[Federal Register Volume 65, Number 63 (Friday, March 31, 2000)]
[Rules and Regulations]
[Pages 17129-17132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7714]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1050]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing revisions to the official staff 
commentary to Regulation Z (Truth in Lending). The commentary applies 
and interprets the requirements of Regulation Z. The revisions address 
short-term cash advances commonly called ``payday loans.'' The Board is 
also publishing technical corrections to the commentary and regulation.

DATES: This rule is effective March 24, 2000. Compliance is optional 
until October 1, 2000.

FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor, Counsel, or Michael 
L. Hentrel or David A. Stein, Staff Attorneys; Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, at 
(202) 452-3667 or 452-2412; for users of Telecommunications Device for 
the Deaf (TDD) only, contact Janice Simms at (202) 872-4984.

SUPPLEMENTARY INFORMATION:

I. Background

    The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et 
seq.) is to promote the informed use of consumer credit by providing 
for disclosures about its terms and cost. The act requires creditors to 
disclose the cost of credit as a dollar amount (the finance charge) and 
as an annual percentage rate (APR). Uniformity in creditors' 
disclosures is intended to assist consumers in comparison shopping. 
TILA requires additional disclosures for loans secured by consumers' 
homes and permits consumers to rescind certain transactions that 
involve their principal dwelling. The act also regulates certain 
practices of creditors.
    TILA is implemented by the Board's Regulation Z (12 CFR part 226). 
The Board's official staff commentary (12 CFR part 226 (Supp. I)) 
interprets the regulation, and provides guidance to creditors in 
applying the regulation to specific transactions. The commentary is a 
substitute for individual staff interpretations; it is updated 
periodically to address significant questions that arise.
    In November 1999, the Board published proposed amendments to the 
commentary (64 FR 60368, November 5, 1999). The Board received more 
than 50 comment letters. Most of the comments were from financial 
institutions, other creditors, and their representatives. Comments were 
also received from state attorneys general, state regulatory agencies, 
and consumer advocates. The comment letters were focused on the 
proposed comment concerning payday loans. Most commenters supported the 
proposal. A few commenters, mostly payday lenders and their 
representatives, were opposed.
    As discussed below, the commentary is being adopted substantially 
as proposed. Some revisions have been made for clarity in response to 
commenters' suggestions. The commentary revision concerning payday 
loans clarifies that when such transactions involve an agreement to 
defer payment of a debt, they are within the definition of credit in 
TILA and Regulation Z. Several technical corrections are being made to 
the commentary and regulation.

II. Regulatory Revisions

Subpart B--Open-End Credit

Section 226.5a--Credit and Charge Card Applications and Solicitations
    5a(a) General Rules.
    5a(a)(3) Exceptions.
    Section 226.5a(a)(3) is republished to correct a technical error. 
This section was published in its entirety in 1989. (54 FR 13865, April 
6, 1989.) A portion of the text was inadvertently omitted from 
subsequent publications of the Code of Federal Regulations (54 FR 
24670, June 9, 1989).
Section 226.12-Special Credit Card Provisions
    12(g) Relation to Electronic Fund Transfer Act and Regulation Z.
    Section 226.12(g) contains a reference and citation to the Board's 
Regulation E (Electronic Fund Transfers), 12 CFR Part 205. Technical 
amendments have been made to conform the citation in section 226.12(g) 
with organizational changes made to Regulation E in 1996. The 
references to sections 205.5 and 205.6 of Regulation E are replaced by 
a reference to section 205.12(a).

III. Commentary Revisions

Subpart A--General

Section 226.2--Definitions and Rules of Construction
    2(a) Definitions.
    2(a)(14) Credit.

    The Board proposed to add comment 2(a)(14)-2 to clarify that 
transactions commonly known as ``payday loans'' constitute credit for 
purposes of TILA. These transactions may also be known as ``cash 
advance loans,'' ``check advance loans,'' ``post-dated check loans,'' 
``delayed deposit checks,'' or ``deferred deposit checks.''
    Typically in such transactions, a cash advance is made to a 
consumer in exchange for the consumer's personal check, or the 
consumer's authorization to debit the consumer's deposit account 
electronically. In either case, the consumer pays a fee in connection 
with the advance. Both parties understand that the amount advanced is 
not, or may not be, available from the consumer's deposit account at 
the time of the exchange. The parties agree, therefore, that the 
consumer's check will not be cashed or deposited for collection (or the 
consumer's deposit account debited) until a designated future date. On 
that date, the consumer may have the option of repaying the obligation 
or further deferring repayment of the advance. The consumer may repay 
the obligation in various ways, for example, by providing cash or by 
allowing the obligee to deposit the consumer's check or electronically 
debit the consumer's deposit account.
    Most commenters supported the proposal because they believed that 
payday loans are credit transactions. A few commenters opposed the 
proposal. These commenters questioned whether payday loans should be 
covered under TILA when applicable state law does not treat such 
transactions as credit. They were concerned that Regulation Z would 
preempt state law where, for example, the transactions are regulated 
under check-cashing laws, and they also

[[Page 17130]]

asserted that providing TILA disclosures would result in unnecessary 
compliance costs. These commenters also questioned whether disclosure 
of the APR in such transactions provides consumers with useful 
information. One commenter asserted that the proposed comment's scope 
was unclear, and believed the comment might be interpreted too broadly, 
resulting in the application of Regulation Z to noncredit transactions. 
This commenter also suggested that payday lenders will be unable to 
determine whether transactions are consumer credit or for an exempt 
purpose, such as business credit.
    For the reasons discussed below, comment 2(a)(14)-2 is adopted to 
clarify that payday loans, and similar transactions where there is an 
agreement to defer payment of a debt, constitute credit for purposes of 
TILA. Some revisions have been made for clarity to address commenters' 
concerns.
    Consistent with section 103(e) of TILA, section 226.2(a)(14) of 
Regulation Z defines ``credit'' as the right to defer the payment of 
debt or the right to incur debt and defer its payment. Comment 
2(a)(14)-2 is intended to provide an example of a specific transaction 
that involves an agreement to defer payment of a debt. In these 
transactions, the consumer receives a cash advance in exchange for the 
consumer's check or authorization to debit the consumer's deposit 
account. Because there is also an agreement to defer presentment of the 
check or defer debiting the consumer's account, there is an agreement 
to defer payment of the debt. Such agreements are deemed to be 
``credit'' as defined by section 226.2(a)(14), however they are 
described--as payday loans, cash advances, check advance loans, 
deferred presentment transactions, or by another name. Contemporaneous 
check-cashing transactions will not be affected where there is no 
agreement to defer presentment of the consumer's check; the routine 
delay in debiting a consumer's deposit account during the check 
collection process does not constitute credit.
    TILA, as implemented by Regulation Z, reflects the intent of the 
Congress to provide consumers with uniform cost disclosures to promote 
the informed use of credit and assist consumers in comparison shopping. 
This purpose is furthered by applying the regulation to transactions, 
such as payday loans, that fall within the statutory definition of 
credit, regardless of how such transactions are treated or regulated 
under state law. The fact that some creditors may have to comply with 
state laws as well as with Regulation Z, and that creditors may bear 
compliance costs, is not a sufficient basis to disregard TILA's 
applicability to the covered transactions. Where a creditor is unable 
to determine if a transaction is primarily for an exempt purpose, such 
as business-purpose credit, the creditor is free to make disclosures 
under TILA, and the fact that disclosures are made would not be 
controlling on the question of whether the transaction was exempt. See 
Comment 3(a)-1.
    A few commenters questioned the effect of the proposed comment on 
state laws that regulate payday loans and similar transactions. Section 
226.28 of Regulation Z describes the effect of TILA on state laws. As a 
general matter, state laws are preempted if they are inconsistent with 
the act and regulation, and then only to the extent of the 
inconsistency. A state law is inconsistent if it requires or permits 
creditors to make disclosures or take actions that contradict the 
requirements of federal law. A state law may not be deemed inconsistent 
if it is more protective of consumers.
    TILA does not impair a state's authority to regulate or prohibit 
payday lending activities. Persons that regularly extend payday loans 
and otherwise meet the definition of creditor (Sec. 226.2(a)(17)) are 
required, however, to provide disclosures to consumers consistent with 
the requirements of Regulation Z. The Board notes that a number of 
state statutes expressly require payday lenders to provide federal TILA 
disclosures. The Board will review any issues brought to its attention 
regarding the effect of TILA and Regulation Z on particular state laws. 
Appendix A to Regulation Z outlines the Board's procedures for making 
such determinations.
    Some commenters expressed concern that by referring specifically to 
``payday loans,'' the proposed comment might be limited to transactions 
labeled as such. Comment 2(a)(14)-2 has been modified to address this 
concern. Transactions in which the parties agree to defer payment of a 
debt are ``credit'' transactions regardless of the label used to 
describe them.
    In describing payday loan transactions, the proposed comment 
referred to the fact that consumers typically must pay a fee. Some 
commenters questioned whether such fees are finance charges for 
purposes of Regulation Z. These commenters noted that under some state 
laws, the fees charged for payday loans and similar transactions are 
not considered interest or finance charges.
    A fee charged in connection with a payday loan may be a finance 
charge for purposes of TILA pursuant to section 226.4 of Regulation Z, 
regardless of how the fee is characterized for state law purposes. 
Where the fee charged constitutes a finance charge under TILA, and the 
person advancing funds regularly extends consumer credit, that person 
is a creditor covered by Regulation Z. See Sec. 226.2(a)(17). Comment 
2(a)(14)-2 has been revised to reflect this guidance.
    A few commenters sought clarification on whether payday lenders 
obtain a security interest in the check provided by a consumer. Under 
Regulation Z, the existence of a security interest is determined by the 
applicable state law. See Sec. 226.2(a)(25). Once a security interest 
is determined to exist, it must be disclosed according to section 
226.6(c) for open-end credit plans, or section 226.18(m) for closed-end 
transactions. If a creditor is unsure whether a particular interest is 
a security interest under applicable law, the creditor may at its 
option treat it as a security interest for purposes of TILA. See 
Comment 2(a)(25)-1.
    Comment 2(a)(14)-2 has been added as an example of a specific type 
of transaction that involves an agreement to defer payment of a debt. 
Because such a transaction falls within the existing statutory and 
regulatory definition of ``credit,'' the comment does not represent a 
change in the law. Generally, updates to the Board's staff commentary 
are effective upon publication. Consistent with the requirements of 
section 105(d) of TILA, however, the Board typically provides an 
implementation period of six months or longer. During that period, 
compliance with the published update is optional so that creditors may 
adjust their documents to accommodate TILA's disclosure requirements.

Subpart B--Open-End Credit

Section 226.13--Billing Error Resolution
    13(i) Relation to Electronic Fund Transfer Act and Regulation E.
    A technical amendment has been made to comment 13(i)-3 to conform a 
citation to Regulation E with organizational changes made to that 
regulation. The reference to section 205.11(e) of Regulation E has been 
replaced with a reference to section 205.11(c).

[[Page 17131]]

Subpart C--Closed-End Credit

Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions
    19(b) Certain variable-rate transactions.
    The Board is adopting technical amendments to comments 19(b)-5, 
19(b)(2)-4, 19(b)(2)(vi)-1, and 19(b)(2)(vii)-1 to conform the 
citations in those comments to section 226.19(b)(2) of Regulation Z, as 
amended. No substantive change is intended.

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 226.32--Requirements for Certain Closed-end Home Mortgages
    32(a) Coverage.
    32(a)(1)(ii).
    TILA, as amended by the Home Ownership and Equity Protection Act of 
1994 (HOEPA), imposes additional disclosure requirements and 
substantive limitations on certain closed-end mortgage loans bearing 
rates or fees above a certain percentage or amount. See Sec. 226.32. 
Such loans are covered by HOEPA if the total points and fees payable by 
the consumer at or before loan closing exceed the greater of $400 or 8 
percent of the total loan amount. HOEPA requires the Board to adjust 
the $400 amount annually on January 1 by the annual percentage change 
in the Consumer Price Index (CPI) that was reported on the preceding 
June 1. (15 U.S.C. 1602(aa)(3) and 12 CFR 226.32(a)(1)(ii)). The 
adjusted amount for 2000 ($451), published on November 5, 1999 (64 FR 
60335), is added to comment 32(a)(1)(ii)-2.
    32(c) Disclosures.
    32(c)(4) Variable-rate.
    The Board is revising comment 32(c)(4)-1 to conform the citations 
in the comment to section 226.19(b)(2) of Regulation Z, as amended. No 
substantive change is intended.

List of Subjects in 12 CFR Part 226

    Advertising, Federal Reserve System, Mortgages, Reporting and 
recordkeeping requirements, Truth in lending.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 226 as follows:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

    2. Section 226.5a(a)(3) is revised to read as follows:

Subpart B--Open-End Credit


Sec. 226.5a  Credit and charge card applications and solicitations

    (a) * * *
    (3) Exceptions. This section does not apply to home-equity plans 
accessible by a credit or charge card that are of the type subject to 
the requirements of Sec. 226.5b; overdraft lines of credit tied to 
asset accounts accessed by check-guarantee cards or by debit cards; or 
lines of credit accessed by check-guarantee cards or by debit cards 
that can be used only at automated teller machines.
* * * * *
    3. In Sec. 226.12, paragraph (g) is revised to read as follows:
* * * * *


Sec. 226.12  Special credit card provisions.

* * * * *
    (g) Relation to Electronic Fund Transfer Act and Regulation E. For 
guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12 
CFR part 205) applies in instances involving both credit and electronic 
fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a) 
regarding issuance and liability for unauthorized use. On matters other 
than issuance and liability, this section applies to the credit aspects 
of combined credit/electronic fund transfer transactions, as 
applicable.
    4. In Supplement I to Part 226:
    a. Under Section 226.2--Definitions and Rules of Construction, 
under 2(a)(14) Credit., paragraph 2. is added.
    b. Under Section 226.13--Billing Error Resolution, under 13(i) 
Relation to Electronic Fund Transfer Act and Regulation E., paragraph 
3. is revised.
    c. Under Section 226.19--Certain Residential Mortgage and Variable-
Rate Transactions, under 19(b) Certain variable-rate transactions, 
paragraph 5. is revised.
    d. Under Section 226.19--Certain Residential Mortgage and Variable-
Rate Transactions, under Paragraph 19(b)(2), paragraph 4. is amended by 
removing ``Sec. 226.19(b)(2)(xi)'' and adding ``Sec. 226.19(b)(2)(x)'' 
in its place.
    e. Under Section 226.19--Certain Residential Mortgage and Variable-
Rate Transactions, under Paragraph 19(b)(2)(vi), paragraph 1. is 
amended by removing ``comments 19(b)(2)(viii)-7 and 19(b)(2)(x)-4'' and 
adding ``comments 19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4'' in its 
place.
    f. Under Section 226.19--Certain Residential Mortgage and Variable-
Rate Transactions, under Paragraph 19(b)(2)(vii), paragraph 1. is 
amended by removing ``comments 19(b)(2)(viii)-6 and 19(b)(2)(x)-3'' and 
adding ``comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3'' in its 
place.
    g. Under Section 226.32--Requirements for Certain Closed-End Home 
Mortgages, under paragraph 32(a)(1)(ii), the second sentence of 
paragraph 2. is revised and paragraph 2.v. is added; and
    h. Under Section 226.32--Requirements for Certain Closed-End Home 
Mortgages, under paragraph 32(c)(4), paragraph 1. is amended by 
removing ``Sec. 226.19(b)(2)(x)'' and adding 
``Sec. 226.19(b)(2)(viii)(B)'' in its place.

SUPPLEMENT I TO PART 226  OFFICIAL STAFF INTERPRETATIONS

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

    2(a) Definitions.
* * * * *
    2(a)(14) Credit.
* * * * *
    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).
* * * * *

Subpart B-Open-End Credit

* * * * *

Section 226.13--Billing Error Resolution

* * * * *
    13(i) Relation to Electronic Fund Transfer Act and Regulation E.
* * * * *
    3. Application to debit/credit transactions-examples. If a 
consumer withdraws money at an automated teller machine and 
activates an overdraft credit feature on the checking account:
    i. An error asserted with respect to the transaction is subject, 
for error resolution purposes, to the applicable Regulation E 
provisions (such as timing and notice) for the entire transaction.
    ii. The creditor need not provisionally credit the consumer's 
account, under

[[Page 17132]]

Sec. 205.11(c)(2)(i) of Regulation E, for any portion of the unpaid 
extension of credit.
    iii. The creditor must credit the consumer's account under 
Sec. 205.11(c) with any finance or other charges incurred as a 
result of the alleged error.
    iv. The provisions of Sec. 226.13(d) and (g) apply only to the 
credit portion of the transaction.
* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions

* * * * *
    19(b) Certain variable-rate transactions.
* * * * *
    5. Examples of variable-rate transactions.
    i. The following transactions, if they have a term greater than 
one year and are secured by the consumer's principal dwelling, 
constitute variable-rate transactions subject to the disclosure 
requirements of Sec. 226.19(b).
    A. Renewable balloon-payment instruments where the creditor is 
both unconditionally obligated to renew the balloon-payment loan at 
the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. (See comment 
17(c)(1)-11 for a discussion of conditions within a consumer's 
control in connection with renewable balloon-payment loans.)
    B. Preferred-rate loans where the terms of the legal obligation 
provide that the initial underlying rate is fixed but will increase 
upon the occurrence of some event, such as an employee leaving the 
employ of the creditor, and the note reflects the preferred rate. 
The disclosures under Secs. 226.19(b)(1) and 226.19(b)(2)(v), 
(viii), (ix), and (xii) are not applicable to such loans.
    C. ``Price-level-adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic 
adjustments to payments and the loan balance to reflect changes in 
an index measuring prices or inflation. The disclosures under 
Sec. 226.19(b)(1) are not applicable to such loans, nor are the 
following provisions to the extent they relate to the determination 
of the interest rate by the addition of a margin, changes in the 
interest rate, or interest-rate discounts: Section 226.19(b)(2)(i), 
(iii), (iv), (v), (vi), (vii), (viii), and (ix). (See comments 
20(c)-2 and 30-1 regarding the inapplicability of variable-rate 
adjustment notices and interest-rate limitations to price-level-
adjusted or similar mortgages.)
    ii. Graduated-payment mortgages and step-rate transactions 
without a variable-rate feature are not considered variable-rate 
transactions.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 226.32--Requirements for Certain Closed-End Home Mortgages

    32(a) Coverage
* * * * *
    Paragraph 32(a)(1)(ii)
* * * * *
    2. Annual adjustment of $400 amount. * * * The $400 figure is 
adjusted annually on January 1 by the annual percentage change in 
the CPI that was in effect on the preceding June 1. * * *
* * * * *
    v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-
U from June 1998 to June 1999, rounded to the nearest whole dollar.
* * * * *
    By order of the Board of Governors of the Federal Reserve System, 
acting through the Director of the Division of Consumer and Community 
Affairs and the Secretary of the Board under delegated authority, March 
24, 2000.

Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 00-7714 Filed 3-30-00; 8:45 am]
BILLING CODE 6210-01-P