequently enough to
assure itself that the condition permitting the freeze continues to
exist. The frequency with which the creditor must investigate to
determine whether a condition continues to exist depends upon the
specific condition permitting the freeze. As an alternative to such
monitoring, the creditor may shift the duty to the consumer to request
reinstatement of credit privileges by providing a notice in accordance
with Sec. 226.9(c)(3). A creditor may require a reinstatement request to
be in writing if it notifies the consumer of this requirement on the
notice provided under Sec. 226.9(c)(3). Once the consumer requests
reinstatement, the creditor must promptly investigate to determine
whether the condition allowing the freeze continues to exist. Under this
alternative, the creditor has a duty to investigate only upon the
consumer's request.
5. Suspension of credit privileges following request by consumer. A
creditor may honor a specific request by a consumer to suspend credit
privileges. If the consumer later requests that the creditor reinstate
credit privileges, the creditor must do so provided no other
circumstance justifying a suspension exists at that time. If two or more
consumers are obligated under a plan and each
[[Page 397]]
has the ability to take advances, the agreement may permit any of the
consumers to direct the creditor not to make further advances. A
creditor may require that all persons obligated under a plan request
reinstatement.
6. Significant decline defined. What constitutes a significant
decline for purposes of Sec. 226.5b(f)(3)(vi)(A) will vary according to
individual circumstances. In any event, if the value of the dwelling
declines such that the initial difference between the credit limit and
the available equity (based on the property's appraised value for
purposes of the plan) is reduced by fifty percent, this constitutes a
significant decline in the value of the dwelling for purposes of
Sec. 226.5b(f)(3)(vi)(A). For example, assume that a house with a first
mortgage of $50,000 is appraised at $100,000 and the credit limit is
$30,000. The difference between the credit limit and the available
equity is $20,000, half of which is $10,000. The creditor could prohibit
further advances or reduce the credit limit if the value of the property
declines from $100,000 to $90,000. This provision does not require a
creditor to obtain an appraisal before suspending credit privileges
although a significant decline must occur before suspension can occur.
7. Material change in financial circumstances. Two conditions must
be met for Sec. 226.5b(f)(3)(vi)(B) to apply. First, there must be a
``material change'' in the consumer's financial circumstances, such as a
significant decrease in the consumer's income. Second, as a result of
this change, the creditor must have a reasonable belief that the
consumer will be unable to fulfill the payment obligations of the plan.
A creditor may, but does not have to, rely on specific evidence (such as
the failure to pay other debts) in concluding that the second part of
the test has been met. A creditor may prohibit further advances or
reduce the credit limit under this section if a consumer files for or is
placed in bankruptcy.
8. Default of a material obligation. Creditors may specify events
that would qualify as a default of a material obligation under
Sec. 226.5b(f)(3)(vi)(C). For example, a creditor may provide that
default of a material obligation will exist if the consumer moves out of
the dwelling or permits an intervening lien to be filed that would take
priority over future advances made by the creditor.
9. Government limits on the annual percentage rate. Under
Sec. 226.5b(f)(3)(vi)(D), a creditor may prohibit further advances or
reduce the credit limit if, for example, a state usury law is enacted
which prohibits a creditor from imposing the agreed-upon annual
percentage rate.
5b(g) Refund of Fees
1. Refund of fees required. If any disclosed term, including any
term provided upon request pursuant to Sec. 226.5b(d), changes between
the time the early disclosures are provided to the consumer and the time
the plan is opened, and the consumer as a result decides to not enter
into the plan, a creditor must refund all fees paid by the consumer in
connection with the application. All fees, including credit report fees
and appraisal fees, must be refunded whether such fees are paid to the
creditor or directly to third parties. A consumer is entitled to a
refund of fees under these circumstances whether or not terms are
guaranteed by the creditor under Sec. 226.5b(d)(2)(i).
2. Variable-rate plans. The right to a refund of fees does not apply
to changes in the annual percentage rate resulting from fluctuations in
the index value in a variable-rate plan. Also, if the maximum annual
percentage rate is expressed as an amount over the initial rate, the
right to refund of fees would not apply to changes in the cap resulting
from fluctuations in the index value.
3. Changes in terms. If a term, such as the maximum rate, is stated
as a range in the early disclosures, and the term ultimately applicable
to the plan falls within that range, a change does not occur for
purposes of this section. If, however, no range is used and the term is
changed (for example, a rate cap of 6 rather than 5 percentage points
over the initial rate), the change would permit the consumer to obtain a
refund of fees. If a fee imposed by the creditor is stated in the early
disclosures as an estimate and the fee changes, the consumer could elect
to not enter into the agreement and would be entitled to a refund of
fees. On the other hand, if fees imposed by third parties are disclosed
as estimates and those fees change, the consumer is not entitled to a
refund of fees paid in connection with the application. Creditors must,
however, use the best information reasonably available in providing
disclosures about such fees.
4. Timing of refunds and relation to other provisions. The refund of
fees must be made as soon as reasonably possible after the creditor is
notified that the consumer is not entering into the plan because of the
changed term, or that the consumer wants a refund of fees. The fact that
an application fee may be refunded to some applicants under this
provision does not render such fees finance charges under
Sec. 226.4(c)(1) of the regulation.
5b(h) Imposition of Nonrefundable Fees
1. Collection of fees after consumer receives disclosures. A fee may
be collected after the consumer receives the disclosures and brochure
and before the expiration of three days, although the fee must be
refunded if, within three days of receiving the required information,
the consumer decides to not enter into the agreement. In such a case,
the consumer must be notified that the fee is refundable for three days.
The notice must be
[[Page 398]]
clear and conspicuous and in writing, and may be included with the
disclosures required under Sec. 226.5b(d) or as an attachment to them.
If disclosures and brochure are mailed to the consumer, footnote 10d of
the regulation provides that a nonrefundable fee may not be imposed
until six business days after the mailing.
2. Collection of fees before consumer receives disclosures. An
application fee may be collected before the consumer receives the
disclosures and brochure (for example, when an application contained in
a magazine is mailed in with an application fee) provided that it
remains refundable until three business days after the consumer receives
the Sec. 226.5b disclosures. No other fees except a refundable
membership fee may be collected until after the consumer receives the
disclosures required under Sec. 226.5b.
3. Relation to other provisions. A fee collected before disclosures
are provided may become nonrefundable except that, under Sec. 226.5b(g),
it must be refunded if the consumer elects to not enter into the plan
because of a change in terms. (Of course, all fees must be refunded if
the consumer later rescinds under Sec. 226.15.)
Section 226.6 Initial Disclosure Statement
1. Consistent terminology. Language on the initial and periodic
disclosure statements must be close enough in meaning to enable the
consumer to relate the 2 sets of disclosures; however, the language need
not be identical. For example, in making the disclosure under
Sec. 226.6(a)(3), the creditor may refer to the ``outstanding balance at
the end of the billing cycle,'' while the disclosure for Sec. 226.7(i)
refers to the ``ending balance'' or ``new balance.''
2. Separate initial disclosures permitted. In a certain open-end
credit program involving more than one creditor--a card issuer of
travel-and-entertainment cards and a financial institution--the consumer
has the option to pay the card issuer directly or to transfer to the
financial institution all or part of the amount owing. In this case, the
creditors may send separate initial disclosure statements.
6(a) Finance charge.
Paragraph 6(a)(1)
1. When finance charges accrue. Creditors may provide a general
explanation about finance charges beginning to run and need not disclose
a specific date. For example, a disclosure that the consumer has 30 days
from the closing date to pay the new balance before finance 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 finance charge begins on the date the
transaction 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 of 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 example, cash advances), even though the
balance for another feature (purchases) may be subject to 2 rates (a
1.5% periodic rate on purchase balances of $0-$500, while balances above
$500 are subject to a 1% periodic rate). Of course, the creditor must
give a range of balances disclosure for the purchase feature.
2. Variable-rate disclosures--coverage. This section covers open-end
credit plans under which rate changes are part of the plan and are tied
to an index or formula. A creditor would use variable-rate disclosures
(and thus be excused from the requirement of giving a change-in-terms
notice when rate increases occur as disclosed) for plans involving rate
changes such as the following:
Rate changes that are tied to the rate the creditor pays on
its 6-month money market certificates.
Rate changes that are tied to Treasury bill rates.
Rate changes that are tied to changes in the creditor's
commercial lending rate.
In contrast, the creditor's contract reservation to increase the rate
without reference to such an index or formula (for example, a plan that
simply provides that the creditor reserves the right to raise its rates)
would not be considered a variable-rate plan for Truth in Lending
disclosure purposes. (See the rule in Sec. 226.5b(f)(1) applicable to
home equity plans, however, which prohibits ``rate reservation''
clauses.) Moreover, an open-end credit plan in which the employee
receives a lower rate contingent upon employment (that is, with the rate
to be increased upon termination of employment) is not a variable-rate
plan. (With regard to such employee preferential-rate plans, however,
see comment 9(c)-1, which provides that if the specific change that
would occur is disclosed on the initial disclosure statement, no notice
of a change in terms need be given when the term later changes as
disclosed.)
3. Variable rate plan--rate(s) in effect. In disclosing the rate(s)
in effect at the time of the initial disclosures (as is required by
Sec. 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
[[Page 399]]
disclosure from time to time, for example, each calendar month; or may
disclose an estimated rate under Sec. 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 instructions for obtaining it.
6. Variable rate plan--circumstances for increase. Circumstances
under which the rate(s) may increase include, for example:
An increase in the Treasury bill rate.
An increase in the Federal Reserve discount 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 discount 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 duration of the plan must be
disclosed. When there are no limitations, the creditor may, but need
not, disclose that fact. (A maximum interest rate must be included in
dwelling-secured open-end credit plans under which the interest rate may
be changed. See Sec. 226.30 and the commentary to that section.) Legal
limits such as usury or rate ceilings under State or Federal statutes or
regulations need not be disclosed. Examples of limitations that must be
disclosed include:
``The rate on the plan will not exceed 25% annual
percentage rate.''
``Not more than \1/2\% increase in the annual percentage
rate per year will occur.''
8. Variable rate plan--effects of increase. Examples of effects that
must be disclosed include:
Any requirement for additional collateral if the annual
percentage rate increases beyond 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
variable rate plan as defined in Comment 6(a)(2)-2.
10. Discounted variable-rate plans. In some variable-rate plans,
creditors may set an initial interest rate that is not determined by the
index or formula used to make later interest rate adjustments.
Typically, this initial rate is lower than the rate would be if it were
calculated using the index or formula.
For example, a creditor may calculate interest rates
according to a formula using the six-month Treasury bill rate plus a 2
percent margin. If the current Treasury bill rate is 10 percent, the
creditor may forego the 2 percent spread and charge only 10 percent for
a limited time, instead of setting an initial rate of 12 percent, or the
creditor may disregard the index or formula and set the initial rate at
9 percent.
When creditors use an initial rate that is not calculated
using the index or formula for later rate adjustments, the initial
disclosure statement should reflect: (1) The initial rate (expressed as
a periodic rate and a corresponding annual percentage rate), together
with a statement of how long it will remain in effect; (2) the current
rate that would have been applied using the index or formula (also
expressed as a periodic rate and a corresponding annual percentage
rate); and (3) the other variable-rate information required by footnote
12 to Sec. 226.6(a)(2).
In disclosing the current periodic and annual percentage
rates that would be applied using the index or formula, the creditor may
use any of the disclosure options described in comment 6(a)(2)-3.
11. Increased penalty rates. If the initial rate may increase upon
the occurrence of one or more specific events, such as a late payment or
an extension of credit that exceeds the credit limit, the creditor must
disclose the initial rate and the increased penalty rate that may apply.
If the penalty rate is based on an index and an increased margin, the
issuer must disclose the index and the margin. The creditor must also
disclose the specific event or events that may result in the increased
rate, such as ``22% APR, if 60 days late.'' If the penalty rate cannot
be determined at the time disclosures are given, the creditor must
provide an explanation of the specific event or events that may result
in the increased rate. At the creditor's option, the creditor may
disclose the period for which the increased rate will remain in effect,
such as ``until you make three timely payments.'' The creditor need not
disclose an increased rate that is imposed when credit privileges are
permanently terminated.
Paragraph 6(a)(3).
1. Explanation of balance computation method. A shorthand phrase
such as ``previous balance method'' does not suffice in explaining the
balance computation method. (See appendix G-1 for model clauses.)
2. Allocation of 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 payments are applied first to
finance charges, then to purchases, and then to cash
[[Page 400]]
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 Sec. 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 Sec. 226.4(c)(7)).
6(b) Other charges.
1. General; examples of other charges. Under Sec. 226.6(b),
significant charges related to the plan (that are not finance charges)
must also be disclosed. For example:
i. Late payment and over-the-credit-limit charges.
ii. Fees for providing documentary evidence of transactions
requested under Sec. 226.13 (billing error resolution).
iii. Charges imposed in connection with real estate transactions
such as title, appraisal, and credit report fees (see Sec. 226.4(c)(7)).
iv. A tax imposed on the credit transaction by a state or other
governmental body, such as a documentary stamp tax on cash advances (see
the commentary to Sec. 226.4(a)).
v. A membership or participation fee for a package of services that
includes an open-end credit feature, unless the fee is required whether
or not the open-end credit feature is included. For example, a
membership fee to join a credit union is not an ``other charge,'' even
if membership is required to apply for credit. For the fee to be
excluded from disclosure as an ``other charge,'' however, the package of
services must have some substantive purpose other than access to the
credit feature. For example, if the primary benefit of membership in an
organization is the opportunity to apply for a credit card, and the
other benefits offered (such as a newsletter or a member information
hotline) are merely incidental to the credit feature, the membership fee
would have to be disclosed as an ``other charge.''
vi. Automated teller machine (ATM) charges described in comment
4(a)-4 that are not finance charges.
vii. Charges imposed for the termination of an open-end credit plan.
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 collection activity after
default; attorney's fees, whether or not automatically imposed;
foreclosure costs; post-judgment interest rates imposed by law; and
reinstatement or reissuance fees.
Premiums for voluntary credit life or disability insurance,
or for property insurance, that are not part of the finance charge.
Application fees under Sec. 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.
Charges for submitting as payment a check that is later
returned unpaid. (See the commentary to Sec. 226.4(c)(2).)
Charges imposed on a cardholder by an institution other
than the card issuer for the use of the other institution's ATM in a
shared or interchange system. (See also comment 7(b)-2.)
Taxes and filing or notary fees excluded from the finance
charge under Sec. 226.4(e).
6(c) Security interests.
1. General. Disclosure is not required about the type of security
interest, or about the creditor'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 interest by using, for example, pledge, lien,
or mortgage (instead of security interest).
2. Identification of property. Identification of the collateral by
type is satisfied by stating, for example, motor vehicle or household
appliances. (Creditors should be aware, however, that the federal credit
practices rules, as well as some state laws, prohibit certain security
interests in household goods.) The creditor may, at its option, provide
a more specific identification (for example, a model and serial number).
3. Spreader clause. The fact that collateral for pre-existing credit
extensions with the institution is being used to secure the present
obligation 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 specific identification of that
collateral is unnecessary, 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 required 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 security interest will be taken in household goods
if the consumer's balance exceeds $1,000, the creditor should disclose
accordingly. 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 initial
disclosure statement that security will be required if the balance
exceeds $1,000, and the creditor must provide a change-in-terms notice
under
[[Page 401]]
Sec. 226.9(c) at the time the security is taken. (See comment 6(c)-2.)
5. Collateral from third party. In certain situations, the
consumer's obligation may be secured 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
security 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.
6(e) Home Equity Plan Information
1. Additional disclosures required. For home equity plans, creditors
must provide several of the disclosures set forth in Sec. 226.5b(d)
along with the disclosures required under Sec. 226.6. Creditors also
must disclose a list of the conditions that permit the creditor to
terminate the plan, freeze or reduce the credit limit, and implement
specified modifications to the original terms. (See comment
5b(d)(4)(iii)-1.)
2. Form of disclosures. The home equity disclosures provided under
this section must be in a form the consumer can keep, and are governed
by Sec. 226.5(a)(1). The segregation standard set forth in
Sec. 226.5b(a) does not apply to home equity disclosures provided under
Sec. 226.6.
3. Disclosure of payment and variable-rate examples. The payment
example disclosure in Sec. 226.5b(d)(5)(iii) and the variable-rate
information in Sec. 226.5b(d)(12) (viii), (x), (xi), and (xii) need not
be provided with the disclosures under Sec. 226.6 if:
The disclosures under Sec. 226.5b(d) were provided in a
form the consumer could keep; and
The disclosures of the payment example under
Sec. 226.5b(d)(5)(iii), the maximum payment example under
Sec. 226.5b(d)(12)(x) and the historical table under
Sec. 226.5b(d)(12)(xi) included a representative payment example for the
category of payment options the consumer has chosen.
For example, if a creditor offers three payment options (one for each of
the categories described in the commentary to Sec. 226.5b(d)(5)),
describes all three options in its early disclosures, and provides all
of the disclosures in a retainable form, that creditor need not provide
the Sec. 226.5b(d)(5)(iii) or (d)(12) disclosures again when the account
is opened. If the creditor showed only one of the three options in the
early disclosures (which would be the case with a separate disclosure
form rather than a combined form, as discussed under Sec. 226.5b(a)),
the disclosures under Sec. 226.5b(d)(5)(iii) and (d)(12) (viii), (x),
(xi) and (xii) must be given to any consumer who chooses one of the
other two options. If the Sec. 226.5b(d)(5)(iii) and (d)(12) disclosures
are provided with the second set of disclosures, they need not be
transaction-specific, but may be based on a representative example of
the category of payment option chosen.
4. Disclosures for the repayment period. The creditor must provide
disclosures about both the draw and repayment phases when giving the
disclosures under Sec. 226.6. Specifically, the creditor must make the
disclosures in Sec. 226.6(e), state the corresponding annual percentage
rate (as required in Sec. 226.6(a)(2)) and provide the variable-rate
information required in footnote 12 for the repayment phase. To the
extent the corresponding annual percentage rate, the information in
footnote 12, and any other required disclosures are the same for the
draw and repayment phase, the creditor need not repeat such information,
as long as it is clear that the information applies to both phases.
References
Statute: Section 127(a).
Other sections: Sections 226.4, 226.5, 226.7, 226.9, 226.14, and
appendix G.
Previous regulation: Section 226.7(a) and Interpretation
Sec. 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
disability insurance, required property insurance premiums, default
charges, or fees for collection activity. Disclosures for variable rate
plans are now required by the regulation, replacing Interpretation
Sec. 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 purchases, cash advances, or overdraft checking.
Groups of transactions subject to different finance charge terms because
of the dates on which the transactions took place are treated like
different features for purposes of disclosures on the periodic
statements. The commentary includes some special rules for multifeatured
plans.
2. Separate periodic statements permitted. In a certain open-end
credit program involving more than one creditor--a card issuer of
travel-and-entertainment cards and a financial institution--the consumer
has the option to pay the card issuer directly or to transfer to the
financial institution all or part of the amount owing. In this case, the
[[Page 402]]
creditors may send separate periodic statements that reflect the
separate obligations owed to each.
3. Deferred payment transactions. Creditors offer a variety of
payment plans for purchases that permit consumers to avoid finance
charges if the purchase balance is paid in full by a certain date. The
following provides guidance for one type of deferred payment plan where,
for example, no finance charge is imposed on a $500 purchase made in
January if the $500 balance is paid by March 31.
i. Periodic rates. Under Sec. 226.7(d), creditors must disclose each
periodic rate that may be used to compute the finance charge. Under some
plans with a deferred payment feature, if the deferred payment balance
is not paid by the payment due date, finance charges attributable to
periodic rates applicable to the billing cycles between the date of
purchase and the payment due date (January through March in this
example) may be imposed. Periodic rates that may apply to the deferred
payment balance ($500 in this example) if the balance is not paid in
full by the payment due date must appear on periodic statements for the
billing cycles between the date of purchase and the payment due date.
However, if the consumer does not pay the deferred payment balance by
the due date, the creditor is not required to identify, on the periodic
statement disclosing the finance charge for the deferred payment
balance, periodic rates that have been disclosed in previous billing
cycles between the date of purchase and the payment due date.
ii. Balances subject to periodic rates. Under Sec. 226.7(e),
creditors must disclose the balances subject to periodic rates during a
billing cycle. The deferred payment balance ($500 in this example) is
not subject to a periodic rate for billing cycles between the date of
purchase and the payment due date. Periodic statements sent for those
billing cycles should not include the deferred payment balance in the
balance disclosed under Sec. 226.7(e). At the creditor's option, this
amount may be disclosed on periodic statements provided it is identified
by a term other than the term used to identify the balance disclosed
under Sec. 226.7(e) (such as ``deferred payment balance''). During any
billing cycle in which a periodic rate finance charge on the deferred
payment balance is debited to the account, the balance disclosed under
Sec. 226.7(e) should include the deferred payment balance for that
billing cycle.
iii. Amount of finance charge. Under Sec. 226.7(f), creditors must
disclose finance charges imposed during a billing cycle. For some
deferred payment purchases, the creditor may impose a finance charge
from the date of purchase if the deferred payment balance ($500 in this
example) is not paid in full by the due date, but otherwise will not
impose finance charges for billing cycles between the date of purchase
and the payment due date. Periodic statements for billing cycles
preceding the payment due date should not include in the finance charge
disclosed under Sec. 226.7(f) the amounts a consumer may owe if the
deferred payment balance is not paid in full by the payment due date. In
this example, the February periodic statement should not identify as
finance charges interest attributable to the $500 January purchase. At
the creditor's option, this amount may be disclosed on periodic
statements provided it is identified by a term other than ``finance
charge'' (such as ``contingent finance charge'' or ``deferred finance
charge''). The finance charge on a deferred payment balance should be
reflected on the periodic statement under Sec. 226.7(f) for the billing
cycle in which the finance charge is debited to the account.
iv. Free-ride period. Assuming monthly billing cycles ending at
month-end and a free-ride period ending on the 25th of the following
month, here are four examples illustrating how a creditor may comply
with the requirement to disclose the free-ride period applicable to a
deferred payment balance ($500 in this example) and with the 14-day rule
for mailing or delivering periodic statements before imposing finance
charges (see Sec. 226.5):
A. The creditor could include the $500 purchase on the periodic
statement reflecting account activity for February and sent on March 1
and identify March 31 as the payment due date for the $500 purchase.
(The creditor could also identify March 31 as the payment due date for
any other amounts that would normally be due on March 25.)
B. The creditor could include the $500 purchase on the periodic
statement reflecting activity for March and sent on April 1 and identify
April 25 as the payment due date for the $500 purchase, permitting the
consumer to avoid finance charges if the $500 is paid in full by April
25.
C. The creditor could include the $500 purchase and its due date on
each periodic statement sent during the deferred payment period
(January, February, and March in this example).
D. If the due date for the deferred payment balance is March 7
(instead of March 31), the creditor could include the $500 purchase and
its due date on the periodic statement reflecting activity for January
and sent on February 1, the most recent statement sent at least 14 days
prior to the due date.
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
[[Page 403]]
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 separate 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
balance need not reflect finance charges accrued since the last payment.
7(b) Identification of transactions.
1. Multifeatured plans. In identifying transactions under
Sec. 226.7(b) for multifeatured plans, creditors may, for example,
choose to arrange transactions by feature (such as disclosing sale
transactions separately from cash advance transactions) or in some other
clear manner, such as by arranging the transactions in general
chronological order.
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on the
cardholder by an institution other than the card issuer for the use of
the other institution's ATM in a shared or interchange system and
included by the terminal-operating institution in the amount of the
transaction need not be separately disclosed on the periodic statement.
7(c) Credits.
1. Identification--sufficiency. The creditor need not describe each
credit by type (returned merchandise, rebate of finance charge, etc.)--
credit would suffice--except if the creditor is using the periodic
statement to satisfy the billing error correction notice requirement.
(See the commentary to Sec. 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 consumer which type of credit each entry represents.
3. Date. If only one date is disclosed (that is, the crediting date
as required by the regulation), no further identification of that date
is necessary. More than one date may be disclosed for a single entry, as
long as it is clear which date represents the date on which credit was
given.
4. Totals. Where the creditor lists the credits made to the account
during the billing cycle, the creditor need not disclose total figures
for the amounts credited.
7(d) Periodic rates.
1. Disclosure of 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 during the billing cycle. For example:
If the consumer's account has both a purchase 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 billing
cycle.
If the rate varies (such as when it is tied to a particular
index), the creditor must disclose each rate in effect during the cycle
for which the statement was issued.
2. Disclosure of periodic rates required only if imposition
possible. With regard to the periodic rate disclosure (and its
corresponding annual percentage rate), only rates that could have been
imposed during the billing cycle reflected on the periodic statement
need to be disclosed. For example:
If the creditor is changing rates effective during the next
billing cycle (either because it is changing terms or because of a
variable rate plan), the rates required to be disclosed under
Sec. 226.7(d) are only those in effect during the billing cycle
reflected on the periodic statement. For example, if the monthly rate
applied during May was 1.5 percent, but the creditor will increase the
rate to 1.8 percent effective June 1, 1.5 percent (and its corresponding
annual percentage rate) is the only required disclosure under
Sec. 226.7(d) for the periodic statement reflecting the May account
activity.
If the consumer has an overdraft line that might later be
expanded upon the consumer's request to include secured advances, the
rates for the secured advance feature need not be given until such time
as the consumer has requested and received access 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 disclose 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% applied to the outstanding balance and a required credit life
insurance component calculated at .1% per month on the same outstanding
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% monthly, 18% annual percentage rate; .1% monthly,
1.2% annual percentage rate.)
Disclose one composite periodic rate (that is, 1.6% per
month) along with the applicable range of balances and corresponding
annual percentage rate.
[[Page 404]]
4. Corresponding annual percentage rate. In disclosing the annual
percentage rate that corresponds 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
(historical rate) required to be disclosed (Sec. 226.7(g)), the creditor
need disclose only one annual percentage rate, but must use the phrase
``annual percentage rate.''
6. Ranges of balances. See Comment 6(a)(2)-1.
7. Deferred payment transactions. See comment 7-3(i).
7(e) Balance on which finance charge computed.
1. Limitation to periodic rates. Section 226.7(e) only requires
disclosure of the balance(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 consumer obtains
a $1,500 cash advance subject to both a 1% transaction fee and a 1%
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 previous cycles).
2. Split rates applied to balance ranges. If split rates were
applied to a balance because different 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 monthly periodic rate of 1 percent to the
remainder. This option to disclose a combined balance does not apply
when the finance charge is computed by applying the split rates to each
day's balance (in contrast, for example, to applying the rates to the
average daily balance). In that case, the balances must be disclosed
using any of the options that are available if two or more daily rates
are imposed. (See comment 7(e)-5.)
3. Monthly rate on average daily balance. If a creditor computes a
finance charge on the average daily balance by application of a monthly
periodic rate or rates, the balance is adequately 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. Multifeatured plans. In a multifeatured plan, the creditor must
disclose a separate balance (or balances, as applicable) to which a
periodic rate was applied for each feature or group of features subject
to different periodic rates or different balance computation methods.
Separate balances are not required, however, merely because a ``free-
ride'' period is available for some features but not others. A total
balance for the entire plan is optional. This does not affect how many
balances the creditor must disclose--or may disclose--within each
feature. (See, for example, comment 7(e)-5.)
5. 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 cycle on which the balance
in the account changes
--The sum of the daily balances during the billing cycle
--The average daily balance during the billing cycle, in which case
the creditor shall explain that the average daily balance is or can be
multiplied by the number 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 cycle on which the balance
in the account changes
--Two or more average daily balances, each applicable to the daily
periodic rates imposed for the time that those rates were in effect, as
long as the creditor 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 applicable daily
periodic rate, and (3) adding these products together.
6. Explanation of balance computation method. See the commentary to
Sec. 226.6(a)(3).
7. Information to compute balance. In connection with disclosing the
finance charge balance, the creditor need not give the consumer all of
the information necessary to compute the balance if that information is
not otherwise required to be disclosed. For example, if current
purchases are included
[[Page 405]]
from the date they are posted to the account, the posting date need not
be disclosed.
8. Non-deduction of credits. The creditor need not specifically
identify the total dollar amount of credits not deducted in computing
the finance charge balance. Disclosure of the amount of credits not
deducted is accomplished by listing the credits (Sec. 226.7(c)) and
indicating which credits will not be deducted in determining the balance
(for example, ``credits after the 15th of the month are not deducted in
computing the finance charge.'')
9. Use of one balance computation method explanation when multiple
balances disclosed. Sometimes the creditor will disclose more than one
balance to which a periodic rate was applied even though each balance
was computed using the same balance computation method. For example, if
a plan involves purchases and cash advances that are subject to
different rates, more than one balance must be disclosed even though the
same computation method is used for determining the balance for each
feature. In these cases, one explanation of the balance computation
method is sufficient. Sometimes the creditor separately discloses the
portions of the balance that are subject to different rates because
different portions of the balance fall within two or more balance
ranges, even when a combined balance disclosure would be permitted under
comment 7(e)-2. In these cases, one explanation of the balance
computation method is also sufficient (assuming, of course, that all
portions of the balance were computed using the same method).
10. Deferred payment transactions. See comment 7-3(ii).
7(f) Amount of finance charge.
1. Total. A total finance charge amount for the plan is not
required.
2. Itemization--types of 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, individually
or as a total. For example, 5 transaction charges of $1 may be listed
separately or as $5.
3. Itemization--different periodic rates. Whether different periodic
rates are applicable to different types of transactions or to different
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% per month on the first $500 of a balance and 1%
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 periodic
rates no total periodic rate disclosure for the entire plan need be
given.
5. Finance charges not added to account. A finance charge that is
not included in the new balance because it is payable to a third party
(such as required life insurance) must still be shown on the periodic
statement as a finance charge.
6. Finance charges other than periodic rates. See Comment 6(a)(4)-1
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 obligation. In such a plan, no
disclosure is required of finance charges that have accrued since the
last payment.
8. Start-up fees. Points, loan fees, and similar finance charges
relating to the opening of the account that are paid prior to the
issuance of the first periodic statement need not be disclosed on the
periodic statement. If, however, these charges are financed as part of
the plan, including charges that are paid out of the first advance, the
charges must be disclosed as part of the finance charge on the first
periodic statement. However, they need not be factored into the annual
percentage rate. (See footnote 33 in the regulation.)
9. Deferred payment transactions. See comment 7-3(iii).
7(g) Annual percentage rate.
1. Rate same as corresponding annual percentage 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 feature, or may be described as
a composite for the whole plan. 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. Similarly, closing costs or
settlement costs, for example, may be used to describe charges imposed
in connection with real estate transactions that are excluded from the
finance charge under Sec. 226.4(c)(7), if the same term (such as closing
costs) was used in the initial disclosures and if the creditor chose to
itemize and individually disclose the costs included in that term. Even
though the taxes and filing or notary fees excluded from the finance
charge under Sec. 226.4(e) are not required to be disclosed as other
charges under Sec. 226.6(b), these charges may be included in
[[Page 406]]
the amount shown as closing costs or settlement costs on the periodic
statement, if the charges were itemized and disclosed as part of the
closing costs or settlement costs on the initial disclosure statement.
(See comment 6(b)-1 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.
4. Itemization--types of other charges. Each type of other charge
(such as late payment charges, over-the-credit-limit charges, ATM fees
that are not finance charges, and membership fees) imposed during the
cycle must be separately itemized; for example, disclosure of only a
total of other charges attributable to both an over-the-credit-limit
charge and a late payment charge would not be permissible. Other charges
of the same type may be disclosed, however, individually or as a total.
For example, three ATM fees of $1 may be listed separately or as $3.
7(i) Closing date of billing cycle; new balance.
1. Credit balances. See Comment 7(a)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance may
be disclosed for each feature or for the plan as a whole. If separate
new balances are disclosed, a total new balance is optional.
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 obligation. 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 specific wording is required,
so long as the language 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.
2. Deferred payment transactions. See comment 7-3(iv).
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 Sec. 226.13. Since
all disclosures must be ``clear,'' the statement should indicate the
general purpose for the address, although no elaborate explanation or
particular wording is required.
2. Telephone number. A telephone number may be included, but the
address for billing error inquiries, which is the required disclosure,
must be clear and conspicuous. One way to ensure that the address is
clear and conspicuous is to include a precautionary instruction that
telephoning will not preserve the consumer's billing error rights. Both
of the billing rights statements in appendix G contain such a
precautionary instruction, so that a creditor could, by including either
of these statements with each periodic statement, ensure that the
required address is provided in a clear and conspicuous manner.
References
Statute: Section 127(b).
Previous regulation: Section 226.7(b)(1) and Interpretation
Secs. 226.701, 226.703, 226.706, and 226.707.
Other sections: Sections 226.4 through 226.6, 226.8, 226.14, and
appendix G.
1981 changes: Under Sec. 226.7, required terminology is no longer
mandated except for the terms finance charge and annual percentage rate.
The requirement in the previous regulation about the location of
disclosures has been deleted.
Under the revised Sec. 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 periodic statement
disclosure of other charges (non-finance 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 of identification rules. Section 226.8 deals with the
requirement (imposed by Sec. 226.7(b)) for identification of each credit
transaction made during the billing cycle. The rules for identifying
transactions on periodic statements vary, depending on whether:
The transaction involves sale credit (purchases) or nonsale
credit (cash advances, for example).
An actual copy of the credit document reflecting 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 related persons.
2. Sale credit. The term sale credit refers to a purchase in which
the consumer uses a credit card or otherwise directly accesses an open-
end line of credit (see Comment 8-3 if access is by means of a check) to
obtain goods or services from a merchant, whether or not the merchant is
the card issuer. Sale credit even includes:
Premiums for voluntary credit life insurance whether sold
by the card issuer or another person.
[[Page 407]]
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 include a recreated
document. It includes, for example, a duplicate, carbon, or photographic
copy, but does not include a so-called ``facsimile draft'' in which the
required information 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. For purposes of identifying
transactions, the term same or related persons refers to, for example:
Franchised or licensed sellers of a creditor'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
consumer to use the credit only in transactions with that seller.
A seller is not related to the creditor merely because the seller
and the creditor have an agreement authorizing the seller to honor the
creditor's credit card.
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 non-related sellers and creditors.
7. Credit insurance offered through the creditor. When credit
insurance that is not part of the finance charge (for example, voluntary
credit life insurance) is offered to the consumer through the creditor,
but is actually provided by another company, the creditor has the option
of identifying the premiums in one of two ways on the periodic
statement. The creditor may describe the premiums using either the rule
in Sec. 226.8(a)(2) for related sellers and creditors, or the rule in
Sec. 226.8(a)(3) for non-related sellers and creditors. This means,
therefore, that the creditor may identify the insurance either by
providing, under Sec. 226.8(a)(2), a brief identification of the
services provided (for example, credit life insurance), or by
disclosing, under Sec. 226.8(a)(3), the name and address of the company
providing the insurance (for example, ABC Insurance Company, New York,
New York). In either event, the creditor would, of course, also provide
the amount and the date of the transaction.
8. Transactions involving creditors and sellers with corporate
connections. In a credit card plan established for use primarily with
sellers that have no corporate connection with the creditor, the
creditor may describe all transactions under the plan by using the rules
in Sec. 226.8(a)(3)--creditor and seller not same or related persons--
including transactions involving a seller that has a corporate
connection with the creditor. In other credit card plans, the creditor
may describe transactions involving a seller that has a corporate
connection with the creditor, such as subsidiary-parent, using the rules
in Sec. 226.8(a)(3) where it is unlikely that the consumer would know of
the corporate connection between the creditor and the seller--for
example, where the names of the creditor and the seller are not similar,
and the periodic statement is issued in the name of the creditor only.
8(a) Sale credit.
1. Date--disclosure of only one date. If only the required date is
disclosed for a transaction, the creditor need not identify it as the
``transaction date.'' If the creditor discloses more than one date (for
example, the transaction date and the posting date), the creditor must
identify each.
2. Date--disclosure of 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 disclosure to the consumer.
3. When transaction takes place. If the consumer conducts the
transaction in person, the date of the transaction is the calendar date
on which the consumer made the purchase or order, or secured the
advance. For transactions billed to the account on an ongoing basis
(other than installments to pay a precomputed 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 transactions 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 installment 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
[[Page 408]]
with either any other identifying information required by Sec. 226.8(a)
(such as the seller's name and address in a three-party situation) or
other appropriate identifying information relating the transaction 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 of credit document provided.
1. Format. The information required by Sec. 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 of credit document not provided--creditor and seller
same or related person(s).
1. Property identification--sufficiency of description. The ``brief
identification'' provision in Sec. 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,
miscellaneous, second-hand goods, or promotional items would not
suffice.
A reference to a department in a sales establishment that
accurately conveys the identification of the types of property or
services available in the department is sufficient--for example,
jewelry, sporting goods.
2. Property identification--number or symbol. The ``brief
identification'' may be made by disclosing on the periodic statement a
number or symbol that is related to an identification list printed
elsewhere on the statement.
3. Property identification--additional document. In making the
``brief identification'' required by Sec. 226.8(a)(2), the creditor may
identify the property by describing the transaction on a document
accompanying the periodic statement (for example, on a facsimile 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 processor or other shared-service provider.
5. Date of transaction--foreign transactions. In a foreign
transaction, the debiting date may be considered the transaction date.
8(a)(3) Copy of credit document not provided--creditor and seller
not same or related person(s).
1. Seller's name. The requirement contemplates 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 receipt 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 of 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 seller has multiple
stores or branches within that city, the creditor need not identify the
specific branch at which the sale occurred.
3. No fixed location. When no meaningful address 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 designation, such as
aboard plane, ABC Airways Flight, customer's home, telephone order, or
mail order.
4. Date of transaction--foreign transactions. See Comment 8(a)(2)-5.
8(b) Nonsale credit.
1. Date of transaction. If only one of the required 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 creditor must identify each.
2. Amount of 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 cumulative daily basis, rather than the amount
attributable to each check or each use of the debit/credit card.
4. Identification of transaction type. The creditor 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: Section 127(b)(2).
Previous regulation: Section 226.7(k).
Other sections: Section 226.7.
1981 changes: Section 226.8 has been streamlined and reorganized to
facilitate its use.
[[Page 409]]
Technical detail has been deleted from the Regulation for inclusion in
the commentary. The Regulation implements the amended section 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 responsibilities for certain small creditors. For
descriptive billing of nonsale transactions, the regulation now permits
the use of the debiting date in all cases.
Section 226.9--Subsequent Disclosure Requirements
9(a) Furnishing Statement of Billing Rights.
9(a)(1) Annual Statement
1. General. The creditor may provide the annual 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
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 alternative 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.
2. Substantially similar. See the commentary to appendix G-4.
9(b) Disclosures for Supplemental Credit Devices and Additional Features
1. Credit device--examples. Credit device includes, for example, a
blank check, payee-designated check, blank draft or order, or
authorization 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 existing account
(although the regular checks that could trigger the overdraft feature
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.
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 previously
disclosed, the creditor:
Need only provide a reminder that the new device or feature
is covered by the earlier disclosures. (For example, in mailing special
checks that directly access the credit line, the creditor might give a
disclosure such as ``Use this as you would your XYZ card to obtain a
cash advance from our bank''); or
May remake the Sec. 226.6(a) finance charge disclosures.
Paragraph 9(b)(2)
1. Different finance charge terms. If the finance 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 device or feature.
9(c) Change in Terms
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
increases under a properly disclosed variable-rate 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 certain balance in a
savings account in order to keep a particular rate and the account
balance falls below the specified minimum. In contrast, notice must be
given if the contract allows the creditor to increase the rate at its
discretion but does not include specific terms for an increase (for
example, when an increase may occur under the creditor's contract
reservation right to increase the periodic rate). The rules in
Sec. 226.5b(f) relating to home equity plans, however, limit the ability
of a creditor to change the terms of such plans.
2. State law issues. Examples of issues not addressed by
Sec. 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 balances, 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 creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if the
change either affects any of the terms
[[Page 410]]
required to be disclosed under Sec. 226.6 or increases the minimum
payment, unless an exception under Sec. 226.9(c)(2) applies; for
example, the creditor must give advance notice if the creditor initially
disclosed a 25-day free-ride 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 notices 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 of change. The rule that the notice of the
change in terms be provided at least 15 days before the change takes
effect permits mid-cycle changes when there is clearly no retroactive
effect, such as the imposition 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. Advance notice of 15 days is
not necessary--that is, a notice of change in terms is required, but it
may be mailed or delivered as late as the effective date of the change--
in two circumstances:
If there is an increased periodic rate or any other finance
charge attributable to the consumer's delinquency or default.
If the consumer agrees to the particular change. This provision
is intended for use in the unusual instance when a consumer substitutes
collateral or when the creditor can advance additional credit only if a
change relatively unique to that consumer is made, such as the
consumer's providing additional security or paying an increased minimum
payment amount. Therefore, the following are not ``agreements'' between
the consumer and the creditor for purposes of Sec. 226.9(c)(1): The
consumer's general acceptance of the creditor's contract reservation of
the right to change terms; the consumer's use of the account (which
might imply acceptance of its terms under State law); and the consumer's
acceptance of a unilateral term change that is not particular to that
consumer, but rather is of general applicability to consumers with that
type of account.
4. Form of change-in-terms notice. A complete new set of the initial
disclosures containing the changed term complies with Sec. 226.9(c) if
the change is highlighted in some way on the disclosure statement, or if
the disclosure statement is accompanied by a letter or some other insert
that indicates or draws attention to the term change.
5. Security interest change--form of 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.
6. Changes to home equity plans entered into on or after November 7,
1989. Section 226.9(c) applies when, by written agreement under
Sec. 226.5b(f)(3)(iii), a creditor changes the terms of a home equity
plan--entered into on or after November 7, 1989--at or before its
scheduled expiration, for example, by renewing a plan on terms different
from those of the original plan. In disclosing the change:
If the index is changed, the maximum annual percentage rate
is increased (to the limited extent permitted by Sec. 226.30), or a
variable-rate feature is added to a fixed-rate plan, the creditor must
include the disclosures required by Sec. 226.5b (d)(12)(x) and
(d)(12)(xi), unless these disclosures are unchanged from those given
earlier.
If the minimum payment requirement is changed, the
creditor must include the disclosures required by Sec. 226.5(d)(5)(iii)
(and, in variable-rate plans, the disclosures required by Sec. 226.5b
(d)(12)(x) and (d)(12)(xi)) unless the disclosures given earlier
contained representative examples covering the new minimim payment
requirement. (See the commentary to Sec. 226.5b (d)(5)(iii), (d)(12)(x)
and (d)(12)(xi) for a discussion of representative examples.)
When the terms are changed pursuant to a written agreement as described
in Sec. 226.5b(f)(3)(iii), the advance-notice requirement does not
apply.
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 consumer sells the car.
2. Skip features. If a credit program allows consumers to skip or
reduce one or more payments during the year, or involves temporary
reductions in finance charges, no notice of the change in terms is
required either prior to the reduction or upon resumption of the higher
rates or payments if these features are explained on the initial
disclosure statement (including an explanation of the terms upon
resumption). For example, a
[[Page 411]]
merchant may allow consumers to skip the December payment to encourage
holiday shopping, or a teachers' credit union may not require payments
during summer vacation. Otherwise, the creditor must give notice prior
to resuming the original schedule or rate, even though no notice is
required prior to the reduction. The change-in-terms notice may be
combined with the notice offering the reduction. For example, the
periodic statement reflecting the reduction or skip feature may also be
used to notify the consumer of the resumption of the original schedule
or rate, either by stating explicitly when the higher payment or charges
resume, or by indicating the duration of the skip option. Language such
as ``You may skip your October payment,'' or ``We will waive your
finance charges for January,'' may serve as the change-in-terms notice.
9(c)(3) Notice for Home Equity Plans
1. Written request for reinstatement. If a creditor requires the
request for reinstatement of credit privileges to be in writing, the
notice under Sec. 226.9(c)(3) must state that fact.
2. Notice not required. A creditor need not provide a notice under
this paragraph if, pursuant to the commentary to Sec. 226.5b(f)(2), a
creditor freezes a line or reduces a credit line rather than terminating
a plan and accelerating the balance.
9(d) Finance Charge Imposed at Time of Transaction
1. Disclosure prior to imposition. A person imposing a finance
charge at the time of honoring a consumer's credit card must disclose
the amount of the charge, or an explanation of how the charge will be
determined, prior to its imposition. This must be disclosed before the
consumer becomes obligated for property or services that may be paid for
by use of a credit card. For example, disclosure must be given before
the consumer has dinner at a restaurant, stays overnight at a hotel, or
makes a deposit guaranteeing the purchase of property or services.
9(e) Disclosures Upon Renewal of Credit or Charge Card
1. Coverage. This paragraph applies to credit and charge card
accounts of the type subject to 226.5a. (See Sec. 226.5a(a)(3) and the
accompanying commentary for discussion of the types of accounts subject
to Sec. 226.5a.) The disclosure requirements are triggered when a card
issuer imposes any annual or other periodic fee on such an account,
whether or not the card issuer originally was required to provide the
application and solicitation disclosures described in Sec. 226.5a.
2. Form. The disclosures under this paragraph must be clear and
conspicuous, but need not appear in a tabular format or in a prominent
location. The disclosures need not be in a form the cardholder can
retain.
3. Terms at renewal. Renewal notices must reflect the terms actually
in effect at the time of renewal. For example, a card issuer that offers
a preferential annual percentage rate to employees during their
employment must send a renewal notice to employees disclosing the lower
rate actually charged to employees (although the card issuer also may
show the rate charged to the general public).
4. Variable rate. If the card issuer cannot determine the rate that
will be in effect if the cardholder chooses to renew a variable-rate
account, the card issuer may disclose the rate in effect at the time of
mailing or delivery of the renewal notice. Alternatively, the card
issuer may use the rate as of a specified date (and then update the rate
from time to time, for example, each calendar month) or use an estimated
rate under Sec. 226.5(c).
5. Renewals more frequent than annual. If a renewal fee is billed
more often than annually, the renewal notice should be provided each
time the fee is billed. In this instance, the fee need not be disclosed
as an annualized amount. Alternatively, the card issuer may provide the
notice no less than once every twelve months if the notice explains the
amount and frequency of the fee that will be billed during the time
period covered by the disclosure, and also discloses the fee as an
annualized amount. The notice under this alternative also must state the
consequences of a cardholder's decision to terminate the account after
the renewal notice period has expired. For example, if a $2 fee is
billed monthly but the notice is given annually, the notice must inform
the cardholder that the monthly charge is $2, the annualized fee is $24,
and $2 will be billed to the account each month for the coming year
unless the cardholder notifies the card issuer. If the cardholder is
obligated to pay an amount equal to the remaining unpaid monthly charges
if the cardholder terminates the account during the coming year but
after the first month, the notice must disclose that fact.
6. Terminating credit availability. Card issuers have some
flexibility in determining the procedures for how and when an account
may be terminated. However, the card issuer must clearly disclose the
time by which the cardholder must act to terminate the account to avoid
paying a renewal fee. State and other applicable law govern whether the
card issuer may impose requirements such as specifying that the
cardholder's response be in writing or that the outstanding balance be
repaid in full upon termination.
7. Timing of termination by cardholder. When a card issuer provides
notice under Sec. 226.9(e)(1), a cardholder must be given at least 30
days or one billing cycle, whichever
[[Page 412]]
is less, from the date the notice is mailed or delivered to make a
decision whether to terminate an account. When notice is given under
Sec. 226.9(e)(2), a cardholder has 30 days from mailing or delivery to
decide to terminate an account.
8. Timing of notices. A renewal notice is deemed to be provided when
mailed or delivered. Similarly, notice of termination is deemed to be
given when mailed or delivered.
9. Prompt reversal of renewal fee upon termination. In a situation
where a cardholder has provided timely notice of termination and a
renewal fee has been billed to a cardholder's account, the card issuer
must reverse or otherwise withdraw the fee promptly. Once a cardholder
has terminated an account, no additional action by the cardholder may be
required.
9(e)(3) Notification on Periodic Statements
1. Combined disclosures. If a single disclosure is used to comply
with both Secs. 226.9(e) and 226.7, the periodic statement must comply
with the rules in Secs. 226.5a and 226.7. For example, the words grace
period must be used and the name of the balance calculation method must
be identified (if listed in Sec. 226.5a(g)) to comply with the
requirements of Sec. 226.5a, even though the use of those terms would
not otherwise be required for periodic statements under Sec. 226.7. A
card issuer may include some of the renewal disclosures on a periodic
statement and others on a separate document so long as there is some
reference indicating that they relate to one another. All renewal
disclosures must be provided to a cardholder at the same time.
2. Preprinted notices on periodic statements. A card issuer may
preprint the required information on its periodic statements. A card
issuer that does so, however, using the advance notice option under
Sec. 226.9(e)(1), must make clear on the periodic statement when the
preprinted renewal disclosures are applicable. For example, the card
issuer could include a special notice (not preprinted) at the
appropriate time that the renewal fee will be billed in the following
billing cycle, or could show the renewal date as a regular (preprinted)
entry on all periodic statements.
9(f) Change in Credit Card Account Insurance Provider
1. Coverage. This paragraph applies to credit card accounts of the
type subject to Sec. 226.5a if credit insurance (typically life,
disability, and unemployment insurance) is offered on the outstanding
balance of such an account. (Credit card accounts subject to
Sec. 226.9(f) are the same as those subject to Sec. 226.9(e); see
comment 9(e)-1.) Charge card accounts are not covered by this paragraph.
In addition, the disclosure requirements of this paragraph apply only
where the card issuer initiates the change in insurance providers. For
example, if the card issuer's current insurance provider is merged into
or acquired by another company, these disclosures would not be required.
Disclosures also need not be given in cases where card issuers pay for
credit insurance themselves and do not separately charge the cardholder.
2. No increase in rate or decrease in coverage. The requirement to
provide the disclosure arises when the card issuer changes the provider
of insurance, even if there will be no increase in the premium rate
charged the consumer and no decrease in coverage under the insurance
policy.
3. Form of notice. If a substantial decrease in coverage will result
from the change in providers, the card issuer either must explain the
decrease or refer to an accompanying copy of the policy or group
certificate for details of the new terms of coverage. (See the
commentary to appendix G-13.)
4. Discontinuation of insurance. In addition to stating that the
cardholder may cancel the insurance, the card issuer may explain the
effect the cancellation would have on the consumer's credit card plan.
5. Mailing by third party. Although the card issuer is responsible
for the disclosures, the insurance provider or another third party may
furnish the disclosures on the card issuer's behalf.
9(f)(3) Substantial Decrease in Coverage
1. Determination. Whether a substantial decrease in coverage will
result from the change in providers is determined by the two-part test
in Sec. 226.9(f)(3): First, whether the decrease is in a significant
term of coverage; and second, whether the decrease might reasonably be
expected to affect a cardholder's decision to continue the insurance. If
both conditions are met, the decrease must be disclosed in the notice.
References
Statute: Section 127(a)(7).
Other sections: Sections 226.4 through 226.7 and appendix G.
Previous regulation: Section 226.7 (d) through (f) and (j) and
Interpretation Secs. 226.705 and 226.708.
1981 changes: Section 226.9(a) implements the statutory change that
the long-form statement 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 creditor
elects to use the alternative summary statement, the new regulation no
longer requires that the long-form statement be sent upon receiving a
billing error notice and at the consumer's request. The rules in
[[Page 413]]
Sec. 226.708 on switching the type of billing rights statement used have
been modified.
Under Sec. 226.9(b) disclosure requirements have been streamlined
when supplemental 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 disclosures 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 reduced: change-in-terms notices are
no longer required for the types of changes described in
Sec. 226.9(c)(2). But the provision reverses Interpretation
Sec. 226.705, which indicated that certain changes in the balance
computation method did not require disclosure because they could result
in lowered finance charges; now, any change in the balance computation
method requires disclosure.
When a finance charge is imposed at the time of a transaction,
Sec. 226.9(d) only requires disclosure of the finance charge at point of
sale; the amount financed and annual percentage rate figured in
accordance with the closed-end credit provisions need no longer be
disclosed. Furthermore, the finance charge disclosure now may be made
orally by the person honoring the card.
Section 226.10--Prompt Crediting of Payments
10(a) General rule.
1. 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 of the date of
receipt.
2. Date of 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 the funds until the contractual payment date.
If the consumer elects to have payment made by a third-
party payor such as a financial institution, through a preauthorized
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 Sec. 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 payment by mail and payments made in person.
Specifying that only checks or money orders should be sent
by mail.
Specifying that payment is to be made in U.S. dollars.
Specifying one particular address for receiving payments,
such as a post office box.
The creditor may be prohibited, however, from specifying payment by
preauthorized electronic fund transfer. (See section 913 of the
Electronic Fund Transfer Act.)
2. Payment requirements--limitations. Requirements for making
payments must be reasonable; 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 of non-conforming payments. If the creditor accepts a
non-conforming payment (for example, payment at a branch office, when it
had specified that payment be sent to headquarters), finance charges may
accrue for the period between receipt and crediting of payments.
4. Implied guidelines for payments. In the absence of specified
requirements for making payments (see Sec. 226.10(b)):
Payments may be made at any location where the creditor
conducts business.
Payments may be made any time during the creditor's normal
business hours.
Payments may be made by cash, money order, draft, or other
similar instrument in properly negotiable form, or by electronic fund
transfer if the creditor and consumer have so agreed.
References
Statute: Section 164.
Other sections: Section 226.7.
Previous regulation: Section 226.7(g).
1981 changes: Much of the explanatory detail of the previous
regulation is now in the commentary. The revised regulation gives the
creditor 5 days in which to credit non-conforming payments, whereas the
previous regulation required the crediting of such payments promptly,
with an outside limit of 5 days. The 5 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
regulation, which only allowed deferred crediting for payments made at
the wrong location.
[[Page 414]]
Section 226.11--Treatment of Credit Balances
1. Timing of refund. The creditor may also fulfill its obligations
under Sec. 226.11 by: