[Federal Register Volume 72, Number 114 (Thursday, June 14, 2007)]
[Proposed Rules]
[Pages 32948-33145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2656]
[[Page 32947]]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 /
Proposed Rules
[[Page 32948]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1286]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act (TILA), and the staff commentary to the
regulation, following a comprehensive review of TILA's rules for open-
end (revolving) credit that is not home-secured. The proposed revisions
take into consideration comments from the public on an initial advance
notice of proposed rulemaking (ANPR) published in December 2004 on a
variety of issues relating to the format and content of open-end credit
disclosures and the substantive protections provided under the
regulation. The proposal also considers comments received on a second
ANPR published in October 2005 that addressed several amendments to
TILA's open-end credit rules contained in the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005. Consumer testing was
conducted as a part of the review.
Except as otherwise noted, the proposed changes apply solely to
open-end credit. Disclosures accompanying credit card applications and
solicitations would highlight fees and reasons penalty rates might be
applied, such as for paying late. Creditors would be required to
summarize key terms at account opening and when terms are changed. The
proposal would identify specific fees that must be disclosed to
consumers in writing before an account is opened, and give creditors
flexibility regarding how and when to disclose other fees imposed as
part of the open-end plan. Periodic statements would break out costs
for interest and fees. Two alternatives are proposed dealing with the
``effective'' or ``historical'' annual percentage rate disclosed on
periodic statements.
Rules of general applicability such as the definition of open-end
credit and dispute resolution procedures would apply to all open-end
plans, including home-equity lines of credit. Rules regarding the
disclosure of debt cancellation and debt suspension agreements would be
revised for both closed-end and open-end credit transactions. Loans
taken against employer-sponsored retirement plans would be exempt from
TILA coverage.
DATES: Comments must be received on or before October 12, 2007.
ADDRESSES: You may submit comments, identified by Docket No. R-1286, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Amy Burke or Vivian Wong, Attorneys,
Krista Ayoub, Dan Sokolov, Ky Tran-Trong, or John Wood, Counsels, or
Jane Ahrens, Senior Counsel, 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 (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. The
purposes of TILA are (1) to provide a meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit; and
(2) to protect consumers against inaccurate and unfair credit billing
and credit card practices.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.
II. Summary of Major Proposed Changes
The goal of the proposed amendments to Regulation Z is to improve
the effectiveness of the disclosures that creditors provide to
consumers at application and throughout the life of an open-end (not
home-secured) account. The proposed changes are the result of the
Board's review of the provisions that apply to open-end (not home-
secured) credit. The Board's last comprehensive review of Regulation Z
was in 1981. The Board is proposing changes to format, timing, and
content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions.
Applications and solicitations. The proposal contains changes to
the format and content to make the credit and charge card application
and solicitation disclosures more meaningful and easier for consumers
to use. The proposed changes include:
Adopting new format requirements for the summary table,
including rules regarding: Type size and use of boldface type for
certain key terms, placement of information, and the use of cross-
references.
Revising content, including: A requirement that creditors
disclose the duration that penalty rates may be in effect, a shorter
disclosure about variable rates, new disclosures highlighting the
effect of creditors' payment allocation practices, and a reference to
consumer education materials on the Board's Web site.
Account-opening disclosures. The proposal also contains revisions
to the cost disclosures provided at account opening to make the
information more conspicuous and easier to read. The proposed changes
include:
[[Page 32949]]
Disclosing certain key terms in a summary table at account
opening, which would be substantially similar to the table required for
credit and charge card applications and solicitations, in order to
summarize for consumers key information that is most important to
informed decision-making.
Adopting a different approach to disclosing fees, to
provide greater clarity for identifying fees that must be disclosed. In
addition, creditors would have flexibility to disclose charges (other
than those in the summary table) in writing or orally.
Periodic statement disclosures. The proposal also contains
revisions to make disclosures on periodic statements more
understandable, primarily by making changes to the format requirements,
such as by grouping fees, interest charges, and transactions together.
The proposed changes include:
Itemizing interest charges for different types of
transactions, such as purchases and cash advances, and providing
separate totals of fees and interest for the month and year-to-date.
Modifying the provisions for disclosing the ``effective
APR,'' including format and terminology requirements to make it more
understandable. Because of concerns about the disclosure's
effectiveness, however, the Board is also soliciting comment on whether
this rate should be required to be disclosed.
Requiring disclosure of the effect of making only the
minimum required payment on repayment of balances (changes required by
the Bankruptcy Act).
Changes in consumer's interest rate and other account terms. The
proposal would expand the circumstances under which consumers receive
written notice of changes in the terms (e.g., an increase in the
interest rate) applicable to their accounts, and increase the amount of
time these notices must be sent before the change becomes effective.
The proposed changes include:
Generally increasing advance notice before a changed term
can be imposed from 15 to 45 days, to better allow consumers to obtain
alternative financing or change their account usage.
Requiring creditors to provide 45 days' prior notice
before the creditor increases a rate due to the consumer's delinquency
or default.
When a change-in-terms notice accompanies a periodic
statement, requiring a tabular disclosure on the front of the periodic
statement of the key terms being changed.
Advertising provisions. The proposal would revise the rules
governing advertising of open-end credit to help ensure consumers
better understand the credit terms offered. These proposed revisions
include:
Requiring advertisements that state a minimum monthly
payment on a plan offered to finance the purchase of goods or services
to state, in equal prominence to the minimum payment, the time period
required to pay the balance and the total of payments if only minimum
payments are made.
Permitting advertisements to refer to a rate as ``fixed''
only if the advertisement specifies a time period for which the rate is
fixed and the rate will not increase for any reason during that time,
or if a time period is not specified, if the rate will not increase for
any reason while the plan is open.
III. The Board's Review of Open-End Credit Rules
A. December 2004 Advance Notice of Proposed Rulemaking
The Board began a review of Regulation Z in December 2004.\1\ The
Board initiated its review of Regulation Z by issuing an advance notice
of proposed rulemaking (December 2004 ANPR). 69 FR 70925; December 8,
2004. At that time, the Board announced its intent to conduct its
review of Regulation Z in stages, focusing first on the rules for open-
end (revolving) credit accounts that are not home-secured, chiefly
general-purpose credit cards and retailer credit card plans. The
December 2004 ANPR sought public comment on a variety of specific
issues relating to three broad categories: the format of open-end
credit disclosures, the content of those disclosures, and the
substantive protections provided for open-end credit under the
regulation. The December 2004 ANPR solicited comment on the scope of
the Board's review, and also requested commenters to identify other
issues that the Board should address in the review. The comment period
closed on March 28, 2005.
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\1\ The review was initiated pursuant to requirements of section
303 of the Riegle Community Development and Regulatory Improvement
Act of 1994, section 610(c) of the Regulatory Flexibility Act of
1980, and section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996.
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The Board received over 200 comment letters in response to the
December 2004 ANPR. More than half of the comments were from individual
consumers. About 60 comments were received from the industry or
industry representatives, and about 20 comments were received from
consumer advocates and community development groups. The Office of the
Comptroller of the Currency, one state agency, and one member of
Congress also submitted comments.
Scope. Commenters' views on a staged review of Regulation Z were
divided. Some believe reviewing the regulation in stages makes the
process manageable and focuses discussion and analysis. Others
supported an independent focus on open-end credit rules because they
believe open-end credit by its nature is distinct from other credit
products covered by TILA and Regulation Z.
Some commenters supported the Board's approach generally, but
voiced concern that looking at the regulation in a piecemeal fashion
may lead to decisions in the early stages of the review that may need
to be revisited later. If the review is staged, these commenters want
all changes implemented at the same time, to ensure consistency between
the open-end and closed-end rules.
Some commenters urged the Board to include open-end rules affecting
home-equity lines of credit (HELOCs) in the initial stage of the
review. If the Board chooses not to expand its review of open-end
credit rules to cover home-secured credit, these commenters urged the
Board to avoid making any revisions that would be inconsistent with
existing HELOC requirements.
A few commenters concurred with the Board's approach of reviewing
Regulation Z in stages, but they preferred that the Board start with
rules of general applicability, such as definitions. These commenters
generally urged the Board to provide additional clarity on the
definition of ``finance charge,'' TILA's dollar cost of credit.
Finally, a few commenters stated the Board needs to review the
entire regulation at the same time. They suggested a staged approach is
not workable, and cited concerns about duplicating efforts, creating
inconsistencies, and revisiting changes made in earlier stages of a
lengthy review.
Format. In general, commenters representing both consumers and
industry stated that the tabular format requirements for TILA's direct-
mail credit card application and solicitation disclosures have proven
useful to consumers, although a variety of suggestions were made to add
or delete specific disclosures. Many, however, noted that typical
account-opening disclosures are lengthy and complex, and suggested that
the effectiveness of account-opening disclosures could be improved if
key terms were summarized in a standardized format, perhaps in the same
format as TILA's direct-mail credit card application and solicitation
[[Page 32950]]
disclosures. These suggestions were consistent with the views of some
members of the Board's Consumer Advisory Council. Industry commenters
supported the Board's plan to use focus groups or other consumer
research tools to test the effectiveness of any proposed revisions.
To combat ``information overload,'' many commenters asked the Board
to emphasize only the most important information that consumers need at
the time the disclosure is given. They asked the Board to avoid rules
that require the repetitive delivery of complex information, not all of
which is essential to comparison shopping, such as a lengthy
explanation of the creditor's method of calculating balances now
required at account opening and on periodic statements. Commenters
suggested that the Board would most effectively promote comparison
shopping by focusing on essential terms in a simplified way. They
believe some information could also be provided to consumers through
nonregulatory, educational methods. Taken together, these approaches
could lead to simpler disclosures that consumers might be more inclined
to read and understand.
Content. In general, commenters provided a variety of views on how
to simplify TILA's cost disclosures. For example, some suggested that
creditors should disclose only interest as the ``finance charge'' and
simply identify all other fees and charges. Others suggested all fees
associated with an open-end plan should be disclosed as the ``finance
charge.'' Creditors sought, above all, clear rules.
Comments were divided on the usefulness of open-end APRs. TILA
requires creditors to disclose an ``interest rate'' APR for shopping
disclosures (such as in advertisements and solicitations) and at
account opening, and an ``effective'' APR on periodic statements that
reflects interest and fees, such as transaction charges assessed during
the billing period. In general, consumer groups suggested that the
Board mandate for shopping disclosures an ``average'' or ``typical''
effective APR based on an historical average cost to consumers with
similar accounts. An average APR, consumer representatives stated,
would give consumers a more accurate picture of what consumers' actual
cost might be. Regarding the effective APR on periodic statements,
consumer advocates stated that it is a key disclosure that is helpful,
and can provide ``shock value'' to consumers when fees cause the APR to
spike for the billing cycle. Commenters representing industry argued
that an effective APR is not meaningful, confuses consumers, and is
difficult to explain. Some commenters suggested that a disclosure on
the periodic statement that provides context by explaining what costs
are included in the effective APR might improve its usefulness.
Regarding advance notice of changes to rates and fees, comments
were sharply divided. Creditors generally believe the current notice
requirements are adequate, although for rate (and other) changes not
involving a consumer's default, a number of creditors supported
increasing the advance notice requirement from 15 to 30 days. Consumers
and consumer representatives generally believe that when terms change,
consumers should have the right under TILA to opt out of the new terms,
or be allowed a much longer time period to find alternative credit
products. They suggested a two-billing cycle advance notice or as long
as 90 days. More fundamentally, these commenters believe card issuers
should be held to the initial terms of the credit contract, at least
until the credit card expires.
Where triggering events are set forth in the account agreement such
as events that might trigger penalty pricing, creditors believe there
is no need to provide additional notice when the event occurs; they are
not changing a term, they stated, but merely implementing the
agreement. Some suggest that instead of providing a notice when penalty
pricing is triggered, penalty pricing and the triggers should be better
emphasized in the application and account-opening disclosures.
Consumers and consumer representatives agree that creditors' policies
about when terms may change should be more prominently displayed,
including in the credit card application disclosures. They further
believe the Board should provide new substantive protections to
consumers, such as prohibiting the practice of increasing rates merely
because the consumer paid late on another credit account.
B. The Bankruptcy Act's Amendments to TILA and October 2005 Advance
Notice of Proposed Rulemaking
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(the ``Bankruptcy Act'') primarily amended the federal bankruptcy code,
but also contained several provisions amending TILA. Public Law 109-8,
119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal
with open-end credit accounts and require new disclosures on periodic
statements, on credit card applications and solicitations, and in
advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235; October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules. The comment period for the October 2005 ANPR closed on December
16, 2005.
The Board received approximately 50 comment letters in response to
the October 2005 ANPR. Forty-five letters were submitted by financial
institutions and their trade groups. Five letters were submitted by
consumer groups.
Minimum payment warnings. Under the Bankruptcy Act, creditors that
offer open-end accounts must provide standardized disclosures on each
periodic statement about the effects of making only minimum payments,
including an example of how long it would take to pay off a specified
balance, along with a toll-free telephone number that consumers can use
to obtain an estimate of how long it will take to pay off their own
balance if only minimum payments are made. The Board must develop a
table that creditors can use in responding to consumers requesting such
estimates.
Industry commenters generally favored limiting the minimum payment
disclosure to credit card accounts (thus, excluding HELOCs and
overdraft lines of credit) and to those consumers who regularly make
only minimum payments. Consumer groups generally favored broadly
applying the rule to all types of open-end credit and to all open-end
accountholders.
Industry commenters supported having an option to provide
customized information (reflecting a consumer's actual account status)
on the periodic statement or in response to a consumer's telephone
call, but also wanted the option to use a standardized formula
developed by the Board. Consumer group commenters asked the Board to
require creditors to provide more customized estimates of payoff
periods through the toll-free telephone number and to not allow
creditors to use a standardized formula, and supported disclosure of an
``actual'' repayment time on the periodic statement.
Late-payment fees. Under the Bankruptcy Act, creditors offering
open-end accounts must disclose on each periodic statement the earliest
date on which a late payment fee may be charged, as well as the amount
of the fee.
Industry commenters urged the Board to base the disclosure
requirement on
[[Page 32951]]
the contractual payment due date and to disregard any ``courtesy''
period that creditors informally recognize following the contractual
payment due date. Although the industry provided mixed comments on any
format requirements, most opposed a proximity requirement for
disclosing the amount of the fee and the date. Comments were mixed on
adding information about penalty APRs and ``cut-off times'' to the late
payment disclosures. While supporters (a mix of industry and consumer
commenters) believe the additional information is useful, others were
concerned about the complexity of such a disclosure, and opposed the
approach for that reason. Consumer commenters suggested substantive
protections to ensure consumers' payments are timely credited, such as
considering the postmark date to be the date of receipt.
Internet solicitations. The Bankruptcy Act provides that credit
card issuers offering cards on the Internet must include the same
tabular summary of key terms that is currently required for
applications or solicitations sent by direct mail.
Although the Bankruptcy Act refers only to solicitations (where no
application is required), most commenters (both industry and consumer
groups) agreed that Internet applications should be treated the same as
solicitations. Many industry commenters stated that the Board's interim
final rule on electronic disclosures, issued in 2001, would be
appropriate to implement the Bankruptcy Act. Regarding accuracy
standards, the majority of industry commenters addressing this issue
indicated that issuers should be required to update Internet
disclosures every 30 days, while consumer groups suggested that the
disclosures should be updated in a ``timely fashion,'' with 30 days
being too long in some instances.
Introductory rate offers. Under the Bankruptcy Act, credit card
issuers offering discounted introductory rates must clearly and
conspicuously disclose in marketing materials the expiration date of
the offer, the rate that will apply after that date, and an explanation
of how the introductory rate may be revoked (for example, if the
consumer makes a late payment).
In general, industry commenters asked for flexibility in complying
with the new requirements. Consumer groups supported stricter
standards, such as requiring an equivalent typeface for the word
``introductory'' in immediate proximity to the temporary rate and
requiring the expiration date and subsequent rate to appear either
side-by-side with, or immediately under or above, the most prominent
statement of the temporary rate.
Account termination. Under the Bankruptcy Act, creditors are
prohibited from terminating an open-end account before its expiration
date solely because the consumer has not incurred finance charges on
the account. Creditors are permitted, however, to terminate an account
for inactivity.
Regarding guidance on what should be considered an ``expiration
date,'' several industry commenters suggested using card expiration
dates as the account expiration date. Others cautioned against using
such an approach, because accounts do not terminate upon a card
expiration date. Regarding what constitutes ``inactivity,'' many
industry commenters stated no further guidance is necessary. Among
those suggesting additional guidance, most suggested ``activity''
should be measured only by consumers' actions (charges and payments) as
opposed to card issuer activity (for example, refunding fees, billing
inactivity fees, or waiving unpaid balances).
High loan-to-value mortgage credit. For home-secured credit that
may exceed the dwelling's fair-market value, the Bankruptcy Act
amendments require creditors to provide additional disclosures at the
time of application and in advertisements (for both open-end and
closed-end credit). The disclosures would warn consumers that interest
on the portion of the loan that exceeds the home's fair-market value is
not tax deductible and encourage consumers to consult a tax advisor.
Because these amendments deal with home-secured credit, the Board is
not proposing revisions to Regulation Z to implement these provisions
at this time. The Board anticipates implementing these provisions in
connection with the upcoming review of Regulation Z's rules for
mortgage transactions. Nevertheless, the following is a summary of the
comments received.
In general, creditors asked for flexibility in providing the
disclosure, either by permitting the notice to be provided to all
mortgage applicants, or to be provided later in the approval process
after creditors have determined the disclosure is triggered. Similarly,
a number of industry commenters advocated limiting the advertising rule
to creditors that specifically market high loan-to-value mortgage
loans. Creditor commenters asked for guidance on loan-to-value
calculations and safe harbors for how creditors determine property
values. Consumer advocates favored triggering the disclosure when the
possibility of negative amortization could occur.
C. Consumer Testing
A principal goal for the Regulation Z review is to produce revised
and improved credit card disclosures that consumers will be more likely
to pay attention to, understand, and use in their decisions, while at
the same time not creating undue burdens for creditors. In April 2006,
the Board retained a research and consulting firm (Macro International)
that specializes in designing and testing documents to conduct consumer
testing to help the Board review Regulation Z's credit card rules.
Specifically, the Board used consumer testing to develop proposed model
forms for the following credit card disclosures required by Regulation
Z:
Summary table disclosures provided in direct-mail
solicitations and applications;
Disclosures provided at account opening;
Periodic statement disclosures; and
Subsequent disclosures, such as notices provided when key
account terms are changed, and notices on checks provided to access
credit card accounts.
Working closely with the Board, Macro International conducted
several tests. Each round of testing was conducted in a different city,
throughout the United States. In addition, the consumer testing groups
contained participants with a range of ethnicities, ages, educational
levels, credit card behavior, and whether a consumer likely has a prime
or subprime credit card.
Exploratory focus groups. In May and June 2006, the Board worked
with Macro International to conduct two sets of focus groups with
credit card consumers, in part, to learn more about what information
consumers currently use in making decisions about their credit card
accounts. Each focus group consisted of between eight and thirteen
people that discussed issues identified by the Board and raised by a
moderator from Macro International. Through these focus groups, the
Board gathered information on what credit terms consumers usually
consider when shopping for a credit card, what information they find
useful when they receive a new credit card in the mail, and what
information they find useful on periodic statements.
Cognitive interviews on existing disclosures. In August 2006, the
Board worked with Macro International to conduct nine cognitive
interviews with credit card customers. These cognitive interviews
consisted of one-on-one discussions with consumers, during
[[Page 32952]]
which consumers were asked to view existing sample credit card
disclosures. The goals of these interviews were: (1) To learn more
about what information consumers read when they receive current credit
card disclosures; (2) to research how easily consumers can find various
pieces of information in these disclosures; and (3) to test consumers'
understanding of certain credit card-related words and phrases.
1. Initial design of disclosures for testing. In the fall of 2006,
the Board worked with Macro International to develop sample credit card
disclosures to be used in the later rounds of testing, taking into
account information learned through the focus groups and the cognitive
interviews.
2. Additional cognitive interviews and revisions to disclosures. In
late 2006 and early 2007, the Board worked with Macro International to
conduct four rounds of cognitive interviews (between seven and nine
participants per round), where consumers were asked to view new sample
credit card disclosures developed by the Board and Macro International.
The rounds of interviews were conducted sequentially to allow for
revisions to the testing materials based on what was learned from the
testing during each previous round.
Results of testing. Several of the model forms were developed
through the testing. A report summarizing the results of the testing is
available on the Board's public Web site: http://www.federalreserve.gov.
Testing participants generally read the summary table provided in
direct-mail credit card solicitations and applications and ignored
information presented outside of the table. Thus, the proposal requires
that information about events that trigger penalty rates and about
important fees (late-payment fees, over-the-credit-limit fees, balance
transfer fees, and cash advance fees) be placed in the table.
Currently, this information may be placed outside the table.
With respect to the account-opening disclosures, consumer testing
indicates that consumers commonly do not review their account
agreements, which are often in small print and dense prose. The
proposal would require creditors to include a table summarizing the key
terms applicable to the account, similar to the table required for
credit card applications and solicitations. Setting apart the most
important terms in this way will better ensure that consumers are
apprised of those terms.
With respect to periodic statement disclosures, testing
participants found it beneficial to have the different types of
transactions grouped together by type. Thus, the proposal requires
creditors to group transactions together by type, such as purchases,
cash advances, and balance transfers. In addition, many consumers more
easily noticed the number and amount of fees when the fees were
itemized and grouped together with interest charges. Consumers also
noticed fees and interest charges more readily when they were located
near the disclosure of the transactions on the account. Thus, under the
proposal, creditors would be required to group all fees together and
describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the fees would be considered ``finance charges,'' ``other
charges'' or neither under the regulation.
With respect to change-in-terms notices, consumer testing indicates
that much like the account-opening disclosures, consumers may not
typically read such notices, because they are often in small print and
dense prose. To enhance the effectiveness of change-in-terms notices,
when a creditor is changing terms which were required to be disclosed
in the summary table provided at account opening, the proposed rules
would require the creditor to include a table summarizing any such
changed terms. Creditors commonly provide notices about changes to
terms or rates in the same envelope with periodic statements. Consumer
testing indicates that consumers may not typically look at the notices
if they are provided as separate inserts given with periodic
statements. Thus, in such cases, a table summarizing the change would
have to appear on the periodic statement directly above the transaction
list, where consumers are more likely to notice the changes.
Additional testing after comment period. After receiving comments
from the public on the proposal and the revised disclosure forms, the
Board will work with Macro International to revise the model
disclosures. Macro International then will conduct additional rounds of
cognitive interviews to test the revised disclosures. After the
cognitive interviews, quantitative testing will be conducted. The goal
of the quantitative testing is to measure consumers' comprehension and
the usability of the newly-developed disclosures relative to existing
disclosures and formats.
D. Other Outreach and Research
The Board also solicited input from members of the Board's Consumer
Advisory Council on various issues presented by the review of
Regulation Z's open-end credit rules. During 2005 and 2006, for
example, the Council discussed the feasibility and advisability of
reviewing Regulation Z in stages, ways to improve the summary table
provided on or with credit card applications and solicitations, issues
related to TILA's substantive protections (including dispute resolution
procedures), and issues related to the Bankruptcy Act amendments. In
addition, the Board met or conducted conference calls with various
industry and consumer group representatives throughout the review
process leading to this proposal. The Board also reviewed disclosures
currently provided by creditors, consumer complaints received by the
federal banking agencies, and surveys on credit card usage to help
inform the proposal.\2\
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\2\ Surveys reviewed include: Thomas A. Durkin, Credit Cards:
Use and Consumer Attitudes, 1970-2000, Federal Reserve Bulletin,
(September 2000); Thomas A. Durkin, Consumers and Credit
Disclosures: Credit Cards and Credit Insurance, Federal Reserve
Bulletin (April 2002).
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E. Reviewing Regulation Z in Stages
Based on the comments received and upon its own analysis, the Board
is proceeding with a review of Regulation Z in stages. This proposal
largely contains revisions to rules affecting open-end plans other than
HELOCs subject to Sec. 226.5b. These open-end (not home-secured) plans
are distinct from other TILA-covered products, and conducting a review
in stages allows for a manageable process. Possible revisions to rules
affecting HELOCs will be considered in the Board's review of home-
secured credit, currently underway. To minimize compliance burden for
creditors offering HELOCs as well as other open-end credit, many of the
open-end rules would be reorganized to delineate clearly the
requirements for HELOCs and other forms of open-end credit. Although
this reorganization would increase the size of the regulation and
commentary, the Board believes a clear delineation of rules for HELOCs
and other forms of open-end credit pending the review of HELOC rules
provides a clear compliance benefit to creditors. Creditors that
generate a single periodic statement for all open-end products would be
given the option to retain the existing periodic statement disclosure
scheme for HELOCs, or to disclose information on periodic statements
under the revised rules for other open-end plans.
F. Implementation Period
The Board contemplates providing creditors sufficient time to
implement
[[Page 32953]]
any revisions that may be adopted. The Board seeks comment on an
appropriate implementation period.
IV. The Board's Rulemaking Authority
TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Add or modify information required to be disclosed with
credit and charge card applications or solicitations if the Board
determines the action is necessary to carry out the purposes of, or
prevent evasions of, the application and solicitation disclosure rules.
15 U.S.C. 1637(c)(5).
Require disclosures in advertisements of open-end plans.
15 U.S.C. 1663.
In the course of developing the proposal, the Board has considered
the information collected from comment letters submitted in response to
its ANPRs, its experience in implementing and enforcing Regulation Z,
and the results obtained from testing various disclosure options in
controlled consumer tests. For the reasons discussed in this notice,
the Board believes this proposal is appropriate to effectuate the
purposes of TILA, to prevent the circumvention or evasion of TILA, and
to facilitate compliance with the act.
Also as explained in this notice, the Board believes that the
specific exemptions proposed are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion,
the Board considered (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection. The rationales for these proposed exemptions
are explained below.
V. Discussion of Major Proposed Revisions
The goal of the proposed revisions is to improve the effectiveness
of the Regulation Z disclosures that must be provided to consumers for
open-end accounts. A summary of the key account terms must accompany
applications and solicitations for credit card accounts. For all open-
end credit plans, creditors must disclose costs and terms at account
opening, generally before the first transaction. Consumers must receive
periodic statements of account activity, and creditors must provide
notice before certain changes in the account terms may become
effective.
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key terms of open-end accounts. But
the terms and conditions affecting credit card account pricing can be
complex. The proposed revisions to Regulation Z are intended to provide
the most essential information to consumers when the information would
be most useful to them, with content and formats that are clear and
conspicuous. The proposed revisions are expected to improve consumers'
ability to make informed credit decisions and enhance competition among
credit card issuers. Many of the changes are based on the consumer
testing that was conducted in connection with the review of Regulation
Z.
In considering the proposed revisions, the Board has also sought to
balance the potential benefits for consumers with the compliance
burdens imposed on creditors. For example, the proposed revisions seek
to provide greater certainty to creditors in identifying what costs
must be disclosed for open-end plans, and when those costs must be
disclosed. More effective disclosures may also reduce customer
confusion and misunderstanding, which may also ease creditors' costs
relating to consumer complaints and inquiries.
A. Credit Card Applications and Solicitations
Under Regulation Z, credit and charge card issuers are required to
provide information about key costs and terms with their applications
and solicitations.\3\ This information is abbreviated, to help
consumers focus on only the most important terms and decide whether to
apply for the credit card account. If consumers respond to the offer
and are issued a credit card, creditors must provide more detailed
disclosures at account opening, before the first transaction occurs.
---------------------------------------------------------------------------
\3\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this notice will refer simply to ``credit
cards.''
---------------------------------------------------------------------------
The application and solicitation disclosures are considered among
the most effective TILA disclosures principally because they must be
presented in a standardized table with headings, content, and format
substantially similar to the model forms published by the Board. In
2001, the Board revised Regulation Z to enhance the application and
solicitation disclosures by adding rules and guidance concerning the
minimum type size and requiring additional fee disclosures.
Penalty pricing. The proposal would make several revisions that
seek to improve consumers' understanding of default or penalty pricing.
Currently, credit card issuers must disclose inside the table the APR
that will apply in the event of the consumer's ``default.'' Some
creditors define a ``default'' as making one late payment or exceeding
the credit limit once. The actions that may trigger the penalty APR are
currently required to be disclosed outside the table.
Consumer testing indicated that many consumers did not notice the
information about penalty pricing when it was disclosed outside the
table. Under the proposal, card issuers would be required to include in
the table the specific actions that trigger penalty APRs (such as a
late payment), the rate that will apply, the balances to which the
penalty rate will apply, and the circumstances under which the penalty
rate will expire or, if true, the fact that the penalty rate could
apply indefinitely. The regulation would require card issuers to use
the term ``penalty APR'' because the testing demonstrated that some
consumers are confused by the term ``default rate.''
Similarly, the proposal requires card issuers to disclose inside
(rather than outside) the table the fees for paying late, exceeding a
credit limit, or making a payment that is returned, along with
[[Page 32954]]
a cross-reference to the penalty rate if, for example, paying late
could also trigger the penalty rate. Cash advance fees and balance
transfer fees would also be disclosed inside the table. This proposed
change is also based on consumer testing results; fees disclosed
outside the table were often not noticed. Requiring card issuers to
disclose returned-payment fees would be a new disclosure.
Variable-rate information. Currently, applications and
solicitations offering variable APRs must disclose inside the table the
index or formula used to make adjustments and the amount of any margin
that is added. Additional details, such as how often the rate may
change, must be disclosed outside the table. Under the proposal,
information about variable APRs would be reduced to a single phrase
indicating the APR varies ``with the market,'' along with a reference
to the type of index, such as ``Prime.'' Consumer testing indicated
that few consumers use the variable-rate information when shopping for
a card. Moreover, participants were distracted or confused by details
about margin values, how often the rate may change, and where an index
can be found.
Payment allocation. The proposal would add a new disclosure to the
table about the effect on credit costs of creditors' payment allocation
methods when payments are applied entirely to transferred balances at
low introductory APRs. If, as is common, a creditor allocates payments
to low-rate balances first, consumers who make purchases on the account
will not be able to take advantage of any ``grace period'' on
purchases, without paying off the entire balance, including the low-
rate balance transfer. Consumer testing indicated that consumers are
often confused about this aspect of balance transfer offers. The new
disclosure would alert consumers that they will pay interest on their
purchases until the transferred balance is paid in full.
Web site reference. The proposal would also require card issuers to
include a reference to the Board's Web site, where additional
information is available about how to compare credit cards and what
factors to consider. This responds to commenters who suggested that the
Board consider nonregulatory approaches to provide opportunities for
consumers to learn about credit products.
Subprime accounts. The proposal also addresses a concern that has
been raised about subprime credit cards, which are generally offered to
consumers with low credit scores or credit problems. Subprime credit
cards often have substantial fees associated with opening the account.
Typically, fees for the issuance or availability of credit are billed
to consumers on the first periodic statement, and can substantially
reduce the amount of credit available to the consumer. For example, the
initial fees on an account with a $250 credit limit may reduce the
available credit to less than $100. Consumer complaints received by the
federal banking agencies state that consumers were unaware when they
applied for cards of how little credit would be available after all the
fees were assessed at account opening.
To address this concern, the proposal would require additional
disclosures if the card issuer requires fees or a security deposit to
issue the card that are 25 percent or more of the minimum credit limit
offered for the account. In such cases, the card issuer would be
required to include an example in the table of the amount of available
credit the consumer would have after paying the fees or security
deposit, assuming the consumer receives the minimum credit limit.
Balance computation methods. TILA requires creditors to identify
their balance computation method by name, and Regulation Z requires
that the disclosure be inside the table. However, consumer testing
suggests that these names, such as the ``two-cycle average daily
balance method,'' hold little meaning for consumers, and that consumers
do not consider such information when shopping for accounts.
Accordingly, the proposed rule requires creditors to place the name of
the balance computation method outside the table, so that the
disclosure does not detract from information that is more important to
consumers.
B. Account-Opening Disclosures
Regulation Z requires creditors to disclose costs and terms before
the first transaction is made on the account. The disclosures must
specify the circumstances under which a ``finance charge'' may be
imposed and how it will be determined. A ``finance charge'' is any
charge that may be imposed as a condition of or an incident to the
extension of credit, and includes, for example, interest, transaction
charges, and minimum charges. The finance charge disclosures include a
disclosure of each periodic rate of interest that may be applied to an
outstanding balance (e.g., purchases, cash advances) as well as the
corresponding annual percentage rate (APR). Creditors must also explain
any grace period for making a payment without incurring a finance
charge. They must also disclose the amount of any charge other than a
finance charge that may be imposed as part of the credit plan (``other
charges''), such as a late-payment charge. Consumers'' rights and
responsibilities in the case of unauthorized use or billing disputes
must also be explained. Currently, there are few format requirements
for these account-opening disclosures, which are typically interspersed
among other contractual terms in the creditor's account agreement.
Account-opening summary table. Account-opening disclosures have
often been criticized because the key terms TILA requires to be
disclosed are often interspersed within the credit agreements, and such
agreements are long and complex. The proposal to require creditors to
include a table summarizing the key terms addresses that concern by
making the information more conspicuous. Creditors may continue,
however, to provide other account-opening disclosures, aside from the
fees and terms specified in the table, with other terms in their
account agreements.
The new table provided at account opening would be substantially
similar to the table provided with direct-mail credit card applications
and solicitations. Consumer testing and surveys indicate that consumers
generally are aware of the table on applications and solicitations.
Consumer testing also indicates that consumers may not typically read
their account agreements, which are often in small print and dense
prose. Thus, setting apart the most important terms in a summary table
will better ensure that consumers are aware of those terms.
The table required at account opening would include more
information than the table required at application. For example, it
would include a disclosure of any fee for transactions in a foreign
currency or that take place in a foreign country. However, to reduce
compliance burden for creditors that provide account-opening
disclosures at application, the proposal would allow creditors to
provide the more specific and inclusive account-opening table at
application in lieu of the table otherwise required at application.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the written
account-opening disclosures. A subsequent written notice is required if
one of the fees disclosed at account opening increases or if certain
fees are newly introduced during the life of the plan. The terms
``finance charge'' and ``other charge'' are given broad and flexible
meanings in the regulation and commentary. This ensures that TILA
adapts to changing
[[Page 32955]]
conditions, but it also creates uncertainty. The distinctions among
finance charges, other charges, and charges that do not fall into
either category are not always clear. As creditors develop new kinds of
services, some find it difficult to determine if associated charges for
the new services meet the standard for a ``finance charge'' or ``other
charge'' or are not covered by TILA at all. This uncertainty can pose
legal risks for creditors that act in good faith to comply with the
law. Examples of included or excluded charges are in the regulation and
commentary, but these examples cannot provide definitive guidance in
all cases. Creditors are subject to civil liability and administrative
enforcement for underdisclosing the finance charge or otherwise making
erroneous disclosures, so the consequences of an error can be
significant. Furthermore, overdisclosure of rates and finance charges
is not permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated. These rules require creditors to provide fee disclosures at
account opening, which may be months, and possibly years, before a
particular disclosure is relevant to the consumer, such as when the
consumer calls the creditor to request a service for which a fee is
imposed. In addition, an account-related transaction may occur by
telephone, when a written disclosure is not feasible.
The proposed rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, under the proposal, the
rules would be revised to (1) specify precisely the charges that
creditors must disclose in writing at account opening (interest,
minimum charges, transaction fees, annual fees, and penalty fees such
as for paying late), which would be listed in the summary table, and;
(2) permit creditors to disclose other less critical charges orally or
in writing before the consumer agrees to or becomes obligated to pay
the charge. Although the proposal would permit creditors to disclose
certain costs orally for purposes of TILA, the Board anticipates that
creditors will continue to identify fees in the account agreement for
contract or other reasons.
Under the proposal, some charges would be covered by TILA that the
current regulation, as interpreted by the staff commentary, excludes
from TILA coverage, such as fees for expedited payment and expedited
delivery. It may not have been useful to consumers to cover such
charges under TILA when such coverage would have meant only that the
charges were disclosed long before they became relevant to the
consumer. The Board believes it would be useful to consumers to cover
such charges under TILA as part of a rule that permits their disclosure
at a relevant time. Further, as new services (and associated charges)
are developed, the proposal minimizes risk of civil liability
associated with the determination as to whether a fee is a finance
charge or an other charge, or is not covered by TILA at all.
C. Periodic Statements
Creditors are required to provide periodic statements reflecting
the account activity for the billing cycle (typically, about one
month). In addition to identifying each transaction on the account,
creditors must identify each ``finance charge'' using that term, and
each ``other charge'' assessed against the account during the statement
period. When a periodic interest rate is applied to an outstanding
balance to compute the finance charge, creditors must disclose the
periodic rate and its corresponding APR. Creditors must also disclose
an ``effective'' or ``historical'' APR for the billing cycle, which,
unlike the corresponding APR, includes not just interest but also
finance charges imposed in the form of fees (such as cash advance fees
or balance transfer fees). Periodic statements must also state the time
period a consumer has to pay an outstanding balance to avoid additional
finance charges (the ``grace period''), if applicable.
Fees and interest costs. The proposal contains a number of
revisions to the periodic statement to improve consumers' understanding
of fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' that have been added to the
account during the billing cycle, and creditors typically list these
charges with other transactions, such as purchases, chronologically on
the statement. The finance charges must be itemized by type. Thus,
interest charges might be described as ``finance charges due to
periodic rates.'' Charges such as late payment fees, which are not
``finance charges,'' are typically disclosed individually and are
interspersed among other transactions.
Consumer testing indicated that consumers generally understand that
``interest'' is the cost that results from applying a rate to a balance
over time and distinguish ``interest'' from other fees, such as a cash
advance fee or a late payment fee. Consumer testing also indicated that
many consumers more easily determine the number and amount of fees when
the fees are itemized and grouped together.
Thus, under the proposal, creditors would be required to group all
charges together and describe them in a manner consistent with
consumers' general understanding of costs (``interest charge'' or
``fee''), without regard to whether the charges would be considered
``finance charges,'' ``other charges,'' or neither. Interest charges
would be identified by type (for example, interest on purchases or
interest on balance transfers) as would fees (for example, cash advance
fee or late-payment fee).
Consumer testing also indicated that many consumers more quickly
and accurately determined the total dollar cost of credit for the
billing cycle when a total dollar amount of fees for the cycle was
disclosed. Thus, the proposal would require creditors to disclose the
(1) total fees and (2) total interest imposed for the cycle. The
proposal would also require disclosure of year-to-date totals for
interest charges and fees. For many consumers, costs disclosed in
dollars are more readily understood than costs disclosed as percentage
rates. The year-to-date figures are intended to assist consumers in
better understanding the overall cost of their credit account and would
be an important disclosure and an effective aid in understanding
annualized costs, especially if the Board were to eliminate the
requirement to disclose the effective APR on periodic statements, as
discussed below.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance.
For the reasons discussed below, the Board is proposing two
alternative approaches to address the effective APR. The first approach
would try to improve consumer understanding of this rate and reduce
creditor uncertainty about its calculation. The second approach would
eliminate the requirement to disclose the effective APR.
Creditors believe the effective APR should be eliminated. They
believe consumers do not understand the effective APR, including how it
differs from the corresponding (interest rate) APR, why it is often
``high,'' and which fees the effective APR reflects. Creditors say they
find it difficult, if not impossible, to explain the effective APR to
consumers who call them with questions or concerns. They note that
[[Page 32956]]
callers sometimes believe, erroneously, that the effective APR signals
a prospective increase in their interest rate, and they may make
uninformed decisions as a result. And, creditors say, even if the
consumer does understand the effective APR, the disclosure does not
provide any more information than a disclosure of the total dollar
costs for the billing cycle. Moreover, creditors say the effective APR
is arbitrary and inherently inaccurate, principally because it
amortizes the cost for credit over only one month (billing cycle) even
though the consumer may take several months (or longer) to repay the
debt.
Consumer groups acknowledge that the effective APR is not well
understood, but argue that it nonetheless serves a useful purpose by
showing the higher cost of some credit transactions. They contend the
effective APR helps consumers decide each month whether to continue
using the account, to shop for another credit product, or to use an
alternative means of payment such as a debit card. Consumer groups also
contend that reflecting costs, such as cash advance fees and balance
transfer fees, in the effective APR creates a ``sticker shock'' and
alerts consumers that the overall cost of a transaction for the cycle
is high and exceeds the advertised corresponding APR. This shock, they
say, may persuade some consumers not to use certain features on the
account, such as cash advances, in the future. In their view, the
utility of the effective APR would be maximized if it reflected all
costs imposed during the cycle (rather than only some costs as is
currently the case).
As part of the consumer testing, mock periodic statements were
developed in an attempt to improve consumers' understanding of the
effective APR. A written explanation and varying terminology were
tested. In most rounds participants showed little understanding of the
effective APR, but the form was adjusted between rounds as to
terminology and format, and in the last round a number of participants
showed more understanding of the effective APR.
Thus, the draft proposal includes a number of revisions to the
presentation of the effective APR intended to help consumers understand
the figure. In addition, the proposal seeks to improve consumer
understanding and reduce creditor uncertainty by specifying more
clearly which fees are to be included in the effective APR.\4\ As
mentioned, however, the Board is also seeking comment on an alternative
proposal to eliminate the disclosure on the basis that it may not
provide consumers a meaningful benefit.
---------------------------------------------------------------------------
\4\ The proposal also would reverse a staff commentary provision
that excludes ATM fees from the finance charge and effective APR;
and it would address for the first time foreign transaction fees,
which it would clarify are to be included in the finance charge and
effective APR.
---------------------------------------------------------------------------
Transactions. Currently, there are no format requirements for
disclosing different types of transactions, such as purchases, cash
advances, and balance transfers on periodic statements. Often,
transactions are presented together in chronological order. Consumer
testing indicated that participants found it helpful to have similar
types of transactions grouped together on the statement. Consumers also
found it helpful, within the broad grouping of fees and transactions,
when transactions were segregated by type (e.g., listing all purchases
together, separate from cash advances or balance transfers). Further,
consumers noticed fees and interest charges more readily when they were
located near the transactions. For these reasons, the proposal requires
creditors to: (1) Group similar transactions together by type, such as
purchases, cash advances, and balance transfers, and (2) group fees and
interest charges together, itemized by type, with the list of
transactions.
Late payments. Currently, creditors must disclose the date by which
consumers must pay a balance to avoid finance charges. Creditors must
also disclose any cut-off time for receiving payments on the payment
due date; this is usually disclosed on the reverse side of periodic
statements. The Bankruptcy Act amendments expressly require creditors
to disclose the payment due date (or if different, the date after which
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
Under the proposal, creditors would be required to disclose the
payment due date on the front side of the periodic statement and,
closely proximate to the date, any cut-off time if it is before 5 p.m.
Consumer testing indicates that many consumers believe cut-off times
are the close of the business day and more readily notice the cut-off
time when it is located near the due date.
Creditors would also be required to disclose, in close proximity to
the due date, the amount of the late-payment fee and the penalty APR
that could be triggered by a late payment. Applying the penalty APR to
outstanding balances can significantly increase costs. Thus, it is
important for consumers to be alerted to the consequence of paying
late.
Minimum payments. The Bankruptcy Act requires creditors offering
open-end plans to provide a warning about the effects of making only
minimum payments. The proposal would implement this requirement solely
for credit card issuers. Under the proposal, card issuers must provide
(1) a ``warning'' statement indicating that making only the minimum
payment will increase the interest the consumer pays and the time it
takes to repay the consumer's balance; (2) a hypothetical example of
how long it would take to pay a specified balance in full if only
minimum payments are made; and (3) a toll-free telephone number that
consumers may call to obtain an estimate of the time it would take to
repay their actual account balance using minimum payments. Most card
issuers must establish and maintain their own toll-free telephone
numbers to provide the repayment estimates. However, the Board is
required to establish and maintain, for two years, a toll-free
telephone number for creditors that are depository institutions having
assets of $250 million or less. This number is for the customers of
those institutions to call to get answers to questions about how long
it will take to pay their account in full making only the minimum
payment. The Federal Trade Commission (FTC) must maintain a similar
toll-free telephone number for use by customers of creditors that are
not depository institutions. In order to standardize the information
provided to consumers through the toll-free telephone numbers, the
Bankruptcy Act amendments direct the Board to prepare a ``table''
illustrating the approximate number of months it would take to repay an
outstanding balance if the consumer pays only the required minimum
monthly payments and if no other advances are made (``generic repayment
estimate'').
Pursuant to the Bankruptcy Act amendments, the proposal also allows
a card issuer to establish a toll-free telephone number to provide
customers with the actual number of months that it will take consumers
to repay their outstanding balance (``actual repayment disclosure'')
instead of providing an estimate based on the Board-created table. A
card issuer that does so need not include a hypothetical example on its
periodic statements, but must disclose the warning statement and the
toll-free telephone number.
The proposal also allows card issuers to provide the actual
repayment disclosure on their periodic statements. Card issuers would
be encouraged to use this approach. Participants in consumer testing
who typically carry
[[Page 32957]]
credit card balances (revolvers) found an estimated repayment period
based on terms that apply to their own account more useful than a
hypothetical example. To encourage card issuers to provide the actual
repayment disclosure on their periodic statements, the proposal
provides that if card issuers do so, they need not disclose the
warning, the hypothetical example and a toll-free telephone number on
the periodic statement, nor need they maintain a toll-free telephone
number to provide the actual repayment disclosure.
As described above, the Bankruptcy Act also requires the Board to
develop a ``table'' that creditors, the Board and the FTC must use to
create generic repayment estimates. Instead of creating a table, the
proposal contains guidance for how to calculate generic repayment
estimates. Consumers that call the toll-free telephone number could be
prompted to input information about their outstanding balance and the
APR applicable to their account. Although issuers have the ability to
program their systems to obtain consumers' account information from
their account management systems, for the reasons discussed in the
section-by-section analysis to Appendix M-1, the proposal does not
require issuers to do so.
D. Changes in Consumer's Interest Rate and Other Account Terms
Regulation Z requires creditors to provide advance written notice
of some changes to the terms of an open-end plan. The proposal includes
several revisions to Regulation Z's requirements for notifying
consumers about such changes.
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. However, creditors need not inform consumers in advance
if the rate applicable to their account increases due to default or
delinquency. Thus, consumers may not realize until they receive their
monthly statement for a billing cycle that their late payment triggered
application of the higher penalty rate, effective the first day of the
month's statement.
Timing. Currently, Regulation Z generally requires creditors to
mail a change-in-terms notice 15 days before a change takes effect.
Consumer groups and others have criticized the 15-day period as
providing too little time after the notice is sent for the consumer to
receive the notice, shop for alternative credit and possibly pay off
the existing credit card account. Under the proposal, notice must be
sent at least 45 days before the effective date of the change, which
would give consumers about a month to pursue their options.
Penalty rates. Currently, creditors must inform consumers about
rates that are increased due to default or delinquency, but not in
advance of implementation of the increase. Contractual thresholds for
default are sometimes very low, and penalty pricing commonly applies to
all existing balances, including low-rate promotional balances. An
event triggering the default may occur a year or more after the account
is opened. For example, a consumer may open an account, and a year or
more later may take advantage of a low promotional rate to transfer
balances from another account. That consumer reasonably may not recall
reading in the account-opening disclosure that a single transaction
exceeding the credit limit could cause the interest rates on existing
balances, including on the promotional transfer, to increase. Thus, the
proposal would expand the events triggering advance notice to include
increases triggered by default or delinquency. Advance notice of a
potentially significant increase in the cost of credit is intended to
allow consumers to consider alternatives before the increase is
imposed, such as making other financial arrangements or choosing not to
engage in additional transactions that will increase the balances on
their account. Comment is solicited on whether a shorter time period
than 45 days' advance notice would be adequate. Actions creditors may
engage in to mitigate risk, such as by lowering credit limits or
suspending credit privileges, are not affected by the proposal.
Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors
commonly intersperse change-in-terms notices with other amendments to
the account agreement, and both are provided in pamphlets in small
print and dense prose. Consumer testing indicates many consumers set
aside and do not read densely-worded pamphlets.
Under the proposal, creditors may continue to notify consumers
about changes to terms required to be disclosed by Regulation Z, along
with other changes to the account agreement. However, if a changed term
is one that must be provided in the account-opening summary table,
creditors must provide that change in a summary table to enhance the
effectiveness of the change-in-terms notice.
Creditors commonly enclose notices about changes to terms or rates
with periodic statements. Under the proposal, if a notice enclosed with
a periodic statement discusses a change to a term that must be
disclosed in the account-opening summary table, or announces that a
penalty rate will be imposed on the account, a table summarizing the
impending change must appear on the periodic statement. The table would
have to appear directly above the transaction list, in light of testing
that shows many consumers tend to focus on the list of transactions.
Consumers who participated in testing set aside change-in-terms
pamphlets that accompanied periodic statements. Participants uniformly
looked at the front side of periodic statements and reviewed at least
the transactions.
E. Advertisements
Advertising minimum payments. Consumers commonly are offered the
option to finance the purchase of goods or services (such as appliances
or furniture) by establishing an open-end credit plan. The monthly
minimum payments associated with the purchase are often advertised as
part of the offer. Under current rules, advertisements for open-end
credit plans are not required to include information about the time it
will take to pay for a purchase or the total cost if only minimum
payments are made; if the transaction were a closed-end installment
loan, the number of payments and the total cost would be disclosed.
Under the proposal, advertisements stating a minimum monthly payment
for an open-end credit plan that would be established to finance the
purchase of goods or services must state, in equal prominence to the
minimum payment, the time period required to pay the balance and the
total of payments if only minimum payments are made.
Advertising ``fixed'' rates. Creditors sometimes advertise the APR
for open-end accounts as a ``fixed'' rate even though the creditor
reserves the right to change the rate at any time for any reason.
Consumer testing indicated that many consumers believe that a ``fixed
rate'' will not change, and do not understand that creditors may use
the term ``fixed'' as a shorthand reference for rates that do not vary
based on changes in an index or formula. Under the proposal, an
advertisement may refer to a rate as ``fixed'' if the advertisement
specifies a time period the rate will be fixed and the rate will not
increase during that period. If a time period is not specified, the
advertisement may refer to a rate as ``fixed'' only if the rate will
not increase while the plan is open.
[[Page 32958]]
F. Other Disclosures and Protections
``Open-end'' plans comprised of closed-end features. Some creditors
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods.
These creditors treat these loans as advances on a revolving credit
line for purposes of Regulation Z even though the consumer's credit
information is separately evaluated and he or she may have to complete
a separate application for each ``advance,'' and the consumer's
payments on the ``advance'' do not replenish the ``line.'' Provisions
in the commentary lend support to this approach. The proposal would
revise these provisions to indicate closed-end disclosures rather than
open-end disclosures are appropriate when the credit being extended is
individual loans that are individually approved and underwritten.
Checks that access a credit card account. Many credit card issuers
provide accountholders with checks that can be used to obtain cash, pay
the outstanding balance on another account, or purchase goods and
services directly from merchants. The solicitation letter accompanying
the checks may offer a low introductory APR for transactions that use
the checks. The proposed revisions would require the checks mailed by
card issuers to be accompanied by cost disclosures.
Currently, creditors need not disclose costs associated with using
the checks if the finance charges that would apply (that is, the
interest rate and transaction fees) have been previously disclosed,
such as in the account agreement. If the check is sent 30 days or more
after the account is opened, creditors must refer consumers to their
account agreements for more information about how the rate and fees are
determined.
Consumers may receive these checks throughout the life of the
credit card account. Thus, significant time may elapse between the time
account-opening disclosures are provided and the time a consumer
considers using the check. In addition, consumer testing indicates that
consumers may not notice references to other documents such as the
account-opening disclosures or periodic statements for rate information
because they tend to look for percentages and dollar figures when
looking for the costs of using the checks. Under the proposed
revisions, checks that can access credit card accounts must be
accompanied by information about the rates and fees that will apply if
the checks are used, and about whether a grace period exists. To ensure
the disclosures are conspicuous, creditors would be required to provide
the information in a table, on the front side of the page containing
the checks.
Credit insurance, debt cancellation, and debt suspension coverage.
Under Regulation Z, premiums for credit life, accident, health, or
loss-of-income insurance are considered finance charges if the
insurance is written in connection with a credit transaction. However,
these costs may be excluded from the finance charge and APR (for both
open-end and closed-end credit transactions), if creditors disclose the
cost and the fact that the coverage is not required to obtain credit,
and the consumer signs or initials an affirmative written request for
the insurance. Since 1996, the same rules have applied to creditors'
``debt cancellation'' agreements, in which a creditor agrees to cancel
the debt, or part of it, on the occurrence of specified events.
Under the proposal, the existing rules for debt cancellation
coverage would also be applied to ``debt suspension'' coverage (for
both open-end credit and closed-end transactions). ``Debt suspension''
products are related to, but different from, debt cancellation. Debt
suspension products merely defer consumers' obligation to make the
minimum payment for some period after the occurrence of a specified
event. During the suspension period, interest may continue to accrue,
or it may be suspended as well. Under the proposal, to exclude the cost
of debt suspension coverage from the finance charge and APR, creditors
must inform consumers that the coverage suspends, but does not cancel,
the debt.
Under the current rules, charges for credit insurance and debt
cancellation coverage are deemed not to be finance charges if a
consumer requests coverage after an open-end credit account is opened
or after a closed-end credit transaction is consummated (the coverage
is deemed not to be ``written in connection'' with the credit
transaction). Because in such cases the charges are defined as non-
finance charges, Regulation Z does not require a disclosure or written
evidence of consent to exclude them from the finance charge. The
proposed revisions to Regulation Z would implement a broader
interpretation of ``written in connection'' with a credit transaction
and require creditors to provide disclosures, and obtain evidence of
consent, on sales of credit insurance or debt cancellation or
suspension coverage during the life of an open-end account. If a
consumer requests the coverage by telephone, creditors may provide the
disclosures orally, but in that case they must mail written disclosures
within three days of the call.\5\
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\5\ The proposed revisions to Regulation Z requiring disclosures
to be mailed within three days of a telephone request for these
products are consistent with the rules of the federal banking
agencies governing insured depository institutions' sales of
insurance and with guidance published by the Office of the
Comptroller of the Currency (OCC) concerning national banks' sales
of debt cancellation and debt suspension products.
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VI. Section-by-Section Analysis
In reviewing the rules affecting open-end credit, the Board has
reorganized some provisions to make the regulation easier to use. Rules
affecting home-equity lines of credit (HELOCs) subject to Sec. 226.5b
are separately delineated in Sec. 226.6 (account-opening disclosures),
Sec. 226.7 (periodic statements), and Sec. 226.9 (subsequent
disclosures) Footnotes have been moved to the text of the regulation or
commentary, as appropriate. These proposed revisions are identified in
a table below.
See IX. Redesignation Table.
Introduction
The official staff commentary to Regulation Z begins with an
Introduction. Comment I-6 discusses reference materials published at
the end of each section of the commentary adopted in 1981. 46 FR
50,288; October 9, 1981. The references were intended as a compliance
aid during the transition to the 1981 revisions to Regulation Z. The
Board would delete these references and comment I-6, as obsolete.
Comment I-3, I-4(b), and I-7, which address 1981 rules of transition,
also would be deleted as obsolete.
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
Section 226.1(c) generally outlines the persons and transactions
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the
regulation applies to consumer credit extended to residents (including
resident aliens) of a state. Technical revisions are proposed for
clarity. Comment is requested if further guidance on the scope of
coverage would be helpful.
Section 226.1(d)(2), which summarizes the organization of the
regulation's open-end credit rules (Subpart B), would be amended to
reinsert text inadvertently deleted in a previous rulemaking. See 54 FR
24670; June 9, 1989. Section 226.1(d)(4), which summarizes
miscellaneous provisions in the regulation (Subpart D), would be
updated to describe amendments made in 2001 to Subpart D relating to
[[Page 32959]]
disclosures made in languages other than English. See 66 FR 17339;
March 30, 2001. The substance of Footnote 1 would be deleted as
unnecessary.
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(2) Advertisement
For clarity, the Board proposes technical revisions to the
commentary to Sec. 226.2(a)(2), with no intended change in substance
or meaning. No changes are proposed for the text of Sec. 226.2(a)(2).
2(a)(4) Billing Cycle
TILA Section 127(b) provides that, for an open-end credit plan, the
creditor shall send the consumer a periodic statement for each billing
cycle at the end of which there is an outstanding balance or with
respect to which a finance charge is imposed. 15 U.S.C. 1637(b).
``Billing cycle'' is not defined in the statute, but is defined in
Sec. 226.2(a)(4) of Regulation Z as ``the interval between the days or
dates of regular periodic statements.'' In addition, Sec. 226.2(a)(4)
requires that billing cycles be equal and no longer than a quarter of a
year, and allows a variance of up to four days from the regular day or
date of the statement. Comment 2(a)(4)-3 provides an exception to the
requirement for equal cycles: 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.'' Under the proposal, the
Board would clarify that creditors may also vary the length of the
first cycle on an open-end account in certain situations.
Questions have sometimes arisen about the first cycle that occurs
when a consumer opens an open-end credit account, and specifically,
about whether the first cycle may vary by more than four days from the
regular cycle interval without violating the equal-cycle requirement.
For example, in order to establish the consumer's account on the
creditor's billing system, the first cycle may need to be longer or
shorter than a monthly period by more than four days, depending upon
the date the account is opened. The Board believes that such a variance
for a first cycle, within reason, would not harm consumers and would
facilitate compliance. Comment 2(a)(4)-3 would be revised to clarify
this point.
2(a)(15) Credit Card
TILA defines ``credit card'' as ``any card, plate, coupon book or
other credit device existing for the purpose of obtaining money,
property, labor, or services on credit.'' TILA Section 103(k); 15
U.S.C. 1602(k). In addition, Regulation Z provides that a credit card
is a ``single credit device that may be usable from time to time to
obtain credit.'' See Sec. 226.2(a)(15). The definition of ``credit
card'' in the regulation would remain largely unchanged; however, the
current reference to a ``coupon book'' in the definition would be
deleted as obsolete.
Checks that access credit card accounts. Credit card issuers
sometimes provide cardholders with checks that access a credit card
account, which can be used to obtain cash, purchase goods or services,
or pay the outstanding balance on another account. These checks are
often mailed to consumers unsolicited, sometimes with consumers'
monthly statements. When a consumer uses such a check, the amount of
the check will be billed to the cardholder's account.
Historically, checks that access credit card accounts have not been
treated as ``credit cards'' under TILA because each check can be used
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a
result, TILA's protections involving merchant disputes, unauthorized
use of the account, and the prohibition against unsolicited issuance,
which apply only to ``credit cards,'' do not apply to these checks. See
Sec. 226.12. However, other protections do apply to such checks. See
Sec. 226.13. In the December 2004 ANPR, the Board solicited comment as
to whether it should extend TILA's protections for credit cards to
other extensions on credit card accounts, in particular checks that
access credit card accounts. Q45. The Board also asked whether the
industry is developing open-end credit plans that would allow consumers
to conduct transactions using only account numbers and that do not
involve the issuance of physical devices traditionally considered to be
credit cards. Q44.
In response to the December 2004 ANPR, several consumer commenters
urged the Board to expand the definition of ``credit card'' to include
checks that access a credit card account, in particular to address the
risk of increased fraud and heightened identity theft stemming from the
unrestricted issuance of such checks. Specifically, these commenters
cited concerns that these checks could be sent to a consumer at any
time without the consumer's request. Alternatively, some consumer
commenters suggested that if these checks continued to be issued on an
unsolicited basis, consumers should at least be able to opt out from
receiving them. In addition, one consumer group commented that the
Board could address non-physical credit cards by clarifying that the
term ``device'' as it appears in the definition of ``credit card'' can
include any physical object or a method or process.
Industry commenters opposed expanding the definition of ``credit
card'' to cover checks that access credit card accounts, for various
reasons. In general, industry commenters stated that they were aware of
few complaints regarding such checks, and that in their experience,
most consumers find the checks useful and convenient, as demonstrated
by their frequent use. In addressing unsolicited issuance concerns
specifically, industry commenters noted that upon a consumer's request,
most issuers will discontinue sending checks that access a credit card
account.
Industry commenters also stated that it was unnecessary to extend
the unauthorized use protections to convenience checks because
convenience check transactions are generally subject to the Uniform
Commercial Code (UCC) provisions governing checks, and thus a consumer
generally would not have any liability for a forged check, provided the
consumer complies with certain timing requirements. Industry commenters
also opposed applying the merchant dispute provisions (in Sec. 226.12)
to checks that access a credit card account, stating that these checks
are not processed through the payment card associations' networks.
Because card issuers may have no connection to or relationship with
merchants that accept these checks, industry commenters stated that
issuers do not have the ability to charge back to that merchant
transactions conducted with these checks. Accordingly, industry
commenters believed that the consumer was in the best position to
contact the merchant in the event of a dispute involving a transaction
using one of these checks.
In the proposal, the definition of ``credit card'' would remain
unchanged. The Board believes it may be unnecessary to address
unauthorized use concerns by treating checks that access credit card
accounts as credit cards, to the extent existing law or agreements
provide protections to these transactions. Moreover, under Regulation
Z, a consumer is currently able to assert billing error claims for
transactions involving checks that access a credit card account because
the billing error provisions in Sec. 226.13 apply to any extension of
credit under an open-end plan, and are not limited to credit cards. The
Board also does not
[[Page 32960]]
believe that it is necessary to require issuers to provide consumers
with the ability to opt out of receiving checks that access credit card
accounts. The Board understands that in many instances, issuers will
honor consumer requests to opt out of receiving such checks, and the
Board encourages creditors to continue the practice. In addition, as
noted above, consumers would be able to assert a billing error claim
with respect to any unauthorized transactions involving such checks and
is not liable for unauthorized transactions, as provided for under
Sec. 226.13.
Plans in which no physical device is issued. The proposal does not
address circumstances where a consumer may conduct a transaction on an
open-end plan that does not have a physical device. The Board had
solicited comment on such plans because it has received anecdotal
information about limited cases in which consumers obtained credit by
providing an account number (for example, to obtain food and services
at a resort) and where a physical device was not issued to the
consumer. Industry commenters stated that, in general, they were
unaware of any plans to provide open-end accounts that did not involve
the issuance of a card or other physical device. In particular,
industry commenters noted that creditors will continue to issue
physical devices because transactions where a card or other physical
device is present are generally far more secure and less likely to
involve fraud compared to those in which only the account number, along
with other information, is used to verify the identity of the user.
Moreover, industry commenters noted that consumers still need a
tangible device bearing account information that they can easily carry
with them. As a result, industry commenters generally believed that
issuers would be unlikely to abandon the issuance of a physical card or
device.
The Board believes that it is not necessary at this time to address
this issue, but it will continue to monitor developments in the
marketplace. Of course, to the extent a creditor has issued a device
that meets the definition of a ``credit card'' for an account,
transactions on that account are subject to the provisions that apply
to transactions involving the use of a ``credit card,'' even if the
particular transaction itself is not conducted using the device (for
example, in the case of phone or Internet transactions).
Coupon books. As noted above, the definition of ``credit card''
under both TILA and Regulation Z includes a reference to a ``coupon
book.'' Neither the statute nor the regulation provides any guidance on
the types of devices that would constitute a ``coupon book'' so as to
qualify as a ``credit card'' under the definition. Comment 2(a)(15)-1,
as discussed above, states that checks and similar instruments that can
be used only once to obtain a single credit extension are not ``credit
cards,'' and, logically such instruments, even if issued in a separate
booklet or in conjunction with a periodic statement, also would not be
considered to be coupon books. Thus, as the Board is not aware of
devices existing today that would qualify as a coupon book under the
statute and regulation, the Board is proposing to delete the reference
to such devices in the definition of ``credit card'' as obsolete.
Comment is requested as to whether removal of the reference to ``coupon
book'' in Sec. 226.2(a)(15) would help clarify the definition of
``credit card'' without inadvertently limiting the availability of
Regulation Z protections.
Charge cards. Comment 2(a)(15)-3 discusses charge cards and
identifies provisions in Regulation Z in which a charge card is
distinguished from a credit card. As discussed in detail in the
section-by-section analysis to Sec. 226.7(b)(11) and Sec.
226.7(b)(12), the new late payment and minimum payment disclosure
requirements contained in the Bankruptcy Act do not apply to charge
card issuers. Thus, comment 2(a)(15)-3 is updated to reflect those
changes.
2(a)(17) Creditor
For reasons explained in the section-by-section analysis to Sec.
226.3, the Board is proposing to exempt from TILA coverage credit
extended under employee-sponsored retirement plans. Comment
2(a)(17)(i)-8, which provides guidance on whether such a plan is a
creditor for purposes of TILA, would be deleted. The guidance would no
longer be necessary because loans granted under such plans would be
exempt from TILA and, as such, the definition of ``creditor'' would not
need to be clarified.
In addition, the substance of footnote 3 would be moved to a new
Sec. 226.2(a)(17)(v), and references revised, accordingly. The dates
used to illustrate numerical tests for determining whether a creditor
``regularly'' extends consumer credit are updated in comments 2(a)(17)-
3 through -6.
2(a)(20) Open-End Credit
Under TILA Section 103(i), as implemented by Sec. 226.2(a)(20) of
Regulation Z, ``open-end credit'' is consumer credit extended by a
creditor under a plan in which (1) the creditor reasonably contemplates
repeated transactions, (2) the creditor may impose a finance charge
from time to time on an outstanding unpaid balance, and (3) the amount
of credit that may be extended to the consumer during the term of the
plan, up to any limit set by the creditor, generally is made available
to the extent that any outstanding balance is repaid. Comment 2(a)(20)-
1 reiterates that consumer credit must meet all three of these criteria
to be open-end credit. Comment 2(a)(20)-5 currently states, with
respect to replenishment of the credit line, that a creditor need not
establish a specific credit limit for the line of credit and that the
line need not always be replenished to its original amount.
``Spurious'' open-end credit. The Board has received comments from
time to time from state attorneys general and consumer groups voicing
concern that the definition of open-end credit permits creditors to
treat as open-end plans certain credit transactions that would be more
properly characterized as closed-end credit. These commenters note that
as a practical matter, such ``spurious'' open-end credit is unlikely to
be used for repeated transactions and the credit line does not
replenish to the extent that the consumer pays down his or her balance.
Furthermore, these open-end plans may be established primarily to
finance an infrequently purchased product or service, the credit limits
for many of the creditor's customers may be close to the cost of that
product or service, and the creditor may have no reasonable grounds for
expecting that there will be repeated transactions by many of its
customers. When open-end disclosures are given for such products, the
concern voiced by state attorneys general and consumer groups is that
those disclosures fail to adequately disclose the period of time that
it will take to repay the balance, the total of the payments that a
consumer will be required to make (assuming in both cases that the
consumer makes only the minimum required payments).
In an effort to address these concerns, in 1997 the Board proposed
adding two sets of factors to the commentary, one set that creditors
should consider when determining whether they ``reasonably contemplate
repeated transactions,'' and another set to provide guidance on whether
a credit line is ``reusable.'' \6\
[[Page 32961]]
The Board received many comments from industry in response to this
proposal, most of which criticized the factors on the grounds that they
would result in excluding from the definition of ``open-end credit''
legitimate open-end credit products. In particular, commenters were
concerned about the status of private label credit cards that offer an
incentive to the consumer to make a large initial purchase. In response
to these concerns, the two sets of factors were not adopted in the
final commentary revisions.
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\6\ The factors that were proposed regarding the ``repeated
transactions'' portion of the definition were: (1) Whether the
product is something that consumers would most likely not purchase
in multiples, (2) whether the line of credit is established for the
purpose of purchasing a designated item, (3) the amount of the
initial purchase relative to the credit limit, (4) the extent to
which the creditor reasonably solicits customers to make additional
purchases, and (5) whether the creditor has information on consumers
with the credit line showing that they have made repeat purchases.
The proposed revisions also would have provided that a line of
credit generally is not self-replenishing if the initial line of
credit is less than, or not much more than, the amount of the item
purchased to open the credit line (or the minimum monthly payments
are so low that the credit line is not reusable for an extended
period of time). See 62 FR 64,769, December 9, 1997.
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As discussed further in the section-by-section analysis to Sec.
226.16, the Board proposes to address potential ``spurious'' open-end
credit transactions through improved advertising disclosures. The Board
believes this to be a more targeted and effective approach than
revising the definition of open-end credit. One of the major problems
with ``spurious'' open-end credit highlighted by commenters is that
creditors advertise a low minimum monthly payment which can mislead
consumers, who may not be aware of the total amount of payments they
would be required to make, or the term over which they would be
obligated to make those payments. As discussed below in the section-by-
section analysis to Sec. 226.16(b), the proposed rule would require a
creditor that states a minimum monthly payment in an advertisement also
to state the term that it will take to repay the debt at that minimum
payment level, as well as the total amount of the payments. The
proposed rule would require that disclosure of the term and total
amount of payments be equally prominent to the advertisement of the
minimum payment. The Board believes that disclosure of the term and
total of payments in advertisements will help to improve consumer
understanding about the cost of credit products for which a low monthly
payment is advertised, addressing one of the major concerns regarding
``spurious'' open-end credit.
``Open-end'' plans comprised of closed-end features. The Board also
is concerned that, under current guidance in the commentary, some
credit products are treated as open-end plans, with open-end
disclosures given to consumers, when such products would more
appropriately be treated as closed-end transactions. Closed-end
disclosures are more appropriate than open-end disclosures when the
credit being extended is individual loans that are individually
approved and underwritten. The Board is particularly concerned about
certain credit plans, where each individual credit transaction is
separately evaluated.
For example, under certain so-called multifeatured open-end plans,
creditors may offer loans to be used for the purchase of an automobile.
These automobile loan transactions are approved and underwritten
separately from other credit made available on the plan. (In addition,
the consumer typically has no right to borrow additional amounts on the
automobile loan ``feature'' as the loan is repaid.) If the consumer
repays the entire automobile loan, he or she may have no right to take
further advances on that ``feature,'' and must separately reapply if he
or she wishes to obtain another automobile loan, or use that aspect of
the plan for similar purchases. Typically, while the consumer may be
able to obtain additional advances under the plan as a whole, the
creditor separately evaluates each request.
Currently, some creditors may be treating such plans as open-end
credit, in light of several sections in the current commentary. Current
comment 2(a)(20)-2 provides that if a program as a whole meets the
definition of open-end credit, such a program may be considered a
single multifeatured plan, notwithstanding the fact that certain
features might be used infrequently. In addition, current comment
2(a)(20)-3 indicates that, for a multifeatured open-end plan, a
creditor need not believe a consumer will reuse a particular feature of
the plan. Also, current comment 2(a)(20)-5 indicates that a creditor
may verify credit information such as a consumer's continued income and
employment status or information for security purposes.
The Board believes that in certain circumstances treating such
credit as open-end is inappropriate under Regulation Z, and accordingly
proposes a number of revisions to Sec. 226.2(a)(20) and the
accompanying commentary. Closed-end disclosures are more appropriate
than open-end disclosures unless the consumer's credit line generally
replenishes to the extent that he or she repays outstanding balances so
that the consumer may continue to borrow and take advances under the
plan without having to obtain separate approval for each subsequent
advance. Replenishment of the amount of credit available to a consumer
in good standing without the need for separate underwriting or approval
of each advance distinguishes open-end credit from a series of advances
made pursuant to separate closed-end loan commitments, such as the
automobile loan described above. For example, if a consumer makes two
payments of $500 that reduce the outstanding principal balance on the
line of credit, the consumer generally should be able to obtain an
additional $1,000 of credit under the open-end plan without having a
creditor separately underwriting or evaluating whether the consumer can
borrow the $1,000.
The Board proposes to revise comment 2(a)(20)-2 to clarify that
while a consumer's account may contain different sub-accounts, each
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. In particular,
proposed comment 2(a)(20)-2 would provide that repayments of an advance
for any sub-account must generally replenish a single credit line for
that sub-account so that the consumer may continue to borrow and take
advances under the plan to the extent that he or she repays outstanding
balances without having to obtain separate approval for each subsequent
advance.
Due to the concerns noted above regarding closed-end automobile
loans being characterized as features of so-called open-end plans, the
Board proposes to delete comment 2(a)(20)-3.ii. While there may be
circumstances under which it would be more reasonable for a financial
institution to make advances from an open-end line of credit for the
purchase of an automobile than for an automobile dealer to sell a car
under an open-end plan, the Board believes that the current example
places inappropriate emphasis on the identity of the creditor rather
than the type of credit being extended by that creditor.
TILA Section 103(i) provides that a plan can be an open-end credit
plan even if the creditor verifies credit information from time to
time. 15 U.S.C. 1602(i). The Board believes this provision is not
intended to permit a creditor to separately underwrite each advance
made to a consumer under an open-end plan or account. Such a process
could result in closed-end credit being deemed open-end credit. The
Board proposes to clarify in comment 2(a)(20)-5 that in general, a
credit line is self-replenishing if a consumer can obtain further
advances or funds without being required to separately
[[Page 32962]]
apply for those additional advances, and without undergoing a separate
review by the creditor of that consumer's credit information, in order
to obtain approval for each such additional advance.
Notwithstanding this proposed change, a creditor could verify
credit information to ensure that the consumer's creditworthiness has
not deteriorated (and could revise the consumer's credit limit or
account terms accordingly). However, to perform such an inquiry for
each specific credit request would go beyond verification and would
more closely resemble underwriting of closed-end credit. The Board
recognizes that a creditor may need to review, and as appropriate,
decrease the amount of credit available to a consumer from time to time
to address safety and soundness and other concerns. Such a review would
not be affected by the proposed changes, as explained in proposed
comment 2(a)(20)-5.
These revisions are not intended to impact home-equity lines of
credit (HELOCs), which may have a fixed draw period (during which time
a consumer may continue to take advances to the extent that he or she
repays the outstanding balance) followed by a repayment period where
the consumer may no longer draw against the line, as closed-end credit.
The Board seeks comment regarding the proposed rule's impact on HELOCs.
Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a
credit limit or refuse to extend new credit due to changes in the
economy, the creditor's financial condition, or the consumer's
creditworthiness. The Board's proposal would delete the reference to
changes in the economy to simplify this provision.
The Board also proposes a technical update to comment 2(a)(20)-4 to
delete a reference to ``china club plans,'' which may no longer be very
common. No substantive change is intended.
2(a)(24) Residential Mortgage Transaction
Comment 2(a)(24)-1, which identifies key provisions affected by the
term ``residential mortgage transaction,'' is revised to include a
reference to Sec. 226.32, correcting an inadvertent omission.
Section 226.3 Exempt Transactions
Section 226.3 implements TILA Section 104 and provides exemptions
for certain classes of transactions specified in the statute. 15 U.S.C.
1603.
The Board proposes a number of substantive and technical revisions
to Sec. 226.3 as described below. The substance of footnote 4 is moved
to the commentary. See comment 3-1.
3(a) Business, Commercial, Agricultural, or Organizational Credit
Section 226.3(a) provides, in part, that the regulation does not
apply to extensions of credit primarily for business, commercial or
agricultural purposes. The Board received no comments regarding this
exemption in regard to the December 2004 ANPR. Questions have arisen
from time to time, however, regarding whether transactions made for
business purposes on a consumer purpose credit card are exempt from
TILA. The Board seeks to provide clarification regarding this question.
The determination as to whether a credit card account is primarily for
consumer purposes or business purposes is best made when the account is
opened, rather than on a transaction-by-transaction basis, and thus the
Board is proposing to add a new comment 3(a)-2 to clarify that
transactions made for business purposes on a consumer-purpose credit
card are covered by TILA (and, conversely, that purchases made for
consumer purposes on a business-purpose credit card are exempt from
TILA). Other sections of the commentary regarding Sec. 226.3(a) would
be renumbered accordingly. A new comment 3(a)-7 would provide guidance
on card renewals, consistent with proposed comment 3(a)-2.
3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling
Section 226.3(b) exempts from Regulation Z extensions of credit not
secured by real property or a dwelling, in which the amount financed
exceeds $25,000 or in which there is an express written commitment to
extend credit in excess of $25,000. The $25,000 threshold in Sec.
226.3(b) is the same as the statutory threshold set in TILA Section
104(3). 15 U.S.C. 1603(3).
In the December 2004 ANPR, the Board solicited comment as to
whether the rules implementing TILA Section 104 needed to be updated.
Q58. The Board received several comments regarding the $25,000
threshold. One consumer group noted that the $25,000 figure is outdated
due to inflation and should be increased. One bank noted that the
threshold remains appropriate for unsecured credit but suggested that
the Board might consider at a later stage of the Regulation Z review
whether the $25,000 figure should be raised for secured credit, such as
automobile loans. The Board agrees that the Sec. 226.3(b) threshold
would be more appropriately considered in connection with its planned
review of the closed-end credit provisions of Regulation Z and is not
proposing to take any action at the present time. In delaying
consideration of the $25,000 threshold to the closed-end Regulation Z
review, the Board expresses no view on whether the $25,000 threshold is
appropriate for open-end (not home-secured) credit. Rather, the Board
proposes to review the threshold for all credit covered by TILA at the
same time.
3(c) Public Utility Credit
Section 226.3(c) exempts from Regulation Z extensions of credit
involving public utility services provided through pipe, wire, other
connected facilities, or radio or similar transmission, if the charges
for service, delayed payment, or any discounts for prompt payment are
filed with or regulated by any government unit. 15 U.S.C. 1603(4).
The Board received no comments on the December 2004 ANPR regarding
the applicability and scope of Sec. 226.3(c). However, the Board has
received inquiries from time to time regarding the applicability of
Regulation Z to service plans for cellular telephones. In addition, in
light of the deregulation in recent years by some states of utilities
such as gas and electric services, the Board believes that it may be
appropriate to reconsider the scope of the public utility credit
exemption more generally. The Board also notes that due to
technological advances, there may be additional types of services, such
as certain Internet services, for which exemption from Regulation Z may
be appropriate. The Board is not proposing to take any action at the
present time, however, because these issues would be better considered
in the context of the Board's upcoming rulemaking regarding the closed-
end credit provisions of Regulation Z.
3(g) Employer-Sponsored Retirement Plans
The Board has received questions from time to time regarding the
applicability of TILA to loans taken against employer-sponsored
retirement plans. Pursuant to TILA Section 104(5), the Board has the
authority to exempt transactions for which it determines that coverage
is not necessary in order to carry out the purposes of TILA. 15 U.S.C.
1603(5). The Board also has the authority pursuant to TILA Section
105(a) to provide adjustments and exceptions for any class of
transactions, as in the judgment of the Board are necessary or proper
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Board
proposes to add to the regulation a new Sec. 226.3(g), which
[[Page 32963]]
would exempt loans taken by employees against their employer-sponsored
retirement plans qualified under Section 401(a) of the Internal Revenue
Code and tax-sheltered annuities under Section 403(b) of the Internal
Revenue Code, provided that the extension of credit is comprised of
fully-vested funds from such participant's account and is made in
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26
U.S.C. 401(a); 26 U.S.C. 403(b).
The Board believes that an exemption for loans taken against funds
invested in such types of employer-sponsored retirement plans is
appropriate for the following reasons. The consumer's interest and
principal payments on such a loan are reinvested in the consumer's own
account, and there is no third-party creditor imposing finance charges
on the consumer. Also, TILA disclosures would be of very limited, if
any, value. The costs of a loan taken against assets invested in a
401(k) plan, for example, are not comparable to the costs of a third
party loan product, because a consumer pays the interest on a 401(k)
loan to himself or herself rather than to a third party. Moreover, plan
administration fees must be disclosed under Department of Labor
regulations. See 29 CFR 2520.1023(1).
Family Trusts
The Board also has from time to time received inquiries regarding
TILA coverage of family trusts created for estate planning purposes.
Because most of these questions pertain to real-estate secured loans,
the applicability of the exemptions in Sec. 226.3 to these types of
estate planning arrangements would be better considered in the context
of the Board's upcoming closed-end Regulation Z review.
Section 226.4 Finance Charge
Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit as a dollar amount, the ``finance charge,''
is to be disclosed. The rules for determining which charges make up the
finance charge are set forth in TILA Section 106 and Regulation Z Sec.
226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and
others apply only to closed-end credit, while some apply to both. With
limited exceptions discussed below, the Board is not proposing to
change Sec. 226.4 for either closed-end credit or open-end credit.
The Board is aware of longstanding criticisms that the definition
of the ``finance charge'' in Sec. 226.4, as interpreted in the
regulation and the related commentary, is too narrow, too broad, or too
vague. In a 1998 report to Congress, the Board discussed these
concerns, and proposed solutions, in the context of closed-end mortgage
loans.\7\ In this proposal, the Board addresses concerns about the
definition of the ``finance charge'' in the context of open-end (not
home-secured) plans through changes to Sec. 226.5, Sec. 226.6, and
Sec. 226.7 to simplify disclosure of charges on such plans. The Board
is not proposing to address these concerns through changes to Sec.
226.4, with limited exceptions. The Board proposes to revise Sec.
226.4 and related commentary to address (1) transaction charges imposed
by credit card issuers, such as charges for obtaining cash advances
from ATMs and for making purchases in foreign currencies, and (2)
charges for credit insurance, debt cancellation coverage, and debt
suspension coverage.
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\7\ Board of Governors of the Federal Reserve System and
Department of Housing and Urban Development, Joint Report to the
Congress Concerning Reform to the Truth in Lending Act and the Real
Estate Settlement Procedures Act, July 1998.
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4(a) Definition
Under the definition of ``finance charge'' in TILA Section 106 and
Regulation Z Sec. 226.4(a), a charge specific to a credit transaction
is ordinarily a finance charge. 15 U.S.C. 1605. See also Sec.
226.4(b)(2). However, also under Section 106 and Sec. 226.4(a), the
finance charge does not include any charge of a type payable in a
``comparable cash transaction.'' Under the staff commentary to Sec.
226.4(a), in determining whether a charge associated with a credit
transaction is a finance charge, the creditor should compare the credit
transaction in question with a ``similar'' cash transaction, if one
exists. See comment 4(a)-1. The commentary states a general principle
for applying this rule in the case of credit that finances the sale of
property or services: the creditor should compare charges with those
that would be payable if the services or property were purchased using
cash rather than a loan. Thus, for example, if an escrow agent charges
the same fee regardless of whether real estate is bought in cash or
with a mortgage loan, then the agent's fee is not a finance charge.
In other cases, however, particularly in cases involving credit
cards, determining which, if any, transaction is a ``similar'' or
``comparable'' cash transaction for purposes of Sec. 226.4(a) can be
difficult. For example, when consumers became able to take cash
advances on credit card accounts using ATMs, a question arose as to
whether a fee charged by a card issuer for the transaction was a
finance charge if the issuer charged the same fee for using a debit
card to withdraw cash from an asset account. The Board solicited
comment on this question in 1983 and adopted staff comment 4(a)-4 in
1984. 48 FR 54,642; December 6, 1983 and 49 FR 40,560; October 17,
1984. That comment indicates that the fee 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. Another
comment indicates that the fee is an ``other charge.'' See current
comment 6(b)-1(vi). Accordingly, the fee must be disclosed at account
opening and on the periodic statement, but it is not labeled as a
``finance charge'' nor included in the effective APR.
Since comment 4(a)-4 was adopted, questions have been raised about
its scope and application. For example, the comment does not address
whether it applies when an affiliate of the card issuer, but not the
card issuer itself, issues a debit card. Even in the seemingly simple
case where the credit card issuer itself issues a debit card, a variety
of complexities arise. The issuer may assess an ATM fee for one kind of
deposit account (for example, an account with a low minimum balance)
but not for another. The comment does not indicate which account is the
proper basis for comparison.
Questions have also been raised about whether disclosure of the
charge pursuant to comments 4(a)-4 and 6(b)-1.iv. is meaningful to
consumers. Under the comment, the disclosure a consumer receives after
incurring a fee for taking a cash advance through an ATM depends on the
structure of the institution that issued the credit card. If the credit
card issuer does not provide asset accounts and is not affiliated with
an institution that does, then it must disclose the charge as a finance
charge. If the credit card issuer provides asset accounts and offers
debit cards on those accounts, then, depending on the circumstances,
the issuer must not disclose the charge as a finance charge. It is not
clear that the distinction is meaningful to consumers.
Recently, a question has arisen about the proper disclosure of
another kind of transaction fee imposed on credit cards. The question
is whether fees that credit cardholders are assessed for making
purchases in a foreign currency or outside the United States--for
example, when the cardholder travels abroad-- are finance charges. The
question has arisen in litigation between consumers
[[Page 32964]]
and major card issuers.\8\ Some card issuers have argued by analogy to
comment 4(a)-4 that a foreign transaction fee is not a finance charge
if the fee does not exceed the issuer's fee for using a debit card for
the same purchase. Some card issuers disclose the foreign transaction
fee as a finance charge and include it in the effective APR, but others
do not.
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\8\ See Third Consolidated Amended Class Action Complaint at 47-
48, In re Currency Conversion Fee Antitrust Litigation, MDL Docket
No. 1409 (S.D.N.Y.). The court approved a settlement on a
preliminary basis on November 8, 2006.
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The uncertainty about proper disclosure of charges for foreign
transactions and for cash advances from ATMs reflects the inherent
complexity of seeking to distinguish transactions that are ``comparable
cash transactions'' to credit card transactions from transactions that
are not. The Board believes that clearer guidance may result from a new
and simpler approach that treats as a finance charge any fee charged by
credit card issuers for transactions on their credit card plans. This
guidance may be helpful to creditors in determining which charges must
be included in the computation of the effective APR, if the Board
retains the effective APR. See section-by-section analysis to Sec.
226.7(b)(7). Such an approach would also provide more meaningful
disclosures to consumers by assuring a consistent approach to the
disclosure of transaction fees.
The current approach of providing guidance on a case-by-case (fee-
by-fee) basis, such as for ATM fees, has not provided sufficient
certainty for many creditors about how to disclose transaction charges
on credit cards. Moreover, to the extent creditors have adopted
different disclosure practices in the face of regulatory uncertainty,
consumers may have had difficulty understanding the disclosures, since,
for example, one creditor might disclose an ATM fee as a finance charge
while another creditor may disclose the fee as an ``other'' charge.
Thus, while the Board could adopt guidance specific to fees as they
arise, such as the Board did in 1984 for the ATM fee and could do for
the foreign transaction fee, it is not clear that fee-by-fee guidance
is sufficient to both facilitate compliance by credit card issuers and
promote understanding by consumers.
It is also not clear that an attempt to adopt general rules for
distinguishing comparable transactions from non-comparable
transactions, in the case of credit cards, would adequately facilitate
compliance by credit card issuers and promote understanding by
cardholders. One major difficulty in formulating such rules would be
deciding whether to adopt the perspective of the card issuer or that of
the cardholder. For example, a transaction on an asset account with a
card issuer may be comparable to a credit card transaction from the
perspective of the card issuer, but not from the perspective of a
cardholder who does not have an asset account with the issuer. A rule
based on the issuer's perspective may confuse consumers; it may not be
reasonable to expect a consumer to understand that one transaction fee
is a finance charge and the other is not because one card issuer issues
a debit card and the other does not. Yet a rule based on the
cardholder's perspective may not be practicable for the issuer to
implement; the issuer may not be able to determine whether a particular
consumer has an asset account with another institution and, if so, the
amount of the fee charged on the account. As explained above in the
context of the fee for cash advances from ATMs, even when a rule is
based on the card issuer's perspective, the card issuer may have
difficulty determining which asset account, precisely, is the relevant
basis for comparison. The difficulty of determining which perspective
to adopt increases in a case such as a fee for a purchase conducted in
a foreign currency. From the perspective of the consumer, the debit
card is not the only alternative to the credit card; the consumer may
also pay in cash.
Thus, having considered alternative approaches, the Board is
proposing to adopt a simple interpretive rule that any transaction fee
on a credit card plan is a finance charge, regardless of whether the
issuer in its capacity as a depository institution imposes the same or
lesser charge on withdrawals of funds from an asset account such as a
checking or savings account. This proposal would be implemented by
removing staff comment 4(a)-4 and replacing it with a new comment of
the same number reflecting this rule. The comment would give as
examples of such finance charges a fee imposed by the issuer for
foreign transactions and a fee imposed by the issuer for taking a cash
advance at an ATM.\9\ Such guidance would be consistent with TILA
Section 106, 15 U.S.C. 1605, which gives the Board discretion to
determine whether a given credit transaction has a comparable cash
transaction within the meaning of the statute. This guidance would also
facilitate compliance and promote consumer understanding. See TILA
Section 105(a), 15 U.S.C. 1604(a).
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\9\ The proposed change to comment 4(a)-4 would not affect
disclosure of ATM fees assessed by institutions other than the
credit card issuer. See proposed Sec. 226.6(b)(1)(ii)(A).
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The Board seeks comment on whether this new approach would
facilitate compliance and improve consumer understanding without
causing unintended consequences.
Comment 4(a)-1 provides examples of charges in comparable cash
transactions that are not finance charges. Among the examples are
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 institution. The Board solicits comment
on whether the example is still useful, or should be deleted as
unnecessary or obsolete.
4(b) Examples of Finance Charges
Charges for credit insurance or debt cancellation or suspension
coverage. Premiums or other charges for credit life, accident, health,
or loss-of-income insurance are finance charges if the insurance or
coverage is ``written in connection with'' a credit transaction. 15
U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the
finance charge premiums for credit insurance if they disclose the cost
of the insurance and the fact that the insurance is not required to
obtain credit. In addition, the statute requires creditors to obtain an
affirmative written indication of the consumer's desire to obtain the
insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires
creditors to obtain the consumer's initials or signature. 15 U.S.C.
1605(b). In 1996, the Board expanded the scope of the rule to include
plans involving charges or premiums for debt cancellation coverage. See
Sec. 226.4(b)(10), Sec. 226.4(d)(3). See also 61 FR 49,237; September
19, 1996. Currently, however, insurance or coverage sold after
consummation of a closed-end credit transaction or after the opening of
an open-end plan and upon a consumer's request is considered not to be
``written in connection with the credit transaction,'' and, therefore,
a charge for such insurance or coverage is not a finance charge. See
comment 4(b)(7) and (8)-2.
The Board is proposing a number of revisions to these rules:
(1) The same rules that apply to debt cancellation coverage would
be applied explicitly to debt suspension coverage. However, to exclude
the cost of debt suspension coverage from the finance charge, creditors
would be required to inform consumers, as applicable, that the
obligation to pay loan principal and interest is only suspended, and
that interest will continue to accrue during the period of suspension.
These
[[Page 32965]]
proposed revisions would apply to all open-end plans and closed-end
credit transactions.
(2) Creditors could exclude from the finance charge the cost of
debt cancellation and suspension coverage for events beyond those
permitted today, namely, life, accident, health, or loss-of-income.
This proposed revision would also apply to all open-end plans and
closed-end credit transactions.
(3) The meaning of insurance or coverage ``written in connection
with'' an open-end plan would be expanded to cover sales made
throughout the life of an open-end (not home-secured) plans. Under the
proposal, for example, consumers solicited for the purchase of optional
insurance or debt cancellation or suspension coverage for existing
credit card accounts would receive disclosures about the cost and
optional nature of the product at the time of the consumer's request to
purchase the insurance or coverage. Home-equity lines of credit
(HELOCs) subject to Sec. 226.5b and closed-end transactions would not
be affected by this proposed revision.
(4) For telephone sales, creditors offering open-end (not home-
secured) plans would be provided with flexibility in evidencing
consumers' requests for optional insurance or debt cancellation or
suspension coverage, consistent with rules published by federal banking
agencies to implement Section 305 of the Gramm-Leach-Bliley Act
regarding the sale of insurance products by depository institutions and
guidance published by the Office of the Comptroller of the Currency
(OCC) regarding the sale of debt cancellation and suspension products.
See 12 CFR part 208.81 et seq. regarding insurance sales; 12 CFR part
37 regarding debt cancellation and debt suspension products. For
telephone sales, creditors could provide disclosures orally, and
consumers could request the insurance or coverage orally, if the
creditor maintains evidence of compliance with the requirements, and
mails written information within 3 days after the sale. HELOCs subject
to Sec. 226.5b and closed-end transactions would not be affected by
this proposed revision.
All of these products serve similar functions but some are
considered insurance under state law and others are not. Taken
together, the proposed revisions would provide consistency in how
creditors deliver, and consumers receive, information about the cost
and optional nature of similar products.
4(b)(7) and (8) Insurance Written in Connection With Credit Transaction
Premiums or other charges for insurance for credit life, accident,
health, or loss-of-income, loss of or damage to property or against
liability arising out of the ownership or use of property are finance
charges if the insurance or coverage is written in connection with a
credit transaction. 15 U.S.C. 1605(b) and (c); Sec. 226.4(b)(7) and
(8). Comment 4(b)(7) and (8)-2 provides that insurance is not written
in connection with a credit transaction if the insurance is sold after
consummation on a closed-end transaction or after an open-end plan is
opened and the consumer requests the insurance. The Board believes this
approach remains sound for closed-end transactions, which typically
consist of a single transaction with a single advance of funds.
Consumers with open-end plans, however, retain the ability to obtain
advances of funds long after account opening, so long as they pay down
the principal balance. That is, a consumer can engage in credit
transactions throughout the life of a plan.
Accordingly, under proposed revisions to comment 4(b)(7) and (8)-2,
insurance purchased after an open-end (not home-secured) plan was
opened would be considered to be written ``in connection with a credit
transaction.'' Proposed new comment 4(b)(10)-2 would give the same
treatment to purchases of debt cancellation or suspension coverage. As
proposed, therefore, purchases of voluntary insurance or coverage after
account opening would trigger disclosure and consent requirements. For
purchases by telephone, creditors would be permitted to provide
disclosures and obtain consent orally, so long as they meet
requirements intended to ensure the purchase is voluntary. See proposed
Sec. 226.4(d)(4).
4(b)(9) Discounts
Comment 4(b)(9)-2, which addresses cash discounts to induce
consumers to use cash or other payment means instead of credit cards or
open-end plans is revised for clarity. No substantive change is
intended.
4(b)(10) Debt Cancellation and Debt Suspension Fees
As discussed above, premiums or other charges for credit life,
accident, health, or loss-of-income insurance are finance charges if
the insurance or coverage is written in connection with a credit
transaction. In 1996, the Board amended Sec. 226.4 to make clear that
the term ``finance charge'' includes charges or premiums paid for debt
cancellation coverage. See Sec. 226.4(b)(10). Although debt
cancellation fees meet the definition of ``finance charge,'' they may
be excluded from the finance charge on the same conditions as credit
insurance premiums. See Sec. 226.4(d)(3).
Recent years have seen two developments in the market for coverage
of this type. First, creditors have been selling a related, but
different, product called debt suspension. Debt suspension is
essentially the creditor's agreement to suspend, on the occurrence of a
specified event, the consumer's obligation to make the minimum
payment(s) that would otherwise be due. During the suspension period,
interest may continue to accrue or it may be suspended as well,
depending on the plan. The borrower may be prohibited from using the
credit plan during the suspension period. In a second development,
creditors have been selling debt suspension coverage for events other
than loss of life, health, or income, such as a wedding, a divorce, the
birth of child, a medical emergency, and military deployment.
The Board is proposing to revise Sec. 226.4(b)(10) to make it
explicit that charges for debt suspension coverage are finance charges.
In the proposed commentary, debt suspension coverage would be defined
as coverage that suspends the consumer's obligation to make one or more
payments on the date(s) otherwise required by the credit agreement,
when a specified event occurs. The commentary would clarify that the
term debt suspension coverage as used in Sec. 226.4(b)(10) does not
include ``skip payment'' arrangements in which the triggering event is
the borrower's unilateral election to defer repayment, or the bank's
unilateral decision to allow a deferral of payment. (A skip payment
fee, although a finance charge, would not be factored into the
effective APR under the proposal. See proposed Sec. 226.14(e).) These
revisions would apply to closed-end as well as open-end credit
transactions. It appears appropriate to consider charges for debt
suspension products to be finance charges, because these products
operate in a similar manner to debt cancellation, and re-allocate the
risk of non-payment between the borrower and the creditor. The
conditions under which debt cancellation and debt suspension charges
may be excluded from the finance charge are discussed under Sec.
226.4(d)(3), below.
[[Page 32966]]
4(c) Charges Excluded From the Finance Charge
4(c)(1)
Section 226.4(c)(1) excludes from the finance charge application
fees charged to all applicants for credit, whether or not credit is
actually extended. Application fees are charged for both closed-end and
open-end credit transactions, and represent an additional cost to
consumers who obtain credit. Because application fees are more
prevalent for home-secured credit, the Board will consider whether to
revise Sec. 226.4(c)(1) in its upcoming review of rules for home-
secured credit.
As discussed below in the section-by-section analysis to Sec.
226.6, the Board proposes to require for open-end (not home-secured)
plans, the disclosure of charges imposed as part of the plan, which
include fees that must be paid to receive access to the plan, without
regard to whether the fees are or are not finance charges. Application
fees charged to all applicants for credit, whether or not credit is
actually extended, would be considered charges imposed as part of the
plan, and would be included in the account-summary table given at
account opening. See proposed Sec. 226.6(b)(1)(i). This would provide
useful information to consumers about the total cost of obtaining
credit. The fee, if financed, would also be included among the fees
required to be grouped on periodic statements. See proposed Sec.
226.7(b)(6).
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
As explained under Sec. 226.4(b)(10), debt cancellation fees and,
as clarified in this proposal, debt suspension fees meet the definition
of ``finance charge.'' Under current Sec. 226.4(d)(3), debt
cancellation fees may be excluded from the finance charge on the same
conditions as credit insurance premiums. These conditions are: The
coverage is not required and this fact is disclosed in writing, and the
consumer affirmatively indicates in writing a desire to obtain the
coverage after written disclosure to the consumer of the cost. Debt
cancellation coverage that may be excluded from the finance charge is
limited to coverage that provides for cancellation of all or part of a
debtor's liability (1) in case of accident or loss of life, health, or
income; or (2) for amounts exceeding the value of collateral securing
the debt (commonly referred to as ``gap'' coverage, frequently sold in
connection with motor vehicle loans). See current Sec.
226.4(d)(3)(ii).
To address the development of debt cancellation and debt suspension
coverage discussed earlier, the OCC adopted, for national banks,
substantive limitations and procedures for disclosure and affirmative
election on the sale of such coverage. See 12 CFR part 37. Some states
have also adopted regulations that address these products, or
incorporate the OCC regulations under parity laws.
The Board solicited comment in 2003 on whether and how to address
disclosure of these kinds of coverage under TILA. 68 FR 68,793;
December 10, 2003. About 30 commenters responded, the vast majority of
them creditors or vendors. Several creditors and vendors urged the
Board to expressly permit creditors to exclude from the finance charge
fees for products that cover any event to which a creditor and borrower
agree, not just the events listed in the regulation, and fees for
agreements that suspend, rather than cancel, debt repayment. Some
commenters disagreed. A major consumer group urged the Board to include
even voluntary credit insurance premiums and debt cancellation fees in
the finance charge. The Board deferred a decision on these issues until
this review.
The December 2004 ANPR did not specifically seek comment again on
these issues. Nonetheless, a coalition of companies that issue or
administer debt cancellation and debt suspension agreements submitted
two comments in response to the December 2004 ANPR reiterating the 2003
request by industry commenters that the Board modify Sec. 226.4(d)(3)
to cover any triggering event and explicitly recognize that debt
suspension agreements are also covered by that provision. These
companies also requested that the Board revise Sec. 226.4(d)(3) to
provide that the disclosures and consumer affirmative request required
as conditions to excluding the fee from the finance charge may be
provided orally.
Debt cancellation coverage and debt suspension coverage are
fundamentally similar to the extent they offer a consumer the ability
to pay in advance for the right to reduce the consumer's obligations
under the plan on the occurrence of specified events that could impair
the consumer's ability to satisfy those obligations. The two types of
coverage are, however, different in a key respect. One cancels debt, at
least up to a certain agreed limit, while the other merely suspends the
payment obligation while the debt remains constant or increases,
depending on coverage terms.
The Board proposes to revise Sec. 226.4(d)(3) to expressly permit
creditors to exclude charges for voluntary debt suspension coverage
from the finance charge when, after receiving certain disclosures, the
consumer affirmatively requests such a product. The Board also proposes
to add a disclosure, to be provided as applicable, that the obligation
to pay loan principal and interest is only suspended, and that interest
will continue to accrue during the period of suspension. These
revisions would apply to closed-end as well as open-end credit
transactions. Model Clauses and Samples are proposed at Appendix G-
16(A) and G-16(B) and H-17(A) and H-17(B).
The same industry coalition has also requested that charges for
debt cancellation or debt suspension coverage be excludable from the
finance charge when the coverage applies to events other than the
events covered by the product lines identified in current Sec.
226.4(d)(3)(ii), namely, accident or loss of life, health, or income.
The identification of those events in Sec. 226.4(d)(3)(ii) is based on
TILA Section 106(b), which addresses credit insurance for accident or
loss of life or health. 15 U.S.C. 1605(b). That statutory provision
reflects the regulation of credit insurance by the states, which may
limit the types of insurance that insurers may sell. Many states,
however, do not restrict debt cancellation or debt suspension coverage
to a select few events, and regulations of the OCC expressly permit
national banks to sell debt cancellation and debt suspension coverage
for any event.
The Board proposes to continue to limit the exclusion permitted by
Sec. 226.4(d)(3) to charges for coverage for accident or loss of life,
health, or income. The Board also proposes, however, to add comment
4(d)(3)-3 to clarify that, if debt cancellation or debt suspension
coverage for two or more events is sold at a single charge, the entire
charge may be excluded from the finance charge if at least one of the
events is accident or loss of life, health, or income. This approach
would recognize that debt cancellation and suspension coverage often
are not limited by applicable law to the events allowed for insurance
and it also would be consistent with the purpose of Section 106(b). 15
U.S.C. 1605(b).
The regulation provides guidance on how to disclose the cost of
debt cancellation coverage. See proposed Sec. 226.4(d)(3)(ii). The
Board seeks comment on whether additional
[[Page 32967]]
guidance is needed for debt suspension coverage, particularly for
closed-end loans.
For the reasons discussed below, Sec. 226.4(d)(4) would be added
to provide flexibility in telephone sales to obtain consumers' requests
for voluntary debt cancellation and debt suspension coverage on open-
end (not home-secured) plans.
In a technical revision, the substance of footnotes 5 and 6 would
be moved to the text.
4(d)(4) Telephone Purchases
As discussed above, TILA Section 106(b), 15 U.S.C. 1605(b), permits
creditors to exclude from the finance charge premiums for credit
insurance if, among other conditions, the creditor obtains a specific
written indication of the consumer's desire to obtain the insurance.
This requirement is implemented in Sec. 226.4(d)(1) by requiring
written initials or a signature. The Board expanded in 1996 the types
of products covered by the exclusion to include debt cancellation
agreements, and now proposes to extend the exclusion to debt suspension
products. As mentioned, an industry coalition has requested that the
Board permit the disclosures and affirmative consumer request, which
are conditions to this exclusion, to be provided orally.
Congress has recognized the practice of telephone sales for the
purchase of insurance products. 12 U.S.C. 1831x(c)(1)(E). Similarly,
the OCC has issued telephone sales guidelines for national banks that
sell debt cancellation and debt suspension coverage. 12 CFR parts
37.6(c)(3), 37.7(b). Accordingly, the Board is proposing an exception
to the requirement to obtain a written signature or initials for
telephone purchases of credit insurance or debt cancellation and debt
suspension coverage on an open-end (not home-secured) plan. Under new
Sec. 226.4(d)(4), for telephone purchases the creditor may make the
disclosures orally and the consumer may affirmatively request the
insurance or coverage orally, provided that the creditor (1) maintains
reasonable procedures to provide the consumer with the oral disclosures
and maintains evidence that demonstrates the consumer then
affirmatively elected to purchase the insurance or coverage; and (2)
mails the disclosures under Sec. 226.4(d)(1) or Sec. 226.4(d)(3)
within three business days after the telephone purchase. Comment
4(d)(4)-1 would provide that a creditor does not satisfy the
requirement to obtain an affirmative request if the creditor uses a
script with leading questions or negative consent.
Requiring a consumer's written signature or initials is intended to
evidence that the consumer is purchasing the product voluntarily; the
proposal contains safeguards intended to insure that oral purchases are
voluntary. Under the proposal, creditors must maintain tapes or other
evidence that the consumer received required disclosures orally and
affirmatively requested the product. Comment 4(d)(4)-1 indicates that a
creditor does not satisfy the requirement to obtain an affirmative
request if the creditor uses a script with leading questions or
negative consent. In addition to oral disclosures, under the proposal
consumers will receive written disclosures shortly after the
transaction. The fee will also appear on the first monthly periodic
statement after the purchase, and, as applicable, thereafter. Consumer
testing conducted for the Board suggests that consumers review the
transactions on their statements carefully. Moreover, the Board
proposes to better highlight fees, including insurance and coverage
fees, on statements. Consumers who are billed for insurance or coverage
they did not purchase may dispute the charge as a billing error. These
safeguards are expected to ensure that purchases of credit insurance or
debt cancellation or suspension coverage by telephone are voluntary.
The Board proposes this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes it is appropriate to exempt, for open-end (not
home-secured) plans, telephone sales of credit insurance or debt
cancellation or debt suspension plans from the requirement to obtain a
written signature or initials from the consumer. As noted above, the
consumer would continue to be protected by a variety of safeguards to
assure that the purchase is voluntary, including a requirement that the
creditor maintain tapes or other evidence of the transaction, the
receipt of written disclosures shortly after the transaction, and
inclusion of fees on periodic statements, for which consumers may
dispute billing errors. At the same time, the proposal should
facilitate the convenience to both consumers and creditors of
conducting transactions by telephone. The proposal, therefore, has the
potential to better inform consumers and further the goals of consumer
protection and the informed use of credit for open-end (not home-
secured) credit. The Board welcomes comment on this matter.
Section 226.5 General Disclosure Requirements
Section 226.5 contains format and timing requirements for open-end
credit disclosures. Under the current rules, a creditor must disclose a
charge that is a ``finance charge'' or ``other charge'' before the
account is opened, before the charge is added to the plan after account
opening and before the charge is increased. These disclosures must be
in writing. As discussed below, the proposal seeks to reform the rules
governing disclosure of charges before they are imposed. Under the
proposal: (1) All charges imposed as part of the plan would be
disclosed before they are imposed; (2) specified charges would continue
to be disclosed in writing at account opening, and before being
increased or newly introduced; and (3) other charges imposed as part of
the plan could be disclosed orally at any relevant time before the
consumer becomes obligated to pay the charge. The proposed reform is
intended to assure that all charges imposed as part of the plan are
disclosed before they are imposed, simplify the rules for identifying
such charges, and better
[[Page 32968]]
match the timing and method of disclosure with reasonable industry
practices and consumer expectations. The proposal responds to comments
received on the December 2004 ANPR that criticize current rules (1) as
unduly vague and inconsistent in identifying charges covered by TILA,
and (2) as failing to recognize that some transactions on the plan
between the consumer and the creditor are appropriately, or even
necessarily, conducted by telephone.
5(a) Form of Disclosures
The Board is proposing substantive changes to Sec. 226.5(a) and
the associated commentary regarding the standard to provide ``clear and
conspicuous'' disclosures. In addition, creditors would be required to
use consistent terminology in all open-end TILA-required disclosures.
In technical revisions, the Board proposes to rearrange certain
provisions in Sec. 226.5(a) for clarity.
5(a)(1) General
Clear and conspicuous standard. TILA Section 122(a) mandates that
all TILA-required disclosures be made clearly and conspicuously. 15
U.S.C. 1632(a). The Board has implemented this requirement for open-end
credit plans in Sec. 226.5(a)(1). Under current comment 5(a)(1)-1, the
Board has interpreted clear and conspicuous to mean that the disclosure
must be in a reasonably understandable form. In most cases, this
standard does not require that disclosures be segregated from other
material or located in any particular place on the disclosure
statement, nor that numerical amounts or percentages be in any
particular type size.
However, the Board has previously determined that certain
disclosures in Subpart B of Regulation Z are subject to a higher
standard in meeting the clear and conspicuous requirement due to the
importance of the disclosures and the context in which they are given.
Specifically, disclosures in credit and charge card applications and
solicitations subject to Sec. 226.5a must be both in a reasonably
understandable form and readily noticeable to the consumer. See current
comment 5a(a)(2)-1, which the Board is proposing to amend as discussed
below.
1. Readily noticeable standard. The Board is proposing to highlight
certain information in a tabular format in the account-opening
disclosures pursuant to Sec. 226.6(b)(4); on checks that access a
credit card account pursuant to Sec. 226.9(b)(3); in change-in-terms
notices pursuant to Sec. 226.9(c)(2)(iii)(B); and in disclosures when
a rate is increased due to delinquency, default or as a penalty
pursuant to Sec. 226.9(g)(3)(ii). As discussed in further detail in
the section-by-section analysis to Sec. Sec. 226.6(b), 226.9(b),
226.9(c), and 226.9(g), consumer testing conducted for the Board
suggests that highlighting important information in a tabular format
helps consumers locate the information disclosed in these tables much
more easily. Because these disclosures would be highlighted in a
tabular format similar to the table required with respect to credit
card applications and solicitations under Sec. 226.5a, the Board is
proposing that these disclosures also be in a reasonably understandable
form and readily noticeable to the consumer. The Board is proposing to
amend comment 5(a)(1)-1 accordingly. The Board also is proposing to
move the guidance on the meaning of ``reasonably understandable form''
to comment 5(a)(1)-2. Current comment 5(a)(1)-2, which provides
guidance on what constitutes an ``integrated document,'' is moved to
comment 5(a)(1)-4.
The Board also proposes to add comment 5(a)(1)-3 to provide
guidance on the meaning of the readily noticeable standard.
Specifically, new comment 5(a)(1)-3 provides that to meet the readily
noticeable standard, disclosures for credit card applications and
solicitations under Sec. 226.5a, highlighted account-opening
disclosures under Sec. 226.6(b)(4), highlighted disclosures on checks
that access a credit card account under Sec. 226.9(b)(3); highlighted
change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B), and
highlighted disclosures when a rate is increased due to delinquency,
default or as a penalty under Sec. 226.9(g)(3)(ii) must be given in a
minimum of 10-point font. The Board believes that with respect to these
disclosures, special formatting requirements, such as a tabular format
and font size requirements, are needed to highlight for consumers the
importance and significance of the disclosures. The Board notes that
this approach of requiring a minimum of 10-point font for certain
disclosures is consistent with the approach taken recently by eight
federal agencies (including the Board) in issuing a proposed model form
that financial institutions may use to comply with the privacy notice
requirements under Section 503 of the Gramm-Leach-Bliley Act. 15 U.S.C.
6803(e); 72 FR 14,940; Mar. 29, 2007. In the privacy proposal, the
eight federal agencies indicate that financial institutions that use
the privacy model form must use an easily readable type font; easily
readable type font includes a minimum of 10-point font and sufficient
spacing between the lines of type.
2. Disclosures subject to the clear and conspicuous standard. The
Board has received questions on the types of communications that are
subject to the clear and conspicuous standard. Thus, the Board proposes
comment 5(a)(1)-5 to make clear that all required disclosures and other
communications under Subpart B of Regulation Z are considered
disclosures required to be clear and conspicuous. This would include,
for example, the disclosure by a person other than the creditor of a
finance charge imposed at the time of honoring a consumer's credit card
under Sec. 226.9(d) and the correction notice required to be sent to
the consumer under Sec. 226.13(e).
Oral disclosure. In order to give guidance about the meaning of
clear and conspicuous for oral disclosures, the Board proposes to amend
the guidance on what constitutes a ``reasonably understandable form,''
in proposed comment 5(a)(1)-2. This amendment is based in part on the
Federal Trade Commission's (FTC) guidance on oral disclosure in its
publication Complying with the Telemarketing Sales Rule (available at
the FTC's Web site). Oral disclosures would be considered to be in a
reasonably understandable form when they are given at a volume and
speed sufficient for a consumer to hear and comprehend the disclosures.
5(a)(1)(ii)
Section 226.5(a)(1)(ii) provides that in general, disclosures for
open-end plans must be provided in writing and in a retainable form.
Oral disclosures. The Board is proposing that certain charges may
be disclosed after account opening. See proposed Sec. 226.5(b)(1)(ii).
The goal of this proposal is to better ensure that consumers receive
disclosures at relevant times; some charges may not be relevant to a
consumer at account opening but may become relevant later. The Board is
also proposing to permit creditors to make the form of disclosure more
relevant to consumers. A written form of disclosure has obvious merit
at account opening, when a consumer must assimilate a lot of
information that may influence major decisions by the consumer about
how, or even whether, to use the account. During the life of the
account, in contrast, a consumer will sometimes need to decide whether
to purchase a single service from the creditor, a service that may not
be central to the consumer's use of the account (for example, the
service of
[[Page 32969]]
providing documentary evidence of transactions). Moreover, during the
life of the account, the consumer may become accustomed to purchasing
such services by telephone. The consumer and the creditor may find it
convenient to conduct the transaction by telephone, and will,
accordingly, expect to receive a disclosure of the charge for the
service during the same telephone call. For these reasons, the Board is
proposing to permit creditors to disclose orally charges not
specifically identified by the proposed regulation in Sec. 226.6(b)(4)
as critical to disclose in writing at account opening. Further, the
Board proposes that creditors be provided with the same flexibility
when the cost of such a charge changes or is newly introduced, as
discussed in the section-by-section analysis to Sec. 226.9(c). The
proposal, set forth inSec. 226.5(a)(1)(ii)(A), is intended to be
consistent with consumers' expectations and with the business practices
of card issuers.
Under the proposal, creditors may continue to comply with TILA by
providing written disclosures at account-opening for all fees. In
proposing to permit creditors to disclose certain costs orally for
purposes of TILA, the Board anticipates that creditors will continue to
identify fees in the account agreement for contract and other reasons,
although the proposal would not require creditors to do so. For
example, some creditors identify the types of fees that could be
assessed on the account in the account agreement. The Board anticipates
that such practices will continue.
Creditors are permitted to provide in electronic form any TILA
disclosure that is required to be provided or made available to
consumers in writing if the consumer affirmatively consents to receipt
of electronic disclosures in a prescribed manner. Electronic Signatures
in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et
seq. The Board requests comment on whether there are circumstances in
which creditors should be permitted to provide cost disclosures in
electronic form to consumers who have not affirmatively consented to
receive electronic disclosures for the account, such as when a consumer
seeks to make a payment online, and the creditor imposes a fee for the
service.
In technical revisions, the Board proposes to move to proposed
Sec. 226.5(a)(1)(ii)(A) the current exemption that disclosures
required by Sec. 226.9(d) need not be in writing. (This exemption
currently is in footnote 7 under Sec. 226.5(a)(1).) Section 226.9(d)
requires disclosure when a finance charge is imposed by a person other
than the card issuer at the time of a transaction.
In another technical revision, the substance of footnote 8,
regarding disclosures that do not need to be in a retainable form the
consumer may keep, is moved to proposed Sec. 226.5(a)(1)(ii)(B).
Electronic communication. In April 2007, the Board issued for
public comment a proposal on electronic communication which would
withdraw portions of the interim final rules issued in 2001 and to
implement certain provisions of the Bankruptcy Act (``2007 Electronic
Disclosure Proposal''). See 72 FR 21,141; April 30, 2007. Proposed
Sec. 226.5(a)(1)(iii) and the proposal to delete current Sec.
226.5(a)(5) is also proposed in the 2007 Electronic Disclosure
Proposal. The language in proposed Sec. 226.5(a)(1)(iii) clarifies
that creditors may provide open-end disclosures to consumers in
electronic form, subject to compliance with the consumer consent and
other applicable provisions of the E-Sign Act. 15 U.S.C. 1001, et seq.
The language also provides that the open-end disclosures required by
Sec. Sec. 226.5a, 226.5b, and 226.16 may be provided to the consumer
in electronic form, under the circumstances set forth in those
sections, without regard to the consumer consent or other provisions in
the E-Sign Act.
5(a)(2) Terminology
Consistent terminology. Currently, disclosures given pursuant to
Sec. Sec. 226.5a(b), 226.6, and 226.7 must use consistent terminology.
See current Sec. 226.5a(a)(2)(iv), comment 5a(a)(2)-6, and comment 6-
1. The Board proposes to expand this requirement more generally in new
Sec. 226.5(a)(2)(i) to include other disclosures required by the open-
end provisions of the regulation (Subpart B), such as subsequent
disclosures under Sec. 226.9. A new comment 5(a)(2)-4 would clarify
that terms do not need to be identical but must be close enough in
meaning to enable the consumer to relate the disclosures to one
another, which is consistent with current guidance in current comment
5a(a)(2)-6 and current comment 6-1. The Board believes that the use of
consistent terminology should be applied to all open-end TILA-required
disclosures to allow consumers to better identify the terms across all
disclosures.
As discussed above, the Board is proposing to highlight certain
information in a tabular format in the account-opening disclosures
pursuant to Sec. 226.6(b)(4); on checks that access a credit card
account pursuant to Sec. 226.9(b)(3); in change-in-terms notices
pursuant to Sec. 226.9(c)(2)(iii)(B); and in disclosures when a rate
is increased due to delinquency, default or as a penalty pursuant to
Sec. 226.9(g)(3)(ii). These disclosures are meant to be highlighted in
a tabular format similar to the table currently required with respect
to credit card applications and solicitations under Sec. 226.5a.
Currently, disclosures required for credit card applications and
solicitation under Sec. 226.5a must use the term ``grace period'' to
describe the date by which or the period within which any credit
extended for purchases may be repaid without incurring a finance
charge. The Board proposes in new Sec. 226.5(a)(2)(iii) to extend this
requirement to use the term ``grace period'' to all references to such
a term for the disclosures required to be in the form of a table as
discussed above. In addition, proposed Sec. 226.5(a)(2)(iii) provides
that if disclosures are required to be presented in a tabular format,
the term ``penalty APR'' shall be used to describe an increased rate
that may result because of the occurrence of one or more specific
events specified in the account agreement, such as a late payment or an
extension of credit that exceeds the credit limit. For example,
creditors would be required to provide information about penalty rates
in the table given with credit card applications and solicitations
under Sec. 226.5a; in the summary table given at account opening under
Sec. 226.6(b)(4); if the penalty rate is changing, in the summary
table given on or with the change-in-terms notice under Sec.
226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table
given under Sec. 226.9(g)(3)(ii).
Requiring card issuers to use a uniform term to describe the grace
period and disallowing variants like ``free-ride period'' may improve
consumers' understanding of the concept. Similarly, requiring card
issuers to use a uniform term to describe the increased rate may
improve consumers' understanding of the rate and when it applies. In
the consumer testing conducted for the Board, many participants
believed the term ``Penalty APR'' as opposed to ``Default APR'' or
``Highest Possible APR'' more clearly conveyed the increased rate. In
testing the term ``Default APR,'' some participants said that the word
``default'' indicated to them that it would only apply when the account
was closed due to delinquent payments. Some other participants said
that the word ``default'' seemed like the ``normal'' rate, not
something that occurs because a cardholder does something wrong. Some
participants
[[Page 32970]]
also were confused by the term ``Highest Possible APR;'' one
participant, for example, assumed that this was the highest point to
which variable rates could increase.
Moreover, if credit insurance or debt cancellation or debt
suspension coverage is required as part of the plan and information
about that coverage is required to be disclosed in a tabular format,
proposed Sec. 226.5(a)(2)(iii) requires that in describing the
coverage, the term ``required'' shall be used and the program shall be
identified by its name. For example, creditors would be required to
provide information about the required coverage in the table given with
credit card applications and solicitations under Sec. 226.5a, in the
summary table given at account opening under Sec. 226.6(b)(4), and if
certain information about the coverage is changing, in the summary
table given in change-in-terms notice under Sec. 226.9(c)(2)(iii)(B).
In consumer testing conducted for the Board, the Board tested
disclosing information about the required debt suspension coverage in
the disclosure table given with a mock credit card solicitation. The
Board found that describing the coverage by its name allowed
participants to link disclosures that were provided in the table to
other information about the coverage that was provided elsewhere in the
solicitation materials given to the participants.
Furthermore, the Board proposes in Sec. 226.5(a)(2)(iii) that if
required to be disclosed in a tabular format, APRs may be described as
``fixed'' or any similar term only if that rate will remain in effect
unconditionally until the expiration of a specified time period. If no
time period is specified, then the term ``fixed'' or any similar term
may not be used unless the rate remains in effect unconditionally until
the plan is closed. As further discussed in the section-by-section
analysis to proposed Sec. 226.16(g) below, the Board is proposing
these rules in order to avoid consumer confusion and the uninformed use
of credit.
Terms required to be more conspicuous than others. TILA Section
122(a) requires that the terms ``annual percentage rate'' and ``finance
charge'' be disclosed more conspicuously than other terms, data, or
information. 15 U.S.C. 1632(a). The Board has implemented this
provision in current Sec. 226.5(a)(2)(iii) by requiring that the terms
``finance charge'' and ``annual percentage rate,'' when disclosed with
a corresponding amount or percentage rate, be disclosed more
conspicuously than any other required disclosure. Under current
footnote 9, however, the terms do not need to be more conspicuous when
used under Sec. Sec. 226.5a, 226.7(d), 226.9(e), and 226.16.
In September 2006, the United States Government Accountability
Office (GAO) issued a report that analyzed current credit card
disclosures and recommended improvements to these disclosures (GAO
Report on Credit Card Rates and Fees).\10\ The GAO criticized credit
card disclosure documents that ``unnecessarily emphasized specific
terms.'' GAO Report on Credit Card Rates and Fees, p. 43. As an
illustration of this point, the GAO reprinted a paragraph of text from
a creditor's credit card disclosure documents where the phrase
``periodic finance charge'' was singled out for emphasis each time the
phrase was used, even when such term was not disclosed with a
corresponding amount or percentage rate. The usability consultant used
by the GAO commented that this type of emphasis potentially required
readers to work harder to understand the passage's message.
---------------------------------------------------------------------------
\10\ United States Government Accountability Office, Credit
Cards: Increased Complexity in Rates and Fees Heightens Need for
More Effective Disclosures to Consumers, 06-929 (September 2006).
---------------------------------------------------------------------------
The Board agrees that overemphasis of these terms may make
disclosures more difficult for consumers to read. In order to address
this problem, the Board considered a proposal to prohibit the terms
``finance charge'' and ``annual percentage rate'' from being disclosed
more conspicuously than other required disclosures except when the
regulation so requires. However, this proposal could produce unintended
consequences. For example, in a change-in-terms notice, the term
``annual percentage rate'' may appear as a heading, and thus be
disclosed more conspicuously than other disclosures in the notice even
though the term is not disclosed with a rate figure. It appears,
therefore, that a rule prohibiting more conspicuous terms in certain
cases would need to include detailed safe harbors or exceptions, which
might make it unworkable. Therefore, the Board seeks comment on how to
address this issue.
Furthermore, the Board is proposing to amend the regulation to
expand the list of disclosures where the terms ``finance charge'' and
``annual percentage rate'' need not be more conspicuous to include the
account-opening disclosures that would be highlighted under proposed
Sec. 226.6(b)(4), the disclosure of the effective APR under proposed
Sec. 226.7(b)(7), disclosures on checks that access a credit card
account under proposed Sec. 226.9(b)(3), the information on change-in-
terms notices that would be highlighted under proposed Sec.
226.9(c)(2)(iii)(B), the disclosures given when a rate is increased due
to delinquency, default or as a penalty under proposed Sec.
226.9(g)(3)(ii). Currently, the requirement that the terms ``finance
charge'' and ``annual percentage rate'' be more conspicuous than other
disclosures does not apply to disclosures highlighted in the tabular
format used for credit card application and solicitations under Sec.
226.5a. All of the disclosures discussed above must be highlighted in a
tabular format similar to the table required for credit card
applications and solicitations under Sec. 226.5a. The Board believes
the rule should be consistent across these disclosures. Moreover, the
Board believes that the tabular format sufficiently highlights the
disclosures, so that the ``more conspicuous'' rule is not needed.
Finally, for organizational purposes, the Board proposes to consolidate
current Sec. 226.5(a)(2) and current footnote 9 into Sec.
226.5(a)(2)(ii).
5(a)(3) Specific Formats
There are special rules regarding the specific format for
disclosures under Sec. 226.5a for credit and charge card applications
and solicitations and Sec. 226.5b for home-equity plans, as noted in
current Sec. 226.5(a)(3) and current Sec. 226.5(a)(4), respectively.
These rules would be consolidated in proposed Sec. 226.5(a)(3), for
clarity. In addition, as discussed below, the Board is proposing that
certain account-opening disclosures, periodic statement disclosures and
subsequent disclosures, such as change-in-terms disclosures, must be
provided in specific formats under proposed Sec. 226.6(b)(4);
Sec. Sec. 226.7(b)(6), (b)(7) and (b)(13); and Sec. Sec. 226.9(b),
(c) and (g) and these special format rules are noted in proposed Sec.
226.5(a)(3).
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
TILA Section 127(a) requires creditors to provide disclosures
``before opening any account.'' 15 U.S.C. 1637(a). Section 226.5(b)(1)
requires these disclosures (identified in Sec. 226.6) to be furnished
``before the first transaction is made under the plan,'' which is
interpreted as ``before the consumer becomes obligated on the plan.''
Comment 5(b)(1)-1. Also under the existing commentary, creditors may
provide the disclosures required by Sec. 226.6 after the first
transaction only in limited circumstances. This guidance would be moved
from the commentary to the
[[Page 32971]]
regulation. See proposed Sec. 226.5(b)(1)(iii)-(v). In addition, the
Board is proposing revisions to the timing rules for disclosing certain
costs imposed on an open-end (not home-secured) plan, and in connection
with certain transactions conducted by telephone, as discussed below.
Additional guidance is proposed on providing timely disclosures when
the first transaction is a balance transfer. Technical revisions would
change references from ``initial'' disclosures required by Sec. 226.6
to ``account-opening'' disclosures, without any intended substantive
change. In today's marketplace, there are few open-end products for
which consumers receive the disclosures required under Sec. 226.6 as
their ``initial'' Truth in Lending disclosure. See Sec. Sec. 226.5a,
226.5b, which require creditors to provide disclosures before consumers
apply for a credit or charge card, or for a HELOC.
5(b)(1)(i) General Rule
Section 226.5(b)(1)(i), as renumbered, would state the general
timing rule for furnishing account-opening disclosures. Specifically,
creditors generally must provide the account-opening disclosures before
the first transaction is made under the plan.
Balance transfers. Creditors commonly extend credit to consumers
for the purpose of paying off consumers' existing credit balances with
other creditors. Requests for these ``balance transfers'' are often
part of an offer to open a credit card account, and consumers may
request transfers as part of the application for the new account.
Comment 5(b)(1)(i)-5, as renumbered, provides that creditors must
provide account-opening disclosures before the balance transfer occurs.
The Board proposes to update this comment to reflect current
business practices. Some creditors provide account-opening disclosures,
including APRs, along with the balance transfer offer and account
application, and these creditors would not be affected by the proposal.
Other creditors offer balance transfers for which the APRs that may
apply are disclosed as a range, depending on the consumer's
creditworthiness. Consumers who respond to such an offer and apply for
the transfer later receive account-opening disclosures, including the
APR that will apply to the transferred balance. The proposed change
would clarify that the creditor must provide disclosures sufficiently
in advance of the transfer to allow the consumer to respond to the
terms that will apply to the transfer, including to contact the
creditor before the balance is transferred and decline the transfer.
Guidance in current comment 5(b)(1)-1 regarding account-opening
disclosures provided with cash advance checks would be deleted as
unnecessary.
Assessing fees on an account as acceptance of the account. Comment
5(b)(1)(i)-1(i), as renumbered, currently provides that if after
receiving the account-opening disclosures, the consumer uses the
account, pays a fee or negotiates a cash advance check, the creditor
may consider the account not rejected. The comment would be amended to
clarify that if the only activity on account is the creditors'
assessment of fees (such as start-up fees), the consumer is not
considered to have accepted the account until the consumer is provided
with a billing statement and makes a payment. The clarification
addresses concerns about some subprime card accounts that assess a
large number of fees at account opening. Consumers who have not made
purchases or otherwise obtained credit on the account would have an
opportunity to review their account-opening disclosures and decide
whether to reject the account and decline to pay the fees.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured)
Plan
Currently, charges imposed on an open-end plan that are a ``finance
charge'' or an ``other charge'' must be disclosed before the first
transaction. 15 U.S.C. 1637(a); current Sec. 226.5(b)(1) and Sec.
226.6(a) and (b). When a new service (and associated charge) is
introduced or an existing charge is increased, creditors must provide a
change-in-terms notice to update account-opening disclosures for all
accountholders if the new charge is a finance charge or an other
charge. See current Sec. 226.9(c).
For the reasons discussed in the section-by-section analysis to
Sec. 226.6, the Board is proposing revisions to the rules identifying
charges required to be disclosed under open-end (not home-secured)
plans. The current rule requiring the disclosure of costs before the
first transaction (in writing and in a retainable form) would continue
to apply to specified costs. See proposed Sec. 226.6(b)(4)(iii) for
the charges, and Sec. 226.9(c)(2) where such charges are changing or
newly introduced. These costs are fees of which consumers should be
aware before using the account such as annual or late payment fees, or
fees that the creditor would not otherwise have an opportunity to
disclose before the fee is triggered, such as a fee for using a cash
advance check during the first billing cycle. The Board proposes to
except charges imposed as part of an open-end (not home-secured) plan,
other than those specified in proposed Sec. 226.6(b)(4)(iii), from the
requirement to disclose charges before the first transaction. Creditors
would be permitted, at their option, to disclose those charges either
before the first transaction or later, though before the cost is
imposed. Examples of these charges would be fees to obtain documentary
evidence or to expedite payments or delivery of a credit card.
Creditors may, of course, continue to disclose any charge imposed as
part of an open-end (not home-secured) plan at account opening (or when
increased or newly introduced under Sec. 226.9(c)(2)).
The charges covered by the proposed exception are triggered by
events or transactions that may take place months, or even years, into
the life of the account, when the consumer may not reasonably be
expected to recall the amount of the charge from the account-opening
disclosure, nor readily to find or obtain a copy of the account-opening
disclosure or most recent change-in-term notice. Requiring such charges
to be disclosed before account opening may not provide a meaningful
benefit to consumers in the form of useful information or protection.
Consumers would benefit, however, from a rule that permits creditors to
disclose charges when consumers reasonably expect to receive the
disclosures, and, thus, are most likely to notice and use the
disclosures. The proposal assures that consumers continue to receive
disclosure of charges imposed as part of the plan before they become
obligated to pay them.
Examples of the charges to which the proposed exception would apply
are fees to expedite payments or delivery of a card. Fees to expedite
payments or card delivery are now excluded from TILA coverage. In a
2003 rulemaking concerning those two charges, the Board determined that
neither was required to be disclosed under TILA. 68 FR 16,185; April 3,
2003. In the supplementary information accompanying the final rule, the
Board noted some commenters' views that requiring a written disclosure
of a charge for a service long before the consumer might consider
purchasing the service did not provide the consumer material benefit.
The Board also noted creditors' practice of disclosing the charge when
the service is requested, and encouraged them to continue that
practice. The Board believes that flexible disclosure of such charges
may better serve TILA's purposes than the present exclusion of the
charges from TILA's coverage altogether.
[[Page 32972]]
The Board also believes the proposed exception may facilitate
compliance by creditors. As stated earlier, it can be challenging under
the current rule to determine whether charges are a finance charge or
an other charge or not covered by TILA, and thus whether advance notice
is required if a charge is increased or newly introduced. The proposal
reduces these uncertainties and risks. Under the proposal, the creditor
could disclose a new or increased charge only to those consumers for
whom it is relevant because they are considering at the time of
disclosure whether to take the action that would trigger the charge.
Moreover, the creditor would not have to determine whether a charge was
a finance charge or other charge or not covered by TILA so long as the
creditor disclosed the charge, orally or in writing, before the
consumer became obligated to pay it, which creditors, in general,
already do for business and other legal reasons.
The proposal would allow flexibility in the timing of certain cost
disclosures. In proposing to permit creditors to disclose certain
charges--orally or in writing--before the fee is imposed, the Board
would require creditors to disclose a charge at a time consumers would
likely notice the charge when the consumer decides whether to take the
action that would trigger the charge, such as purchasing a service.
Proposed comment 5(b)(1)(ii)-1 would provide an example that
illustrates the standard.
The limited exception to TILA's requirement to disclose charges
imposed as part of the plan before the first transaction is proposed
pursuant to TILA Section 105(a). Specifically, the Board has authority
under TILA Section 105(a) to adopt ``such adjustments and exceptions
for any class of transactions, as in the judgment of the Board are
necessary or proper to effectuate the purposes of the title, to prevent
circumvention or evasion thereof, or to facilitate compliance
therewith.'' 15 U.S.C. 1604(a). The class of transactions that would be
affected is transactions on open-end plans not secured by a dwelling,
though only with respect to certain charges. On the basis of the
information currently available to the Board, a narrow adjustment and
exception appears necessary and proper to effectuate TILA's purpose to
assure meaningful disclosure and informed credit use, and to facilitate
compliance.
5(b)(1)(iii) Telephone Purchases
Consumers who call a retailer to order goods by telephone commonly
use an existing credit card account to finance the purchase. Some
retailers, however, offer discounted purchase prices or promotional
payment plans to consumers who finance the purchase by establishing a
new open-end credit plan with the retailer. Under the current timing
rule, retailers must provide TILA account-opening disclosures before
the first transaction. This means retailers must delay the shipment of
goods until a consumer has received the disclosures. Consumers who want
goods shipped immediately may use another credit card to finance the
purchase but they lose any discount or promotion that may be associated
with opening a new plan. The Board proposes to provide additional
flexibility to retailers and consumers for such transactions.
Under proposed Sec. 226.5(b)(1)(iii), retailers that establish an
open-end plan in connection with a telephone purchase of goods or
services initiated by the consumer may provide account-opening
disclosures as soon as reasonably practicable after the first
transaction if the retailer (1) permits consumers to return any goods
financed under the plan at the time the plan is opened and provides the
consumer sufficient time to reject the plan and return the items free
of cost after receiving the written disclosures required by Sec.
226.6, and (2) informs the consumer about the return policy as a part
of the offer to finance the purchase. Alternatively, the retailer may
delay shipping the goods until after the account disclosures have been
provided.
Proposed commentary provisions would clarify that creditors may
provide disclosures with the goods, or for creditors that have separate
distribution systems for credit documents and for goods, by
establishing procedures reasonably designed to have the disclosures
sent within the same time period after the purchase as when the goods
will be sent. A return policy would be of sufficient duration if the
consumer is likely to receive the disclosures and have sufficient time
to decide about the financing plan. A return policy would include
returns via the United States Postal Service for goods delivered by
private couriers. The commentary would also clarify that retailers'
policies regarding the return of merchandise need not provide a right
to return goods if the consumer consumes or damages the goods. The
proposal does not affect merchandise purchased after the plan was
initially established, or purchased by other means such as a credit
card issued by another creditor. See proposed comments 5(b)(1)(iii)-1.
5(b)(2) Periodic Statements
TILA Sections 127(b) and 163 provide the timing requirements for
providing periodic statements for open-end credit accounts. 15 U.S.C.
1637(b) and 15 U.S.C. 1666b. The Board proposes to retain the existing
regulation and commentary, with a few changes discussed below.
5(b)(2)(i)
TILA Section 127(b) establishes that creditors generally must send
periodic statements at the end of billing cycles in which there is an
outstanding balance or a finance charge is imposed. Section
226.5(b)(2)(i) provides for a number of exceptions to a creditor's duty
to send periodic statements.
De minimis amounts. Creditors need not send periodic statements if
an account balance (debit or credit) is $1 or less (and no finance
charge is imposed). In the December 2004 ANPR, the Board requested
comment on whether the de minimis amount should be adjusted. Q53. Few
commented on this issue; there was little support for an adjustment.
One major credit card issuer stated that the cost to reprogram systems
would exceed the benefit. Thus, the Board proposes to retain the $1
threshold.
Uncollectible accounts. Creditors are not required to send periodic
statements on accounts the creditor has deemed ``uncollectible.'' That
term is not defined. The Board understands that creditors typically
send statements on past-due accounts until the account is charged-off
for purposes of loan-loss provisions, which is typically after 180 days
of nonpayment. The Board is not proposing regulatory or commentary
provisions on when an account is deemed ``uncollectible'' but seeks
comment on whether additional guidance would be helpful.
Instituting collection proceedings. Creditors need not send
statements if ``delinquency collection proceedings have been
instituted.'' Over the years, the Board's staff has been asked for
guidance on what actions a creditor must take to be covered by the
exception. The Board proposes to add comment 5(b)(2)(i)-3 to clarify
that a collection proceeding entails a filing of a court action or
other adjudicatory process with a third party, and not merely assigning
the debt to a debt collector.
Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors
must continue to comply with all the rules for open-end credit,
including sending a periodic statement, when credit privileges end,
such as when a consumer stops taking draws and pays off the outstanding
balance over time. Another comment provides that ``if an open-end
credit account is converted to
[[Page 32973]]
a closed-end transaction under a written agreement with the consumer,
the creditor must provide a set of closed-end credit disclosures before
consummation of the closed-end transaction.'' See comment 17(b)-2.
Over the years, the Board's staff has received requests for
guidance on the effect of certain work-out arrangements for past-due
open-end accounts. For example, a borrower with a delinquent credit
card account may agree by telephone to a workout plan to reduce or
extinguish the debt and the conversation is later memorialized in a
writing. The Board proposes to clarify that creditors entering into
workout agreements for delinquent open-end plans without converting the
debt to a closed-end transaction comply with the regulation if
creditors continue to follow the regulations and procedures under
Subpart B during the work-out period. The Board's proposal is intended
to provide flexibility and reduce burden and uncertainty. The Board
seeks comment on whether further guidance would be helpful, such as by
establishing a safe harbor for when an open-end plan is deemed to be
satisfied and replaced by a new closed-end obligation.
5(b)(2)(ii)
Credit card issuers commonly offer consumers a ``grace period'' or
``free-ride period'' during which consumers can avoid finance charges
on purchases by paying the balance in full. TILA does not require
creditors to provide a grace period, but if creditors provide one, TILA
Section 163(a) requires them to send statements at least 14 days before
the grace period ends. 15 U.S.C. 1666c(a). The rule is a ``mailbox''
rule; that is, the 14-day period runs from the date creditors mail
their statements, not from the end of the statement period nor from the
date consumers receive their statements.
The Board is aware of anecdotal evidence of consumers receiving
statements relatively close to the payment due date, with little time
remaining before the payment must be mailed to meet the due date. This
may be due to the fact that at the end of a billing cycle, it may take
several days for a consumer to receive a statement. In addition, for
consumers who mail their payments, they may need to mail their payments
several days before the due date to ensure that the payment is receive
by the creditor by the due date. Although the Board notes that using
the Internet to make payments is increasingly common, the Board
requests comment on (1) whether it should recommend to Congress that
the 14-day period be increased to a longer time period, so that
consumer will have additional time to receive their statements and mail
their payments to ensure that payments will be received by the due
date, and (2) if so, what time period the Board should recommend to
Congress.
5(b)(2)(iii)
In a technical revision, the substance of footnote 10 is moved to
the regulatory text.
5(c) Through 5(e)
Sections 226.5(c), (d), and (e) address, respectively: The basis of
disclosures and the use of estimates; multiple creditors and multiple
consumers; and the effect of subsequent events. The Board does not
propose any changes to these provisions, except that the Board proposes
to add new comment 5(d)-3, referencing the statutory provisions
pertaining to charge cards with plans that allow access to an open-end
credit plan maintained by a person other than the charge card issuer.
TILA 127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D). (See the section-by-section
analysis to Sec. 226.5a(f).)
Section 226.5a Credit and Charge Card Applications and Solicitations
TILA Section 127(c), implemented by Sec. 226.5a, requires card
issuers to provide certain cost disclosures on or with an application
or solicitation to open a credit or charge card account.\11\ 15 U.S.C.
1637(c). The format and content requirements differ for cost
disclosures in card applications or solicitations, depending on whether
the applications or solicitations are given through direct mail,
provided electronically, provided orally, or made available to the
general public such as in ``take-one'' applications and in catalogs or
magazines. Disclosures in applications and solicitations provided by
direct mail or electronically must be presented in a table. For oral
applications and solicitations, certain cost disclosures must be
provided orally, except that issuers in some cases are allowed to
provide the disclosures later in a written form. Applications and
solicitations made available to the general public, such as in a take-
one application, must contain one of the following: (1) The same
disclosures as for direct mail presented in a table; (2) a narrative
description of how finance charges and other charges are assessed, or
(3) a statement that costs are involved, along with a toll-free
telephone number to call for further information.
---------------------------------------------------------------------------
\11\ Charge cards are a type of credit card for which full
payment is typically expected upon receipt of the billing statement.
To ease discussion, this memorandum will refer simply to ``credit
cards.''
---------------------------------------------------------------------------
The Board proposes a number of substantive and technical revisions
to Sec. 226.5a and the accompanying commentary, as described in more
detail below. For example, the proposal contains a number of revisions
to the format and content of application and solicitation disclosures,
to make the disclosures more meaningful and easier to understand.
Format changes would affect type size, placement of information within
the table, use of cross-references to related information, and use of
boldface type for certain key terms. Information concerning penalty
APRs and the reasons they may be triggered would be more noticeable,
and information would be added about how long penalty APRs may apply.
The existing disclosures about how variable rates are determined would
be shortened and simplified. Creditors that allocate payments to
transferred balances that carry low rates would be required to disclose
to consumers that they will pay interest on their (higher rate)
purchases until (lower rate) transferred balances are paid in full.
Creditors also would be required to include a reference to the Board's
Web site where additional information about shopping for credit cards
is available.
To address concerns about subprime credit cards programs that have
high fees with low credit limits, additional disclosures would be
required if the fees or security deposits required to receive the card
are 25 percent or more of the minimum credit limit that the consumer
may receive. For example, the initial fees on an account with a $250
credit limit may reduce the available credit to less than $100.
Under the proposal, the disclosure of the balance computation
method, which now appears in the table, would be required to be outside
the table so that the table emphasizes information that is more useful
to consumers when they are shopping for a card.
With respect to take-one applications and solicitations, under the
proposal, card issuers that provide cost disclosures in take-one
applications and solicitations would be required to provide the
disclosures in the form of a table, and would no longer be allowed to
meet the requirements of Sec. 226.5a by providing a narrative
description of account-opening disclosures. This proposed revision is
consistent with other revisions contained in the proposal that would
require certain account-opening information (such as information about
key rates and fees) to be given in the form of a table. See
[[Page 32974]]
section-by-section analysis to Sec. 226.6(b)(4).
5a(a) General Rules
Combining disclosures. Currently, comment 5a-2 states that account-
opening 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 document meets the
requirements of both sections. The Board proposes to retain this
comment, but to revise it to account for proposed revisions to Sec.
226.6. Specifically, the Board is proposing to require that certain
information given at account opening must be disclosed in the form of a
table. See proposed Sec. 226.6(b)(4). The account-opening table would
be substantially similar to the table required by Sec. 226.5a, but the
content required would not be identical. The account-opening table
would require information that would not be required in the Sec.
226.5a table, such as a reference to billing error rights. The Board
proposes to revise comment 5a-2 to provide that a card issuer may
satisfy Sec. 226.5a by providing the account-opening summary table on
or with a card application or solicitation, in lieu of the Sec. 226.5a
table. For various reasons, card issuers may want to provide the
account-opening disclosures with the card application or solicitation.
When issuers do so, this comment allows them to provide the account-
opening summary table in lieu of the table containing the Sec. 226.5a
disclosures.
Clear and conspicuous standard. Section 226.5(a) requires that
disclosures made under subpart B (including disclosures required by
Sec. 226.5a) must be clear and conspicuous. Currently, comment
5a(a)(2)-1 provides guidance on the clear and conspicuous standard as
applied to the Sec. 226.5a disclosures. The Board proposes to provide
guidance on applying the clear and conspicuous standard to the Sec.
226.5a disclosures in comment 5(a)(1)-1. Thus, guidance currently in
comment 5a(a)(2)-1 would be deleted as unnecessary. The Board proposed
to add comment 5a-3 to cross reference the clear and conspicuous
guidance in comment 5a(a)(1)-1.
5a(a)(1) Definition of Solicitation
Firm offers of credit. The term ``solicitation'' is defined in
Sec. 226.5a(a)(1) of Regulation Z to mean ``an offer by the card
issuer to open a credit card account that does not require the consumer
to complete an application.'' 15 U.S.C. 1637(c). Board staff has
received questions about whether card issuers making ``firm offers of
credit'' as defined in the Fair Credit Reporting Act (FCRA) are
considered to be making solicitations for purposes of Sec. 226.5a. 15
U.S.C. 1681 et seq. The Board proposes to amend the definition of
``solicitation'' to clarify that such ``firm offers of credit'' for
credit cards are solicitations for purposes of Sec. 226.5a, as
discussed below.
The definition ``solicitation'' was adopted in 1989 to implement
part of the Fair Credit and Charge Card Disclosure Act of 1988. It
captures situations where an issuer has preapproved a consumer to
receive a card, and thus, no application is required. In 1996, the FCRA
was amended to allow creditors to use consumer report information in
connection with pre-selecting consumers to receive ``firm offers of
credit.'' 15 U.S.C. 1681a(l), 1681b(c). A ``firm offer of credit'' is
an offer that must be honored by a creditor if a consumer continues to
meet the specific criteria used to select the consumer for the offer.
15 U.S.C. 1681a(l). Creditors may obtain additional credit information
from consumers, such as income information, when the consumer responds
to the offer. However, creditors may decline to extend credit to the
consumer based on this additional information only where the consumer
does not meet specific criteria established by the creditor before
selecting the consumer for the offer. Thus, because consumers who
receive ``firm offers of credit'' have been preapproved to receive a
credit card and may be turned down for credit only under limited
circumstances, the Board believes that these preapproved offers are of
the type intended to be captured as a ``solicitation,'' even though
consumers are asked to provide some additional information in
connection with accepting the offer.
Invitations to apply. The Board also proposes to add comment
5a(a)(1)-1 to distinguish solicitations from ``invitations to apply,''
which are not covered by Sec. 226.5a. An ``invitation to apply''
occurs when a card issuer contacts a consumer who has not been
preapproved for a card account about opening an account (whether by
direct mail, telephone, or other means) and invites the consumer to
complete an application, but the contact itself does not include an
application. The Board believes that these ``invitations to apply'' do
not meet the definition of ``solicitation'' because the consumer must
still submit an application in order to obtain the offered card. Thus,
proposed comment 5a(a)(1)-1 would clarify that this ``invitation to
apply'' is not covered by Sec. 226.5a unless the contact itself
includes an application form in a direct mailing, electronic
communication or ``take one,'' an oral application in a telephone
contact initiated by the card issuer, or an application in an in-person
contact initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
Fees for late payment, over-the-credit-limit, balance transfers and
cash advances. Currently, Sec. 226.5a(a)(2)(ii) and comment 5a(a)(2)-
5, which implement TILA Section 127(c)(1)(B), provide that card issuers
may disclose late payment fees, over-the-credit-limit fees, balance
transfer fees, and cash advance fees in the table or outside the table.
15 U.S.C. 1637(c)(1)(B). In the December 2004 ANPR, the Board requested
comment on whether these fees should be required to be in the table.
Q8. Many commenters indicated that the Board should require these fees
to be in the table, because these are core fees, and uniformity in the
placement of the fees would make the disclosures more familiar and
predictable for consumers. Some commenters, however, urged the Board to
retain the flexibility for card issuers to place the fee disclosures
either in the table or immediately outside the table.
The Board proposes to require that these fees be disclosed in the
table. In the consumer testing conducted for the Board, participants
consistently identified these fees as among the most important pieces
of information they consider as part of the credit card offer. With
respect to the disclosure of these fees, the Board tested placement of
these fees in the table and immediately below the table. Participants
who were shown forms where the fees were disclosed below the table
tended not to notice these fees compared to participants who were shown
forms where the fees were presented in the table. The Board proposes to
amend Sec. 226.5a(a)(2)(i) to require these fees to be disclosed in
the table, so that consumers can easily identify them. Current Sec.
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers
to place the fees outside the table, would be deleted. These proposed
revisions are based in part on TILA Section 127(c)(5), which authorizes
the Board to add or modify Sec. 226.5a disclosures. 15 U.S.C.
1637(c)(5).
Highlighting APRs and fee amounts in the table. Section 226.5a
generally requires that certain information about rates and fees
applicable to the card offer be disclosed to the consumer in
[[Page 32975]]
card applications and solicitations. This information includes not only
the annual percentage rates and fee amounts that will apply, but also
explanatory information that gives context to these figures. The Board
seeks to enable consumers to identify easily the rates and fees
disclosed in the table. Thus, the Board proposes to add Sec.
226.5a(a)(2)(iv) to require that when a tabular format is required,
issuers must disclose in bold text any APRs required to be disclosed,
any discounted initial rate permitted to be disclosed, and any fee
amounts or percentages required to be disclosed, except for any maximum
limits on fee amounts disclosed in the table. Proposed Samples G-10(B)
and G-10(C) provide guidance on how to show the rates and fees
described in bold text. Proposed Samples G-10(B) and G-10(C) also
provide guidance to issuers on how to disclose the percentages and fees
described above in a clear and conspicuous manner, by including these
percentages and fees generally as the first text in the applicable rows
of the table so that the highlighted rates and fees generally are
aligned vertically. In consumer testing conducted for the Board,
participants who saw a table with the APRs and fees in bold and
generally before any text in the table were more likely to identify the
APRs and fees quickly and accurately than participants who saw other
forms in which the APRs and fees were not highlighted in such a
fashion.
Electronic applications and solicitations. Section 1304 of the
Bankruptcy Act amends TILA Section 127(c) to require solicitations to
open a card account using the Internet or other interactive computer
service to contain the same disclosures as those made for applications
or solicitations sent by direct mail. Regarding format, the Bankruptcy
Act specifies that disclosures provided using the Internet or other
interactive computer service must be ``readily accessible to consumers
in close proximity'' to the solicitation. 15 U.S.C. 1637(c)(7).
In September 2000, the Board revised Sec. 226.5a, and as part of
these revisions, provided guidance on how card issuers using electronic
disclosures may comply with the Sec. 226.5a requirement that certain
disclosures be ``prominently located'' on or with the application or
solicitation. 65 FR 58,903; October 3, 2000. In March 2001, the Board
issued interim final rules, which are not mandatory, containing
additional guidance for the electronic delivery of disclosures under
Regulation Z, consistent with the requirements of the E-Sign Act. 66 FR
17,329; March 30, 2001. As discussed above, in April 2007, the Board
issued for public comment the 2007 Electronic Disclosure Proposal. See
section-by-section analysis to Sec. 226.5(a)(1).
The Bankruptcy Act provision applies to solicitations to open a
card account ``using the Internet or other interactive computer
service.'' The term ``Internet'' is defined as the international
computer network of both Federal and non-Federal interoperable packet-
switched data networks. The term ``interactive computer service'' is
defined as any information service, system or access software provider
that provides or enables computer access by multiple users to a
computer server, including specifically a service or system that
provides access to the Internet and such systems operated or services
offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7).
Based on the definitions of ``Internet'' and ``interactive computer
service,'' the Board believes that Congress intended to cover card
offers that are provided to consumers in electronic form, such as via
e-mail or an Internet Web site.
In addition, although this Bankruptcy Act provision refers to
credit card solicitations (where no application is required), the Board
requested comment in the October 2005 ANPR on whether the provision
should be interpreted also to include applications. Q93. Almost all
commenters on this issue stated that there is no reason to treat
electronic applications differently from electronic solicitations. With
respect to both electronic applications and solicitations, it is
important for consumers who are shopping for credit to receive accurate
cost information before submitting an electronic application or
responding to an electronic solicitation. The Board proposes to apply
the Bankruptcy Act provision relating to electronic offers to both
electronic solicitations and applications to promote the informed use
of credit and avoid circumvention of TILA. 15 U.S.C. 1601(a), 1604(a).
Thus, in implementing the Bankruptcy Act provision, the Board proposes
to amend Sec. 226.5a(c) to require that applications and solicitations
that are provided in electronic form contain the same disclosures as
applications and solicitations sent by direct mail. The same proposal
is included in the Board's 2007 Electronic Disclosure Proposal.
With respect to the form of disclosures required under Sec.
226.5a, the Board proposes to amend Sec. 226.5a(a)(2) by adding a new
paragraph (v) to provide that if a consumer accesses an application or
solicitation for a credit card in electronic form, the disclosures
required on or with an application or solicitation for a credit card
must be provided to the consumer in electronic form on or with the
application or solicitation. A consumer accesses an application or
solicitation in electronic form when, for example, the consumer views
the application or solicitation on his or her personal computer. On the
other hand, if a consumer receives an application or solicitation in
the mail, the creditor would not satisfy its obligation to provide
Sec. 226.5a disclosures at that time by including a reference in the
application or solicitation to the Web site where the disclosures are
located. See proposed comment 5a(a)(2)-6. The same proposal is included
in the Board's 2007 Electronic Disclosure Proposal. See Sec.
226.5a(a)(2)(v) and comment 5a(a)(2)-9 in the 2007 Electronic
Disclosure Proposal.
The Board also proposes to revise existing comment 5a(a)(2)-8 added
by the 2001 interim final rule, which states that a consumer must be
able to access the electronic disclosures at the time the application
form or solicitation reply form is made available by electronic
communication. The Board proposes to revise this comment to describe
alternative methods for presenting electronic disclosures. This comment
is intended to provide examples of the methods rather than an
exhaustive list. The same proposal was included in the Board's 2007
Electronic Disclosure Proposal.
The Board also proposes to provide guidance on a Bankruptcy Act
provision requiring that the Sec. 226.5a disclosures must be ``readily
accessible to consumers in close proximity'' to an application or
solicitation that is made electronically. In the October 2005 ANPR, the
Board asked whether additional or different guidance is needed from the
guidance previously issued by the Board in 2000 regarding how card
issuers using electronic disclosures may comply with the Sec. 226.5a
requirement that certain disclosures be ``prominently located'' on or
with the application or solicitation. Q95.
In particular, the 2000 guidance states that the disclosures
required by Sec. 226.5a must be prominently located on or with
electronic applications and solicitations. 65 FR 58,903; October 3,
2000. The guidance provides flexibility for satisfying this
requirement. For example, a card issuer could provide on the
application or reply form a link to disclosures provided elsewhere, as
long as consumers cannot bypass the disclosures before submitting the
application or reply form. Alternatively, if a link to the disclosures
is not used,
[[Page 32976]]
the electronic application or reply form could clearly and
conspicuously indicate where the fact that rate, fee or other cost
information could be found. Or the disclosures could automatically
appear on the screen when the application or reply form appears. (See
current comment 5a(a)(2)-2, which would be renumbered as 5a(a)(2)-1
under the proposal.)
Most commenters stated that the Board should retain this existing
guidance to interpret the ``close proximity'' standard. A few industry
commenters stated that the existing guidance should not apply, and
that, for example, it should suffice to provide a link to the
disclosures that the consumer could choose to access or not. Some
commenters urged the Board generally to allow maximum flexibility to
creditors regarding the display of electronic disclosures, and stated
that no guidance or specific rules were necessary.
The Board proposes to revise the existing guidance to interpret the
``close proximity'' standard. The existing guidance would be revised to
be consistent with proposed changes to comment 5a(a)(2)-8, that
provides guidance to issuers on providing access to electronic
disclosures at the time the application form or solicitation reply form
is made available by electronic communication. Specifically, the Board
proposes to provide that electronic disclosures are deemed to be
closely proximate to an application or solicitation if, for example,
(1) they automatically appear on the screen when the application or
reply form appears, (2) they are located on the same Web ``page'' as
the application or reply form without necessarily appearing on the
initial screen, if the application or reply form contains a clear and
conspicuous reference to the location of the disclosures and indicates
that the disclosures contain rate, fee, and other cost information, as
applicable, or (3) 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. See proposed comment 5a(a)(2)-1.ii.
The Board proposes to retain the requirement that if an electronic
link to the disclosures is used, the consumer must not be able to
bypass the link before submitting an application or a reply form. The
Board believes that the ``close proximity'' standard is designed to
ensure that the disclosures are easily noticeable to consumers, and
this standard is not met when consumers are only given a link to the
disclosures, but not to the disclosures themselves. The Board proposes
to incorporate the ``close proximity'' standard for electronic
applications and solicitations in Sec. 226.5a(a)(2)(vi)(B), and the
guidance regarding the location of the Sec. 226.5a disclosures in
electronic applications and solicitations in comment 5a(a)(2)-1.ii.
Terminology. Section 226.5a currently requires terminology in
describing the disclosures required by Sec. 226.5a must be consistent
with terminology describing the account-opening disclosures (Sec.
226.6) and for the periodic statement disclosures (Sec. 226.7). TILA
and Sec. 226.5a also require that the term ``grace period'' be used to
describe the date by which or the period within which any credit
extended for purchases may be repaid without incurring a finance
charge. 15 U.S.C. 1632(c)(2)(C). The Board proposes that all guidance
for terminology requirements with respect to Sec. 226.5a disclosures
be placed in proposed Sec. 226.5(a)(2)(iii). The Board proposes to add
comment 5a(a)(2)-7 to cross-reference the guidance in Sec.
226.5(a)(2).
5a(a)(4) Certain Fees That Vary by State
Currently, under Sec. 226.5a, if the amount of a late-payment fee,
over-the-credit-limit fee, cash advance fee or balance transfer fee
varies from state to state, a card issuer may disclose the range of the
fees instead of the amount for each state, if the disclosure includes a
statement that the amount of the fee varies from state to state. See
existing Sec. 226.5a(a)(5), renumbered as new Sec. 226.5a(a)(4). As
discussed below, the Board proposes to require card issuers to disclose
in the table any fee imposed when a payment is returned. See proposed
Sec. 226.5a(b)(12). The Board proposes to amend new Sec. 226.5a(a)(4)
to add returned payment fees to the list of fees for which an issuer
may disclose a range of fees. The Board requests comment on whether
other fees required to be disclosed under Sec. 226.5a should be added
to the list of fees for which the issuer may disclose a range of fees,
such as fees for required insurance or debt cancellation or suspension
coverage under proposed Sec. 226.5a(b)(14).
5a(a)(5) Exceptions
Section 226.5a currently contains several exceptions to the
disclosure requirements. Some of these exceptions are in the regulation
itself, while others are contained in the commentary. For clarity, all
exceptions would be placed together in new Sec. 226.5a(a)(5), as
indicated in the redesignation table below.
5a(b) Required Disclosures
Section 226.5a(b) specifies the disclosures that are required to be
included on or with certain applications and solicitations.
5a(b)(1) Annual Percentage Rate
Section 226.5a requires card issuers to disclose the rates
applicable to the account, such as rates applicable to purchases, cash
advances, and balance transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
16-point font for disclosure of purchase APRs. Currently, under
Sec. 226.5a(b)(1), the purchase rate must be disclosed in the table in
at least 18-point font. This font requirement does not apply to (1) a
temporary initial rate for purchases that is lower than the rate that
will apply after the temporary rate expires; or (2) a penalty rate that
will apply upon the occurrence of one or more specified events. In
response to the December 2004 ANPR, several industry commenters
suggested that the Board delete this 18-point font requirement. These
commenters indicated that disclosing the purchase rate in 18-point font
size might distract consumers from other important terms being
disclosed, and that disclosing the purchase rate in the table in large
font size is not necessary because simply disclosing the purchase rate
in the table provides consumers meaningful and comparable disclosure of
that term.
The Board is proposing to reduce the 18-point font requirement to a
16-point font. The purchase rate is one of the most important terms
disclosed in the table, and it is essential that consumers be able to
identify that rate easily. A 16-point font size requirement for the
purchase APR appears to be sufficient to highlight the purchase APR.
(The Board is proposing that other disclosures in the table are
required to be in 10-point type. See proposed comment 5(a)(1)-3.) In
consumer testing conducted for the Board, versions of the table in
which the purchase rate was the same font as other rates included in
the table were reviewed. In other versions, the purchase rate was in
16-point type while other disclosures were in 10-point type.
Participants tended to notice the purchase rate more often when it was
in a font bigger than the font used for other rates. Nonetheless, there
was no evidence from consumer testing that it was necessary to use a
font size of 18-point in order for the purchase APR to be noticeable to
participants. Given that the proposal is requiring a minimum of 10-
point type for the disclosure of other terms in the table, based on
document design principles, the Board believes that a 16-point font
size for the purchase
[[Page 32977]]
APR would be effective in highlighting the purchase APR in the table.
Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to
disclose the periodic rate in the table in addition to the required
disclosure of the corresponding APR. The Board proposes to delete
comment 5a(b)(1)-1, and thus, prohibit disclosure of the periodic rate
in the table. Based on consumer testing conducted for the Board,
consumers do not appear to shop using the periodic rate, nor is it
clear that this information is important to understanding a credit card
offer. Allowing the periodic rate to be disclosed in the table may
distract from more important information in the table, and contribute
to ``information overload.'' Thus, in an effort to streamline the
information that appears in the table, the Board proposes to prohibit
disclosure of the periodic rate in the table. Nonetheless, card issuers
may disclose this information outside of the table.
Variable rate information. Section 226.5a(b)(1)(i), which
implements TILA Section 127(c)(1)(A)(i)(II), currently requires for
variable-rate accounts, that the card issuer must disclose the fact
that the rate may vary and how the rate is determined. 15 U.S.C.
1637(c)(1)(A)(i)(II). In disclosing how the applicable rate will be
determined, the card issuer is required to provide the index or formula
used 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. See current comment
5a(b)(1)-3.
1. Index and margins. Currently, the variable rate information is
required to be disclosed separately from the applicable APR, in a row
of the table with the heading ``Variable Rate Information.'' Some card
issuers will include the phrase ``variable rate'' with the disclosure
of the applicable APR and include the details about the index and
margin under the ``Variable Rate Information'' heading. In the consumer
testing conducted for the Board, many participants who saw the variable
rate information presented as described above understood that the label
``variable'' meant that a rate could change, but could not locate
information on the tested form regarding how or why these rates could
change. This was true even if the index and margin information was
taken out of the row of the table with the heading ``Variable Rate
Information'' and placed in a footnote to the phrase ``variable rate.''
Many participants who did find the variable rate information were
confused by the variable-rate margins, often interpreting them
erroneously as the actual rate being charged. In addition, very few
participants indicated that they would use the margins in shopping for
a credit card account.
Accordingly, the Board proposes to amend Sec. 226.5a(b)(1)(i) to
specify that issuers may not disclose the amount of the index or
margins in the table. Specifically, card issuers would not be allowed
to disclose in the table the current value of the index (for example,
that the prime rate currently is 7.5 percent) or the amount of the
margin that is used to calculate the variable rate. Card issuers would
be allowed to indicate only that the rate varies and the type of index
used to determine the rate (such as the ``prime rate,'' for example.)
In describing the type of index, the issuer may not include details
about the index in the table. For example, if the issuer uses a prime
rate, the issuer must just describe the rate as tied to a ``prime
rate'' and may not disclose in the table that the prime rate used is
the highest prime rate published in the Wall Street Journal two
business days before the closing date of the statement for each billing
period. See proposed comment 5a(b)(1)-2. Also, the Board would require
that the disclosure about a variable rate (the fact that the rate
varies and the type of index used to determine the rate) must be
disclosed with the applicable APRs, so that consumers can more easily
locate this information. See proposed Model Form G-10(A), Samples G-
10(B) and G-10(C). Proposed Samples G-10(B) and G-10(C) provide
guidance to issuers on how to disclose the fact that the applicable
rate varies and how it is determined.
2. Rate floors and ceilings. Currently, card issuers may disclose
in the table, at their option, any limitations on how high (i.e., a
rate ceiling) or low (i.e., a rate floor) a particular rate may go. For
example, assume that the purchase rate on an account could not go below
12 percent or above 24 percent. An issuer would be required to disclose
in the table the current rate offered on the credit card (for example,
18 percent), and would be permitted to disclose in the table that the
rate would not go below 12 percent and above 24 percent. See current
comment 5a(b)(1)-4. The Board proposes to revise the commentary to
prohibit the disclosure of the rate floors and ceilings in the table.
Based on consumer testing conducted for the Board, consumers do not
appear to shop based on these rate floors and ceilings, and allowing
them to be disclosed in the table may distract from more important
information in the table, and contribute to ``information overload.''
Thus, in an effort to streamline the information that may appear in the
table, the Board proposes to prohibit disclosure of the rate floors and
ceilings in the table. Nonetheless, card issuers may disclose this
information outside of the table.
Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies
that if the initial rate is temporary and is lower than the rate that
will apply after the temporary rate expires, a card issuer must
disclose the rate that will otherwise apply to the account. A
discounted initial 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.
The Board proposes to move comment 5a(b)(1)-5 to new Sec.
226.5a(b)(1)(ii). The Board also proposes to add new comment 5a(b)(1)-3
to specify that if a card issuer discloses the discounted initial rate
and expiration date in the table, the issuer is deemed to comply with
the standard to provide this information clearly and conspicuously if
the issuer uses the format specified in proposed Samples G-10(B) and G-
10(C) to present this information.
In addition, under TILA Section 127(c)(6)(A), as added by Section
1303(a) of the Bankruptcy Act, the term ``introductory'' must be used
in immediate proximity to each listing of a discounted initial rate in
the application, solicitation, or promotional materials accompanying
such application or solicitation. Thus, the Board proposes to revise
new Sec. 226.5a(b)(1)(ii) to specify that if an issuer provides a
discounted initial rate in the table along with the rate required to be
disclosed, the card issuer must use the term ``introductory'' in
immediate proximity to the listing of the initial discounted rate.
In the October 2005 ANPR, commenters asked the Board to consider
permitting creditors to use the term ``intro'' as an alternative to the
word ``introductory.'' Because ``intro'' is a commonly understood
abbreviation of the term ``introductory,'' and consumer testing
indicates that consumers understand this term, the Board proposes to
allow creditors to use ``intro'' as an alternative to the requirement
to use the term ``introductory'' and is proposing to clarify this
approach in new Sec. 226.5a(b)(1)(ii). Also, to give card issuers
guidance on the meaning of ``immediate proximity,'' the Board is
[[Page 32978]]
proposing to provide guidance for creditors that place the word
``introductory'' or ``intro'' within the same phrase as each listing of
the discounted initial rate. This guidance is set forth in proposed
comment 5a(b)(1)-3. The Board believes that interpreting ``immediate
proximity'' to mean adjacent to the rate may be too restrictive.
Moreover, the Board has proposed the ``within the same phrase''
standard as a safe harbor instead of requiring this placement,
recognizing that even if the term ``introductory'' is not ``within the
same phrase'' as the rate it may still meet the ``immediate proximity''
standard.
Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a
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 the increased penalty rate
that may apply and the specific event or events that may result in the
increased rate. If a tabular format is required, the issuer must
disclose the penalty rate in the table under the heading ``Other
APRs,'' along with any balance transfer or cash advance rates.
The specific event or events must be described outside the table
with an asterisk or other means to direct the consumer to the
additional information. At its option, the issuer may include outside
the table with 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 if credit privileges are permanently terminated.
In the December 2004 ANPR, the Board solicited comment on whether
the table was effective as currently designed. Q7. In response to this
question, many commenters suggested that the specific event or events
that may result in the penalty rate should be disclosed in the table
along with the penalty rate, because this would enhance comparison
shopping and consumer understanding by highlighting penalty pricing and
its effect on the other rates for the account.
In the consumer testing conducted for the Board, when reviewing
forms in which the specific events that trigger the penalty rate were
disclosed outside the table, many participants did not readily notice
the penalty rate triggers when they initially read through the document
or when asked follow-up questions. In addition, many participants did
not readily notice the penalty rate when it was included in the row
``Other APRs'' along with other rates. The GAO also found that
consumers had difficulty identifying the default rate and circumstances
that would trigger rate increases. See GAO Report on Credit Card Rates
and Fees, at page 49. In the testing conducted for the Board, when the
penalty rate was placed in a separate row in the table, participants
tended to notice the rate more often. Moreover, participants tended to
notice the specific events that result in the penalty rate more often
when these events were included with the penalty rate in a single row
in the table. For example, two types of forms related to placement of
the events that could trigger the penalty rate were tested--several
versions showed the penalty rate in one row of the table and the
description of the events that could trigger the penalty rate in
another row of the table. Several other versions showed the penalty
rate and the triggering events in the same row. Participants who saw
the versions of the table with the penalty rate in a separate row from
the description of the triggering events tended to skip over the row
that specified the triggering events when reading the table.
Nonetheless, participants who saw the versions of the table in which
the penalty rate and the triggering events were in the same row tended
to notice the triggering events when they reviewed the table.
As a result, the Board proposes to add Sec. 226.5a(b)(1)(iv) and
amend new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7) to require
card issuers to briefly disclose in the table the specific event or
events that may result in the penalty rate. In addition, the Board is
proposing that the penalty rate and the specific events that cause the
penalty rate to be imposed must be disclosed in the same row of the
table. See proposed Model Form G-10(A). In describing the specific
event or events that may result in an increased rate, new comment
5a(b)(1)-4 provides that the descriptions of the triggering events in
the table should be brief. For example, if an issuer may increase a
rate to the penalty rate if the consumer does not make the minimum
payment by 5 p.m., Eastern time, on its payment due date, the issuer
should describe this circumstance in the table as ``make a late
payment.'' Proposed Samples G-10(B) and G-10(C) provide additional
guidance on the level of detail that issuers should use in describing
the specific events that result in the penalty rate.
The Board also proposes to specify in new Sec. 226.5a(b)(1)(iv)
that in disclosing a penalty rate, a card issuer also must specify the
balances to which the increased rate will apply. Typically, card
issuers apply the increased rate to all balances on the account. The
Board believes that this information helps consumers better understand
the consequences of triggering the penalty rate.
In addition, the Board proposes to specify in new Sec.
226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer
must describe how long the increased rate will apply. Proposed comment
5a(b)(1)-4 provides that in describing how long the increased rate will
remain in effect, the description should be brief, and refers issuers
to Samples G-10(B) and G-10(C) for guidance on the level of detail that
issuer should use to describe how long the increased rate will remain
in effect. Also, proposed comment 5a(b)(1)-4 provides that if a card
issuer reserves the right to apply the increased rate indefinitely,
that fact should be stated. The Board believes that this information
may help consumers better understand the consequences of triggering the
penalty rate.
Also, the Board proposes to add language to new Sec.
226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card
issuers must include a brief description of the circumstances under
which any discounted initial rates may be revoked and the rate that
will apply after the discounted initial rate is revoked. Section
1303(a) of the Bankruptcy Act requires that a credit card application
or solicitation must contain in a prominent location on or with the
application or solicitation a clear and conspicuous disclosure of a
general description of the circumstances that may result in revocation
of a discounted initial rate offered with the card, and the rate that
will apply after the discounted initial rate is revoked. 15 U.S.C.
1637(c)(6)(C). The Board is proposing that this information be
disclosed in the table along with other penalty rate information.
Often, the same events that trigger a loss of a discounted initial rate
and an increase to the penalty rate also trigger an increase in other
rates on the account.
Rates that depend on consumers' creditworthiness. Credit card
issuers often engage in risk-based pricing such that the rates offered
on a credit card will depend on later determinations of a consumer's
creditworthiness. For example, an issuer may use information collected
in a consumer's application or solicitation reply form (e.g., income
information) or obtained through a credit report from a consumer
reporting agency to determine the rate for which a consumer qualifies.
For preapproved solicitations, issuers that engage in risk-based
pricing typically will disclose the
[[Page 32979]]
specific rates offered to the consumer, because for these offers,
issuers typically will have some indication of a consumer's
creditworthiness based on the prescreening process done through a
consumer reporting agency. For applications not involving prescreens,
however, issuers that use risk-based pricing may not be able to
disclose the specific rate that would apply to a consumer, because
issuers may not have sufficient information about a consumer's
creditworthiness at the time the application is given.
In response to the December 2004 ANPR, industry commenters asked
for guidance on how rates should be disclosed under Sec. 226.5a when
an issuer does not know the specific rate for which the consumer will
qualify at the time the disclosures are made because the specific rate
depends on a later determination of the consumer's creditworthiness.
Some industry commenters asked the Board to clarify that issuers may
disclose the range of possible rates, with an explanation that the rate
obtained by the consumer is based on the consumer's creditworthiness.
Another industry commenter suggested that the Board should allow
issuers to disclose a recent APR or the median rate within the range of
possible rates, with an explanation that the rate could be higher or
lower depending on the consumer's creditworthiness. Several consumer
group commenters suggested that the Board should not allow issuers to
disclose a range of possible rates. Instead, issuers should be required
to disclose the actual APR that the creditor is offering, because
otherwise, consumers do not know the rate for which they are applying.
The Board proposes to add Sec. 226.5(b)(1)(v) and comment
5a(b)(1)-5 to clarify that in circumstances in which an issuer cannot
state a single specific rate being offered at the time disclosures are
given because the rate will depend on a later determination of the
consumer's creditworthiness, issuers must disclose the possible rates
that might apply, and a statement that the rate for which the consumer
may qualify at account opening depends on the consumer's
creditworthiness. A card issuer may disclose the possible rates as
either specific rates or a range of rates. For example, if there are
three possible rates that may apply (e.g., 9.99, 12.99 or 17.99
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99
percent) or a range of rates (9.99 to 17.99 percent). Proposed Samples
G-10(B) and G-10(C) provide guidance for issuers on how to meet these
requirements. In addition, the Board solicits comment on whether card
issuer should alternatively be permitted to list only the highest
possible rate that may apply instead of a range of rates (e.g., up to
17.99 percent).
As discussed above, one industry commenter suggested that the Board
should allow issuers to disclose a recent APR or the median rate within
the range of possible rates, with an explanation that the APR could be
higher or lower depending on the consumer's creditworthiness. The Board
believes that requiring card issuers to disclose all the possible rates
(as either specific rates, or as a range of rates) provides more useful
information to consumers than allowing issuers to disclose a median APR
within the range. If only one rate is disclosed in the table, consumers
may mistake the rate disclosed as the specific rate offered on the
account, and not understand that it is a median rate within a certain
range, even if there is an explanation that the rate could be higher or
lower. If a consumer sees a range or several specific rates, the
consumer may be better able to determine that more than one rate is
being disclosed.
Transactions with both rate and fee. When a consumer initiates a
balance transfer or cash advance, card issuers typically charge
consumers both interest on the outstanding balance of the transaction,
and a fee to complete the transaction. It is important that consumers
understand when both a rate and a fee apply to specific transactions.
In the consumer testing conducted for the Board, several ways of
presenting rate and fee information were reviewed. In some tests, the
cash advance and balance transfer rates were included in a section with
other rates, and cash advance and balance transfer fees were included
in a section with other fees. In other tests, cash advance and balance
transfer fees were not included with other fees, but instead were
included with the cash advance and balance transfer rates. Participants
in the first test (the one where balance transfer and cash advance fees
were grouped with other fees) were more likely to notice the balance
transfer and cash advance fees than participants in the other tests.
Participants tended to notice rates more easily when they were grouped
together, and fees more easily when they are grouped together. Thus,
the Board is proposing to group APRs together in the table and fees
together in the table, rather than grouping APRs and fees related to
cash advances together and APRs and fees related to balance transfers
together.
Nonetheless, because the rates and the fees related to cash
advances and balance transfers are not grouped together, a cross
reference from the cash advance and balance transfer rates to the
applicable fees may help consumers notice both the rate and the fee. In
consumer testing conducted for the Board, some participants were more
aware that an interest rate applies to cash advances and balance
transfers than they were aware of the fee component, so a cross
reference between the rate and the fee may help those consumers notice
both the rate and the fee components. Therefore, the Board proposes to
add new Sec. 226.5a(b)(1)(vi) to require that if a rate and fee both
apply to a balance transfer or cash advance transaction, a card issuer
must disclose that a fee also applies when disclosing the rate, and a
cross-reference to the fee. 15 U.S.C. 1637(c)(5).
Typical APR. In response to the December 2004 ANPR, several
consumer groups indicated that the current disclosure requirements in
Sec. 226.5a allow card issuers to promote low APRs, that include
interest but not fees, while charging high penalty fees and penalty
rates when consumers, for example, pay late or exceed the credit limit.
As a result, these consumer groups suggested that the Board require
credit card issuers to disclose in the table a ``typical rate'' that
would include fees and charges that consumers pay for a particular
open-end credit products. This rate would be calculated as the average
effective rate disclosed on periodic statements over the last three
years for customers with the same or similar credit card product. These
consumer groups believe that this ``typical rate'' would reflect the
real rate that consumers pay for the credit card product.
The Board is not proposing that card issuers disclose the ``typical
rate'' as part of the Sec. 226.5a disclosures. Although a single cost
figure (like the APR on closed-end credit) is a laudable objective, the
Board does not believe that the proposed typical APR would be helpful
to consumers that seek credit cards. There are many different ways
consumers may use their credit cards, such as the features they use,
what fees they incur, and whether a balance is carried from month to
month. For example, some consumers use their cards only for purchases,
always pay off the bill in full, and never pay fees. Other consumers
may use their cards for purchases, balance transfers or cash advances,
but never pay late-payment fees, over-the-credit-limit fees or other
penalty fees. Still others may pay penalty fees and incur penalty
rates. A ``typical rate,'' however, would be based
[[Page 32980]]
on average fees and average balances that may not be typical for many
consumers. Moreover, such a rate may confuse consumers about the actual
rate that may apply to their account.
Nonetheless, the Board believes it is important that consumers
understand the penalty rates and penalty fees that apply to a credit
card account. Thus, the Board is proposing to make penalty rates more
prominent in the table and require card issuers to describe in the
table the reasons why a penalty rate may apply and how long the penalty
rate will apply. See proposed Sec. 226.5a(b)(1)(iv). Likewise, the
Board is proposing to highlight penalty fees by requiring that late
payment fees, over-the-credit-limit fees, and returned-payment fees be
disclosed in the table. See proposed Sec. 226.5a(a)(2)(i).
5a(b)(2) Fees for Issuance or Availability
Section 226.5a(b)(2), which implements TILA Section
127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or
other periodic fee, expressed as an annualized amount, that is imposed
for the issuance or availability of a credit card, including any fee
based on account activity or inactivity. 15 U.S.C.
1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA
Section 127(c)(5) to require that issuers also disclose non-periodic
fees related to opening the account, such as one-time membership or
participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13,855, April 6, 1989.
Fees for issuance or availability of credit card products targeted
to subprime borrowers. Often, subprime credit cards will have
substantial fees related to the issuance and availability of credit.
For example, these cards may impose an annual fee, and a monthly
maintenance fee for the card. In addition, these cards may impose
multiple one-time fees when the consumer opens the card account, such
as an application fee and a program fee. The Board believes that these
fees should be clearly explained to consumers at the time of the offer
so that consumers better understand when these fees will be imposed.
The Board proposes to amend Sec. 226.5a(b)(2) to require
additional information about periodic fees. 15 U.S.C. 1637(c)(5).
Currently, issuers are required to disclose only the annualized amount
of the fee. The Board proposes to amend Sec. 226.5a(b)(2) to require
issuers also to disclose the amount of the periodic fee, and how
frequently it will be imposed. For example, if an issuer imposes a $10
monthly maintenance fee for a card, the issuer must disclose in the
table that there is a $10 monthly maintenance fee, and that the fee is
$120 on an annual basis.
In addition, the Board proposes to amend Sec. 226.5a(b)(2) to
require additional information about non-periodic fees related to
opening the account. Currently, issuers are required to disclose the
amount of the non-periodic fee, but not that it is a one-time fee. The
Board proposes to amend Sec. 226.5a(b)(2) to require card issuers to
disclose the amount of the fee and that it is a one-time fee. This
additional information will allow consumers to better understand set-up
and maintenance fees that are often imposed in connection with subprime
credit cards. For example, the proposed changes would provide consumers
with additional information about when the fees will be imposed by
identifying which fees are one-time fees, which fees are periodic fees
(such as monthly fees), and which fees are annual fees.
In addition, application fees that are charged regardless of
whether the consumer receives credit currently are not considered fees
as imposed for the issuance or availability of a credit card, and thus
are not disclosed in the table. See current comment 5a(b)(2)-3 and
Sec. 226.4(c)(1). The Board proposes to delete the exception for these
application fees and require that they be disclosed in the table as
fees imposed for the issuance or availability of a credit card. The
Board believes that consumers should be aware of these fees when they
are shopping for a credit card.
5a(b)(3) Minimum Finance Charge
Currently, Sec. 226.5a(b)(3), which implements TILA Section
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any
minimum or fixed finance charge that could be imposed during a billing
cycle. Card issuers typically impose a minimum charge (e.g., $.50) in
lieu of interest in those months where a consumer would otherwise incur
an interest charge that is less than the minimum charge (a so-called
``minimum interest charge''). In response to the December 2004 ANPR,
one industry commenter suggested that the Board no longer require that
the minimum finance charge be disclosed in the table because these fees
are typically small (e.g., $.50) and consumers do not shop on them.
Another industry commenter suggested that the Board only require that
the minimum finance charge be included in the table if the charge is a
significant amount. On the other hand, several consumer groups urged
the Board to continue to include the minimum finance charge in the
table because this charge can have a significant effect on the cost of
credit.
The Board proposes to retain the minimum finance charge disclosure
in the table. Although minimum charges currently may be small, card
issuers may increase these charges in the future. Also, Board is aware
of at least one credit card product for which no APR is charged, but
each month a fixed charge is imposed based on the outstanding balance
(for example, $6 charge per $1,000 balance). If the minimum finance
charge disclosure was eliminated from the table, card issuers that
offer this type of pricing would no longer be required to disclose the
fixed charge in the table. The Board is not proposing to require the
minimum finance charge only if it is a significant amount. This
approach could undercut the uniformity of the table, and could be
misleading to consumers. If consumers do not see a minimum finance
charge disclosed in the table, the Board is concerned that most
consumers might assume that there is not a minimum finance charge on
the card, when the charge was below a certain threshold.
Under Sec. 226.5a(b)(3), card issuers are only required to
disclose the amount of any minimum or fixed finance charge that could
be imposed during a billing cycle. Card issuers currently are not
required to provide a description of when this charge may be imposed.
In consumer testing conducted for the Board, model forms were tested
that only included the amount of the minimum interest charge in the
table. In viewing these forms, some participants misunderstood that
they would pay the minimum interest charge every month, not just those
months where they otherwise would incur interest that was less than the
minimum charge. Thus, the Board proposes to amend Sec. 226.5a(b)(3) to
require card issuers to disclose in the table a brief description of
the minimum finance charge, to give consumers context for when this
charge will be imposed. 15 U.S.C. 1637(c)(5). Proposed Samples G-10(B)
and G-10(C) provide guidance regarding how to disclose a minimum
interest charge.
5a(b)(4) Transaction Charges
Section 226.5a(b)(4), which implements TILA Section
127(c)(1)(A)(ii)(III), requires that card issuers disclose any
transaction charge imposed on purchases. The current commentary to this
provision clarifies that only transaction fees on purchases imposed by
the issuer must be disclosed. (See comment 5a(b)(4)-1.) For clarity,
the Board would amend Sec. 226.5a(b)(4) to incorporate this commentary
provision.
[[Page 32981]]
In addition, the Board proposes to amend Sec. 226.5a(b)(4) to
specify that fees charged for transactions in a foreign currency or
that take place in a foreign country may not be disclosed in the table.
In an effort to streamline the contents of the table, the Board
proposes to highlight only those fees that may be important for a
significant number of consumers. In consumer testing for the Board,
participants did not tend to mention foreign transaction fees as
important fees they use to shop. There are few consumers who may pay
these fees with any frequency. Thus, the Board proposes to except
foreign transaction fees from disclosure of transaction fees. The Board
proposes to include foreign transaction fees in the account-opening
summary table that is required under Sec. 226.6(b)(4), so that
interested consumers can learn of the fees before using the card.
5a(b)(5) Grace Period
Section 226.5a(b)(5), which implements TILA Section
127(c)(A)(iii)(I), requires that card issuers disclose in the table the
date by which or the period within which any credit extended for
purchases may be repaid without incurring a finance charge. If no grace
period is provided, that fact must be disclosed. Comment 5a(b)(5)-1
provides that a 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).''
The consumer testing conducted for the Board indicated that some
participants misunderstood the word ``grace period'' to mean the time
after the payment due date that an issuer may give the consumer to pay
the bill without charging a late-payment fee. The GAO found similar
misunderstandings by consumers in its consumer testing. Furthermore,
many participants in the GAO testing incorrectly indicated that the
grace period was the period of time promotional interest rates applied.
See GAO Report on Credit Card Rates and Fees, at page 50.
In consumer testing conducted for the Board, participants tended to
understand the grace period more clearly when additional context was
added, such as describing that if the consumer paid the bill in full
each month, the consumer would have some period of time (e.g., 25 days)
to pay the new purchase balance in full to avoid interest. Thus, the
Board proposes to amend Sec. 226.5a(b)(5) to require card issuers to
disclose briefly any conditions on the applicability of the grace
period. 15 U.S.C. 1637(c)(5). The Board also proposes to amend comment
5a(b)(5)-1 to provide guidance for how issuers may meet the
requirements in proposed Sec. 226.5a(b)(5).
5a(b)(6) Balance Computation Method
TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance on which finance charges are
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the
balance computation methods named by the Board, Sec. 226.5a(b)(6)
requires that issuers must disclose the name of that balance
computation method in the table as part of the disclosures required by
Sec. 226.5a, and issuers are not required to provide a description of
the balance computation method. If the issuer uses a balance
computation method that is not named by the Board, the issuer must
disclose a detailed explanation of the balance computation method. See
current Sec. 226.5a(b)(6); Sec. 226.5a(a)(2)(i).
In response to the December 2004 ANPR, several commenters suggested
that the Board delete the description of the balance computation method
from the table. These commenters believed that the implications of the
balance computation method on the actual cost of credit are simply too
complex and too contingent on future purchasing patterns to be of any
use to consumers in shopping for credit.
The Board agrees that balance computation methods are too complex
to explain in a simple fashion in the table. Most card issuers use one
of two methods--either the ``average daily balance method (including
new purchases)'' or the ``two-cycle average daily balance method
(including new purchases).'' For consumers that carry a balance on
their credit card every month or for consumers that pay off their
balance in full every month, there essentially is no difference between
these two methods. There is a difference between the two methods only
in those months where a consumer paid off their previous balance in
full, but did not pay off their current balance in full. In those
months, the consumer will pay more interest under the ``two-cycle
average daily balance method'' than under the ``average daily balance
method.'' How much more interest the consumer pays depends on the
amount of the purchases in the previous billing cycle, when those
purchases were made, the amount of any payments made in that billing
cycle, and when those payments were made.
In consumer testing conducted for the Board, virtually no
participants understood the two balance computation methods most used
by card issuers--the average daily balance method and the two-cycle
average daily balance method--when those methods were just described by
name. The GAO found similar results in its consumer testing. See GAO
Report on Credit Card Rates and Fees, at pages 50-51. In the consumer
testing conducted for the Board, a version of the table was used which
attempted to explain briefly that the ``two-cycle average daily balance
method'' would be more expensive than the ``average daily balance
method'' for those consumers that sometimes pay their bill in full and
sometimes do not. Participants' answers suggested they did not
understand this disclosure. They appeared to need more information
about how balances are calculated. Nonetheless, the addition of more
information would likely add too much detail to the disclosures and
result in ``information overload.'' In addition, it is unclear whether
most consumers would consider the balance computation method when
shopping for a credit card.
As a result, the Board proposes to retain a brief reference to the
balance computation method, but move the disclosure from the table to
directly below the table. See Sec. 226.5a(a)(2)(iii). TILA Section
122(c)(2) states that for certain disclosures set forth in Section TILA
127(c)(1)(A), including the balance computation method, the Board shall
require that the disclosure of such information shall, to the extent
the Board determines to be practicable and appropriate, be in the form
of a table. 15 U.S.C. 1632(c)(2). The Board believes that it is no
longer appropriate to continue to disclose the balance computation
method in the table, because the name of the balance computation method
used by issuers does not appear to be meaningful to consumers without
additional context and may distract from more important information
contained in the table. The Board proposes to continue to require that
issuers disclose the name of the balance computation method beneath the
table, so that consumers and others will have access to this
information if they find it useful.
5a(b)(8) Cash Advance Fee
Currently, comment 5a(b)(8)-1 provides that a card issuer must
disclose only those fees it imposes for a cash advance that are finance
charges under
[[Page 32982]]
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. As discussed in the section-by-section analysis to
Sec. 226.4, the Board proposes to provide that all transaction fees on
credit cards would be considered finance charges. Thus, the Board
proposes to delete the current guidance discussed in comment 5a(b)(8)-1
as obsolete.
5a(b)(12) Returned Payment Fee
Currently, Sec. 226.5a does not require a card issuer to disclose
a fee imposed when a payment is returned. The Board proposes to add
Sec. 226.5a(b)(12) to require issuers to disclose this fee in the
table. Typically, card issuers will impose a fee and a penalty rate if
a cardholder's payment is returned. As discussed above, the Board
proposes to require card issuers to disclose in the table the reasons
that a penalty rate may be imposed. See proposed Sec.
226.5a(b)(1)(iv). The Board proposes that the returned payment fee be
disclosed too, so that consumers are told both consequences of returned
payments.
5a(b)(13) Cross References from Fees to Penalty Rate
Card issuers often impose both a fee and penalty rate for the same
behavior--such as a consumer paying late, exceeding the credit limit,
or having a payment returned. In consumer testing conducted for the
Board, participants tended to associate paying penalty fees with
certain behaviors (such as paying late or going over the credit limit),
but they did not tend to associate rate increases with these same
behaviors. By linking the penalty fees with the penalty rate,
participants more easily understood that if they engage in certain
behaviors, such as paying late, their rates may increase in addition to
incurring a fee. Thus, the Board proposes to add Sec. 226.5a(b)(13) to
provide that if a card issuer may impose a penalty rate for any of the
reasons that a penalty fee would be disclosed in the table (such as
late payments, going over the credit limit, or returned payments), the
issuer in disclosing the fee also must disclose that the penalty rate
may apply, and a cross-reference to the penalty rate. Proposed Samples
G-10(B) and G-10(C) provide guidance on how to provide these
disclosures.
5a(b)(14) Required Insurance, Debt Cancellation Or Debt Suspension
Coverage
Credit card issuers often offer optional insurance or debt
cancellation or suspension coverage with the credit card. Under the
current rules, costs associated with the insurance or debt cancellation
or suspension coverage are not considered ``finance charges'' if the
coverage is optional, the issuer provides certain disclosures to the
consumer about the coverage, and the issuer obtain an affirmative
written request for coverage after the consumer has received the
required disclosures. Card issuers frequently provide the disclosures
discussed above on the application form and a space to sign or initial
an affirmative written request for the coverage. Currently, issuers are
not required to provide any information about the insurance or debt
cancellation or suspension coverage in the table that contains the
Sec. 226.5a disclosures.
In the event that a card issuer requires the insurance or debt
cancellation or debt suspension coverage (to the extent permitted by
state or other applicable law), the Board proposes new Sec.
226.5a(b)(14) to require that the issuer disclose any fee for this
coverage in the table. In addition, new Sec. 226.5a(b)(14) would
require that the card issuer also disclose a cross-reference to where
the consumer may find more information about the insurance or debt
cancellation or debt suspension coverage, if additional information is
included on or with the application or solicitation. Proposed Sample G-
10(B) provides guidance on how to provide the fee information and the
cross-reference in the table. If insurance or debt cancellation or
suspension coverage is required in order to obtain a credit card, the
Board believes that fees required for this coverage should be
highlighted in the table so that consumers are aware of these fees when
considering an offer, because they will be required to pay the fee for
this coverage every month in order to have the credit card.
5a(b)(15) Payment Allocation
Some credit card issuers will allocate payments first to balances
that are subject to the lowest APR. For example, if a cardholder made
purchases using a credit card account and then initiated a balance
transfer, the card issuer might allocate a payment (less than the
amount of the balances) to the transferred balance portion of the
account if that balance was subject to a lower APR than the purchases.
Card issuers often will offer a discounted initial rate on balance
transfers (such as 0 percent for an introductory period) with a credit
card solicitation, but not offer the same discounted rate for
purchases. In addition, the Board is aware of at least one issuer that
offers the same discounted initial rate for balance transfers and
purchases for a specified period of time, where the discounted rate for
balance transfers (but not the discounted rate for purchases) may be
extended until the balance transfer is paid off if the consumer makes a
certain number of purchases each billing cycle. At the same time,
issuers typically offer a grace period for purchases if a consumer pays
his or her bill in full each month. Card issuers, however, do not
typically offer a grace period on balance transfers or cash advances.
Thus, on the offers described above, a consumer cannot take advantage
of both the grace period on purchases and the discounted rate on
balance transfers. Because the payments will be allocated to the
balance transfers first, the only way for a consumer to avoid paying
interest on purchases--and thus have the benefit of the grace period--
is to pay off the entire balance, including the balance transfer
subject to the discounted rate.
The Board believes that it is important that consumers understand
payment allocation in these circumstances, so that they can better
understand the offer and decide whether to use this particular card for
purchases. For example, if consumers knew that they would pay interest
on all purchases made while paying off the balance transfer at the
discounted rate, they might not use that particular card for purchases.
They might use another card for purchases and pay that card in full
every month to take advantage of the grace period on purchases. Or they
might use another card with a lower purchase rate, if they did not plan
to pay off the purchases in full each month.
In the consumer testing conducted for the Board, many participants
did not understand that they could not take advantage of the grace
period on purchases and the discounted rate on balance transfers at the
same time. Model forms were tested that included a disclosure notice
attempting to explain this to consumers. Nonetheless, testing showed
that a significant percentage of participants still did not fully
understand how payment allocation can affect their interest charges,
even after reading the disclosure tested. The Board plans to conduct
further testing of the disclosure to determine whether the disclosure
can be improved to be more effectively communicate to consumers how
[[Page 32983]]
payment allocation can affect their interest charges. Nonetheless,
because some participants did benefit from the disclosure, and in light
of further testing, the Board, under its authority pursuant to TILA
Section 127(c)(5), proposes to add Sec. 226.5a(b)(15) to require a
card issuer to explain payment allocation to consumers. 15 U.S.C.
1637(c)(5). Proposed Sec. 226.5a(b)(15) states that if (1) a card
issuer offers a discounted initial rate on a balance transfers or cash
advance that is lower than the rate on purchases, (2) the issuer offers
a grace period on purchases, and (3) the issuer may allocate payments
to the lower rate balance first, then the issuer must make certain
disclosures in the table. Specifically, issuers would be required to
disclose: (1) that the discounted initial rate applies only to balance
transfers or cash advances, as applicable, and not to purchases; (2)
that payments will be allocated to the balance transfer or cash advance
balance, as applicable, before being allocated to any purchase balance
during the time the discounted initial rate is in effect; and (3) that
the consumer will incur interest on the purchase balance until the
entire balance is paid, including the transferred balance or cash
advance balance, as applicable. The Board would require these
disclosures in the table only if the discounted initial rate applies to
balance transfers or cash advances that consumers can request as part
of accepting the offer. If the discounted initial rate only applies to
subsequent balance transfers or checks that access a credit card
account, the issuer would not need to provide this disclosure with the
offer. The Board proposes to add comment 5a(b)(15)-1 to provide
examples of when these disclosures must be given. The Board also
proposes to add comment 5a(b)(15)-2 to specify that a card issuer may
comply with the requirements in new Sec. 226.5a(b)(15) by providing
the applicable disclosures contained in proposed Samples G-10(B) and G-
10(C).
5a(b)(16) Available Credit
Subprime credit cards often have substantial fees assessed when the
account is opened. Those fees will be billed to the consumer as part of
the first statement, and will substantially reduce the amount of credit
that the consumer initially has available with which to make purchases
or other transactions on the account. For example, for cards for which
a consumer is given a minimum credit line of $250, after the start-up
fees have been billed to the account, the consumer may have less than
$100 of available credit with which to make purchases or other
transactions in the first month. In addition, consumers will pay
interest on these fees until they are paid in full.
The federal banking agencies have received a number of complaints
from consumers with respect to cards of this type. Complainants often
claim that they were not aware of how little available credit they
would have after all the fees were assessed. Thus, the Board is
proposing to add Sec. 226.5a(b)(16) to inform consumers about the
impact of these fees on their initial available credit. Specifically,
Sec. 226.5a(b)(16) would provide that if (1) a card issuer imposes
required fees for the issuance or availability of credit, or a security
deposit, that will be charged against the card when the account is
opened, and (2) the total of those fees and/or security deposit equal
25 percent or more of the minimum credit limit applicable to the card,
a card issuer must disclose in the table an example of the amount of
the available credit that a consumer would have remaining after these
fees or security deposit are debited to the account, assuming that the
consumer receives the minimum credit limit offered on the relevant
account. In determining whether the 25 percent threshold test is met,
the issuer must only consider fees for issuance or availability of
credit, or a security deposit, that are required. If certain fees for
issuance or availability are optional, these fees should not be
considered in determining whether the disclosure must be given.
Nonetheless, if the 25 percent threshold test is met in connection with
the required fees or security deposit, the issuer must disclose the
available credit after excluding any optional fees from the amounts
debited to the account, and the available credit after including any
optional fees in the amounts debited to the account. The Board believes
that 25 percent is an appropriate threshold because it represents a
significant reduction in the initial available credit as a result of
the imposition of fees or security deposit. The Board solicits comment
on this threshold amount.
In addition, the Board proposes comment 5a(b)(16)-1 to clarify that
in calculating the amount of available credit that must be disclosed in
the table, an issuer must consider all fees for the issuance or
availability of credit described in Sec. 226.5a(b)(2), and any
security deposit, that will be imposed when the account is opened and
charged to the account, such as one-time issuance and set-up fees that
will be imposed when the card is opened. For example, in calculating
the available credit, issuers must consider the first year's annual fee
and the first month's maintenance fee (if applicable) if they are
charged to the account immediately at account opening. Proposed Sample
G-10(C) provides guidance to issuers on how to provide this disclosure.
(See proposed comment 5a(b)(16)-2).
As described above, a card issuer would consider only required fees
for issuance or availability of credit, or a security deposit, that
will be charged against the card when the account is opened in
determining whether the 25 percent threshold test is met. The Board
requests comment on whether there are other fees (other than fees
required for issuance or availability of credit) that are typically
imposed on these types of accounts when the account is opened, and
should be included in determining whether the 25 percent threshold test
is met.
5a(b)(17) Reference to Board Web Site for Additional Information
In the December 2004 ANPR, the Board requested comment on
suggestions for non-regulatory approaches that may further the Board's
goal of improving the effectiveness of TILA's disclosures and
substantive protections. Q57. In response to the ANPR, several
commenters encouraged the Board to develop educational materials, such
as pamphlets, targeted media, and interactive Web sites, that could
educate consumers on a variety of topics related to shopping for and
using credit cards. These commenters believe that certain topics that
are difficult to explain to consumers, such as balance computation
methods, are better provided in educational materials than in the TILA
disclosures.
The Board proposes to revise Sec. 226.5a to require that credit
card issuers must disclose in the table a reference to a Board Web site
and a statement that consumers can find on this Web site educational
materials on shopping for and using credit card accounts. See proposed
Sec. 226.5a(b)(17). Such materials would expand those already
available on choosing a credit card at the Board's Web site.\12\ The
Board recognizes that some consumers may need general education about
how credit cards work and an explanation of typical account terms that
apply to credit cards. In the consumer testing conducted for the Board,
participants showed a wide range of knowledge about how credit cards
work generally, with some participants showing a firm understanding of
terms that relate to
[[Page 32984]]
credit card accounts, while others had difficulty expressing basic
financial concepts, such as how the interest rate differs from a one-
time fee. The Board's current Web site explains some basic financial
concepts--such as what an annual percentage rate is--as well as terms
that typically apply to credit card accounts. Through the Web site, the
Board could expand the explanation of other credit card terms, such as
balance computation methods, that may be difficult to explain concisely
in the disclosures given with applications and solicitations.
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\12\ The materials can be found at http://www.federalreserve.gov/pubs/shop/default.htm.
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As part of consumer testing, participants were asked whether they
would use a Board Web site to obtain additional information about
credit cards generally. Some participants indicated they might use the
Web site, while others indicated that it was unlikely they would use
such a Web site. Although it is hard to predict from the results of the
testing how many consumers might use the Board's Web site, and
recognizing that not all consumers have access to the Internet, the
Board believes that this Web site may be helpful to some consumers as
they shop for a credit card and manage their account once they obtain a
credit card. Thus, the Board is proposing that a reference to a Board
Web site be included in the table because this is a cost-effective way
to provide consumers with supplemental information on credit cards. The
Board seeks comments on the content for the Web site.
Additional disclosures. In response to the December 2004 ANPR,
several consumer groups suggested that the Board require information
about the minimum payment formula, credit limit, any security interest,
and all fees imposed on the account be disclosed in the table. The
Board has decided not to propose this additional information in the
table for the reasons detailed below.
1. Minimum payment formula. In the consumer testing conducted for
the Board, participants did not tend to mention the minimum payment
formula as one of the terms on which they shop for a card. In addition,
minimum payment formulas used by card issuers can be complicated
formulas that would be hard to describe concisely in the table. For
example, while some issuers still use a percentage to calculate the
payment, such as 2 percent of the outstanding balance or $10, whichever
is less, other issuers use much more complicated formulas, such as
``the greater of (1) $15 or (2) 2 percent of the balance or (3) the
applicable finance charges, and if the finance charges are largest, add
$15 to that amount.'' Even if the Board were to require issuers to
provide an example showing the amount of the minimum payment for a
certain balance (for example, $1000), this example would be of doubtful
usefulness for the many consumers who have balances different from the
example. In addition, the example might mislead consumers, because one
card might yield a lower minimum payment amount than another card for
one balance (for example, $1000), but the second card might yield a
lower minimum payment than the first card if the minimum payment was
calculated on a different balance.
2. Credit limit. Card issuers often indicate a credit limit in a
cover letter sent with an application or solicitation. Frequently, this
credit limit is not stated as a specific amount but, instead, is stated
as an ``up to'' amount, indicating the maximum credit limit for which a
consumer may qualify. The actual credit limit for which a consumer
qualifies depends on the consumer's creditworthiness, which is
evaluated after the application or solicitation is submitted. Several
consumer groups suggested that the Board include the credit limit in
the table because it is a key factor for many consumers in shopping for
a credit card. These groups also suggested that the Board require
issuers to state a specific credit limit, and not an ``up to'' amount.
The Board is not proposing to include the credit limit in the
table. As explained above, in most cases, the credit limit for which a
consumer qualifies depends on the consumer's creditworthiness, which is
fully evaluated after the application or solicitation has been
submitted. In addition, in consumer testing conducted for the Board,
participants were not generally confused by the ``up to'' credit limit.
Most participants understood that the ``up to'' amount on the
solicitation letter was a maximum amount, rather than the amount the
issuer was promising them. Almost all participants tested understood
that the credit limit for which they would qualify depended on their
creditworthiness, such as credit history.
3. Security interest. Several consumer groups suggested that any
required security interest should be disclosed in the table. These
commenters suggest that if a security interest is required, the
disclosure in the table should describe it briefly, such as ``in items
purchased with card'' or ``required $200 deposit.'' These commenters
indicated that a security deposit is a very important consideration in
credit shopping, especially for low-income consumers. In addition, they
stated that many credit cards issued by merchants are secured by the
goods that the consumer purchases, but consumers are often unaware of
the security interest.
The Board is not proposing to include a disclosure of any required
security interest in the table at this time. Credit card-issuing
merchants may include in their account agreements a security interest
in the goods that are purchased with the card. It is not apparent that
consumers would shop on whether a retail card has this type of security
interest. Requiring or allowing this type of security interest to be
disclosed in the table may distract from important information in the
table, and contribute to ``information overload.'' Thus, in an effort
to streamline the information that may appear in the table, the Board
is not proposing to include this disclosure in the table.With respect
to security deposits, if a consumer is required to pay a security
deposit prior to obtaining a credit card and that security deposit is
not charged to the account but is paid by the consumer from separate
funds, a card issuer must necessarily disclose to the consumer that a
security deposit is required, so that the consumer knows to submit the
deposit in order to obtain the card. A security deposit in these
instances may already be sufficiently highlighted in the materials
accompanying the application or solicitation, and may not need to
appear in the table. Nonetheless, the Board recognizes that a security
deposit may need to be highlighted when the deposit is not paid from
separate funds but is charged to the account when the account is
opened. In those cases, consumers may not realize that the security
deposit may significantly decrease their available credit when the
account is opened. Thus, as described above, the Board proposes to
provide that if (1) a card agreement requires payment of a fee for
issuance or availability of credit, or a security deposit, (2) the fee
or security deposit will be charged to the account when it is opened,
and (3) the total of those fees and security deposit equal 25 percent
or more of the minimum credit limit offered with the card, the card
issuer must disclose in the table an example of the amount of the
available credit that a consumer would have remaining after these fees
or security deposit are debited to the account, assuming that the
consumer receives the minimum credit limit offered on the card.
4. Fees. In response to the December 2004 ANPR, several consumer
groups suggested that all fees imposed on an account should be included
in the table. They believed that by requiring only certain fees in the
table, card issuers have an incentive to devise new fees
[[Page 32985]]
that do not have to be disclosed so prominently. They indicate that if
the Board excludes any fees, the list of such fees should be an
exclusive list. They also suggested that the Board should require card
issuers to report periodically on the volume of the excluded fees
collected. If a certain type of fee increases in volume, these
commenters suggested that the Board should delete this fee from the
list of excluded fees on the grounds that that fee has become a more
significant component of the cost of credit.
As described above, the Board is proposing to include certain
transaction fees and penalty fees, such as cash advance fees, balance
transfer fees, late-payment fees, and over-the-credit limit fees, in
the table because these fees are frequently paid by consumers, and
consumers have indicated these fees are important for shopping
purposes. The Board is not proposing to include other fees in the
table, such as copying fees and stop-payment fees, in the table because
these fees tend to be imposed less frequently and are not fees on which
consumers tend to shop. In consumer testing conducted for the Board,
participants tended to mention cash advance fees, balance transfer
fees, late-payment fees, and over-the-credit-limit fees as the most
important fees they would want to know when shopping for a credit card.
In addition, most participants understood that issuers were allowed to
impose additional fees, beyond those disclosed in the table. Thus, the
Board believes it is important to highlight in the table the fees that
consumers want to know when shopping for a card, rather than including
infrequently-paid fees, to avoid creating ``information overload'' such
that consumers could not easily identify the fees that are most
important to them. Nonetheless, the Board recognizes that fees can
change over time, and the Board plans to monitor the market and update
the fees required to be disclosed in the table as necessary.
5a(c) Direct-Mail and Electronic Applications
5a(c)(1) General
Electronic applications and solicitations. As discussed above, the
Bankruptcy Act amends TILA Section 127(c) to require that solicitations
to open a card account using the Internet or other interactive computer
service must contain the same disclosures as those made for
applications or solicitations sent by direct mail. 15 U.S.C.
1637(c)(7). The interim final rules adopted by the Board in 2001
revised Sec. 226.5a(c) to apply the direct mail rules to electronic
applications and solicitations. The Board proposes to retain these
provisions in Sec. 226.5a(c)(1). (Current Sec. 226.5a(c) would be
revised and renumbered as new Sec. 226.5a(c)(1).) The same proposal
was included in the Board's 2007 Electronic Disclosure Proposal.
The Bankruptcy Act also requires that the disclosures for
electronic offers must be ``updated regularly to reflect the current
policies, terms, and fee amounts.'' In the October 2005 ANPR, the Board
also solicited comment on what guidance the Board should provide on how
to apply that standard for credit card accounts. The Board's 2001
interim final rules provided guidance that disclosures for a variable-
rate credit card plan provided electronically must be based on an APR
in effect within the last 30 days. The 2001 guidance did not contain
specific guidance on accuracy requirements for other disclosures
provided electronically, such as disclosure of fees. The majority of
commenters on the October 2005 ANPR which addressed the accuracy of
variable rates agreed that a 30-day standard would be appropriate to
implement the ``updated regularly'' standard in the Bankruptcy Act.
Some commenters advocated longer periods such as 60 days or shorter
periods such as daily or weekly updating, or suggested that the Board
should not provide specific guidance or rules, instead allowing maximum
flexibility in this area.
The Board proposes to revise Sec. 226.5a(c) to implement the
``updated regularly'' standard in the Bankruptcy Act with regard to the
accuracy of variable rates. A new Sec. 226.5a(c)(2) would be added to
address the accuracy of variable rates in direct mail and electronic
applications and solicitations. This new section would require issuers
to update variable rates disclosed on mailed applications and
solicitations every 60 days and variable rates disclosed on
applications and solicitations provided in electronic form every 30
days, and to update other terms when they change. The Board believes
the 30-day and 60-day accuracy requirements for variable rates strike
an appropriate balance between seeking to ensure consumers receive
updated information and avoiding imposing undue burdens on creditors.
The Board believes it is unnecessary for creditors to disclose to
consumers the exact variable APR in effect on the date the application
or solicitation is accessed by the consumer, so long as consumers
understand that variable rates are subject to change. Moreover, it
would be costly and operationally burdensome for creditors to comply
with a requirement to disclose the exact variable APR in effect at the
time the application or solicitation is accessed. The obligation to
update the other terms when they change ensures that consumers receive
information that is accurate and current, and should not impose
significant burdens on issuers. These terms generally do not fluctuate
with the market like variable rates. In addition, based on discussions
with industry representatives concerning operational issues, the Board
staff understands that issuers typically change other terms
infrequently, perhaps once or twice a year.
Section 226.5a(c)(2) consists of two subsections. Section
226.5a(c)(2)(i) would provide that Sec. 226.5a disclosures mailed to a
consumer must be accurate as of the time the disclosures are mailed.
This section would also provide that an accurate variable APR is one
that is in effect within 60 days before mailing. Section
226.5a(c)(2)(ii) would provide that Sec. 226.5a disclosures provided
in electronic form (except for a variable APR) must be accurate as of
the time they are sent to a consumer's e-mail address, or as of the
time they are viewed by the public on a Web site. For the reasons
discussed above, this section would provide that a variable APR is
accurate if it is in effect within 30 days before it is sent, or viewed
by the public. Presently, variable APRs on most credit cards may change
on a monthly basis, so a 30-day accuracy requirement for variable APRs
appears appropriate.
Many of the provisions included in proposed Sec. 226.5a(c)(2) have
been incorporated from current Sec. 226.5a(b)(1). To eliminate
redundancy, the Board proposes to revise Sec. 226.5a(b)(1) by deleting
Sec. 226.5a(b)(1)(ii), Sec. 226.5a(b)(1)(iii), and comment 5a(c)-1.
The same revisions were included in the Board's 2007 Electronic
Disclosure Proposal.
5a(d) Telephone Applications and Solicitations
5a(d)(2) Alternative Disclosure
Section 226.5a(d) specifies rules for providing cost disclosures in
oral applications and solicitations initiated by a card issuer. Card
issuers generally must provide certain cost disclosures during the oral
conversation in which the application or solicitation is given.
Alternatively, an issuer is not required to give the oral disclosures
if the card issuer either does not impose a fee for the issuance or
availability of a credit card (as described in Sec. 226.5a(b)(2)) or
does not impose such a fee unless the
[[Page 32986]]
consumer uses the card, provided that the card issuer provides the
disclosures later in a written form. Specifically, the issuer must
provide the disclosures required by Sec. 226.5a(b) in a tabular format
in writing within 30 days after the consumer requests the card (but in
no event later than the delivery of the card), and disclose the fact
that the consumer need not accept the card or pay any fee disclosed
unless the consumer uses the card. The Board proposes to add comment
5a(d)-2 to indicate that an issuer may disclose in the table that the
consumer is not required to accept the card or pay any fee unless the
consumer uses the card.
5a(d)(3) Accuracy
Proposed Sec. 226.5a(d)(3) would provide guidance on the accuracy
of telephone disclosures. Current comment 5a(b)(1)-3 specifies that for
variable-rate disclosures in telephone applications and solicitations,
the card issuer must provide the rates currently applicable when oral
disclosures are provided. For the alternative disclosures under Sec.
226.5a(d)(2), an accurate variable APR is one that is (1) in effect at
the time the disclosures are mailed or delivered; (2) in effect as of a
specified date (which rate is then updated from time to time, for
example, each calendar month); or (3) an estimate in accordance with
Sec. 226.5(c). Current comment 5a(b)(1)-3 would be moved to Sec.
226.5a(d)(3), except that the option of estimating a variable APR would
be eliminated as the least meaningful of the three options. Proposed
Sec. 226.5a(d)(3) also would specify that if an issuer discloses a
variable APR as of a specified date, the issuer must update the rate on
at least a monthly basis, the frequency with which variable rates on
most credit card products are adjusted. The Board also would amend
proposed Sec. 226.5a(d)(3) to specify that oral disclosures under
Sec. 226.5a(d)(i) must be accurate when given, consistent with the
requirement in Sec. 226.5(c) that disclosures must reflect the terms
of the legal obligation between the parties. For the alternative
disclosures, terms other than variable APRs must be accurate as of the
time they are mailed or delivered. See proposed Sec. 226.5a(d)(3).
5a(e) Applications and Solicitations Made Available to General Public
TILA Section 127(c)(3) and Sec. 226.5a(e) specify rules for
providing disclosures in applications and solicitations made available
to the general public such as ``take-one'' applications and catalogs or
magazines. 15 U.S.C. 1637(c)(3). These applications and solicitations
must either contain: (1) The disclosures required for direct mail
applications and solicitations, presented in a table; (2) a narrative
that describes how finance charges and other charges are assessed; or
(3) a statement that costs are involved, along with a toll-free
telephone number to call for further information.
Narrative that Describes How Finance Charges and Other Charges Are
Assessed. TILA Section 127(c)(3)(D) and Sec. 226.5a(e)(2) allow
issuers to meet the requirements of Sec. 226.5a for take-one
applications and solicitations by giving a narrative description of
certain account-opening disclosures (such as information about how
finance charges and other charges are assessed), a statement that the
consumer should contact the card issuer for any change in the required
information, and a toll-free telephone number or a mailing address for
that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does
not need to be in the form of a table, but may be a narrative
description, as is also currently allowed for account-opening
disclosures. The Board is proposing, however, to require that certain
account-opening information (such as information about key rates and
fees) must be given in the form of a table. See the section-by-section
analysis to Sec. 226.6(b)(4). Therefore, the Board also is proposing
that card issuers give this same information in a tabular form in take-
one applications and solicitations. Thus, the Board proposes to delete
Sec. 226.5a(e)(2) and comments 5a(e)(2)-1 and -2 as obsolete. Card
issuers that provide cost disclosures in take-one applications and
solicitations would be required to provide the disclosures in the form
of a table, for which they could use the account-opening summary table.
See Sec. 226.5a(e)(1) and comment 5a-2.
5a(e)(4) Accuracy
For applications or solicitations that are made available to the
general public, if a creditor chooses to provide the cost disclosures,
Sec. 226.5a(b)(1)(ii) currently requires that any variable APR
disclosed must be accurate within 30 days before printing. The proposal
would move this provision to Sec. 226.5a(e)(4). Proposed Sec.
226.5a(e)(4) also would specify that other disclosures must be accurate
as of the date of printing.
5a(f) In-Person Applications and Solicitations
Card issuer and person extending credit are not the same. Existing
Sec. 226.5a(f) and its accompanying commentary contain special charge
card rules that address circumstances in which the card issuer and the
person extending credit are not the same person. (These provisions
implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The
Board understands that these types of cards are no longer being
offered. Thus, the Board proposes to delete these provisions and the
Model Clause G-12 from Regulation Z as obsolete, recognizing that the
statutory provision in TILA Section 127(c)(4)(D) will remain in effect
if these products are offered in the future. The Board requests comment
on whether these provisions should be retained in the regulation. A
commentary provision referencing the statutory provision would be added
to Sec. 226.5(d), which addresses disclosure requirements for multiple
creditors. See proposed comment 5(d)-3.
In-person applications and solicitations. The Board is proposing a
new Sec. 226.5a(f) and accompanying commentary to address in-person
applications and solicitations initiated by the card issuer. In in-
person applications, a card issuer initiates a conversation with a
consumer inviting the consumer to apply for a card account, and if the
consumer responds affirmatively, the issuer takes application
information from the consumer. For example, in-person applications
include instances in which a retail employee, in the course of
processing a sales transaction using the customer's bank credit card,
invites the customer to apply for the retailer's credit card and the
customer submits an application.
In in-person solicitations, a card issuer offers a consumer in-
person to open an account that does not require an application. For
example, in-person solicitations include instances where a bank
employee offers a preapproved credit card to a consumer who came into
the bank to open a checking account.
Currently, in-person applications in response to an invitation to
apply are exempted from Sec. 226.5a because they are considered
applications initiated by consumers. (See current comments 5a(a)(3)-2
and 5a(e)-2.) On the other hand, in-person solicitations are not
specifically addressed in Sec. 226.5a. Neither in-person applications
nor solicitations are specifically addressed in TILA.
The Board proposes to cover in-person applications and
solicitations under Sec. 226.5a, pursuant to the Board's authority
under TILA Section 105(a). Requiring in-person applications and
solicitations to include credit terms under Sec. 226.5a could help
serve TILA's purpose to provide meaningful disclosure of credit terms
so that
[[Page 32987]]
consumers will be able to compare more readily the various credit terms
available to him or her, and avoid the uninformed use of credit. 15
U.S.C. 1601(a). Also, the Board understands that card issuers routinely
provide Sec. 226.5a disclosures in these circumstances; therefore, any
additional compliance burden would be minimal.
Card issuers must provide the disclosures required by Sec. 226.5a
in the form of a table, and those disclosures must be accurate when
given (consistent with the direct mail rules) or when printed
(consistent with one option for the take-one rules). See Sec.
226.5a(c), (e)(1). These two alternatives appear to provide issuers
flexibility, while also providing consumers with the information they
need to make informed credit decisions. Existing comment 5a(a)(3)-2
(which would be moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would
be revised to be consistent with Sec. 226.5a(f).
5a(g) Balance Computation Methods Defined
TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more
than five of the most common balance computation methods used by credit
card issuers to calculate the balance on which finance charges are
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the
balance computation methods named by the Board, the issuer must
disclose that name of the balance computation method as part of the
disclosures required by Sec. 226.5a, and is not required to provide a
description of the balance computation method. If the issuer uses a
balance computation method that is not named by the Board, the issuer
must disclose a detailed explanation of the balance computation method.
See current Sec. 226.5a(b)(6). Currently, the Board has named four
balance computation methods: (1) Average daily balance (including new
purchases) or (excluding new purchases); (2) two-cycle average daily
balance (including new purchases) or (excluding new purchases); (3)
adjusted balance; and (4) previous balance. The Board proposes to
retain these four balance computation methods. The Board requests
comment on whether the list should be revised, along with data
indicating why.
Section 226.6 Account-Opening Disclosures
TILA Section 127(a), implemented in Sec. 226.6, requires creditors
to provide information about key credit terms before an open-end plan
is opened, such as rates and fees that may be assessed on the account.
Consumers' rights and responsibilities in the case of unauthorized use
or billing disputes are also explained. 15 U.S.C. 1637(a). See also
Model Forms G-2 and G-3 in Appendix G.
Home-equity lines of credit. Account-opening disclosure and format
requirements for home-equity lines of credit (HELOCs) subject to Sec.
226.5b would be unaffected by the proposal, consistent with the Board's
plan to review Regulation Z's disclosure rules for home-secured credit
in a separate rulemaking. To facilitate compliance, the substantively
unrevised rules applicable only to HELOCs are grouped together in
proposed Sec. 226.6(a), including rules relating to the disclosure of
finance charges, other charges, and specific HELOC-related disclosures.
(See redesignation table below.) For the reasons set forth in the
section-by-section analysis to Sec. 226.6(b)(1), the Board would
update references to ``free-ride period'' as ``grace period'' in the
regulation and commentary, without any intended substantive change.
Open-end (not home-secured) plans. The Board proposes two
significant revisions to account-opening disclosures for open-end (not
home-secured) plans, which are set forth in proposed Sec. 226.6(b).
The rule would (1) require a tabular summary of key terms to be
provided before an account is opened (see proposed Sec. 226.6(b)(4)),
and (2) reform how and when cost disclosures must be made (see proposed
Sec. 226.6(b)(1) for content, Sec. 226.5(b) and Sec. 226.9(c) for
timing). The Board proposes to apply the tabular summary requirement to
all open-end loan products, except HELOCs. Such products include credit
card accounts, traditional overdraft credit plans, personal lines of
credit, and revolving plans offered by retailers without a credit card.
The benefit to consumers from receiving a concise summary of rates and
important fees appears to outweigh the costs, such as developing the
new disclosures and revising them as needed.
Disclosure requirements in Sec. 226.6 that potentially affect all
open-end creditors, namely rules relating to security interests and
billing error disclosure requirements, are grouped together in proposed
Sec. 226.6(c). The section also would be retitled ``Account-opening
disclosures'' to more accurately reflect the timing of the disclosures.
In today's marketplace, there are few open-end products for which
consumers receive the disclosures required under Sec. 226.6 as their
``initial'' Truth in Lending disclosure. See Sec. 226.5a, Sec.
226.5b. The substance of footnotes 11 and 12 is moved to the
regulation; the substance of footnote 13 is moved to the commentary.
(See redesignation table below.)
In technical revisions, comments 6-1 and 6-2 would be deleted. The
substance of comment 6-1, which requires consistent terminology, is
discussed more generally in proposed Sec. 226.5(a)(2). Comment 6-2
addresses certain open-end plans involving more than one creditor, and
is proposed to be deleted as obsolete. See section-by-section analysis
to Sec. 226.5a(f).
Tabular summary. As provided by Regulation Z, creditors may, and
typically do, include account-opening disclosures as a part of an
account agreement document that also contains other contract terms and
state-law disclosures. The agreement is typically lengthy and in small
print. In the December 2004 ANPR, the Board sought comment on possible
approaches to ease consumers' ability to navigate account-opening
disclosures, such as a summary paragraph, a table similar to the one
required on or with credit and charge card applications, or a table of
contents to highlight key features and terms of the account. Q2-Q3.
Commenters generally encouraged the Board to consider format rules
that focus on providing essential terms in a simplified way. In
general, commenters suggested that a summary of key terms would improve
the effectiveness of the now-lengthy and complex account agreement
documents. Some industry commenters, however, opposed a summary. These
commenters noted that the current format rules integrating account
terms and TILA disclosures allow creditors to explain features
coherently, and noted that summarizing information and repeating it in
detail in the contract document may result in information overload. As
a part of consumer research conducted for the Board regarding consumer
understanding of current TILA disclosures, tests simulated consumers'
review of packets of information typically received when new accounts
are opened. Most of the consumers in the Board's sample group set aside
the lengthy multi-fold account agreement pamphlets without reading
them, saying they were too long, the type was too small, and the
language too legalistic. Consumers who reviewed packets that included a
summary of account terms generally noticed and reviewed the summary,
even if they set aside the contract document.
Based on public comment, consumer testing, and its own analysis,
the Board is proposing to introduce format requirements for account-
opening disclosures for open-end (not home-
[[Page 32988]]
secured) plans. The Board proposes to summarize key information most
important to informed decision-making in a table similar to that
required on or with credit and charge card applications and
solicitations. The proposal would permit TILA disclosures that are
typically lengthy or complex and less-often used in determining how to
use an account, such as how variable rates are determined, to be
integrated with the account agreement terms. The content requirements
for the proposed summary are set forth in new Sec. 226.6(b)(4) and are
discussed below; proposed Model Form G-17(A) and Samples G-17(B) and G-
17(C) in Appendix G illustrate the table.
Charges imposed as part of the plan. The Board proposes to reform
its rules regarding cost disclosures provided at account opening for
open-end (not home-secured) plans. Under TILA and current Regulation Z,
account-opening disclosures must include charges that are either a
``finance charge'' or an ``other charge'' (TILA charges). According to
TILA, a charge is a finance charge if it is payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor ``as an incident to the extension of credit.'' The Board
implemented the definition by including as a finance charge under
Regulation Z, any charge imposed ``as an incident to or a condition of
the extension of credit.'' TILA also requires a creditor to disclose,
before opening an account, ``other charges which may be imposed as part
of the plan * * * in accordance with regulations of the Board.'' The
Board implemented the provision virtually verbatim, and the staff
commentary interprets the provision to cover ``significant charges
related to the plan.'' 15 U.S.C. 1605(a), Sec. 226.4; 15 U.S.C.
1637(a)(5), Sec. 226.6(b), current comment 6(b)-1.
The terms ``finance charge'' and ``other charge'' are given broad
and flexible meanings in the regulation and commentary. This ensures
that TILA adapts to changing conditions, but it also creates
uncertainty. The distinctions among finance charges, other charges, and
charges that do not fall into either category are not always clear. As
creditors develop new kinds of services, some find it difficult to
determine if associated charges for the new services meet the standard
for a ``finance charge'' or ``other charge'' or are not covered by TILA
at all. This uncertainty can pose legal risks for creditors that act in
good faith to classify fees. Examples of charges that are included or
excluded charges are in the regulation and commentary, but they cannot
provide definitive guidance in all cases.
A 2003 rulemaking concerning charges for two services--expediting
payments and expediting card delivery--illustrates the challenges in
applying current rules. 68 FR 16,185; April 3, 2003. Public comments on
the proposal reflected a lack of consensus about the proposed
interpretations of expedited payment fee as an ``other charge'' and
expedited card delivery fee as not covered by TILA. More broadly, the
comments reflected a lack of consensus over the basic principles that
should determine whether a charge is a finance charge or an ``other
charge.''
In the final rule, staff adopted official interpretations
indicating that neither charge was a charge covered by TILA. In the
supplementary information accompanying the final rule, Board staff
recognized that requiring a written disclosure of a charge for a
service long before the consumer might consider purchasing the service
did not provide the consumer with any material benefit. The staff also
noted creditors' current practice of disclosing the charge when the
service is requested, and encouraged the continuation of that practice.
Board staff also indicated that a more comprehensive review of
existing rules was needed. Accordingly, the December 2004 ANPR
solicited comment on the effectiveness of the rules governing
disclosure of charges covered by TILA, and on potential alternatives.
The comments indicated a consensus that the current approach should be
replaced with a new one. Commenters split, however, on the proper
approach. Most focused on the definition of ``finance charge'' or
``other charge.'' Approaches ranged from industry's suggestions to
restrict finance charges to interest or to charges required as a
condition to the extension of credit, to consumer groups' suggestion to
include virtually all charges the consumer would pay. While commenters
disagreed over which approach would best serve TILA's purposes, they
shared a common objective: Provide a clear test.
In light of the comments received, consumer testing, and the
Board's experience and analysis, the Board is proposing to reform the
rules governing disclosure of charges before they are imposed, as
discussed below. The proposed rule is intended to respond collectively
to these concerns by (1) giving full effect to TILA's requirement that
all charges imposed as part of an open-end (not home-secured) plan be
disclosed before they are imposed, (2) specifying precisely important
costs that must be disclosed in writing at account opening (e.g.,
interest rates, annual fees, and late-payment or over-the-credit-limit
fees), and (3) permitting the creditor to disclose all other charges
imposed as part of the plan (e.g., fees to expedite payments or to
provide an additional card) at account opening or orally at any time
before the consumer agrees to or becomes obligated to pay the charge.
Charges added or increased during the life of the plan would be subject
to similar rules. See Sec. 226.9(c)(2).
Under the proposal, some charges would be covered by TILA that the
current regulation, as interpreted by the staff commentary, excludes
from TILA coverage, such as fees for expedited payment and expedited
delivery. It may not have been useful to consumers to cover such
charges under TILA when such coverage would have meant only that the
charges were disclosed long before they became relevant to the
consumer. It may, however, be useful to cover such charges under TILA
as part of a rule that permits their disclosure at a (later) more
relevant time. Further, as new services (and associated charges) are
developed, the proposal is intended to reduce uncertainty of how to
disclose such fees and risks of civil liability. The list of charges
creditors must disclose in the account-opening table would be specific
and exclusive, not open-ended as is the case today. Creditors could
otherwise comply with the rule by disclosing other costs at any other
relevant time.
6(a) Rules Affecting Home-Equity Plans
For the reasons discussed above and as illustrated in the
redesignation table below, the proposal would set forth in Sec.
226.6(a) all requirements applying exclusively to home-equity plans
subject to Sec. 226.5b (HELOCs). Rules relating to the disclosure of
finance charges currently in Sec. 226.6(a)(1) through (4) would be
moved to proposed Sec. 226.6(a)(1)(i) through (iv); those rules and
accompanying official staff interpretations are substantively
unchanged. Rules relating to the disclosure of other charges would be
moved from current Sec. 226.6(b) to proposed Sec. 226.6(a)(2), and
specific HELOC-related disclosure requirements would be moved from
current Sec. 226.6(e) to proposed Sec. 226.6(a)(3). Several technical
revisions to commentary provisions are proposed for clarity and in some
cases for consistency with corresponding comments to proposed Sec.
226.6(b)(2), which addresses rate disclosures for open-end (not home-
secured) plans, but these revisions are not intended to be substantive.
See, for example, proposed comments 6(a)(1)(ii)-1 and 6(b)(2)(i)(B)-1,
which address disclosing ranges of balances. Also, commentary
provisions that
[[Page 32989]]
currently apply to open-end plans generally but are inapplicable to
HELOCs would not be moved. For example, guidance in current 6(a)(2)-2
regarding a creditor's general reservation of the right to change terms
would not be moved to proposed comment 6(a)(1)(ii)-2, because Sec.
226.5b(f)(1) prohibits ``rate-reservation'' clauses for HELOCS. Comment
6-1, which addresses the need for consistent terminology with periodic
statement disclosures, would be deleted as duplicative. See proposed
Sec. 226.5(a)(2)(i).
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
6(b)(1) Charges Imposed as Part of Open-End (Not Home-Secured) Plans
Proposed Sec. 226.6(b)(1) would apply to all open-end plans except
HELOCs subject to Sec. 226.5b. It retains TILA's general requirements
for disclosing costs for open-end plans: Creditors would be required to
continue to disclose the circumstances under which charges are imposed
as part of the plan, including the amount of the charge (e.g., $3.00)
or an explanation of how the charge is determined (e.g., 3 percent of
the transaction amount). For finance charges, creditors must include a
statement of when the finance charge begins to accrue and an
explanation of whether or not a ``grace period'' or ``free-ride
period'' exists (a period within which any credit that has been
extended may be repaid without incurring the charge). Regulation Z
generally refers to this period as a ``free-ride period.'' Since 1989,
creditors have been required to use the term ``grace period'' in
complying with disclosure requirements for credit and charge card
applications and solicitations in Sec. 226.5a. 15 U.S.C.
1632(c)(2)(C); current Sec. 226.5a(a)(2)(iii); 54 FR 13,856; April 6,
1989. For consistency and the reasons set forth in the section-by-
section analysis to Sec. 226.6(b)(1), the Board would update
references to ``free-ride period'' as ``grace period'' in the
regulation and commentary, without any intended substantive change.
Currently, the rules for disclosing costs related to open-end plans
create two categories of charges covered by TILA: finance charges
(Sec. 226.6(a)) and ``other charges'' (Sec. 226.6(b)). Under the
proposal, the rules would create a single category of ``charges imposed
as part of an open-end (not home-secured) plan'' as identified in
proposed Sec. 226.6(b)(1)(i). This new section would identify a
complete description of the types of charges that would be considered
to be imposed as part of a plan. These charges include finance charges
under Sec. 226.4(a) and (b), penalty charges, taxes, and charges for
voluntary credit insurance, debt cancellation or debt suspension
coverage.
Charges to be disclosed would also include any charge the payment,
or nonpayment, of which affects the consumer's access to the plan,
duration of the plan, the amount of credit extended, the period for
which credit is extended, and the timing or method of billing or
payment. This proposed provision is intended to be broad but provide
greater clarity than current rules and capture charges that relate to
the key attributes of a credit plan. The proposed commentary would
provide examples of charges covered by the provision, such as
application fees and participation fees (which affect access to the
plan), fees to expedite card delivery (which also affect access to the
plan), and fees to expedite payment (which affect the timing and method
of payment). See proposed comment 6(b)(1)(i)-2.
Three examples of types of charges that are not imposed as part of
the plan are listed in proposed Sec. 226.6(b)(1)(ii). These examples
include charges imposed on a cardholder by an institution other than
the card issuer for the use of the other institution's ATM; and charges
for a package of services that includes an open-end credit feature, if
the fee is required whether or not the open-end credit feature is
included and the non-credit services are not merely incidental to the
credit feature. Comment 6(b)(1)(ii)-1 provides examples of fees for
packages of services that are considered to be imposed as part of the
plan and fees for packages of services that are not. This comment is
substantively identical to current comment 6(b)-1.v.
The proposal would not completely eliminate ambiguity about what
are TILA charges. To mitigate ambiguity, however, the proposal provides
a complete list in new Sec. 226.6(b)(4) of which charges identified
under Sec. 226.6(b)(1) must be disclosed in writing at account opening
(or before they are increased or newly introduced). See proposed Sec.
226.5(b)(1) and Sec. 226.9(c)(2) for timing rules. Any fees aside from
those identified in proposed Sec. 226.6(b)(4) would not be required to
be disclosed in writing at account opening. However, other charges
imposed as part of an open-end (not home-secured) plan may be disclosed
at account opening, or orally at any relevant time before the consumer
agrees to or becomes obligated to pay the charge. This approach is
intended in part to reduce creditor burden. Creditors presumably
disclose fees at relevant times, such as when a consumer orders a
service by telephone, for business reasons and to comply with other
state and federal laws. Moreover, compared to the approach reflected in
the current regulation, the proposed broad application of the statutory
standard of fees ``imposed as part of the plan'' should make it easier
for a creditor to determine whether a fee is a charge covered by TILA,
and reduce litigation and liability risks. In addition, this approach
will help ensure that consumers receive the information they need when
it would be most helpful to them.
6(b)(2) Rules Relating to Rates for Open-End (Not Home-Secured) Plans
Rules for disclosing rates that affect the amount of interest that
will be imposed would be reorganized and consolidated in proposed Sec.
226.6(b)(2). (See redesignation table below.)
6(b)(2)(i)
Finance charges attributable to periodic rates. Currently,
creditors must disclose finance charges attributable to periodic rates.
These costs are typically interest but may include other costs such as
premiums for required credit insurance. As discussed earlier, in
consumer testing for the Board, participants understood credit costs in
terms of interest and fees. The text of proposed Sec. 226.6(b)(2)(i)
reflects the Board's intention to make the distinction between interest
and fees clear.
Balance computation methods. Proposed Sec. 226.6(b)(2)(i) sets
forth rules relating to the disclosure of rates. Proposed Sec.
226.6(b)(2)(i)(D) (currently Sec. 226.6(a)(3)) requires creditors to
explain the method used to determine the balance to which rates apply.
15 U.S.C. 1637(a)(2). Model Clauses that explain commonly used methods,
such as the average daily balance method, are at Appendix G-1. The
Board requests comment on whether model clauses for methods such as
``adjusted balance'' and ``previous balance'' should be deleted as
obsolete, and more broadly, whether G-1 should be eliminated entirely
because creditors no longer use the model clauses.
In the December 2004 ANPR, the Board sought comment on how
significantly the choice of a balance computation method might affect
consumers' cost of credit, and on possible ways to enhance the
effectiveness of any required disclosure. Q28-Q30. Commenters
acknowledged that balance computation methods can affect consumers'
cost of credit but in
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general would favor an approach that emphasizes other key cost terms
instead of the details of balance computation methods. The Board
concurs with these views.
Calculating balances on open-end plans can be complex, and requires
an understanding of how creditors allocate payments, assess fees, and
record transactions as they occur during a billing cycle. Currently,
neither TILA nor Regulation Z requires creditors to disclose all the
information necessary to compute balances to which periodic rates are
applied, and requiring that level of detail would not appear to benefit
consumers because consumers are unlikely to review such detailed
information. Although the Board's model clauses are intended to assist
creditors in explaining common methods, consumers continue to find
explanations in account agreements to be lengthy and complex, and are
not understood. The proposal would require creditors to continue to
explain the balance computation methods in the account-opening
agreement, but the explanation would not be permitted in the account-
opening summary. As discussed below, along with the account-opening
summary proposed in Sec. 226.6(b)(4), creditors would name the balance
computation method and refer consumers to the account-opening
disclosures for an explanation of the balance computation method.
6(b)(2)(ii)
New Sec. 226.6(b)(2)(ii) would set forth the rules for variable-
rate disclosures now contained in footnote 12. In addition, guidance on
the accuracy of variable rates provided at account opening would be
moved from the commentary to the regulation, and revised. Currently,
comment 6(a)(2)-3 provides that creditors may provide the current rate,
a rate as of a specified date if the rate is updated from time to time,
or an estimated rate under Sec. 226.5(c). The Board proposes an
accuracy standard that is consistent with the Board's 2007 Electronic
Disclosure Proposal; that is, the rate disclosed is accurate if it was
in effect as of a specified date within 30 days before the disclosures
are provided. See 72 FR 21,1141; April, 30, 2007. The proposal would
eliminate creditors' option to provide an estimate as the rate in
effect for a variable-rate account. The Board believes creditors are
provided with sufficient flexibility under the proposal to provide a
rate as of a specified date, so the use of an estimate would not be
appropriate. New proposed comment 6(b)(2)(ii)-5, which addresses
discounted variable-rate plans and is substantively unchanged from
current comment 6(a)(2)-10, contains technical revisions.
The Board also proposes to require that, in describing how a
variable rate is determined, creditors must disclose the applicable
margin, if any. See proposed Sec. 226.6(b)(2)(ii)(B). Creditors state
the margin for purposes of contract or other law and are currently
required to disclose margins related to penalty rates, if applicable.
No particular format requirements would apply. Thus, the Board does not
expect the revision would add burden.
6(b)(2)(iii)
New Sec. 226.6(b)(2)(iii) would consolidate existing rules for
rate changes that are specifically set forth in the account agreement
but are not due to changes in an index or formula, such as rules for
disclosing introductory and penalty rates. In addition to identifying
the circumstances under which a rate may change (such as the end of an
introductory period or a late payment), creditors would be required to
disclose how existing balances would be affected by the new rate. The
proposed change is intended to improve consumer understanding as to
whether a penalty rate triggered by, for example, a late payment would
apply not only to outstanding balances for purchases but to existing
balances that were transferred at a low promotional rate. If the
increase in rate is due to an increased margin, creditors must disclose
the increase; the highest margin can be stated if more than one might
apply. See proposed comment 6(b)(2)(iii)-2.
6(b)(3) Voluntary Credit Insurance; Debt Cancellation or Suspension
As discussed in the section-by-section analysis to Sec. 226.4, the
Board is proposing revisions to the requirements to exclude charges for
voluntary credit insurance or debt cancellation or debt suspension
coverage from the finance charge. See proposed Sec. 226.4(d).
Creditors must provide information about the voluntary nature and cost
of the credit insurance or debt cancellation or suspension product, and
about the nature of coverage for debt suspension products. Because
creditors must obtain the consumer's affirmative request for the
product as a part of the disclosure requirements, the Board expects the
disclosures proposed under Sec. 226.4(d) will be provided at the time
the product is offered to the consumer. Thus, consumers may receive the
disclosures at the time they open an open-end account, or earlier in
time, such as at application.
6(b)(4) Tabular Format Requirements for Open-End (Not Home-Secured)
Plans
Proposed Sec. 226.6(b)(4) would introduce format requirements for
account-opening disclosures for open-end (not home-secured) plans. The
proposed summary of account-opening disclosures is based on the format
and content requirements for the tabular disclosures provided with
direct mail applications for credit and charge cards under Sec.
226.5a, as it would be revised under the proposal. Proposed forms under
G-17 in Appendix G illustrate the account-opening tables. As proposed,
comment 6(b)(4)-1 would refer generally to guidance in Sec. 226.5a
regarding format and disclosure requirements for the application and
solicitation table. For clarity, rules under Sec. 226.5a that do not
apply to account-opening disclosures are specifically noted. Comment is
requested on this approach, or whether importing essentially identical
guidance from Sec. 226.5a to Sec. 226.6 would ease compliance.
Rates. Proposed Sec. 226.6(b)(4)(ii) sets forth disclosure
requirements for rates that would apply to accounts. Periodic rates and
index and margin values would not be permitted to be disclosed in the
table, for the same reasons underlying, and consistent with, the
proposed requirements for the table provided with credit card
applications and solicitations. See comment 6(b)(4)(ii)-1. Creditors
would continue to disclose periodic rates, and index and margin values
as part of the account opening disclosures, and these could be provided
in the credit agreement, as is likely currently the case.
The rate disclosures required for the account-opening table differ
from those required for the table provided with credit card
applications and solicitations. For applications and solicitations,
creditors may provide a range of APRs or specific APRs that may apply,
where the APR is based on a later determination of the consumer's
creditworthiness. At account opening, creditors must disclose the
specific APRs that will apply to the account.
Fees. Fees that would be highlighted in the account-opening summary
are identified in Sec. 226.6(b)(4)(iii). The Board believes that these
fees, among the charges that TILA covers, are the most important fees,
at least in the current marketplace, for consumers to know about before
they start to use an account. They include charges that the consumer
could incur without creditors otherwise being able to disclose the cost
in advance of the consumers' act that triggers the cost, such as fees
triggered
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by a consumer's use of a cash advance check or by a consumers' late
payment. Transaction fees imposed for transactions in a feign currency
or that take place in a foreign country would be among the fees
disclosed at account opening, though the Board is not proposing to
require that foreign transaction fees be disclosed in the table
provided with credit card applications and solicitations. See section-
by-section analysis to Sec. 226.5a(b)(4). Although consumer testing
for the Board indicated that consumers do not choose to apply for a
card based on foreign transaction fees, the Board believes highlighting
the fee may be useful for some consumers before they obtain credit on
the account.
The Board intends this list of fees to be exclusive, for two
reasons. An exclusive list eases compliance and reduces the risk of
litigation; creditors have the certainty of knowing that as new
services (and associated fees) develop, the new fees need not be
highlighted in the account-opening summary unless and until the Board
requires their disclosure after notice and public comment. And as
discussed in the section-by-section analysis to Sec. 226.5(a)(1) and
Sec. 226.5(b)(1), charges required to be highlighted under new Sec.
226.6(b)(4) would have to be provided in a written and retainable form
before the first transaction and before being increased or newly
introduced. Creditors would have more flexibility regarding disclosure
of other charges imposed as part of an open-end (not home-secured)
plan.
The exclusive list of fees also benefits consumers. The list
focuses on fees consumer testing conducted for the Board showed to be
most important to consumers. The list is manageable and focuses on key
information rather than attempting to be comprehensive. Since all fees
imposed as part of the plan must be disclosed before the cost is
incurred, not all fees need to be included in the table.
The Board notes that if the amount of a fee such as a late-payment
fee or balance transfer fee varies from state to state, for disclosures
required to be provided with credit card applications and
solicitations, card issuers may disclose a range of fees and a
statement that the amount of the fee varies from state to state. See
existing Sec. 226.5a(a)(5), renumbered as new Sec. 226.5a(a)(4). A
goal of the proposed account-opening summary table is to provide to a
consumer with key information about the terms of the account.
Permitting creditors to disclose a range of fees seems not to meet that
standard. Nonetheless, the Board solicits comment on whether there are
any operational issues presented by the proposed rule to disclose fees
applicable to the consumer's account in the account-opening summary
table, and if so, suggested solutions.
Grace period. Under TILA, creditors providing disclosures with
applications and solicitations must discuss grace periods on purchases;
at account opening, creditor must explain grace periods more generally.
15 U.S.C. 1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Under proposed
Sec. 226.6(b)(4)(iv), creditors would state for all balances on the
account, whether or not a period exists in which consumers may avoid
the imposition of finance charges, and if so, the length of the period.
Required insurance, debt cancellation or debt suspension. For the
reasons discussed in the section-by-section analysis to Sec.
226.5a(b)(14), as permitted by applicable law, creditors that require
credit insurance, or debt cancellation or debt suspension coverage, as
part of the plan would be required to disclose the cost of the product
and a reference to the location where more information about the
product can be found with the account-opening materials, as applicable.
See proposed Sec. 226.6(b)(4)(v).
Payment allocation. In the December 2004 ANPR, the Board asked
about creditors' payment allocation methods, how the methods are
typically disclosed, and whether additional disclosures about payment
allocation should be required. Q34-Q36. Responses suggest that in
general, creditors tend to apply consumers' payments to satisfy low-
rate balances first, but that payment allocation methods vary. The
timing and detail of disclosures also vary. Some card issuers disclose
their payment allocation policies in materials accompanying credit card
applications, while others provide information as part of the account
agreement. Descriptions of payment allocation are typically general.
The Board proposes in Sec. 226.6(b)(4)(vi) to require creditors to
disclose, if applicable, the information proposed to be required with
credit card applications and solicitations regarding how payments will
be allocated if the consumer transfers balances at a low rate and then
makes purchases on the account. The Board believes the information is
useful to the consumer, although perhaps more so at the time of
application when consumers may establish an account to take advantage
of a promotional balance transfer rate. Because the Board is proposing
to allow the account-opening table to substitute for the table given
with an application or solicitation, the Board proposes also to include
the payment allocation disclosure in the account-opening summary, to
ensure that consumers receive this information, if applicable, at the
time of application or solicitation.
Available credit. For the reasons discussed under Sec.
226.5a(b)(16), the Board proposes a disclosure targeted at subprime
card accounts that assess substantial fees at account opening and leave
consumers with a limited amount of available credit. Proposed Sec.
226.6(b)(4)(vii) would require creditors to disclose in the account-
opening table the disclosures required under Sec. 226.5a(b)(16). The
proposed requirements would apply to creditors that require fees for
the availability or issuance of credit, or a security deposit, that
equals 25 percent or more of the minimum credit limit offered on the
account. If that threshold is met, card issuers must disclose in the
table an example of the amount of available credit the consumer would
have after the fees or security deposit are debited to the account,
assuming the consumer receives the minimum credit limit.
Web site reference. For the reasons stated under Sec.
226.5a(b)(17), credit card issuers would be required under proposed
Sec. 226.6(b)(4)(viii) to provide a reference to the Board's Web site
for additional information about shopping for and using credit card
accounts.
Balance computation methods. TILA requires creditors to explain as
part of the account-opening disclosures the method used to determine
the balance to which rates are applied. 15 U.S.C. 1637(a)(2).
Explaining balance computation methods in the account-opening table may
not benefit consumers, because the explanations can be lengthy and
complex, and consumer testing indicates the explanations are not
understood. Including an explanation in the table also may undermine
the goal of presenting essential information in a simplified way.
Nonetheless, some balance computation methods are more favorable to
consumers than others, and the Board believes it is appropriate to
highlight the method used, if not the technical computation details.
For those reasons, the Board proposes that the name of balance
computation methods used be disclosed beneath the table, along with a
statement that an explanation of the method is provided in the account
agreement or disclosure statement. See proposed Sec. 226.6(b)(4)(ix).
To determine the name of the balance computation method to be
disclosed, creditors would refer to Sec. 226.5a(g) for a list of
commonly-used
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methods; if the method used is not among those identified, creditors
would provide a brief explanation in place of the name.
Billing error rights reference. All creditors offering open-end
plans must provide notices of billing rights at account opening. See
current Sec. 226.6(d); proposed Sec. 226.6(c)(2). This information is
important, but lengthy. The Board proposes to draw consumers' attention
to the notices by requiring a statement that information about billing
rights and how to exercise them is provided in the account-opening
disclosures. See proposed Sec. 226.6(b)(4)(x). The statement, along
with the name of the balance computation method, would be located
directly below the table.
6(c) Rules of General Applicability
6(c)(1) Security Interests
Comments to proposed Sec. 226.6(c)(1) (current Sec. 226.6(c)) are
revised for clarity, without any substantive change. &
6(c)(2) Statement of Billing Rights
Creditors offering open-end plans must provide information to
consumers at account opening about consumers' billing rights under
TILA, in the form prescribed by the Board. 15 U.S.C. 1637(a)(7). This
requirement is implemented in the Board's Model Form G-3. The Board is
proposing revisions to Model Form G-3, proposed as G-3(A). The proposed
revisions are not based on consumer testing, although design techniques
and changes in terminology are proposed to improve consumer
understanding of TILA's billing rights. Creditors offering HELOCs
subject to Sec. 226.5b could continue to use current Model Form G-3,
or proposed G-3(A), at the creditor's option.
Section 226.7 Periodic Statement
TILA Section 127(b), implemented in Sec. 226.7, identifies
information about an open-end account that must be disclosed when a
creditor is required to provide periodic statements. 15 U.S.C. 1637(b).
Home-equity lines of credit. Periodic statement disclosure and
format requirements for home-equity lines of credit (HELOCs) subject to
Sec. 226.5b would be unaffected by the proposal, consistent with the
Board's plan to review Regulation Z's disclosure rules for home-secured
credit in a separate rulemaking. To facilitate compliance, the
substantively unrevised rules applicable only to HELOCs are grouped
together in proposed Sec. 226.7(a). (See redesignation table below.)
Open-end (not home-secured) plans. The Board proposes a number of
significant revisions to periodic statement disclosures for open-end
(not home-secured) plans. These rules are grouped together in proposed
Sec. 226.7(b). First, interest and fees imposed as part of the plan
during the statement period would be disclosed in a simpler manner and
in a consistent location. Second, the Board is proposing for comment
two alternative approaches to disclose the effective APR: The first
approach would try to improve consumer understanding of this rate and
reduce creditor uncertainty about its computation. The second approach
would eliminate the requirement to disclose the effective APR. Third,
if an advance notice of changed rates or terms is provided on or with a
periodic statement, a summary of the change would be required on the
front of the periodic statement. Model clauses would illustrate the
proposed revisions, to facilitate compliance. In addition, the Board
proposes to add new paragraphs Sec. 226.7(b)(11) and (12) to implement
disclosures regarding late-payment fees and the effects of making
minimum payments in Section 1305(a) and 1301(a) of the Bankruptcy Act
(further discussed below). TILA Section 127(b)(11) and (12); 15 U.S.C.
1637(b)(11) and (12).
A number of technical revisions are made for clarity. For the
reasons set forth in the section-by-section analysis to Sec.
226.6(b)(1), the Board would update references to ``free-ride period''
as ``grace period'' in the regulation and commentary, without any
intended substantive change. Current comment 7-2, which addresses open-
end plans involving more than one creditor, would be deleted as
obsolete and unnecessary.
Format requirements for periodic statements. TILA and Regulation Z
contain few formatting requirements for periodic statement disclosures.
In the December 2004 ANPR, the Board noted that some information about
past account activity also may be useful to consumers in making future
decisions concerning the plan. The Board sought comment on possible
ways to format information to improve the effectiveness of periodic
statement disclosures, including proximity requirements or grouping of
terms or fees. Q4-Q6.
Commenters' views were mixed. Industry commenters generally opposed
mandating specific format requirements. They suggested that consumers
are not confused by basic information conveyed on periodic statements,
and that mandated format requirements would be expensive to implement
and could stifle creditors' ability to tailor statements to specific
products. Some of these commenters suggested that grouping of terms or
fees might be helpful, but cautioned against a total of fees that would
not differentiate interest from other charges such as penalty fees
(late or over-the-credit-limit, for example). Some consumer group
commenters suggested importing format requirements similar to the
tabular disclosures for credit card applications and solicitations.
Consumer testing conducted for the Board has shown that targeted
proximity requirements on periodic statements tend to improve the
effectiveness of cost disclosures for consumers. For the reasons
discussed below, the Board proposes several proximity requirements. For
example, the proposal would link by proximity the payment due date with
the late payment fee and penalty rate that could be triggered by an
untimely payment. The minimum payment amount also would be linked by
proximity with the new warning required by the Bankruptcy Act about the
effects of making such payments on the account. The Board believes
grouping these disclosures together would enhance consumers' informed
use of credit.
To ensure consumers are alerted to rate increases and other changes
that increase the cost of using their account, a summary of key rate
and term changes would precede the transactions when an advance notice
of a change in term or rate accompanies a periodic statement.
Transactions would be grouped by type, and fee and interest charge
totals would be located with the transactions. Participants in the
consumer testing conducted for the Board tended to review their
transactions and to notice fees and interest charges when placed there.
The Board notes that some financial institutions presently group
transactions by type. Form G-18(A) would illustrate these requirements.
The Board is publishing for the first time forms illustrating front
sides of a periodic statement. The Board is publishing forms G-18(G)
and G-18(H) to illustrate how a periodic statement might be designed to
comply with the requirements of Sec. 226.7. Forms G-18(G) and G-18(H)
contain some additional disclosures that are not required by Regulation
Z. The forms also present information in some additional formats that
are not required by Regulation Z. The Board is publishing the front
side of a statement form as a compliance aid.
Consumer testing for the Board indicates that the effectiveness of
periodic statement disclosures is improved when certain information is
grouped together. The Board seeks comment on any alternative approaches
that would provide creditors more flexibility in grouping related
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information together on the periodic statement.
7(a) Rules Affecting Home-Equity Plans
For HELOCs, creditors are required to comply with the disclosure
requirements under proposed Sec. 226.7(a)(1) through (10), including
existing rules and guidance regarding the disclosure of finance charges
and other charges, which would be combined in a new Sec. 226.7(a)(6).
These rules and accompanying commentary are substantively unchanged
from current Sec. 226.7(a) through (k). Proposed Sec. 226.7(a) also
provides that at their option, creditors offering HELOCs may comply
with the requirements of Sec. 226.7(b). The Board understands that
some creditors may use a single processing system to generate periodic
statements for all open-end products they offer, including HELOCs.
These creditors would have the option to generate statements according
to a single set of rules.
In technical revisions, the substance of footnotes referenced in
Sec. 226.7(d) is moved to proposed Sec. 226.7(a)(4) and comment
7(a)(4)-6.
7(a)(7) Annual Percentage Rate
The Board is proposing two alternative approaches to address
concerns about the effective APR. These approaches are discussed in
detail in the section-by-section analysis to proposed Sec.
226.7(b)(7). The first approach seeks to improve the effective APR. For
HELOCs subject to Sec. 226.5b, creditors would have an option to
comply with the new rules or continue to comply with the current rules
applicable to the effective APR. This is intended as a temporary
measure until the Board reviews comprehensively the rules for HELOCs
subject to Sec. 226.5b. The second approach would eliminate the
requirement to disclose the effective APR; thus, under this approach,
the effective APR would be optional for HELOC creditors pending the
Board's review of home-secured disclosure rules.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
Current comment 7-3 provides guidance on various periodic statement
disclosures for deferred-payment transactions, such as when a consumer
may avoid interest charges if a purchase balance is paid in full by a
certain date. Under the proposal, the substance of comment 7-3, revised
to conform to other proposed revisions in Sec. 226.7(b), is proposed
as comment 7(b)-1. The Board believes the guidance is unnecessary for
HELOCs.
7(b)(2) Identification of Transactions
Proposed Sec. 226.7(b)(2) requires creditors to identify
transactions in accordance with rules set forth in Sec. 226.8. The
Board proposes to revise and significantly simplify those rules, as
discussed in the section-by-section analysis relating to Sec. 226.8
below.
The Board would introduce a format requirement to group
transactions by type, such as purchases and cash advances. In consumer
testing conducted for the Board, participants found such groupings
helpful. Moreover, consumers noticed fees and interest charges more
readily when transactions were grouped together, the fees imposed for
the statement period were not interspersed among the transactions, and
the interest and fees were disclosed in proximity to the transactions.
Comment 7(b)(2)-1 would reflect the new requirement. Sample G-18(A)
would illustrate the proposal.
7(b)(3) Credits
Creditors are required to disclose any credits to the account
during the billing cycle. Creditors typically disclose credits among
other transactions. The Board proposes no substantive changes to the
disclosure requirements for credits. However, consistent with the
format requirements proposed in Sec. 226.7(b)(2), the proposal would
require credits and payments to be grouped together. Consumers who
participated in testing conducted for the Board consistently identified
credits as statement information they review each month, and favored a
separation of credits and payments among the transactions.
Current comment 7(c)-2, which permits creditors to commingle
credits related to extensions of credit and credits related to non-
credit accounts, such as a deposit account, is not proposed under new
Sec. 226.7(b)(3). The Board solicits comment on the need for
alternatives to the proposed format requirements to segregate
transactions and credit, such as when a depository institution provides
on a single periodic statement account activity for a consumer's
checking account and an overdraft line of credit. Sample G-18(A) would
illustrate the proposal. Comment 7(b)(3)-3, as renumbered, is revised
for clarity.
7(b)(4) Periodic Rates
Periodic rates. TILA Section 127(b)(5) and current Sec. 226.7(d)
require creditors to disclose all periodic rates that may be used to
compute the finance charge, and an APR that corresponds to the periodic
rate multiplied by the number of periods in the years. 15 U.S.C.
1637(b)(5); Sec. 226.14(b). The Board is proposing to eliminate, for
open-end (not home-secured) plans, the requirement to disclose periodic
rates on periodic statements.
The Board proposes this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that proposing the exemption is appropriate.
In consumer testing conducted for the Board, consumers indicated they
do not use periodic rates to verify interest charges. Consistent with
the Board's proposal to not allow periodic rates to be disclosed in the
tabular summary on or with credit card applications and disclosures,
the Board believes that requiring periodic rates to be disclosed on
periodic statements may distract from more important information on the
statement, and contribute to information overload. The proposal to
eliminate periodic rates from the periodic statement therefore has the
potential to better inform consumers and further the goals of consumer
protection and the
[[Page 32994]]
informed use of credit for open-end (not home-secured) credit. The
Board welcomes comment on this matter.
Labeling APRs. Currently creditors are provided with considerable
flexibility in identifying the APR that corresponds to the periodic
rate. Current comment 7(d)-4 permits labels such as ``corresponding
annual percentage rate,'' ``nominal annual percentage rate,'' or
``corresponding nominal annual percentage rate.'' To promote
uniformity, creditors offering open-end (not home-secured) plans would
be required to label the annual percentage rate disclosed under
proposed Sec. 226.7(b)(4) as ``annual percentage rate.'' In
combination with the Board's proposed approach to improve consumers'
understanding of the effective APR discussed in the section-by-section
analysis to proposed Sec. 226.7(b)(7), it is important that the
``interest only'' APR be uniformly distinguishable from the effective
APR that includes interest and fees. Forms G-18(G) and G-18(H)
illustrate periodic statements that disclose an APR but no periodic
rates.
Rates that ``may be used.'' Currently, comment 7(d)-1 interprets
the requirement to disclose all periodic rates that ``may be used'' to
mean ``whether or not [the rate] is applied during the cycle.'' For
example, rates on cash advances must be disclosed on all periodic
statements, even for billing periods with no cash advance activity or
balances. The regulation and commentary do not clearly state whether
promotional rates, such as those offered for using checks accessing
credit card accounts, that ``may be used'' should be disclosed under
current Sec. 226.7(d) regardless of whether they are imposed during
the period. See current comment 7(d)-2. The Board is proposing a
limited exception to TILA Section 127(b)(5) to effectuate the purposes
of TILA to require disclosures that are meaningful and to facilitate
compliance.
Under the proposal, creditors would be required to disclose
promotional rates only if the rate actually applied during the billing
period. See proposed Sec. 226.7(b)(4)(ii). For example, a card issuer
may impose a 22 percent APR for cash advances but offer for a limited
time a 1.99 percent promotional APR for advances obtained through the
use of a check accessing a credit card account. Creditors are currently
required to disclose, in this example, the 22 percent cash advance APR
on periodic statements whether or not the consumer obtains a cash
advance during the previous statement period. The proposal would make
clear that creditors are not required to disclose the 1.99 percent
promotional APR unless the consumer used the check during the statement
period. The Board believes that interpreting TILA to require the
disclosure of all promotional rates would be operationally burdensome
for creditors and result in information overload for consumers. The
proposed exception would not apply to HELOCs covered by Sec. 226.5b.
The Board requests comment on whether the class of transactions under
the proposed exceptions should be tailored more broadly to include
HELOCs subject to Sec. 226.5b, and if so, why.
Combining interest and other charges. Currently, creditors must
disclose finance charges attributable to periodic rates. These costs
are typically interest but may include other costs such as premiums for
required credit insurance. If applied to the same balance, creditors
may disclose each rate, or a combined rate. See current comment 7(d)-3.
As discussed earlier, consumer testing for the Board indicates that
participants appeared to understand credit costs in terms of
``interest'' and ``fees,'' and the proposal would require disclosures
to distinguish between interest and fees. To the extent consumers
associate periodic rates with ``interest,'' it seems unhelpful to
consumers' understanding to permit creditors to include periodic rate
charges other than interest into the dollar cost disclosed. Thus,
guidance about combining periodic rates attributable to interest and
other finance charges would be retained for HELOCs in proposed comment
7(a)(4)-3, but would be eliminated for open-end (not home-secured)
plans.
A new comment 7(b)(4)-7 would be added to provide guidance to
creditors when a fee is imposed, remains unpaid, and accrues interest
on the unpaid balance. The comment provides that creditors disclosing
fees in accordance with the format requirements of Sec. 226.7(b)(6)
need not separately disclose which periodic rate applies to the unpaid
fee balance.
In technical revisions, the substance of footnotes referenced in
Sec. 226.7(d) is moved to the regulation and comment 7(b)(4)-5.
7(b)(5) Balance on which Finance Charge is Computed
Creditors must disclose the amount of the balance to which a
periodic rate was applied and an explanation of how the balance was
determined. The Board provides model clauses creditors may use to
explain common balance computation methods. 15 U.S.C. 1637(b)(7);
current Sec. 226.7(e); Model Clauses G-1, Appendix G. The staff
commentary to current Sec. 226.7(e) interprets how creditors may
comply with TILA in disclosing the ``balance,'' which typically changes
in amount throughout the cycle, on periodic statements.
Amount of balance. The proposal does not change how creditors are
required to disclose the amount of the balance on which finance charges
are computed. It would, however, permit creditors, at their option, not
to include an explanation of how the finance charge may be verified for
creditors that use a daily balance method. Currently, creditors that
use a daily balance method are permitted to disclose an average daily
balance for the period, provided they explain that the amount of the
finance charge can be verified by multiplying the average daily balance
by the number of days in the statement period, and then applying the
periodic rate. The Board would retain the rule permitting creditors to
disclose an average daily balance but would eliminate the requirement
to provide the explanation. Consumer testing conducted for the Board
suggests that the explanation may not be used by consumers as an aid to
calculate their interest charges. Participants suggested that if they
attempted without satisfaction to calculate balances and verify
interest charges based on information on the periodic statement, they
would call the creditor for assistance.
The section-by-section analysis to Sec. 226.7(b)(6) discusses
proposed revisions intended to further consumers' understanding of
interest charges, as distinguished from fees. To complement those
proposed revisions, the Board would require creditors to refer to the
balance as ``balances subject to interest rate,'' for consistency.
Forms G-18(G) and 18(H) illustrate this format requirement. For the
reasons discussed regarding guidance on disclosing periodic rates,
guidance about disclosing balances to which periodic rates attributable
to interest and other finance charges are applied would be retained for
HELOCs in proposed comment 7(a)(5)-1, but would be eliminated for open-
end (not home-secured) plans.
Explanation of balance computation method. The Board is proposing
an alternative to providing an explanation of how the balance was
determined. Under the proposal, a creditor that uses a balance
computation method identified in Sec. 226.5a(g) has two options. The
creditor may: (1) Provide an explanation, as the rule currently
requires, or (2) identify the name of the balance computation method
and
[[Page 32995]]
provide a toll-free telephone number where consumers may obtain more
information from the creditor about how the balance is computed and
resulting finance charges are determined. If the creditor uses a
balance computation method that is not identified in Sec. 226.5a(g),
the creditor would provide a brief explanation of the method. The
Board's proposal is guided by the following factors.
Calculating balances on open-end plans can be complex, and requires
an understanding of how creditors allocate payments, assess fees, and
record transactions as they occur during the cycle. Currently, neither
TILA nor Regulation Z requires creditors to disclose on periodic
statements all the information necessary to compute a balance, and
requiring that level of detail appears not to be warranted. Although
the Board's model clauses are intended to assist creditors in
explaining common methods, consumers continue to find these
explanations lengthy and complex. As stated earlier, consumer testing
indicates that consumers call the creditor for assistance when they
attempt without satisfaction to calculate balances and verify interest
charges.
The Board believes that providing the name of the balance
computation method (or a brief explanation, if the name is not
identified in Sec. 226.5a(g)), along with a reference to where
additional information may be obtained provides essential information
in a simplified way, and in a manner consistent with how consumers
obtain further balance computation information. The proposal is
consistent with the views of some commenters who responded to the
December 2004 ANPR and suggested that the Board simplify some of the
more complex disclosures not used by most consumers. Current comment
7(e)-6, which refers creditors to guidance in Sec. 226.6 about
disclosing balance computation methods would be deleted as unnecessary.
7(b)(6) Charges Imposed
As discussed in the section-by-section analysis to Sec. 226.6, the
Board proposes to reform cost disclosure rules for open-end (not home-
secured) plans, in part, to ensure that all charges assessed as part of
an open-end (not home-secured) plan are disclosed before they are
imposed and to simplify the rules for creditors to identify such
charges. Consistent with the proposed revisions at account opening, the
proposed revisions to cost disclosures on periodic statements are
intended to simplify how creditors identify the dollar amount of
charges imposed during the statement period.
Consumer testing conducted for the Board indicates that most
participants reviewing mock periodic statements could not correctly
explain the term ``finance charge.'' The proposed revisions are
intended to conform labels of charges more closely to common
understanding, ``interest'' and ``fees.'' Format requirements would
also help ensure that consumers notice charges imposed during the
statement period.
Two alternatives are proposed: One addresses interest and fees in
the context of an effective APR disclosure, the second assumes no
effective APR is disclosed.
Charges imposed as part of the plan. Proposed Sec. 226.7(b)(6)
would require creditors to disclose the amount of any charge imposed as
part of an open-end (not home-secured) plan, as stated in Sec.
226.6(b)(1). Guidance on which charges are deemed to be imposed as part
of the plan is in proposed Sec. 226.6(b)(1) and accompanying
commentary. Although coverage of charges would be broader under the
proposed standard of ``charges imposed as part of the plan'' than under
current standards for finance charges and other charges, the Board
understands that creditors have been disclosing on the statement all
charges debited to the account regardless of whether they are now
defined as ``finance charges,'' ``other charges,'' or charges that do
not fall into either category. Accordingly, the Board understands that
creditors already disclose all charges that would be considered
``imposed as part of the plan,'' and it does not expect this proposed
change to affect significantly the disclosure of charges on the
periodic statement.
Interest charges and fees. For creditors complying with the new
proposed cost disclosure requirements, the current requirement in Sec.
226.7(f) to label finance charges as such would be eliminated. See
current Sec. 226.7(f). Testing of this term with consumers found that
it did not help them to understand charges. Instead, charges imposed as
part of an open-end (not home-secured) plan would be disclosed under
the labels of ``interest charges'' and ``fees.'' Consumer testing
supplies evidence that consumers may generally understand interest as
the cost of borrowing money over time and characterize other costs--
regardless of their characterization under TILA and Regulation Z--as
fees (other than interest). The Board's proposal is consistent with
this evidence.
TILA Section 127(b)(4) requires creditors to disclose on periodic
statements the amount of any finance charge added to the account during
the period, itemized to show amounts due to the application of periodic
rates and the amount imposed as a fixed or minimum charge. 15 U.S.C.
1637(b)(4). This requirement is currently implemented in Sec.
226.7(f), and creditors are given considerable flexibility regarding
totaling or subtotaling finance charges attributable to periodic rates
and other fees. See current Sec. 226.7(f) and comments 7(f)-1, -2, and
-3. To improve uniformity and promote the informed use of credit,
creditors would be required under proposed Sec. 226.7(b)(6)(ii) to
itemize finance charges attributable to interest, by type of
transaction labeled as such, and would be required to disclose, for the
statement period, a total interest charge, labeled as such. Although
creditors are not currently required to itemize interest charges by
transaction type, creditors often do so. For example, creditors may
disclose the dollar interest costs associated with cash advance and
purchase balances. Based on consumer testing, the Board believes
consumers' ability to make informed decisions about the future use of
their open-end plans--primarily credit card accounts--may be promoted
by a simply-labeled breakdown of the current interest cost of carrying
a purchase or cash advance balance. The breakdown would enable
consumers to better understand the cost for using each type of
transaction, and uniformity among periodic statements would allow
consumers to compare one account with other open-end plans the consumer
may have. Under the proposal, finance charges attributable to periodic
rates other than interest charges, such as required credit insurance
premiums, would be identified as fees and would no longer be permitted
to be combined with interest costs. See proposed comment 7(b)(4)-3.
Current Sec. 226.7(h) requires the disclosure of ``other charges''
parallel to the requirement in TILA Section 127(a)(5) and current Sec.
226.6(b) to disclose such charges at account opening. 15 U.S.C.
1637(a)(5). Consistent with current rules to disclose ``other
charges,'' revised Sec. 226.7(b)(6)(iii) would require that other
costs be identified consistent with the feature or type, and itemized.
The proposal differs from current requirements in the following
respect: fees would be required to be grouped together and a total of
all fees for the statement period would be required. Currently,
creditors typically include fees among other transactions identified
[[Page 32996]]
under Sec. 226.7(b). In consumer testing, consumers were able to more
accurately and easily determine the total cost of non-interest charges
when fees were grouped together and a total of fees was given than when
fees were scattered among the transactions without a total. (Section
226.7(b)(6)(iii) also would require that certain fees that are included
in the computation of the effective APR pursuant to Sec. 226.14 must
be labeled either as ``transaction fees'' or ``fixed fees.'' This
proposed requirement is discussed in further detail in the section-by-
section analysis to Sec. 226.7(b)(7).)
To highlight the overall cost of the credit account to consumers,
creditors would disclose the total amount of interest charges and fees
for the statement period and calendar year to date. Participants in
consumer testing conducted for the Board noticed the year-to-date cost
figures and indicated they would find the numbers helpful in making
future financial decisions. The Board believes that disclosure of year-
to-date totals would better inform consumers about the cumulative cost
of their credit plans over a significant period of time. Comment
7(b)(6)-3 would provide guidance on how creditors may disclose the year
to date totals at the end of a calendar year.
Proposed Sec. 226.7(b)(6)(iv) in Alternative 1 contains
requirements for calculating and disclosing totals for interest and
certain fees in connection with the disclosure of the effective APR
pursuant to Sec. 226.7(b)(7). These requirements are in addition to
the total interest and fee disclosures disclosed in proximity to
transactions, and are discussed in further detail in the section-by-
section analysis to Sec. 226.7(b)(7).
Format requirements. In consumer testing, consumers consistently
reviewed transactions identified on their periodic statements and
noticed fees and interest charges, itemized and totaled, when they were
grouped together with transactions. Some creditors also disclose these
costs in account summaries or in a progression of figures associated
with disclosing finance charges attributable to periodic rates. The
proposal would not affect creditors' flexibility to provide this
information in such summaries. See Forms G-18(G) and G-18(H), which
illustrate, but do not require, such summaries. However, the Board
believes TILA's purpose to promote the informed use of credit would be
furthered significantly if consumers are uniformly provided, in a
location they routinely review, basic cost information--interest and
fees--that enables consumers to compare costs among their open-end
plans. The Board proposes that charges required to be disclosed under
Sec. 226.7(b)(6)(i) would be grouped together with the transactions
identified under Sec. 226.7(b)(2), substantially similar to Sample G-
18(A) in Appendix G. Proposed Sec. 226.7(b)(6)(iii) would require non-
interest fees to be itemized and grouped together, and a total of fees
would be disclosed for the statement period and calendar year to date.
Interest charges would be itemized by type of transaction, grouped
together, and a total of interest charges would be disclosed for the
statement period and year to date. Sample G-18(A) in Appendix G
illustrates the proposal.
7(b)(7) Effective Annual Percentage Rate
TILA Section 127(b)(6) requires disclosure of an APR calculated as
the quotient of the total finance charge for the period to which the
charge relates divided by the amount on which the finance charge is
based, multiplied by the number of periods in the year. 15 U.S.C.
1637(b)(6). This rate has come to be known as the ``historical APR'' or
``effective APR.'' (This APR will be referred to as the ``effective
APR'' in this section-by-section analysis, and in the regulation and
accompanying commentary.) Section 127(b)(6) exempts a creditor from
disclosing an effective APR when the total finance charge does not
exceed 50 cents for a monthly or longer billing cycle, or the pro rata
share of 50 cents for a shorter cycle. In such a case, TILA Section
127(b)(5) requires the creditor to disclose only the periodic rate and
the annualized rate that corresponds to the periodic rate. 15 U.S.C.
1637(b)(5). When the finance charge exceeds 50 cents, the act requires
creditors to disclose the periodic rate but not the corresponding APR.
Since 1970, however, Regulation Z has required disclosure of the
corresponding APR in all cases. See current Sec. 226.7(d). Current
Sec. 226.7(g) implements TILA Section 127(b)(6)'s requirement to
disclose an effective APR.
The effective APR and corresponding APR for any given plan feature
are the same when the finance charge in a period arises only from
application of the periodic rate to the applicable balance (the balance
calculated according to the creditor's chosen method, such as average
daily balance method). When the two APRs are the same, Regulation Z
requires that the APR be stated just once. The effective and
corresponding APRs diverge when the finance charge in a period arises
(at least in part) from a charge not determined by application of a
periodic rate and the total finance charge exceeds 50 cents. When they
diverge, Regulation Z requires that both be stated.
The following example illustrates the relationship between the
effective APR and the corresponding APR in a simple case. A credit
cardholder with no balance in the previous cycle takes a cash advance
of $100 on the first day of the cycle. A cash advance fee of 3 percent
applies (a finance charge of $3), as does a periodic rate of 1\1/2\
percent per month on the average daily balance of $100 (a finance
charge of $1.50). No other transactions, and no payments, occur during
the cycle, which is 30 days. The corresponding APR is 18 percent (1\1/
2\ percent times 12). To determine the effective APR, first the total
finance charge of $4.50 is divided by the balance of $100. This
quotient, 4\1/2\ percent, is the rate of the total finance charge on a
monthly basis. The monthly rate is annualized, or multiplied by 12, to
yield an effective APR of 54 percent. Under Regulation Z, the creditor
would disclose on the periodic statement both the corresponding APR of
18 percent and the effective APR of 54 percent.
The controversy over the effective APR. The statutory requirement
of an effective APR is intended to provide the consumer with an annual
rate that reflects the total finance charge, including both the finance
charge due to application of a periodic rate (interest) and finance
charges that take the form of fees. This rate, like other APRs required
by TILA, presumably was intended to provide consumers information about
the cost of credit that would help consumers compare credit costs and
make informed credit decisions and, more broadly, strengthen
competition in the market for consumer credit. 15 U.S.C. 1601(a). There
is, however, a longstanding controversy about the extent to which the
requirement to disclose an effective APR advances TILA's purposes or,
as some argue, undermines them. This controversy has been reflected in
such forums as discussions by the Board's Consumer Advisory Council and
comments on the ANPR. Q23-Q25. The following discussion seeks to place
the controversy over the effective APR in the context of certain
objective characteristics of the disclosure.
The effective APR is essentially retrospective, or ``historical.''
An effective APR on a particular periodic statement represents the cost
of transactions in which the consumer engaged during the cycle to which
that statement pertains. It is not likely, however, that the effective
APR for a transaction in a given cycle will predict accurately the cost
of a transaction in a
[[Page 32997]]
future cycle. If any one of several factors is different in the future
cycle than it was in the past cycle, such as the balance at the
beginning of the cycle or the amount and timing of each transaction and
payment during the cycle, then the effective APRs in the two cycles
will be different, too.\13\ In short, the effective APR is by nature
retrospective and idiosyncratic and, therefore, provides limited
information about the cost of future transactions.
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\13\ An example demonstrates how the effective APR depends
critically on the timing of transactions during two different
cycles. Assume for the sake of simplicity that the transaction
amount and beginning balance remain the same in both cycles. In the
example discussed above, a cash advance of $100 on the first day of
a 30-day cycle yielded an effective APR of 54 percent, three times
the corresponding APR of 18 percent. If in a later cycle the
consumer were to take the cash advance on the last day of the 30-day
cycle, the effective APR would be 36.6 percent, about twice the
corresponding APR. (The finance charge produced by the periodic rate
would be $.05 (1\1/2\ percent times the average daily balance of
$3.33). The total finance charge of $3.05 divided by the transaction
amount of $100 yields a quotient of 3.05 percent, which is
multiplied by 12 to yield an effective APR of 36.6 percent.)
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Consumer groups argue that the information the rate provides about
the cost of future transactions, even if limited, is meaningful. The
effective APR for a specific transaction or set of transactions in a
given cycle may provide the consumer a rough indication that the cost
of repeating such transactions is high in some sense or, at least,
higher than the corresponding APR alone conveys. Industry commenters
respond that the cost of a transaction is not usually as high as the
effective APR makes it appear, and that this tendency of the rate to
exaggerate the cost makes this APR misleading. Commenters generally
agree that the effective APR can be ``shocking,'' but they disagree as
to whether it conveys meaningful information.
One reason that effective APRs appear high is the assumption built
into the disclosure that the borrower paid the balance at the end of
the cycle. This assumption tends to make the APR higher, and more
volatile, than if a longer repayment period were used. In the example
given above, the effective APR on cash advances, 54 percent, is three
times the corresponding APR, 18 percent. Moreover, the effective APR
would have been 18 percent (the same as the corresponding APR) in the
previous cycle if no cash advances had been taken then, and it will
fall back to 18 percent in the next cycle if no cash advance is taken
then (assuming the rate is fixed). Use of a longer repayment period
would, other things being equal, yield a lower, and less volatile,
effective APR. A lower APR based on available information about the
consumer's expected time to repay might seem more realistic. But its
disclosure would require making assumptions about activity in future
cycles, such as the timing and amount of future transactions and
payments--or it would require assuming that there is to be no activity
on the account until the balance is repaid. Such assumptions would
often appear arbitrary and unrealistic. Accordingly, Regulation Z has
always required that the effective APR be calculated on the premise
that payment was made at the end of the cycle. The likelihood that the
premise is often wrong accounts, at least in part, for the controversy
as to whether the effective APR can supply meaningful information about
credit costs.
Consumer advocates and industry representatives also disagree as to
whether the effective APR promotes credit shopping. The dependence of
the effective APR on the particular activity in a given cycle means
that any given effective APR in any given cycle is not typically a
practical shopping tool. Comparing two particular effective APRs for
any two cycles on two different accounts is not usually a reliable
basis to determine which account costs the consumer more. Moreover, an
effective APR for a given month on an existing account cannot be
compared reliably to the corresponding APR advertised on a different
account, which by definition does not reflect any finance charges
imposed in the form of fees. There may be cases in which repeated
disclosure of effective APRs in consecutive cycles, as opposed to one
effective APR for one cycle, would facilitate shopping. For example, if
an account had a periodic rate and a corresponding APR of zero, the
effective APRs disclosed on the account might provide the most
practical basis for assessing the cost of the account in relationship
to other advertised accounts. This example, though, does not appear to
be common in today's market.
Although the effective APR is not commonly usable as a shopping
tool in itself, consumer group commenters argue that the effective APR
promotes credit shopping by encouraging consumers to seek out other
sources of credit, especially when the rate reaches levels that
``shock'' consumers. Industry commenters respond, however, that the
tendency of the effective APR to exaggerate the cost of credit may lead
consumers to make invalid comparisons. They say that disclosure of a
high effective APR in a cycle may cause a consumer to discontinue using
the account in favor of another account that appears less expensive
based on its corresponding APR but is in fact more expensive, because
of fixed or minimum charges or other factors.
Supporters of the effective APR also argue that high effective APRs
typical for cash advances and balance transfers benefit consumers by
discouraging them from engaging in these transactions. Industry
commenters respond that consumers do not necessarily benefit if they
refrain categorically from a particular kind of credit transaction;
depending on the alternatives consumers choose, they may be worse-off
rather than better-off. Some of these commenters also argue that
discouraging particular kinds of credit transactions is not a valid
objective of Regulation Z.
Industry and community group commenters find some common ground in
their observations that consumers do not understand the effective APR
well. Industry commenters argue from their experience with their
customers that consumers do not understand how this APR differs from
the corresponding APR, why it is ``so high,'' or which fees it
reflects. Creditor commenters say that when their customers call them
and express alarm or confusion over the effective APR, the creditors
find it difficult, if not impossible, to make the caller understand the
disclosure. Nor, they argue, does a consumer find the disclosure any
more useful than disclosure of interest and fees in dollars and cents,
even if the consumer understands the disclosure. Consumer groups
concede that, as implemented today, the effective APR is difficult for
consumers to understand, and they support efforts to make it more
understandable, such as improved presentation on the periodic
statement. Industry commenters expressed doubt that such efforts would
be worthwhile.
Industry commenters also claim the effective APR imposes direct
costs on creditors that consumers pay indirectly. They represent that
the effective APR raises compliance costs when they introduce new
services, including legal analysis of Regulation Z to determine whether
the fee for the new service must be included in the effective APR and
software programming if it is included; they are also concerned about
litigation risks. Also, responding to telephone inquiries from confused
customers and accommodating them (e.g., with fee waivers or rebates)
increases operational costs. Costs associated with adverse consumer
reactions to the effective APR may influence creditors to take steps to
minimize the frequency with which
[[Page 32998]]
they must disclose it. One such step would be to price credit mostly
through a periodic rate rather than fees. Although this effect is
difficult to measure, a trade association commenter concedes a policy
argument for retaining the effective APR as a hedge against creditors
shifting their pricing from periodic rates to transaction-triggered
fees and charges.
Like most other industry commenters, however, this same commenter
concludes that the effective APR should be eliminated because, for the
reasons discussed above, its costs outweigh its benefits. Some industry
commenters support replacing the effective APR with enhanced fee
disclosures (for example, grouping fees on the statement or summing
them for each period or for the year), but many do not. Consumer groups
urge the Board not only to retain the effective APR, but to expand it
in two respects: (1) Include in the rate all charges, including charges
not currently defined as finance charges in Regulation Z; and (2)
require creditors to disclose a ``typical effective APR'' (an average
of effective APRs) on solicitations and account-opening
disclosures.\14\
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\14\ Consumer group comments about a ``typical APR'' disclosure
are summarized in the section-by-section analysis to Sec. 226.5a.
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Consumer research conducted for the Board. It is difficult to
measure directly how the effective APR ultimately affects consumers,
creditors, and the credit market generally. It is feasible, however, at
a minimum, to assess to some degree consumers' awareness and
understanding of the disclosure. Such assessments may support
inferences about the disclosure's effectiveness.
Accordingly, the Board undertook research, through a consultant, to
shed light on consumer awareness and understanding of the effective
APR; and on whether changes to the presentation of the disclosure could
increase awareness and understanding. A Board consultant used a
qualitative testing method, one-on-one cognitive interviews with
consumers. Consumers were provided mock disclosures of periodic
statements that included effective APRs and asked questions about the
disclosure designed to elicit their understanding of the rate. In the
first round the statements were copied from examples in the market. For
subsequent testing rounds, however, statements were modified in
language and design to better convey how the effective APR differs from
the corresponding APR. Several different approaches and many variations
on those approaches were tested.
In most of the rounds, a minority of participants correctly
explained that the effective APR for cash advances in the last cycle
was higher than the corresponding APR for cash advances because a cash
advance fee had been imposed. A smaller minority correctly explained
that the effective APR for purchases was the same as the corresponding
APR for purchases because no transaction fee had been imposed on
purchases. A majority offered incorrect explanations or did not offer
any explanation. Results changed at the final testing site, however,
when a majority of participants evidenced an understanding that the
effective APR for cash advances would be elevated for the statement
period when a cash advance fee was imposed during that period, that the
effective APR would not be as elevated for periods where a cash advance
balance remained outstanding but no fee had been imposed, and that the
effective APR for purchases was the same as the corresponding APR for
purchases because no transaction fee had been imposed on purchases.
The form in the final round labeled the rate ``Fee-Inclusive APR''
and placed it in a table separate from the corresponding APR. The
``Fee-Inclusive APR'' table included the amount of interest and the
amount of transaction fees. An adjacent sentence stated that the ``Fee-
Inclusive APR'' represented the cost of transaction fees as well as
interest. Similar approaches had been tried in some of the earlier
rounds, except that the effective APR had been labeled ``Effective
APR.''
The Board's two alternative proposals. The considerations and data
discussed above lead the Board to propose two alternative approaches
for disclosing the effective APR: The first approach would try to
improve consumer understanding of this rate and reduce creditor
uncertainty about its computation. The second approach would eliminate
the requirement to disclose the effective APR. The evidence of consumer
understanding of the effective APR supplied by the qualitative research
conducted for the Board is mixed, but it suggests that it may be
possible to increase current levels of understanding by modifying the
presentation of the rate on the periodic statement. The Board's
experience with Regulation Z also suggests that it may be possible to
reduce burdens by simplifying computation of the effective APR.
The Board plans to conduct further research into consumer
understanding of the effective APR after the comment period has ended.
The Board will evaluate this additional research with the research
conducted to date, and with other information, including comments
received on this proposal, and determine whether the effective APR
should be retained with modifications as proposed, eliminated, or
addressed in some other way.
1. First alternative proposal. Under the first alternative, the
Board proposes to impose uniform terminology and formatting on
disclosure of the effective APR and the fees included in its
computation. See proposed Sec. Sec. 226.7(b)(7)(i), 226.7(b)(6)(iv).
This proposal is based largely on a form developed through several
rounds of one-on-one interviews with consumers. The Board also proposes
under this alternative to revise Sec. 226.14, which governs
computation of the effective APR, in an effort to increase certainty
about which fees the rate must include. See proposed Sec. 226.14(d).
See section-by-section analysis to Sec. 226.7(a)(7) regarding how the
proposal affects HELOCs subject to Sec. 226.5b.
Under proposed Sec. 226.7(b)(7)(i) and Sample Form G-18(B),
creditors would label the effective APR ``Fee-Inclusive APR'' and
indicate that the Fee-inclusive APRs are the ``APRs that you paid this
period when transactions or fixed fees are taken into account as well
as interest.'' Creditors would disclose an effective APR for each
feature, such as purchases and cash advances, in a tabular format. A
composite effective APR for two or more features would no longer be
permitted, as it is more difficult to explain to consumers. The
effective APR(s) would appear in a table, by feature, with the total of
interest, labeled as ``interest charges,'' and the total of the fees
included in the effective APR, labeled as ``transaction and fixed
charges.'' To facilitate understanding, proposed Sec. 226.7(b)(6)(iii)
would require creditors to label the specific fees used to calculate
the effective APR either as ``transaction'' or ``fixed'' fees,
depending whether the fee relates to a specific transaction; such fees
would be disclosed in the list of transactions. If the only finance
charges in a billing cycle are interest charges, the corresponding and
effective APRs are identical. In those cases, creditors would disclose
only the corresponding APRs and would not be required to label fees as
``transaction'' or ``fixed'' fees. These requirements would be
illustrated in forms under G-18 in Appendix G, and creditors would be
required to use the model or a substantially similar presentation.
To facilitate compliance, the proposed regulation would give
specific guidance about how to attribute fees to account
[[Page 32999]]
features. For convenience and uniformity, two kinds of charges, when
used to calculate the effective APR, would be grouped under the
purchase feature of the account: (1) Charges that relate to specific
purchase transactions; and (2) minimum, fixed and other non-interest
charges not related to a specific transaction. See proposed Sec.
226.7(b)(6)(iv)(B). If there are purchase features other than the
standard purchase feature--such as a promotional purchase feature--then
the minimum, fixed or other non-interest charges would be grouped with
other charges relating to the balance on the standard purchase feature.
See proposed comment 7(b)(6)-5. In addition, a minimum charge would be
disclosed as a fee, rather than as interest, and it would be grouped
together with other fees related to standard purchases and used to
calculate the effective APR with respect to the standard purchase
feature. See proposed comment 7(b)(6)-4.
The proposal also seeks to simplify computation of the effective
APR, both to increase consumer understanding of the disclosure and
facilitate creditor compliance. New Sec. 226.14(e) would provide a
specific and exclusive list of finance charges that would be included
in calculating the effective APR.\15\ This proposed change is discussed
further in the section-by-section analysis to Sec. 226.14.
---------------------------------------------------------------------------
\15\ Under the statute, the numerator of the quotient used to
determine the historical APR is the total finance charge. See
Section 107(a)(2), 15 U.S.C. 1606(a)(2). The Board has authority to
make exceptions and adjustments to this calculation method to serve
TILA's purposes and facilitate compliance. See Section 105(a), 15
U.S.C. 1604(a). The Board has used this authority before to exclude
certain kinds of finance charges from the historical APR. See
current Sec. 226.14(c)(2), fn. 33.
---------------------------------------------------------------------------
The Board seeks comment on the potential benefits and costs of the
first alternative proposal.
2. Second alternative proposal. Under the second alternative
proposal, for the reasons discussed in the introduction to the
discussion of the effective APR, the effective APR would no longer be
disclosed. The Board proposes this approach pursuant to its exception
and exemption authorities under TILA Section 105. Section 105(a)
authorizes the Board to make exceptions to TILA to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uniformed use of
credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board
to exempt any class of transactions (with an exception not relevant
here) from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that proposing the exemption is appropriate.
Consumer testing suggests that consumers find the current requirement
of disclosing an APR that combines rates and fees to be confusing. The
proposal would require disclosure of the nominal interest rate and fees
in a manner that is more readily understandable and comparable across
institutions. It therefore has the potential to better inform consumers
and further the goals of consumer protection and the informed use of
credit for all types of open-end credit. A potentially competing
consideration is the extent to which ``sticker shock'' from the
effective APR benefits consumers, even if the disclosure is somewhat
arbitrary. A second consideration is whether the effective APR is a
hedge against fee-intensive pricing by creditors, and if so, the extent
to which it promotes transparency. On balance, however, the Board
believes that the benefits of the proposal would outweigh these
considerations.
The Board welcomes comment on this matter.
7(b)(9) Address for Notice of Billing Errors
Consumers who allege billing errors must do so in writing. 15
U.S.C. 1666; Sec. 226.13(b). Creditors must provide on or with
periodic statements an address for this purpose. See current Sec.
226.7(k). Currently, comment 7(k)-2 provides that creditors may also
provide a telephone number along with the mailing address as long as
the creditor makes clear a telephone call to the creditor will not
preserve consumers' billing error rights. The Board would update
comment 7(k)-2, renumbered as comment 7(b)(9)-2, to address
notification by e-mail or via a Web site. The comment would provide
that the address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by e-mail or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.
7(b)(10) Closing Date of Billing Cycle; New Balance
Creditors must disclose the closing date of the billing cycle and
the account balance outstanding on that date. As a part of its proposal
to implement TILA amendments in the Bankruptcy Act regarding late
payment and the effect of making minimum payments, the Board is
proposing to require creditors to group together, as applicable,
disclosures of related information about due dates and payment amounts,
including the new balance. This is discussed in the section-by-section
analysis to Sec. Sec. 226.7(b)(11) and (b)(13) below, and illustrated
in Forms G-18(G) and G-18(H) in Appendix G.
7(b)(11) Due Date; Late Payment Costs
TILA Section 127(b)(12), added by Section 1305(a) of the Bankruptcy
Act, requires creditors that charge a late-payment fee to disclose on
the periodic statement (1) the payment due date or, if different, the
earliest date on which the late-payment fee may be charged, and (2) the
amount of the late-payment fee. 15 U.S.C. 1637(b)(12). The October 2005
ANPR solicited comment on the need for additional guidance on the date
to be disclosed under the new rule, and whether the Board should
consider any format requirements, such as proximity rules, or the
publication of model disclosures. Q97-Q99.
Home-equity plans. The Board intends to implement the late payment
disclosure for HELOCs as a part of its review of rules affecting home-
secured credit. Creditors offering HELOCs may comply with proposed
Sec. 226.7(b)(11), at their option.
Charge card issuers. TILA Section 127(b)(12) applies to
``creditors.'' TILA's definition of ``creditor'' includes card issuers
and other persons that offer consumer open-end credit. Issuers of
``charge cards'' (which are typically products where outstanding
balances cannot be carried over from one billing
[[Page 33000]]
period to the next and are payable when a periodic statement is
received) are ``creditors'' for purposes of specifically enumerated
TILA disclosure requirements. 15 U.S.C. 1602(f); Sec. 226.2(a)(17).
The new disclosure requirement in TILA Section 127(b)(12) is not among
those specifically enumerated.
The Board proposes that charge card issuers are not subject to the
late payment disclosure requirements contained in the Bankruptcy Act
and to be implemented in new Sec. 226.7(b)(11); the new requirement is
not specifically enumerated to apply to charge card issuers. In
addition, the Board understands that for some charge card issuers,
payments are not considered ``late'' for purposes of imposing a fee
until a second statement is received without a payment. The Board
believes it would be undesirable to encourage consumers who in January
receive a statement with the balance due upon receipt, for example, to
avoid paying the balance when due because a late-payment fee may not be
assessed until mid-February; such a disclosure could cause issuers to
change such a practice.
Payment due date. Under the proposal, creditors must disclose the
due date for a payment if a late-payment fee could be imposed under the
credit agreement. The Board interprets this to be a date that is
required by the legal obligation and not to encompass informal
``courtesy periods'' that are not part of the legal obligation and that
creditors may observe for a short period after the stated due date
before a late-payment fee is imposed, to account for minor delays in
payments such as mail delays. Several commenters asked the Board to
clarify that in complying with the new late-payment fee disclosure,
creditors need not disclose informal ``courtesy periods'' not part of
the legal obligation. The Board proposes a comment to this effect. See
proposed comment 7(b)(11)-1.
Under the statute, creditors must disclose on periodic statements
the payment due date or, if different, the earliest date on which the
late-payment fee may be charged. Some state laws require that a certain
number of days must elapse following a due date before a late-payment
fee may be imposed. Under such a state law, the later date arguably
would be required to be disclosed on periodic statements. The Board is
concerned, however, that such a disclosure would not provide a
meaningful benefit to consumers in the form of useful information or
protection and would result in consumer confusion. For example, assume
a payment is due on March 10 and state law provides that a late payment
fee cannot be assessed before March 21. The Board is concerned that
highlighting March 20 as the last date to avoid a late payment fee may
mislead consumers into thinking that a payment made any time on or
before March 20 would have no adverse financial consequences. However,
failure to make a payment when due is considered an act of default
under most credit contracts, and can trigger higher costs due to
interest accrual and perhaps penalty APRs. Particularly in the case of
an increased rate that applies to all account balances, the cost of
paying late may be significant.
The Board considered additional disclosures on the periodic
statement that would more fully explain the consequences of paying
after the due date and before the date triggering the late-payment fee,
but such an approach appears cumbersome and overly complicated. For
those reasons, the Board proposes that creditors must disclose the due
date under the terms of the legal obligation, and not a date different
than the due date, such as when creditors are required by state or
other law to delay for a specified period imposing a late-payment fee
when a payment is received after the due date. Consumers' rights under
state laws to avoid the imposition of late-payment fees during a
specified period following a due date are unaffected by the proposal;
that is, in the above example, the creditor would disclose March 10 as
the due date for purposes of Sec. 226.7(b)(11), but could not, under
state law, assess a late-payment fee before March 21. However, the
proposal would provide additional protections to consumers by not
requiring a disclosure that a late-payment fee will be imposed only
after a specified period after the due date, which, if followed, may
result in even more costly consequence of an increased penalty rate.
Cut-off time for making payments. As discussed in the section-by-
section analysis to Sec. 226.10(b), the Board proposes to require that
creditors disclose any cut-off time for receiving payments closely
proximate to each reference of the due date, if the cut-off time is
before 5 p.m. on the due date. If cut-off times prior to 5 p.m. differ
depending on the method of payment (such as by check or via the
Internet), the creditor must state the earliest time without specifying
the method to which it applies. This avoids information overload by
potentially identifying several cut-off times. Cut-off hours of 5 p.m.
or later may continue to be disclosed under the existing rule
(including on the reverse side of periodic statements).
Amount of late payment fee; penalty APR. Creditors must disclose
the amount of the late-payment fee and the payment due date on periodic
statements, under TILA amendments contained in the Bankruptcy Act. The
purpose of the new late payment disclosure requirement is to ensure
consumers know the consequences of paying late. To fulfill that
purpose, the Board proposes that the amount of the late-payment fee
must be disclosed in close proximity to the due date. If the amount of
the late-payment fee is based on outstanding balances, the proposal
would permit the creditor to disclose either the fee that would apply
to that specific balance, or the highest fee in the range (e.g., ``up
to'' a stated dollar amount).
In addition, the Board believes that an equally (or more) important
consequence of paying late is the potential increase in APRs. The
extent of rate increases may be substantial, particularly where the
increased APR applies to all existing balances, including balances at
low promotional rates. Further, the increased APR may apply for a
lengthy period of time (although if the creditor imposes a penalty
rate, the increase would not become effective for at least 45 days,
under the Board's proposal). See proposed Sec. 226.9(g). The Board is
concerned that if the disclosure refers to only the late payment fee,
consumers may overlook the more costly consequence of penalty rates.
Therefore, the Board proposes to require creditors to disclose any
increased rate that may apply if consumers' payments are received after
the due date. If, under the terms of the account agreement, a late
payment could result in the loss of a promotional rate, the imposition
of a penalty rate, or both, the creditor must disclose the highest rate
that could apply, to avoid information overload. Under the proposal,
the increased APR would be disclosed closely proximate to the fee and
due date, as set forth in proposed Sec. 226.7(b)(13). The Board
believes this fulfills Congress's intent to warn consumers about the
effects of paying late.
7(b)(12) Minimum Payment
The Bankruptcy Act amends TILA Section 127(b) to require creditors
that extend open-end credit to provide a disclosure on the front of
each periodic statement in a prominent location about the effects of
making only minimum payments. 15 U.S.C. Sec. 1637(b)(11). This
disclosure must include: (1) A ``warning'' statement indicating that
[[Page 33001]]
making only the minimum payment will increase the interest the consumer
pays and the time it takes to repay the consumer's balance; (2) a
hypothetical example of how long it would take to pay off a specified
balance if only minimum payments are made; and (3) a toll-free
telephone number that the consumer may call to obtain an estimate of
the time it would take to repay their actual account balance.
Under the Bankruptcy Act, depository institutions may establish and
maintain their own toll-free telephone numbers or use a third party. In
order to standardize the information provided to consumers through the
toll-free telephone numbers, the Bankruptcy Act directs the Board to
prepare a ``table'' illustrating the approximate number of months it
would take to repay an outstanding balance if the consumer pays only
the required minimum monthly payments and if no other advances are
made. The Board is directed to create the table by assuming a
significant number of different APRs, account balances, and minimum
payment amounts; instructional guidance must be provided on how the
information contained in the table should be used to respond to
consumers' requests. The Board is also required to establish and
maintain, for two years, a toll-free telephone number for use by
customers of creditors that are depository institutions having assets
of $250 million or less. The Federal Trade Commission (FTC) must
maintain a toll-free telephone number for creditors that are not
depository institutions. 15 U.S.C. 1637(b)(11)(A)-(C).
The Bankruptcy Act provides that consumers who call the toll-free
telephone number may be connected to an automated device through which
they can obtain repayment information by providing information using a
touch-tone telephone or similar device, but consumers who are unable to
use the automated device must have the opportunity to be connected to
an individual from whom the repayment information may be obtained.
Creditors, the Board and the FTC may not use the toll-free telephone
number to provide consumers with repayment information other than the
repayment information set forth in the ``table'' issued by the Board.
15 U.S.C. 1637(b)(11)(F)-(H).
Alternatively, a creditor may use a toll-free telephone number to
provide the actual number of months that it will take consumers to
repay their outstanding balance instead of providing an estimate based
on the Board-created table. A creditor that does so also need not
include a hypothetical example on its periodic statements, but must
disclose the warning statement and the toll-free telephone number on
its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).
For ease of reference, the Board will refer to the above
disclosures about the effects of making only the minimum payment as
``the minimum payment disclosures.''
Proposal to limit the minimum payment disclosure requirements to
credit card accounts. Under the Bankruptcy Act, the minimum payment
disclosures apply to all open-end accounts (such as credit card
accounts, HELOCs, and general-purpose credit lines). The Act expressly
states that these disclosure requirements do not apply, however, to any
``charge card'' account, the primary aspect of which is to require
payment of charges in full each month.
In the October 2005 ANPR, the Board requested comment on whether
certain open-end accounts should be exempted from some or all of the
minimum payment disclosure requirements. Q59. Many industry commenters
urged the Board to limit the minimum payment disclosure requirements to
credit card accounts because they believed that Congress intended the
minimum payment disclosures only for such accounts. On the other hand,
several consumer groups urged the Board to apply the minimum payment
disclosures to all open-end plans because they believed that these
disclosures could be useful to consumers for all open-end products,
including HELOCs.
The Board is proposing to exempt open-end credit plans other than
credit card accounts from the minimum payment disclosure requirements.
This exemption would cover, for example, HELOCs (including open-end
reverse mortgages), overdraft lines of credit and other general-purpose
personal lines of credit.
The debate in Congress about the minimum payment disclosures
focused on credit card accounts. For example, Senator Grassley, a
primary sponsor of the Bankruptcy Act, in discussing the minimum
payment disclosures, stated:
[The Bankruptcy Act] contains significant new disclosures for
consumers, mandating that credit card companies provide key
information about how much [consumers] owe and how long it will take
to pay off their credit card debts by only making the minimum
payment. That is very important consumer education for every one of
us.
Consumers will also be given a toll-free number to call where
they can get information about how long it will take to pay off
their own credit card balances if they only pay the minimum payment.
This will educate consumers and improve consumers' understanding of
what their financial situation is.
Remarks of Senator Grassley (2005), Congressional Record (daily
edition), vol. 151, March 1, p. S 1856.
Thus, it appears the principal concern of Congress was that
consumers may not be fully aware of the length of time it takes to pay
off their credit card accounts if only minimum monthly payments are
made. The concern expressed by Congress for credit card accounts does
not necessarily apply to other types of open-end credit accounts. These
other types of open-end accounts are discussed below.
1. HELOCs. Many industry commenters requested that HELOCs be
exempted from the minimum payment disclosure requirements. These
commenters indicated that most HELOCs have a fixed repayment period
specified in the account agreement, so that consumers know from the
account agreement the length of the draw period and the length of the
repayment period. Nonetheless, several consumer groups urged that
HELOCs should not be exempted entirely. They advocated a warning to
HELOC consumers that they can pay down the balance faster and save on
finance charges if they pay more than the minimum monthly payment
required.
Based on the comments received in response to the October 2005 ANPR
as well as other information, the Board understands that most HELOCs
have a fixed repayment period. Thus, for those HELOCs, consumers could
learn from the current disclosures the length of the draw period and
the repayment period. See current Sec. 226.6(e)(2). The minimum
payment disclosures would not appear to provide useful information to
consumers that is not already disclosed to them. The cost of providing
this information a second time, including the costs to reprogram
periodic statement systems and to establish and maintain a toll-free
telephone number, may not be justified by the limited benefit to
consumers. Thus, the Board proposes to exempt HELOCs from the minimum
payment disclosures requirements at this time, but will consider
changes to HELOC disclosures as part of the HELOC review.
2. Open-end reverse mortgages. An open-end reverse mortgage is a
HELOC that is designed to allow consumers to convert the equity in
their homes into cash. During an extended ``draw'' period consumers
continue living in their homes, can draw on the line of credit to the
extent they repay any outstanding balance. The principal and interest
become due when the homeowner
[[Page 33002]]
moves, sells the home, or dies. Consumers with open-end reverse
mortgages would not likely benefit from the minimum payment
disclosures, because these disclosures would be based on assumptions
about events difficult to predict, such as when the homeowner will
move, sell the house or die.
3. Overdraft lines of credit and other general-purpose personal
lines of credit. In response to the October 2005 ANPR, several industry
commenters suggested that the Board exempt overdraft lines of credit
from the minimum payment disclosure requirements. For example, one
industry trade group indicated that overdraft lines of credit have
relatively low credit limits and are not intended as a long term credit
option. The commenter also indicated that features and terms of
overdraft lines of credit vary widely from institution to institution.
Some banks require that an overdraft line of credit be paid in full
within a short period after the consumer receives notice that the
overdraft line has been used. Other banks permit longer periods of time
to repay, but those periods and the size of any minimum payment vary
significantly from bank to bank. This commenter indicated that the cost
to small institutions of providing the minimum payment disclosures
might cause them to stop providing overdraft products.
The Board is proposing to exempt overdraft lines of credit and
other general-purpose credit lines from the minimum payment disclosure
requirements for several reasons. First, these lines of credit are not
in wide use. The 2004 Survey of Consumer Finances data indicates that
few families--1.6 percent--had a balance on lines of credit other than
a home-equity line or credit card at the time of the interview. (In
terms of comparison, 74.9 percent of families had a credit card, and 58
percent of these families had a credit card balance at the time of the
interview.) \16\ Second, these lines of credit typically are neither
promoted, nor used, as long-term credit options of the kind for which
the minimum payment disclosures are intended. Third, the Board is
concerned that the operational costs of requiring creditors to comply
with the minimum payment disclosure requirements with respect to
overdraft lines of credit and other general-purpose lines of credit may
cause some institutions to no longer provide these products as
accommodations to consumers, to the detriment of consumers who
currently use these products. For these reasons, the Board is proposing
to exempt overdraft lines of credit and other general-purpose credit
lines from the minimum payment disclosure requirements.
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\16\ Brian Bucks, et al., Recent Changes in U.S. Family
Finances: Evidence from the 2001 and 2004 Survey of Consumer
Finances, Federal Reserve Bulletin (March 2006).
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7(b)(12)(i) General Disclosure Requirements
Under the Bankruptcy Act, the hypothetical example that creditors
must disclose on periodic statements varies depending on the creditor's
minimum payment requirement. Generally, creditors that require minimum
payments equal to 4 percent or less of the account balance must
disclose on each statement that it takes 88 months to pay off a $1,000
balance at an interest rate of 17 percent if the consumer makes a
``typical'' 2 percent minimum monthly payment. Creditors that require
minimum payments exceeding 4 percent of the account balance must
disclose that it takes 24 months to pay off a balance of $300 at an
interest rate of 17 percent if the consumer makes a ``typical'' 5
percent minimum monthly payment (but a creditor may opt instead to
disclose the statutory example for 2 percent minimum payments). The 5
percent minimum payment example must be disclosed by creditors for
which the FTC has the authority under the Truth in Lending Act to
enforce the act and this regulation. Creditors also have the option to
substitute an example based on an APR that is greater than 17 percent.
The Bankruptcy Act authorizes the Board to periodically adjust the APR
used in the hypothetical example and to recalculate the repayment
period accordingly. 15 U.S.C. 1637(b)(11)(A)-(E).
Wording of the examples. The Bankruptcy Act sets forth specific
language for issuers to use in disclosing the applicable hypothetical
example on the periodic statement. The Board proposes to amend the
statutory language to facilitate consumers' use and understanding of
the disclosures, pursuant to its authority under TILA Section 105(a) to
make adjustments that are necessary to effectuate the purposes of TILA.
15 U.S.C. 1604(a). First, the Board proposes to require that issuers
disclose the payoff periods in the hypothetical examples in years,
rounding fractional years to the nearest whole year, rather than in
months as provided in the statute. Thus, issuers would disclose that it
would take over 7 years to pay off the $1,000 hypothetical balance, and
about 2 years for the $300 hypothetical balance. The Board believes
that disclosing the payoff period in years allows consumers to better
comprehend the repayment period without having to convert it themselves
from months to years. Participants in the consumer testing conducted
for the Board reviewed disclosures with the estimated payoff period in
years, and they indicated they understood the length of time it would
take to repay the balance if only minimum payments were made. Consumers
may also appreciate more that the repayment periods are merely
estimates.
Second, the statute requires that issuers disclose in the examples
the minimum payment formula used to calculate the payoff period. In the
$1,000 example above, the statute would require issuers to indicate
that a ``typical'' 2 percent minimum monthly payment was used to
calculate the repayment period. In the $300 example above, the statute
would require issuers to indicate that a 5 percent minimum monthly
payment was used to calculate the repayment period. The Board proposes
to eliminate the specific minimum payment formulas from the examples.
The references to the 2 percent minimum payment in the $1,000 example,
and a 5 percent minimum payment in the $300 example, are incomplete
descriptions of the minimum payment requirement. In the $1,000 example,
the minimum payment formula used to calculate the repayment period is
the greater of 2 percent of the outstanding balance or $20. In the $300
example, the minimum payment formula used to calculate the repayment
period is the greater of 5 percent of the outstanding balance or $15.
In fact, in each example, the hypothetical consumer always pays the
absolute minimum ($20 or $15, depending on the example).
The Board believes that including the entire minimum payment
formula, including the floor amount, in the disclosure could make the
example too complicated and have the unintended consequence of
misleading a consumer who reads the language set out in the statute
into concluding that the payment is smaller than it actually is. While
the disclosures could be revised to indicate that the repayment period
in the $1,000 balance was calculated based on a $20 payment, and
repayment period in the $300 balance was calculated based on a $15
payment, the Board believes that revising the statutory language in
this way changes the disclosure to focus consumers on the effects of
making a fixed payment each month as opposed to the effects of making
minimum payments. Moreover, disclosing the
[[Page 33003]]
minimum payment formula is not necessary for consumers to understand
the essential point of the examples--that it can take a significant
amount of time to pay off a balance if only minimum payments are made.
In testing conducted for the Board, the $1,000 balance example was
tested without including the 2 percent minimum payment disclosure
required by the statute. Consumers appeared to understand the purpose
of the disclosure--that it would take a significant amount of time to
repay a $1,000 balance if only minimum payments were made. For these
reasons, the Board is proposing to require the hypothetical examples
without a minimum payment formula.
The proposed regulatory language for the examples is set forth in
new Sec. 226.7(b)(12)(i). In addition to the revisions mentioned
above, the Board also proposes several stylistic revisions to the
statutory language, based on plain language principles, in an attempt
to make the language of the examples more understandable to consumers.
Adjustments to the APR used in the examples. The Bankruptcy Act
specifically authorizes the Board to periodically adjust the APR used
in the hypothetical example and to recalculate the repayment period
accordingly. In the October 2005 ANPR, the Board requested comment on
whether the Board should adjust the APR used in the hypothetical
examples, because current APRs on credit cards may be less than the 17
percent APR in the examples. Q62. Commenters were split on whether the
Board should adjust the APR in the examples.
The Board is not proposing to adjust the APR used in the
hypothetical examples. The Board recognizes that the examples are
intended to provide consumers with an indication that it can take a
long time to pay off a balance if only minimum payments are made.
Revising the APR used in the example to reflect the average APR paid by
consumers would not significantly improve the disclosure, because for
many consumers an average APR would not be the APR that applies to the
consumer's account. Moreover, consumers will be able to obtain a more
tailored disclosure of a repayment period based on the APR applicable
to their accounts by calling the toll-free telephone number provided as
part of the minimum payment disclosure.
7(b)(12)(ii) Estimate of Actual Repayment Period
Under the Bankruptcy Act, a creditor may use a toll-free telephone
number to provide consumers with the actual number of months that it
will take consumers to repay their outstanding balance instead of
providing an estimate based on the Board-created table. Creditors that
choose to give the actual number via the telephone number need not
include a hypothetical example on their periodic statements. Instead,
they must disclose on periodic statements a warning statement that
making the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance and a toll-free
telephone number that consumers may use to obtain the actual repayment
disclosure. 15 U.S.C. 1637(b)(11)(I) and (K). The Board proposes to
implement this statutory provision in new Sec. 226.7(b)(12)(ii)(A).
In addition, the Board proposes to provide that if card issuers
provide the actual repayment disclosure on the periodic statement, they
need not disclose the warning, the hypothetical example and a toll-free
telephone number on the periodic statement, nor need they maintain a
toll-free telephone number to provide the actual repayment disclosure.
See proposed Sec. 226.7(b)(12)(ii)(B).
The Board strongly encourages card issuers to provide the actual
repayment disclosure on periodic statements, and solicits comments on
whether the Board can take other steps to provide incentives to card
issuers to use this approach. A recent study conducted by the GAO on
minimum payments suggests that certain cardholders would find the
actual repayment disclosure more helpful than the generic disclosures
required by the Bankruptcy Act. For this study, the GAO interviewed 112
consumers and collected data on whether these consumers preferred to
receive on the periodic statement (1) customized minimum payment
disclosures that are based on the consumers' actual account terms (such
as the actual repayment disclosure), (2) generic disclosures such as
the warning statement and the hypothetical example required by the
Bankruptcy Act; or (3) no disclosure.\17\ According to the GAO's
report, in the interviews with the 112 consumers, most consumers who
typically carry credit card balances (revolvers) found customized
disclosures very useful and would prefer to receive them in their
billing statements. Specifically, 57 percent of the revolvers preferred
the customized disclosures, 30 percent preferred the generic
disclosures, and 14 percent preferred no disclosure. In addition, 68
percent of the revolvers found the customized disclosure extremely
useful or very useful, 9 percent found the disclosure moderately
useful, and 23 percent found the disclosure slightly useful or not
useful. According to the GAO, the consumers that preferred the
customized disclosures liked that such disclosures would be specific to
their accounts, would change based on their transactions, and would
provide more information than generic disclosures. GAO Report on
Minimum Payments, pages 25, 27.
---------------------------------------------------------------------------
\17\ United States Government Accountability Office, Customized
Minimum Payment Disclosures Would Provide More Information to
Consumers, but Impact Could Vary, 06-434 (April 2006). (The GAO
indicated that the sample of 112 consumers was not designed to be
statistically representative of all cardholders, and thus the
results cannot be generalized to the population of all U.S.
cardholders.)
---------------------------------------------------------------------------
In addition, the Board believes that disclosing the actual
repayment disclosure on the periodic statement would simplify the
process for consumers and creditors. Consumers would not need to take
the extra step to call the toll-free telephone number to receive the
actual repayment disclosure, but instead would have that disclosure
each month on their periodic statements. Card issuers (other than
issuers that may use the Board or the FTC toll-free telephone number)
would not have the operational burden of establishing a toll-free
telephone number to receive requests for the actual repayment
disclosure and the operational burden of linking the toll-free
telephone number to consumer account data in order to calculate the
actual repayment disclosure.
The Board proposes this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions (with an exception not relevant here)
from coverage under any part of TILA if the Board determines that
coverage under that part does not provide a meaningful benefit to
consumers in the form of useful information or protection. 15 U.S.C.
1604(f)(1). Section 105(f) directs the Board to make this determination
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or
[[Page 33004]]
makes more expensive the credit process; (3) the status of the
borrower, including any related financial arrangements of the borrower,
the financial sophistication of the borrower relative to the type of
transaction, and the importance to the borrower of the credit, related
supporting property, and coverage under TILA; (4) whether the loan is
secured by the principal residence of the borrower; and (5) whether the
exemption would undermine the goal of consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes it is appropriate to provide an exemption from
the requirement to provide on periodic statements a warning about the
effects of making minimum payments, a hypothetical example, and a toll-
free telephone number consumers may call to obtain repayment periods,
and to maintain a toll-free telephone number for responding to
consumers' requests, if the creditor instead provides the actual
repayment period on the periodic statement. As noted above, consumer
testing indicated that actual repayment period information is more
useful to consumers than estimated information. Providing that
disclosure on a statement rather than over the telephone provides
consumers with easier access to the information. Thus, the proposal has
the potential to better inform consumers and further the goals of
consumer protection and the informed use of credit for credit card
accounts. The Board welcomes comment on this matter.
7(b)(12)(iii) Exemptions
As explained above, the Board proposes to require the minimum
payment disclosures only for credit card accounts. See proposed Sec.
226.7(b)(12)(i). Thus, creditors would not need to provide the minimum
payment disclosures for HELOCs (including open-end reverse mortgages),
overdraft lines of credit or other general-purpose personal lines of
credit. For the same reasons, the Board proposes to exempt these
products regardless of whether they can be accessed by a credit card
device. Specifically, proposed Sec. 226.7(b)(12)(iii) would exempt the
following types of credit card accounts: (1) HELOCs accessible by
credit cards that are subject to Sec. 226.5b; (2) overdraft lines of
credit tied to asset accounts accessed by check-guarantee cards or by
debit cards; and (3) lines of credit accessed by check-guarantee cards
or by debit cards that can be used only at automated teller machines.
See proposed Sec. 226.7(b)(12)(iii)(A)-(C). The Board also proposes to
exempt charge cards from the minimum payment disclosure requirements,
to implement TILA Section 127(b)(11)(I). 15 U.S.C. 1637(b)(11)(I); See
proposed Sec. 226.7(b)(12)(iii)(D).
Exemption for credit card accounts with a specific repayment
period. In the October 2005 ANPR, the Board requested comment on
whether certain open-end accounts should be exempted from some or all
of the minimum payment disclosure requirements, such as open-end plans
that have a fixed repayment period. Q59. Industry commenters generally
supported an exemption for open-end plans that have a fixed repayment
period. These commenters indicated that the minimum payment disclosures
are not necessary in this context, because the consumer will already
know from the account agreement how long it will take to repay the
balance.
The Board proposes to exempt credit card accounts where a fixed
repayment period for the account is specified in the account agreement
and the required minimum payments will amortize the outstanding balance
within the fixed repayment period. See proposed Sec.
226.7(b)(12)(iii)(E). The minimum payment disclosures would not appear
to provide useful information to consumers that they do not already
have in their account agreements. The cost of providing this
information a second time, including the costs to reprogram periodic
statement systems and to establish and maintain a toll-free telephone
number, may not be justified by the limited benefit to consumers.
In order for this proposed exemption to apply, a fixed repayment
period must be specified in the account agreement. As proposed, this
exemption would include, for example, accounts where the account has
been closed due to delinquency and the required monthly payment has
been reduced or the balance decreased to accommodate a fixed payment
for a fixed period of time designed to pay off the outstanding balance.
See proposed comment 7(b)(12)(iii)-1. This exemption would not apply
where the credit card may have a fixed repayment period for one credit
feature, but an indefinite repayment period on another feature. For
example, some retail credit cards have several credit features
associated with the account. One of the features may be a general
revolving feature, where the minimum payment for this feature does not
pay off the balance in a specific period of time. The card also may
have another feature that allows consumers to make specific types of
purchases (such as furniture purchases, or other large purchases), and
the minimum payments for that feature will pay off the purchase within
a fixed period of time, such as one year. New comment 7(b)(12)(iii)-1
makes clear that the exemption relating to a fixed repayment period
does not apply to the above situation, because the retail card account
as a whole does not have a fixed repayment period.
Exemption where cardholders have paid their accounts in full for
two consecutive months. In the October 2005 ANPR, the Board requested
comment on whether the Board should exempt credit card accounts of
consumers who typically do not revolve balances or make monthly
payments that regularly exceed the minimum. Q60. In response to the
October 2005 ANPR, several industry commenters urged the Board to
exempt card issuers from providing minimum payment disclosures to
consumers who do not regularly make minimum payments. These commenters
indicated that excluding non-minimum payers is appropriate because the
minimum payment disclosures are less meaningful to those consumers. On
the other hand, several consumer groups indicated that the Board should
not provide an exemption based on the characteristics or habits of the
accountholder, such as whether they typically pay in full. These
commenters indicated that the typical behavior of a particular consumer
can change quickly, due either to a temporary change in circumstances
(a move, a layoff, or a major medical expense) or a permanent change
(the death of a spouse or a disability). The consumer groups believed
that in these circumstances, it is important that consumers have
disclosure about the effects of paying the minimum payments in a timely
fashion, before an outstanding balance grows unmanageable.
The Board proposes to provide that card issuers are not required to
comply with minimum payment disclosure requirements for a particular
billing cycle if a consumer has paid the entire balance in full for the
previous two billing cycles. See proposed Sec. 226.7(b)(12)(iii)(F).
The GAO found in its study on minimum payment disclosures that
cardholders who pay their balances in full each month (non-revolvers)
were generally satisfied with receiving generic disclosures or none at
all, and did not prefer customized disclosures such as actual repayment
disclosures. Thirty-seven percent of non-revolvers found the customized
disclosure extremely or very useful. Eight percent of non-revolvers
found the customized disclosure moderately
[[Page 33005]]
useful and 55 percent found it slightly or not useful. The GAO
indicated that many of the non-revolvers it interviewed who preferred
not to receive a customized disclosure explained that they paid their
balance in full each month, already understood the consequences of
making only minimum payments, and did not need the additional reminder.
See GAO Report on Minimum Payments, pages 26, 30-31.
Thus, because non-revolvers may not find the minimum payment
disclosures very useful or meaningful, the Board proposes to exempt
card issuers from the requirement to provide the minimum payment
disclosures in a particular billing cycle if a consumer has paid the
entire balance in full for the two previous billing cycles. For
example, if a consumer paid the entire balance in full for account
activity in March and April, the creditor would not be required to
provide the minimum payment disclosure for the statement representing
account activity in May. The Board believes this approach strikes an
appropriate balance between benefits to consumers from the disclosures,
and compliance burdens on issuers in providing the disclosures.
Consumers who might benefit from the disclosures will receive them.
Consumers who carry a balance each month will always receive the
disclosure, and consumers who pay in full each month will not.
Consumers who sometimes pay their bill in full and sometimes do not
will receive the minimum payment disclosures if they do not pay in full
the prior two consecutive months (cycles). Also, if a consumer's
typical payment behavior changes from paying in full to revolving, the
consumer will begin receiving the minimum payment disclosures after not
paying in full one billing cycle, when the disclosures would appear to
be timely. In addition, creditors already typically track whether a
consumer has paid their balance in full for two consecutive months.
Typically, creditors provide a grace period on new purchases to
consumers (that is, creditors do not charge interest to consumers on
new purchases) if consumers paid both the current balance and the
previous balance in full. Thus, creditors currently capture payment
history for consumers for two billing cycles.
In response to the October 2005 ANPR, one industry commenter
indicated that many creditors do not have the processing systems that
are capable of selectively pricing the disclosures from month-to-month
based on customers' prior payment patterns. Card issuers are not
required to take advantage of this exemption from providing the minimum
payment disclosures for a particular billing cycle if a consumer has
paid the entire balance in full for the previous two billing cycles.
Card issuers may provide the minimum payment disclosures to all of its
cardholders, even to those cardholders that fall within this exemption.
If issuers choose to provide voluntarily the minimum payment
disclosures to those cardholders that fall within this exemption,
issuers should follow the disclosures rules set forth in Sec.
226.7(b)(12), the accompanying commentary, and Appendices M1-M3 (as
appropriate) for those cardholders.
Exemption where balance has fixed repayment period. In response to
the October 2005 ANPR, several industry commenters urged the Board to
exempt credit cards with fixed payment features from the minimum
payment disclosures. As described above, some retail credit cards may
have several features on the card. One of those features may allow
consumers to make certain types of purchases with the feature (such as
furniture purchases, or other large purchases), and the minimum
payments for that feature will pay off the purchase within a specific
period of time, such as one year. Some commenters indicated that these
types of accounts should be exempted from the minimum payment
disclosure requirements because consumers would know the repayment
period from the account agreement.
The Board proposes to exempt credit card issuers from providing the
minimum payment disclosures on periodic statements in a billing cycle
where the entire outstanding balance held by consumers in that billing
cycle is subject to a fixed repayment period specified in the account
agreement and the required minimum payments applicable to this feature
will amortize the outstanding balance within the fixed repayment
period. This exemption is meant to cover the retail cards described
above in those cases where the entire outstanding balance held by a
consumer in a particular billing cycle is subject to a fixed repayment
period specified in the account agreement. The minimum payment
disclosures would not appear to provide useful information to consumers
in this context because consumers would be able to learn from their
account agreements how long it would take to repay the balance. The
cost of providing this information a second time, including the costs
to reprogram periodic statement systems and to establish and maintain a
toll-free telephone number, may not be justified by the limited benefit
to consumers. See proposed comment 7(b)(12)(iii)-2.
Other exemptions. In response to the October 2005 ANPR, several
commenters suggested other exemptions to the minimum payment
requirements, as discussed below. For the reasons discussed below, the
Board is not proposing to include these exemptions.
1. Exemption for discontinued credit card products. In response to
the October 2005 ANPR, one commenter urged the Board to provide a
partial exemption for credit card products for which no new accounts
are being opened and for which existing accounts are closed to new
transactions. With respect to these products, the commenter urged the
Board to exempt issuers of these products from having to place the
minimum payment disclosures on the periodic statement, but instead
allow issuers to provide these notices in freestanding inserts to the
periodic statements. The commenter indicates that the number of
accounts that are discontinued are usually very small and the computer
systems used to produce the statements for the closed accounts are
being phased out.
The Board solicits further comment on why this exemption is needed.
What are the costs of redesigning the old computer systems to provide
the minimum payment disclosures (that is, the warning statement, the
hypothetical example, and the toll-free telephone number) on the
periodic statements?
2. Exemption for credit card accounts purchased within the last 18
months. In response to the October 2005 ANPR, one commenter urged the
Board to provide an exemption for accounts purchased by a credit card
issuer. With respect to these purchased accounts, the commenter urged
the Board to exempt issuers from placing the minimum payment
disclosures on the periodic statement during a transitional period (up
to 18 months) while the purchasing issuer converts the new accounts to
its statement system. In this situation, the commenter indicated that
issuers should be allowed to provide these notices in freestanding
inserts to the periodic statements.
The Board solicits further comment on why this exemption is needed.
Why could the purchasing issuer not continue to use the periodic
statement system and toll-free telephone numbers used by the selling
issuer to meet the requirements of the minimum payment disclosures,
until the purchased accounts are converted to the purchaser's systems?
3. Credit card products that do not use declining balance
amortization. One commenter suggested that the Board
[[Page 33006]]
exempt from the minimum payment disclosure requirements credit card
products that do not use declining balance amortization to calculate
the minimum payment. For example, some retail credit cards base their
minimum payment formula on the original purchase price or similar
amount, rather than on the declining balance. The commenter indicates
that these products should be exempt because amortization schedules for
these products result in far shorter repayment periods. The Board is
proposing not to adopt this exemption because even though the
amortization schedules for these products may be shorter than for cards
where the minimum payment is calculated on the declining balance, the
payoff time may not be so short as to justify an exemption. For
example, assume the minimum payment formula is 3.33 percent of the
highest balance or $10, whichever is greater. It could still take
around 4 years to pay off a $500 balance at a 21.9 percent APR if a
consumer only made minimum payments. (For contrast, the repayment
period would be around 7 years if the minimum payment was calculated
based on the outstanding balance, instead of the highest balance.)
4. Credit cards with balances of less than $500. One commenter
suggested that the Board exempt credit card accounts from the minimum
payment disclosure requirements in cases where the balance on the card
is less than $500. This commenter indicated in cases of low balances,
the repayment period is fairly short and so the minimum payment
disclosure is less needed. The Board is not proposing to exempt these
credit card accounts. Depending on how the minimum payment is
calculated, it can still take a significant amount of time to pay off a
$500 balance if only minimum payments are made. For example, assume the
minimum payment is calculated based on the following formula: the
greater of (1) 1 percent of the outstanding balance plus interest
charges that accrued in the past month; or (2) $10. It could still take
around 5 years to repay a $500 balance at a 7.99 percent APR if only
minimum payments are made.
7(b)(12)(iv) Toll-free Telephone Numbers
Under Section 1301(a) of the Bankruptcy Act, depository
institutions generally must establish and maintain their own toll-free
telephone numbers or use a third party to disclose the repayment
estimates based on the ``table'' issued by the Board. 15 U.S.C.
1637(b)(11)(F)(i). At the issuer's option, the issuer may disclose the
actual repayment disclosure through the toll-free telephone number. The
Board also is required to establish and maintain, for two years, a
toll-free telephone number for use by customers of depository
institutions having assets of $250 million or less. 15 U.S.C.
1637(b)(11)(F)(ii). The FTC must maintain a toll-free telephone number
for creditors other than depository institutions. 15 U.S.C.
1637(b)(11)(F).
The Bankruptcy Act also provides that consumers who call the toll-
free telephone number may be connected to an automated device through
which they can obtain repayment information by providing information
using a touch-tone telephone or similar device, but consumers who are
unable to use the automated device must have the opportunity to be
connected to an individual from whom the repayment information may be
obtained. Unless the issuer is providing an actual repayment
disclosure, the issuer may not provide through the toll-free telephone
number a repayment estimate other than estimates based on the ``table''
issued by the Board. 15 U.S.C. 1637(b)(11)(F). These same provisions
apply to the FTC's and the Board's toll-free telephone numbers as well.
The Board proposes to add new Sec. 226.7(b)(12)(iv) and
accompanying commentary to implement the above statutory provisions
related to the toll-free telephone numbers. In addition, new comment
7(b)(12)(iv)-3 would provide that once a consumer has indicated that he
or she is requesting the generic repayment estimate or the actual
repayment disclosure, as applicable, card issuers may not provide
advertisements or marketing information to the consumer prior to
providing the repayment information required or permitted by Appendix
M1 or M2, as applicable.
7(b)(12)(v) Definitions
As discussed above, Section 1301(a) of the Bankruptcy Act requires
the Board to establish and maintain, for two years, a toll-free
telephone number for use by customers of depository institutions having
assets of $250 million or less. 15 U.S.C. 1637(b)(11)(F)(ii). For ease
of reference in the regulation, the Board proposes to define the above
depository institutions as ``small depository institution issuers.''
See proposed Sec. 226.7(b)(12)(v).
7(b)(13) Format Requirements
As discussed throughout this section-by-section analysis to Sec.
226.7, consumer testing conducted for the Board indicates improved
understanding when related information is grouped together. Under the
proposal, creditors would group together when a payment is due (due
date and cut-off time if before 5 p.m.), how much is owed (minimum
payment and ending balance), and what the potential costs are for
paying late (late-payment fee, and penalty APR if triggered by a late
payment). See proposed Samples G-18(E) and G-18(F) in Appendix G. The
proposed format requirements are intended to fulfill Congress's intent
to have the new late payment and minimum payment disclosures ensure
consumers' ability to understand the consequences of paying late or
making only minimum payments.
7(b)(14) Change-in-Terms and Increased Penalty Rate Summary for Open-
End (Not Home-Secured) Plans
A major goal of its review of Regulation Z's open-end credit rules
is to address consumers' surprise at increased rates (and/or fees). In
part, the Board is addressing the issue in Sec. 226.9(c) and Sec.
226.9(g) to give more time before new rates and changes to significant
costs become effective. See proposed Sec. 226.9(c)(2) and Sec.
226.9(g). The proposed new Sec. 226.7(b)(14) is intended to enable
consumers to notice more easily changes in their account terms.
Increasing the time period to act is ineffective if consumers do not
see the change-in-term notice. Consumers who participated in testing
conducted for the Board consistently set aside change of term notices
that accompanied periodic statements. Research conducted for the Board
indicates that consumers do look at the front side of periodic
statements and do look at transactions. Therefore, when a change-in-
terms notice is provided on or with a periodic statement the proposal
would require a summary of key changes to precede transactions. In
addition, when a notice of a rate increase due to delinquency or
default or as a penalty is provided on or with a periodic statement,
the proposal would require this notice to precede transactions. Samples
G-20 and G-21 in Appendix G illustrate the proposed format requirement
under Sec. 226.7(b)(14) and the level of detail required for the
notice under Sec. 226.9(c)(2)(iii) and Sec. 226.9(g)(3). Forms G-
18(G) and G-18(H) illustrate the placement of these notices on a
periodic statement.
Section 226.8 Identifying Transactions on Periodic Statements
TILA Section 127(b)(2) requires creditors to identify on periodic
statements credit extensions that occurred during a billing cycle. 15
[[Page 33007]]
U.S.C. 1637(b)(2). The statute calls for the Board to implement
requirements that are sufficient to identify the transaction or to
relate the credit extension to sales vouchers or similar instruments
previously furnished. The rules for identifying transactions are
implemented in Sec. 226.8, and vary depending on whether: (1) The
sales receipt or similar credit document is included with the periodic
statement, (2) the transaction is sale credit (purchases) or nonsale
credit (cash advances, for example), and (3) the creditor and seller
are the ``same or related.'' TILA's billing error protections include
consumers' requests for additional clarification about transactions
listed on a periodic statement. 15 U.S.C. 1666(b)(2); Sec.
226.13(a)(6).
The Board proposes to update and simplify the rules for identifying
sales transactions when the sales receipt or similar document is not
provided with the periodic statement (so called ``descriptive
billing''), which is typical today. The rules for identifying
transactions where such receipts accompany the periodic statement are
not affected by the proposal. The proposed changes reflect current
business practices and consumer experience, and are intended to ease
compliance. Currently, creditors that use descriptive billing are
required to include on periodic statements an amount and date as a
means to identify transactions, and the proposal would not affect those
requirements. As an additional means to identify transactions, current
rules contain description requirements that differ depending on whether
the seller and creditor are ``same or related.'' For example, a retail
department store with its own credit plan (seller and creditor are same
or related) sufficiently identifies purchases on periodic statements by
providing the department such as ``jewelry'' or ``sporting goods;''
item-by-item descriptions are not required. Periodic statements
provided by issuers of general purpose credit cards, where the seller
and creditor are not the same or related, identify transactions by the
seller's name and location.
The Board proposes to provide additional flexibility to creditors
that do not provide sales slips or similar documents with the periodic
statement. Under the proposal, all creditors would be permitted to
identify sales transactions (in addition to the amount and date) by the
seller's name and location. Thus, creditors and sellers that are the
same or related could, at their option, identify transactions by a
brief identification of goods or services, which they are currently
required to do in all cases, or they could provide the seller's name
and location for each transaction. Guidance on the level of detail
required to describe amounts, dates, the identification of goods, or
the seller's name and location remains unchanged.
The Board's proposal is guided by several factors. The standard set
forth by TILA for identifying transactions on periodic statements is
quite broad. 15 U.S.C. 1637(b)(2). Whether a general description such
as ``sporting goods'' or the store name and location would be more
helpful to a consumer can depend on the situation. Many retailers
permit consumers to purchase in a single transaction items from a
number of departments; in that case, the seller's name and location may
be as helpful as the description of a single department from which
several dissimilar items were purchased. Also, the seller's name and
location has become the more common means of identifying transactions,
as the use of general purpose cards increases and the number of store-
only cards decreases. Under the proposed rule, retailers that commonly
accept general purpose credit cards but also offer a credit card
account or other open-end plan for use only at their store would not be
required to maintain separate systems that enable different
descriptions to be provided, depending on the type of card used.
Finally, it appears that any consumer benefits would be minimally
affected by the proposed change because many retailers permit purchases
from different departments to be charged in a single transaction.
Moreover, consumers are likely to carefully review transactions on
periodic statements and inquire about transactions they do not
recognize, such as when a retailer is identified by its parent company
on sales slips which the consumer may not have noticed at the time of
the transaction. Moreover, consumers are protected under TILA with the
ability to assert a billing error to seek clarification about
transactions listed on periodic statements, and are not required to pay
the disputed amount while the creditor obtains the necessary
clarification. Maintaining rules that require more standardization and
detail would be costly, and likely without significant corresponding
consumer benefit. Thus, the proposal is intended to provide flexibility
for creditors without reducing consumer protection.
The Board notes, however, that some retailers offering their own
open-end credit plans tie their inventory control systems to their
systems for generating sales receipts and periodic statements. In these
cases, purchases listed on periodic statements may be described item by
item, for example, to indicate brand name such as ``XYZ Sweater.'' This
item-by-item description, while not required under current or proposed
rules, would remain permissible under the proposal; thus, no
operational changes would be required for these retailers.
To implement the approach described above, Sec. 226.8 would be
revised as follows. Section 226.8(a)(1) would set forth the proposed
rule providing flexibility in identifying sales transactions, as
discussed above. Section 226.8(a)(2) would contain the existing rules
for identifying transactions when sales receipts or similar documents
accompany the periodic statement. Section 226.8(b) is revised for
clarity. A new Sec. 226.8(c) would be added to set forth rules now
contained in footnotes 16 and 19; and, without references to ``same or
related'' parties, footnotes 17 and 20. The substance of footnote 18,
based on a statutory exception where the creditor and seller are the
same person, would be deleted as unnecessary. The title of the section
would be revised for clarity.
The commentary to Sec. 226.8 would be reorganized and consolidated
but would not be substantively changed. Comments 8-1, 8(a)-1, and
8(a)(2)-4 would be deleted as duplicative. Similarly, comments 8-6
through 8-8, which provide creditors with flexibility in describing
certain specific classes of transactions regardless of whether they are
``related'' or ``nonrelated'' sellers or creditors, would be deleted as
unnecessary. Existing comments 8-4 and 8(a)(2)-3, which provide
guidance when copies of credit or sales slips accompany the statement,
also would be deleted. The Board believes this practice is no longer
common, and to the extent sales or similar credit documents accompany
billing statements, additional guidance seems unnecessary. Proposed
Sec. 226.8(a)(1)(ii) and comments 8(a)-3 and 8(a)-7, which provide
guidance for identifying mail or telephone transactions, also would
refer to Internet transactions. Proposed comment 8(a)-1 would provide
an example of new services that are now commonly purchased from
creditors as well as third party service providers (sale credit).
Section 226.9 Subsequent Disclosure Requirements
Section 226.9 sets forth a number of disclosure requirements that
apply after an account is opened, including a requirement to provide
billing rights
[[Page 33008]]
statements annually, a requirement to provide at least 15 days advance
notice whenever a term required to be disclosed in the account-opening
disclosures is changed, and a requirement to provide finance charge
disclosures whenever credit devices or features are added on terms
different from those previously disclosed.
With respect to open-end (not home-secured) plans, the Board
proposes a number of substantive and technical revisions to Sec. 226.9
and the accompanying commentary, as further described below. The
proposal would require certain disclosures to accompany checks that
access a credit card account. In addition, the proposal would require
creditors to provide a summary table of a limited number of key terms
if those terms are changed. The summary table would appear on the first
page of the notice or a separate piece of paper. Moreover, if the
change-in-terms notice is included with a periodic statement, that
summary table would be required to be provided on the front of the
first page of the periodic statement, before the list of transactions
for the statement period. Also, the Board would require creditors to
provide advance notice when a rate is increased due to a consumer's
delinquency or default or as a penalty. The Board's proposal also would
require creditors to provide 45 days advance notice for changes in
terms or increases in rates due to delinquency or default or penalty
pricing. Home-equity lines of credit (HELOCs) subject to Sec. 226.5b
would not be affected by these proposed revisions. For the reasons set
forth in the section-by-section analysis to Sec. 226.6(b)(1), the
Board would update references to ``free-ride period'' as ``grace
period'' in the regulation and commentary, without any intended
substantive change.
9(a) Furnishing Statement of Billing Rights
TILA Section 127(a)(7) and Sec. 226.9(a) require creditors to mail
or deliver a billing error rights statement annually, either to all
consumers or to each consumer entitled to receive a periodic statement.
15 U.S.C. 1637(a)(7). (See Model Form G-3.) Alternatively, creditors
may provide a billing rights statement on each periodic statement. (See
Model Form G-4.) Both the regulation and commentary would be unchanged
under the proposal. However, the Board proposes to revise both Model
Forms G-3 and G-4 to improve the readability of these notices. The
revised forms are in G-3(A) and G-4(A) of Appendix G. For open-end (not
home-secured) plans, creditors may use Model Forms G-3(A) and G-4(A).
For HELOCs subject to the requirements of Sec. 226.5b, creditors may
use the current Model Forms G-3 and G-4, or the revised forms.
9(b) Disclosures for Supplemental Credit Access Devices and Additional
Features
Section 226.9(b) requires certain disclosures when a creditor adds
a credit device or feature to an existing open-end plan. When a
creditor adds a credit feature or delivers a credit device to the
consumer within 30 days of mailing or delivering the account-opening
disclosures under current Sec. 226.6(a), and the device or feature is
subject to the same finance charge terms previously disclosed, the
creditor is not required to provide additional disclosures. If the
credit feature or credit device is added more than 30 days after
mailing or delivering the account-opening disclosures, and is subject
to the same finance charge terms previously disclosed in the account-
opening agreement, the creditor must disclose that the feature or
device is for use in obtaining credit under the terms previously
disclosed. However, if the added credit device or feature has finance
charge terms that differ from the disclosures previously given under
Sec. 226.6(a), then the disclosures required by Sec. 226.6(a) that
are applicable to the added feature or device must be given before the
consumer uses the new feature or device.
In the December 2004 ANPR, the Board solicited comment as to
whether there are formatting tools or navigational aids that could more
effectively link information in account-opening disclosures with
information provided in subsequent disclosures under Sec. 226.9(b),
such as checks that access a credit card account. Q45. Many creditors
commented that there would be no benefit to linking subsequent
disclosures and account-opening disclosures because many consumers fail
to retain the information they receive at account opening. Several
creditors commented that improved formatting could improve consumer
understanding; however, they were concerned about overly prescriptive
requirements that might hinder creditors' ability to tailor their
disclosure formats to their products and product terms. Some creditors
and consumer groups suggested importing the tabular format used to
disclose information in credit card or charge card applications and
solicitations to the subsequent disclosure context.
The Board is proposing to retain the current rules set forth in
Sec. Sec. 226.9(b)(1) and 226.9(b)(2) for all credit devices and
credit features except checks that access a credit card account. With
respect to such checks, the Board is concerned that the current rule in
Sec. 226.9(b)(1) may not communicate effectively to the consumer the
material terms of checks that access a credit card account, when those
checks are mailed or sent to a consumer 30 days or more after the Sec.
226.6 disclosures for the underlying account are provided. The Board
agrees with commenters that, after a significant time has passed, it
becomes less likely that consumers will still have a copy of the
account-opening disclosures, and all relevant change-in-terms notices.
With respect to open-end (not home-secured) plans, the Board is
proposing to create a new Sec. 226.9(b)(3) that would require that
certain information be disclosed each time that checks that access a
credit card account are mailed to a consumer, for checks mailed more
than 30 days following the delivery of the account-opening disclosures.
This provision would apply regardless of whether that information was
previously included in the account-opening disclosures. As under the
current regulation, no additional disclosures would be required when a
creditor provides, within 30 days of the account-opening disclosures,
checks that access a credit card account, if the finance charge terms
are the same as those that were previously disclosed. HELOCs would not
be affected by this proposed revision.
Creditors would be required to provide the new Sec. 226.9(b)(3)
disclosures on the front of the page containing the checks that access
a credit card account. Specifically, the proposed amendments would
require the following key terms be disclosed on the front of the page
containing the checks: (1) Any discounted initial rate, and when that
rate will expire, if applicable; (2) the type of rate that will apply
to the checks after expiration of any discounted initial rate (such as
whether the purchase or cash advance rate applies) and the applicable
annual percentage rate; (3) any transaction fees applicable to the
checks; and (4) whether a grace period applies to the checks, and if
one does not apply, that interest will be charged immediately. If a
discounted initial rate applies, a creditor must disclose the type of
rate that will apply after the discounted initial rate expires, and the
rate that will apply after the discounted initial rate expires. The
disclosures must be accurate as of the time the disclosures are given.
A variable annual percentage rate is accurate if it was in effect
within 30 days of when the disclosures are given. Proposed Sec.
226.9(b)(3) would
[[Page 33009]]
require that these key terms be disclosed in a tabular format
substantially similar to Sample G-19 in Appendix G.
It is the Board's understanding that checks that access a credit
card account often are mailed with the periodic statement, so consumers
will frequently receive an updated disclosure of the periodic rate in
the same envelope as the checks. The Board considered permitting
creditors to disclose the rate that applies to a check by means of a
reference to the type of applicable periodic rate (e.g., balance
transfer or cash advance) accompanied by a reference to the consumer's
periodic statement. However, consumer testing conducted for the Board
showed that while participants looked at actual numbers on the front of
the page of checks, they generally did not notice or pay attention to a
cross reference to the periodic statement.
Thus, the Board proposes that the actual APRs and fees applicable
to the checks must be disclosed pursuant to Sec. 226.9(b)(3). The
Board understands, however, that creditors may engage in risk-based
pricing with regard to checks used by consumers, and seeks with this
proposal to strike an appropriate balance between meaningful disclosure
for consumers and the operational burden on creditors. The proposed
rule would require that creditors customize each set of checks sent to
reflect a particular consumer's rate. The Board seeks comment on the
operational burden associated with customizing the checks, and on
alternatives, such as whether providing a reference to the type of rate
that will apply, accompanied by a toll-free telephone number that a
consumer could call to receive additional information, would provide
sufficient benefit to consumers while limiting burden on creditors.
The Board also seeks comment as to whether there are other credit
devices or additional features that creditors add to consumers'
accounts to which this proposed rule should apply.
The Board has proposed several technical revisions to improve the
clarity of Sec. 226.9(b) and the associated commentary.
9(c) Change in Terms
Under Sec. 226.9(c) of Regulation Z, certain changes to the terms
of an open-end plan require specific notice of the change. (TILA does
not address changes in terms to open-end plans.) The general rule is
that creditors must provide 15 days' advance notice of changes in terms
required to be included in the account-opening disclosures, with some
exceptions, or to increase the minimum payment. See current Sec.
226.9(c)(1).
Advance notice currently is not required in all cases. For example,
if an interest rate or other finance charge increases due to a
consumer's default or delinquency, notice is required, but need not be
given in advance. See current Sec. 226.9(c)(1); comment 9(c)(1)-3.
Furthermore, no change-in-terms notice is required if the specific
change is set forth initially by the creditor in the account-opening
disclosures. See current comment 9(c)-1. For example, some credit card
account agreements permit the card issuer to increase the periodic rate
if the consumer makes a late payment. Because the circumstances of the
increase are specified in advance in the account agreement, the
creditor currently need not provide a change-in-terms notice; under
current Sec. 226.7(d) the new rate will appear on the periodic
statement for the cycle in which the increase occurs.
In the December 2004 ANPR, the Board sought comment as to whether
mailing a notice 15 days prior to the effective date of a change in an
interest rate provided timely notice to consumers. Q26. The Board also
asked whether existing disclosure rules for increases to interest rates
and other finance charges were adequate to enable consumers to make
timely decisions about how to manage their accounts. Q27. Some
commenters noted that consumers are surprised by changes to the terms
of their accounts and are not aware that such changes are possible
before they take effect, because they do not receive advance notice of
those changes and do not remember the information regarding those
changes that was contained in the account-opening disclosures. Consumer
advocates expressed concern that consumers are not aware when they have
triggered rate increases, for example by paying late, and thus are
unaware that it might be in their best interest to shop for alternative
financing before the rate increase takes effect. Some consumer
commenters requested that the Board ban certain practices, such as
``universal default clauses,'' which permit a creditor to raise a
consumer's interest rate to the penalty rate if the consumer, for
example, makes a late payment on any account, not just on accounts with
that creditor.
The Board proposes three revisions to the regulation and commentary
to improve consumers' awareness about changes in their account terms or
increased rates due to delinquency or default or as a penalty. These
revisions also are intended to enhance consumers' ability to shop for
alternative financing before such account terms become effective. The
proposed revisions generally apply when a creditor is changing terms
that must be disclosed in the account-opening summary table under Sec.
226.6(b)(4). See section-by-section analysis to Sec. 226.6(b)(4).
First, the Board proposes to expand the circumstances under which
consumers receive advance notice of changed terms, or increased rates
due to delinquency, or for default or as a penalty. Second, the Board
proposes to give consumers earlier notice of a change in terms, or for
increased rates due to delinquency or default or as a penalty. Third,
the Board proposes to introduce format requirements to make the
disclosures about changes in terms or for increased rates due to
delinquency, default or as a penalty more effective. HELOCs would not
be affected by these proposed revisions. The provisions dealing with
notices about increased rates due to delinquency, or default or as a
penalty are discussed in the section-by-section analysis to Sec.
226.9(g).
Changes in late-payment fees and over-the-credit limit fees.
Creditors currently do not have to provide notice of changes to late-
payment fees and over-the-credit-limit charges, pursuant to current
Sec. 226.9(c)(2). For open-end (not home-secured) plans, the Board's
proposal would require 45 days advance notice for changes involving
late-payment charges or over-the-credit-limit charges, other than a
reduction in the amount of the charges. See proposed Sec.
226.9(c)(2)(i). The Board believes that it would be beneficial for
consumers to have advance notice of changes to these charges, which can
be substantial depending on how a consumer uses his or her account.
Late-payment charges and over-the-credit-limit charges can have a large
aggregate effect, particularly since they need not be one-time charges,
and can be charged month after month if a consumer repeatedly makes
late payments or exceeds his or her credit limit. Advance notice
regarding changes in the amount of these charges may assist consumers
to make better decisions regarding their account usage and regarding
when and in what amount they should make payments in order to avoid
these potentially recurring charges. This amendment would require that
45 days' advance notice be given only when the amount of a late-payment
fee or over-the-credit-limit fee changes, not when such a fee is
applied to a consumer's account.
Timing. As discussed above, Sec. 226.9(c)(1) currently provides
that whenever any term required to be disclosed under Sec. 226.6 is
changed or the required minimum payment is
[[Page 33010]]
increased, a written notice must be mailed or delivered to the consumer
at least 15 days before that change becomes effective. Commenters
responding to the December 2004 ANPR expressed a number of opinions
about this requirement. One consumer group and a number of individual
consumers stated that 15 days is not enough time for a consumer to seek
alternative financing, and recommended that consumers be given more
time. Some creditors stated that 15 days' advance notice was adequate.
Other industry commenters stated that they did not oppose increasing
the notice period from 15 days to 30 days, and added that many
consumers already receive notice approximately one month before a
change in terms becomes effective, because the notices often are sent
with periodic statements. A few consumer group commenters recommended
90 days' advance notice for all changes to terms.
In light of the comments received and upon further consideration of
this issue, for open-end (not home-secured) plans, the Board proposes
to add Sec. 226.9(c)(2)(i) to extend the notice period from 15 days to
45 days. For changes that require advance notice, the Board believes
that consumers should have sufficient time, following the notice and
before the change becomes effective, to change the usage of their plan
or to pursue alternative means of financing their purchases, such as
using another credit card, utilizing a home-equity line or installment
loan, or shopping for a new credit card.
The Board considered requiring that advance notice of changes in
terms be sent 30 days in advance, but concluded that 30 days could be
inadequate in some circumstances. The rule governs when notices must be
sent, not received by the consumer, so in practice the notice will be
received by the consumer with less days remaining to act than the full
advance notice period specified in the rule. In light of delays in mail
delivery, for example, a notice sent to a consumer 30 days in advance
may give a consumer only 25 days to seek alternative financing before
the change in terms takes effect. For example, if a consumer wants to
shop for another credit card, apply for, open, and transfer a balance
from an existing card to a new card, 30 days may be too short a time in
some cases. The Board's proposal that notice be sent 45 days in advance
should ensure, in most cases, that a consumer will have at least one
calendar month following receipt of the notice and before the change in
terms takes effect, to seek alternative financing or otherwise mitigate
the effect of the new terms.
The proposed 45 day notice period would not apply when the changes
affect charges that are not required to be disclosed under Sec.
226.6(b)(4). See proposed Sec. 226.9(c)(2)(ii). Specifically, if a
creditor increases any component of a charge, or introduces a new
charge, that is imposed as part of the plan under Sec. 226.6(b)(1) but
is not required to be disclosed as part of the account-opening summary
table under Sec. 226.6(b)(4), the creditor may either, at its option
(1) provide at least 45 days written advance notice before the change
becomes effective, or (2) provide notice orally or in writing of the
amount of the charge to an affected consumer at a relevant time before
the consumer agrees to or becomes obligated to pay the charge. For
example, a fee for expedited delivery of a credit card is a charge
imposed as part of the plan under Sec. 226.6(b)(1) but is not required
to be disclosed in the account-opening summary table under Sec.
226.6(b)(4). If a creditor changes the amount of that expedited
delivery fee, the creditor may provide written advance notice of the
change to affected consumers at least 45 days before the change becomes
effective. Alternatively, the creditor may provide notice orally or in
writing of the amount of the charge to an affected consumer at a
relevant time before the consumer agrees to or becomes obligated to pay
the charge. See comment 9(c)(2)(ii)-1. Creditors meet the standard to
provide the notice at a relevant time if the oral or written notice of
a charge is given when a consumer would likely notice it, such as when
deciding whether to purchase the service that would trigger the charge.
For example, if a consumer telephones a card issuer to discuss a
particular service, a creditor would meet the standard if the creditor
clearly and conspicuously discloses the fee associated with the service
that is the topic of the telephone call. See comment 9(c)(2)(ii)-2. The
Board believes that for these charges, consumers do not need advance
notice of the current amount of the charge.
As discussed in the section-by-section analysis to Sec.
226.5(a)(1)(ii), creditors are permitted under the E-Sign Act to
provide in electronic form any TILA disclosure that is required to be
provided or made available to consumers in writing if the consumer
affirmatively consents to receipt of electronic disclosures in a
prescribed manner. 15 U.S.C. 7001 et seq. The Board requests comment on
whether there are circumstances in which creditors should be permitted
to provide cost disclosures in electronic form to consumers who have
not affirmatively consented to receive electronic disclosures for the
account, such as when a consumer seeks to make a payment online, and
the creditor imposes a fee for the service.
Format. Section 226.9 currently contains no restrictions or
requirements with regard to how change-in-terms notices are presented
or formatted. The consumer testing conducted for the Board explored the
usability of current change-in-terms notices. The results of this
consumer testing suggest that typical change-in-terms notices are not
formatted in a manner that is noticeable and easy for consumers to
understand. Consumer testing also suggests that improvements can be
made to these notices. A typical change-in-terms notice contains dense
blocks of contractual language in a small font, and may be on an
accordion-style pamphlet included with the consumer's periodic
statement. Consumer testing indicated that consumers may not look at
these pamphlets when they are included with periodic statements, and
that some consumers have trouble navigating these notices even when
their attention is explicitly drawn to the disclosures. These pamphlets
generally are not designed to draw attention to the changes because
they provide a disclosure of contractual provisions.
For open-end (not home-secured) plans, the Board proposes that
creditors be required to provide a summary table of a limited specified
number of key terms on the front of the first page of the change-in-
terms notice, or segregated on a separate sheet of paper. See proposed
Sec. 226.9(c)(2)(iii), Sample G-20 in Appendix G. Creditors would be
required to utilize the same headings as in the account-opening tables
in Model Form G-17(A) and Samples G-17(B) and G-17(C) in Appendix G. If
the change-in-terms notice were included with a periodic statement, a
summary table would be required to appear on the front of the periodic
statement, preceding the list of transactions for the period. See
Sec. Sec. 226.7(b)(14), 226.9(c)(2)(iii).
The Board believes that requiring a tabular summary of the key
terms of the consumer's account would make change-in-terms notices more
useful to consumers by highlighting those terms that may be of most
interest to them. Based on consumer testing conducted for the Board,
when a summary of key terms was included on change-in-terms notices
tested, consumers tended to read the notice and appeared to understand
better what key terms were being changed than when a summary was not
included.
[[Page 33011]]
The proposal also would require that creditors provide other
information in the change-in-terms notice, specifically (1) a statement
that changes are being made to the account; (2) a statement indicating
the consumer has the right to opt out of these changes, if applicable,
and a reference to additional information describing the opt out right
provided in the notice, if applicable; (3) the date the changes to
terms described in the summary table will become effective; (4) if
applicable, an indication that the consumer may find additional
information about the summarized changes, and other changes to the
account, in the notice; and (5) if the creditor is changing a rate on
the account, other than a penalty rate, a statement that if a penalty
rate applies to the consumer's account, the new rate described in the
notice does not apply to the consumer's account until the consumer's
account balances are no longer subject to the penalty rate. This
information must be placed directly above the summary of key changes
described above. This information is intended to give context to the
summary of key changes.
With respect to the reference to a right to opt out of the changes,
the Board is not requiring that creditors provide such an opt out
right. State law or other applicable laws may provide consumers with a
right to opt out of certain changes. If a consumer has the right to opt
out of the changes in the notice, a creditor must include a statement
indicating the consumer has the right to opt out of these changes, if
applicable, and a reference to additional information describing the
opt out right provided in the notice, if applicable.
Reduction in credit limit. Under Regulation Z, a creditor generally
may decrease a consumer's credit limit without providing any notice,
except with regard to HELOCs. As a result, there could be situations
where a consumer may exceed his or her credit limit without realizing
it, potentially triggering late-payment fees and penalty pricing. Under
new Sec. 226.9(c)(2)(v), for open-end (not home-secured) plans, if a
creditor decreases the credit limit on an account, advance notice of
the decrease must be provided before an over-the-limit fee or a penalty
rate can be imposed solely as a result of the consumer exceeding the
newly decreased credit limit. Under the proposal, notice must be
provided in writing or orally at least 45 days prior to imposing the
over-the-limit fee or penalty rate and shall state that the credit
limit on the account has been or will be decreased. The Board and other
federal banking agencies in the past have received a number of
complaints from consumers who were not notified when their credit
limits were decreased, and were surprised at the subsequent imposition
of an over-the-credit-limit fee. The Board is not proposing that
creditors may not reduce a consumer's credit limit. The Board
recognizes that creditors have a legitimate interest in mitigating the
risk of loss when a consumer's creditworthiness deteriorates, and that
a consumer's creditworthiness can deteriorate quickly. Therefore, the
Board's proposal would simply require that a creditor provide a notice
that it has reduced or will be reducing a consumer's credit limit 45
days before imposing any fee or penalty rate for exceeding that new
limit. This proposed amendment would apply only when the over-the-
credit-limit fee is imposed solely as a result of a reduction in the
credit limit; if the over-the-credit-limit fee would have been charged
notwithstanding the reduction in a credit limit, no advance notice
would be required. This provision is not intended to permit creditors
to provide a general notice at account opening that a consumer's credit
limit may change from time to time; rather, the notice should be sent
with regard to a specific credit limit reduction that has occurred or
will be occurring.
Rules affecting home-equity plans. The Board proposes at the
present time to retain in proposed Sec. 226.9(c)(1), without intended
substantive change, the current rules regarding the circumstances,
timing, and content of change-in-terms notices for HELOCs. These rules
will be reviewed in the Board's upcoming review of the provisions of
Regulation Z addressing closed-end and open-end (home-secured) credit.
The Board is aware that the current change-in-terms rules, which
have applicability both to HELOCs and open-end (not home-secured)
credit, address several types of changes in terms that are
impermissible for HELOCs subject to Sec. 226.5b. Section 226.5b
imposes substantive restrictions on which terms of HELOCs may be
changed, and in retaining the current change-in-terms rules for HELOCs,
the Board does not intend to amend or in any way change the substantive
restrictions imposed by Sec. 226.5b. Accordingly, the Board proposes
to make several deletions in proposed Sec. 226.9(c)(1) and the related
commentary with respect to HELOCs. For example, the Board proposes
deleting in new comment 9(c)(1)-1 the requirement that notice ``be
given if the contract allows the creditor to increase the rate at its
discretion but does not include specific terms for an increase,''
because such a contractual term would be prohibited under Sec. 226.5b.
The Board welcomes comment on whether there are any remaining
references in Sec. 226.9(c)(1) and the related commentary to changes
in terms that would be impermissible for open-end (home-secured) credit
pursuant to Sec. 226.5b.
9(e) Disclosures Upon Renewal of Credit or Charge Card
TILA Section 127(d), which is implemented in Sec. 226.9(e),
requires card issuers that assess an annual or other periodic fee,
including a fee based on activity or inactivity, on a credit card
account of the type subject to Sec. 226.5a to provide a renewal notice
before the fee is imposed. 15 U.S.C. 1637(d). The creditor must provide
disclosures required for credit card applications (although not in a
tabular format) and must inform the consumer that the renewal fee can
be avoided by terminating the account by a certain date. The notice
must generally be provided at least 30 days or one billing cycle,
whichever is less, before the renewal fee is assessed to the account.
However, there is an alternative delayed notice procedure where the fee
can be assessed; the fee must be reversed if the consumer terminates
the account provided the consumer is given notice.
Creditors are given considerable flexibility in the placement of
the disclosures required under Sec. 226.9(e). For example, the notice
can be preprinted on the periodic statement, such as on the back of the
statement. See Sec. 226.9(e)(3) and comment 9(e)(3)-2. However,
creditors that place any of the disclosures on the back of the periodic
statement must include a reference to those disclosures under Sec.
226.9(e)(3). To aid in compliance, a model clause that may, but is not
required to, be used is proposed for creditors that use the delayed
notice method. See proposed comment 9(e)(3)-1.
Comment 9(e)-4, which addresses accuracy standards for disclosing
rates on variable rate plans, would be revised, for the same reasons
and consistent with the proposed accuracy standard for account-opening
disclosures. See section-by-section analysis to Sec.
226.6(b)(2)(ii)(G).
Other proposed changes to Sec. 226.9(e) are minor with no intended
substantive change. For example, footnote 20a, dealing with format, is
deleted as unnecessary. The proposed reorganization of Sec. 226.5a is
intended, in part, to separate more clearly content and format
requirements in that section.
[[Page 33012]]
Nonetheless, to avoid any possible confusion, comment 9(e)-2, which
generally repeats footnote 20a, would be retained.
9(g) Increase in Rates Due to Delinquency or Default or Penalty Pricing
As discussed above with respect to Sec. 226.9(c), in the December
2004 ANPR, the Board asked whether existing disclosure rules for
increases to interest rates and other finance charges were adequate to
enable consumers to make timely decisions about how to manage their
accounts. Q27. Consumer advocates expressed concern that consumers are
not aware when they have triggered rate increases, for example by
paying late, and thus are unaware that it might be in their interest to
shop for alternative financing before the rate increase takes effect.
Some consumer commenters requested that the Board ban certain
practices, such as ``universal default clauses,'' which permit a
creditor to raise a consumer's interest rate to the penalty rate if the
consumer defaults on any accounts, not just on accounts with that
creditor.
The Board is not proposing at the present time to prohibit
universal default clauses or similar practices. Instead, as discussed
in the section-by-section analysis to Sec. 226.5a, the Board's
proposal seeks to improve the effectiveness of the disclosures given to
consumers regarding the conditions in which penalty pricing will apply.
In addition, the Board seeks to improve the ability of consumers to use
the disclosures given to them by proposing that disclosures be provided
prior to the application of penalty pricing to their accounts. To this
end, with respect to open-end (not home-secured) plans, the Board's
proposed rule would add Sec. 226.9(g)(1) to require creditors to
provide 45 days advance notice when a rate is increased due to a
consumer's delinquency or default, or if a rate is increased as a
penalty for one or more events specified in the account agreement, such
as a late payment or an extension of credit that exceeds the credit
limit. This notice would be required even if, as is currently the case,
the creditor specifies the penalty rate and the specific events that
may trigger the penalty rate in the account-opening disclosures.
Neither Regulation Z nor TILA defines what a ``default'' is, and
the Board is aware that credit agreements of some creditors permit
penalty pricing based on a single late payment by the consumer to that
creditor. The Board is concerned that the imposition of penalty pricing
can come as a costly surprise to consumers who are not aware of, or do
not understand, what behavior is considered a ``default'' under their
agreement. As discussed in the section-by-section analysis to Sec.
226.5a, consumer testing conducted for the Board indicated that some
consumers do not understand what factors can give rise to penalty
pricing, such as the fact that one late payment may constitute a
``default.'' Moreover, when penalty pricing is imposed, it may apply to
all of the balances on a consumer's account and often applies to
balances for several months or longer. Penalty rates can be more than
twice as much as the consumer's normal rate on purchases; for example,
default rates in excess of 30 percent are not uncommon.
The Board believes that the way to address penalty pricing is
through improved disclosures regarding the conditions under which
penalty pricing may be imposed. In part, the Board is proposing, in
connection with the disclosures given with credit card applications and
solicitations and at account opening, to enhance disclosures about
penalty pricing and revise terminology to address consumer confusion
regarding the meaning of ``default.'' However, in light of the
relatively low contractual threshold for rate increases based on
consumer delinquency, default or as a penalty, the Board believes that
consumers also would benefit from advance notice of these rate
increases, which they otherwise may not expect. Advance notice would
give consumers an opportunity to shop for alternate sources of credit,
pay down account balances before the rate increase takes effect, or
contact the card issuer to rectify any errors before penalty rates are
imposed. To make this opportunity viable, the Board is proposing that
the notice be provided at least 45 days before the increase takes
effect. The Board requests comment on whether a shorter time period,
such as 30 days' advance notice, would be adequate notice for consumers
whose interest rates are being increased due to default or delinquency,
or as a penalty.
The proposed rule would impose a de facto limitation on the
implementation of contractual terms between a consumer and creditor, in
that creditors would no longer be permitted to provide for the
immediate application of penalty pricing upon the occurrence of certain
events specified in the contract. The Board believes that this delay in
implementing contract terms is appropriate in light of the potential
benefit to consumers. Many consumers are likely unaware of the events
that will trigger such pricing. The account-opening disclosures may be
provided to the consumer too far in advance for the consumer to recall
the circumstances that may cause his or her rates to increase. In
addition, the consumer may not have retained a copy of the account-
opening disclosures and may not be able to effectively link the
information disclosed at account opening to the current repricing of
his or her account.
The Board notes that this advance notice provision does not, in any
manner, limit the contractual ability of creditors to establish the
events that trigger penalty pricing, or to establish the rates that
apply for such events. The Board also notes that use of this sort of de
facto delay in implementing contract terms has precedent in Regulation
Z. For example, since 1988, Sec. 226.20(c) has provided that 25 days'
advance notice must be given for certain increases in the payment for
an adjustable rate mortgage, even if the circumstances of the increase
are specified in advance in the contract.
Under the proposed rule, creditors would retain the ability to
mitigate risk by freezing credit accounts or lowering the credit limit
without providing advance notice (subject to proposed Sec.
226.9(c)(2)(v) discussed above, which addresses over-the-credit-limit
fees or penalty rates). Thus, creditors would be able to effectively
mitigate risk on accounts that are delinquent or in default
notwithstanding the fact that they would be required to provide a
notice 45 days before increasing the rate.
The rule also would not require that 45 days' advance notice be
given for certain changes made in accordance with the contract,
provided that such adjustment is not due to delinquency, default or as
a penalty. For example, if an employee offers an open-end plan with
discounted rates to its employees, the employer would not be required
to give a former employee 45 days' advance notice before increasing the
rate on that individual's account from the preferential employees' rate
to the standard rate, provided that the rate increase was set forth in
the account agreement.
Disclosure content and format. With respect to open-end (not home-
secured) plans, under the Board proposal, if a creditor is increasing
the rate due to delinquency or default or as a penalty, the creditor
must provide a notice with the following information: (1) A statement
that the delinquency or default rate or penalty rate has been
triggered, as applicable; (2) the date as of which the delinquency or
default rate or penalty rate will be applied to the account, as
applicable; (3) the
[[Page 33013]]
circumstances under which the delinquency or default rate or penalty
rate, as applicable, will cease to apply to the consumer's account, or
that the delinquency or default rate or penalty rate will remain in
effect for a potentially indefinite time period; and (4) a statement
indicating to which balances on the account the delinquency or default
rate or penalty rate will be applied, as applicable. See proposed Sec.
226.9(g)(3)(i). In consumer testing conducted for the Board, some
participants did not appear to understand that penalty rates can apply
to all of their balances, including existing balances. Some
participants also did not appear to understand how long a penalty rate
could be in effect. Without information about the balances to which the
penalty rate applies and how long it applies, consumers might have
difficultly determining whether they should shop for another card or
pursue alternate sources of financing. Consumers also may consider the
duration of penalty pricing when shopping for alternative sources of
credit which would enhance their ability to make prudent decisions.
If the notice regarding increases in rates due to delinquency,
default or penalty pricing were included on or with a periodic
statement, this notice must be in a tabular format. Under the proposal,
the notice also would be required to appear on the front of the
periodic statement, preceding the list of transactions for the period.
See proposed Sec. Sec. 226.7(b)(14), 226.9(g)(3)(ii)(A). If the notice
is not included on or with a periodic statement, the information
described above must be disclosed on the front of the first page of the
notice. See Sec. 226.9(g)(3)(ii)(B).
Section 226.10 Prompt Crediting of Payments
Section 226.10, which implements TILA Section 164, generally
requires a creditor to credit to a consumer's account a payment that
conforms to the creditor's instructions (also known as a conforming
payment) as of the date of receipt, except when a delay in crediting
the account will not result in a finance or other charge. 15 U.S.C.
1666c; Sec. 226.10(a). Section 226.10 also requires a creditor that
accepts a non-conforming payment to credit the payment within five days
of receipt. See Sec. 226.10(b). The Board has interpreted Sec. 226.10
to permit creditors to specify cut-off times indicating the time when a
payment is due, provided that the requirements for making payments are
reasonable, to allow most consumers to make conforming payments without
difficulty. See comments 10(b)-1 and -2. Pursuant to Sec. 226.10(b)
and comment 10(b)-1, if a creditor imposes a cut-off time, it must be
disclosed on the periodic statement; many creditors put the cut-off
time on the back of statements.
The December 2004 ANPR solicited comment regarding the cut-off
times used currently by most issuers for receiving payments, whether
cut-off times differ based on the type of payment (e.g., check, EFT,
telephone, or Internet), and whether the operating times of third party
processors differ from those of creditors. Q47-Q48, Q50. The December
2004 ANPR also requested comment regarding the adequacy and clarity of
current disclosures of payment due dates and cut-off times, and asked
whether the Board should issue a rule requiring creditors to credit
payments as of the date they are received, regardless of the time. Q49,
Q51.
Disclosure of cut-off times. In response to the December 2004 ANPR,
the Board received a number of comments describing issuers' current
practices regarding cut-off times. The majority of industry commenters
noted that they do set cut-off times that are in the early or mid-
afternoon, but that cut-off times may differ based on the means by
which a consumer makes his or her payment, with telephone and Internet
payments often having later cut-off times than payments made by mail.
These industry commenters argued that current disclosure of these cut-
off times is clear. Consumer groups and consumers commented that the
majority of banks now set a cut-off time on payment due dates and that
these cut-off times are a problem because they could result in a due
date that is one day earlier in practice than the date disclosed.
Consumer groups expressed particular concern about cut-off times
because they believe that issuers simultaneously may be decreasing the
time period between the end of the statement period and the time when
the payment is due.
Almost all industry comments opposed the Board's suggestion to
require creditors to credit payments as of the date they are received,
regardless of the time, noting that issuers need flexibility to work
with external vendors and that creditors' internal processes and
systems will to some extent dictate the timing of payment crediting.
Consumer and consumer group comments proposed a rule that would require
banks to consider the postmark to be the day the payment is received.
The Board is not proposing to require a minimum cut-off time.
Instead, as discussed above, the Board is proposing, in what would be
new Sec. 226.7(b)(11), to require that for open-end (not home-secured)
plans, creditors must disclose the earliest of their cut-off times for
payments near the due date on the front page of the periodic statement,
if that earliest cut-off time is before 5 p.m. on the due date. The
Board believes that the disclosure-based approach may benefit consumers
without imposing an unreasonable operational burden on creditors.
Consumers would be able to make better decisions about when to make
payments in order to avoid late-payment fees and default rates if
earlier cut-off times such as 12:00 p.m. were more prominently
disclosed on the periodic statement. In recognition of the fact that
creditors may have different cut-off times depending on the type of
payment (e.g., mail, Internet, or telephone), the Board's proposal
would require that creditors disclose only the earliest cut-off time,
if earlier than 5 p.m. on the due date. See proposed Sec.
226.7(b)(11). HELOCs would not be affected by the disclosure rule in
Sec. 226.7(b)(11).
Receipt of electronic payments made through a creditor's Web site.
The Board also proposes to add an example to comment 10(a)-2 that
states that for payments made through a creditor's Web site, the date
of receipt is the date as of which the consumer authorizes the creditor
to debit that consumer's account electronically. Industry comments to
the December 2004 ANPR stated that most credit card payments are still
received by mail. Nevertheless, the Internet is an increasingly
utilized resource for making credit card payments and for receiving
information about accounts. Unlike payments delivered by mail, payments
made via a creditor's Web site may be received almost immediately by
that creditor.
The proposed comment would refer to the date on which the consumer
authorizes the creditor to effect the electronic payment, not the date
on which the consumer gives the instruction. The consumer may give an
advance instruction to make a payment and some days may elapse before
the payment is actually made; accordingly, comment 10(a)-2 would refer
to the date on which the creditor is authorized to debit the consumer's
account. If the consumer authorized an immediate payment, but provided
the instruction after a creditor's cut-off time, the relevant date
would be the following business day. For example, a consumer may go
online on a Sunday evening and instruct that a payment be made;
however, the creditor could not transmit the request for the debit to
the
[[Page 33014]]
consumer's account until the next day, Monday. Under proposed comment
10(a)-2 the date on which the creditor was authorized to effect the
electronic payment would be deemed to be Monday, not Sunday. Proposed
comment 10(b)-1.i.B would clarify that the creditor may, as with other
means of payment, specify a cut-off time for an electronic payment to
be received on the due date in order to be credited on that date. The
Board solicits comment regarding the incidence of, and types of, any
delays that may prevent creditors or their third party processors from
receiving electronic payments on the date on which the creditor is
authorized to effect the payment.
The Board considered expanding this comment to cover electronic
payments received by other means (e.g., if the consumer authorizes a
payment to his deposit account-holding bank's Web site), because it is
likely that such electronic payments made through such parties also may
be received by the creditor on the same day that they are authorized.
However, it could be difficult for a creditor to monitor when a
consumer gives a third party an instruction to send a payment, and, in
addition, the creditor has no direct control over how long it takes the
third party to process that instruction. As a result, the Board's
proposed clarification of comment 10(a)-2 is limited to electronic
payments effected through the creditor's own Web site, over which the
creditor has control.
Promotion of payment via the creditor's Web site. The Board also
proposes to update the commentary to clarify that if a creditor
discloses that payments can be made on that creditor's Web site, then
payments made through the creditor's Web site will be considered
conforming payments for purposes of Sec. 226.10(b). Many creditors now
permit consumers to make payments via their Web site. Payment on the
creditor's Web site may not be specified on or with the periodic
statement as conforming payments, but it may be promoted in other ways,
such as in the account-opening agreement, via e-mail, in promotional
material, or on the Web site itself. It would be reasonable for a
consumer who receives materials from the creditor promoting payment on
the creditor's Web site to believe that it would be a conforming
payment and credited on the date of receipt. Therefore, the Board
proposes to amend comment 10(b)-2 to clarify that if a creditor
promotes that it accepts payments via its Web site (such as disclosing
on the Web site itself or on the periodic statement that payments can
be made via the Web site), then it is considered a conforming payment
for purposes of Sec. 226.10(b).
Third party processors. With regard to third party processors,
industry commenters noted that current practice is that payments
received by a third party processor are treated as if they were
received directly by the creditor, and that no further clarification is
necessary. Accordingly, the Board is not currently proposing any
amendments to specifically address third party processors.
Section 226.11 Treatment of Credit Balances; Account Termination
11(a) Credit Balances
TILA Section 165, implemented in Sec. 226.11, sets forth specific
steps that a creditor must take to return any credit balance in excess
of $1 on a credit account, including making a good faith effort to
refund any credit balance remaining in the consumer's account for more
than six months. 15 U.S.C. 1666d. The substance of Sec. 226.11 would
remain unchanged; however, the commentary would be revised to provide
that a creditor may comply with this section by refunding any credit
balance upon receipt of a consumer's oral or electronic request. See
proposed comment 11(a)-1. In addition, the Board proposes to move the
current rules in Sec. 226.11 to a new paragraph (a), with the
commentary renumbered accordingly, and to add a new paragraph (b) which
implements the account termination prohibition for certain open-end
accounts in Section 1306 of the Bankruptcy Act (further discussed
below). See TILA Section 127(h); 15 U.S.C. 1637(h). The section title
would be amended to reflect the new subject matter.
11(b) Account Termination
TILA Section 127(h), added by the Bankruptcy Act, prohibits an
open-end creditor from terminating open-end accounts for certain
reasons. Creditors cannot terminate an open-end plan before its
expiration date solely because the consumer has not incurred finance
charges on the account. The prohibition does not prevent a creditor
from terminating an account for inactivity in three or more consecutive
months. The October 2005 ANPR solicited comment on the need for
additional guidance, such as when an account ``expires'' and when an
account is ``inactive.'' Q106-Q108.
The Board proposes to implement TILA Section 127(h) in new Sec.
226.11(b). The general rule is stated in Sec. 226.11(b)(1) and mirrors
the statute; the prohibition would apply to all open-end plans.
Commenters expressed differing views on how the Board might
interpret ``expiration date.'' Some suggested using the expiration date
on credit cards as the date the account is deemed to expire. Others
noted that while cards may expire from time to time, the underlying
open-end plans commonly do not have maturity or expiration dates. These
commenters were concerned that if an account were deemed to ``expire''
when a credit card's expiration date occurs, new account-opening
disclosures would be required for the account to continue. The Board
believes that Congress did not intend such a result. Therefore, comment
11(b)(1)-1 would clarify that the underlying credit agreement, not the
credit card, determines if there is a stated expiration (maturity)
date. Creditors offering accounts without a stated expiration date
could not terminate those accounts solely because the consumer does not
incur finance charges on the account.
Under the proposal, a new Sec. 226.11(b)(2) would be added to
provide that the new rule in Sec. 226.11(b)(1) does not prevent
creditors from terminating an account under an open-end plan (with or
without an expiration date) that is inactive for three consecutive
months. Commenters were split on the need for guidance on an
``inactive'' account. Of those that suggested guidance, commenters
generally concurred that ``activity'' includes purchases or cash
advances, for example. But commenters disagreed whether an account with
an outstanding balance was ``active.'' Because finance charges are
likely to accrue on balances remaining after the end of a grace period
if any, the Board believes the Congress was addressing situations where
no finance charges were accruing due to inactivity. Therefore, proposed
Sec. 226.11(b)(2) would provide that an account is inactive if there
has been no extension of credit (such as by purchase, cash advance, or
balance transfer) and the account has no outstanding balance.
Section 226.12 Special Credit Card Provisions
Section 226.12 contains special rules applicable to credit cards
and credit card accounts, including conditions under which a credit
card may be issued, liability of cardholders for unauthorized use, and
cardholder rights to assert merchant claims and defenses against the
card issuer. The proposal would, among other things, provide additional
guidance on the rules on unauthorized use and the rights of
[[Page 33015]]
cardholders to assert claims or defenses involving a merchant against
the card issuer (consumer claims with merchants) and update the section
to address Internet transactions.
12(a) Issuance of Credit Card
TILA Section 132, which is implemented by Sec. 226.12(a) of
Regulation Z, generally prohibits creditors from issuing credit cards
except in response to a request or application. Section 132 explicitly
exempts from this prohibition credit cards issued as renewals of or
substitutes for previously accepted credit cards. 15 U.S.C. 1642.
Existing comment 12(a)(2)-5, the ``one-for-one rule,'' interprets these
statutory and regulatory provisions by providing that, in general, a
creditor may not issue more than one credit card as a renewal of or
substitute for an accepted credit card. The proposal would leave Sec.
226.12(a) and the accompanying commentary generally unchanged, except
that the text of footnote 21 defining the term ``accepted credit card''
would be moved to new comment 12(a)-2.
In 2003, Board staff revised the commentary to Sec. 226.12(a) to
allow card issuers to replace an accepted credit card with more than
one card, subject to certain conditions, including the limitation that
the consumer's total liability for unauthorized use with respect to the
account could not increase with the issuance of the additional renewal
or substitute card(s). See comment 12(a)(2)-6; 68 FR 16,185; April 3,
2003. Card issuers could thus, for example, issue credit cards using a
new format or technology to existing accountholders, even though the
new card is intended to supplement rather than replace the traditional
card. In the December 2004 ANPR, the Board solicited comment as to
whether it should consider revising Sec. 226.12(a) to allow the
unsolicited issuance of additional cards on an existing account outside
of renewal or substitution under certain conditions, including that the
additional cards be sent unactivated. Q46.
Consumer groups stated that additional credit cards should only be
sent if the consumer specifically requests such cards, citing identity
theft concerns if issuers were permitted to send out credit cards
without any advance warning or notice. One consumer group suggested
that the Board require that consumers be notified in writing or by
phone before additional cards are sent. Industry commenters strongly
encouraged the Board to amend the regulation to permit the unsolicited
issuance of additional cards on existing accounts even when a
previously accepted card is not being replaced. These industry
commenters observed that the current constraints on distributing new
types of credit cards potentially impeded industry innovation in
providing more convenient methods for consumers to access their
accounts. Industry commenters also contested the notion that sending
additional cards on an unsolicited basis would increase the risk of
identity theft because, in their view, providing an additional card
presents no greater risk than sending the first card, which the
consumer has requested, or a renewal card, which consumers often would
not know when to expect. Industry commenters also noted that allowing
the unsolicited issuance of credit cards outside the context of a
renewal or substitution would not expose consumers to greater liability
for unauthorized transactions given the contemplated condition that
liability for unauthorized use on the card account may not increase
with the issuance of the additional card.
At this time, the Board does not propose to amend Sec. 226.12(a)
and the one-for-one rule to allow the unsolicited issuance of credit
cards outside the context of a renewal or substitution of an accepted
access device. Based on current card issuer practices, the Board
understands that some issuers may be unable to require separate
activation procedures for access devices on the same credit card
account. As a result, additional cards sent on an unsolicited basis
outside the context of a renewal or substitution might be sent in
activated form, which could cause considerable harm to consumers. Even
if the card issuer were not permitted to impose any additional
liability on the consumer for unauthorized use, consumers would
nevertheless still suffer the inconvenience of refuting unwarranted
claims of liability.
12(b) Liability of Cardholder for Unauthorized Use
TILA Section 133(a) limits a cardholder's liability for an
unauthorized use of a credit card to no more than $50 for transactions
that occur prior to notification of the card issuer that an
unauthorized use has occurred or may occur as the result of loss, theft
or otherwise. 15 U.S.C. 1643. Before a card issuer may impose liability
for an unauthorized use of a credit card, it must satisfy certain
conditions: (1) the card must be an accepted credit card; (2) the
issuer must have provided adequate notice of the cardholder's maximum
liability and of the means by which the issuer may be notified in the
event of loss or theft of the card; and (3) the issuer must have
provided a means to identify the cardholder on the account or the
authorized user of the card. The statutory provisions on unauthorized
use are implemented in Sec. 226.12(b) of the regulation. The Board is
proposing a number of revisions that would clarify the scope of the
provision and update the regulation to reflect current business
practices. The proposed revisions also would provide guidance on the
relationship between the unauthorized use provision and the billing
error provisions in Sec. 226.13.
Scope. The definition of ``unauthorized use'' currently found in
footnote 22 would be moved into the regulation in new Sec.
226.12(b)(1)(i). The definition provides that unauthorized use is use
of a credit card by a person who lacks ``actual, implied, or apparent
authority'' to use the credit card. Comment 12(b)(1)-1 further
clarifies that whether such authority exists must be determined under
state or other law. Commenters were asked in the December 2004 ANPR
about whether there was a need to revise any of the substantive
protections for open-end credit accounts. Q43. Some commenters urged
the Board to consider adopting a provision similar to the existing
staff commentary under Regulation E (Electronic Fund Transfer Act) to
address circumstances where a consumer has furnished an access device
to a person who has exceeded the authority given. The proposal would
add a new comment 12(b)(1)-3 to clarify that if a cardholder furnishes
a credit card to another person and that person exceeds the authority
given, the cardholder is liable for that credit transaction unless the
cardholder has notified (in writing, orally, or otherwise) the creditor
that use of the credit card by that person is no longer authorized. See
also comment 205.2(m)-2 of the Official Staff Commentary to Regulation
E, 12 CFR part 205. New comment 12(b)(1)-4 would provide, however, that
an unauthorized use would include circumstances where a person has
obtained a credit card, or otherwise has initiated a credit card
transaction through robbery or fraud (e.g., if the person holds the
consumer at gunpoint). See also comment 205.2(m)-3 of the Official
Staff Commentary to Regulation E, Sec. 205.5. In both cases, the Board
believes it is appropriate for the same standard to apply to credit
cards that applies to debit cards under Regulation E. Thus, the Board
is proposing to adopt
[[Page 33016]]
the two standards under Regulation Z for consistency.
The Board does not anticipate that the proposed comments would
significantly expand the circumstances under which liability could be
imposed on a cardholder for a particular transaction, in light of the
existing reference in the definition of ``unauthorized use'' to
``implied or apparent authority.'' Nevertheless, the addition of this
comment could help provide greater clarity for issuers when
investigating unauthorized use claims. Comment is requested, however,
as to whether this clarification is necessary in light of the existing
definition of ``unauthorized use.'' Current Sec. 226.12(b)(1) would be
re-designated as Sec. 226.12(b)(1)(ii).
Section 226.12(b)'s liability provisions apply only to unauthorized
uses of a cardholder's credit card. Thus, the liability limits
established in Sec. 226.12(b) do not apply to unauthorized
transactions involving the use of a check that accesses a credit card
account. (See prior discussion of ``credit card'' under Sec.
226.2(a)(15).) The consumer would nevertheless be able to assert the
billing error protections in Sec. 226.13 which are independent of the
protections under Sec. 226.12(b). New comment 12(b)-4 would contain
this clarification.
Some commenters on the December 2004 ANPR urged the Board to adopt
a time period within which consumers must make claims for unauthorized
transactions made through the use of a credit card. These commenters
asserted that over time, evidence becomes more difficult to obtain,
making a creditor's investigation more difficult and that a consumer's
early detection and notification would prevent additional fraud on the
account. In contrast to TILA Section 161 which requires consumers to
assert a billing error claim within 60 days after a periodic statement
reflecting the error has been sent, TILA Section 133 does not prescribe
a time frame for asserting an unauthorized use claim. 15 U.S.C. 1643.
The Board believes that had Congress intended that a consumer's rights
to assert an unauthorized use claim to be time-limited, it would have
established a time frame for asserting the claim. Accordingly, the
proposal does not contain the suggested change.
Conditions for imposing liability. Section 226.12(b)(2) requires
the card issuer to satisfy three conditions before the issuer may
impose any liability for an unauthorized use of a credit card. First,
the credit card must be an accepted credit card. See footnote 21;
proposed comment 12-2. Second, the card issuer must have provided
``adequate notice'' to the cardholder of his or her maximum potential
liability and the means by which to notify the issuer of the loss or
theft of the card. Third, the card issuer also must have provided a
means to identify the cardholder on the account or the authorized user
of the card. See Sec. 226.12(b)(2).
Under the proposal, the guidance regarding what constitutes
adequate notice currently in footnote 23 would be moved to the staff
commentary. See new comment 12(b)(2)(ii)-2. In addition, the examples
in comment 12(b)(2)(iii)-1 describing means of identifying a cardholder
or user would be updated to contemplate additional biometric means of
identification other than a fingerprint on a card.
Comment 12(b)(2)(iii)-3 currently states that a cardholder may not
be held liable under Sec. 226.12(b) when the card itself or some other
sufficient means of identification of the cardholder is not presented.
In these circumstances, the card issuer has not satisfied one of the
conditions precedent necessary to impose liability; that is, it has not
provided a means to identify the cardholder of the account or the user
of the card. For example, no liability may be imposed on the cardholder
if a person without authority to do so orders merchandise by telephone,
using a credit card number or another number that appears only on the
card. The example would be updated to also apply to Internet
transactions.
In many instances, a credit card will bear a separate 3- or 4-digit
number, which is typically printed on the back of the card on the
signature block or in some cases on the front of the card above the
card number. Although the provision of the 3- or 4-digit number may
suggest that the person providing the number is in possession of the
card, it does not meet the requirement to provide a means to identify
the cardholder or the authorized user of the card, as required by the
regulation. Thus, comment 12(b)(2)(iii)-3 would clarify that a card
issuer may not impose liability on the cardholder when merchandise is
ordered by telephone or Internet if the person using the card without
the cardholder's authority provides the credit card number by itself or
with other information that appears on the card because it has not met
the requirement that a means to identify the cardholder or authorized
user of the card in the transaction.
The Board is also proposing revisions to Model Clause G-2, which
can be used to explain the consumer's liability for unauthorized use,
to improve its readability. For HELOCs subject to Sec. 226.5b, at the
creditor's option, the creditor may use Model Clause G-2 or G-2(A). For
open-end (not home-secured) plans, the creditor may use G-2(A).
12(c) Right of Cardholder to Assert Claims or Defenses Against Card
Issuer
Under TILA Section 170, as implemented in Sec. 226.12(c) of the
regulation, a cardholder may assert against the card issuer a claim or
defense for defective goods or services purchased with a credit card.
The claim or defense applies only as to unpaid balances for the goods
or services, and if the merchant honoring the card fails to resolve the
dispute. See 15 U.S.C. 1666i. The cardholder may withhold payment up to
the unpaid balance of the purchase that gave rise to the dispute and
any finance or other charges imposed on that amount. The right is
limited to disputes exceeding $50 for purchases made in the consumer's
home state or within 100 miles. See Sec. 226.12(c).\18\ The proposal
would update the regulation to address current business practices and
move guidance currently in the footnotes to the rule or the staff
commentary as appropriate.
---------------------------------------------------------------------------
\18\ Certain merchandise disputes, such as the nondelivery of
goods, may also be separatel asserted as a ``billing error'' under
Sec. 226.13(a)(3). See comment 12(c)-1.
---------------------------------------------------------------------------
In order to assert a claim under Sec. 226.12(c), a cardholder must
have used a credit card to purchase the goods or services associated
with the dispute. Comment 12(c)(1)-1 lists examples of circumstances
that are excluded or included by Sec. 226.12(c). The proposal would
add Internet transactions charged to the credit card account to the
list of circumstances included within the scope of Sec. 226.12(c)
(provided that certain conditions are met, including that the disputed
transaction take place in the same state as the cardholder's current
designated address, or within 100 miles from that address).
In technical revisions, guidance stating Sec. 226.12(c)'s
inapplicability to the transactions listed in footnote 24 has been
moved to comment 12(c)-3 with corresponding changes in comment
12(c)(1)-1. The reference to ``paper-based debit cards'' in existing
comment 12(c)(1)-1 would be deleted as obsolete. The Board is aware of
at least one product, however, whereby a consumer can pay cash and is
instantly issued an account number (along with a 3-digit card
identification number and expiration date) that allows the consumer to
conduct transactions with an online merchant. No physical card device
is issued to the consumer.
[[Page 33017]]
Comment is requested whether the reference to paper-based debit cards
should be retained or expanded to include these ``virtual'' cards.
Comment is also requested as to whether the references to ``check-
guarantee cards'' under comments 12(c)-3 (see existing footnote 24) and
12(c)(1)-1 should continue to be retained as guidance in the commentary
or whether they should also be deleted as obsolete.
Section 226.12 also requires that the disputed transaction must
have occurred in the same state as the cardholder's current designated
address or, if different, within 100 miles from that address. See Sec.
226.12(c)(3). Thus, if applicable state law provides that a mail,
telephone, or Internet transaction occurs at the cardholder's address,
such transactions would be covered under Sec. 226.12(c), even if the
merchant is located more than 100 miles from the cardholder's address.
The conditions for asserting merchant claims would be re-designated
under Sec. 226.12(c)(3)(i)(A) and (B) in the proposal. In addition,
the Board proposes to move the guidance currently found in footnote 26
regarding the applicability of some of the limitations in Sec.
226.12(c) to Sec. 226.12(c)(3)(ii). Corresponding revisions to reflect
the proposed changes would also be made to the staff commentary, with
additional clarifying changes.
Guidance regarding how to calculate the amount of the claim or
defense that may be asserted by the cardholder under Sec. 226.12(c),
currently found in footnote 25, would be moved to the commentary in
proposed comment 12(c)-4.
12(d) Offsets by Card Issuer Prohibited
TILA Section 169 prohibits card issuers from taking any action to
offset a cardholder's credit card indebtedness against funds of the
cardholder held on deposit with the card issuer. 15 U.S.C. 1666h. The
statutory provision is implemented by Sec. 226.12(d) of the
regulation. Section 226.12(d)(2) currently provides that card issuers
are permitted to ``obtain or enforce a consensual security interest in
the funds'' held on deposit. Comment 12(d)(2)-1 provides guidance on
the security interest provision. For example, the security interest
must be affirmatively agreed to by the consumer, and must be disclosed
as part of the account-opening disclosures under Sec. 226.6. In
addition, the comment provides that the security interest must not be
``the functional equivalent of a right of offset.'' The comment states
that the consumer ``must be aware that granting a security interest is
a condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account.'' The comment gives some examples of how this
requirement can be met, such as use of separate signature or initials
to authorize the security interest, placement of the security agreement
on a separate page, or reference to a specific amount or account number
for the deposit account. The comment also states that the security
interest must be ``obtainable and enforceable by creditors generally.
If other creditors could not obtain a security interest in the
consumer's deposit accounts to the same extent as the card issuer, the
security interest is prohibited by Sec. 226.12(d)(2).''
From time to time, questions have been raised about comment
12(d)(2)-1. For example, some card issuers have asked whether using
only one of the methods to ensure the consumer's awareness and intent
is sufficient, versus using more than one. Card issuers have also asked
about the requirement that the security interest be obtainable and
enforceable by creditors generally. The Board requests comment on
whether additional guidance is needed and, if so, the specific issues
that the guidance should address.
12(e) through 12(g)
Sections Sec. 226.12(e), (f), and (g) address, respectively: the
prompt notification of returns and crediting of refunds; discounts and
tie-in arrangements; and guidance on the applicable regulation
(Regulation Z or Regulation E) in instances involving both credit and
electronic fund transfer aspects. The Board does not propose any
changes to these provisions.
Section 226.13 Billing Error Resolution
TILA Section 161, as implemented in Sec. 226.13 of the regulation,
addresses error resolution procedures for billing errors, and requires
a consumer to provide written notice of the error within 60 days after
the first periodic statement reflecting the alleged error is sent. 15
U.S.C. 1666. The written notice triggers a creditor's duty to
investigate the claim within prescribed time limits. In contrast to the
consumer protections in Sec. 226.12 of the regulation, which are
limited to transactions involving the use of a credit card, the billing
error procedures apply to any extensions of credit that are made in
connection with an open-end account. Commenters on the December 2004
ANPR provided few comments addressing the billing error provisions,
except to urge the Board to increase the time period for investigating
errors. Q43.
The proposed revisions would clarify, among other things, that (1)
the billing error provisions apply to purchases made using a third-
party payment intermediary, where the purchase is funded through an
extension of credit using the consumer's credit card or other open-end
plan; (2) a creditor must complete its investigation within the time
frames established under the regulation and may not reverse any credits
made once the time frames have expired; and (3) a creditor may not
deduct any portion of a disputed amount or related charges when a
cardholder uses an automatic payment service offered directly by or
through the creditor.
In technical revisions, the substance of footnotes 27-30 would be
moved to the regulation or the commentary, as appropriate, and footnote
31 would be deleted. (See redesignation table below.) For the reasons
set forth in the section-by-section analysis to Sec. 226.6(b)(1), the
Board would update references to ``free-ride period'' as ``grace
period'' in the regulation and commentary, without any intended
substantive change.
13(a) Definition of Billing Error
The definition of a billing error in Sec. 226.13(a) would be
substantively unchanged in the proposal. Under Sec. 226.13(a)(3), the
term ``billing error'' includes disputes about property or services
that are not accepted by the consumer or not delivered to the consumer
as agreed. See Sec. 226.13(a)(3). The proposal would add a new comment
13(a)(3)-2 to clarify that Sec. 226.13(a)(3) also applies when a
consumer uses his or her credit card or other open-end account to
purchase a good or service through a third-party payment intermediary,
such as a person-to-person Internet payment service.
In some cases, a consumer might pay for merchandise purchased
through an Internet auction site using an Internet payment service,
which is in turn funded through an extension of credit from the
consumer's credit card or other open-end account. As in the case of
purchases made using a check that accesses a consumer's credit card
account, there may not be a direct relationship between the merchant
selling the merchandise and the card issuer when an Internet payment
service is used. Because a consumer has billing error rights with
respect to purchases made with checks that access a credit card
account, the Board believes the same result should apply when the
consumer makes a purchase using a third-party intermediary funded using
the same credit card account. In particular, the Board believes that
there
[[Page 33018]]
is little difference between a consumer using his or her credit card to
make a payment directly to the merchant on the merchant's Internet Web
site or to make a payment to the merchant through a third-party
intermediary. Accordingly, comment 13(a)(3)-2 would clarify that when
an extension of credit from the consumer's credit card or other open-
end account is used to fund a purchase through a third-party payment
intermediary, the good or service purchased is not the payment medium,
but rather the good or service that is obtained using the payment
service.
Proposed new comment 13(a)(3)-3 would clarify that prior notice to
the merchant is not required before the consumer can assert a billing
error that the good or service was not accepted or delivered as agreed.
Thus, in contrast to claims or defenses asserted under TILA Section 170
and Sec. 226.12(c) of the regulation which require that the cardholder
first make a good faith attempt to obtain satisfactory resolution of a
disagreement or problem with the person honoring the credit card, the
consumer need not provide prior notice of the dispute to the person
from whom the consumer purchased the good or service of the dispute
before asserting a billing error claim directly with the creditor. 15
U.S.C. 1666i.
The text of footnote 27 prohibiting a creditor from accelerating a
consumer's debt or restricting or closing the account because the
consumer has exercised billing error rights, and alerting creditors to
the statutory forfeiture penalty under TILA Section 161(e) (15 U.S.C.
1666) for failing to comply with any of the requirements in Sec.
226.13 would be moved to the list of error resolution rules under Sec.
226.13(d)(3). Current comment 13-1 referring to this general
prohibition would be deleted as redundant.
13(b) Billing-Error Notice
To assert a billing error under Sec. 226.13(b), a consumer must
provide a written notice of the error to the creditor no later than 60
days after the creditor transmitted the first periodic statement that
reflects the alleged error. The notice must provide sufficient
information to enable the creditor to investigate the claim, including
the consumer's name and account number, the type, date and amount of
the error, and, to the extent possible, the consumer's reasons for his
or her belief that a billing error exists.
Comment 13(b)-1 would be revised to incorporate the guidance
currently in footnote 28 stating that the creditor need not comply with
the requirements of Sec. 226.13(c) through (g) if the consumer
voluntarily withdraws the billing error notice. Comment 13(b)-2 would
be added to incorporate the guidance currently in footnote 29 stating
that the creditor may require that the written billing error notice not
be made on the payment coupon or other material accompanying the
periodic statement if the creditor so states in the billing rights
statement on the account-opening disclosure and annual billing rights
statement. In addition, comment 13(b)-2 would provide that billing
error notices submitted electronically would be deemed to satisfy the
requirement that billing error notices be provided in writing, provided
that the creditor has stated in the billing rights statement required
by Sec. Sec. 226.6(c)(2) and 226.9(a) that it will accept notices
submitted electronically, including how the consumer can submit billing
error notices in this manner.
13(c) Time for Resolution; General Procedures
Section 226.13(c) generally requires a creditor to mail or deliver
written acknowledgment to the consumer within 30 days of receiving a
billing-error notice, and to complete the billing error investigation
procedures within two billing cycles (but no later than 90 days) after
receiving a billing-error notice. Comment 13(c)(2)-2 would be added to
clarify that a creditor must complete its investigation and
conclusively determine whether an error occurred within the error
resolution time frames. Thus, once the error resolution time frame has
expired, the creditor may not reverse any corrections it has made
related to the asserted billing error, including any previously
credited amounts, even if the creditor subsequently obtains evidence
indicating that the billing error did not occur as asserted. The
statute is clear that a creditor must complete its investigation and
make appropriate corrections to the consumer's account within two
complete billing cycles after the receipt of the consumer's notice of
error, and does not permit the creditor to continue its investigation
beyond the error resolution period. 15 U.S.C. 1666. This rule is
intended to ensure finality in the error resolution process, and to
ensure creditors complete their investigations in a timely manner. Of
course, a creditor may reverse a prior determination, based on an
investigation, that no error occurred and subsequently credit the
consumer's account for the amount of the error even after the error
resolution period has elapsed.
Some commenters on the December 2004 ANPR urged the Board to
increase the time period for investigating errors from 90 days to 120
days to allow issuers to investigate billing error claims effectively.
Q43. The 90-day time frame is statutory, and the Board does not propose
to extend the maximum error resolution period. The Board further notes
that the 90-day maximum time frame would apply only in cases where a
creditor's billing cycle is 45 days or more. Otherwise, the creditor
must complete its investigation within the time period represented by
two billing cycles. Thus, for example, if a creditor's billing cycle is
30 days, it would only have 60 days to conclude its investigation of
alleged billing errors.
Of course, any determination that an error has not occurred must be
based upon a reasonable investigation. See Sec. 226.13(f).
13(d) Rules Pending Resolution
Once a billing error is asserted by a consumer, the creditor is
prohibited under Sec. 226.13(d) from taking certain actions with
respect to the dispute in order to ensure that the consumer is not
otherwise discouraged from exercising his or her billing error rights.
For example, the creditor may not take action to collect any disputed
amounts, including related finance or other charges, or make or
threaten to make an adverse report, including reporting that the amount
or account is delinquent, to any person about the consumer's credit
standing arising from the consumer's failure to pay the disputed amount
or related finance or other charges.
Under the current rule, the card issuer is specifically prohibited
from deducting any part of the disputed amount or related charges from
a cardholder's deposit account that is also held by the card issuer. To
reflect new payment practices, the proposal would extend the
prohibition to automatic deductions from the consumer's deposit account
where the consumer has enrolled in the card issuer's automatic payment
plan. The Board believes that whenever an automatic payment service is
offered by the card issuer, thereby giving the card issuer control over
the amount to be debited, a cardholder should not be treated any
differently solely because the consumer's deposit account is maintained
at a different account-holding institution. Thus, for example, if the
cardholder has agreed to pay a predetermined amount each month and
subsequently disputes one or more transactions that appear on a
statement, the card issuer must ensure that it does not debit the
consumer's asset account for any part of the amount in dispute. The
proposed revision would apply whether the card issuer operates the
automatic payment service
[[Page 33019]]
itself or outsources the service to a third-party service provider, but
would not apply where the consumer has enrolled in a third-party bill
payment service that is not offered by the card issuer. Thus, for
example, the proposed revision would not apply where the consumer uses
a bill-payment service offered by his or her deposit account-holding
institution to pay his debt (unless the account-holding institution is
also the card issuer). Section 226.13(d)(1) and comment 13(d)(1)-4,
which describes the coverage of the automatic payment plan exclusion,
would be revised to reflect the proposed change. Comment is requested
regarding any operational issues card issuers may encounter in
implementing the systems changes necessary to comply with the proposed
revision.
13(e) Procedures if Error Occurred as Asserted and 13(f) Procedures if
Different Billing Error or No Billing Error Occurred
Paragraphs (e) and (f) of Sec. 226.13 set forth procedures that a
creditor must follow to resolve a billing error claim, depending on
whether the billing error occurred as asserted, or if a different
billing error or no billing error occurred. In particular, Sec.
226.13(f) requires that a creditor first conduct a reasonable
investigation before the creditor may deny the consumer's claim or
conclude that the billing error occurred differently than as asserted
by the consumer. See TILA Section 161(a)(3)(B)(ii); 15 U.S.C.
1666(a)(3)(B)(ii). These provisions in the regulation would be
substantively unchanged in the proposal. The text of footnote 31 is
deleted as unnecessary in light of the general obligation under Sec.
226.13(f) to conduct a reasonable investigation before a creditor may
deny a billing error claim.
13(g) Creditor's Rights and Duties After Resolution
Section 226.13(g) specifies the creditor's rights and duties once
it has determined, after a reasonable investigation under Sec.
226.13(f), that a consumer owes all or a portion of the disputed amount
and related finance or other charges. The proposal would provide
guidance to clarify the length of the time the consumer would have to
repay the amount determined still to be owed without incurring
additional finance charges (i.e., the grace period) that would apply
under these circumstances.
Before a creditor may collect any amounts owed related to a
disputed charge that is determined to be proper, the creditor must
promptly notify the consumer in writing when the payment is due and the
portion of the disputed amount and related finance or other charges
that is still owed (including any charges that may be retroactively
imposed on the amount found not to be in error). See 15 U.S.C. 1666(a);
Sec. 226.13(g)(1). The consumer must then be given any grace period
disclosed under proposed Sec. Sec. 226.6(a)(1), 226.6(b)(1),
226.7(a)(8), or 226.7(b)(8), as applicable, to pay the amount due as
specified in the written notice without incurring any additional
finance or other charges. See Sec. 226.13(g)(2). Comment 13(g)(2)-1
would be revised to clarify that if the consumer was entitled to a
grace period at the time the consumer asserted the alleged billing
error, then the consumer must be given a period of time equivalent to
the disclosed grace period to pay the disputed amount as well as
related finance or other charges. The Board believes that this
interpretation is necessary to ensure that consumers are not
discouraged from asserting their statutory billing rights by putting
the consumer in the same position (that is, with the same grace period)
if the consumer had not disputed the transaction in the first place.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
Section 226.13(i) is designed to facilitate compliance when
financial institutions extend credit incident to electronic fund
transfers that are subject to the Board's Regulation E, for example,
when the credit card account is used to advance funds to prevent a
consumer's deposit account from becoming overdrawn or to maintain a
specified minimum balance in the consumer's account. See 12 CFR part
205. The provision states that under these circumstances, the creditor
should comply with the error resolution procedures of Regulation E,
rather than those in Regulation Z (except that the creditor must still
comply with Sec. Sec. 226.13(d) and (g)). The Board is not proposing
any changes to this provision as it appears in the regulation; however,
a minor clarification is proposed for an existing comment.
Comment 13(i)-2 states that incidental credit that is not extended
under an agreement between the consumer and the financial institution
is governed solely by the error resolution procedures in Regulation E.
The example in the current comment would be revised to include a
specific reference to overdraft protection services that are not
subject to the Board's Regulation Z when there is no agreement between
the creditor and the consumer to extend credit when the consumer's
account is overdrawn. See Sec. 226.4(c)(3); 70 FR 29,582; May 24,
2005.
Comment is requested as to whether the Board should expand the
guidance provided under Sec. 226.13(i) to apply more generally to
other circumstances when an extension of credit is incident to an
electronic fund transfer, rather than limited to transactions pursuant
to an agreement between a consumer and a financial institution to
extend credit when the consumer's account is overdrawn or to maintain a
specified balance. For example, in situations where a consumer
transfers funds from an open-end credit plan, such as a home-equity
line of credit, to the consumer's checking or savings account, the
wrong amount may be transferred from the credit plan to the deposit
account. Both Regulation E and Z could potentially apply under this
circumstance leaving a potential issue as to which set of error
resolution provisions the creditor/ financial institution should
follow. In particular, if Regulation E is deemed to apply, the
institution would have a shorter period of time in which to complete
its investigation.
Section 226.14 Determination of Annual Percentage Rate
As discussed in the section-by-section analysis to Sec.
226.7(b)(7), Regulation Z requires disclosure on periodic statements of
both the effective APR and the corresponding APR. The regulation also
requires disclosure of the corresponding APR in account-opening
disclosures, change-in-terms notices, advertisements, and other
documents. The computation methods for both the corresponding APR and
the effective APR are implemented in Sec. 226.14 of Regulation Z.
Section 226.14 also provides tolerances for accuracy in APR
disclosures.
As also discussed in the section-by-section analysis to Sec.
226.7(b)(7), the Board is proposing for comment two alternative
approaches regarding the computation and disclosure of the effective
APR. Under the first alternative, the Board proposes to retain the
requirement that the effective APR be disclosed on the periodic
statement, with modifications to the rules for computing and disclosing
the effective APR to reflect an approach tested with consumers. See
proposed Sec. 226.7(b)(7) and Sec. 226.14(d). For HELOCs subject to
Sec. 226.5b, the Board proposes to allow a creditor to comply with the
current rules applicable to the effective APR; creditors would not be
required to make changes in their periodic statement
[[Page 33020]]
systems for such plans at this time. See proposed Sec. Sec.
226.7(a)(7), 226.14(c). If the creditor chooses, however, the creditor
may disclose an effective APR for its HELOCs according to any revised
rules adopted for the effective APR.
The second alternative would be to eliminate the requirement to
provide the effective APR on the periodic statement. Under the second
alternative, for a HELOC subject to Sec. 226.5b, a creditor would have
the option of providing the effective APR according to current rules.
The two proposed alternatives are reflected in two proposed alternative
versions of Sec. 226.14.
Under either alternative, the current provisions in Sec. 226.14(a)
and (b) dealing with tolerances for the APR and guidance on calculating
the APR for certain disclosures other than the periodic statement would
not be substantively revised, but minor changes would be made. Section
226.14(b) identifies the regulatory sections where a corresponding APR
(the periodic rate multiplied by the number of periods in a year) must
be disclosed. A reference to proposed Sec. Sec. 226.7(a)(4) and
226.7(b)(4) (currently Sec. 226.7(d)), which requires creditors to
disclose corresponding APRs on periodic statements, would be added to
Sec. 226.14(b). (A reference to Sec. 226.7(d) would be deleted from
Sec. 226.14(c) as obsolete.) With respect to technical revisions,
under both alternatives, the Sec. 226.14 regulatory and commentary
text would be revised where necessary to reflect changes in terminology
and to eliminate footnotes, moving their substance into the text of the
regulation.
First alternative proposal. Under the first alternative, the
proposed new rules for calculating the effective APR are contained in
Sec. Sec. 226.14(d) and 14(e), and accompanying commentary. As
discussed above under Sec. 226.7(b)(7), for multifeatured plans, the
Board proposes to require that the creditor must compute and disclose
an effective APR separately for each feature. For example, purchases
and cash advances would be separate features; there might be two
separate cash advance features, if there was a promotional APR on
certain cash advances and a different APR on others. Proposed Sec.
226.14(d) and accompanying commentary provide rules on how the
effective APR should be computed for each feature. (Current Sec.
226.14(d) would be redesignated as Sec. 226.14(c)(5)).
In proposed Sec. 226.14(e), the Board proposes to limit the
finance charges that are included in calculating the effective APR.
These charges would be: (1) Charges attributable to a periodic rate
used to calculate interest; (2) charges that relate to a specific
transaction; (3) charges related to required credit insurance or debt
cancellation or suspension coverage; (4) minimum charges imposed if,
and only if, a charge would otherwise have been determined by applying
a periodic rate to a balance except for the fact that such charge is
smaller than the minimum (such as a $1.00 minimum finance charge); and
(5) charges based on the account balances, account activity or
inactivity, or the amount of credit available. This exclusive list is
intended to limit disclosure of an effective APR to situations in which
it is more likely to be understood by consumers and be useful to
consumers, as well as provide creditors with certainty as to the fees
that must be included in the computation of the effective APR.
For finance charges that relate to a specific transaction, such as
cash advance and balance transfers, expressing the interest and
transactions fees in the effective APR may help consumers better
understand the costs of these transactions. For finance charges that
relate to required credit insurance or debt cancellation or suspension
coverage (coverage for which the regulation's conditions for excluding
the charge from the finance charge have not been satisfied), consumers
may benefit from seeing an effective APR that combines two costs that
will be imposed every month if a consumer carries a balance--interest
on the balance and the required fee for insurance or debt cancellation
or suspension coverage. For finance charges that are minimum charges in
lieu of interest described above, a consumer that typically carries a
small balance may benefit from seeing an effective APR that includes
this minimum charge, so that the consumer understands that he or she is
paying a higher rate for carrying that small balance than the
corresponding APR suggests. For finance charges based on the account
balances, account activity or inactivity, or the amount of credit
available, consumers may benefit from seeing an effective APR that
includes these charges, because these charges could be imposed as often
as every month as a substitute for interest or in addition to interest.
For example, the Board is aware of at least one credit card product
where there is no interest rate applicable to the card, but each month
a fixed charge is charged based on the outstanding balance on the card
(for example, $6 charge per $1,000 balance). For such a price
structure, which has a corresponding APR of zero, consumers may find
the effective APR helpful.
Also, in proposed Sec. 226.14(e), the Board would make clear that
a finance charge related to opening the account, and a finance charge
imposed not more often than annually as a condition to continuing or
renewing the account, is not included in calculating the effective APR.
Because these fees would be imposed infrequently (either at account
opening or annually, or less frequently, to continue or renew the
account), including these finance charges in the effective APR may not
be helpful to consumers.
With respect to open-end (not home-secured) plans, the Board would
also revise the current rule that exempts a creditor from disclosing an
effective APR when the total finance charge does not exceed 50 cents
for a monthly or longer billing cycle, or the pro rata share of 50
cents for a shorter cycle. See 15 U.S.C. 127(b)(6); current Sec.
226.14(c)(4). The Board would exercise its exceptions authority to
adjust the 50-cent threshold to $1.00 to reflect adjusted prices since
the rule was implemented. Section 226.14(d)(4) would also be revised to
limit the finance charges included in determining whether the threshold
is exceeded to those specified in proposed Sec. 226.14(e). See
proposed Sec. 226.14(d)(4).
Also under the first alternative, the Board proposes to place in
Sec. 226.14(c) the rules for calculating the effective APR for
periodic statements for HELOCs subject to Sec. 226.5b. As proposed,
Sec. 226.14(c) provides that, for HELOCs subject to Sec. 226.5b, a
creditor may comply either with (1) the current rules applicable to the
effective APR, (which are contained in proposed Sec. 226.14(c)), or
(2) with the revised rules applicable to open-end (not home-secured)
plans (which are contained in proposed Sec. 226.14(d)).
Second alternative proposal. Under the second alternative, for the
reasons discussed in the section-by-section analysis to Sec.
226.7(b)(7), the Board proposes to eliminate the requirement to provide
the effective APR on the periodic statement. Under this alternative,
however, for a HELOC subject to Sec. 226.5b, a creditor would have the
option of disclosing an effective APR according to the current rules in
Regulation Z for computing and disclosing the effective APR. No
guidance would be given for disclosing the effective APR on open-end
(not home-secured) plans, since the requirement to provide the
effective APR on such plans would be eliminated.
Section 226.16 Advertising
TILA Section 143, implemented by the Board in Sec. 226.16, governs
advertisements of open-end credit plans. 15 U.S.C. 1663. The statute
[[Page 33021]]
applies to the advertisement itself, and therefore, the statutory and
regulatory requirements apply to any person advertising an open-end
credit plan, whether or not such person meets the definition of
creditor. See comment 2(a)(2)-2. Under the statute, if an advertisement
sets forth any of the specific terms of the plan, then the
advertisement must also state: (1) Any minimum or fixed amount which
could be imposed; (2) the periodic rates expressed as APRs, if periodic
rates may be used to compute the finance charge; and (3) any other term
the Board requires by regulation. The specific terms of an open-end
plan that ``trigger'' additional disclosures, which are commonly known
as ``triggering terms,'' are finance charges and other charges required
to be disclosed under current Sec. Sec. 226.6(a) and 226.6(b). If an
advertisement states a triggering term, the regulation requires that
the advertisement also state (1) any minimum, fixed, transaction,
activity or similar charge that could be imposed; (2) any periodic rate
that may be applied expressed as an APR; and (3) any membership or
participation fee that could be imposed. See current Sec. 226.16(b)
and comment 16(b)-7 (as redesignated to proposed comment 16(b)-1).
The Board is proposing several changes to the advertising rules in
Sec. 226.16 in order to ensure meaningful disclosure of advertised
credit terms, alleviate compliance burden for certain advertisements,
and implement provisions of the Bankruptcy Act. Specifically, under
Sec. 226.16(b), the Board is proposing to make the triggering terms
consistent for all open-end credit advertisements by including terms
stated negatively (for example, no interest), as is currently required
under TILA for advertisements of HELOCs. Presently, for advertisements
for open-end (not home-secured) plans, only positive terms trigger the
additional disclosure.
If an advertisement states a minimum monthly payment to finance a
purchase under a plan established by a creditor or retailer, the
proposal would amend Sec. 226.16(b) to require a disclosure of the
total number of payments and time period to repay. In addition, the
Board is proposing in new Sec. 226.16(g) to provide guidelines
concerning use of the word ``fixed'' in connection with an APR. To ease
compliance burden on advertisers, the Board is proposing in new Sec.
226.16(f), alternative disclosures for television and radio
advertisements in recognition of the time and space constraints on such
media. Finally, the Board is implementing Section 1303 of the
Bankruptcy Act, in part, in new Sec. 226.16(e) and Section 1309 of the
Bankruptcy Act in the commentary on clear and conspicuous in new
comment 16-2. The Board's proposed revisions to Sec. 226.16 and the
accompanying commentary are described in more detail below.
Clear and conspicuous standard. Comment 16-1 provides that
disclosures made under Sec. 226.16 are subject to the clear and
conspicuous standard required for all disclosures for open-end credit
plans. See Sec. 226.5(a)(1). To be clear and conspicuous, disclosures
must be in a reasonably understandable form. See comment 5(a)(1)-1.
Generally, there are no specific rules regarding the format of
disclosures in advertisements. See comment 16-1.
Section 1309 of the Bankruptcy Act requires the Board to implement
the ``clear and conspicuous'' term as it applies to certain disclosures
required by Section 1303(a) of the Bankruptcy Act. Section 1303(a)
applies to direct-mail applications and solicitations for credit cards
and accompanying promotional materials. The Bankruptcy Act requires, in
part, that when an introductory rate is stated, the time period in
which the introductory period will end and the rate that will apply
after the end of the introductory period must be stated ``in a clear
and conspicuous manner'' in a prominent location closely proximate to
the first listing of the introductory rate. The statute requires these
disclosures to be ``reasonably understandable and designed to call
attention to the nature and significance of the information in the
notice.''
The Board solicited comment in the October 2005 ANPR on
interpreting the standard for clear and conspicuous set forth in
Section 1309 of the Bankruptcy Act. Q85. Most industry commenters
stated that additional guidance on clear and conspicuous was
unnecessary. Consumer group commenters suggested that the Board impose
minimum font size requirements, while industry commenters universally
opposed such requirements.
After considering comments, the Board is proposing in comment 16-2
that creditors clearly and conspicuously disclose when the introductory
period will end and the rate that will apply after the end of the
introductory period if the information is equally prominent to the
first listing of the introductory rate to which it relates. Guidance on
what is considered the first listing of the introductory rate is given
in proposed comment 16(e)-4, as discussed below. The Board is also
proposing that if these disclosures are the same type size as the first
listing of the introductory rate, they will be deemed to be equally
prominent. See proposed comment 16-2. Requiring equal prominence for
this information calls attention to the nature and significance of such
information by ensuring that the information is at least as significant
as the introductory rate to which it relates. Furthermore, an equally
prominent standard for similar information currently applies to
advertisements for HELOCs. See current Sec. 226.16(d)(2).
16(b) Advertisement of Terms That Require Additional Disclosures
Negative terms as triggering terms. If an advertisement states
certain terms, additional information must be disclosed. See Sec.
226.16(b). The goal of this triggering term approach is to provide
consumers with a more complete picture of costs that may apply to the
plan when certain specified charges for the plan are given. TILA
Section 143 provides that stating any specific term of the plan
triggers additional disclosures. 15 U.S.C. 1663. The Board, however,
limited triggering terms for advertisements of open-end (not home-
secured) plans to those terms that are stated as a positive number. For
home-equity advertisements, under TILA Section 147(a) (15 U.S.C.
1665b(a)), triggering terms include both positive as well as negative
terms. See also current Sec. 226.16(d)(1) and comments 16(b)-2 and
16(d)-1. Pursuant to TILA Section 143(3), the Board proposes to apply
this approach to advertisements for all open-end plans. The Board
believes that negative terms such as ``no interest'' and ``no annual
fee'' alone may not provide consumers with a sufficiently accurate
portrayal of possible costs associated with the plan if the additional
disclosures are not provided. This approach would also ensure similar
treatment for all open-end plans. Current comment 16(b)-2 would be
amended accordingly and moved to a revised comment 16(b)-1, which
includes guidance on triggering terms in general. See redesignation
table below.
Advertisement of minimum monthly payment. The Board has the
authority under TILA Section 143(3) to require the disclosure in
advertisements for open-end credit of any terms in addition to those
explicitly required by the statute. 15 U.S.C. 1663(3). The Board
proposes to require additional disclosures for advertisements that
provide a minimum monthly payment for an open-end credit plan that
would be established to finance the purchase of goods or services. If a
minimum
[[Page 33022]]
monthly payment is advertised, the advertisement would be required to
state, in equal prominence to the minimum payment, the time period
required to pay the balance and the total dollar amount of payments if
only minimum payments are made. Proposed Sec. 226.16(b)(2) would
clarify that this disclosure should assume that the consumer makes only
the minimum payment required during each payment period.
The Board believes that advertisements that state a minimum monthly
payment will provide a clearer picture of credit costs if such
advertisements also state the total dollar amount of payments the
consumer would make, and the amount of time needed to pay the balance
if only the minimum payments are made. The Board has received comments
from time to time from state attorneys general regarding creditors that
sell large-ticket items and simultaneously arrange financing for the
purchase of those items. See discussion regarding the definition of
open-end credit in the section-by-section analysis to Sec.
226.2(a)(20). The comments the Board has received indicate that some
consumers agree to the financing on the basis of a certain advertised
minimum payment but are later surprised to learn how long the debt will
take to pay, and how much the credit will cost them over that time
period. The Board believes that disclosure of the time period and total
dollar amount of payments will help to improve consumer understanding
about the cost of credit products for which a minimum monthly payment
is advertised.
Other changes to 226.16(b). Currently, terms that are required to
be disclosed under Sec. 226.6 trigger the disclosure of additional
terms. See Sec. 226.16(b). Under current comment 16(b)-1, this would
include terms required to be disclosed under Sec. Sec. 226.6(a) and
226.6(b). As discussed in the section-by-section analysis to Sec.
226.6, the Board is proposing new cost disclosure rules for open-end
(not home-secured) plans, but is preserving existing cost disclosure
rules for HELOCs pending a review of all home-secured rules. Section
226.16(b) would be conformed to reflect these revisions.
In technical revisions, Sec. 226.16(b) has been renumbered:
Triggering term requirements would be set forth in a revised Sec.
226.16(b)(1); and the new proposed minimum monthly payment disclosures
would be set forth in a revised Sec. 226.16(b)(2). Footnote 36d
(stating that disclosures given in accordance with Sec. 226.5a do not
constitute advertising terms) would be deleted as unnecessary since
``advertisements'' do not include notices required under federal law,
including disclosures required under Sec. 226.5a. See comment 2(a)(2)-
1(ii). The Board is proposing to move the guidance in current comments
16(b)-1 and 16(b)-8 to new Sec. 226.16(b)(1), with some revisions.
Proposed comment 16(b)-1 would provide guidance on triggering terms by
consolidating current comment 16(b)-2, amended as discussed above, with
current comment 16(b)-7. Current comment 16(b)-6 would be eliminated as
duplicative of the requirements under proposed Sec. 226.16(e), as
discussed below.
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic
Advertisements
Amendments to Sec. 226.16(c) and comments 16(c)(1)-1, 16(c)(1)-2,
and 16(c)(3)-1 reflect provisions contained in the 2007 Electronic
Disclosure Proposal. See 72 FR 21,1141; April 30, 2007. The amendments
provide that for an advertisement that is accessed by the consumer in
electronic form, the disclosures required under Sec. 226.16 must be
provided to the consumer in electronic form on or with the
advertisement.
16(d) Additional Requirements for Home-Equity Plans
No revisions are proposed for the advertising rules under Sec.
226.16(d), consistent with the Board's plan to review rules affecting
HELOCs in a separate rulemaking.
High loan-to-value disclosures. Section 1302 of the Bankruptcy Act
amends TILA Section 127(a)(13) to require that credit applications for,
and advertisements related to, an extension of credit secured by a
dwelling that may exceed the fair market value of the dwelling include
a statement that the interest on the portion of the credit extension
that is greater than the fair market value of the dwelling is not tax
deductible for Federal income tax purposes. 15 U.S.C. 1637(a)(13). For
these applications and advertisements, the statute also requires
inclusion of a statement that the consumer should consult a tax adviser
for further information on the deductibility of the interest. The new
disclosures would apply to advertisements for home-secured credit,
whether open-end or closed-end; thus, the Board plans to address issues
related to this requirement during its review of the rules relating to
home-secured credit.
16(e) Introductory Rates
TILA Section 127(c)(6), as added by Section 1303(a) of the
Bankruptcy Act, requires that if a credit card issuer states an
introductory rate in applications, solicitations, and all accompanying
promotional materials, the issuer must use the term ``introductory''
clearly and conspicuously in immediate proximity to each mention of the
introductory rate. 15 U.S.C. 1637(c)(6). Credit card issuers also must
disclose, in a prominent location closely proximate to the first
mention of the introductory rate, other than the listing of the rate in
the table required for credit card applications and solicitations, the
time period when the introductory rate expires and the rate that will
apply after the introductory rate expires.
TILA Section 127(c)(7), as added by Section 1304(a) of the
Bankruptcy Act, applies these requirements to ``any solicitation to
open a credit card account for any person under an open end consumer
credit plan using the Internet or other interactive computer service.''
15 U.S.C. 1637(c)(7). The Board proposes to implement these
requirements for promotional materials accompanying such applications
or solicitations in a new Sec. 226.16(e). In addition, the Board
proposes to apply these requirements more broadly, pursuant to the
Board's authority under TILA Section 105(a), to issue regulations with
classification, differentiations or other provisions as in the judgment
of the Board are necessary to effectuate the purposes of TILA, as
discussed below. 15 U.S.C. 1604(a). Sections 1303 and 1304 of the
Bankruptcy Act would be implemented in Sec. 226.5a, and are discussed
in the section-by-section analysis to Sec. 226.5a.
16(e)(1) Scope
The Bankruptcy Act amendments regarding ``introductory'' rates, the
time period these rates may be in effect, and the post-introductory
rate apply to direct-mail applications and solicitations, and
accompanying promotional materials. 15 U.S.C. 1637(c)(1)(A). To provide
meaningful disclosure of credit terms in order to avoid the uninformed
use of credit, the Board is proposing to extend these requirements to
applications or solicitations to open a credit card account, and all
accompanying promotional materials, that are available publicly
(``take-ones''). 15 U.S.C. 1601(a); 15 U.S.C. 1604(a); 15 U.S.C.
1637(c)(3)(A). Consumers who obtain publicly available applications and
solicitations are in essentially the same position in terms of the
shopping
[[Page 33023]]
process as consumers who receive direct mail applications and
solicitations or applications or solicitations offered through the
Internet. Therefore, the Board believes the information provided about
introductory rates in these materials should be the same.
Moreover, as discussed in the section-by-section analysis to Sec.
226.5a(a)(2), the Board is proposing to apply the Bankruptcy Act
provisions relating to Internet offers to both electronic solicitations
and applications, although the statute refers only to solicitations, in
order to promote the informed use of credit. Therefore, proposed Sec.
226.16(e)(1) would state that the introductory rate requirements in
Sec. 226.16(e) apply to all promotional materials accompanying credit
card applications and solicitations offered through direct mail and
electronically as well as those available publicly.
Furthermore, the Board proposes to extend some of the requirements
in Section 1303 of the Bankruptcy Act regarding the presentation of
introductory rates to other written advertisements for open-end credit
plans that may not accompany an application or solicitation, other than
advertisements of HELOCs subject to Sec. 226.5b, in order to promote
the informed use of credit. Advertisements for open-end credit plans
are already required to comply with similar, though not identical,
requirements to those set forth in Section 1303 of the Bankruptcy Act
for ``discounted variable-rate plans.'' See current comment 16(b)-6.
Specifically, ``discounted variable-rate plans'' are required to
provide both the initial rate (with the statement of how long it will
remain in effect) and the current indexed rate (with the statement that
this second rate may vary). The Board's proposal would ensure that the
presentation of introductory rates in all written advertisements for
open-end credit is consistent with the presentation requirements for
promotional materials accompanying applications and solicitations, as
discussed below. The Board believes consumers will benefit from these
enhancements and advertisers will benefit from the consistent
application of requirements related to introductory rates for all
written open-end advertisements. Since the Board plans to address
issues related to HELOCs during the next phase of its review of
Regulation Z, proposed Sec. 226.16(e) would not apply to
advertisements of HELOCs subject to Sec. 226.5b. The requirements of
Sec. 226.16(e) would apply to communications that are considered
advertisements, and would not include disclosures required under Sec.
226.5a and under Sec. 226.6.
16(e)(2) Definitions
TILA Section 127(c)(6)(D)(i), as added by Section 1303(a) of the
Bankruptcy Act, defines a temporary APR as a rate of interest
applicable to a credit card account for an introductory period of less
than 1 year, if that rate is less than an APR that was in effect within
60 days before the date of mailing the application or solicitation. 15
U.S.C. 1637(c)(6)(D)(i). TILA Section 127(c)(6)(D)(ii) defines an
``introductory period'' as ``the maximum time period for which the
temporary APR may be applicable.'' 15 U.S.C. 1637(c)(6)(D)(ii). The
Board proposes to implement the definition of ``introductory period''
in Sec. 226.16(e)(2) without change. With respect to the definition of
``temporary APR,'' the Board proposes to implement the term more
broadly, as discussed below.
Since the term ``introductory rate'' is a commonly understood term
that is currently used in Regulation Z, the Board proposes to use the
term ``introductory rate'' in place of ``temporary APR'' for
consistency and to facilitate compliance. Furthermore, for the reasons
set forth below, the Board would implement the term more broadly to
apply to any rate of interest applicable to an open-end plan for an
introductory period if that rate is less than the advertised APR that
will apply at the end of the introductory period.
The statutory definition compares the temporary APR to an APR that
was in effect within 60 days before the date of mailing of the
application or solicitation. Since the advertised variable rate that
will apply at the end of the introductory period in direct-mail credit
card applications and solicitations (and accompanying promotional
materials) must have been in effect within 60 days before the date of
mailing, as required under proposed Sec. 226.5a(c)(2)(i) (and
currently under Sec. 226.5a(b)(1)(ii)), the Board's proposed
definition captures the same concept in more simple language.
Furthermore, because the Board is proposing to extend these
requirements to publicly available applications and solicitations as
well as applications and solicitations offered through the Internet,
the Board's proposed definition of ``introductory rate'' would also
incorporate the timing requirements for variable rates under proposed
Sec. Sec. 226.5a(c)(2) and 226.5a(e)(4).
The statutory definition currently applies to offers where the
introductory period is less than 1 year. The Board is proposing to
extend the definition of ``introductory rate'' to include offers where
the introductory period is a year or more, in order to promote the
informed use of credit. Creditors, however, often offer an introductory
rate for a year or more, and the Board believes that consumers would
benefit from the application of the requirements imposed by the
Bankruptcy Act on introductory rates to these types of offers as well.
In addition, the requirements for the advertisement of ``discounted
variable-rate plans'' under current comment 16(b)-6 are not limited to
offers where the introductory period is less than 1 year, and the Board
believes that these requirements should continue to apply to such
advertised offers.
The requirements for ``discounted variable-rate plans'' under
current comment 16(b)-6 apply solely to variable-rate plans. In
adopting the proposed definition of ``introductory rate'' at Sec.
226.16(e)(2), the Board would cover both variable- and nonvariable-rate
plans under the requirements regarding the presentation of introductory
rates. Current comment 16(b)-6 would be deleted as obsolete.
16(e)(3) Stating the Term ``Introductory''
Under TILA Section 127(c)(6)(A), as added by section 1303(a) of the
Bankruptcy Act, the term ``introductory'' must be used in immediate
proximity to each listing of the temporary APR in the application,
solicitation, or promotional materials accompanying such application or
solicitation. 15 U.S.C. 1637(c)(6)(A). The Board solicited comment in
the October 2005 ANPR on what type of guidance was appropriate with
respect to this requirement. Q86.
Abbreviation. In the October 2005 ANPR, many commenters asked the
Board to consider permitting creditors to use the term ``intro'' as an
alternative to the word ``introductory.'' One commenter also asked the
Board to consider permitting creditors to use terms that convey the
same meaning (such as ``temporary''). Because ``intro'' is a commonly-
understood abbreviation of the term ``introductory,'' the Board
proposes to allow creditors to use ``intro'' as an alternative to the
requirement to use the term ``introductory'' in new Sec. 226.16(e)(3).
Because the Bankruptcy Act requires the use of the term
``introductory,'' the Board does not propose to allow use of a
different term.
Immediate proximity. Responses to the October 2005 ANPR suggested
three general approaches to interpreting the meaning of ``immediate
proximity:'' (1) Immediately preceding or following the
[[Page 33024]]
APR; (2) within the same sentence as the APR (or within a certain
number of words); or (3) in the sentence immediately preceding or
following the sentence with the APR. After considering comments, the
Board is proposing to provide a safe harbor for creditors that place
the word ``introductory'' or ``intro'' within the same phrase as each
listing of the temporary APR. This guidance is in proposed comment
16(e)-2. The Board believes that interpreting ``immediate proximity''
to mean adjacent to the rate may be too restrictive and would
effectively ban phrases such as ``introductory balance transfer rate X
percent.'' Moreover, the Board has proposed a safe harbor, recognizing
that there may be instances where the term ``introductory'' may
arguably appear in ``immediate proximity'' of the rate, yet not
necessarily be in the same phrase as the rate, such as in a graphic.
16(e)(4) Stating the Introductory Period and Post-Introductory Rate
TILA Section 127(c)(6)(A), as added by Section 1303(a) of the
Bankruptcy Act, also requires that the time period in which the
introductory period will end and the APR that will apply after the end
of the introductory period be listed in a clear and conspicuous manner
in a ``prominent location closely proximate to the first listing'' of
the introductory APR (disclosures in the application and solicitation
table are not covered). 15 U.S.C. 1637(c)(6)(A). The Board specifically
solicited comments on this provision in the October 2005 ANPR. Q87-Q90.
Prominent location closely proximate. Industry comments received
during the October 2005 ANPR generally advocated flexibility in
interpreting the phrases ``prominent location'' and ``closely
proximate.'' Consumer group commenters suggested very specific
formatting requirements in interpreting these phrases, including
minimum font size and placement requirements.
The Board believes flexible guidance is appropriate in interpreting
``prominent location closely proximate'' given the numerous ways this
information may be presented. Accordingly, the Board is proposing a
safe harbor in order to provide guidance on this issue. Specifically,
the Board would provide a safe harbor for advertisers that place the
time period in which the introductory period will end and the APR that
will apply after the end of the introductory period in the same
paragraph as the first listing of the introductory rate. This proposal
is in proposed comment 16(e)-3. Congress's use of the term ``closely
proximate'' may be distinguished from its use of the term ``immediate
proximity'', and thus, the Board believes that guidance on the meaning
of ``prominent location closely proximate'' should be more flexible
than the guidance given for the meaning of ``immediate proximity'' in
comment 16(e)-2.
Recognizing that there may be instances where the information may
not appear in the same ``paragraph'' as the first listing and yet may
still be considered in a prominent location closely proximate to the
first listing (for example, in a graphic), the Board's guidance has
been provided as a safe harbor. Consumer testing conducted for the
Board suggests that placing this type of information in a footnote
makes it much less likely the consumer will notice it. In light of the
statutory provision providing that this information appear in a
prominent location closely proximate to the listing, the Board believes
that placing this information in footnotes would not be a prominent
location closely proximate to the listing.
First listing. In the October 2005 ANPR, the Board solicited
comments on which listing of the temporary APR should be considered the
``first listing'' other than the rate listed in the table required on
or with credit card applications or solicitations. In particular, the
Board requested comment on (1) which document within a multi-page
mailing should be considered the one with the first listing, and (2)
which listing of the introductory APR within a particular document
should be considered the first listing. With respect to the first
question, commenters suggested either (1) that the first listing should
apply to the ``principal promotional document'' in the package, or (2)
that the Board treat each separate document within a mailing as a
separate solicitation such that the information would need to appear in
a prominent location closely proximate to the first listing on each
separate document. The ``principal promotional document'' is a concept
used in connection with the placement of a prescreening opt-out notice
under the Fair Credit Reporting Act (FCRA). 15 U.S.C. 1681 et seq. The
FTC, in its regulations related to the FCRA, defines the ``principal
promotional document'' as ``the document designed to be seen first by
the consumer such as the cover letter.'' 16 CFR 642.2(b).
After considering comments received during the ANPR, the Board is
proposing in comment 16(e)-4 to provide that for a multi-page mailing
or application or solicitation package, the first listing should apply
solely to the ``principal promotional document'' in the package, unless
the introductory rate is not listed in the principal promotional
document and appears in another document in the package. If the
introductory rate does not appear in the principal promotional document
but appears in another document in the package, then the requirements
apply to each separate document that lists the introductory rate.
Proposed comment 16(e)-4 clarifies that the term ``principal
promotional document'' includes solicitation letters. The Board's
consumer testing efforts suggest that consumers are likely to read the
principal promotional document. Applying the requirement to each
document in a mailing/package would be unnecessary if the consumer will
already have seen the introductory rate in the principal promotional
document. If the introductory rate does not appear in the principal
promotional document, however, the Board proposes that the requirements
apply to the first listing of the introductory rate in each document in
the package containing the introductory rate as it is not clear which
document the consumer will read first in such circumstances.
With respect to the question of which listing of the introductory
rate within a particular document should be considered the first
listing, many industry commenters suggested that creditors be given
flexibility in determining which listing is the first listing. Some
commenters suggested that the first listing be the highest listing on
the page while other commenters advocated the most prominent listing.
After considering comments, the Board is proposing that the first
listing be the most prominent listing of the introductory rate on the
front of the first page of the document. Consumer testing conducted for
the Board suggests that consumers may not necessarily read documents in
an application/solicitation package from top to bottom. Instead, they
may tend to look first to the pieces of information that are set forth
most prominently on the document. As a result, the Board believes that
the first listing (i.e., the one the consumer sees first) would not
necessarily be the highest one on the page, especially if such listing
is in an inconspicuous format, and instead, it would be the one that is
most prominent to the consumer. In terms of judging which listing is
the ``most prominent,'' the Board is proposing a safe harbor for the
listing with the largest type size. While type size is one measure for
judging the most prominent listing, the Board recognizes that there may
be
[[Page 33025]]
other ways to assess the most prominent listing independent of type
size.
Post-introductory rate. The Board requested comment in the October
2005 ANPR regarding whether the Board should issue guidance with
respect to listing the rate that will apply after the end of the
introductory period. Q90. Most commenters agreed that advertisers
should be permitted to list a range of rates. Consistent with the
guidance given above for listing the APR in the table required for
credit card applications and solicitations under Sec. 226.5a(b)(1)(v),
the Board is proposing that a range of rates may be listed as the rate
that will apply after the introductory period if the specific rate for
which the consumer will qualify will depend on later determinations of
a consumer's creditworthiness. See section-by-section analysis to Sec.
226.5a(b)(1). The Board proposes comment 16(e)-5 to be consistent with
comment 5a(b)(1)-5. In addition, the Board solicits comment on whether
advertisers may alternatively list only the highest rate that may apply
instead of a range of rates. For example, if there are three rates that
may apply (9.99 percent, 12.99 percent or 17.99 percent), instead of
disclosing three rates (9.99 percent, 12.99 percent or 17.99 percent)
or a range of rates (9.99 percent to 17.99 percent), card issuers
should be permitted to provide only the highest rate (up to 17.99
percent).
16(e)(5) Envelope Excluded
TILA Section 127(c)(6)(B), as added by Section 1303(a) of the
Bankruptcy Act, specifically excludes envelopes or other enclosures in
which an application or solicitation to open a credit card account is
mailed from the requirements of TILA Section 127(c)(6)(A)(ii) and
(iii). 15 U.S.C. 1637(c)(6)(B). This guidance is set forth in proposed
Sec. 226.16(e)(5).
In the October 2005 ANPR, the Board solicited comment on whether
there should be any difference in guidance provided to applications and
solicitations provided electronically with those that are provided in
paper form. Q92. In response to comments received, the Board is
proposing in Sec. 226.16(e)(5) to exclude banner advertisements and
pop-up advertisements that are linked to an electronic application or
solicitation. In the Board's view, these devices are similar to
envelopes or other enclosures in the direct mail context.
16(f) Alternative Disclosures--Television or Radio Advertisements
For radio and television advertisements, the Board is proposing to
allow alternative disclosures to the ones required by Sec. 226.16(b)
if a triggering term is stated in the advertisement. Radio and
television advertisements would still be required to disclose any APR
applicable to the plan, consistent with the requirements in proposed
Sec. 226.16(b)(1)(ii); however, instead of the detailed information in
proposed Sec. Sec. 226.16(b)(1)(i) and (iii) (minimum or fixed
payments, and annual or membership fees, respectively) an advertisement
would be able to provide a toll-free telephone number that the consumer
may call to receive more information.
This approach is consistent with the approach taken in the
advertising rules for Regulation M (See Sec. 213.7(f)). Given the
space and time constraints on radio and television advertisements, the
additional disclosures required by proposed Sec. Sec. 226.16(b)(1)(i)
and (iii) may go unnoticed by consumers or be difficult for them to
retain and would therefore not provide a meaningful benefit to
consumers. An alternative means of disclosure may be more effective in
many cases given the nature of television and radio media.
While proposed Sec. 226.16(f) is similar to Sec. 213.7(f) in
Regulation M, it is not identical. For example, Sec. 213.7(f)(1)(ii)
permits a leasing advertisement made through television or radio to
direct the consumer to a written advertisement in a publication of
general circulation in a community served by the media station. The
Board believes that advertisers of open-end credit plans would be
unlikely to use this option and has thus not proposed it for Sec.
226.16(f).
16(g) Misleading Terms
Creditors often refer to an APR as ``fixed'' to denote an APR that
is not tied to an index. However, the Board has found through consumer
testing efforts that most participants did not appear to understand the
term ``fixed'' in this manner. Participants also did not appear to
understand that creditors often reserve the right to increase a
``fixed'' rate upon the occurrence of certain events (such as when a
consumer pays late or goes over the credit limit) or for other reasons.
Thus, consumer testing suggests many consumers believe a ``fixed'' rate
does not change, such as with fixed-rate mortgage loans.
Therefore, to avoid consumer confusion and the uninformed use of
credit, the Board proposes to restrict the term ``fixed'' to instances
where the rate will not change for any reason. 15 U.S.C. 1601(a),
1604(a). Proposed Sec. 226.16(g) prohibits the use of the term
``fixed'' or any similar term in describing an APR unless that rate
will remain in effect unconditionally until the expiration of an
advertised time period. If no time period is advertised, then the term
``fixed'' or any similar term may not be used unless the rate will
remain in effect unconditionally until the plan is closed. For example,
a creditor could describe a rate that is subject to change as non-
indexed, to indicate that the rate will not change due to changes in
the market. A creditor could not, however, describe a rate as
``unchanging'' or ``permanent'' unless the standard in proposed Sec.
226.16(g) is met. Restricting the use of the term ``fixed'' is intended
to help consumers distinguish rates that do not change for any reason
from rates that can change for one reason or another.
Appendix E--Rules for Card Issuers That Bill on a Transaction-by-
Transaction Basis
Appendix E applies to card programs in which the card issuer and
the seller are the same or related persons; no finance charge is
imposed; cardholders are billed in full for each use of the card on a
transaction-by-transaction basis; and no cumulative account is
maintained reflecting transactions during a period of time such as a
month. At the time the provisions now constituting Appendix E
(originally adopted as an official Board interpretation to Regulation
Z) were added to the regulation, they were intended to address card
programs offered by automobile rental companies.
Appendix E specifies the provisions of Regulation Z that apply to
credit card programs covered by the Appendix. For example, for the
account-opening disclosures under Sec. 226.6, the required disclosures
are limited to penalty charges such as late charges, and to a
disclosure of billing error rights and of any security interest. For
the periodic statement disclosures under Sec. 226.7, the required
disclosures are limited to identification of transactions and an
address for notifying the card issuer of billing errors. Further, since
Appendix E card issuers do not issue periodic statements of account
activity, Appendix E provides that these disclosures may be made on the
invoice or statement sent to the consumer for each transaction. In
general, the disclosures that this category of card issuers need not
provide are those that are clearly inapplicable, either because the
disclosures relate to finance charges, are based on a system in which
periodic statements are generated, or apply to three-party credit cards
(such as bank-issued credit cards).
The Board proposes to revise Appendix E by inserting material
[[Page 33026]]
explaining what is meant by ``related persons.'' In addition, technical
changes would be made, including numbering the paragraphs within the
appendix and changing cross-references to conform to the renumbering of
other provisions of Regulation Z.
The Board solicits comment on whether Appendix E should be revised
to specify that the disclosures required under Sec. 226.5a apply to
card programs covered by the appendix. For the most part, the credit
card application and solicitation disclosures required by Sec. 226.5a
appear to be inapplicable to this category of card programs because
most of those disclosures relate to finance charges or APRs. However, a
few of the Sec. 226.5a disclosures could potentially apply, such as
annual or membership fees and late charges. (Appendix E does not
currently require a disclosure of annual or membership fees; comment is
requested, however, on whether the appendix should be revised to
require such a disclosure, if a transaction-by-transaction card issuer
were to impose such a fee.) If few or no such card issuers impose fees
covered by Sec. 226.5a, there may be no need to revise Appendix E to
apply these requirements. In addition, the value of such a revision may
depend on whether transaction-by-transaction card issuers typically
make credit card applications or solicitations available to consumers
in the ways specified by Sec. 226.5a, such as by direct mail,
telephone solicitation, or as take-ones. On the other hand, if Appendix
E were revised to apply Sec. 226.5a to these card issuers, they would
have to comply only to the extent the requirements are applicable.
Thus, no burden would be imposed on card issuers that, for example, do
not impose late-payment fees or annual fees, or do not conduct direct-
mail credit card solicitations or other activities that come within
Sec. 226.5a.
The Board also requests comment on whether any other provisions of
Regulation Z not currently specified in Appendix E as applicable to
transaction-by-transaction card issuers (such as Sec. Sec. 226.5b and
226.16) should be specified as being applicable, and on whether any
provisions currently specified as being applicable should be deleted.
Appendix F--Annual Percentage Rate Computations for Certain Open-End
Credit Plans
Appendix F provides guidance regarding the computation of the
effective APR under Sec. 226.14(c)(3), which applies to situations
where the finance charge imposed during a billing cycle includes a
transaction charge, such as a balance transfer fee or a cash advance
fee. As discussed in the section-by-section analysis to Sec. Sec.
226.7(a)(7) and (b)(7), and Sec. 226.14, the Board is proposing two
alternative approaches for computation and disclosure of the effective
APR. Depending upon the alternative and upon whether or not the plan is
home-secured, the creditor (1) may use proposed Sec. 226.14(c)(3) or
Sec. 226.14(d)(3) if the finance charge for the billing cycle includes
a transaction charge, or (2) would not be required to calculate and
disclose an effective APR at all. The guidance in existing Appendix F
would continue to apply to either proposed Sec. 226.14(c)(3) or
proposed Sec. 226.14(d)(3). Therefore, the Board is not proposing
changes to Appendix F except to add applicable cross references and to
move the substance of footnote 1 to Appendix F to the text of the
appendix. A cross-reference to proposed comment 14(d)(3)-3 is added to
the staff commentary to Appendix F.
Appendix G--Open-End Model Forms and Clauses; Appendix H--Closed-End
Model Forms and Clauses
Appendices G and H set forth model forms, model clauses and sample
forms that creditors may use to comply with the requirements of
Regulation Z. Appendix G contains model forms, model clauses and sample
forms applicable to open-end plans. Appendix H contains model forms,
model clauses and sample forms applicable to closed-end loans. Although
use of the model forms and clauses is not required, creditors using
them properly will be deemed to be in compliance with the regulation
with regard to those disclosures. As discussed above, the Board
proposes to add or revise several model and sample forms to Appendix G.
The new or revised model and samples forms are discussed above in the
section-by-section analysis applicable to the regulatory provisions to
which the forms relate. See section-by-section analysis to Sec. Sec.
226.4(d)(3), 226.5a(b), 226.6(b)(4), 226.6(c)(2), 226.7(b), 226.9(a),
226.9(b), 226.9(c), 226.9(g) and 226.12(b). In addition, the Board
proposes to add a new model clause and sample form relating to debt
suspension coverage in Appendix H. These forms are discussed above in
the section-by-section analysis of Sec. 226.4(d)(3). In Appendix G,
all the existing forms applicable to home-equity lines of credit
(HELOCs) have been retained without revision. The Board anticipates
considering changes to these forms when it reviews the home-equity
disclosure requirements in Regulation Z.
The Board also proposes to revise or add commentary to the model
and sample forms in Appendix G, as discussed below. The Board solicits
comment on the proposed revisions below, as well as whether any
additional commentary should be added to explain the model and sample
forms contained in Appendix G.
Permissible changes to the model and sample forms. The commentary
to appendices G and H currently states that creditors may make certain
changes in the format and content of the model forms and clauses and
may delete any disclosures that are inapplicable to a transaction or a
plan without losing the act's protection from liability. See comment
app. G and H-1. As discussed above, the Board is proposing format
requirements with respect to certain disclosures applicable to open-end
(not home-secured) plans, such as a tabular requirement for certain
account-opening disclosures and certain change-in-terms disclosures.
See Sec. 226.5(a)(3). In addition, the Board is proposing revisions to
certain model forms to improve their readability. See proposed G-2(A),
G-3(A) and G-4(A). Thus, the Board would amend comment app. G and H-1
to indicate that with respect to certain model and sample forms in
Appendix G, formatting changes may not be made to the model and sample
forms.
In a technical revision, the Board proposes to delete comment app.
G and H-1(vii) as obsolete. This comment allows a creditor to
substitute appropriate references, such as ``bank,'' ``we'' or a
specific name, for ``creditor'' in the account-opening disclosures, but
none of the model or sample forms applicable to the account-opening
disclosures uses the term ``creditor.''
Model clauses for notice of liability for unauthorized use and
billing-error rights. Currently, Appendix G contains Model Clause G-2
which provides a model clause for the notice of liability for
unauthorized use of a credit card. The Board is proposing revisions to
Model Clause G-2 to improve its readability. This revised model clause
is designated G-2(A). In addition, Appendix G currently contains Model
Forms G-3 and G-4, which contain models for the long-form billing-error
rights statement (for use with the account-opening disclosures and as
an annual disclosure or, at the creditor's option, with each periodic
statement) and the alternative billing-error rights statement (for use
with each periodic statement), respectively. Like with Model Clause G-
2, the Board is proposing revisions to Model Forms G-3 and G-4 to
improve readability.
[[Page 33027]]
The revised model forms are designated Model Form G-3(A) and G-4(A).
The Board is proposing to revise comments app. G and H-2 and 3 to
provide that for HELOCs subject to Sec. 226.5b, at the creditor's
option, a creditor either may use the current forms (G-2, G-3, and G-4)
or the revised forms (G-2(A), 3(A) and 4(A)). For open-end (not home-
secured) plans, creditors may use the revised forms.
Model and sample forms applicable to disclosures for credit card
applications and solicitations and account-opening disclosures.
Currently, Appendix G contains several model forms related to the
credit card application and solicitation disclosures required by Sec.
226.5a. Current Model Form G-10(A) illustrates, in the tabular format,
the disclosures required under Sec. 226.5a for applications and
solicitations for credit cards other than charge cards. Current Sample
G-10(B) is a sample disclosure illustrating an account with a lower
introductory rate and a penalty rate. Model Form G-10(A) and Sample G-
10(B) would be substantially revised to reflect the proposed changes to
Sec. 226.5a, as discussed in the section-by-section analysis to Sec.
226.5a. In addition, the Board proposes to add Sample G-10(C) to
provide another example of how certain disclosures required by Sec.
226.5a may be given. Under the proposal, current Model Form G-10(C)
illustrating the tabular format disclosures for charge card
applications and solicitations would be moved to G-10(D) and revised.
The Board proposes to add Sample G-10(E) to provide an example of how
certain disclosures in Sec. 226.5a applicable to charge card
applications and solicitations may be given. In addition, the Board
proposes to add a model form and two sample forms to illustrate, in the
tabular format, the disclosures required under Sec. 226.6(b)(4) for
account-opening disclosures. See proposed Model G-17(A) and Samples G-
17(B) and G-17(C).
The Board also proposes to revise the existing commentary that
provides guidance to creditors on how to use Model Forms and Samples G-
10(A)-(E) and G-17(A)-(C). Currently, the commentary indicates that the
disclosures required by Sec. 226.5a may be arranged horizontally
(where headings are at the top of the page) or vertically (where
headings run down the page, as is shown in the Model Forms G-10(A), G-
10(D) and G-17(A), and need not be highlighted aside from being
included in the table. The Board proposes to delete this guidance and
instead require that the table for credit card application and
solicitation disclosures and account-opening disclosures be presented
in the format shown in proposed Model Forms G-10(A), G-10(D) and G-
17(A), where a vertical format is used. The Board would no longer allow
a horizontal format because such formats would be difficult for
consumers to read, given the information that is required to be
disclosed in the table. In addition, the Board proposes to delete the
provision that disclosures in the tables need not be highlighted aside
from being included in the table, as inconsistent with the proposed
requirement that creditors must include certain rates and fees in the
tables in bold text. See Sec. Sec. 226.5a(a)(2)(iv) and
226.6(b)(4)(i)(C).
In addition, Model Form G-10(A) applicable to credit card
applications and solicitations currently uses the heading ``Minimum
Finance Charge'' for disclosing a minimum finance charge under Sec.
226.5a(b)(3). The Board proposes to amend Model Form G-10(A) to provide
two alternative headings (``Minimum Interest Charge'' and ``Minimum
Charge'') for disclosing a minimum finance charge under Sec.
226.5a(b)(3). The same two headings are proposed for Model Form G-
17(A), the model form for the account-opening table required under
Sec. 226.6(b)(4). In the consumer testing conducted for the Board,
many participants did not understand the term ``finance charge'' in
this context. The term ``interest'' was more familiar to many
participants. Under the proposal, if a creditor imposes a minimum
finance charge in lieu of interest in those months where a consumer
would otherwise incur an interest charge but that interest charge is
less than the minimum charge, the creditor should disclose this charge
under the heading ``Minimum Interest Charge.'' Other minimum finance
charges should be disclosed under the heading ``Minimum Charge.''
Also, under the proposal, Model Forms G-10(A), G-10(D) and G-17(A)
contain two alternative headings (``Annual Fees'' and ``Set-up and
Maintenance Fees'') for disclosing fees for issuance or availability of
credit under Sec. 226.5a(b)(2) or Sec. 226.6(b)(4)(iii)(A). The Board
proposes to provide guidance on when a creditor should use each
heading. Under the proposal, if the only fee for issuance or
availability of credit disclosed under Sec. 226.5a(b)(2) or Sec.
226.6(b)(4)(iii)(A) is an annual fee, a creditor should use the heading
``Annual Fee'' to disclose this fee. If a creditor imposes fees for
issuance or availability of credit disclosed under Sec. 226.5a(b)(2)
or Sec. 226.6(b)(4)(iii)(A) other than, or in addition to, an annual
fee, the creditor should use the heading ``Set-up and Maintenance
Fees'' to disclose fees for issuance or availability of credit,
including the annual fee.
The Board also would revise the commentary to provide details about
proposed sample forms G-10(B), G-10(C), G-17(B) and G-17(C) for credit
card application and solicitation disclosures and account-opening
disclosures. For example, the commentary indicates that samples G-
10(B), G-10(C), G-17(B) and G-17(C) are designed to be printed on an
8x14 inch sheet of paper. In addition, the following formatting
techniques were used in presenting the information in the table to
ensure that the information was readable:
1. A readable font style and font size (10-point Ariel font style,
except for the purchase APR which is shown in 16-point type).
2. Sufficient spacing between lines of the text. That is, words
were not compressed to appear smaller than 10-point type.
3. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as appropriate.
For example, in the samples, in the row of the tables with the heading
``APR for Balance Transfers,'' the forms disclose three components: (a)
The applicable balance transfer rate, (b) a cross-reference to the
balance transfer fee, and (c) a notice about payment allocation. The
samples show these three components on separate lines with adequate
space between each component. On the other hand, in the samples, in the
disclosure of the late payment fee, the form discloses two components:
(a) The late-payment fee, and (b) the cross-reference to the penalty
rate. Because the disclosure of both these components is short, these
components are disclosed on the same line in the table.
4. Standard spacing between words and characters.
5. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the sides
of the text.
6. Sufficient contrast between the text and the background. Black
text was used on white paper.
While the Board is not requiring issuers to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font size), the Board encourages issuers
to consider these techniques when disclosing information in the table,
to ensure that the information is presented in a readable format.
[[Page 33028]]
Model and sample forms for periodic statements. The Board is
proposing to add several model forms for periodic statements
disclosures that creditors may use to comply with the requirements in
proposed Sec. 226.7(b) applicable to open-end (not home-secured)
plans. As discussed above in the section-by-section analysis of Sec.
226.7(a), for HELOCs subject to Sec. 226.5b, at the creditor's option,
a creditor either may comply with the current rules applicable to
periodic statement disclosures in Sec. 226.7(a) or comply with the new
rules applicable to periodic statement disclosures in Sec. 226.7(b).
The Board proposes to added comment app. G and H-8 to provide that for
HELOCs subject to Sec. 226.5b, if a creditor chooses to comply with
the new periodic statement requirements in Sec. 226.7(b), the creditor
may use Samples G-18(A)-(F) to comply with the requirements in Sec.
226.7(b).
Appendix M1--Generic Repayment Estimates
As discussed in the section-by-section analysis to Sec.
226.7(b)(12), Section 1301(a) of the Bankruptcy Act requires creditors,
the FTC and the Board to establish and maintain toll-free telephone
numbers in certain instances in order to provide consumers with an
estimate of the time it will take to repay the consumer's outstanding
balance, assuming the consumer makes only minimum payments on the
account and the consumer does not make any more draws on the account.
15 U.S.C. Sec. 1637(b)(11)(F). The Act requires creditors, the FTC and
the Board to provide estimates that are based on tables created by the
Board that estimate repayment periods for different minimum monthly
payment amounts, interest rates, and outstanding balances. Instead of
issuing a table, the Board proposes to issue guidance in Appendix M1 to
card issuers and the FTC for how to calculate this generic repayment
estimate. The Board would use the same guidance to calculate the
generic repayment estimates given through its toll-free telephone
number. The Board expects that this guidance would be more useful than
a table, because the guidance will facilitate the use of automated
systems to provide the required disclosures, although the guidance also
can be used to generate a table.
Under Section 1301(a) of the Bankruptcy Act, a creditor may use a
toll-free telephone number to provide the actual number of months that
it will take consumers to repay their outstanding balance instead of
providing an estimate based on the Board-created table. 15 U.S.C.
1637(b)(11)(I)-(K). The Board proposes new Appendix M2 to provide
guidance to issuers on how to calculate the actual repayment
disclosure.
Calculating generic repayment estimates. Proposed Appendix M1
provides guidance on how to calculate the generic repayment estimates.
In the October 2005 ANPR, the Board noted that the Bankruptcy Act
directs the Board in estimating repayment periods to allow for a
significant number of different minimum payment amounts, interest
rates, and outstanding balances. With respect to the toll-free
telephone numbers set up by the Board and the FTC, information about
the consumers' account terms must come from consumers because the
information is not available to the Board or the FTC. Consumers would
need convenient access to this information to request an estimated
repayment period. Because consumers' outstanding account balances
appear on their monthly statements, consumers are able to provide that
amount when requesting an estimate of the repayment period. Issues
arise, however, with respect to the minimum payment requirement and
interest rate information.
Periodic statements do not disclose the fixed percentage or formula
used to determine the minimum dollar amount that must be paid each
month. The statements only disclose the minimum dollar amount that must
be paid for the current statement period, which would vary each month
as the account balance changes. Furthermore, while periodic statements
must disclose all APRs applicable to the account, the statements may,
but do not necessarily, indicate the portion of the account balance
subject to each APR. This information is also needed to estimate the
actual repayment period.
The Board sought commenters' views regarding three basic approaches
for developing a system to calculate estimated repayment periods for
consumers who call the toll-free telephone number. The three approaches
were:
(1) Prompting consumers to provide an account balance, a minimum
payment formula, and all applicable APRs in order to obtain an
estimated repayment period. For information about minimum payments and
APRs that is not currently disclosed on periodic statements, the Board
could require additional disclosures on those statements. But the Board
also could develop guidance that makes assumptions about these
variables for a ``typical'' account.
(2) Prompting consumers to input information, or using assumptions
based on a ``typical'' account to calculate an estimated repayment
period--but also giving creditors the option to input information from
their own systems regarding consumers' account terms, to provide more
accurate estimates. Estimates provided by creditors that elect this
option would differ somewhat from the estimates provided by other
creditors, the Board, and the FTC.
(3) Prompting consumers to provide their account balance, but
requiring creditors to input information from their own systems
regarding the account's minimum payment requirement, APRs, and the
portion of the balance subject to each APR. These estimates would be
more accurate, but would impose additional compliance burdens, and
would not necessarily reflect consumers' actual repayment periods
because of the use of several other assumptions.
In response to the October 2005 ANPR, industry commenters urged the
Board not to require issuers to program their systems to obtain
consumers' account information from their account management systems to
calculate the generic repayment estimate. These commenters indicated
that such a requirement was not contemplated by the statute. Several
consumer group commenters indicated that issuers should be required to
use inputs from their own systems about minimum monthly payment
formulas, APRs, and account balances applicable to an account in
calculating the generic repayment estimate.
The Board is proposing to allow credit card issuers and the FTC to
use a ``consumer input'' system to collect information from the
consumer to calculate the generic repayment estimate. The Board would
also use a ``consumer input'' system for its toll-free telephone
number. For example, certain information is needed to calculate the
generic repayment estimate, such as the outstanding balance on the
account and the APR applicable to the account. The Board's proposed
rule would allow issuers and the FTC to prompt the consumer to input
this information so that the generic repayment estimate can be
calculated. Although issuers have the ability to program their systems
to obtain consumers' account information from their account management
systems, the Board is not proposing that issuers be required to do so.
Allowing issuers to use a ``consumer input'' system in calculating the
generic repayment estimate preserves the distinction between estimates
based on
[[Page 33029]]
the Board table and actual repayment disclosures contemplated in the
statute.
In proposed Appendix M1, the Board sets forth guidance for credit
card issuers and the FTC in determining the minimum payment formula,
the APR, and the outstanding balance to use in calculating the generic
repayment estimates. With respect to other terms that could impact the
calculation of the generic repayment estimate, the Board proposes to
set forth assumptions about these terms that issuers and the FTC must
use.
1. Minimum payment formula. In the October 2005 ANPR, the Board
sought comment on whether the Board should select a ``typical'' minimum
payment formula that issuers and the FTC must use in calculating the
generic repayment estimates. Q66. In response to the ANPR, many
industry commenters acknowledged that there is no ``typical'' minimum
payment formula for credit cards. Nonetheless, some industry commenters
indicated that the Board should use a minimum formula of 1 percent of
the outstanding balance plus the accrued finance charges for the
billing period, with a minimum payment of $20. Another industry
commenter indicated that the Board should require that issuers, the FTC
and the Board use the minimum payment formula in the statutory examples
to calculate the generic repayment estimate. As indicated above,
several consumer groups indicated that issuers should be required to
use the minimum payment formula(s) that is applicable to the consumer's
account. These commenters indicated that the FTC and the Board should
be required to use a minimum payment formula that is identified by the
Board as producing the ``worst-case scenario'' repayment estimate.
As indicated in Appendix M1, the Board proposes to require credit
card issuers to use the minimum payment formula that applies to most of
the issuer's accounts. The Board proposes different rules for general-
purpose credit cards and retail credit cards in selecting the ``most
common'' minimum payment formula. The Board proposes to define retail
credit cards as credit cards that are issued by a retailer for use only
in transactions with the retailer or a group of retailers that are
related by common ownership or control, or a credit card where a
retailer arranges for a creditor to offer open-end credit under a plan
that allows the consumer to use the credit only in transactions with
the retailer or a group of retailers that are related by common
ownership or control. General-purpose credit cards are defined as
credit cards that are not retail credit cards.
When calculating the generic repayment estimate for general-purpose
credit cards, card issuers must use the minimum payment formula that
applies to most of its general-purpose credit card accounts. The issuer
must use this ``most common'' formula to calculate the generic
repayment estimate for all of its general-purpose credit card accounts,
regardless of whether this formula applies to a particular account.
Proposed Appendix M1 contains additional guidance to issuers of
general-purpose credit cards in complying with the ``most common''
formula approach. The Board solicits comment on the need for guidance
if two or more formulas could apply equally to the same number of
accounts.
When calculating the generic repayment estimate for retail credit
cards, credit card issuers must use the minimum payment formula that
most commonly applies to its retail credit card accounts. If an issuer
offers credit card accounts on behalf of more than one retailer, credit
card issuers must group credit card accounts relating to each retailer
separately, and determine the minimum formula that is most common to
each retailer. For example, if Issuer A, the owner of Retailer A and
Retailer B, issues separate cards for Retailer A and Retailer B, the
proposal would require Issuer A to determine the most common formula
separately for each retailer (A and B). Under the proposal, the issuer
must use the ``most common'' formula for each retailer to calculate the
generic repayment estimate for the retail credit card accounts related
to each retailer, regardless of whether this formula applies to a
particular account. Proposed Appendix M1 provides additional guidance
to issuers of retail credit cards on how to comply with the ``most
common'' formula approach. The Board solicits comment on whether Issuer
A in the example above should be permitted to determine a single ``most
common'' formula for all retailers under its common ownership or
control, and if so, what the standard of affiliation should be. The
Board also solicits comment on the need for guidance if two or more
formulas could apply equally to the same number of accounts.
The Board believes that the ``most common'' approach described
above is preferable to using a ``typical'' minimum payment formula
identified by the Board for several reasons. First, as acknowledged by
the industry commenters, there is no ``typical'' minimum payment
formula that generally applies to credit card accounts. Informally, the
Board gathered data on the minimum payment formulas used by the top 10
issuers of general-purpose credit cards. With respect to those 10
issuers, there was no minimum payment formula that most of the issuers
used. Second, the minimum payment formula can have a significant impact
on the calculation of the generic repayment estimate. For example,
based on the minimum payment formulas used by the top 10 issuers, the
repayment period for paying a $1,000 balance at a 13.99 percent APR if
only minimum payments are made can range from 6 years to 12 years
depending on the issuer.
In addition, it appears that at least for general-purpose credit
cards, issuers typically use the same or similar minimum payment
formula for their entire credit card portfolio. Thus, for those types
of credit cards, the ``most common'' minimum payment formula identified
by an issuer often will match the actual formula used on a consumer's
account. The Board recognizes that in some cases the ``most common''
minimum payment formula will not match the actual formula used on a
consumer's account, for example, where a consumer has opted out of a
change in the minimum payment formula, and the consumer is paying off
the balance under the old minimum payment formula. The Board also
recognizes that allowing retail card issuers to use one minimum payment
formula under the ``most common'' formula approach to calculate the
generic repayment estimate even when multiple minimum payment formulas
apply to the account yields a less accurate estimate than if the issuer
were required to use all the minimum payment formulas applicable to a
consumer's account. Nonetheless, short of requiring issuers to obtain
the actual minimum payment formula(s) applicable to a consumer's
account from the issuer's account management systems to calculate the
generic repayment estimate, which does not appear to be contemplated by
the statute, the Board believes that the approach of requiring issuers
to identify their ``most common'' minimum payment formulas to calculate
the generic repayment estimates is a preferable approach than allowing
issuers to use a ``typical'' formula identified by the Board.
As discussed in the section-by-section analysis to Sec.
226.7(b)12), the Board is required to establish and maintain, for two
years, a toll-free telephone number for use by customers of depository
institutions having assets of $250 million or less to obtain generic
repayment estimates. The Board
[[Page 33030]]
proposes to use the following minimum payment formula to calculate the
generic repayment estimates: either 2 percent of the outstanding
balance, or $20, whichever is greater. This is the same minimum payment
formula used to calculate the repayment estimate for the statutory
example related to the $1,000 balance. The Board proposes to use the
same formula as in the statutory example because the Board is not aware
of any ``typical'' minimum payment formula that applies to general-
purpose credit cards issued by smaller depository institutions. For the
same reasons, the Board proposes that the FTC use the 5 percent minimum
payment formula used in the $300 example in the statute to calculate
the generic repayment estimates given through the FTC's toll-free
telephone number.
2. Annual percentage rates. In the October 2005 ANPR, the Board
noted that the statute's hypothetical repayment examples assume that a
single APR applies to a single account balance. But credit card
accounts can have multiple APRs. The APR may differ for purchases, cash
advances, and balance transfers. A card issuer may have a promotional
APR that applies to the initial balance transfer and a separate APR for
other balance transfers. Although all the APRs for accounts are
disclosed on periodic statements, calculating the repayment period
requires information about what percentage or amount of the total
ending balance is subject to each APR, and what payment allocation
method is used. 15 U.S.C. 1637(b)(5); current Sec. 226.7(d).
Currently, the total ending balance is required to be disclosed, but
not the portion of the cycle's ending balance that is subject to each
APR. 15 U.S.C. 1637(b)(8); current Sec. 226.7(i). (Some creditors may
voluntarily disclose such information on periodic statements.) For
example, assuming a $1,000 outstanding balance on an account with a 12
percent APR for purchases and a 19.5 percent APR on cash advances, the
consumer will know from his or her periodic statement the amount of the
total outstanding balance ($1,000), but may not know the percentage or
amount of the ending balance is subject to the 12 percent rate and what
amount of the ending balance is subject to the 19.5 percent rate.
Creditors know the portion of the cycle's ending balance that is
subject to each APR, and could develop automated systems that
incorporate this information as part of their calculation. But again,
the toll-free telephone systems developed by the Board and FTC would
have to depend solely on data provided by the consumer.
If multiple APRs apply to the outstanding balance, using the lowest
APR to calculate the repayment period would estimate repayment periods
that are shorter for some consumers, depending on the components of the
balance, while using the highest APR would estimate repayment periods
that are longer for some consumers. How much the repayment periods are
underestimated or overestimated in each of these cases would depend on
which rate applies to the outstanding balance. Using an average of the
multiple rates may either overestimate or underestimate the repayment
period depending on which rate applies to the outstanding balance. It
is unclear whether detailed transaction data about how consumers use
their credit card accounts would support a finding that there is a
``typical'' approach that would provide the best estimate of the
repayment periods in most cases.
In the October 2005 ANPR, the Board solicited comment on whether it
would be appropriate for accounts that have multiple APRs to calculate
an estimated repayment period using a single APR, and if so, which APR
for the account should be used. Q71. Most industry commenters suggested
that the Board use a single APR. They pointed out that it would be
impractical to use multiple APRs for the generic repayment estimate.
Consumers would need to understand and input multiple APRs and balances
that apply to the accounts (as well as any expiration dates and APRs
that apply after any promotional APRs expire). The complexity and
effort required to accommodate multiple APRs would be unduly burdensome
for consumers, which could discourage consumers from using such an
approach, and for creditors. In terms of which APR on the account to
use to calculate the generic repayment estimate, some industry
commenters indicated that the purchase APR should be used because this
is the rate that most typically applies to the majority of the balances
on consumers' accounts. Other industry commenters indicated that the
highest APR on the account should be used to calculate the generic
repayment estimates because this would provide consumers with the
``worst-case scenario.'' Several consumer groups indicated that the
Board should require issuers to use all the APRs applicable to a
consumer's account in calculating the generic repayment estimates.
The Board proposes to require that the generic repayment estimate
be calculated using a single APR, even for accounts that have multiple
APRs. As indicated above, the Board does not believe that the statute
contemplates that issuers be required to use their account management
systems to disclose an estimate based on all of the APRs applicable to
a consumer's account and the actual balances to which those rates
apply. The Board also agrees with several industry commenters that the
complexity and effort required to accommodate multiple APRs using a
``consumer-input'' system would be unduly burdensome. In selecting the
single APR to be used in calculating the generic repayment estimates,
the Board proposes to require that credit card issuers, and the FTC use
the highest APR on which the consumer has outstanding balances. As
proposed, an issuer and the FTC may use an automated system to prompt
the consumer to enter in the highest APR on which the consumer has an
outstanding balance, and calculate the generic repayment estimate based
on the consumer's response. The Board would follow the same approach in
calculating the generic repayment estimates for its toll-free telephone
number. The Board recognizes that using the highest APR on which a
consumer has an outstanding balance will overestimate the repayment
period when the consumer has outstanding balances at lower APRs as
well. Nonetheless, allowing issuers to use the purchase APR on the
account to calculate the repayment period would underestimate the
repayment period, if a consumer also has balances subject to higher
APRs, such as cash advance balances. The Board believes that an
overestimate of the repayment period is a better approach for purposes
of this disclosure than an underestimate of the repayment period
because it gives consumers the worst-case estimate of how long it may
take to pay off their balance.
3. Outstanding balance. As discussed above, because consumers'
outstanding account balances appear on their monthly statements,
consumers can provide that amount when requesting an estimate of the
repayment period. The Board proposes that when calculating the generic
repayment estimate, credit card issuers and the FTC must use the
outstanding balance on a consumer's account as of the closing date of
the last billing cycle to calculate the generic repayment estimates. As
proposed, an issuer and the FTC may use an automated system to prompt
the consumer to enter in the outstanding balance included on the last
periodic statement received, and calculate the generic repayment
estimate based on the consumer's response. The Board would
[[Page 33031]]
follow the same approach in calculating the generic repayment estimates
for its toll-free telephone number.
Other terms. In the October 2005 ANPR, the Board noted that Section
1301(a) of the Bankruptcy Act appears to contemplate that the generic
repayment estimate should be calculated based on three variables: The
minimum payment formula, the APR, and the outstanding balance.
Nonetheless, a number of other assumptions can also affect the
calculation of a repayment period. For example, the hypothetical
examples that must be disclosed on periodic statements incorporate the
following assumptions, in addition to the statutory assumptions that
only minimum monthly payments are made each month, and no additional
extensions of credit are obtained: (1) The balance computation method
used is the previous-balance method and finance charges are based on
the beginning balance for the cycle; (2) no grace period applies to any
portion of the balance; and (3) when the account balance becomes less
than the required minimum payment, the receipt of the final amount in
full completely pays off the account. In other words, there is no
residual finance charge that accrues in the month when the final bill
is paid in full.
In the October 2005 ANPR, the Board requested comment on whether
the Board should incorporate the above three assumptions into the
calculation of the generic repayment estimates. Q67. Most industry
commenters generally favored using the above three assumptions in the
calculation of the generic repayment estimates. One consumer group
commenter indicated that the Board should use ``worst-case scenario''
assumptions in calculating the generic repayment estimates.
1. Balance computation method. Instead of using the previous-
balance method used in the statutory example, the Board proposes to use
the average daily balance method for purposes of calculating the
generic repayment estimate. The average daily balance method is more
commonly used by issuers to compute the balance on credit card
accounts. Nonetheless, requiring use of the average daily balance
method makes other assumptions necessary, including the length of the
billing cycle, and when payments are made. The Board proposes to assume
that all months are the same length. In addition, in the absence of
data on when consumers typically make their payments each month, the
Board proposes to assume that payments are credited on the last day of
the month.
2. Grace period. The Board proposes to assume that no grace period
exists. The required disclosures about the effect of making minimum
payments are based on the assumption that the consumer will be
``revolving'' or carrying a balance. Thus, it seems reasonable to
assume that the account is already in a revolving condition at the time
the consumer calls to obtain the estimate, and that no grace period
applies. This assumption about the grace period is also consistent with
the Board's proposal to exempt issuers from providing the minimum
payment disclosures to consumers that have paid their balances in full
for two consecutive months.
3. Residual interest. When the consumer's account balance at the
end of a billing cycle is less than the required minimum payment, the
statutory examples assume that no additional transactions occurred
after the end of the billing cycle, that the account balance will be
paid in full, and that no additional finance charges will be applied to
the account between the date the statement was issued and the date of
the final payment. The Board proposes to make these same assumptions
with respect to the calculation of the generic repayment estimates.
These assumptions are necessary to have a finite solution to the
repayment period calculation. Without these assumptions, the repayment
period could be infinite.
Disclosing the generic repayment estimates to consumers. The Board
proposes in Appendix M1 to provide guidance regarding how the generic
repayment estimate must be disclosed to consumers. As discussed in more
detail below, credit card issuers and the FTC would be required to
provide certain required disclosures to consumers in responding to a
request through a toll-free telephone number for generic repayment
estimates. In addition, issuers and the FTC would be permitted to
provide certain other information to consumers, so long as that
permitted information is disclosed after the required information. The
Board would follow the same approach in disclosing the generic
repayment estimates through its toll-free telephone number.
1. Required disclosures. In the October 2005 ANPR, the Board
requested comment on what key assumptions, if any, should be disclosed
to consumers in connection with the estimated repayment period. Q76.
Some commenters indicated that a number of assumptions should be
disclosed to consumers, such as that the estimated repayment period is
based on the assumption there will be no new transactions, no late
payments, no changes in the APRs and the minimum payment formula, and
that only minimum payments are made. Other commenters indicated that
the Board should only require a more general statement that the
repayment period provided is only an estimate and the actual repayment
period would differ based on a number of factors related to the
consumers' behavior and the particular terms of their account.
As the rule is proposed, credit card issuers and the FTC would be
required to provide the following information when responding to a
request for generic repayment estimates through a toll-free telephone
number: (1) The generic repayment estimate; (2) the beginning balance
on which the generic repayment estimate is calculated; (3) the APR on
which the generic repayment estimate is calculated; (4) the assumptions
that only minimum payments are made and no other amounts are added to
the balance; and (5) the fact that the repayment period is an estimate,
and the actual time it may take to pay off the balance if only making
minimum payment will differ based on the consumer's account terms and
future account activity. The Board proposes to include a model form in
Appendix M1 that credit card issuers and the FTC may use to comply with
the above disclosure requirements. The Board is proposing to require a
brief statement that the repayment period is an estimate rather than
include a list of assumptions used to calculate the estimate, because
the Board believes the brief statement is more helpful to consumers.
The many assumptions that are necessary to calculate a repayment period
are complex and unlikely to be meaningful or useful to most consumers.
Nonetheless, the Board proposes to allow issuers and the FTC to
disclose through the toll-free telephone number the assumptions used to
calculate the generic repayment estimates, so long as this information
is disclosed after the required information described above. The Board
would follow the same approach in disclosing the generic repayment
estimates through its toll-free telephone number.
2. Negative amortization. Negative amortization can occur if the
required minimum payment is less than the total finance charges and
other fees imposed during the billing cycle. Several major credit card
issuers have established minimum payment requirements that prevent
prolonged negative amortization. But some creditors may use a minimum
payment formula that allows negative amortization (such as by requiring
a payment of 2 percent of the
[[Page 33032]]
outstanding balance, regardless of the finance charges or fees
incurred). If negative amortization occurs when calculating the
repayment estimate, issuers and the FTC would be required to disclose
to the consumer that based on the assumptions used to calculate the
repayment estimate, the consumer will not pay off the balance by making
only the minimum payment. As proposed, Appendix M1 contains a model
form that issuers and the FTC may use to disclose to the consumer that
negative amortization is occurring. The Board would follow the same
approach in disclosing through its toll-free telephone number that
negative amortization is occurring.
If creditors use a minimum payment formula that allows for negative
amortization, the Board believes that consumers should be told that
negative amortization is occurring. The Board recognizes that in some
cases because of the assumptions used to calculate the generic
repayment estimate, the estimate may indicate that negative
amortization is occurring, when in fact, if the estimate was based on
the consumer's actual account terms, negative amortization would not
occur. The Board strongly encourages issuers to use the actual
repayment disclosure provided in proposed Appendix M2 in these
instances to avoid giving inaccurate information to consumers.
3. Permitted disclosures. As the rule is proposed, credit card
issuers and the FTC may provide the following information when
responding to a request for the generic repayment estimate through a
toll-free telephone number, so long as this permitted information is
given after the required disclosures: (1) A description of the
assumptions used to calculate the generic repayment estimate; (2) an
estimate of the length of time it would take to repay the outstanding
balance if an additional amount was paid each month in addition to the
minimum payment amount, allowing the consumer to select the additional
amount; (3) an estimate of the length of time it would take to repay
the outstanding balance if the consumer made a fixed payment amount
each month, allowing the consumer to select the amount of the fixed
payment; (4) the monthly payment amount that would be required to pay
off the outstanding balance within a specific number of months,
allowing the consumer to select the payoff period, (5) a reference to
Web sites that contains minimum payment calculators; and (6) the total
interest that a consumer may pay if he or she makes minimum payments
for the length of time disclosed in the generic repayment estimate. The
Board would follow the same approach in disclosing permitted
information through its toll-free telephone number.
In consumer testing conducted for the Board, several participants
reviewed a disclosure that provided an estimate of the time it would
take to pay off a $1,000 balance at a 17 percent APR, if the consumer
paid $10 more than the minimum payment each month. Most participants
that reviewed this disclosure found it to be useful. Thus, the Board is
proposing to allow credit card issuers and the FTC, via the toll-free
telephone number, to provide this type of disclosure to consumers, as
well as other relevant repayment information. The Board believes that
consumers may find this information helpful in making decisions about
how much to pay each month.
In addition, in the October 2005 ANPR, the Board solicited comment
on whether any creditors currently offer web-based calculation tools
that permit consumers to obtain estimates of repayment periods. Several
industry commenters indicated that they do offer such web-based
calculation tools. In addition, other industry commenters indicated
that such tools are available on the Internet from a variety of
sources. For example, these Web sites may provide calculators that
provide the monthly payment amount that would be required to pay off a
particular balance within a specific number of months indicated by the
consumer, and the total interest that would be paid during that period.
Because these types of Web sites might be useful to consumers to obtain
additional information about repayment periods, the Board proposes to
allow issuers, and the FTC to provide Internet addresses for these Web
sites as part of responding to a request for the generic repayment
estimate through a toll-free telephone number.
Appendix M2--Actual Repayment Disclosures
As indicated above, Section 1301(a) of the Bankruptcy Act allows
creditors to forego using the toll-free telephone number to provide a
generic repayment estimate if the creditor instead provides through the
toll-free telephone number the ``actual number of months'' to repay the
consumer's account. In the October 2005 ANPR, the Board requested
comment on whether the Board should provide guidance on the how to
calculate the actual repayment disclosures. Q77. Commenters generally
favored the Board providing such guidance because without this
guidance, issuers would be less likely to provide the actual repayment
disclosures. The Board proposes to provide in Appendix M2 guidance to
credit card issuers on how to calculate the actual repayment disclosure
to encourage issuers to provide these estimates.
Calculating the actual repayment disclosures. As a general matter,
the Board is proposing that credit card issuers calculate the actual
repayment disclosure for a consumer based on the minimum payment
formula(s), the APRs and the outstanding balance currently applicable
to a consumer's account. For other terms that may impact the
calculation of the actual repayment disclosure, the Board proposes to
allow issuers to make certain assumption about these terms.
1. Minimum payment formulas. Generally, when calculating actual
repayment disclosures, the Board proposes that credit card issuers
generally must use the minimum payment formula(s) that apply to a
cardholder's account. The Board proposes to allow issuers to disregard
promotional terms that may be currently applicable to a consumer
account when calculating the actual repayment disclosure. Specifically,
if any promotional terms related to payments currently apply to a
cardholder's account, such as a ``deferred payment plan'' where a
consumer is not required to make payments on the account for a certain
period of time, credit card issuers may assume the promotional terms do
not apply, and use the minimum payment formula(s) that would currently
apply without regard to the promotional terms. Allowing issuers to
disregard promotional terms on accounts eases compliance burden on
issuers, without a significant impact on the accuracy of the repayment
estimates for consumers.
In addition, in response to the October 2005 ANPR, one commenter
indicated that the issuers should not be required in calculating the
actual repayment disclosure to develop different estimating
methodologies for minimum payment formulas that apply to atypical
customers. The commenter indicated that this might occur, for example,
where customers have opted out of a newer version of a creditor's
minimum payment formula, customers have received test versions of newer
minimum payment formulas, or customers have received a relatively
unique product with relatively unique versions of the creditor's basic
minimum payment formula. The commenter indicated that requiring
creditors to develop special estimating methodologies for such small
groups of customers would impose significant systems development costs,
operational
[[Page 33033]]
complexities, and similar burdens on creditors in excess of benefits to
those customers.
The Board solicits additional comment on why an exception from the
general requirement that the actual repayment estimate should be based
on the minimum payment formula(s) applicable to a consumer's account is
needed for atypical customers. Are the accounts for these atypical
customers contained on separate periodic statements systems from other
customers? If not, would not the issuer need to make changes only to
one periodic statement system to obtain the minimum payment formula(s)
applicable to a consumer's account, even if the minimum payment
formulas applicable to the consumer's account were atypical?
2. Annual percentage rates. Generally, when calculating actual
repayment disclosures, the Board proposes that credit card issuers must
use each of the APRs that currently apply to a consumer's account,
based on the portion of the balance to which that rate applies. For the
reason discussed above, the Board proposes to allow issuers to
disregard promotional APRs that may currently apply to a consumer's
account. Specifically, if any promotional terms related to APRs
currently apply to a cardholder's account, such as introductory rates
or deferred interest plans, credit card issuers may assume the
promotional terms do not apply, and use the APRs that currently would
apply without regard to the promotional terms.
3. Outstanding balance. When calculating the actual repayment
disclosures, the Board proposes that credit card issuers must use the
outstanding balance on a consumer's account as of the closing date of
the last billing cycle. Issuers would not be required to take into
account any transactions consumers may have made since the last billing
cycle. This rule makes it easier for issuers to place the estimate on
the periodic statement, because the outstanding balance used to
calculate the actual repayment disclosure would be the same as the
outstanding balance shown on the periodic statement.
4. Other terms. As discussed above, as a general matter, the Board
is proposing that issuers calculate the actual repayment disclosures
for a consumer based on the minimum payment formula(s), the APRs and
the outstanding balance currently applicable to a consumer's account.
For other terms that may impact the calculation of the actual repayment
disclosures, the Board proposes to allow issuers to make certain
assumptions about these terms. For example, the Board would allow
issuers to make the same assumptions about balance computation method,
grace period, and residual interest as are allowed for the generic
repayment estimates. In addition, the Board proposes to allow issuers
to assume that payments are allocated to lower APR balances before
higher APR balances when multiple APRs apply to an account. This
assumption is consistent with typical industry practice regarding how
issuers allocate payments. Allowing issuers to make these assumptions
eases compliance burden for issuers, without a significant impact on
the accuracy of the actual repayment disclosures.
Disclosing the actual repayment disclosures to consumers through
the toll-free telephone number or on the periodic statement. The Board
proposes in Appendix M2 to provide guidance regarding how the actual
repayment disclosure must be disclosed to consumers if a toll-free
telephone number is used or if the actual repayment disclosure is
placed on the periodic statement. The Board proposes similar rules with
respect to disclosing the actual repayment disclosures as are being
proposed with respect to the generic repayment estimate. Specifically,
the Board proposes to require credit card issuers to disclose certain
information when providing the actual repayment disclosure, and permits
the issuers to disclose other related information, so long as that
permitted information is disclosed after the required information. See
proposed Appendix M2.
Appendix M3--Sample Calculations of Generic Repayment Estimates and
Actual Repayment Disclosures
Proposed Appendix M3 provides samples calculations for the generic
repayment estimate and the actual repayment disclosures discussed in
appendices M1 and M2. Specifically, proposed Appendix M3 contains an
example of how to calculate the generic repayment estimate using the
guidance in Appendix M1 where the APR is 17 percent, the outstanding
balance is $1,000, and the minimum payment formula is 2 percent of the
outstanding balance or $20, whichever is greater. In addition, proposed
Appendix M3 also provides an example of how to calculate the actual
repayment disclosure using the guidance in Appendix M2 where three APRs
apply, the total outstanding balance is $1,000, and the minimum payment
formula is 2 percent of the outstanding balance or $20, whichever is
greater. The sample calculations in Appendix M3 are written in SAS
code.
VII. Initial Regulatory Flexibility Act Analysis
In accordance with Section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 601-612) (RFA), the Board is publishing an initial regulatory
flexibility analysis for the proposed amendment to Regulation Z.
Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule will have a significant economic
impact on a substantial number of small entities. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period. The Board requests public
comment in the following areas.
1. Reasons, statement of objectives and legal basis for the
proposed rule. The purpose of the Truth in Lending Act is to promote
the informed use of consumer credit by providing for disclosures about
its terms and cost. In this regard, the goal of the proposed amendments
to Regulation Z is to improve the effectiveness of the disclosures that
creditors provide to consumers at application and throughout the life
of an open-end account. Accordingly, the Board is proposing changes to
format, timing, and content requirements for the five main types of
disclosures governed by Regulation Z: (1) credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions.
The following sections of the Supplementary Information above
describe in detail the reasons, objectives, and legal basis for each
component of the proposed rule:
A high-level summary of the major changes being proposed
is in II. Summary of Major Proposed Changes, and a more detailed
discussion is in V. Discussion of Major Proposed Revisions and VI.
Section-by-section Analysis.
The Board's major sources of rulemaking authority pursuant
to TILA are summarized in IV. The Board's Rulemaking Authority. More
detailed information regarding the source of rulemaking authority for
each individual proposed change, as well as the rulemaking authority
for certain changes mandated by the Bankruptcy Act, are discussed in
VI. Section-by-section Analysis.
2. Description of small entities to which the proposed rule would
apply. The total number of small entities likely to be affected by the
proposal is
[[Page 33034]]
unknown, because the open-end credit provisions of TILA and Regulation
Z have broad applicability to individuals and businesses that extend
even small amounts of consumer credit. See Sec. 226.1(c)(1).\19\ Based
on December 2006 call report data, there are approximately 13,000
depository institutions in the United States that have assets of $165
million or less and thus are considered small entities for purposes of
the Regulatory Flexibility Act. Of them, there were 2,293 banks, 3,603
insured credit unions, and 33 other thrift institutions with credit
card assets (or securitizations), and total assets less than $165
million. The number of small non-depository institutions that are
subject to Regulation Z's open-end credit provisions cannot be
determined from information in call reports, but recent congressional
testimony by an industry trade group indicated that 200 retailers, 40
oil companies, and 40 third-party private label credit card issuers of
various sizes also issue credit cards.\20\ There is no comprehensive
listing of small consumer finance companies that may be affected by the
proposed rules or of small merchants that offer their own credit plans
for the purchase of goods or services. Furthermore, it is unknown how
many of these small entities offer open-end credit plans as opposed to
closed-end credit products, which would not be affected by the proposed
rule.
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\19\ Regulation Z generally applies to ``each individual or
business that offers or extends credit when four conditions are met:
(i) The credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly, (iii) the credit
is subject to a finance charge or is payable by a written agreement
in more than four installments, and (iv) the credit is primarily for
personal, family, or household purposes.'' Section 226.1(c)(1).
\20\ Testimony of Edward L. Yingling for the American Bankers'
Association before the Subcommittee on Financial Institutions and
Consumer Credit, Financial Services Committee, United States House
of Representatives, April 26, 2007, fn. 1, p 3.
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The effect of the proposed revisions to Regulation Z on small
entities also is unknown. Small entities would be required to, among
other things, conform their open-end credit disclosures, including
those in solicitations, account opening materials, periodic statements,
and change-in-terms notices, and advertisements to the revised rules.
The precise costs to small entities of updating their systems are
difficult to predict. These costs will depend on a number of factors
that are unknown to the Board, including, among other things, the
specifications of the current systems used by such entities to prepare
and provide disclosures and administer open-end accounts, the
complexity of the terms of the open-end credit products that they
offer, and the range of such product offerings. Nevertheless, the Board
believes that these costs will have a significant economic effect on
small entities. The Board seeks information and comment on the effects
of the proposed rules on small entities.
3. Projected reporting, recordkeeping and other compliance
requirements of the proposed rule. The compliance requirements of the
proposed rules are described in VI. Section-by-section Analysis. The
Board seeks information and comment on any costs, compliance
requirements, or changes in operating procedures arising from the
application of the proposed rule to small institutions.
4. Other federal rules. As noted in the section-by-section analysis
for Sec. 226.13(i), there is a potential conflict between Regulation Z
and Regulation E with respect to error resolution procedures when a
transaction involves both an extension of credit and an electronic fund
transfer. The Board has not identified any other federal rules that
duplicate, overlap, or conflict with the proposed revisions to
Regulation Z. The Board seeks comment regarding any statutes or
regulations, including state or local statutes or regulations, that
would duplicate, overlap, or conflict with the proposed rule.
5. Significant alternatives to the proposed revisions. As
previously noted, the proposed rule implements the Board's mandate to
prescribe regulations that carry out the purposes of TILA. In addition,
the Board is directed to implement certain provisions of the Bankruptcy
Act that require new disclosures on periodic statements, on credit card
applications and solicitations, and in advertisements. The Board seeks
with this proposed rule to balance the benefits to consumers arising
out of more effective TILA disclosures against the additional burdens
on creditors and other entities subject to TILA. To that end, and as
discussed in VI. Section-by-section Analysis, consumer testing was
conducted for the Board in order to assess the effectiveness of the
proposed revisions to Regulation Z. In this manner, the Board has
sought to avoid imposing additional regulatory requirements without
evidence that these proposed revisions may be beneficial to consumer
understanding regarding open-end credit products.
The Board welcomes comments on any significant alternatives,
consistent with TILA and the Bankruptcy Act, that would minimize the
impact of the proposed rule on small entities.
VIII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Federal
Reserve may not conduct or sponsor, and an organization is not required
to respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z,
including for-profit financial institutions and small businesses.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notices of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home-
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with
certain products, such as reverse mortgages, certain variable-rate
loans, and certain mortgages with rates and fees above specified
thresholds. TILA and Regulation Z also contain rules concerning credit
advertising. Creditors are required to retain evidence of compliance
for twenty-four months (Sec. 226.25), but Regulation Z does not
specify the types of records that must be retained.
Under the PRA, the Federal Reserve accounts for the paperwork
burden associated with Regulation Z for the state member banks and
other creditors supervised by the Federal Reserve that engage in
lending covered by Regulation Z and, therefore, are respondents under
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: state member banks, branches and agencies of
foreign banks (other than federal branches, federal agencies, and
insured state branches of foreign banks), commercial lending
[[Page 33035]]
companies owned or controlled by foreign banks, and organizations
operating under section 25 or 25A of the Federal Reserve Act. Other
federal agencies account for the paperwork burden on other creditors.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 552,398 hours for the 1,172 Federal
Reserve-regulated institutions that are deemed to be respondents for
the purposes of the PRA. To ease the burden and cost of complying with
Regulation Z (particularly for small entities), the Federal Reserve
provides model forms, which are appended to the regulation.
The proposed rule would impose a one-time increase in the total
annual burden under Regulation Z for all respondents regulated by the
Federal Reserve by 73,240 hours, from 552,398 to 625,638 hours. The
total one-time burden increase, as well as the estimates of the one-
time burden increase associated with each major section of the proposed
rule as set forth below, represent averages for all respondents
regulated by the Federal Reserve. The Federal Reserve expects that the
amount of time required to implement each of the proposed changes for a
given institution may vary based on the size and complexity of the
respondent. (Furthermore, this one-time burden estimate does not
include the burden addressing electronic disclosures as announced in a
separate proposed rulemaking (Docket No. R-1284)). In addition, the
Federal Reserve estimates that, on a continuing basis, the proposed
revisions to the rules governing change-in-terms notices would increase
the frequency with which such notices are required, and that this
change would increase the total annual burden on a continuing basis
from 552,398 to 607,759 hours.
As discussed in the preamble, the Federal Reserve proposes changes
to format, timing, and content requirements for the five main types of
open-end credit disclosures governed by Regulation Z: (1) Application
and solicitation disclosures; (2) account-opening disclosures; (3)
periodic statement disclosures; (4) change-in-terms notices; and (5)
advertising provisions.
The proposed revisions to the application and solicitation
disclosures are intended to make the content of those disclosures more
meaningful and easier for consumers to use. The Federal Reserve
estimates that 279 respondents regulated by the Federal Reserve would
take, on average, 8 hours (one business day) to reprogram and update
their systems to comply with the proposed disclosure requirements in
Sec. 226.5a and estimates the annual one-time burden to be 2,232
hours.
The proposed revisions to the account-opening disclosures are
intended to make the information in those disclosures more conspicuous
and easier for consumers to read. The Federal Reserve estimates that
1,172 respondents regulated by the Federal Reserve would take, on
average, 8 hours (one business day) to reprogram and update their
systems to comply with the proposed disclosure requirements in Sec.
226.6 and estimates the annual one-time burden to be 9,376 hours.
The proposed revisions to the periodic statement disclosures are
intended to make the information in those disclosures more
understandable, primarily through changes to the format requirements,
such as by grouping fees, interest charges, and transactions together.
The Federal Reserve estimates that 1,172 respondents regulated by the
Federal Reserve would take, on average, 40 hours (one week) to
reprogram and update their systems to comply with the proposed
disclosure requirements in Sec. 226.7 and estimates the annual one-
time burden to be 42,880 hours.
The proposed revisions to the change-in-terms notices would expand
the circumstances under which consumers receive written notice of
changes in the terms (e.g., an increase in the interest rate)
applicable to their accounts, and increase the amount of time these
notices must be sent before the change becomes effective. The Federal
Reserve estimates that 1,172 respondents regulated by the Federal
Reserve will take, on average, 8 hours (one business day) to reprogram
and update their systems to comply with the proposed disclosure
requirements in Sec. 226.9(c) and estimates the annual one-time burden
to be 9,376 hours; In addition, the Federal Reserve estimates that, on
a continuing basis, the proposed revisions to the change-in-terms
notices would increase the estimated annual frequency for from 2,500 to
3,750. The estimated annual burden for change-in-terms notices would
increase from 36,907 to 55,361 hours.
The proposed changes to the advertising provisions would revise the
rules governing advertising of open-end credit to help improve consumer
understanding of the credit terms offered. The Federal Reserve
estimates that 1,172 respondents regulated by the Federal Reserve would
take, on average, 8 hours (one business day) to reprogram and update
their systems to comply with the proposed disclosure requirements in
Sec. 226.16 and estimates the annual one-time burden to be 9,376
hours.
Additionally, the Federal Reserve proposes to revise the definition
of open-end credit in Sec. 226.2(a)(20) to ensure that the appropriate
(i.e., open-end or closed-end) disclosures are provided in connection
with multifeatured plans. The Federal Reserve also proposes to extend
the applicability of the rules in Sec. 226.4 for debt cancellation
products to debt suspension products. The Federal Reserve estimates the
burden to comply with the Sec. 226.2(a)(20) provisions for open-end
credit would be minimal. The burden associated with reprogramming and
updating a respondent's systems to comply with the proposed debt
suspension disclosure requirements in Sec. 226.4, is included in the
one-time burden estimates for application and solicitation and periodic
statement disclosures mentioned above.
The other federal financial agencies are responsible for estimating
and reporting to OMB the total paperwork burden for the institutions
for which they have administrative enforcement authority. They may, but
are not required to, use the Federal Reserve's burden estimates. Using
the Federal Reserve's method, the total current estimated annual burden
for all financial institutions subject to Regulation Z, including
Federal Reserve-supervised institutions, would be approximately
12,324,037 hours. The proposed rule would impose a one-time increase in
the estimated annual burden for all institutions subject to Regulation
Z by 1,389,600 hours to 13,713,637 hours. On a continuing basis, the
proposed revisions to the change-in-terms notices would increase the
estimated annual frequency, thus increasing the total annual burden on
a continuing basis from 12,324,037 to 13,516,584 hours. The above
estimates represent an average across all respondents and reflect
variations between institutions based on their size, complexity, and
practices. All covered institutions, including card issuers, retailers,
and depository institutions (of which there are approximately 19,300)
potentially are affected by this collection of information, and thus
are respondents for purposes of the PRA.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; (2) the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; (3) ways to enhance the quality, utility, and
[[Page 33036]]
clarity of the information to be collected; and (4) ways to minimize
the burden of information collection on respondents, including through
the use of automated collection techniques or other forms of
information technology. Comments on the collection of information
should be sent to Michelle Shore, Federal Reserve Board Clearance
Officer, Division of Research and Statistics, Mail Stop 151-A, Board of
Governors of the Federal Reserve System, Washington, DC 20551, with
copies of such comments sent to the Office of Management and Budget,
Paperwork Reduction Project (7100-0200), Washington, DC 20503.
IX. Redesignation Table
In reviewing the rules affecting open-end credit, The Board has
proposed organizational revisions that are designed to make the
regulation easier to use. The following table indicates the proposed
redesignations.
------------------------------------------------------------------------
Current Redesignation
------------------------------------------------------------------------
Footnote 3............................. Sec. 226.2(a)(17)(v).
Footnote 4............................. Comment 3-1.
Comment 3(a)-2......................... Comment 3(a)-3.
Comment 3(a)-3......................... Comment 3(a)-4.
Comment 3(a)-4......................... Comment 3(a)-5.
Comment 3(a)-5......................... Comment 3(a)-6.
Comment 3(a)-6......................... Comment 3(a)-8.
Comment 3(a)-7......................... Comment 3(a)-9.
Comment 3(a)-8......................... Comment 3(a)-10.
Footnote 5............................. Sec. 226.4(d)(2).
Footnote 6............................. Sec. 226.4(d)(2)(i).
Footnote 7............................. Sec. 226.5(a)(1)(ii)(A).
Footnote 8............................. Sec. 226.5(a)(1)(ii)(B).
Sec. 226.5(a)(2)..................... Sec. 226.5(a)(2)(ii).
Footnote 9............................. Sec. 226.5(a)(2)(ii).
Sec. 226.5(a)(3)..................... Sec. 226.5(a)(3)(i).
Sec. 226.5(a)(4)..................... Sec. 226.5(a)(3)(ii).
Sec. 226.5(a)(5)..................... Sec. 226.5(a)(1)(iii).
Comment 5(a)(1)-1...................... Comments 5(a)(1)-1 and 5(a)(1)-
2.
Comment 5(a)(1)-2...................... Comment 5(a)(1)-4.
Footnote 10............................ Sec. 226.5(b)(2)(iii).
Comment 5(b)(1)-1...................... Sec. 226.5(b)(1)(iv)-(v);
Comment 5(b)(1)(i)-1.
Sec. 226.5a(a)(2)(i) (prominent Sec. 226.5a(a)(2)(vi).
location).
Sec. 226.5a(a)(2)(iii)............... Sec. 226.5(a)(2)(iii).
Sec. 226.5a(a)(2)(iv)................ Sec. 226.5(a)(2)(i).
Sec. 226.5a(a)(3).................... Sec. 226.5a(a)(5).
Sec. 226.5a(a)(4).................... Sec. 226.5a(a)(3).
Sec. 226.5a(a)(5).................... Sec. 226.5a(a)(4).
Sec. 226.5a(b)(1)(ii)); Comment 5a(c)- Sec. 226.5a(c)(2)(i); Sec.
1. 226.5a(e)(4).
Sec. 226.5a(b)(1)(iii)............... Sec. 226.5a(c)(2)(ii).
Sec. 226.5a(e)(3).................... Sec. 226.5a(e)(2).
Sec. 226.5a(e)(4).................... Sec. 226.5a(e)(3).
Comment 5a(a)(2)-2..................... Comment 5a(a)(2)-1.
Comment 5a(a)(2)-3..................... Comment 5a(a)(2)-2.
Comment 5a(a)(2)-4..................... Sec. 226.5a(a)(2)(ii).
Comment 5a(a)(2)-7..................... Comment 5a(a)(2)-4.
Comments 5a(a)(3)-1; -3................ Sec. 226.5a(a)(5).
Comment 5a(a)(3)-2..................... Sec. 226.5a(a)(5); Comment
5a(a)(5)-1.
Comment 5a(a)(5)-1..................... Comment 5a(a)(4)-1.
Comment 5a(b)(1)-2..................... Comment 5a(b)(1)-1.
Comment 5a(b)(1)-3..................... Sec. 226.5a(d)(3).
Comment 5a(b)(1)-4..................... Sec. 226.5a(b)(1)(i); Comment
5a(b)(1)-2.
Comment 5a(b)(1)-5..................... Sec. 226.5a(b)(1)(ii).
Comment 5a(b)(1)-6..................... Sec. 226.5a(b)(1)(iii).
Comment 5a(b)(1)-7..................... Sec. 226.5a(b)(1)(iv);
Comment 5a(b)(1)-4.
Comment 5a(c)-2........................ Comment 5(a)(c)-1.
Comment 5a(e)(3)-1..................... Comment 5a(e)(2)-1.
Comment 5a(e)(4)-1..................... Comment 5a(e)(3)-1.
Comment 5a(e)(4)-2..................... Comment 5a(e)(3)-2.
Comment 5a(e)(4)-3..................... Comment 5a(e)(3)-3.
Sec. 226.6(a)(1)..................... Sec. 226.6(a)(1)(i).
Sec. 226.6(a)(2)..................... Sec. 226.6(a)(1)(ii).
Footnote 11............................ Sec. 226.6(a)(1)(ii); Sec.
226.6(b)(2)(i)(B).
Footnote 12............................ Sec. 226.6(a)(1)(ii); Sec.
226.6(b)(2)(ii).
Sec. 226.6(a)(3)..................... Sec. 226.6(a)(1)(iii).
Sec. 226.6(a)(4)..................... Sec. 226.6(a)(1)(iv).
Footnote 13............................ Comments 6(a)(1)(iv)-1 and
6(b)(1)-3.
Sec. 226.6(b)........................ Sec. 226.6(a)(2).
Sec. 226.6(c)........................ Sec. 226.6(c)(1).
Sec. 226.6(d)........................ Sec. 226.6(c)(2).
Sec. 226.6(e)(1)..................... Sec. 226.6(a)(3)(i).
Sec. 226.6(e)(2)..................... Sec. 226.6(a)(3)(ii).
Sec. 226.6(e)(3)..................... Sec. 226.6(a)(3)(iii).
[[Page 33037]]
Sec. 226.6(e)(4)..................... Sec. 226.6(a)(3)(iv).
Sec. 226.6(e)(5)..................... Sec. 226.6(a)(3)(v).
Sec. 226.6(e)(6)..................... Sec. 226.6(a)(3)(vi).
Sec. 226.6(e)(7)..................... Sec. 226.6(a)(3)(vii).
Comment 6(a)(1)-1...................... Comments 6(a)(1)(i)-1 and
6(b)(1)-1.
Comment 6(a)(1)-2...................... Comments 6(a)(1)(i)-2 and
6(b)(1)-2.
Comment 6(a)(2)-1...................... Comments 6(a)(1)(ii)-1 and
6(b)(2)(i)(B)-1.
Comment 6(a)(2)-2...................... Comments 6(a)(1)(ii)-2 and
6(b)(2)(ii)-1.
Comment 6(a)(2)-3...................... Comment 6(a)(1)(ii)-3.
Comment 6(a)(2)-4...................... Comment 6(a)(1)(ii)-4.
Comment 6(a)(2)-5...................... Comment 6(a)(1)(ii)-5.
Comment 6(a)(2)-6...................... Comments 6(a)(1)(ii)-6 and
6(b)(2)(ii)-2.
Comment 6(a)(2)-7...................... Comments 6(a)(1)(ii)-7 and
6(b)(2)(ii)-3.
Comment 6(a)(2)-8...................... Comments 6(a)(1)(ii)-8 and
6(b)(2)(ii)-4.
Comment 6(a)(2)-9...................... Comment 6(a)(1)(ii)-9.
Comment 6(a)(2)-10..................... Comments 6(a)(1)(ii)-10 and
6(b)(2)(ii)-5.
Comment 6(a)(2)-11..................... Comment 6(a)(1)(ii)-11.
Comment 6(a)(3)-1...................... Comment 6(a)(1)(iii)-1.
Comment 6(a)(3)-2...................... Comment 6(a)(1)(iii)-2.
Comment 6(a)(4)-1...................... Comment 6(a)(1)(iv)-1.
Comment 6(b)-1......................... Comment 6(a)(2)-1.
Comment 6(b)-2......................... Comment 6(a)(2)-2.
Comment 6(c)-1......................... Comment 6(c)(1)-1.
Comment 6(c)-2......................... Comment 6(c)(1)-2.
Comment 6(c)-3......................... Comment 6(c)(1)-3.
Comment 6(c)-4......................... Comment 6(c)(1)-4.
Comment 6(c)-5......................... Comment 6(c)(1)-5.
Comment 6(d)........................... Comment 6(c)(2).
Comment 6(e)-1......................... Comment 6(a)(3)-1.
Comment 6(e)-2......................... Comment 6(a)(3)-2.
Comment 6(e)-3......................... Comment 6(a)(3)-3.
Comment 6(e)-4......................... Comment 6(a)(3)-4.
Sec. 226.7(a)........................ Sec. 226.7(a)(1); Sec.
226.7(b)(1).
Sec. 226.7(b)........................ Sec. 226.7(a)(2); Sec.
226.7(b)(2).
Sec. 226.7(c)........................ Sec. 226.7(a)(3); Sec.
226.7(b)(3).
Sec. 226.7(d)........................ Sec. 226.7(a)(4); Sec.
226.7(b)(4).
Footnote 15............................ Sec. 226.7(a)(4); Sec.
226.7(b)(4).
Sec. 226.7(e)........................ Sec. 226.7(a)(5); Sec.
226.7(b)(5).
Sec. 226.7(f)........................ Sec. 226.7(a)(6)(i).
Sec. 226.7(g)........................ Sec. 226.7(a)(7); Sec.
226.7(b)(7).
Sec. 226.7(h)........................ Sec. 226.7(a)(6)(ii).
Sec. 226.7(i)........................ Sec. 226.7(a)(10); Sec.
226.7(b)(10).
Sec. 226.7(j)........................ Sec. 226.7(a)(8); Sec.
226.7(b)(8).
Sec. 226.7(k)........................ Sec. 226.7(a)(9); Sec.
226.7(b)(9).
Comment 7-3............................ Comment 7(b)-1.
Comment 7(a)-1......................... Comments 7(a)(1)-1 and 7(b)(1)-
1.
Comment 7(a)-2......................... Comments 7(a)(1)-2 and 7(b)(1)-
2.
Comment 7(a)-3......................... Comments 7(a)(1)-3 and 7(b)(1)-
3.
Comment 7(b)-1......................... Comments 7(a)(2)-1 and 7(b)(2)-
1.
Comment 7(b)-2......................... Comments 7(a)(2)-2 and 7(b)(2)-
2.
Comment 7(c)-1......................... Comments 7(a)(3)-1 and 7(b)(3)-
1.
Comment 7(c)-2......................... Comment 7(a)(3)-2.
Comment 7(c)-3......................... Comments 7(a)(3)-3 and 7(b)(3)-
2.
Comment 7(c)-4......................... Comments 7(a)(3)-4 and 7(b)(3)-
3.
Comment 7(d)-1......................... Comments 7(a)(4)-1 and 7(b)(4)-
1.
Comment 7(d)-2......................... Comments 7(a)(4)-2 and 7(b)(4)-
2.
Comment 7(d)-3......................... Comments 7(a)(4)-3 and 7(b)(4)-
3.
Comment 7(d)-4......................... Comment 7(a)(4)-4.
Comment 7(d)-5......................... Comments 7(a)(4)-5 and 7(b)(4)-
4.
Comment 7(d)-6......................... Comments 7(a)(4)-6 and 7(b)(4)-
5.
Comment 7(d)-7......................... Comment 7(b)(4)-6.
Comment 7(e)-1......................... Comment 7(a)(5)-1.
Comment 7(e)-2......................... Comments 7(a)(5)-2 and 7(b)(5)-
1.
Comment 7(e)-3......................... Comments 7(a)(5)-3 and 7(b)(5)-
2.
Comment 7(e)-4......................... Comments 7(a)(5)-4 and 7(b)(5)-
3.
Comment 7(e)-5......................... Comments 7(a)(5)-5 and 7(b)(5)-
4.
Comment 7(e)-6......................... Comment 7(a)(5)-6.
Comment 7(e)-7......................... Comments 7(a)(5)-7 and 7(b)(5)-
5.
Comment 7(e)-8......................... Comments 7(a)(5)-8 and 7(b)(5)-
6.
Comment 7(e)-9......................... Comments 7(a)(5)-9 and 7(b)(5)-
7.
Comment 7(e)-10........................ Comment 7(b)(5)-8.
Comments 7(f)-1........................ Comment 7(a)(6)(i)-1.
Comment 7(f)-2......................... Comment 7(a)(6)(i)-2.
Comment 7(f)-3......................... Comment 7(a)(6)(i)-3.
[[Page 33038]]
Comment 7(f)-4......................... Comment 7(a)(6)(i)-4.
Comment 7(f)-5......................... Comment 7(a)(6)(i)-5.
Comment 7(f)-6......................... Comment 7(a)(6)(i)-6.
Comment 7(f)-7......................... Comment 7(a)(6)(i)-7.
Comment 7(f)-8......................... Comment 7(a)(6)(i)-8.
Comment 7(g)-1......................... Comments 7(a)(7)-1 and 7(b)(7)-
1.
Comment 7(g)-2......................... Comments 7(a)(7)-2 and 7(b)(7)-
2.
Comment 7(h)-1......................... Comment 7(a)(6)(ii)-1.
Comment 7(h)-2......................... Comment 7(a)(6)(ii)-2.
Comment 7(h)-3......................... Comment 7(a)(6)(ii)-3.
Comment 7(h)-4......................... Comment 7(a)(6)(ii)-4.
Comment 7(i)-1......................... Comments 7(a)(10)-1 and
7(b)(10)-1.
Comment 7(i)-2......................... Comments 7(a)(10)-2 and
7(b)(10)-2.
Comment 7(i)-3......................... Comments 7(a)(10)-3 and
7(b)(10)-3.
Comment 7(j)-1......................... Comments 7(a)(8)-1 and 7(b)(8)-
1.
Comment 7(j)-2......................... Comment 7(b)(8)-2.
Comment 7(k)-1......................... Comments 7(a)(9)-1 and 7(b)(9)-
1.
Comment 7(k)-2......................... Comments 7(a)(9)-2 and 7(b)(9)-
2.
Comment 8-2............................ Comment 8(a)-1.
Comment 8-3............................ Comment 8(b)-1.
Comment 8-5............................ Comment 8(a)-5.
Comment 8(a)-1......................... Comment 8(a)-4.i.
Comment 8(a)-2......................... Comment 8(a)-4.ii.
Comment 8(a)-4......................... Comment 8(a)-2.
Comment 8(a)(2)-1...................... Comment 8(a)-6.
Comment 8(a)(2)-2...................... Comment 8(a)-6.
Comment 8(a)(2)-5...................... Comment 8(a)-3.
Comment 8(a)(3)-1...................... Comment 8(a)-7.
Comment 8(a)(3)-2...................... Comment 8(a)-8.
Comment 8(a)(3)-3...................... Comment 8(a)-8.
Comment 8(a)(3)-4...................... Comment 8(a)-3.
Comment 8(b)-1......................... Comment 8(b)-3.
Comment 8(b)-3......................... Comment 8(b)-2.
Footnote 16............................ Sec. 226.8(c)(1).
Footnote 17............................ Sec. 226.8(c)(2).
Footnote 19............................ Sec. 226.8(a)(1)(ii).
Sec. 226.9(c)........................ Sec. 226.9(c)(1) and
226.9(c)(2).
Sec. 226.9(c)(1)..................... Sec. 226.9(c)(1)(i) and Sec.
226.9(c)(2)(i).
Sec. 226.9(c)(2)..................... Sec. 226.9(c)(1)(ii) and Sec.
226.9(c)(2)(iv).
Sec. 226.9(c)(3)..................... Sec. 226.9(c)(1)(iii).
Comment 9(c)-1......................... Comments 9(c)(1)-1 and 9(c)(2)-
1.
Comment 9(c)-2......................... Comment 9(c)(1)-2 and 9(c)(2)-
2.
Comment 9(c)-3......................... Comment 9(c)(1)-3 and 9(c)(2)-
3.
Comment 9(c)(1)-1...................... Comment 9(c)(1)(i)-1 and
9(c)(2)(i)-1.
Comment 9(c)(1)-2...................... Comment 9(c)(1)(i)-2 and
9(c)(2)(i)-2.
Comment 9(c)(1)-3...................... Comment 9(c)(1)(i)-3 and
9(c)(2)(i)-3.
Comment 9(c)(1)-4...................... Comment 9(c)(1)(i)-4 and
9(c)(2)(i)-4.
Comment 9(c)(1)-5...................... Comment 9(c)(1)(i)-5 and
9(c)(2)(i)-5.
Comment 9(c)(1)-6...................... Comment 9(c)(1)(i)-6.
Comment 9(c)(2)-1...................... Comment 9(c)(1)(ii)-1 and
9(c)(2)(iv)-1.
Comment 9(c)(2)-2...................... Comment 9(c)(1)(ii)-2 and
9(c)(2)(iv)-2.
Comment 9(c)(3)-1...................... Comment 9(c)(1)(iii)-1.
Comment 9(c)(3)-2...................... Comment 9(c)(1)(iii)-2.
Sec. 226.11.......................... Sec. 226.11(a).
Sec. 226.11(a)....................... Sec. 226.11 (a)(1).
Sec. 226.11(b)....................... Sec. 226.11(a)(2).
Sec. 226.11(c)....................... Sec. 226.11(a)(3).
Comment 11-1........................... Comment 11(a)-1.
Comment 11-2........................... Comment 11(a)-2.
Comment 11(b)-1........................ Comment 11(a)(2)-1.
Comment 11(c)-1........................ Comment 11(a)(3)-1.
Comment 11(c)-2........................ Comment 11(a)(3)-2.
Sec. 226.12(b)(1).................... Sec. 226.12(b)(1)(ii).
Sec. 226.12(c)(3).................... Sec. 226.12(c)(3)(i).
Sec. 226.12(c)(3)(i)................. Sec. 226.12(c)(3)(i)(A).
Sec. 226.12(c)(3)(ii)................ Sec. 226.12(c)(3)(i)(B).
Footnote 21............................ Comment 12-2.
Footnote 22............................ Sec. 226.12(b)(1)(i).
Footnote 23............................ Comment 12(b)(2)(ii)-2.
Footnote 24............................ Comment 12(c)-3.
Footnote 25............................ Comment 12(c)-4.
Footnote 26............................ Sec. 226.12(c)(3)(ii).
Comment 12(c)(3)(i)-1.................. Comment 12(c)(3)(i)(A)-1.
Comment 12(c)(3)(ii)-1................. Comment 12(c)(3)(i)(B)-1.
[[Page 33039]]
Comment 12(c)(3)(ii)-2................. Comment 12(c)(3)(ii)-1.
Footnote 27............................ Sec. 226.13(d)(3).
Footnote 28............................ Comment 13(b)-1.
Footnote 29............................ Comment 13(b)-2.
Footnote 30............................ Sec. 226.13(d)(4).
Comment 13-2........................... Comment 13-1.
Comment 13(a)-1........................ Comment 13(a)(1)-1.
Footnote 31a........................... Sec. 226.14(a).
Footnote 32............................ Sec. 226.14(c)(2).
Footnote 33............................ Sec. 226.14(c)(2).
Sec. 226.14(d)(1).................... Sec. 226.14(c)(5)(i).
Sec. 226.14(d)(2).................... Sec. 226.14(c)(5)(ii).
Comment 14(c)-2........................ Comment 14(c)(1)-1.
Comment 14(c)-3........................ Comment 14(c)(2)-1.
Comment 14(c)-4........................ Comment 14(c)(2)-2.
Comment 14(c)-5........................ Comment 14(c)(3)-1.
Comment 14(c)-6........................ Comment 14(c)(3)-2.
Comment 14(c)-7........................ Comment 14(c)-2.
Comment 14(c)-8........................ Comment 14(c)-3.
Comment 14(c)-9........................ Comment 14(c)-4.
Comment 14(c)-10....................... Comment 14(c)-5.
Comment 14(d)-1........................ Comment 14(c)-6.
Comment 14(d)-2........................ Comment 14(c)-6.
Sec. 226.16(b)(1).................... Sec. 226.16(b)(1)(i).
Sec. 226.16(b)(2).................... Sec. 226.16(b)(1)(ii).
Sec. 226.16(b)(3).................... Sec. 226.16(b)(1)(iii).
Comment 16-2........................... Comment 16-3.
Comment 16(b)-1........................ Sec. 226.16(b)(1).
Comment 16(b)-2........................ Comment 16(b)-1.
Comment 16(b)-3........................ Comment 16(b)-2.
Comment 16(b)-4........................ Comment 16(b)-3.
Comment 16(b)-6........................ Sec. 226.16(e).
Comment 16(b)-7........................ Comment 16(b)-1.
Comment 16(b)-8........................ Sec. 226.16(b)(1).
Comment 16(b)-9........................ Comment 16(b)-4.
------------------------------------------------------------------------
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside arrows while language that
would be deleted is set off with brackets.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System, Reporting
and recordkeeping requirements, Truth in Lending.
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
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 226.1 is amended by republishing paragraphs (a), (b),
(c), and (e), revising paragraph (d), and removing and reserving
footnote 1 to read as follows:
Subpart A--General
Sec. 226.1 Authority, purpose, coverage, organization, enforcement,
and liability.
(a) Authority. This regulation, known as Regulation Z, is issued by
the Board of Governors of the Federal Reserve System to implement the
Federal Truth in Lending Act, which is contained in title I of the
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.).
This regulation also implements title XII, section 1204 of the
Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat.
552). Information-collection requirements contained in this regulation
have been approved by the Office of Management and Budget under the
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No.
7100-0199.
(b) Purpose. The purpose of this regulation is to promote the
informed use of consumer credit by requiring disclosures about its
terms and cost. The regulation also gives consumers the right to cancel
certain credit transactions that involve a lien on a consumer's
principal dwelling, regulates certain credit card practices, and
provides a means for fair and timely resolution of credit billing
disputes. The regulation does not govern charges for consumer credit.
The regulation requires a maximum interest rate to be stated in
variable-rate contracts secured by the consumer's dwelling. It also
imposes limitations on home equity plans that are subject to the
requirements of Sec. 226.5b and mortgages that are subject to the
requirements of Sec. 226.32. The regulation prohibits certain acts or
practices in connection with credit secured by a consumer's principal
dwelling.
(c) Coverage.
(1) In general, this regulation applies to each individual or
business that offers or extends credit when four conditions are met:
(i) the credit is offered or extended to consumers; (ii) the offering
or extension of credit is done regularly; \1\ (iii) the credit is
subject to the finance charge or is payable by a written agreement in
more than four installments; and (iv) the credit is primarily for
personal, family, or household purposes.
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\1\ [rtrif][Reserved][ltrif] [The meaning of ``regularly'' is
explained in the definition of ``creditor'' in Sec. 226.2(a).]
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(2) If a credit card is involved, however, certain provisions apply
even if the credit is not subject to a finance charge, or is not
payable by a written
[[Page 33040]]
agreement in more than four installments, or if the credit card is to
be used for business purposes.
(3) In addition, certain requirements of Sec. 226.5b apply to
persons who are not creditors but who provide applications for home
equity plans to consumers.
(d) Organization. The regulation is divided into subparts and
appendices as follows:
(1) Subpart A contains general information. It sets forth: (i) the
authority, purpose, coverage, and organization of the regulation; (ii)
the definitions of basic terms; (iii) the transactions that are exempt
from coverage; and (iv) the method of determining the finance charge.
(2) Subpart B contains the rules for open-end credit. It requires
that [rtrif]account-opening[ltrif] [initial] disclosures and periodic
statements be provided, as well as additional disclosures for credit
and charge card applications and solicitations and for home equity
plans subject to the requirements of Sec. 226.5a and Sec. 226.5b,
respectively. [rtrif]It also describes special rules that apply to
credit card transactions, treatment of payments and credit balances,
procedures for resolving credit billing errors, annual percentage rate
calculations, rescission requirements, and advertising.[ltrif]
(3) Subpart C relates to closed-end credit. It contains rules on
disclosures, treatment of credit balances, annual percentage rate
calculations, rescission requirements, and advertising.
(4) Subpart D contains rules on oral disclosures,
[rtrif]disclosures in languages other than English[ltrif] [Spanish-
language disclosure in Puerto Rico], record retention, effect on state
laws, state exemptions, and rate limitations.
(5) Subpart E contains special rules for [rtrif]certain[ltrif]
mortgage transactions. Section 226.32 requires certain disclosures and
provides limitations for loans that have rates and fees above specified
amounts. Section 226.33 requires disclosures, including the total
annual loan cost rate, for reverse mortgage transactions. Section
226.34 prohibits specific acts and practices in connection with
[rtrif]certain[ltrif] mortgage transactions.
(6) Several appendices contain information such as the procedures
for determinations about state laws, state exemptions and issuance of
staff interpretations, special rules for certain kinds of credit plans,
a list of enforcement agencies, and the rules for computing annual
percentage rates in closed-end credit transactions and total-annual-
loan-cost rates for reverse mortgage transactions.
(e) Enforcement and liability. Section 108 of the act contains the
administrative enforcement provisions. Sections 112, 113, 130, 131, and
134 contain provisions relating to liability for failure to comply with
the requirements of the act and the regulation. Section 1204(c) of
title XII of the Competitive Equality Banking Act of 1987, Pub. L. No.
100-86, 101 Stat. 552, incorporates by reference administrative
enforcement and civil liability provisions of sections 108 and 130 of
the act.
3. Section 226.2 is amended by revising paragraph (a), republishing
paragraph (b) and removing and reserving footnote 3 to read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. For purposes of this regulation, the following
definitions apply:
(1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
(2) Advertisement means a commercial message in any medium that
promotes, directly or indirectly, a credit transaction.
(3) [Reserved] \2\
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\2\ [Reserved].
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(4) Billing cycle or cycle means the interval between the days or
dates of regular periodic statements. These intervals shall be equal
and no longer than a quarter a year. An interval will be considered
equal if the number of days in the cycle does not vary more than four
days from the regular day or date of the periodic statement.
(5) Board means the Board of Governors of the Federal Reserve
System.
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. 226.15 and
Sec. 226.23, and for purposes of Sec. 226.31, the term means all
calendar days except Sundays and the legal public holidays specified in
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
(7) Card issuer means a person that issues a credit card or that
person's agent with respect to the card.
(8) Cardholder means a natural person to whom a credit card is
issued for consumer credit purposes, or a natural person who has agreed
with the card issuer to pay consumer credit obligations arising from
the issuance of credit card to another natural person. For purposes of
Sec. 226.12(a) and (b), the term includes any person to whom a credit
card is issued for any purpose, including business, commercial or
agricultural use, or a person who has agreed with the card issuer to
pay obligations arising from the issuance of such a credit card to
another person.
(9) Cash price means the price at which a creditor, in the ordinary
course of business, offers to sell for cash property or service that is
the subject of the transaction. At the creditor's option, the term may
include the price accessories, services related to the sale, service
contracts and taxes and fees for license, title, and registration. The
term does not include any finance charge.
(10) Closed-end credit means consumer credit other than ``open end
credit'' as defined in this section.
(11) Consumer means a cardholder or natural person to whom consumer
credit is offered or extended. However, for purposes of the rescission
under Sec. 226.15 and Sec. 226.23, the term also includes a natural
person in whose principal dwelling a security interest is or will be
retained or acquired, if that person's ownership interest in the
dwelling is or will be subject to the security interest.
(12) Consumer credit means credit offered or extended to a consumer
primarily for personal, family, or household purposes.
(13) Consummation means the time that a consumer becomes
contractually obligated on credit transaction.
(14) Credit means the right to defer payment of debt or to incur
debt and defer its payment.
(15) Credit card means any card, plate, [coupon book,] or other
single credit device that may be used from time to time to obtain
credit. Charge card means a credit card on an account for which no
periodic rate is used to compute a finance charge.
(16) Credit sale means a sale in which the seller is a creditor.
The term includes a bailment or lease (unless terminable without
penalty at any time by the consumer) under which the consumer--
(i) Agrees to pay as compensation for use a sum substantially
equivalent to, or in excess of, the total value of the property and
service involved; and
(ii) Will become (or has the option to become), for no additional
consideration or for nominal consideration, the owner of the property
upon compliance with the agreement.
(17) Creditor means:
[[Page 33041]]
(i) A person (A) who regularly extends consumer credit \3\ that is
subject to a finance charge or is payable by written agreement in more
than four installments (not including a down payment), and (B) to whom
the obligation is initially payable, either on the face of the note or
contract, or by agreement when there is no note or contract.
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\3\ [rtrif][Reserved][ltrif] [A person regularly extends
consumer credit only if it extended credit (other than credit
subject to the requirements of section 226.32) more than 25 times
(or more than 5 times for transactions secured by the dwelling) in
the preceding calendar year. If a person did not meet these
numerical standards in the preceding calendar year, the numerical
standards shall be applied to the current calendar year. A person
regularly extends consumer credit if, in any 12-month period, the
person originates more than one credit extension that is subject to
the requirements of section 226.32 or one or more such credit
extensions through a mortgage broker.]
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(ii) For purposes of Sec. Sec. 226.4(c)(8) (Discounts), 226.9(d)
(finance charge imposed at time of transaction), and 226.12(e) (prompt
notification of returns and crediting of refunds), a person that honors
a credit card.
(iii) For purposes of subpart B, any card issuer that extends
either open-end credit or credit that is not subject to a finance
charge and is not payable by written agreement in more than four
installments.
(iv) For purposes of subpart B (except for the credit and charge
card disclosures contained in Sec. Sec. 226.5a and 226.9(e) and (f),
the finance charge disclosures contained in [rtrif]Sec. Sec.
226.6(a)(1) and (b)(1) and Sec. Sec. 226.7(a)(4) through (7) and
(b)(4) through (7)[ltrif] [Sec. 226.6(a) and Sec. 226.7(d) through
(g)] and the right of rescission set forth in Sec. 226.15) and subpart
C, any card issuer that extends closed-end credit that is subject to a
finance charge or is payable by written agreement in more than four
installments.
[rtrif](v) A person regularly extends consumer credit only if it
extended credit (other than credit subject to the requirements of Sec.
226.32) more than 25 times (or more than 5 times for transactions
secured by the dwelling) in the preceding calendar year. If a person
did not meet these numerical standards in the preceding calendar year,
the numerical standards shall be applied to the current calendar year.
A person regularly extends consumer credit if, in any 12-month period,
the person originates more than one credit extension that is subject to
the requirements of Sec. 226.32 or one or more such credit extensions
through a mortgage broker.[ltrif]
(18) Downpayment means an amount, including the value of property
used as a trade-in, paid to a seller to reduce the cash price of goods
or services purchased in a credit sale transaction. A deferred portion
of a downpayment may be treated as part of the downpayment if it is
payable not later than the due date of the second otherwise regularly
scheduled payment and is not subject to a finance charge.
(19) Dwelling means a residential structure that contains one to
four units, whether or not that structure is attached to real property.
The term includes an individual condominium unit, cooperative unit,
mobile home, and trailer, if it is used as a residence.
(20) Open-end credit means consumer credit extended by a creditor
under a plan in which:
(i) The creditor reasonably contemplates repeated transactions;
(ii) The creditor may impose a finance charge from time to time on
an outstanding unpaid balance; and
(iii) The amount of credit that may be extended to the consumer
during the term of the plan (up to any limit set by the creditor) is
generally made available to the extent that any outstanding balance is
repaid.
(21) Periodic rate means a rate of finance charge that is or may be
imposed by a creditor on a balance for a day, week, month, or other
subdivision of a year.
(22) Person means a natural person or an organization, including a
corporation, partnership, proprietorship, association, cooperative,
estate, trust, or government unit.
(23) Prepaid finance charge means any finance charge paid
separately in cash or by check before or at consummation of a
transaction, or withheld from the proceeds of the credit at any time.
(24) Residential mortgage transaction means a transaction in which
a mortgage, deed of trust, purchase money security interest arising
under an installment sales contract, or equivalent consensual security
interest is created or retained in the consumer's principal dwelling to
finance the acquisition or initial construction of that dwelling.
(25) Security interest means an interest in property that secures
performance of a consumer credit obligation and that is recognized by
state or federal law. It does not include incidental interests such as
interests in proceeds, accessions, additions, fixtures, insurance
proceeds (whether or not the creditor is a loss payee or beneficiary),
premium rebates, or interests in after-acquired property. For purposes
of disclosures under Sec. 226.6 and Sec. 226.18, the term does not
include an interest that arises solely by operation of law. However,
for purposes of the right of rescission under Sec. 226.15 and Sec.
226.23, the term does include interests that arise solely by operation
of law.
(26) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, and any territory or possession of the
United States.
(b) Rules of construction. For purposes of this regulation, the
following rules of construction apply:
(1) Where appropriate, the singular form of a word includes the
plural form and plural includes singular.
(2) Where the words obligation and transaction are used in the
regulation, they refer to a consumer credit obligation or transaction,
depending upon the context. Where the work credit is used in the
regulation, it means consumer credit unless the context clearly
indicates otherwise.
(3) Unless defined in this regulation, the words used have the
meanings given to them by state law or contact.
(4) Footnotes have the same legal effect as the text of the
regulation.
(5) Where the word ``amount'' is used in this regulation to
describe disclosure requirements, it refers to a numerical amount.
4. Section 226.3 is amended by republishing paragraphs (a), (b),
(c), (d), (e), and (f), adding a new paragraph (g), and removing and
reserving footnote 4 to read as follows:
Sec. 226.3 Exempt transactions.
This regulation does not apply to the following: \4\
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\4\ [rtrif][Reserved][ltrif] [The provisions in Section
226.12(a) and (b) governing the issuance of credit cards and the
liability for their unauthorized use apply to all credit cards, even
if the credit cards are issued for use in connection with extensions
of credit that otherwise are exempt under this section.]
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(a) Business, commercial, agricultural, or organizational credit.
(1) An extension of credit primarily for a business, commercial or
agricultural purpose.
(2) An extension of credit to other than a natural person,
including credit to government agencies or instrumentalities.
(b) Credit over $25,000 not secured by real property or a dwelling.
An extension of credit not secured by real property, or by personal
property used or expected to be used as the principal dwelling of the
consumer, in which the amount financed exceeds $25,000 or in which
there is an express written commitment to extend credit in excess of
$25,000.
(c) Public utility credit. An extension of credit that involves
public utility services provided through pipe, wire,
[[Page 33042]]
other connected facilities, or radio or similar transmission (including
extensions of such facilities), if the charges for service, delayed
payment, or any discounts for prompt payment are filed with or
regulated by any government unit. The financing of durable goods or
home improvements by a public utility is not exempt.
(d) Securities or commodities accounts. Transactions in securities
or commodities accounts in which credit is extended by a broker-dealer
registered with the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
(e) Home fuel budget plans. An installment agreement for the
purchase of home fuels in which no finance charge is imposed.
(f) Student loan programs. Loans made, insured, or guaranteed
pursuant to a program authorized by title IV of the Higher Education
Act of 1965 (20 U.S.C. 1070 et seq.).
[rtrif](g) Employer-sponsored retirement plans. An extension of
credit to a participant in an employer-sponsored retirement plan
qualified under Section 401(a) of the Internal Revenue Code or a tax-
sheltered annuity under Section 403(b) of the Internal Revenue Code (26
U.S.C. 401(a); 26 U.S.C. 403(b)), provided that the extension of credit
is comprised of fully vested funds from such participant's account and
is made in compliance with the Internal Revenue Code (26 U.S.C. 1 et
seq.).[ltrif]
5. Section 226.4 is amended by republishing paragraphs (a), (c),
(e), and (f), revising paragraphs (b) and (d), and removing and
reserving footnotes 5 and 6 to read as follows:
Sec. 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose
the third party; or
(ii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. Fees charged by a third
party that conducts the loan closing (such as a settlement agent,
attorney, or escrow or title company) are finance charges only if the
creditor--
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or
to the creditor for delivery to the broker) are finance charges even if
the creditor does not require the consumer to use a mortgage broker and
even if the creditor does not retain any portion of the charge.
(b) Examples of finance charges. The finance charge includes the
following types of charges, except for charges specifically excluded by
paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under
an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account to the
extent that the charge exceeds the charge for a similar account without
a credit feature.
(3) Points, loan fees, assumption fees, finder's fees, and similar
charges.
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance
protecting the creditor against the consumer's default or other credit
loss.
(6) Charges imposed on a creditor by another person for purchasing
or accepting a consumer's obligation, if the consumer is required to
pay the charges in cash, as an addition to the obligation, or as a
deduction from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, written in connection with a credit
transaction.
(8) Premiums or other charges for insurance against loss of or
damage to property, or against liability arising out of the ownership
or use of property, written in connection with a credit transaction.
(9) Discounts for the purpose of inducing payment by a means other
than the use of credit.
(10) Debt cancellation [rtrif]and debt suspension[ltrif] fees.
Charges or premiums paid for debt cancellation [rtrif]or debt
suspension[ltrif] coverage written in connection with a credit
transaction, whether or not the [debt cancellation] coverage is
insurance under applicable law.
(c) Charges excluded from the finance charge. The following charges
are not finance charges:
(1) Application fees charged to all applicants for credit, whether
or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a
credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis.
(5) Seller's points.
(6) Interest forfeited as a result of an interest reduction
required by law on a time deposit used as security for an extension of
credit.
(7) Real-estate related fees. The following fees in a transaction
secured by real property or in a residential mortgage transaction, if
the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance,
property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit-report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest-infestation or flood-hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
(8) Discounts offered to induce payment for a purchase by cash,
check, or other means, as provided in section 167(b) of the Act.
(d) Insurance and debt cancellation [rtrif]and debt
suspension[ltrif] coverage.
(1) Voluntary credit insurance premiums. Premiums for credit life,
accident, health, or loss-of-income insurance may be excluded from the
finance charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is
disclosed [rtrif]in writing[ltrif]. If the term of insurance is less
than the term of the transaction, the term of insurance also shall be
[[Page 33043]]
disclosed. The premium may be disclosed on a unit-cost basis only in
open-end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 226.17(g), and certain closed-end credit
transactions involving an insurance plan that limits the total amount
of indebtedness subject to coverage.
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in this
paragraph[rtrif], except as provided in paragraph (d)(4) of this
section[ltrif]. Any consumer in the transaction may sign or initial the
request.
(2) [rtrif]Property insurance premiums.[ltrif] Premiums for
insurance against loss of or damage to property, or against liability
arising out of the ownership or use of property, [rtrif]including
single interest insurance if the insurer waives all right of
subrogation against the consumer,[ltrif] \5\ may be excluded from the
finance charge if the following conditions are met:
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\5\ [rtrif][Reserved][ltrif] [This includes single interest
insurance if the insurer waives all right of subrogation against the
consumer.]
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(i) The insurance coverage may be obtained from a person of the
consumer's choice,\6\ and this fact is disclosed. [rtrif](A creditor
may reserve the right to refuse to accept, for reasonable cause, an
insurer offered by the consumer.)[ltrif]
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\6\ [rtrif][Reserved][ltrif] [A creditor may reserve the right
to refuse to accept, for reasonable cause, an insurer offered by the
consumer.]
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(ii) If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed. The premium may be disclosed
on a unit-cost basis only in open-end credit transactions, closed-end
credit transactions by mail or telephone under Sec. 226.17(g), and
certain closed-end credit transactions involving an insurance plan that
limits the total amount of indebtedness subject to coverage.
(3) Voluntary debt cancellation [rtrif]or debt suspension[ltrif]
fees. [(i)]Charges or premiums paid for debt cancellation coverage
[rtrif]for amounts exceeding the value of the collateral securing the
obligation or for debt cancellation or debt suspension coverage in the
event of the loss of life, health, or income or in case of
accident[ltrif] [of the type specified in paragraph (d)(3)(ii) of this
section] may be excluded from the finance charge, whether or not the
coverage is insurance, if the following conditions are met:
[rtrif](i)[ltrif] [(A)] The debt cancellation [rtrif]or debt
suspension[ltrif] agreement or coverage is not required by the
creditor, and this fact is disclosed in writing;
[rtrif](ii)[ltrif] [(B)] The fee or premium for the initial term of
coverage is disclosed [rtrif]in writing[ltrif]. If the term of coverage
is less than the term of the credit transaction, the term of coverage
also shall be disclosed. The fee or premium may be disclosed on a unit-
cost basis only in open-end credit transactions, closed-end credit
transactions by mail or telephone under Sec. 226.17(g), and certain
closed-end credit transactions involving a debt cancellation agreement
that limits the total amount of indebtedness subject to coverage;
[rtrif](iii) The following are disclosed, as applicable, for debt
suspension coverage: that the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension.[ltrif]
[rtrif](iv)[ltrif] [(C)] The consumer signs or initials an
affirmative written request for coverage after receiving the
disclosures specified in this paragraph [rtrif], except as provided in
paragraph (d)(4) of this section[ltrif]. Any consumer in the
transaction may sign or initial the request.
[(ii) Paragraph (d)(3)(i) of this section applies to fees paid for
debt cancellation coverage that provides for cancellation of all or
part of the debtor s liability for amounts exceeding the value of the
collateral securing the obligation, or in the event of the loss of
life, health, or income or in case of accident.]
[rtrif](4) Telephone purchases. If a consumer purchases credit
insurance or debt cancellation or debt suspension coverage for an open-
end (not home-secured) plan by telephone, the creditor must make the
disclosures under paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through
(iii) of this section, as applicable, orally. In such a case, the
creditor shall:
(i) Maintain reasonable procedures to provide the disclosures to
the consumer orally and maintain evidence that the consumer, after
being provided the disclosures, affirmatively elected to purchase the
insurance or coverage; and
(ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or
(d)(3)(i) through (iii) of this section, as applicable, within three
business days after the telephone purchase.[ltrif]
(e) Certain security interest charges. If itemized and disclosed,
the following charges may be excluded from the finance charge:
(1) Taxes and fees prescribed by law that actually are or will be
paid to public officials for determining the existence of or for
perfecting, releasing, or satisfying a security interest.
(2) The premium for insurance in lieu of perfecting a security
interest to the extent that the premium does not exceed the fees
described in paragraph (e)(1) of this section that otherwise would be
payable.
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the instrument securing the
evidence of indebtedness.
(f) Prohibited offsets. Interest, dividends, or other income
received or to be received by the consumer on deposits or investments
shall not be deducted in computing the finance charge.
6. Section 226.5 is amended by revising paragraphs (a) and (b),
republishing paragraphs (c), (d), and (e), and removing and reserving
footnotes 7 through 10 to read as follows:
Sec. 226.5 General disclosure requirements.
(a) Form of disclosures.
(1) [rtrif]General.[ltrif]
[rtrif](i)[ltrif] The creditor shall make the disclosures required
by this subpart clearly and conspicuously[rtrif].[ltrif]
[rtrif](ii) The creditor shall make the disclosures required by
this subpart[ltrif] in writing,\7\ in a form that the consumer may
keep[.] \8\ [rtrif], except that:
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\7\ [rtrif][Reserved][ltrif] [The disclosure required by Sec.
226.9(d) when a finance charge is imposed at the time of a
transaction need not be written.]
\8\ [rtrif][Reserved][ltrif] [The disclosures required under
Sec. 226.5a for credit and charge card applications and
solicitations, the home equity disclosures required under Sec.
226.5b(d), the alternative summary billing-rights statement provided
for in Sec. 226.9(a)(2), the credit and charge card renewal
disclosures required under Sec. 226.9(e), and the disclosures made
under Sec. 226.10(b) about payment requirements need not be in a
form that the consumer can keep.]
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(A) The following disclosures need not be written: disclosures
under Sec. 226.6(b)(1) of charges that are imposed as part of the plan
and may be provided at any time before the consumer agrees to pay or
becomes obligated to pay for the charge, pursuant to the timing
requirements of paragraph (b)(1)(ii) of this section and related
disclosures under Sec. 226.9(c)(2)(ii)(B) of charges; and disclosures
under Sec. 226.9(d) when a finance charge is imposed at the time of
the transaction.
(B) The following disclosures need not be in a retainable form:
disclosures for credit and charge card applications and solicitations
under Sec. 226.5a; home equity disclosures under Sec. 226.5b(d); the
[[Page 33044]]
alternative summary billing-rights statement under Sec. 226.9(a)(2);
the credit and charge card renewal disclosures required under Sec.
226.9(e); and the payment requirements under Sec. 226.10(b), except as
provided in Sec. 226.7(b)(13).
(iii) The disclosures required by this subpart may be provided to
the consumer in electronic form, subject to compliance with the
consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.). The disclosures required by Sec. Sec. 226.5a, 226.5b,
and 226.16 may be provided to the consumer in electronic form without
regard to the consumer consent or other provisions of the E-Sign Act in
the circumstances set forth in those sections.[ltrif]
[rtrif](2) Terminology.
(i) Terminology used in providing the disclosures required by this
subpart shall be consistent.
(ii) The terms finance charge and annual percentage rate, when
required to be disclosed with a corresponding amount or percentage
rate, shall be more conspicuous than any other required disclosure.\9\
The terms need not be more conspicuous when used for credit and charge
card applications and solicitations under Sec. 226.5a; for account-
opening disclosures in a tabular format under Sec. 226.6(b)(4); for
periodic statements disclosures under Sec. 226.7(b)(4) and Sec.
226.7(b)(7); for disclosures in a tabular format accompanying checks
that access a credit card account under Sec. 226.9(b)(3); for
information in change-in-terms notices in a tabular format under Sec.
226.9(c)(2)(iii)(B); for information when rates are increased due to
delinquency, default or penalty pricing under Sec. 226.9(g)(3)(ii);
for credit and charge card renewal disclosures under Sec. 226.9(e);
and for advertisements under Sec. 226.16.
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\9\ [rtrif][Reserved][ltrif] [The terms need not be more
conspicuous when used under Sec. 226.5a generally for credit and
charge card applications and solicitations, under Sec. 226.7(d) on
periodic statements, under Sec. 226.9(e) in credit and charge card
renewal disclosures, and under Sec. 226.16 in advertisements. (But
see special rule for annual percentage rate for purchases, Sec.
226.5a(b)(1).)]
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(iii) If disclosures are required to be presented in a tabular
format pursuant to paragraph (a)(3) of this section, the term grace
period and penalty APR shall be used, as applicable. If credit
insurance or debt cancellation or debt suspension coverage is required
as part of the plan, the term required shall be used and the program
shall be identified by its name. If an annual percentage rate is
required to be presented in a tabular format pursuant to paragraph
(a)(3)(i) or (a)(3)(iii) of this section, the term fixed, or a similar
term, may not be used to describe such rate unless the creditor also
specifies a time period that the rate will be fixed and the rate will
not increase during that period, or if no such time period is provided,
the rate will not increase while the plan is open.[ltrif]
[rtrif](3) Specific formats.
(i) Certain disclosures for credit and charge card applications and
solicitations must be provided in a tabular format in accordance with
the requirements of Sec. 226.5a(a)(2).
(ii) Certain disclosures for home equity plans must precede other
disclosures and must be given in accordance with the requirements of
Sec. 226.5b(a).
(iii) Certain account-opening disclosures must be provided in a
tabular format in accordance with the requirements of Sec.
226.6(b)(4).
(iv) Certain disclosures provided on periodic statement must be
provided in a tabular format in accordance with the requirements of
Sec. 226.7(b)(7).
(v) Certain disclosures provided on periodic statements must be
grouped together in accordance with the requirements of Sec.
226.7(b)(6) and Sec. 226.7(b)(13).
(vi) Certain disclosures accompanying checks that access a credit
card account must be provided in a tabular format in accordance with
the requirements of Sec. 226.9(b)(3).
(vii) Certain disclosures provided in a change-in-terms notice must
be provided in a tabular format in accordance with the requirements of
Sec. 226.9(c)(2)(iii)(B).
(viii) Certain disclosures provided when a rate is increased due to
delinquency, default or as a rate must be provided in a tabular format
in accordance with the requirements of Sec. 226.9(g)(3)(ii).[ltrif]
[(2) The terms ``finance charge'' and ``annual percentage rate,''
when required to be disclosed with a corresponding amount or percentage
rate, shall be more conspicuous than any other required disclosure.
(3) Certain disclosures required under Sec. 226.5a for credit and
charge card applications and solicitations must be provided in a
tabular format or in a prominent location in accordance with the
requirements of that section.
(4) For rules governing the form of disclosures for home equity
plans, see Sec. 226.5b(a).
(5) Electronic communication. For rules governing the electronic
delivery of disclosures, including the definition of electronic
communication, see Sec. 226.36.]
(b) Time of disclosures.
(1) [Initial] [rtrif]Account-opening[ltrif] disclosures.
[rtrif] (i) General rule.[ltrif] The creditor shall furnish
[rtrif]account-opening disclosures[ltrif] [the initial disclosure
statement] required by Sec. 226.6 before the first transaction is made
under the plan.
[rtrif](ii) Charges imposed as part of an open-end (not home-
secured) plan. Charges that are imposed as part of an open-end (not
home-secured) plan and are not required to be disclosed under Sec.
226.6(b)(4) may be provided at any relevant time before the consumer
agrees to pay or becomes obligated to pay for the charge. This
provision does not apply to charges imposed as part of a home equity
plan subject to the requirements of Sec. 226.5b.
(iii) Telephone purchases. Disclosures required by Sec. 226.6 may
be provided as soon as reasonably practicable after the first
transaction if:
(A) The first transaction occurs when a consumer contacts a
merchant by telephone to purchase goods and at the same time the
consumer accepts an offer to finance the purchase by establishing an
open-end plan with the merchant,
(B) The merchant permits consumers to return any goods financed
under the plan and provides consumers with a sufficient time to reject
the plan and return the goods free of cost after receiving the written
disclosures required by Sec. 226.6, and
(C) The consumer's right to reject the plan and return the goods is
disclosed to the consumer as a part of the offer to finance the
purchase.
(iv) Membership fees. A creditor may collect, or obtain the
consumer's agreement to pay, a membership fee before providing account-
opening disclosures if the consumer may reject the plan after receiving
the disclosures. If the consumer rejects the plan, the creditor must
promptly refund the membership fee if it has been paid, or take other
action necessary to ensure the consumer is not obligated to pay the
fee.
(v) Application fees. A creditor may collect an application fee
excludable from the finance charge under Sec. 226.4(c)(1) before
providing account-opening disclosures.[ltrif]
(2) Periodic statements.
(i) The creditor shall mail or deliver a periodic statement as
required by Sec. 226.7 for each billing cycle at the end of which an
account has a debit or credit balance of more than $1 or on which a
finance charge has been imposed. A periodic statement need not be sent
for an account if the creditor deems it uncollectible, or if
delinquency
[[Page 33045]]
collection proceedings have been instituted, or if furnishing the
statement would violate federal law.
(ii) The creditor shall mail or deliver the periodic statement at
least 14 days prior to any date or the end of any time period required
to be disclosed under [rtrif]Sec. 226.7(a)(8) or Sec. 226.7(b)(8), as
applicable,[ltrif] [Sec. 226.7(j) in order] for the consumer to avoid
an additional finance or other charge.\10\ A creditor that fails to
meet this requirement shall not collect any finance or other charge
imposed as a result of such failure.
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\10\ [rtrif][Reserved][ltrif] [This timing requirement does not
apply if the creditor is unable to meet the requirement because of
an act of God, war, civil disorder, natural disaster, or strike.]
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[rtrif](iii) The timing requirement under this paragraph (b)(2)
does not apply if the creditor is unable to meet the requirement
because of an act of God, war, civil disorder, natural disaster, or
strike.[ltrif]
(3) Credit and charge card application and solicitation
disclosures. The card issuer shall furnish the disclosures for credit
and charge card applications and solicitations in accordance with the
timing requirements of Sec. 226.5a.
(4) Home equity plans. Disclosures for home equity plans shall be
made in accordance with the timing requirements of Sec. 226.5b(b).
(c) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, it shall make the disclosure based on the best information
reasonably available and shall state clearly that the disclosure is an
estimate.
(d) Multiple creditors; multiple consumers. If the credit plan
involves more than one creditor, only one set of disclosures shall be
given, and the creditors shall agree among themselves which creditor
must comply with the requirements that this regulation imposes on any
or all of them. If there is more than one consumer, the disclosures may
be made to any consumer who is primarily liable on the account. If the
right of rescission under Sec. 226.15 is applicable, however, the
disclosures required by Sec. 226.6 and Sec. 226.15(b) shall be made
to each consumer having the right to rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor mails or delivers
the disclosures, the resulting inaccuracy is not a violation of this
regulation, although new disclosures may be required under Sec.
226.9(c).
7. Section 226.5a is amended by revising paragraphs (a), (b), (c),
(d), (e), (f), and republishing paragraph (g) to read as follows:
Sec. 226.5a Credit and charge card applications and solicitations.
(a) General rules. The card issuer shall provide the disclosures
required under this section on or with a solicitation or an application
to open a credit or charge card account.
(1) Definition of solicitation. For purposes of this section, the
term solicitation means an offer by the card issuer to open a credit or
charge card account that does not require the consumer to complete an
application. [rtrif]A ``firm offer of credit'' as defined in section
603(l) of the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) for a
credit or charge card is a solicitation for purposes of this
section.[ltrif]
(2) Form of disclosures [rtrif]; tabular format.[ltrif]
(i) The disclosures in paragraphs (b)(1) through [rtrif](5) and
(b)(7) through (17)[ltrif] [(7)] of this section [rtrif]made pursuant
to paragraph (c), (d)(2), (e)(1) or (f) of this section
generally[ltrif] shall be [provided in a prominent location on or with
an application or a solicitation, or other applicable document , and]
in the form of a table with headings, content, and format substantially
similar to any of the applicable tables found in [rtrif]G-10 in[ltrif]
appendix G.
[rtrif](ii) The table described in paragraph (a)(2)(i) of this
section shall contain only the information required or permitted by
this section. Other information may be presented on or with an
application or solicitation, provided such information appears outside
the required table.
(iii) Disclosures required by paragraph (b)(6) of this section must
be placed directly beneath the table.
(iv) When a tabular format is required, any APR required to be
disclosed pursuant to paragraph (b)(1) of this section, any discounted
initial rate permitted to be disclosed pursuant to paragraph (b)(1)(ii)
of this section, and any fee or percentage amounts required to be
disclosed pursuant to paragraphs (b)(2), (4), (8) through (12) or (14)
of this section must be disclosed in bold text, except for any maximum
limits on fee amounts disclosed in the table. Other APRs or fee amounts
disclosed in the table shall not be in bold text.
(v) For an application or a solicitation that is accessed by the
consumer in electronic form, the disclosures required under this
section must be provided to the consumer in electronic form on or with
the application or solicitation.
(vi)(A) Except as provided in paragraph (a)(2)(vi)(B) of this
section, the table described in paragraph (a)(2)(i) of this section
must be provided in a prominent location on or with an application or a
solicitation.
(B) If the table described in paragraph (a)(2)(i) of this section
is provided electronically, it must be provided in close proximity to
the application or solicitation.[ltrif]
[(ii) The disclosures in paragraphs (b)(8) through (11) of this
section shall be provided either in the table containing the
disclosures in paragraphs (b)(1) through (7), or clearly and
conspicuously elsewhere on or with the application or solicitation.
(iii) The disclosure required under paragraph (b)(5) of this
section shall contain the term grace period.
(iv) The terminology in the disclosures under paragraph (b) of this
section shall be consistent with that to be used in the disclosures
under Sec. Sec. 226.6 and 226.7.
(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.]
[rtrif](3)[ltrif] [(4)] Fees based on a percentage. If the amount
of any fee required to be disclosed under this section is determined on
the basis of a percentage of another amount, the percentage used and
the identification of the amount against which the percentage is
applied may be disclosed instead of the amount of the fee.
[rtrif](4)[ltrif] [(5)] Certain fees that vary by state. If the
amount of any fee referred to in paragraphs (b)(8) through [rtrif] (12)
[ltrif] [(11)] of this section varies from state to state, the card
issuer may disclose the range of the fees instead of the amount for
each state, if the disclosure includes a statement that the amount of
the fee varies from state to state.
[rtrif](5) Exceptions. This section does not apply to:
(i) Home equity plans accessible by a credit or charge card that
are subject to the requirements of Sec. 226.5b;
(ii) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(iii) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines;
(iv) Lines of credit accessed solely by account numbers;
[[Page 33046]]
(v) Additions of a credit or charge card to an existing open-end
plan;
(vi) General purpose applications unless the application, or
material accompanying it, indicates that it can be used to open a
credit or charge card account; or
(vii) Consumer-initiated requests for applications.[ltrif]
(b) Required disclosures. The card issuer shall disclose the items
in this paragraph on or with an application or a solicitation in
accordance with the requirements of paragraphs (c), (d), [or (e)]
[rtrif](e)(1) or (f)[ltrif] of this section. A credit card issuer shall
disclose all applicable items in this paragraph except for paragraph
(b)(7) of this section. A charge card issuer shall disclose the
applicable items in paragraphs (b)(2), (4), (7) through [rtrif](12),
and (16)[ltrif] [(11)] of this section.
(1) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 226.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least [18-point] [rtrif]16-point[ltrif] type, except for the following:
[rtrif]oral disclosures of the annual percentage rate for
purchases,[ltrif] a temporary initial rate that is lower than the rate
that will apply after the temporary rate expires, and a penalty rate
that [rtrif]may[ltrif] [will] apply upon the occurrence of one or more
specific events.
(i) [rtrif]Variable rate information. If a rate disclosed under
paragraph (b)(1) of this section is a variable rate,[ltrif] [If the
account has a variable rate,] the card issuer shall also disclose the
fact that the rate may vary and how the rate is determined. [rtrif]In
describing how the applicable rate will be determined, the card issuer
must identify the type of index or formula that is used in setting the
rate. The value of the index and the amount of the margin that are used
to calculate the variable rate shall not be disclosed in the
table.[ltrif]
[rtrif](ii) Discounted initial rate. If the initial rate is
temporary and is lower than the rate that will apply after the
temporary rate expires, pursuant to paragraph (b)(1) of this section
the card issuer must disclose the rate that would otherwise apply to
the account. Where the rate is not tied to an index or formula, 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 applicable index or formula in
accordance with the accuracy requirements set forth in paragraphs (c),
(d), or (e) of this section, as applicable. The issuer may disclose in
the table the discounted initial rate along with the rate that would
otherwise apply to the account if the card issuer also discloses the
time period during which the discounted initial rate will remain in
effect, and uses the term ``introductory'' or ``intro'' in immediate
proximity to the listing of the discounted initial rate.
(iii) Premium initial rate. If the initial rate is temporary and is
higher than the rate that will apply after the temporary rate expires,
pursuant to paragraph (b)(1) of this section the card issuer must
disclose the premium initial rate. The issuer may disclose in the table
the rate that will apply after the premium initial rate expires if the
issuer also discloses the time period during which the premium initial
rate will remain in effect. The premium initial rate must be in at
least 16-point type unless the issuer also discloses in the table the
rate that will apply after the premium initial rate expires. In that
case, the rate that will apply after the premium initial rate expires
must be in at least 16-point type.
(iv) Penalty rates. If a rate may increase as a penalty for one or
more events specified in the account agreement, such as a late payment
or an extension of credit that exceeds the credit limit, pursuant to
paragraph (b)(1) of this section the card issuer must disclose the
increased rate that would apply, a description of the types of balances
to which the increased rate will apply, a brief description of the
event or events that may result in the increased rate, and a brief
description of how long the increased rate will remain in effect.
Issuers must briefly disclose the circumstances under which any
discounted initial rate may be revoked, and the rate that will apply
after the revocation. The issuer need not disclose an increased rate
that would be imposed if credit privileges are permanently terminated.
(v) Rates depend on consumer's creditworthiness. If a rate cannot
be determined at the time disclosures are given because the rate
depends on a later determination of the consumer's creditworthiness,
the card issuer must disclose the specific rates or the range of rates
that could apply and a statement that the rate for which the consumer
may qualify at account opening will depend on the consumer's
creditworthiness.
(vi) Transaction with both rate and fee. If both a rate and a fee
would apply to a balance transfer or cash advance transaction, the card
issuer must disclose that a fee also applies when disclosing the rate,
and provide a cross-reference to the fee.[ltrif]
[(ii) When variable rate disclosures are provided under paragraph
(c) of this section, an annual percentage rate disclosure is accurate
if the rate was in effect within 60 days before mailing the
disclosures. When variable rate disclosures are provided under
paragraph (e) of this section, an annual percentage rate disclosure is
accurate if the rate was in effect within 30 days before printing the
disclosures. Disclosures provided by electronic communication are
subject to paragraph (b)(1)(iii) of this section.
(iii) When variable rate disclosures are provided by electronic
communication, an annual percentage rate disclosure is accurate if the
rate was in effect within 30 days before mailing the disclosures to a
consumer's e-mail address. If disclosures are made available at another
location such as the card issuer s Internet Web site, the annual
percentage rate must be one in effect within the last 30 days.]
(2) Fees for issuance or availability. [rtrif](i)[ltrif] Any annual
or other periodic fee [expressed as an annualized amount, or any other
fee] that may be imposed for the issuance or availability of a credit
or charge card, including any fee based on account activity or
inactivity[.] [rtrif]; how frequently it will be imposed; and the
annualized amount of the fee.
(ii) Any non-periodic fee that relates to opening an account. A
card issuer must disclose that the fee is a one-time fee.[ltrif]
(3) Minimum finance charge. Any minimum or fixed finance charge
that could be imposed during a billing cycle [rtrif]and a brief
description of the charge[ltrif].
(4) Transaction charges. [rtrif](i) Except as provided in paragraph
(b)(4)(ii) of this section, any[ltrif] [Any] transaction charge imposed
[rtrif]by the card issuer[ltrif] for the use of the card for purchases.
[rtrif](ii) A card issuer shall not disclose in the table required
by paragraph (a)(2)(i) of this section a fee imposed by the issuer for
transactions in a foreign currency or that take place in a foreign
country.[ltrif]
(5) Grace period. The date by which or the period within which any
credit extended for purchases may be repaid without incurring a finance
charge [rtrif]due to a periodic interest rate and any conditions on the
availability of the grace period.[ltrif] If no grace period is
provided, that fact must be disclosed. If the length of the grace
period varies, the card issuer may disclose the range of
[[Page 33047]]
days, the minimum number of days, or the average number of days in the
grace period, if the disclosure is identified as a range, minimum, or
average.
(6) Balance computation method. The name of the balance computation
method listed in paragraph (g) of this section that is used to
determine the balance for purchases on which the finance charge is
computed, or an explanation of the method used if it is not listed.
[rtrif]A card issuer must provide this information directly below the
table, if a tabular format is required.[ltrif] [The explanation of the
method may appear outside the table if the table contains a reference
to the explanation.] In determining which balance computation method to
disclose, the card issuer shall assume that credit extended for
purchases will not be repaid within the grace period, if any.
(7) Statement on charge card payments. A statement that charges
incurred by use of the charge card are due when the periodic statement
is received.
(8) Cash advance fee. Any fee imposed for an extension of credit in
the form of cash or its equivalent.
(9) Late payment fee. Any fee imposed for a late payment.
(10) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(11) Balance transfer fee. Any fee imposed to transfer an
outstanding balance.
[rtrif](12) Returned payment fee. Any fee imposed by the card
issuer for a returned payment.
(13) Cross-reference to penalty rate. If a card issuer may impose a
penalty rate as described in paragraph (b)(1)(iv) of this section for
any of the circumstances for which a fee must be disclosed in paragraph
(b)(9), (b)(10) or (b)(12), the card issuer must disclose the fact that
the penalty rate also may apply, and a cross-reference to the penalty
rate.
(14) Required insurance, debt cancellation or debt suspension
coverage.
(i) A fee for insurance described in Sec. 226.4(b)(7) or debt
cancellation or suspension coverage described in Sec. 226.4(b)(10), if
the insurance or debt cancellation or suspension coverage is required
as part of the plan; and
(ii) A cross-reference to any additional information provided about
the insurance or coverage accompanying the application or solicitation.
(15) Payment allocation. If a card issuer offers a discounted
initial rate on a balance transfer or cash advance that is lower than
the rate on purchases, the issuer offers a grace period on purchases,
and the issuer may allocate a payment to the lower rate balance first,
then the issuer must state the following: the initial discounted rate
applies to balances transfers or cash advances (as applicable) and not
to purchases; payments will be allocated to the balance transfer or
cash advance balance (as applicable) before being allocated to any
purchase balance during the time the discounted initial rate is in
effect; and the consumer will be charged interest on all purchases
until the entire account balance is paid off, including the transferred
balance or cash advance balance (as applicable). This paragraph (b)(15)
applies only if the initial discounted rate applies to balance
transfers or cash advances that consumers can request as part of
accepting the offer.
(16) Available credit. If a card issuer requires fees for the
issuance or availability of credit described in paragraph (b)(2) of
this section, or requires a security deposit for such credit, and the
total amount of those required fees and/or security deposit that will
be imposed when the account is opened and charged to the account equal
25 percent or more of the minimum credit limit offered with the card, a
card issuer must disclose the available credit remaining after these
fees or security deposit are debited to the account, assuming that the
consumer receives the minimum credit limit. In determining whether the
25 percent threshold test is met, the issuer must only consider fees
for issuance or availability of credit, or a security deposit, that are
required. If fees for issuance or availability are optional, these fees
should not be considered in determining whether the disclosure must be
given. Nonetheless, if the 25 percent threshold test is met, the issuer
in providing the disclosure must disclose the amount of available
credit excluding those optional fees, and the available credit
including those optional fees.
(17) Reference to Web site for additional information. A reference
to the Web site established by the Board and a statement that consumers
may obtain on the Web site information about shopping for and using
credit cards.[ltrif]
(c) Direct-mail and electronic applications and solicitations.
[rtrif](1) General.[ltrif] The card issuer shall disclose the
applicable items in paragraph (b) of this section on or with an
application or solicitation that is mailed to consumers [or provided by
electronic communication] [rtrif]or provided to consumers in electronic
form[ltrif].
[rtrif](2) Accuracy. (i) Disclosures in direct mail applications
and solicitations must be accurate as of the time the disclosures are
mailed. An accurate variable annual percentage rate is one in effect
within 60 days before mailing.
(ii) Disclosures provided in electronic form must be accurate as of
the time they are sent, in the case of disclosures sent to a consumer's
e-mail address, or as of the time they are viewed by the public, in the
case of disclosures made available at a location such as a card
issuer's Internet Web site. An accurate variable annual percentage rate
provided in electronic form is one in effect within 30 days before it
is sent to a consumer's e-mail address, or viewed by the public, as
applicable.[ltrif]
(d) Telephone applications and solicitations--(1) Oral disclosure.
The card issuer shall disclose orally the information in paragraphs
(b)(1) through (7) of this section, to the extent applicable, in a
telephone application or solicitation initiated by the card issuer.
(2) Alternative disclosure. The oral disclosure under paragraph
(d)(1) of this section need not be given if the card issuer either does
not impose a fee described in paragraph (b)(2) of this section or does
not impose such a fee unless the consumer uses the card, and the card
issuer discloses in writing within 30 days after the consumer requests
the card (but in no event later than the delivery of the card) the
following:
(i) The applicable information in paragraph (b) of this section;
and
(ii) The fact that the consumer need not accept the card or pay any
fee disclosed unless the consumer uses the card.
[rtrif](3) Accuracy. (i) The oral disclosures under paragraph
(d)(1) of this section must be accurate as of the time they are given.
(ii) The alternative disclosures under paragraph (d)(2) of this
section generally must be accurate as of the time they are mailed or
delivered. A variable annual percentage rate is one that is accurate if
it was:
(A) In effect at the time the disclosures are mailed or delivered;
or
(B) In effect as of a specified date (which rate is then updated
from time to time, but no less frequently than each calendar
month).[ltrif]
(e) Applications and solicitations made available to general
public. The card issuer shall provide disclosures, to the extent
applicable, on or with an application or solicitation that is made
available to the general public, including one contained in a catalog,
magazine, or other generally available publication. The disclosures
shall be provided in accordance with paragraph
[[Page 33048]]
(e)(1)[,] [rtrif]or (e)[ltrif] (2) [or (3)] of this section.
(1) Disclosure of required credit information. The card issuer may
disclose in a prominent location on the application or solicitation the
following:
(i) The applicable information in paragraph (b) of this section;
(ii) The date the required information was printed, including a
statement that the required information was accurate as of that date
and is subject to change after that date; and
(iii) A statement that the consumer should contact the card issuer
for any change in the required information since it was printed, and a
toll-free telephone number or a mailing address for that purpose.
[(2) Inclusion of certain initial disclosures. The card issuer may
disclose on or with the application or solicitation the following:
(i) The disclosures required under Sec. 226.6 (a) through (c); and
(ii) A statement that the consumer should contact the card issuer
for any change in the required information, and a toll-free telephone
number or a mailing address for that purpose.]
[(3)] [rtrif](2)[ltrif] No disclosure of credit information. If
none of the items in paragraph (b) of this section is provided on or
with the application or solicitation, the card issuer may state in a
prominent location on the application or solicitation the following:
(i) There are costs associated with the use of the card; and
(ii) The consumer may contact the card issuer to request specific
information about the costs, along with a toll-free telephone number
and a mailing address for that purpose.
[(4)] [rtrif](3)[ltrif] Prompt response to requests for
information. Upon receiving a request for any of the information
referred to in this paragraph, the card issuer shall promptly and fully
disclose the information requested.
[rtrif](4) Accuracy. The disclosures given pursuant to paragraph
(e)(1) of this section must be accurate as of the date of printing. A
variable annual percentage rate is accurate if it was in effect within
30 days before printing.[ltrif]
[rtrif](f) In-person applications and solicitations--General. A
card issuer shall disclose the information in paragraph (b) of this
section, to the extent applicable, on or with an application or
solicitation that is initiated by the card issuer and given to the
consumer in person. A card issuer complies with the requirements of
this paragraph if the issuer provides disclosures in accordance with
paragraph (c)(1) or (e)(1) of this section.[ltrif]
[(f) Special charge card rule--card issuer and person extending
credit not the same person. If a cardholder may by use of a charge card
access an open-end credit plan that is not maintained by the charge
card issuer, the card issuer need not provide the disclosures in
paragraphs (c), (d) or (e) of this section for the open-end credit plan
if the card issuer states on or with an application or a solicitation
the following:
(1) The card issuer will make an independent decision whether to
issue the card;
(2) The charge card may arrive before the decision is made about
extending credit under the open-end credit plan; and
(3) Approval for the charge card does not constitute approval for
the open-end credit plan.]
(g) Balance computation methods defined. The following methods may
be described by name. Methods that differ due to variations such as the
allocation of payments, whether the finance charge begins to accrue on
the transaction date or the date of posting the transaction, the
existence or length of a grace period, and whether the balance is
adjusted by charges such as late-payment fees, annual fees and unpaid
finance charges do not constitute separate balance computation methods.
(1)(i) Average daily balance (including new purchases). This
balance is figured by adding the outstanding balance (including new
purchases and deducting payments and credits) for each day in the
billing cycle, and then dividing by the number of days in the billing
cycle.
(ii) Average daily balance (excluding new purchases). This balance
is figured by adding the outstanding balance (excluding new purchases
and deducting payments and credits) for each day in the billing cycle,
and then dividing by the number of days in the billing cycle.
(2)(i) Two-cycle average daily balance (including new purchases).
This balance is the sum of the average daily balances for two billing
cycles. The first balance is for the current billing cycle, and is
figured by adding the outstanding balance (including new purchases and
deducting payments and credits) for each day in the billing cycle, and
then dividing by the number of days in the billing cycle. The second
balance is for the preceding billing cycle.
(ii) Two-cycle average daily balance (excluding new purchases).
This balance is the sum of the average daily balances for two billing
cycles. The first balance is for the current billing cycle, and is
figured by adding the outstanding balance (excluding new purchases and
deducting payments and credits) for each day in the billing cycle, and
then dividing by the number of days in the billing cycle. The second
balance is for the preceding billing cycle.
(3) Adjusted balance. This balance is figured by deducting payments
and credits made during the billing cycle from the outstanding balance
at the beginning of the billing cycle.
(4) Previous balance. This balance is the outstanding balance at
the beginning of the billing cycle.
8. Section 226.6 is amended by revising the heading, revising the
introductory paragraph, revising paragraphs (a), (b), and (c), removing
paragraphs (d) and (e), and removing and reserving footnotes 11 through
13 to read as follows:
Sec. 226.6 [rtrif]Account-opening disclosures[ltrif] [Initial
disclosure statement].
[rtrif]Creditors shall disclose the items in this section, to the
extent applicable.[ltrif] [The creditor shall disclose to the consumer,
in terminology consistent with that to be used on the periodic
statement, each of the following items, to the extent applicable:]
(a) [rtrif]Rules affecting home equity plans. The requirements of
paragraph (a) of this section apply only to home equity plans subject
to the requirements of Sec. 226.5b.
(1) [ltrif]Finance charge. The circumstances under which a finance
charge will be imposed and an explanation of how it will be determined,
as follows.
[rtrif](i)[ltrif] [(1)] A statement of when finance charges begin
to accrue, including an explanation of whether or not any time period
exists within which any credit extended may be repaid without incurring
a finance charge. If such a time period is provided, a creditor may, at
its option and without disclosure, impose no finance charge when
payment is received after the time period's expiration.
[rtrif](ii)[ltrif] [(2)] A disclosure of each periodic rate that
may be used to compute the finance charge, the range of balances to
which it is applicable,\11\ and the corresponding annual percentage
rate.\12\ [rtrif]If a creditor offers a variable-rate plan, the
creditor shall also disclose: The circumstances under which the rate(s)
may increase; any limitations on the increase; and the
[[Page 33049]]
effect(s) of an increase.[ltrif] When different periodic rates apply to
different types of transactions, the types of transactions to which the
periodic rates shall apply shall also be disclosed. [rtrif]A creditor
is not required to adjust the range of balances disclosure to reflect
the balance below which only a minimum charge applies.[ltrif]
---------------------------------------------------------------------------
\11\ [rtrif][Reserved][ltrif] [A creditor is not required to
adjust the range of balances disclosure to reflect the balance below
which only a minimum charge applies.]
\12\ [rtrif][Reserved][ltrif] [If a creditor is offering a
variable-rate plan, the creditor shall also disclose, (1) the
circumstances under which the rate(s) may increase; (2) any
limitations on the increase; and (3) the effect(s) of an increase.]
---------------------------------------------------------------------------
[rtrif](iii)[ltrif] [(3)] An explanation of the method used to
determine the balance on which the finance charge may be computed.
[rtrif] (iv) [ltrif][(4)] An explanation of how the amount of any
finance charge will be determined,\13\ including a description of how
any finance charge other than the periodic rate will be determined.
---------------------------------------------------------------------------
\13\ [rtrif][Reserved][ltrif] [If no finance charge is imposed
when the outstanding balance is less than a certain amount, no
disclosure is required of that fact or of the balance below which no
finance charge will be imposed.]
---------------------------------------------------------------------------
[rtrif](2)[ltrif] [(b)] Other charges. The amount of any charge
other than a finance charge that may be imposed as part of the plan, or
an explanation of how the charge will be determined.
[rtrif](3) Home equity plan information. The following disclosures
described in Sec. 226.5b(d), as applicable:
(i) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 226.5b(d)(4)(i), such as
terminating the plan or changing the terms.
(ii) The payment information described in Sec. 226.5b(d)(5)(i) and
(ii) for both the draw period and any repayment period.
(iii) A statement that negative amortization may occur as described
in Sec. 226.5b(d)(9).
(iv) A statement of any transaction requirements as described in
Sec. 226.5b(d)(10).
(v) A statement regarding the tax implications as described in
Sec. 226.5b(d)(11).
(vi) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in
Sec. Sec. 226.5b(d)(6) and 226.5b(d)(12)(ii).
(vii) The variable-rate disclosures described in Sec.
226.5b(d)(12)(viii), (x), (xi), and (xii), as well as the disclosure
described in Sec. 226.5b(d)(5)(iii), unless the disclosures provided
with the application were in a form the consumer could keep and
included a representative payment example for the category of payment
option chosen by the consumer.[ltrif]
[rtrif](b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply to plans other than
home equity plans subject to the requirements of Sec. 226.5b.[ltrif]
[rtrif](1) Charges imposed as part of open-end (not home-secured)
plans. The circumstances under which a charge may be imposed as part of
the plan, including the amount of the charge or an explanation of how
the charge is determined. For finance charges, a statement of when the
charge begins to accrue and an explanation of whether or not any time
period exists within which any credit that has been extended may be
repaid without incurring the charge. If such a time period is provided,
a creditor may, at its option and without disclosure, elect not to
impose a finance charge when payment is received after the time period
expires.
(i) Charges imposed as part of the plan are:
(A) Finance charges identified under Sec. 226.4(a) and Sec.
226.4(b).
(B) Charges resulting from the consumer's failure to use the plan
as agreed, except amounts payable for collection activity after
default, attorney's fees whether or not automatically imposed, and
post-judgment interest rates permitted by law.
(C) Taxes imposed on the credit transaction by a state or other
governmental body, such as documentary stamp taxes on cash advances.
(D) Charges for which the payment, or nonpayment, affect the
consumer's access to the plan, the duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment.
(E) Charges imposed for terminating a plan.
(F) Charges for voluntary credit insurance, debt cancellation or
debt suspension.
(ii) Charges that are not imposed as part of the plan include:
(A) Charges imposed on a cardholder by an institution other than a
creditor for the use of the other institution's ATM in a shared or
interchange system.
(B) A charge for a package of services that includes an open-end
credit feature, if the fee is required whether or not the open-end
credit feature is included and the non-credit services are not merely
incidental to the credit feature.
(C) Charges under Sec. 226.4(e) disclosed as specified.[ltrif]
[rtrif](2) Rules relating to rates for open-end (not home-secured)
plans. If a finance charge disclosed under paragraph (b)(1) of this
section is computed by using a periodic rate:
(i) For each periodic rate that may be used to calculate interest:
(A) The rate, expressed as a periodic rate and a corresponding
annual percentage rate.
(B) The range of balances to which the rate is applicable; however,
a creditor is not required to adjust the range of balances disclosure
to reflect the balance below which only a minimum charge applies.
(C) The type of transaction to which the rate applies, if different
rates apply to different types of transactions.
(D) An explanation of the method used to determine the balance to
which the rate is applied.
(ii) For interest rate changes that are specifically set forth in
the account agreement and are tied to increases in an index or formula
(variable-rate accounts):
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) A rate is accurate if it is a rate as of a specified date
within the last 30 days before the disclosures are provided.
(iii) For interest rate changes that are specifically set forth in
the account agreement and not tied to increases in an index or formula:
(A) The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate) required under paragraph
(b)(2)(i) of this section.
(B) How long the initial rate will remain in effect or the specific
events that cause the initial rate to change.
(C) The rate (expressed as a periodic rate and a corresponding
annual percentage rate) that will apply when the initial rate is no
longer in effect and any limitation on the time period the new rate
will remain in effect.
(D) Whether the new rate will apply to balances outstanding at the
time of the change.[ltrif]
[rtrif](3) Voluntary credit insurance, debt cancellation or debt
suspension. See Sec. Sec. 226.4(d)(1)(i) and (ii) and (d)(3)(i)
through (iii) for disclosures required if optional credit insurance or
debt cancellation or debt suspension coverage identified in Sec.
226.4(b)(7) or Sec. 226.4(b)(10) is offered before the consumer opens
the plan.[ltrif]
[rtrif](4) Tabular format requirements for open-end (not home-
secured) plans.
(i) Tabular format. The disclosures in paragraph (b)(4)(ii) through
(b)(4)(viii) of this section shall be in the form of a
[[Page 33050]]
table with the headings, content, and format substantially similar to
any of the applicable tables found in G-17 in appendix G.
(A) The table described in paragraph (b)(4)(i) of this section
shall contain only the information required or permitted by this
section. Other information may be presented with the account agreement
or account-opening disclosure statement, provided such information
appears outside the required table.
(B) Disclosures required by paragraphs (b)(4)(ix) and b(4)(x) of
this section must be placed directly below the table.
(C) When a tabular format is required, any annual percentage rate
required to be disclosed pursuant to paragraph (b)(4)(ii) of this
section and any fee amounts required to be disclosed pursuant to
paragraph (b)(4)(iii) must be disclosed in bold text, except for any
maximum limits on fee amounts disclosed in the table. Other annual
percentage rates or fee amounts disclosed in the table shall not be in
bold text.
(ii) Annual percentage rate. Each periodic rate that may be used to
compute the finance charge on an outstanding balance for purchases, a
cash advance, or a balance transfer, expressed as an annual percentage
rate (as determined by Sec. 226.14(b)). When more than one rate
applies for a category of transactions, the range of balances to which
each rate is applicable shall also be disclosed. The annual percentage
rate for purchases disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: a temporary initial rate
that is lower than the rate that will apply after the temporary rate
expires, and a penalty rate that may apply upon the occurrence of one
or more specific events.
(A) Variable-rate information. If a rate disclosed under paragraph
(b)(4)(ii) of this section is a variable rate, the creditor shall also
disclose the fact that the rate may vary and how the rate is
determined. In describing how the applicable rate will be determined,
the creditor must identify the type of index or formula that is used in
setting the rate. The value of the index and the amount of the margin
that are used to calculate the variable rate shall not be disclosed in
the table.
(B) Temporary initial rates. If an initial rate is temporary, the
initial rate, the circumstances under which that rate expires, and the
rate that will apply after the temporary rate will expire shall be
disclosed.
(C) Increased penalty rates. If a rate may increase upon the
occurrence of one or more events specified in the account agreement,
such as a late payment or an extension of credit that exceeds the
credit limit, the creditor must disclose pursuant to paragraph
(b)(4)(ii) of this section the increased penalty rate that may apply, a
description of the types of balances to which the increased rate will
apply, a brief description of the event or events that may result in
the increased rate, and a brief description of how long the increased
rate will remain in effect. If a temporary initial rate is lower than
the rate that will apply after the temporary rate expires, creditors
must briefly disclose the circumstances under which any initial
discounted rates may be revoked, and the rate that will apply after the
initial discounted rate is revoked. The creditor need not disclose an
increased rate that would be imposed if credit privileges are
permanently terminated.
(D) Rate and fee both apply to the same transaction. If a rate and
fee both apply to a balance transfer or cash advance transaction, the
creditor must disclose that a fee also applies when disclosing the
rate, and provide a cross reference to the fee.
(iii) Fees.
(A) Fees for issuance or availability of credit. Any annual or
other periodic fee that may be imposed for the issuance or availability
of an open-end plan, including any fee based on account activity or
inactivity; and any non-periodic fee that relates to opening the plan.
A creditor must disclose the amount of the periodic fee, how frequently
it will be imposed, and the annualized amount of the fee. A creditor
disclosing a non-periodic fee must disclose that the fee is a one-time
fee.
(B) Transaction charges. Any transaction charge imposed on
purchases, for cash advances or to transfer balances, including fees
imposed by the creditor for using automated teller machines or for
transactions in a foreign currency or that take place in a foreign
country.
(C) Penalty fees. Any fee imposed for a late payment, exceeding a
credit limit, or for a returned payment. If a creditor may impose a
penalty rate as described in paragraph (b)(4)(ii) of this section for
any of the circumstances where a fee must be disclosed in this
paragraph, the creditor must also disclose that the penalty rate also
may apply and a cross reference to the fee.
(D) Minimum finance charge. Any minimum or fixed finance charge
that could be imposed during a billing cycle and a brief description of
the charge.
(iv) Grace period. An explanation of whether or not any time period
exists within which any credit that has been extended may be repaid
without incurring a finance charge.
(v) Required insurance, debt cancellation or debt suspension
coverage. A fee for insurance described in Sec. 226.4(b)(7) or debt
cancellation or suspension coverage described in Sec. 226.4(b)(10), if
the insurance, or debt cancellation or suspension coverage is required
as part of the plan; and a cross-reference to any additional
information provided about the insurance or coverage, as applicable.
(vi) Payment allocation. If a creditor offers an initial discounted
rate on a balance transfer or cash advance that is lower than the rate
on purchases where the creditor offers a grace period on purchases, and
the creditor allocates payments to the lower rate balance first, the
creditor must provide a statement that payments will be allocated to
the lower rate balance first during the time the lower rate is in
effect, and during that time the consumer will incur interest on the
higher rate balance until the lower rate balance is paid off
completely.
(vii) Available credit. If a creditor requires fees for the
issuance or availability of an open-end plan described in paragraph
(b)(4)(iii)(A) of this section, or a security deposit, and the total
amount of those required fees or security deposit that will be imposed
when the account is opened and charged to the account equal 25 percent
or more of the minimum credit limit offered with the card, a creditor
must disclose the amount of the available credit that a consumer will
have remaining after these fees or security deposit are debited to the
account, assuming that the consumer receives the minimum credit limit.
In determining whether the 25 percent threshold test is met, the
creditor must only consider fees for issuance or availability of
credit, or a security deposit, that is required. If fees for issuance
or availability are optional, these fees should not be considered in
determining whether the disclosure must be given. Nonetheless, if the
25 percent threshold test is met, the creditor in providing the
disclosure must disclose the amount of available credit excluding those
optional fees, and the available credit including those optional fees.
(viii) Web site reference. For issuers of credit cards that are not
charge cards, a reference to the Web site established by the Board and
a statement that consumers may obtain on the Web site information about
shopping for and using credit card accounts.
(ix) Balance computation method. The name of the balance
computation
[[Page 33051]]
method listed in Sec. 226.5a(g) that is used to determine the balance
for purchases on which the finance charge is computed, or an
explanation of the method used if it is not listed, along with a
statement that an explanation of the method required by paragraph
(b)(2)(i)(D) of this section is provided with the account-opening
disclosures. In determining which balance computation method to
disclose, the card issuer shall assume that credit extended for
purchases will not be repaid within any grace period.
(x) Billing error rights reference. A statement that information
about consumers' right to dispute transactions is included in the
account-opening disclosures.[ltrif]
[rtrif] (c) Rules of general applicability.
(1) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.
(2) Statement of billing rights. For plans other than home equity
plans subject to the requirements of Sec. 226.5b, a statement that
outlines the consumer's rights and the creditor's responsibilities
under Sec. Sec. 226.12(c) and 226.13 and that is substantially similar
to the statement found in Model Form G-3(A) in appendix G. Creditors
offering home equity plans subject to the requirements of Sec. 226.5b
may use Model Form G-3 or G-3A, at their option.[ltrif]
[(c) Security interests. The fact that the creditor has or will
acquire a security interest in the property purchased under the plan,
or in other property identified by item or type.]
[(d) Statement of billing rights. A statement that outlines the
consumer's rights and the creditor's responsibilities under Sec. Sec.
226.12(c) and 226.13 and that is substantially similar to the statement
found in appendix G.]
[(e) Home equity plan information. The following disclosures
described in Sec. 226.5b(d), as applicable:
(1) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 226.5b(d)(4)(i), such as
terminating the plan or changing the terms.
(2) The payment information described in Sec. 226.5b(d)(5)(i) and
(ii) for both the draw period and any repayment period.
(3) A statement that negative amortization may occur as described
in Sec. 226.5b(d)(9).
(4) A statement of any transaction requirements as described in
Sec. 226.5b(d)(10).
(5) A statement regarding the tax implications as described in
Sec. 226.5b(d)(11).
(6) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in
Sec. Sec. 226.5b(d)(6) and 226.5b (d)(12)(ii).
(7) The variable-rate disclosures described in Sec.
226.5b(d)(12)(viii), (x), (xi), and (xii), as well as the disclosure
described in Sec. 226.5b(d)(5)(iii), unless the disclosures provided
with the application were in a form the consumer could keep and
included a representative payment example for the category of payment
option chosen by the consumer.]
9. Section 226.7 is amended by republishing the introductory text,
revising paragraphs (a) and (b), removing paragraphs (c), (d), (e),
(f), (g), (h), (i), (j), and (k), and removing and reserving footnotes
14 and 15 to read as follows:
Sec. 226.7 Periodic statement.
The creditor shall furnish the consumer with a periodic statement
that discloses the following items, to the extent applicable:
[rtrif](a) Rules affecting home equity plans. The requirements of
paragraph (a) of this section apply only to home equity plans subject
to the requirements of Sec. 226.5b. Alternatively, a creditor subject
to this paragraph may, at its option, comply with any of the
requirements of paragraph (b) of this section; however, any creditor
that chooses to comply with paragraph (b)(6) of this section must also
comply with paragraph (b)(7) of this section.[ltrif]
[rtrif](1)[ltrif] [(a)] Previous balance. The account balance
outstanding at the beginning of the billing cycle.
[rtrif](2)[ltrif] [(b)] Identification of transactions. An
identification of each credit transaction in accordance with Sec.
226.8.
[rtrif](3)[ltrif] [(c)] Credits. Any credit to the account during
the billing cycle, including the amount and the date of crediting. The
date need not be provided if a delay in accounting does not result in
any finance or other charge.
[rtrif](4)[ltrif] [(d)] Periodic rates. Each periodic rate that may
be used to compute the finance charge, the range of balances to which
it is applicable,\14\ and the corresponding annual percentage rate.\15\
[rtrif]If no finance charge is imposed when the outstanding balance is
less than a certain amount, the creditor is not required to disclose
that fact, or the balance below which no finance charge will be
imposed.[ltrif] If different periodic rates apply to different types of
transactions, the types of transactions to which the periodic rates
apply shall also be disclosed. [rtrif]For variable-rate plans, the fact
that the periodic rate(s) may vary.[ltrif]
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\14\ [rtrif][Reserved][ltrif] [See footnotes 11 and 13.]
\15\ [rtrif][Reserved[ltrif].] [If a variable-rate plan is
involved, the creditor shall disclose the fact that the periodic
rate(s) may vary.]
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[rtrif](5)[ltrif] [(e)] Balance on which finance charge computed.
The amount of the balance to which a periodic rate was applied and an
explanation of how that balance was determined. When a balance is
determined without first deducting all credits and payments made during
the billing cycle, the fact and the amount of the credits and payments
shall be disclosed.
[rtrif](6)[ltrif] [(f)] Amount of finance charge [rtrif] and other
charges. Creditors may comply with paragraphs (a)(6) of this section,
or with paragraph (b)(6) of this section, at their option.
(i) Finance charges.[ltrif] The amount of any finance charge
debited or added to the account during the billing cycle, using the
term finance charge. The components of the finance charge shall be
individually itemized and identified to show the amount(s) due to the
application of any periodic rates and the amounts(s) of any other type
of finance charge. If there is more than one periodic rate, the amount
of the finance charge attributable to each rate need not be separately
itemized and identified.
[rtrif](ii) Other charges. The amounts, itemized and identified by
type, of any charges other than finance charges debited to the account
during the billing cycle.[ltrif]
[rtrif](7)[ltrif] [(g)] Annual percentage rate.
ALTERNATIVE 1--PARAGRAPH (a)(7).
(i) When a finance charge is imposed during the billing cycle, the
annual percentage rate(s) determined under Sec. 226.14 using the term
annual percentage rate.
(ii) Creditors may comply with paragraph (a)(7)(i) of this section
or with paragraph (b)(7) of this section, at their option. If a
creditor chooses to comply with paragraph (b)(7) of this section with
respect to its home equity plans, the creditor must also comply with
paragraph (b)(6) of this section.
ALTERNATIVE 2--PARAGRAPH (a)(7).
At a creditor's option, when a finance charge is imposed during the
billing cycle, the annual percentage rate(s) determined under Sec.
226.14 using the term annual percentage rate.
[rtrif](8)[ltrif] [(j)] [rtrif]Grace[ltrif] [Free-ride] period. The
date by which or the time period within the new balance or any portion
of the new balance must be paid to avoid additional finance charges. If
such a time period is provided, a creditor may, at its option and
without
[[Page 33052]]
disclosure, impose no finance charge if payment is received after the
time period s expiration.
[rtrif](9)[ltrif] [(k)] Address for notice of billing errors. The
address to be used for notice of billing errors. Alternatively, the
address may be provided on the billing rights statement permitted by
Sec. 226.9(a)(2).
[rtrif](10)[ltrif] [(i)] Closing date of billing cycle; new
balance. The closing date of the billing cycle and the account balance
outstanding on that date.
[rtrif](b) Rules affecting open-end (not home-secured) plans. The
requirements of paragraph (b) of this section apply only to plans other
than home equity plans subject to the requirements of Sec. 226.5b.
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 226.8, grouped by type of
transaction in a form substantially similar to that shown in Sample G-
18(A) in appendix G.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in crediting does not result in any finance or
other charge. Credits must be grouped together, and grouped with
transactions identified under paragraph (b)(2) of this section, in a
form substantially similar to that shown in Sample G-18(A) in appendix
G.
(4) Periodic rates. (i) Except as provided in paragraph (b)(4)(ii)
of this section, each periodic rate that may be used to compute the
interest charge expressed as an annual percentage rate and using the
term, Annual Percentage Rate, along with the range of balances to which
it is applicable. If no interest charge is imposed when the outstanding
balance is less than a certain amount, the creditor is not required to
disclose that fact, or the balance below which no interest charge will
be imposed. The types of transactions to which the periodic rates apply
shall also be disclosed. For variable-rate plans, the fact that the
annual percentage rate may vary.
(ii) Exception. An annual percentage rate that differs from the
rate that would otherwise apply and is offered only for a specific and
limited time need not be disclosed except in periods in which the
offered rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined, using the term Balance Subject to Interest
Rate. When a balance is determined without first deducting all credits
and payments made during the billing cycle, the fact and the amount of
the credits and payments shall be disclosed. As an alternative to
providing an explanation of how the balance was determined, a creditor
that uses a balance computation method identified in Sec. 226.5a(g)
may, at the creditor's option, identify the name of the balance
computation method and provide a toll-free telephone number where
consumers may obtain from the creditor more information about the
balance computation method and how resulting finance charges were
determined. If the method used is not identified in Sec. 226.5a(g),
the creditor shall provide a brief explanation of the method used.
(6) Charges imposed. (i) The amounts of any charges imposed as part
of a plan as stated in Sec. 226.6(b)(1), grouped together, in
proximity to transactions identified under paragraph (b)(2) of this
section, substantially similar to Sample G-18(A) in appendix G.
(ii) Interest. Finance charges attributable to periodic interest
rates, using the term Interest Charge, must be grouped together under
the heading Interest Charged, itemized and totaled by type of
transaction, and a total interest charge, using the term Total Interest
Charge, must be disclosed for the statement period and calendar year to
date, using a format substantially similar to Sample G-18(A) in
appendix G.
(iii) Fees. Charges imposed as part of the plan other than interest
must be grouped together under the heading Fees, identified consistent
with the feature or type, and itemized. A total of charges, using the
term Fees, must be disclosed for the statement period and calendar year
to date. Fees identified in Sec. 226.14(e) that relate to a specific
transaction must be labeled using the term Transaction fee, and fees
identified in Sec. 226.14(e) that do not relate to a specific
transaction must be labeled using the term Fixed fee, using a format
substantially similar to Sample G-18(A) in appendix G.
ALTERNATIVE 1 ONLY--PARAGRAPH (b)(6)(iv).
(iv) In addition to the disclosures of interest and fees required
under paragraphs (b)(6)(ii) and (b)(6)(iii) of this section, the
creditor must also disclose, unless paragraph (b)(7)(ii) of this
section applies, charges identified under this paragraph for the
statement period, grouped together in a tabular format with the Fee-
Inclusive APR information identified under paragraph (b)(7)(i) of this
section, in a format substantially similar to Sample G-18(A) in
appendix G.
(A) Finance charges attributable to interest, using the term
interest charges, must be totaled by type of transaction and identified
as relating to balances for that type of transaction.
(B) Charges imposed as part of the plan other than interest that
are identified in Sec. 226.14(e), using the term Transaction and Fixed
Fees, must be grouped together. For multifeatured plans, charges that
relate to a specific purchase transaction and charges that do not
relate to a specific transaction must be totaled and identified as
relating to purchase balances; charges that relate to a specific type
of transaction other than purchases must be totaled and identified as
relating to balances for that type of transaction. For single-featured
plans, charges described in paragraph (b)(7)(iv) of this section must
be grouped together and totaled.
ALTERNATIVE 1--PARAGRAPH (b)(7).
(7) Effective annual percentage rate. (i) Except as provided in
paragraph (b)(7)(ii) of this section, when a finance charge identified
in Sec. 226.14(e) is imposed during the billing cycle, the effective
annual percentage rate(s) determined for each type of transaction under
Sec. 226.14, using the term Fee-Inclusive APR and disclosed for each
type of transaction; a description of the Fee-Inclusive APR; and a
format substantially similar to Sample G-18(B) in appendix G.
(ii) When a finance charge identified in Sec. 226.14(e) is imposed
during the billing cycle and the finance charge is determined solely by
applying one or more periodic rates used to calculate interest, by
multiplying each periodic rate by the number of periods in a year,
disclosed for each type of transaction.
ALTERNATIVE 2--PARAGRAPH (b)(7).
(7) [Reserved.]
(8) Grace period. The date by which or the time period within the
new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
226.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
The new balance must be disclosed in accordance
[[Page 33053]]
with the format requirements of paragraph (b)(13) of this section.
(11) Due date; late payment costs. (i) Except as provided in
paragraph (b)(11)(ii) of this section and in accordance with the format
requirements in paragraph (b)(13) of this section:
(A) The due date for a payment, if a late payment fee or penalty
rate may be imposed.
(B) A cut-off time, if the creditor imposes a cut-off time before 5
p.m. for payment to be received. If the cut-off time differs depending
on the method of payment, the creditor must state the earliest time if
before 5 p.m. without specifying the payment method to which it
applies.
(C) The amount of the fee and any increased periodic rate(s)
(expressed as an annual percentage rate(s)) that may be imposed as a
result of a late payment. If a range of fees may be assessed, the
creditor must state the highest fee. If the rate may be increased for
more than one feature or balance, the creditor must state the highest
rate that could apply.
(ii) Exemptions. The requirements of paragraph (b)(11) of this
section do not apply to periodic statements provided for charge cards
accounts.
(12) Minimum payment. (i) General disclosure requirements. Except
as provided in paragraphs (b)(12)(ii) and (b)(12)(iii) of this section,
a card issuer shall disclose on each periodic statement, in accordance
with the format requirements of paragraph (b)(13) of this section:
(A) Minimum payment not exceeding 4%. Except as provided in
paragraph (b)(12)(i)(C) or (D) of this section, if the required minimum
periodic payment does not exceed 4% of the balance upon which finance
charges accrue, the following statement with a bolded heading: ``Notice
About Minimum Payments: If you make only the minimum payment each
period, you will pay more in interest and it will take you longer to
pay off your balance. For example, if you had a balance of $1,000 at an
interest rate of 17% and always paid only the minimum required, it
would take over 7 years to repay this balance. For an estimate of the
time it would take to repay your actual balance making only minimum
payments, call: [toll-free telephone number]'' A card issuer must
disclose a toll-free telephone number established and maintained
pursuant to paragraph (b)(12)(iv)(A)(1) of this section to provide
generic repayment estimates discussed in appendix M1. Alternatively,
for a two-year period after the date that card issuers must begin
complying with the minimum payment disclosure requirement in paragraph
(b)(12) of this section, small depository institution issuers (as
defined in paragraph (b)(12)(v) of this section) may provide the toll-
free telephone number operated by or on behalf of the Federal Reserve
Board.
(B) Minimum payment exceeding 4%. (1) Except as provided in
paragraphs (b)(12)(i)(B)(2), (b)(12)(i)(C) or (b)(12)(i)(D) of this
section, if the required minimum periodic payment exceeds 4% of the
balance upon which finance charges accrue, the following statement with
a bolded heading: ``Notice About Minimum Payments: If you make only the
minimum payment each period, you will pay more in interest and it will
take you longer to pay off your balance. For example, if you had a
balance of $300 at an interest rate of 17% and always paid only the
minimum required, it would take about 2 years to repay this balance.
For an estimate of the time it would take to repay your actual balance
making only minimum payments, call: [toll-free telephone number]'' A
card issuer must disclose a toll-free telephone number established and
maintained pursuant to paragraph (b)(12)(iv)(A)(1) of this section to
provide generic repayment estimates discussed in appendix M1.
Alternatively, for a two-year period after the date that card issuers
must begin complying with the minimum payment disclosure requirement in
paragraph (b)(12) of this section, small depository institution issuers
(as defined in paragraph (b)(12)(v) of this section) may provide the
toll-free telephone number operated by or on behalf of the Federal
Reserve Board.
(2) At a card issuer's option, an issuer subject to this paragraph
is not required to comply with this paragraph if the issuer complies
with paragraph (b)(12)(i)(A) of this section.
(C) FTC-regulated credit card issuers. Except as provided in
paragraph (b)(12)(i)(D) of this section, if the Federal Trade
Commission has authority under the Truth in Lending Act to enforce the
act and this regulation as to a card issuer, the following statement
with a bolded heading: ``Notice About Minimum Payments: If you make
only the minimum payment each period, you will pay more in interest and
it will take you longer to pay off your balance. For example, if you
had a balance of $300 at an interest rate of 17% and always paid only
the minimum required, it would take about 2 years to repay this
balance. For an estimate of the time it would take to repay your actual
balance making only minimum payments, call the Federal Trade Commission
at this toll-free telephone number:--------.'' The card issuer must
disclose the toll-free telephone number established by or on behalf of
the Federal Trade Commission pursuant to paragraph (b)(12)(iv)(B) of
this section.
(D) Alternative rate. Card issuers that provide the statements
under paragraphs (b)(12)(i)(A) through (b)(12)(i)(C) of this section
may, at their option, substitute an example that uses an annual
percentage rate that is greater than 17 percent.
(ii) Estimate of actual repayment period. A card issuer is not
required to comply with paragraphs (b)(12)(i)(A) through (b)(12)(i)(D)
of this section if the issuer, at its option:
(A) Establishes and maintains a toll-free telephone number for the
purpose of providing consumers with the actual repayment disclosure
described in appendix M2; and discloses the following statement on each
periodic statement: ``Notice About Minimum Payments: If you make only
the minimum payment each period, you will pay more in interest and it
will take you longer to pay off your balance. For more information,
call this toll-free number:--------.'' A card issuer must disclose a
toll-free telephone number established and maintained pursuant to
paragraph (b)(12)(iv)(A)(3) of this section to provide the actual
repayment disclosures described in appendix M2; or
(B) Provides on the periodic statement a disclosure of the actual
repayment information as described in appendix M2, substantially
similar to Sample G-18(D) in appendix G.
(iii) Exemptions. Paragraph (b)(12) of this section does not apply
to:
(A) Home equity plans subject to the requirements of Sec. 226.5b;
(B) Overdraft lines of credit tied to asset accounts accessed by
check-guarantee cards or by debit cards;
(C) Lines of credit accessed by check-guarantee cards or by debit
cards that can be used only at automated teller machines;
(D) Charge card accounts that require payment of outstanding
balances in full at the end of each billing cycle;
(E) Credit card accounts where a fixed repayment period for the
account is disclosed in the account agreement and the required minimum
payments will amortize the outstanding balance within the fixed
repayment period;
(F) A billing cycle where a consumer has paid the entire balance in
full for that billing cycle and the previous billing cycle, or had a
zero outstanding balance or credit balance in those two billing cycles;
and
[[Page 33054]]
(G) A billing cycle where the entire outstanding balance is subject
to a fixed repayment period specified in the account agreement and the
required minimum payments applicable to that feature will amortize the
outstanding balance within the fixed repayment period.
(iv) Toll-free telephone numbers. (A) Issuer-operated toll-free
telephone number.
(1) Subject to paragraph (b)(12)(iv)(A)(2) of this section, if a
card issuer provides the disclosures in paragraphs (b)(12)(i)(A) or
(b)(12)(i)(B) of this section, the issuer must establish and maintain a
toll-free telephone number for the purpose of providing its customers
with generic repayment estimates, as described in appendix M1.
(2) For a two-year period after the date that card issuers must
begin complying with the minimum payment disclosure requirement in
paragraph (b)(12) of this section, small depository institution issuers
(as defined in paragraph (b)(12)(v) of this section) that provide the
disclosures in paragraphs (b)(12)(i)(A) or (b)(12)(i)(B) of this
section are not required to establish and maintain a toll-free
telephone number for purposes of providing their customers with generic
repayment estimates, as described in appendix M1. Instead, small
depository institutions may disclose the toll-free telephone number
operated by or on behalf of the Federal Reserve Board.
(3) If a card issuer provides the disclosure in paragraph
(b)(12)(ii)(A) of this section, the issuer must establish and maintain
a toll-free telephone number for the purpose of providing its customers
with actual repayment disclosures, as described in appendix M2.
(B) FTC-operated toll-free telephone number. The Federal Trade
Commission is required by Section 1637(b)(11)(G) of the Truth in
Lending Act (15 U.S.C. 1637(b)(11)(G)) to establish and maintain a
toll-free telephone number for use by customers of creditors that are
subject to the Federal Trade Commission's authority to enforce the act
and this regulation.
(C) Additional information. In responding to a request for generic
repayment estimates or actual repayment disclosures, as described in
appendices M1 and M2 respectively, through a toll-free telephone
number, neither card issuers nor the FTC may provide any information
other than the repayment information required or permitted by appendix
M1 or M2, as applicable.
(v) Definitions. Small depository institution issuers are card
issuers that are depository institutions (as defined by section 3 of
the Federal Deposit Insurance Act), including Federal credit unions or
State credit unions (as defined in section 101 of the Federal Credit
Union Act), with total assets not exceeding $250 million, as of
December 31 of the year prior to the year in which institutions must
begin complying with the requirements in Sec. 226.7(b)(12).
(13) Format requirements. The due date required by paragraph
(b)(11) of this section shall be disclosed on the front of the first
page of the periodic statement. The cut-off time, the amount of the
fee, and the annual percentage rate(s) required by paragraph (b)(11) of
this section shall be stated in close proximity to the due date. The
ending balance required by paragraph (b)(10) of this section and the
minimum payment disclosure required by paragraph (b)(12) of this
section shall be disclosed closely proximate to the minimum payment
due. The due date, cut-off time, fee and annual percentage rate, ending
balance, minimum payment due, and minimum payment disclosure shall be
grouped together, substantially similar to Samples G-18(E) or G-18(F)
in appendix G.
(14) Change-in-terms and increased penalty rate summary for open-
end (not home-secured) plans. Creditors that provide a change-in-term
notice required by Sec. 226.9(c), or a rate increase notice required
by Sec. 226.9(g), on or with the periodic statement, must disclose the
information in Sec. 226.9(c)(2)(iii)(A) or Sec. 226.9(g)(3)(i) on the
periodic statement in accordance with the format requirements in Sec.
226.9(c)(2)(iii)(B), and Sec. 226.9(g)(3)(ii). This information shall
precede the transactions disclosed pursuant to paragraph (b)(2) of this
section. See Forms G-18(G) and G-18(H) in appendix G.[ltrif]
[(c) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in accounting does not result in any finance or
other charge.]
[(d) Periodic rates. Each periodic rate that may be used to compute
the finance charge, the range of balances to which it is applicable,
and the corresponding annual percentage rate. If different periodic
rates apply to different types of transactions, the types of
transactions to which the periodic rates apply shall also be
disclosed.]
[(e) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined. When a balance is determined without first
deducting all credits and payments made during the billing cycle, the
fact and the amount of the credits and payments shall be disclosed.]
[(f) Amount of finance charge. The amount of any finance charge
debited or added to the account during the billing cycle, using the
term finance charge. The components of the finance charge shall be
individually itemized and identified to show the amount(s) due to the
application of any periodic rates and the amounts(s) of any other type
of finance rate, the amount of the finance charge attributable to each
rate need not be separately itemized and identified.]
[(g) Annual percentage rate. When a finance charge is imposed
during the billing cycle, the annual percentage rate(s) determined
under Sec. 226.14, using the term annual percentage rate.]
[(h) Other charges. The amounts, itemized and identified by type,
of any charges other than finance charges debited to the account during
the billing cycle.]
[(i) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.]
[(j) Free-ride period. The date by which or the time period within
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge payment is received after time period's expiration.]
[(k) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
226.9(a)(2).]
10. Section 226.8 is amended by revising the heading, revising
paragraphs (a) and (b), adding a new paragraph (c), and removing and
reserving footnotes 16 through 20 to read as follows:
Sec. 226.8 [Identification of] [rtrif]Identifying[ltrif] transactions
[rtrif]on periodic statements.[ltrif]
The creditor shall identify credit transactions on or with the
first periodic statement that reflects the transaction by furnishing
the following information, as applicable.\16\
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\16\ [rtrif][Reserved][ltrif] [Failure to disclose the
information required by this section shall not be deemed a failure
to comply with the regulation if (1) the creditor maintains
procedures reasonably adapted to obtain and provide the information;
and (2) the creditor treats an inquiry for clarification or
documentation as a notice of a billing error, including correcting
the account in accordance with Sec. 226.13(e). This applies to
transactions that take place outside a state, as defined in Sec.
226.2(a), whether or not the creditor maintains procedures
reasonably adapted to obtain the required information].
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[[Page 33055]]
(a) Sale credit.
[rtrif](1) Except as provided in paragraph (a)(2) of this section,
for each credit transaction involving the sale of property or services,
the creditor must disclose the amount and date of the transaction, and
either:
(i) A brief identification \17\ of the property or services
purchased, for creditors and sellers that are the same or related; \18\
or
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\17\ [rtrif][Reserved][ltrif] [As an alternative to the brief
identification, the creditor may disclose a number or symbol that
also appears on the receipt or other credit document given to the
consumer, if the number or symbol reasonably identifies that
transaction with that creditor, and if the creditor treats an
inquiry for clarification or documentation as a notice of a billing
error, including correcting the account in accordance with Sec.
226.13(e).]
\18\ [rtrif][Reserved][ltrif] [An identification of property or
services may be replaced by the seller's name and location of the
transaction when: (1) The creditor and the seller are the same
person; (2) the creditor's open-end plan has fewer than 15,000
accounts; (3) the creditor provides the consumer with point-of-sale
documentation for that transaction; and (4) the creditor treats an
inquiry for clarification or documentation as a notice of a billing
error, including correcting the account in accordance with Sec.
226.13(e).]
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(ii) The seller's name; and the city, and state or foreign country
where the transaction took place.\19\ The creditor may omit the address
or provide any suitable designation that helps the consumer to identify
the transaction when the transaction took place at a location that is
not fixed; took place in the consumer's home; or was a mail, Internet,
or telephone order.
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\19\ [rtrif][Reserved][ltrif] [The creditor may omit the address
or provide any suitable designation that helps the consumer to
identify the transaction when the transaction (1) took place at a
location that is not fixed; (2) took place in the consumer's home;
or (3) was a mail or telephone order.]
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(2) Creditors need not comply with paragraph (a)(1) of this section
if an actual copy of the receipt or other credit document is provided
with the first periodic statement reflecting the transaction, and the
amount of the transaction and either the date of the transaction to the
consumer's account or the date of debiting the transaction are
disclosed on the copy or on the periodic statement.[ltrif]
[(a) Sale credit. For each credit transaction involving the sale of
property or services, the following rules shall apply:
(1) Copy of credit document provided. When an actual copy of the
receipt or other credit document is provided with the first periodic
statement reflecting the transaction, the transaction is sufficiently
identified if the amount of the transaction and either the date of the
transaction or the date of debiting the transaction to the consumer's
account are disclosed on the copy or on the periodic statement.
(2) Copy of credit document not provided--creditor and seller same
or related person(s). When the creditor and the seller are the same
person or related persons, and an actual copy of the receipt or other
credit document is not provided with the periodic statement, the
creditor shall disclose the amount and date of the transaction, and a
brief identification of the property or services purchased.
(3) Copy of credit document not provided--creditor and seller not
same or related person(s). When the creditor and seller are not the
same person or related persons, and an actual copy of the receipt or
other credit document is not provided with the periodic statement, the
creditor shall disclose the amount and date of the transaction; the
seller's name; and the city, and state or foreign country where the
transaction took place.]
(b) Nonsale credit. [A nonsale credit transaction is sufficiently
identified if the first periodic statement reflecting the transaction
discloses] [rtrif]For each credit transaction not involving the sale of
property or services, the creditor must disclose[ltrif] a brief
identification of the transaction; \20\ the amount of the transaction;
and at least one of the following dates: the date of the transaction,
the date the transaction was debited to the consumer's account, or, if
the consumer signed the credit document, the date appearing on the
document. If an actual copy of the receipt or other credit document is
provided and that copy shows the amount and at least one of the
specified dates, the brief identification may be omitted.
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\20\ [rtrif][Reserved][ltrif] [See footnote 17].
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[rtrif](c) Alternative creditor procedures; consumer inquiries for
clarification or documentation. The following procedures apply to
creditors that treat an inquiry for clarification or documentation as a
notice of a billing error, including correcting the account in
accordance with Sec. 226.13(e):
(1) Failure to disclose the information required by paragraphs (a)
and (b) of this section is not a failure to comply with the regulation,
provided that the creditor also maintains procedures reasonably
designed to obtain and provide the information. This applies to
transactions that take place outside a state, as defined in Sec.
226.2(a), whether or not the creditor maintains procedures reasonably
adapted to obtain the required information.
(2) As an alternative to the brief identification for sale or
nonsale credit, the creditor may disclose a number or symbol that also
appears on the receipt or other credit document given to the consumer,
if the number or symbol reasonably identifies that transaction with
that creditor.[ltrif]
11. Section 226.9 is amended by revising paragraphs (a), (b), (c),
and (e), republishing paragraph (d) and (f), adding a new paragraph
(g), and removing and reserving footnote 20a to read as follows:
Sec. 226.9 Subsequent disclosure requirements.
(a) Furnishing statement of billing rights--
(1) Annual statement. The creditor shall mail or deliver the
billing rights statement required by [rtrif]Sec. 226.6(c)(2)[ltrif]
[Sec. 226.6(d)] at least once per calendar year, at intervals of not
less than 6 months nor more than 18 months, either to all consumers or
to each consumer entitled to receive a periodic statement under Sec.
226.5(b)(2) for any one billing cycle.
(2) Alternative summary statement. As an alternative to paragraph
(a)(1) of this section, the creditor may mail or deliver, on or with
each periodic statement, a statement substantially similar to [that in
appendix G] [rtrif]Model Forms G-4 and G-4(A) in appendix G, as
applicable[ltrif].
(b) Disclosures for supplemental credit [rtrif]access[ltrif]
devices and additional features.
(1) If a creditor, within 30 days after mailing or delivering the
[initial] [rtrif]account-opening[ltrif] disclosures under [Sec.
226.6(a)] [rtrif]Sec. Sec. 226.6(a)(1) or 226.6(b)(1), as
applicable[ltrif], adds a credit feature to the consumer's account or
mails or delivers to the consumer a credit [rtrif]access[ltrif] device
[rtrif], including but not limited to checks that access a credit card
account,[ltrif] for which the finance charge terms are the same as
those previously disclosed, no additional disclosures are necessary.
[rtrif]Except as provided in paragraph (b)(3) of this section,
after[ltrif] [After] 30 days, if the creditor adds a credit feature or
furnishes a credit [rtrif]access[ltrif] device (other than as a
renewal, resupply, or the original issuance of a credit card) on the
same finance charge terms, the creditor shall disclose, before the
consumer uses the feature or device for the first time, that it is for
use in obtaining credit under the terms previously disclosed.
(2) [rtrif]Except as provided in paragraph (b)(3) of this section,
whenever[ltrif] [Whenever] a credit feature is added or a credit
[rtrif]access[ltrif] device is mailed or delivered, and the finance
charge terms for the feature or device differ from disclosures
previously given, the disclosures required by [Sec. 226.6(a)]
[[Page 33056]]
[rtrif]Sec. Sec. 226.6(a)(1) or 226.6(b)(1), as applicable[ltrif],
that are applicable to the added feature or device shall be given
before the consumer uses the feature or device for the first time.
[rtrif](3) Checks that access a credit card account. (i)
Disclosures. For open-end plans not subject to the requirements of
Sec. 226.5b, if checks that can be used to access a credit card
account are provided more than 30 days after account-opening
disclosures under Sec. 226.6(b)(1) are given, or are provided within
30 days of the account-opening disclosures and the finance charge terms
for the checks differ from disclosures previously given, the creditor
shall disclose on the front of the page containing the checks the
following terms in the form of a table with the headings, content, and
form substantially similar to Sample G-19 in appendix G:
(A) If an initial rate that applies to the checks is temporary and
is lower than the rate that will apply after the temporary rate
expires, the discounted initial rate and the time period during which
the discounted initial rate will remain in effect. A creditor must use
the term ``introductory'' or ``intro'' in immediate proximity to the
listing of the discounted initial rate.
(B) The type of rate that will apply to the checks (such as whether
the purchase or cash advance rate applies) and the applicable annual
percentage rate. If a discounted initial rate applies, a creditor must
disclose the type of rate that will apply after the discounted initial
rate expires, and the annual percentage rate that will apply after the
discounted initial rate expires. In a variable-rate account, a creditor
must disclose an annual percentage rate based on the applicable index
or formula in accordance with the accuracy requirements set forth in
paragraph (b)(3)(ii) of this section.
(C) Any transaction fees applicable to the checks disclosed under
Sec. 226.6(b)(1); and
(D) Whether or not a grace period is given within which any credit
extended by use of the checks may be repaid without incurring a finance
charge due to a periodic interest rate. If no grace period is given,
the issuer must state that no grace period applies and interest will be
charged immediately.
(ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this
section must be accurate as of the time the disclosures are given. A
variable annual percentage rate is accurate if it was in effect within
30 days of when the disclosures are given.[ltrif]
(c) Change in terms.--(1) [Written notice required.] [rtrif]Rules
affecting home equity plans. (i) Written notice required. For home
equity plans subject to the requirements of Sec. 226.5b,
whenever[ltrif] [Whenever] any term required to be disclosed under
Sec. 226.6 [rtrif](a)[ltrif] is changed or the required minimum
periodic payment is increased, the creditor shall mail or deliver
written notice of the change to each consumer who may be affected. The
notice shall be mailed or delivered at least 15 days prior to the
effective date of the change. The 15-day timing requirement does not
apply if the change has been agreed to by the consumer[, or if a
periodic rate or other finance charge is increased because of the
consumer's delinquency or default]; the notice shall be given, however,
before the effective date of the change.
[rtrif](ii)[ltrif] [(2)] Notice not required. [rtrif]For home
equity plans subject to the requirements of Sec. 226.5b, a creditor is
not required to provide[ltrif] [No] notice under this section [is
required] when the change involves [late payment charges, charges for
documentary evidence, or over-the-limit charges;] a reduction of any
component of a finance or other charge[; suspension of future credit
privileges or termination of an account or plan;] or when the change
results from an agreement involving a court proceeding[, or from the
consumer's default or delinquency (other than an increase in the
periodic rate or other finance charge)].
[rtrif](iii)[ltrif] [(3)] [rtrif]Notice to restrict credit[ltrif]
[Notice for home equity plans]. [rtrif]For home equity plans subject to
the requirements of Sec. 226.5b, if the[ltrif] [If a] creditor
prohibits additional extensions of credit or reduces the credit limit
[applicable to a home equity plan] pursuant to Sec. 226.5b(f)(3)(i) or
Sec. 226.5b(f)(3)(vi), the creditor shall mail or deliver written
notice of the action to each consumer who will be affected. The notice
must be provided not later than three business days after the action is
taken and shall contain specific reasons for the action. If the
creditor requires the consumer to request reinstatement of credit
privileges, the notice also shall state that fact.
[rtrif](2) Rules affecting open-end (not home-secured) plans.
(i) Changes where written advance notice is required. For plans
other than home equity plans subject to the requirements of Sec.
226.5b, except as provided in paragraphs (c)(2)(ii) and (c)(2)(iv) of
this section, when a term required to be disclosed under Sec. Sec.
226.6(b)(1), 226.6(b)(2) or 226.6(c)(1) is changed or the required
minimum periodic payment is increased, a creditor must provide a
written notice of the change at least 45 days prior to the effective
date of the change to each consumer who may be affected. The 45-day
timing requirement does not apply if the consumer has agreed to a
particular change; the notice shall be given, however, before the
effective date of the change. Increases in the rate applicable to a
consumer's account due to delinquency, default or as a penalty
described in paragraph (g) of this section that are not due to a change
in the contractual terms of the consumer's account must be disclosed
pursuant to paragraph 9(g) of this section instead of paragraph (c)(2)
of this section.
(ii) Charges not covered by Sec. 226.6(b)(4). Except as provided
in paragraph (c)(2)(iv) of this section, if a creditor increases any
component of a charge, or introduces a new charge, required to be
disclosed under Sec. 226.6(b)(1) that is not required to be disclosed
under Sec. 226.6(b)(4), a creditor may either, at its option:
(A) Comply with the requirements of paragraphs (c)(2)(i) of this
section, or
(B) Provide notice of the amount of the charge at a relevant time
before the consumer agrees to or becomes obligated to pay the charge.
The notice may be provided orally or in writing.
(iii) Disclosure requirements.
(A) Changes to terms described in account-opening table. If a
creditor changes a term required to be disclosed pursuant under Sec.
226.6(b)(4), the creditor must provide the following information on the
notice provided pursuant to paragraph (c)(2)(i) of this section:
(1) A summary of the changes made to terms described in Sec.
226.6(b)(4);
(2) A statement that changes are being made to the account;
(3) A statement indicating the consumer has the right to opt-out of
these changes, if applicable, and a reference to additional information
describing the opt out right provided in the notice, if applicable;
(4) The date the changes will become effective;
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice; and
(6) If the creditor is changing a rate on the account, other than a
penalty rate, a statement that if a penalty rate currently applies to
the consumer's account, the new rate described in the notice will not
apply to the consumer's account until the consumer's account balances
are no longer subject to the penalty rate.
(B) Format requirements. (1) Tabular format. The summary of changes
described in paragraph (c)(2)(iii)(A)(1)
[[Page 33057]]
of this section must be in a tabular format, with headings and format
substantially similar to any of the account-opening tables found in G-
17 in appendix G. The table must disclose the changed term and
information relevant to the change, if that relevant information is
required by Sec. 226.6(b)(4). The new terms shall be described in the
same level of detail as required when disclosing the terms under Sec.
226.6(b)(4).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(2)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(2)(iii)(A)(1) of this section must be disclosed on the statement
beginning on the front of the first page of the periodic statement
directly above the grouping of transactions, credits, fees and interest
required to be disclosed by Sec. Sec. 226.7(b)(2), 226.7(b)(3), and
226.7(b)(6), but may continue on the front of the second page if
necessary, so long as there is a reference on the first page indicating
the information continues on the following page. The summary of changes
described in paragraph (c)(1)(iii)(A)(1) of this section must
immediately follow the information described in paragraph
(c)(1)(iii)(A)(2) through (6) of this section, substantially similar to
the format shown in Sample G-20 in appendix G.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(2)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(2)(iii)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(2)(iii)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(2)(iii)(A)(1)
of this section must immediately follow the information described in
paragraph (c)(1)(iii)(A)(2) through (6) of this section, substantially
similar to the format shown in Sample G-20 in appendix G.
(iv) Notice not required. For open-end plans not subject to the
requirements of Sec. 226.5b, a creditor is not required to provide
notice under this section when the change involves charges for
documentary evidence; a reduction of any component of a finance or
other charge; suspension of future credit privileges (except as
provided in paragraph (c)(2)(v) of this section) or termination of an
account or plan; or when the change results from an agreement involving
a court proceeding.
(v) Reduction of the credit limit. For open-end plans that are not
subject to the requirements of Sec. 226.5b, if a creditor decreases
the credit limit on an account, advance notice of the decrease must be
provided before an over-the-limit fee or a penalty rate can be imposed
solely as a result of the consumer exceeding the newly decreased credit
limit. Notice shall be provided in writing or orally at least 45 days
prior to imposing the over-the-limit fee or penalty rate and shall
state that the credit limit on the account has been or will be
decreased.[ltrif]
(d) Finance charge imposed at time of transaction. (1) Any person,
other than the card issuer, who imposes a finance charge at the time of
honoring a consumer's credit card, shall disclose the amount of that
finance charge prior to its imposition.
(2) The card issuer, other than the person honoring the consumer's
credit card, shall have no responsibility for the disclosure required
by paragraph (d)(1) of this section, and shall not consider any such
charge for the purposes of Sec. [rtrif]Sec. [ltrif] 226.5a, [Sec. ]
226.6 and [Sec. ] 226.7.
(e) Disclosures upon renewal of credit or charge card.
(1) Notice prior to renewal. Except as provided in paragraph (e)(2)
of this section, a card issuer that imposes any annual or other
periodic fee to renew a credit or charge card account of the type
subject to Sec. 226.5a, including any fee based on account activity or
inactivity, shall mail or deliver written notice of the renewal to the
cardholder. The notice shall be provided at least 30 days or one
billing cycle, whichever is less, before the mailing or the delivery of
the periodic statement on which the renewal fee is initially charged to
the account. The notice shall contain the following information:
(i) The disclosures contained in Sec. 226.5a(b)(1) through (7)
that would apply if the account were renewed; 20a and
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\20a\ [rtrif][Reserved][ltrif] [These disclosures need not be
provided in tabular format or in a prominent location.]
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(ii) How and when the cardholder may terminate credit availability
under the account to avoid paying the renewal fee.
(2) Delayed notice. [rtrif]Alternatively,[ltrif] the disclosures
required by paragraph (e)(1) of this section may be provided later than
the time in paragraph (e)(1) of this section, but no later than the
mailing or the delivery of the periodic statement on which the renewal
fee is initially charged to the account, if the card issuer also
discloses at that time that[rtrif]:[ltrif] [--]
(i) The cardholder has 30 days from the time the periodic statement
is mailed or delivered to avoid paying the fee or to have the fee
recredited if the cardholder terminates credit availability under the
account; and
(ii) The cardholder may use the card during the interim period
without having to pay the fee.
(3) Notification on periodic statements. The disclosures required
by this paragraph may be made on or with a periodic statement. If any
of the disclosures are provided on the back of a periodic statement,
the card issuer shall include a reference to those disclosures on the
front of the statement.
(f) Change in credit card account insurance provider--(1) Notice
prior to change. If a credit card issuer plans to change the provider
of insurance for repayment of all or part of the outstanding balance of
an open-end credit card account of the type subject to Sec. 226.5a,
the card issuer shall mail or deliver the cardholder written notice of
the change not less than 30 days before the change in providers occurs.
The notice shall also include the following items, to the extent
applicable:
(i) Any increase in the rate that will result from the change;
(ii) Any substantial decrease in coverage that will result from the
change; and
(iii) A statement that the cardholder may discontinue the
insurance.
(2) Notice when change in provider occurs. If a change described in
paragraph (f)(1) of this section occurs, the card issuer shall provide
the cardholder with a written notice no later than 30 days after the
change, including the following items, to the extent applicable:
(i) The name and address of the new insurance provider;
(ii) A copy of the new policy or group certificate containing the
basic terms of the insurance, including the rate to be charged; and
(iii) A statement that the cardholder may discontinue the
insurance.
(3) Substantial decrease in coverage. For purposes of this
paragraph, a substantial decrease in coverage is a decrease in a
significant term of coverage that might reasonably be expected to
affect the cardholder's decision to continue the insurance.
[[Page 33058]]
Significant terms of coverage include, for example, the following:
(i) Type of coverage provided;
(ii) Age at which coverage terminates or becomes more restrictive;
(iii) Maximum insurable loan balance, maximum periodic benefit
payment, maximum number of payments, or other term affecting the dollar
amount of coverage or benefits provided;
(iv) Eligibility requirements and number and identity of persons
covered;
(v) Definition of a key term of coverage such as disability;
(vi) Exclusions from or limitations on coverage; and
(vii) Waiting periods and whether coverage is retroactive.
(4) Combined notification. The notices required by paragraph (f)(1)
and (2) of this section may be combined provided the timing requirement
of paragraph (f)(1) of this section is met. The notices may be provided
on or with a periodic statement.
[rtrif](g) Increase in rates due to delinquency or default or as a
penalty.
(1) Increases subject to this section. For plans other than home
equity plans subject to the requirements of Sec. 226.5b, a creditor
must provide a written notice to each consumer who may be affected
when:
(i) A rate is increased due to the consumer's delinquency or
default; or
(ii) A rate is increased as a penalty for one or more events
specified in the account agreement, such as making a late payment or
obtaining an extension of credit that exceeds the credit limit.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (g)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided
after the occurrence of the events described in paragraphs (g)(1)(i)
and (g)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3)(i) Disclosure requirements for rate increases. If a creditor is
increasing the rate due to delinquency or default or as a penalty, the
creditor must provide the following information on the notice sent
pursuant to paragraph (g)(1) of this section:
(A) A statement that the consumer's actions have triggered the
delinquency or default rate or penalty rate, as applicable;
(B) The date on which the delinquency or default rate or penalty
rate will apply;
(C) The circumstances under which the delinquency or default rate
or penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency or default rate or penalty rate will
remain in effect for a potentially indefinite time period; and
(D) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied, as applicable.
(ii) Format requirements. (A) If a notice required by paragraph
(g)(1) of this section is included on or with a periodic statement, the
information described in paragraph (g)(3)(i) of this section must be in
the form of a table and provided on the front of the first page of the
periodic statement directly above the grouping of transactions,
credits, fees and interest required to be disclosed by Sec. Sec.
226.7(b)(2), 226.7(b)(3), and 226.7(b)(6), or above the notice
described in paragraph (c)(2)(iii)(A) of this section if that notice is
provided on the same statement.
(B) If a notice required by paragraph (g)(1) of this section is not
included on or with a periodic statement, the information described in
paragraph (g)(3)(i) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(2)(iii)(A) of this section.[ltrif]
12. Section 226.10 is amended by republishing paragraphs (a) and
(c), and revising paragraph (b) to read as follows:
Sec. 226.10 Prompt crediting of payments.
(a) General rule. A creditor shall credit a payment to the
consumer's account as of the date of receipt, except when a delay in
crediting does not result in a finance or other charge or except as
provided in paragraph (b) of this section.
(b) Specific requirements for payments. If a creditor specifies, on
or with the periodic statement, requirements for the consumer to follow
in making payments, but accepts a payment that does not conform to the
requirements, the creditor shall credit the payment within five days of
receipt. [rtrif](See Sec. 226.7(b)(11) for disclosure requirements for
certain cut-off times for plans other than home equity plans subject to
the requirements of Sec. 226.5b.)[ltrif]
(c) Adjustment of account. If a creditor fails to credit a payment,
as required by paragraphs (a) or (b) of this section, in time to avoid
the imposition of finance or other charges, the creditor shall adjust
the consumer's account so that the charges imposed are credited to the
consumer's account during the next billing cycle.
13. Section 226.11 is revised to read as follows:
Sec. 226.11 Treatment of credit balances[rtrif]; account
termination[ltrif].
[rtrif](a) Credit balances.[ltrif] When a credit balance in excess
of $1 is created on a credit account (through transmittal of funds to a
creditor in excess of the total balance due on an account, through
rebates of unearned finance charges or insurance premiums, or through
amounts otherwise owed to or held for the benefit of the consumer), the
creditor shall--
[rtrif](1)[ltrif][(a)] Credit the amount of the credit balance to
the consumer's account;
[rtrif](2)[ltrif][(b)] Refund any part of the remaining credit
balance within seven business days from receipt of a written request
from the consumer;
[rtrif](3)[ltrif][(c)] Make a good faith effort to refund to the
consumer by cash, check, or money order, or credit to a deposit account
of the consumer, any part of the credit balance remaining in the
account for more than six months. No further action is required if the
consumer's current location is not known to the creditor and cannot be
traced through the consumer's last known address or telephone number.
[rtrif](b) Account termination.
(1) Creditors shall not terminate an account prior to its
expiration date solely because the consumer does not incur a finance
charge.
(2) Nothing in paragraph (b)(1) of this section prohibits a
creditor from terminating an account that is inactive for three
consecutive months. An account is inactive if no credit has been
extended (such as by purchase, cash advance or balance transfer) and if
the account has no outstanding balance.[ltrif]
14. Section 226.12 is amended by republishing paragraphs (a), (d),
(e), (f), and (g), revising paragraphs (b) and (c), and removing and
reserving footnotes 21 through 26 to read as follows:
Sec. 226.12 Special credit card provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person except--
(1) In response to an oral or written request or application for
the card; or
(2) As a renewal of, or substitute for, an accepted credit
card.\21\
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\21\ [rtrif][Reserved][ltrif] [For purposes of this section,
``accepted credit card'' means any credit card that a cardholder has
requested or applied for and received, or has signed, used, or
authorized another person to use to obtain credit. Any credit card
issued as a renewal or substitute in accordance with this paragraph
becomes an accepted credit card when received by the cardholder.]
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[[Page 33059]]
(b) Liability of cardholder for unauthorized use--(1) [rtrif](i)
Definition of unauthorized use. For purposes of this section, the term
``unauthorized use'' means the use of a credit card by a person, other
than the cardholder, who does not have actual, implied, or apparent
authority for such use, and from which the cardholder receives no
benefit.
(ii)[ltrif] Limitation on amount. The liability of a cardholder for
unauthorized use \22\ of a credit card shall not exceed the lesser of
$50 or the amount of money, property, labor, or services obtained by
the unauthorized use before notification to the card issuer under
paragraph (b)(3) of this section.
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\22\ [rtrif][Reserved][ltrif] [``Unauthorized use'' means the
use of a credit card by a person, other than the cardholder, who
does not have actual, implied, or apparent authority for such use,
and from which the cardholder receives no benefit.]
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(2) Conditions of liability. A cardholder shall be liable for
unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice \23\ of the
cardholder's maximum potential liability and of means by which the card
issuer may be notified of loss or theft of the card. The notice shall
state that the cardholder's liability shall not exceed $50 (or any
lesser amount) and that the cardholder may give oral or written
notification, and shall describe a means of notification (for example,
a telephone number, an address, or both); and
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\23\ [rtrif][Reserved][ltrif] [``Adequate notice'' means a
printed notice to a cardholder that sets forth clearly the pertinent
facts so that the cardholder may reasonably be expected to have
noticed it and understood its meaning. The notice may be given by
any means reasonably assuring receipt by the cardholder.]
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(iii) The card issuer has provided a means to identify the
cardholder on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is
given when steps have been taken as may be reasonably required in the
ordinary course of business to provide the card issuer with the
pertinent information about the loss, theft, or possible unauthorized
use of a credit card, regardless of whether any particular officer,
employee, or agent of the card issuer does, in fact, receive the
information. Notification may be given, at the option of the person
giving it, in person, by telephone, or in writing. Notification in
writing is considered given at the time of receipt or, whether or not
received, at the expiration of the time ordinarily required for
transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If state law or an
agreement between a cardholder and the card issuer imposes lesser
liability than that provided in this paragraph, the lesser liability
shall govern.
(5) Business use of credit cards. If 10 or more credit cards are
issued by one card issuer for use by the employees of an organization,
this section does not prohibit the card issuer and the organization
from agreeing to liability for unauthorized use without regard to this
section. However, liability for unauthorized use may be imposed on an
employee of the organization, by either the card issuer or the
organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card
issuer \24\--(1) General rule. When a person who honors a credit card
fails to resolve satisfactorily a dispute as to property or services
purchased with the credit card in a consumer credit transaction, the
cardholder may assert against the card issuer all claims (other than
tort claims) and defenses arising out of the transaction and relating
to the failure to resolve the dispute. The cardholder may withhold
payment up to the amount of credit outstanding for the property or
services that gave rise to the dispute and any finance or other charges
imposed on that amount.\25\
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\24\ [rtrif][Reserved][ltrif] [This paragraph does not apply to
the use of a check guarantee card or a debit card in connection with
an overdraft credit plan, or to a check guarantee card used in
connection with cash advance checks].
\25\ [rtrif][Reserved][ltrif] [The amount of the claim or
defense that the cardholder may assert shall not exceed the amount
of credit outstanding for the disputed transaction at the time the
cardholder first notifies the card issuer or the person honoring the
credit card of the existence of the claim or defense. To determine
the amount of credit outstanding for purposes of this section,
payments and other credits shall be applied to: (1) Late charges in
the order of entry to the account; then to (2) finance charges in
the order of entry to the account; and then to (3) any other debits
in the order of entry to the account. If more than one item is
included in a single extension of credit, credits are to be
distributed pro rata according to prices and applicable taxes.]
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(2) Adverse credit reports prohibited. If, in accordance with
paragraph (c)(1) of this section, the cardholder withholds payment of
the amount of credit outstanding for the disputed transaction, the card
issuer shall not report that amount as delinquent until the dispute is
settled or judgment is rendered.
(3) Limitations. [rtrif](i) General.[ltrif] The rights stated in
paragraphs (c)(1) and (2) of this section apply only if:
[(i)] [rtrif](A)[ltrif] The cardholder has made a good faith
attempt to resolve the dispute with the person honoring the credit
card; and
[(ii)] [rtrif](B)[ltrif] The amount of credit extended to obtain
the property or services that result in the assertion of the claim or
defense by the cardholder exceeds $50, and the disputed transaction
occurred in the same state as the cardholder's current designated
address or, if not within the same state, within 100 miles from that
address.\26\
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\26\ [rtrif][Reserved][ltrif] [The limitations stated in
paragraph (c)(3)(i)(A) of this section shall not apply when the
person honoring the credit card: (1) Is the same person as the card
issuer; (2) is controlled by the card issuer directly or indirectly;
(3) is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer; (4) controls
the card issuer directly or indirectly; (5) is a franchised dealer
in the card issuer's products or services; or (6) has obtained the
order for the disputed transaction through a mail solicitation made
or participated in by the card issuer.]
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[rtrif](ii) Exclusion. The limitations stated in paragraph
(c)(3)(i)(B) of this section shall not apply when the person honoring
the credit card:
(A) Is the same person as the card issuer;
(B) Is controlled by the card issuer directly or indirectly;
(C) Is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer;
(D) Controls the card issuer directly or indirectly;
(E) Is a franchised dealer in the card issuer's products or
services; or
(F) Has obtained the order for the disputed transaction through a
mail solicitation made or participated in by the card issuer.[ltrif]
(d) Offsets by card issuer prohibited. (1) A card issuer may not
take any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan against
funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card
issuer acting under state or federal law to do any of the following
with regard to funds of a cardholder held on deposit with the card
issuer if the same procedure is constitutionally available to creditors
generally: obtain or enforce a consensual security interest in the
funds; attach or otherwise levy upon the funds; or obtain or enforce a
court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in
writing by the cardholder, under which the card issuer may periodically
deduct all or part of the cardholder's credit card debt from a deposit
account held with the card
[[Page 33060]]
issuer (subject to the limitations in Sec. 226.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1)
When a creditor other than the card issuer accepts the return of
property or forgives a debt for services that is to be reflected as a
credit to the consumer's credit card account, that creditor shall,
within seven business days from accepting the return or forgiving the
debt, transmit a credit statement to the card issuer through the card
issuer's normal channels for credit statements.
(2) The card issuer shall, within three business days from receipt
of a credit statement, credit the consumer's account with the amount of
the refund.
(3) If a creditor other than a card issuer routinely gives cash
refunds to consumers paying in cash, the creditor shall also give
credit or cash refunds to consumers using credit cards, unless it
discloses at the time the transaction is consummated that credit or
cash refunds for returns are not given. This section does not require
refunds for returns nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract
or otherwise:
(1) Prohibit any person who honors a credit card from offering a
discount to a consumer to induce the consumer to pay by cash, check, or
similar means rather than by use of a credit card or its underlying
account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to
open or maintain any account or obtain any other service not essential
to the operation of the credit card plan from the card issuer or any
other person, as a condition of participation in a credit card plan. If
maintenance of an account for clearing purposes is determined to be
essential to the operation of the credit card plan, it may be required
only if no service charges or minimum balance requirements are imposed.
(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.
15. Section 226.13 is amended by revising paragraphs (a), (b), (d),
and (g), republishing paragraphs (c), (e), (f), (h), and (i), and
removing and reserving footnotes 27 through 31 to read as follows:
Sec. 226.13 Billing error resolution.\27\
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\27\ [rtrif][Reserved][ltrif] [A creditor shall not accelerate
any part of the consumer's indebtedness or restrict or close a
consumer's account solely because the consumer has exercised in good
faith rights provided by this section. A creditor may be subject to
the forfeiture penalty under section 161(e) of the Act for failure
to comply with any of the requirements of this section.]
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(a) Definition of billing error. For purposes of this section, the
term billing error means:
(1) A reflection on or with a periodic statement of an extension of
credit that is not made to the consumer or to a person who has actual,
implied, or apparent authority to use the consumer's credit card or
open-end credit plan.
(2) A reflection on or with a periodic statement of an extension of
credit that is not identified in accordance with the requirements of
Sec. Sec. [rtrif]Sec. Sec. 226.7(a)(2) or (b)(2), as
applicable[ltrif] [226.7(b)] and 226.8.
(3) A reflection on or with a periodic statement of an extension of
credit for property or services not accepted by the consumer or the
consumer's designee, or not delivered to the consumer or the consumer's
designee as agreed.
(4) A reflection on a periodic statement of the creditor's failure
to credit properly a payment or other credit issued to the consumer's
account.
(5) A reflection on a periodic statement of a computational or
similar error of an accounting nature that is made by the creditor.
(6) A reflection on a periodic statement of an extension of credit
for which the consumer requests additional clarification, including
documentary evidence.
(7) The creditor's failure to mail or deliver a periodic statement
to the consumer's last known address if that address was received by
the creditor, in writing, at least 20 days before the end of the
billing cycle for which the statement was required.
(b) Billing error notice.\28\ A billing error notice is a written
notice \29\ from a consumer that:
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\28\ [rtrif][Reserved][ltrif] [The creditor need not comply with
the requirements of paragraphs (c) through (g) of this section if
the consumer concludes that no billing error occurred and
voluntarily withdraws the billing error notice].
\29\ [rtrif][Reserved][ltrif] [The creditor may require that the
written notice not be made on the payment medium or other material
accompanying the periodic statement if the creditor so stipulates in
the billing rights statement required by Sec. Sec. 226.6(d) and
226.9(a)].
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(1) Is received by a creditor at the address disclosed under
[rtrif]Sec. Sec. 226.7(a)(9) or (b)(9), as applicable,[ltrif] [Sec.
226.7(k)] no later than 60 days after the creditor transmitted the
first periodic statement that reflects the alleged billing error;
(2) Enables the creditor to identify the consumer's name and
account number; and
(3) To the extent possible, indicates the consumer's belief and the
reasons for the belief that a billing error exists, and the type, date,
and amount of the error.
(c) Time for resolution; general procedures. (1) The creditor shall
mail or deliver written acknowledgment to the consumer within 30 days
of receiving a billing error notice, unless the creditor has complied
with the appropriate resolution procedures of paragraphs (e) and (f) of
this section, as applicable, within the 30-day period; and
(2) The creditor shall comply with the appropriate resolution
procedures of paragraphs (e) and (f) of this section, as applicable,
within 2 complete billing cycles (but in no event later than 90 days)
after receiving a billing error notice.
(d) Rules pending resolution. Until a billing error is resolved
under paragraph (e) or (f) of this section, the following rules apply:
(1) Consumer's right to withhold disputed amount; collection action
prohibited. The consumer need not pay (and the creditor may not try to
collect) any portion of any required payment that the consumer believes
is related to the disputed amount (including related finance or other
charges).\30\ If the cardholder [maintains a deposit account with the
card issuer and] [rtrif]has enrolled in an automatic payment plan
offered by the card issuer and[ltrif] has agreed to pay the credit card
indebtedness by periodic deductions from the cardholder's deposit
account, the card issuer shall not deduct any part of the disputed
amount or related finance or other charges if a billing error notice is
received any time up to 3 business days before the scheduled payment
date.
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\30\ [rtrif][Reserved][ltrif] [A creditor is not prohibited from
taking action to collect any undisputed portion of the item or bill;
from deducting any disputed amount and related finance or other
charges from the consumer's credit limit on the account; or from
reflecting a disputed amount and related finance or other charges on
a periodic statement, provided that the creditor indicates on or
with the periodic statement that payment of any disputed amount and
related finance or other charges is not required pending the
creditor's compliance with this section.]
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(2) Adverse credit reports prohibited. The creditor or its agent
shall not (directly or indirectly) make or threaten to make an adverse
report to any person
[[Page 33061]]
about the consumer's credit standing, or report that an amount or
account is delinquent, because the consumer failed to pay the disputed
amount or related finance or other charges.
[rtrif](3) Acceleration of debt and restriction of account
prohibited. A creditor shall not accelerate any part of the consumer's
indebtedness or restrict or close a consumer's account solely because
the consumer has exercised in good faith rights provided by this
section. A creditor would be subject to the forfeiture penalty under
section 161(e) of the Act for failure to comply with any of the
requirements of this section.
(4) Permitted creditor actions. A creditor is not prohibited from
taking action to collect any undisputed portion of the item or bill;
from deducting any disputed amount and related finance or other charges
from the consumer's credit limit on the account; or from reflecting a
disputed amount and related finance or other charges on a periodic
statement, provided that the creditor indicates on or with the periodic
statement that payment of any disputed amount and related finance or
other charges is not required pending the creditor's compliance with
this section.[ltrif]
(e) Procedures if billing error occurred as asserted. If a creditor
determines that a billing error occurred as asserted, it shall within
the time limits in paragraph (c)(2) of this section:
(1) Correct the billing error and credit the consumer's account
with any disputed amount and related finance or other charges, as
applicable; and
(2) Mail or deliver a correction notice to the consumer.
(f) Procedures if different billing error or no billing error
occurred. If, after conducting a reasonable investigation,\31\ a
creditor determines that no billing error occurred or that a different
billing error occurred from that asserted, the creditor shall within
the time limits in paragraph (c)(2) of this section:
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\31\ [rtrif][Reserved][ltrif] [If a consumer submits a billing
error notice alleging either the nondelivery of property or services
under paragraph (a)(3) of this section or that information appearing
on a periodic statement is incorrect because a person honoring the
consumer's credit card has made an incorrect report to the card
issuer, the creditor shall not deny the assertion unless it conducts
a reasonable investigation and determines that the property or
services were actually delivered, mailed, or sent as agreed or that
the information was correct].
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(1) Mail or deliver to the consumer an explanation that sets forth
the reasons for the creditor's belief that the billing error alleged by
the consumer is incorrect in whole or in part;
(2) Furnish copies of documentary evidence of the consumer's
indebtedness, if the consumer so requests; and
(3) If a different billing error occurred, correct the billing
error and credit the consumer's account with any disputed amount and
related finance or other charges, as applicable.
(g) Creditor's rights and duties after resolution. If a creditor,
after complying with all of the requirements of this section,
determines that a consumer owes all or part of the disputed amount and
related finance or other charges, the creditor:
(1) Shall promptly notify the consumer in writing of the time when
payment is due and the portion of the disputed amount and related
finance or other charges that the consumer still owes;
(2) Shall allow any time period disclosed under Sec. Sec.
226.6(a)(1) [rtrif]or 226.6(b)(1), as applicable[ltrif], and
[rtrif]226.7(a)(8) or (b)(8), as applicable[ltrif] [226.7(j)], during
which the consumer can pay the amount due under paragraph (g)(1) of
this section without incurring additional finance or other charges;
(3) May report an account or amount as delinquent because the
amount due under paragraph (g)(1) of this section remains unpaid after
the creditor has allowed any time period disclosed under Sec. Sec.
226.6(a)(1) [rtrif]or 226.6(b)(1), as applicable[ltrif], and
[rtrif]226.7(a)(8) or (b)(8), as applicable[ltrif] [226.7(j)] or 10
days (whichever is longer) during which the consumer can pay the
amount; but
(4) May not report that an amount or account is delinquent because
the amount due under paragraph (g)(1) of the section remains unpaid, if
the creditor receives (within the time allowed for payment in paragraph
(g)(3) of this section) further written notice from the consumer that
any portion of the billing error is still in dispute, unless the
creditor also:
(i) Promptly reports that the amount or account is in dispute;
(ii) Mails or delivers to the consumer (at the same time the report
is made) a written notice of the name and address of each person to
whom the creditor makes a report; and
(iii) Promptly reports any subsequent resolution of the reported
delinquency to all persons to whom the creditor has made a report.
(h) Reassertion of billing error. A creditor that has fully
complied with the requirements of this section has no further
responsibilities under this section (other than as provided in
paragraph (g)(4) of this section) if a consumer reasserts substantially
the same billing error.
(i) Relation to Electronic Fund Transfer Act and Regulation E. If
an extension of credit is incident to an electronic fund transfer,
under an agreement between a consumer and a financial institution to
extend credit when the consumer's account is overdrawn or to maintain a
specified minimum balance in the consumer's account, the creditor shall
comply with the requirements of Regulation E, 12 CFR 205.11 governing
error resolution rather than those of paragraphs (a), (b), (c), (e),
(f), and (h) of this section.
16. Section 226.14 is amended by revising paragraphs (a), (b), (c),
and (d), adding a new paragraph (e), and by removing and reserving
footnotes 31a through 35 to read as follows:
Sec. 226.14 Determination of annual percentage rate.
(a) General rule. The annual percentage rate is a measure of the
cost of credit, expressed as a yearly rate. An annual percentage rate
shall be considered accurate if it is not more than \1/8\ of 1
percentage point above or below the annual percentage rate determined
in accordance with this section.\31a\ [rtrif]An error in disclosure of
the annual percentage rate or finance charge shall not, in itself, be
considered a violation of this regulation if:
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\31a\ [rtrif][Reserved][ltrif] [An error in disclosure of the
annual percentage rate or finance charge shall not, in itself, be
considered a violation of this regulation if: (1) The error resulted
from a corresponding error in a calculation tool used in good faith
by the creditor; and (2) upon discovery of the error, the creditor
promptly discontinues use of that calculation tool for disclosure
purposes, and notifies the Board in writing of the error in the
calculation tool.]
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(1) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(2) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes, and notifies the
Board in writing of the error in the calculation tool.[ltrif]
(b) Annual percentage rate [rtrif]--in general[ltrif] [for
Sec. Sec. 226.5a and 226.5b disclosures, for initial disclosures, and
for advertising purposes]. Where one or more periodic rates may be used
to compute the finance charge, the annual percentage rate(s) to be
disclosed for purposes of Sec. Sec. 226.5a, 226.5b, 226.6,
[rtrif]226.7(a)(4) or (b)(4), 226.9, 226.15,[ltrif] [and] 226.16
[rtrif], and 226.26[ltrif] shall be computed by multiplying each
periodic rate by the number of periods in a year.
(c) [rtrif]Effective[ltrif] annual percentage rate [rtrif]for home
equity plans[ltrif] [for periodic statements]. [The annual percentage
rate(s) to be disclosed for purposes of Sec. 226.7(d) shall be
[[Page 33062]]
computed by multiplying each periodic rate by the number of periods in
a year and, for purposes of Sec. 226.7(g), shall be determined as
follows:]
ALTERNATIVE 1--PARAGRAPH (c) INTRODUCTORY TEXT.
[rtrif]For home equity plans subject to the requirements of Sec.
226.5b, a creditor may, at its option, disclose an effective annual
percentage rate(s) pursuant to Sec. 226.7(b)(7) and compute the annual
percentage rate in accordance with paragraph (d) of this section.
Alternatively, the creditor may disclose an effective annual percentage
rate pursuant to Sec. 226.7(a)(7) and compute the rate as follows:
ALTERNATIVE 2--PARAGRAPH (c) INTRODUCTORY TEXT.
A creditor need not disclose an effective annual percentage rate.
For home equity plans subject to the requirements of Sec. 226.5b, a
creditor may, at its option, disclose an effective annual percentage
rate(s) pursuant to Sec. 226.7(a)(7) and compute the effective annual
percentage rate as follows:[ltrif]
(1) [rtrif]Solely periodic rates imposed.[ltrif] If the finance
charge is determined solely by applying one or more periodic rates, at
the creditor's option, either:
(i) By multiplying each periodic rate by the number of periods in a
year; or
(ii) By dividing the total finance charge for the billing cycle by
the sum of the balances to which the periodic rates were applied and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year.
(2) [rtrif]Minimum or fixed charge, but not transaction charge,
imposed.[ltrif] If the finance charge imposed during the billing cycle
is or includes a minimum, fixed, or other charge not due to the
application of a periodic rate, other than a charge with respect to any
specific transaction during the billing cycle, by dividing the total
finance charge for the billing cycle by the amount of the balance(s) to
which it is applicable \32\ and multiplying the quotient (expressed as
a percentage) by the number of billing cycles in a year.\33\ [rtrif]If
there is no balance to which the finance charge is applicable, an
annual percentage rate cannot be determined under this section. Where
the finance charge imposed during the billing cycle is or includes a
loan fee, points, or similar charge that relates to opening, renewing,
or continuing an account, the amount of such charge shall not be
included in the calculation of the annual percentage rate.[ltrif]
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\32\ [rtrif][Reserved][ltrif] [If there is no balance to which
the finance charge is applicable, an annual percentage rate cannot
be determined under this section.]
\33\ [rtrif][Reserved][ltrif] [Where the finance charge imposed
during the billing cycle is or includes a loan fee, points, or
similar charge that relates to the opening of the account, the
amount of such charge shall not be included in the calculation of
the annual percentage rate.]
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(3) [rtrif]Transaction charge imposed.[ltrif] If the finance charge
imposed during the billing cycle is or includes a charge relating to a
specific transaction during the billing cycle (even if the total
finance charge also includes any other minimum, fixed, or other charge
not due to the application of a periodic rate), by dividing the total
finance charge imposed during the billing cycle by the total of all
balances and other amounts on which a finance charge was imposed during
the billing cycle without duplication, and multiplying the quotient
(expressed as a percentage) by the number of billing cycles in a
year,\34\ except that the annual percentage rate shall not be less than
the largest rate determined by multiplying each periodic rate imposed
during the billing cycle by the number of periods in a year.\35\
[rtrif]Where the finance charge imposed during the billing cycle is or
includes a loan fee, points, or similar charge that relates to the
opening, renewing, or continuing an account, the amount of such charge
shall not be included in the calculation of the annual percentage rate.
See appendix F regarding determination of the denominator of the
fraction under this paragraph.[ltrif]
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\34\ [rtrif][Reserved][ltrif] [See appendix F regarding
determination of the denominator of the fraction under this
paragraph.]
\35\ [rtrif][Reserved][ltrif] [See footnote 33.]
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(4) If the finance charge imposed during the billing cycle is or
includes a minimum, fixed, or other charge not due to the application
of a periodic rate and the total finance charge imposed during the
billing cycle does not exceed 50 cents for a monthly or longer billing
cycle, or the pro rata part of 50 cents for a billing cycle shorter
than monthly, at the creditor's option, by multiplying each applicable
periodic rate by the number of periods in a year, notwithstanding the
provisions of paragraphs (c)(2) and (3) of this section.
[rtrif](5)[ltrif] [(d)] Calculations where daily periodic rate
applied. If the provisions of paragraph (c)(1)(ii) or (2) of this
section apply and all or a portion of the finance charge is determined
by the application of one or more daily periodic rates, the annual
percentage rate may be determined either:
[rtrif](i)[ltrif] [(1)] By dividing the total finance charge by the
average of the daily balances and multiplying the quotient by the
number of billing cycles in a year; or
[rtrif](ii)[ltrif] [(2)] By dividing the total finance charge by
the sum of the daily balances and multiplying the quotient by 365.
ALTERNATIVE 1 ONLY.--PARAGRAPHS (d) AND (e).
(d) Effective annual percentage rates for open-end (not home-
secured) plans. For plans not subject to the requirements of Sec.
226.5b, the effective annual percentage rate shall be disclosed
pursuant to Sec. 226.7(b)(7) and computed as follows:
(1) Solely periodic rates imposed. If the finance charge identified
in paragraph (e) of this section is determined solely by applying one
or more periodic rates used to calculate interest, by multiplying each
periodic rate by the number of periods in a year.
(2) Minimum or fixed charge, but not transaction charge, imposed.
If the finance charge identified in paragraph (e) of this section
imposed during the billing cycle is or includes a minimum charge or
other charge not attributable to a periodic rate used to calculate
interest, and does not include a charge that relates to any specific
transaction during the billing cycle, as follows:
(i) Multifeatured plans. For multifeatured plans, by feature, as
follows:
(A) Purchases. Except as provided in paragraph (d)(4) of this
section, for purchase transactions, by totaling the minimum charges and
other charges identified in paragraph (e) of this section that are not
attributable to periodic rates used to calculate interest and not
related to a specific transaction, and any finance charge identified in
paragraph (e) of this section attributable to periodic rates used to
calculate interest on purchase balances, dividing that total by the
amount of the balance to which such charges are applicable, and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year. If there is no balance to which such charges
are applicable, an annual percentage rate cannot be determined under
this paragraph (d)(2)(i)(A) and shall be disclosed as 0.00%. If a
portion of the finance charge described in this paragraph (d)(2)(i)(A)
is determined by the application of one or more daily periodic rates,
the annual percentage rate may be determined, at the creditor's option,
by dividing the total of the finance charges determined above by the
average of the daily purchase balances and multiplying the quotient by
the number of billing cycles in a year; or by dividing the total
finance charge by the sum of the daily purchase balances, and
multiplying the quotient by 365.
[[Page 33063]]
(B) Other features. For other features, by multiplying each
applicable periodic rate by the number of periods in a year. If there
is no balance on a feature to which a periodic interest rate is
applicable, the annual percentage rate for that feature shall be
disclosed as 0.00%.
(ii) Single-featured plans. Subject to paragraph (d)(4) of this
section, for single-featured plans, the annual percentage rate shall be
determined by dividing the total finance charge identified in paragraph
(e) of this section by the amount of the balance(s) to which such
charge is applicable, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year. If there is no
balance to which such charges are applicable, an annual percentage rate
cannot be determined under this paragraph and shall be disclosed as
0.00%. If a portion of the finance charge described in this paragraph
is determined by the application of one or more daily periodic rates,
the annual percentage rate may be determined, at the creditor's option,
by dividing the total finance charge by the average of the daily
purchase balances and multiplying the quotient by the number of billing
cycles in a year; or by dividing the total finance charge by the sum of
the daily purchase balances, and multiplying the quotient by 365.
(3) Transaction charge imposed. If any finance charge imposed
during the billing cycle is identified in paragraph (e) of this section
and is or includes a charge relating to a specific transaction during
the billing cycle, as follows:
(i) Multifeatured plans. For multifeatured plans, by feature, as
follows:
(A) Purchases. Except as provided in paragraph (d)(4) of this
section, for purchase transactions, by totaling the minimum charges and
other charges identified in Sec. 226.14(e) that are not attributable
to periodic rates used to calculate interest and not related to a
specific transaction, any finance charges identified in paragraph (e)
of this section attributable to periodic rates used to calculate
interest applicable to purchase transactions, and any charges
identified in paragraph (e) of this section relating to a specific
purchase transaction, dividing that total by the total of all balances
and other amounts to which such charges are applicable without
duplication, and multiplying the quotient (expressed as a percentage)
by the number of billing cycles in a year, except that the annual
percentage rate shall not be less than the largest rate determined by
multiplying each periodic rate imposed during the billing cycle on
purchase transactions by the number of periods in a year. See appendix
F regarding determination of the denominator of the fraction under this
paragraph (e)(3)(i)(A).
(B) Other features. Except as provided in paragraph (d)(4) of this
section, for other types of transactions, by totaling any finance
charge identified in paragraph (e) of this section attributable to
periodic rates used to calculate interest for the type of transaction,
and any charges identified in paragraph (e) of this section relating to
a specific transaction of that type, dividing that total by the total
of all balance(s) and other amounts to which such charges are
applicable without duplication, and multiplying the quotient (expressed
as a percentage) by the number of billing cycles in a year, except that
the annual percentage rate shall not be less than the largest rate
determined by multiplying each periodic rate imposed during the billing
cycle on that type of transaction by the number of periods in a year.
See appendix F regarding determination of the denominator of the
fraction under this paragraph (e)(3)(i)(B).
(ii) Single-featured plans. Subject to paragraph (d)(4) of this
section, for single-featured plans, the annual percentage rate shall be
determined by dividing the total finance charge identified in paragraph
(e) of this section by the total of all balance(s) and other amounts to
which such charges are applicable without duplication, and multiplying
the quotient (expressed as a percentage) by the number of billing
cycles in a year, except that the annual percentage rate shall not be
less than the largest rate determined by multiplying each periodic rate
imposed during the billing cycle by the number of periods in a year.
See appendix F regarding determination of the denominator of the
fraction under this paragraph (e)(3)(ii).
(4) If the finance charge identified in paragraph (e) of this
section imposed during the billing cycle is or includes a minimum
charge or other charge not attributable to periodic rates used to
calculate interest and the total finance charge identified in paragraph
(e) of this section imposed during the billing cycle does not exceed
$1.00 for a monthly or longer billing cycle, or the pro rata part of
$1.00 for a billing cycle shorter than monthly, at the creditor's
option, by multiplying each applicable periodic rate by the number of
periods in a year, notwithstanding the provisions of paragraphs (d)(2)
and (3) of this section.
(e) Finance charges to be included in the calculation of the
effective annual percentage rate under Sec. 226.14(d). (1) Subject to
paragraph (e)(2) of this section, for purposes of the calculations in
paragraph (d) of this section, only the following finance charges shall
be included:
(i) Charges attributable to a periodic rate used to calculate
interest;
(ii) Charges that relate to a specific transaction;
(iii) Charges related to required credit insurance or debt
cancellation or debt suspension coverage;
(iv) Minimum charges imposed if, and only if, a charge would
otherwise have been determined by applying a periodic rate used to
calculate interest to a balance except for the fact that such charge is
smaller than the minimum; and
(v) Charges based on the account balance, account activity or
inactivity, or the amount of credit available;
(2) Notwithstanding paragraph (e)(1) of this section, the following
finance charges shall not be included for purposes of the calculations
in paragraph (d) of this section:
(i) A charge related to opening the account; or
(ii) A charge related to continuing or renewing the account and
imposed not more often than annually.[ltrif]
17. Section 226.16 is amended by republishing paragraph (a),
revising paragraphs (b), (c), and (d), adding new paragraphs (e), (f),
and (g), and removing and reserving footnote 36d and footnote 36e to
read as follows:
Sec. 226.16 Advertising.
(a) Actually available terms. If an advertisement for credit states
specific credit terms, it shall state only those terms that actually
are or will be arranged or offered by the creditor.
(b) Advertisement of terms that require additional disclosures.
[rtrif](1) Any term required to be disclosed under Sec.
226.6(b)(1) set forth affirmatively or negatively in an advertisement
for an open-end (not home-secured) credit plan triggers additional
disclosures under this section. Any term required to be disclosed under
Sec. Sec. 226.6(a)(1) or 226.6(a)(2) set forth affirmatively or
negatively in an advertisement for a home equity plan subject to the
requirements of Sec. 226.5b triggers additional disclosures under this
section.[ltrif] If any of the terms [rtrif]that trigger additional
disclosures under paragraph (b)(1) of this section[ltrif] [required to
be disclosed under Sec. 226.6] is set forth in an advertisement, the
advertisement shall also clearly and conspicuously set forth the
following:\36d\
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\36d\ [rtrif][Reserved][ltrif] [The disclosures given in
accordance with Sec. 226.5a do not constitute advertising terms for
purposes of the requirements of this section.]
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[[Page 33064]]
[rtrif](i)[ltrif] [(1)] Any minimum, fixed, transaction, activity
or similar charge [rtrif]that is a finance charge under Sec.
226.4[ltrif] that could be imposed.
[rtrif](ii)[ltrif] [(2)] Any periodic rate that may be applied
expressed as an annual percentage rate as determined under Sec.
226.14(b). If the plan provides for a variable periodic rate, that fact
shall be disclosed.
[rtrif](iii)[ltrif] [(3)] Any membership or participation fee that
could be imposed.
[rtrif](2) If an advertisement for credit to finance the purchase
of specific goods or services states a minimum monthly payment, the
advertisement shall also state the total of payments and the time
period to repay the obligation, assuming that the consumer makes only
the minimum payment required for each periodic statement. The
disclosure of the total of payments and the time period to repay the
obligation must be equally prominent to the statement of the minimum
monthly payment.[ltrif]
(c) Catalogs or other multiple-page advertisements; electronic
advertisements.
(1) If a catalog or other multiple-page advertisement, or an
[rtrif]electronic[ltrif] advertisement [rtrif](such as an advertisement
appearing on an Internet Web site)[ltrif] [using electronic
communication], gives information in a table or schedule in sufficient
detail to permit determination of the disclosures required by paragraph
(b) of this section, it shall be considered a single advertisement if:
(i) The table or schedule is clearly and conspicuously set forth;
and
(ii) Any statement of terms set forth in Sec. 226.6 appearing
anywhere else in the catalog or advertisement clearly refers to the
page or location where the table or schedule begins.
(2) A catalog or other multiple-page advertisement or an
[rtrif]electronic[ltrif] advertisement [rtrif](such as an advertisement
appearing on an Internet Web site)[ltrif] [using electronic
communication] complies with this paragraph if the table or schedule of
terms includes all appropriate disclosures for a representative scale
of amounts up to the level of the more commonly sold higher-priced
property or services offered.
[rtrif](3) For an advertisement that is accessed by the consumer in
electronic form, the disclosures required under this section must be
provided to the consumer in electronic form on or with the
advertisement.[ltrif]
(d) Additional requirements for home equity plans. (1)
Advertisement of terms that require additional disclosures. If any of
the terms required to be disclosed under [rtrif]Sec.
226.6(a)(6)[ltrif] [Sec. 226.6(a) or (b)] or the payment terms of the
plan are set forth, affirmatively or negatively, in an advertisement
for a home equity plan subject to the requirements of Sec. 226.5b, the
advertisement also shall clearly and conspicuously set forth the
following:
(i) Any loan fee that is a percentage of the credit limit under the
plan and an estimate of any other fees imposed for opening the plan,
stated as a single dollar amount or a reasonable range.
(ii) Any periodic rate used to compute the finance charge,
expressed as an annual percentage rate as determined under Sec.
226.14(b).
(iii) The maximum annual percentage rate that may be imposed in a
variable-rate plan.
(2) Discounted and premium rates. If an advertisement states an
initial annual percentage rate that is not based on the index and
margin used to make later rate adjustments in a variable-rate plan, the
advertisement also shall state the period of time such rate will be in
effect, and, with equal prominence to the initial rate, a reasonably
current annual percentage rate that would have been in effect using the
index and margin.
(3) Balloon payment. If an advertisement contains a statement about
any minimum periodic payment, the advertisement also shall state, if
applicable, that a balloon payment may result.\36e\ [rtrif]A balloon
payment results if paying the minimum periodic payments does not fully
amortize the outstanding balance by a specified date or time, and the
consumer must repay the entire outstanding balance at such time.[ltrif]
---------------------------------------------------------------------------
\36e\ [rtrif][Reserved][ltrif] [See footnote 10b.]
---------------------------------------------------------------------------
(4) Tax implications. An advertisement that states that any
interest expense incurred under the home equity plan is or may be tax
deductible may not be misleading in this regard.
(5) Misleading terms. An advertisement may not refer to a home
equity plan as ``free money'' or contain a similarly misleading term.
[rtrif](e) Introductory Rates.
(1) Scope. The requirements of this paragraph apply to any written
or electronic advertisement of an open-end (not home-secured) plan,
including promotional materials accompanying applications or
solicitations subject to Sec. 226.5a(c) or accompanying applications
or solicitations subject to Sec. 226.5a(e).
(2) Definitions. The term introductory rate means any rate of
interest applicable to a credit card account for an introductory period
if that rate is less than the advertised annual percentage rate that
will be in effect at the end of the introductory period. An
``introductory period'' means the maximum time period for which the
introductory rate may be applicable.
(3) Stating the term ``introductory''. If any annual percentage
rate that may be applied to the account is an introductory rate, the
term introductory or intro must be in immediate proximity to each
listing of the introductory rate.
(4) Stating the introductory period and post-introductory rate. If
any annual percentage rate that may be applied to the account is an
introductory rate, the following must be stated in a clear and
conspicuous manner in a prominent location closely proximate to the
first listing of the introductory rate:
(i) When the introductory rate will end; and
(ii) The annual percentage rate that will apply after the end of
the introductory period. If such rate is variable, the annual
percentage rate must comply with the accuracy standards in Sec. Sec.
226.5a(c)(2), 226.5a(e)(4), or 226.16(b)(1)(ii) as applicable. If such
rate cannot be determined at the time disclosures are given because the
rate depends on a later determination of the consumer's
creditworthiness, the advertisement must disclose the specific rates or
the range of rates that might apply.
(5) Envelope excluded. The requirements in paragraph (e)(4) of this
section do not apply to an envelope or other enclosure in which an
application or solicitation is mailed, or to a banner advertisement or
pop-up advertisement, linked to an application or solicitation provided
electronically.[ltrif]
[rtrif](f) Alternative disclosures--television or radio
advertisements. An advertisement made through television or radio
stating any of the terms requiring additional disclosures under
paragraph (b)(1) of this section may alternatively comply with
paragraph (b)(1) of this section by stating the information required by
paragraph (b)(1)(ii) of this section, and listing a toll-free telephone
number along with a reference that such number may be used by consumers
to obtain the additional cost information.[ltrif]
[rtrif](g) Misleading terms. An advertisement may not refer to an
annual percentage rate as ``fixed'', or use a similar term, unless the
advertisement also specifies a time period that the rate will be fixed
and the rate will not increase during that period, or if no such time
period is provided, the rate will not increase while the plan is
open.[ltrif]
[[Page 33065]]
18. In Part 226, Appendix E is revised to read as follows:
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[:][rtrif]. The term ``related
person'' refers to, for example, a franchised or licensed seller of
a creditor's product or service or a seller who assigns or sells
sales accounts to a creditor or arranges for 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.[ltrif]
[rtrif]1.[ltrif] Section [rtrif]226.6(c)(2)[ltrif] [226.6(d)],
and, as applicable, [rtrif]Sec. Sec. 226.6(1)(i)(B) and
226.6(c)(1)[ltrif] [section 226.6(b) and (c)]. The disclosure
required by [rtrif]Sec. 226.6(b)(1)(i)(B)[ltrif] [section 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. [rtrif]A tabular format is not
required.[ltrif]
[rtrif]2.[ltrif] Section [rtrif]226.7(a)(2) or Sec.
226.7(b)(2), as applicable; Sec. 226.7(a)(9) or Sec. 226.7(b)(9),
as applicable[ltrif] [226.7(b) and 226.7(k)]. Creditors may comply
by placing the required disclosures on the invoice or statement sent
to the consumer for each transaction.
[rtrif]3.[ltrif] Section 226.9(a). Creditors may comply by
mailing or delivering the statement required by [rtrif]Sec.
226.6(c)(2)[ltrif] [section 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 [rtrif]Sec. 226.6(c)(2)[ltrif] [section 226.6(d)] or
an alternative billing error rights statement substantially similar
to that in appendix G-4, with each invoice sent to a consumer.
[rtrif]4.[ltrif] Section 226.9(c). [rtrif]A tabular format is
not required.[ltrif]
[rtrif]5.[ltrif] Section 226.10.
[rtrif]6.[ltrif] Section 226.11 [rtrif](a)[ltrif]. 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 seven
business days of its receipt by the card issuer.
[rtrif]7.[ltrif] Section 226.12 including [rtrif]Sec. [ltrif]
[section] 226.12(c) and (d), as applicable. Section 226.12(e) is
inapplicable.
[rtrif]8.[ltrif] 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.
[rtrif]9.[ltrif] Section 226.15, as applicable.
19. In Part 226, Appendix F is revised to read as follows:
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 \32\ subject to periodic rates to the sum of the
amounts subject to specific transaction charges. [rtrif](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.'')[ltrif] 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:
---------------------------------------------------------------------------
\32\ [rtrif][Reserved][ltrif] [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 percent is applicable to the specific
transaction. The periodic rate is 1\1/2\ percent 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\
percent) multiplied by 12 (the number of months in a year), i.e., 54
percent.
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 percent is applicable to the specific
transaction. The periodic rate is 1\1/2\ percent 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\ percent
x 12 = 42 percent.
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\ percent x 12 = 27
percent.
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\ percent x 12 = 30 percent.
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\
percent 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\ percent x 12 = 20 percent.
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 percent of the transaction amount or $3.00.
The periodic rate is 1\1/2\ percent 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\ percent x 12 = 45
percent.
20. In Part 226, Appendix G is amended by:
A. Revising the table of contents at the beginning of the appendix;
B. Revising Forms G-1, G-2, G-10(A), G-10(B), G-11, and G-13(A) and
(B);
C. Revising the headings of Forms G-3, G-4, and G-10(C);
D. Adding new Forms G-2(A), G-3(A), G-4(A), G-10(D) and (E), G-
16(A) and (B), G-17(A) through (C), G-18(A)
[[Page 33066]]
through (H), G-19, G-20, and G-21 in numerical order; and
E. Removing and removing and reserving Form G-12.
Appendix G to Part 226--Open-End Model Forms and Clauses
G-1 Balance Computation Methods Model Clauses (Sec. Sec. 226.6 and
226.7)
G-2 Liability for Unauthorized Use Model Clause [rtrif](Home equity
Plans)[ltrif] (Sec. 226.12)
[rtrif]G-2(A) Liability for Unauthorized Use Model Clause
[rtrif](Plans Other Than Home equity Plans) (Sec. 226.12)[ltrif]
G-3 Long-Form Billing-Error Rights Model Form [rtrif](Home equity
Plans)[ltrif] (Sec. Sec. 226.6 and 226.9)
[rtrif]G-3(A) Long-Form Billing-Error Rights Model Form
[rtrif](Plans Other Than Home equity Plans) [ltrif](Sec. Sec. 226.6
and 226.9)[ltrif]
G-4 Alternative Billing-Error Rights Model Form [rtrif] (Home equity
Plans)[ltrif] (Sec. 226.9)
[rtrif]G-4(A) Alternative Billing-Error Rights Model Form (Plans
Other Than Home equity Plans) (Sec. 226.9)[ltrif]
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 Form (Credit Cards)
(Sec. 226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.
226.5a(b))
G-10(C) Applications and Solicitations [rtrif]Sample (Credit
Cards)[ltrif] [Model Form (Charge Cards)] (Sec. 226.5a(b))
[rtrif]G-10(D) Applications and Solicitations Model Form (Charge
Cards) (Sec. 226.5a(b))[ltrif]
[rtrif]G-10(E) Applications and Solicitations Sample (Charge Cards)
(Sec. 226.5a(b))[ltrif]
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 226.5a(e))
G-12 [rtrif]Reserved[ltrif] [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
[rtrif]G-16(A) Debt Suspension Model Clause (Sec.
226.4(d)(3))[ltrif]
[rtrif]G-16(B) Debt Suspension Sample (Sec. 226.4(d)(3))[ltrif]
[rtrif]G-17(A) Account-opening Model Form (Sec. 226.6(b)(4))[ltrif]
[rtrif]G-17(B) Account-opening Sample (Sec. 226.6(b)(4))[ltrif]
[rtrif]G-17(C) Account-opening Sample (Sec. 226.6(b)(4))[ltrif]
[rtrif]G-18(A) Transactions; Interest Charges; Fees Sample (Sec.
226.7(b))[ltrif]
[rtrif]G-18(B) Fee-inclusive APR Sample (Sec. 226.7(b))[ltrif]
[rtrif]G-18(C) Late Payment Fee Sample (Sec. 226.7(b))[ltrif]
[rtrif]G-18(D) Actual Repayment Period Sample Disclosure on Periodic
Statement (Sec. 226.7(b))[ltrif]
[rtrif]G-18(E) New Balance, Due Date, Late Payment and Minimum
Payment Sample (Credit cards) (Sec. 226.7(b))[ltrif]
[rtrif]G-18(F) New Balance, Due Date, and Late Payment Sample (Open-
end Plans (Non-credit-card Accounts)) (Sec. 226.7(b))[ltrif]
[rtrif]G-18(G) Periodic Statement Form[ltrif]
[rtrif]G-18(H) Periodic Statement Form[ltrif]
[rtrif]G-19 Checks Accessing a Credit Card Account Sample (Sec.
226.9(b)(3))[ltrif]
[rtrif]G-20 Change-in-Terms Sample (Sec. 226.9(c)(2))[ltrif]
[rtrif]G-21 Penalty Rate Increase Sample (Sec. 226.9(g)(3))[ltrif]
G-1--Balance Computation Methods Model Clauses
(a) Adjusted balance method.
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``adjusted balance'' of your
account. We get the ``adjusted balance'' by taking the balance you
owed at the end of the previous billing cycle and subtracting [any
unpaid finance charges and] any payments and credits received during
the present billing cycle.
(b) Previous balance method.
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the beginning of
each billing cycle [minus any unpaid finance charges]. We do not
subtract any payments or credits received during the billing cycle.
[The amount of payments and credits to your account this billing
cycle was $----.]
(c) Average daily balance method (excluding current
transactions).
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (excluding current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day and
subtract any payments or credits [and any unpaid finance charges].
We do not add in any new [purchases/advances/loans]. This gives us
the daily balance. Then, we add all the daily balances for the
billing cycle together and divide the total by the number of days in
the billing cycle. This gives us the ``average daily balance.''
(d) Average daily balance method (including current
transactions).
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (including current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day,
add any new [purchases/advances/loans], and subtract any payments or
credits, [and unpaid finance charges]. This gives us the daily
balance. Then, we add up all the daily balances for the billing
cycle and divide the total by the number of days in the billing
cycle. This gives us the ``average daily balance.''
(e) Ending balance method.
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the end of each
billing cycle (including new purchases and deducting payments and
credits made during the billing cycle).
G-2--Liability for Unauthorized Use Model Clause [rtrif](Home equity
Plans)[ltrif]
You may be liable for the unauthorized use of your credit card
[or other term that describes the credit card]. You will not be
liable for unauthorized use that occurs after you notify [name of
card issuer or its designee] at [address], orally or in writing, of
the loss, theft, or possible unauthorized use. In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
[rtrif]G-2A--Liability for Unauthorized Use Model Clause (Plans
Other Than Home equity Plans)
If you notice the loss or theft of your credit card or a
possible unauthorized use of your card, you should write to us
immediately at: [address] [address listed on your bill], or call us
at [telephone number].
You will not be liable for any unauthorized use that occurs
after you notify us. You may, however, be liable for unauthorized
use that occurs before your notice to us. In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].[ltrif]
G-3--Long-Form Billing-Error Rights Model Form [rtrif](Home equity
Plans)[ltrif]
Your Billing Rights
Keep This Notice for Future Use
This notice contains important information about your rights and
our responsibilities under the Fair Credit Billing Act.
Notify Us in Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address listed on your bill]. Write to us as soon as
possible. We must hear from you no later than 60 days after we sent
you the first bill on which the error or problem appeared. You can
telephone us, but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are not sure about.
If you have authorized us to pay your credit card bill
automatically from your savings or checking account, you can stop
the payment on any amount you think is wrong. To stop the payment
your letter must reach us three business days before the automatic
payment is scheduled to occur.
Your Rights and Our Responsibilities After We Receive Your Written
Notice
We must acknowledge your letter within 30 days, unless we have
corrected the error by then. Within 90 days, we must either correct
the error or explain why we believe the bill was correct.
After we receive your letter, we cannot try to collect any
amount you question, or report you as delinquent. We can continue to
bill you for the amount you question, including
[[Page 33067]]
finance charges, and we can apply any unpaid amount against your
credit limit. You do not have to pay any questioned amount while we
are investigating, but you are still obligated to pay the parts of
your bill that are not in question.
If we find that we made a mistake on your bill, you will not
have to pay any finance charges related to any questioned amount. If
we didn't make a mistake, you may have to pay finance charges, and
you will have to make up any missed payments on the questioned
amount. In either case, we will send you a statement of the amount
you owe and the date that it is due.
If you fail to pay the amount that we think you owe, we may
report you as delinquent. However, if our explanation does not
satisfy you and you write to us within ten days telling us that you
still refuse to pay, we must tell anyone we report you to that you
have a question about your bill. And, we must tell you the name of
anyone we reported you to. We must tell anyone we report you to that
the matter has been settled between us when it finally is.
If we don't follow these rules, we can't collect the first $50
of the questioned amount, even if your bill was correct.
Special Rule for Credit Card Purchases
If you have a problem with the quality of property or services
that you purchased with a credit card, and you have tried in good
faith to correct the problem with the merchant, you may have the
right not to pay the remaining amount due on the property or
services.
There are two limitations on this right:
(a) You must have made the purchase in your home state or, if
not within your home state within 100 miles of your current mailing
address; and
(b) The purchase price must have been more than $50.
These limitations do not apply if we own or operate the
merchant, or if we mailed you the advertisement for the property or
services.
[rtrif]G-3(A)--Long-Form Billing-Error Rights Model Form (Plans
Other Than Home equity Plans)
Your Billing Rights: Keep This Document for Future Use
This notice tells you about your rights and our responsibilities
under the Fair Credit Billing Act.
What To Do If You Find a Mistake on Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us:
Within 60 days after the error appeared on your
statement.
At least 3 business days before an automated payment is
scheduled, if you want to stop payment on the amount you think is
wrong.
You must notify us of any potential errors in writing. You may
call us, but if you do we are not required to investigate any
potential errors and you may have to pay the amount in question.
What Will Happen After We Receive Your Letter
When we receive your letter, we must do two things:
1. Within 30 days of receiving your letter, we must tell you
that we received your letter. We will also tell you if we have
already corrected the error.
2. Within 90 days of receiving your letter, we must either
correct the error or explain to you why we believe the bill is
correct.
While we investigate whether or not there has been an error:
We cannot try to collect the amount in question, or
report you as delinquent.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
After we finish our investigation, one of two things will
happen:
If we made a mistake: You will not have to pay the
amount in question or any interest or other fees related to that
amount.
If we do not believe there was a mistake: You will have
to pay the amount in question, along with applicable interest and
fees. We will send you a statement of the amount you owe and the
date payment is due. We may then report you as delinquent if you do
not pay the amount we think you owe.
If you receive our explanation but still believe your bill is
wrong, you must write to us within 10 days telling us that you still
refuse to pay. If you do so, we cannot report you as delinquent
without also reporting that you are questioning your bill. We must
tell you the name of anyone to whom we reported you as delinquent,
and we must let those organizations know when the matter has been
settled between us.
If we do not follow all of the rules above, you do not have to
pay the first $50 of the amount you question even if your bill is
correct.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you use your credit card to make a purchase and you are
dissatisfied with the goods or services that you receive, you may
have the right not to pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must have tried in good faith to correct the problem with
the merchant.
4. You must not yet have fully paid for the purchase.
If you are dissatisfied with a purchase that conforms to the
four criteria above, contact us in writing at:
[Creditor Name]
[Creditor Address]
While we investigate, the same rules apply to the disputed amount as
discussed above. After we finish our investigation, we will tell you
our decision. At that point, if we think you owe an amount and you
do not pay, we may report you as delinquent.[ltrif]
G-4--Alternative Billing-Error Rights Model Form [rtrif](Home equity
Plans)[ltrif]
Billing Rights Summary
In Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[ address] [the address shown on your bill] as soon as possible. We
must hear from you no later than 60 days after we sent you the first
bill on which the error or problem appeared. You can telephone us,
but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are unsure about.
You do not have to pay any amount in question while we are
investigating, but you are still obligated to pay the parts of your
bill that are not in question. While we investigate your question,
we cannot report you as delinquent or take any action to collect the
amount you question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that
you purchased with a credit card, and you have tried in good faith
to correct the problem with the merchant, you may not have to pay
the remaining amount due on the goods or services. You have this
protection only when the purchase price was more than $50 and the
purchase was made in your home state or within 100 miles of your
mailing address. (If we own or operate the merchant, or if we mailed
you the advertisement for the property or services, all purchases
are covered regardless of amount or location of purchase.
)[rtrif]G-4(A)--Alternative Billing-Error Rights Model Form (Plans
Other Than Home equity Plans)
[[Page 33068]]
What To Do If You Think You Find a Mistake on Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of Problem: If you think there is an error
on your bill describe what you believe is wrong and why you believe
it is a mistake.
You must contact us within 60 days after the error appeared on
your statement.
You must notify us of any potential errors in writing. You may
call us, but if you do we are not required to investigate any
potential errors and you may have to pay the amount in question.
While we investigate whether or not there has been an error, the
following are true:
We cannot try to collect the amount in question, or
report you as delinquent.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you use your credit card to make a purchase and you are
dissatisfied with the goods or services that you receive, you may
have the right not to pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must have tried in good faith to correct the problem with
the merchant.
4. You must not yet have fully paid for the purchase.
If you are dissatisfied with a purchase that conforms to the
four criteria above, contact us in writing at:
[Creditor Name]
[Creditor Address]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay, we may report you as delinquent.[ltrif]
* * * * *
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G-11--Applications and Solicitations Made Available to the General
Public Model Clauses
(a) Disclosure of Required Credit Information
The information about the costs of the card described in this
[application]/[solicitation] is accurate as of (month/year). This
information may have changed after that date. To find out what may
have changed, [call us at (telephone number)] [write to us at
(address)].
[(b) Disclosure With Account Opening Statement
To find out about changes in the information in this
[application]/[solicitation], [call us at (telephone number)] [write
to us at (address)].
[rtrif](b)[ltrif] [(c)] No Disclosure of Credit Information
There are costs associated with the use of this card. To obtain
information about these costs, call us at (telephone number) or
write to us at (address).
G-12 [rtrif] [Reserved] [ltrif] [--Charge Card Model Clause (When
Access to Plan Offered by Another)
This charge card may allow you to access credit offered by
another creditor. Our decision about issuing you a charge card will
be independent of the other creditor's decision about allowing you
access to a line of credit. Therefore, approval by us to issue you a
card does not constitute approval by the other creditor to grant you
credit privileges. If we issue you a charge card, you may receive it
before the other creditor decides whether or not to grant you credit
privileges.]
G-13(A)--Change in Insurance Provider Model Form (Combined Notice)
The credit card account you have with us is insured. This is to
notify you that we plan to replace your current coverage with
insurance coverage from a different insurer.
If we obtain insurance for your account from a different
insurer, you may cancel the insurance.
[Your premium rate will increase to $----per----.]
[Your coverage will be affected by the following:
[ ] The elimination of a type of coverage previously provided to
you. [(explanation)] [See----of the attached policy for details.]
[[Page 33073]]
[ ] A lowering of the age at which your coverage will terminate
or will become more restrictive. [(explanation)] [See----of the
attached policy or certificate for details.]
[ ] A decrease in your maximum insurable loan balance, maximum
periodic benefit payment, maximum number of payments, or any other
decrease in the dollar amount of your coverage or benefits.
[(explanation)] [See----of the attached policy or certificate for
details.]
[ ] A restriction on the eligibility for benefits for you or
others. [(explanation)] [See---- of the attached policy or
certificate for details.]
[ ] A restriction in the definition of ``disability'' or other
key term of coverage. [(explanation)] [See----of the attached policy
or certificate for details.]
[ ] The addition of exclusions or limitations that are broader
or other than those under the current coverage. [(explanation)]
[See---- of the attached policy or certificate for details.]
[ ] An increase in the elimination (waiting) period or a change
to nonretroactive coverage. [(explanation)] [See---- of the attached
policy or certificate for details).][The name and mailing address of
the new insurer providing the coverage for your account is (name and
address).]
G-13(B)--Change in Insurance Provider Model Form
We have changed the insurer providing the coverage for your
account. The new insurer's name and address are (name and address).
A copy of the new policy or certificate is attached.
You may cancel the insurance for your account.
* * * * *
[rtrif]G-16(A) Debt Suspension Model Clause
Please enroll me in the optional [insert name of program], and
bill my account the fee of [how cost is determined]. I understand
that enrollment is not required to obtain credit. I also understand
that depending on the event, the protection may only temporarily
suspend my duty to make minimum payments, not reduce the balance I
owe. I understand that my balance will actually grow during the
suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X --------
[ltrif]
[rtrif]G-16(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X -------- [ltrif]
BILLING CODE 6210-01-P
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[rtrif]G-18(C) Late Payment Fee Sample
Late Payment Warning: If we do not receive your minimum payment
by the date listed above, you may have to pay a $35 late fee and
your APRs may be increased up to the Penalty APR of 28.99%.[ltrif]
[rtrif]G-18(D) Actual Repayment Period Sample Disclosure on Periodic
Statement
(a) When Negative Amortization Does Not Occur.
Notice about Minimum Payments: If you make only the minimum
payment each month, it will take you about 13 months to repay the
balance shown on this statement.
(b) When Negative Amortization Occurs.
Notice about Minimum Payments: You will never repay the
outstanding balance shown on this statement if you only pay the
minimum payment.[ltrif]
BILLING CODE 6210-01-P
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21. Under Part 226, Appendix H is amended by revising the table of
contents, and adding new forms H-17(A) and H-17(B) to read as follows:
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
[rtrif]H-17(A) Debt Suspension Model Clause[ltrif]
[rtrif]H-17(B) Debt Suspension Sample[ltrif]
* * * * *
[rtrif]H-17(A) Debt Suspension Model Clause[ltrif]
Please enroll me in the optional [insert name of program], and
bill my account the fee of [how cost is determined ]. I understand
that enrollment is not required to obtain credit. I also understand
that depending on the event, the protection may only temporarily
suspend my duty to make minimum payments, not reduce the balance I
owe. I understand that my balance will actually grow during the
suspension period as interest continues to accumulate.
[To Enroll, Sign Here]/[To Enroll, Initial Here]. X --------
[ltrif]
H-17(B) Debt Suspension Sample
Please enroll me in the optional [name of program], and bill my
account the fee of $.83 per $100 of my month-end account balance. I
understand that enrollment is not required to obtain credit. I also
understand that depending on the event, the protection may only
temporarily suspend my duty to make minimum payments, not reduce the
balance I owe. I understand that my balance will actually grow
during the suspension period as interest continues to accumulate.
To Enroll, Initial Here. X --------[ltrif]
22. Under Part 226, a new Appendix M1, Appendix M2, and Appendix M3
are added to read as follows:
[rtrif]Appendix M1 to Part 226--Generic Repayment Estimates
(a) Calculating generic repayment estimates.
(1) Definitions. (i) Retail credit card means a credit card that
is issued by a retailer that can be used only in transactions with
the retailer or a group of retailers that are related by common
ownership or control, or a credit card where a retailer arranges for
a creditor to offer open-end credit under a plan that allows the
consumer to use the credit only in transactions with the retailer or
a group of retailers that are related by common ownership or
control.
(ii) ``General-purpose credit card'' means a credit card other
than a retail credit card.
(2) Minimum payment formula.
(i) Issuer-operated toll-free telephone number.
(A) General-purpose credit cards. When calculating the generic
repayment estimate for general-purpose credit cards, card issuers
must use the minimum payment formula that applies to most of its
general-purpose credit card accounts. The issuer must use this
``most common'' formula to calculate the generic repayment estimate
for all of its general-purpose credit card accounts, regardless of
whether this formula applies to a particular account. To calculate
which minimum payment formula is most common, card issuers must
choose a day in the last six months, consider all general-purpose
card accounts held by the issuer on that day, and determine which
formula applies to the most accounts. If more than one minimum
payment formula applies to an account, the card issuer must use the
formula applicable to the general-revolving feature to determine
which formula is most common. Card issuers must re-evaluate which
minimum payment formula is most common every 12 months. For example,
assume a card issuer is required to comply with the requirements in
Sec. 226.7(b)(12) and this appendix by July 5 of
[[Page 33084]]
a particular year. The issuer may choose any day between January 5
and July 4 of that year to use in deciding the minimum payment
formula that is most common. For the following and each subsequent
year, the issuer must again choose a day between January 5 and July
4 to use in deciding the minimum payment formula that is most
common, but the day that is chosen need not be the same day chosen
the previous year.
(B) Retail credit cards. When calculating the generic repayment
estimate for retail credit cards, card issuers must use the minimum
payment formula that applies to most of their retail credit card
accounts. If an issuer offers credit card accounts on behalf of more
than one retailer, the card issuer must group credit card accounts
for each retailer separately, and determine the minimum payment
formula that is most common to each retailer. The issuer must use
the ``most common'' formula for each retailer, regardless of whether
this formula applies to a particular account for that retailer. To
calculate which minimum payment formula is most common, card issuers
must choose a day in the last six months, consider all retail card
accounts for each retailer held by the issuer on that day, and
determine which formula applies to the most accounts for that
retailer. If more than one minimum payment formula applies to an
account, the card issuer must use the formula applicable to the
general revolving feature to determine which formula is most common
for each retailer. Card issuers must re-evaluate which minimum
payment formula is most common for retail credit card accounts with
respect to each retailer every 12 months. For example, assume a card
issuer is required to comply with the requirements in Sec.
226.7(b)(12) and this appendix by July 5 of a particular year. The
issuer may choose any day between January 5 and July 4 of that year
to use in deciding the minimum payment formula that is most common.
For the following year, the issuer must again choose a day between
January 5 and July 4 to use in deciding the minimum payment formula
that is most common, but the day that is chosen need not be the same
day the previous year.
(ii) FTC-operated toll-free telephone number. When calculating
the generic repayment estimate, the FTC must use the following
minimum payment formula: 5 percent of the outstanding balance, or
$15, whichever is greater.
(3) Annual percentage rate. When calculating the generic
repayment estimate, credit card issuers and the FTC must use the
highest annual percentage rate on which the consumer has outstanding
balances. An issuer and the FTC may use an automated system to
prompt the consumer to enter the highest annual percentage rate on
which the consumer has an outstanding balance, and calculate the
generic repayment estimate based on the consumer's response.
(4) Beginning balance. When calculating the generic repayment
estimate, credit card issuers and the FTC must use as the beginning
balance the outstanding balance on a consumer's account as of the
closing date of the last billing cycle. An issuer and the FTC may
use an automated system to prompt the consumer to enter the
outstanding balance included on the last periodic statement received
by the consumer, and calculate the generic repayment estimate based
on the consumer's response.
(5) Assumptions. When calculating the generic repayment
estimate, credit card issuers and the FTC must make the following
assumptions. Card issuers and the FTC must make these assumptions
regardless of whether they match the actual terms of the consumer's
account.
(i) Only minimum monthly payments are made each month.
(ii) No additional extensions of credit are obtained.
(iii) There is no grace period.
(iv) The final payment pays the account in full (i.e., there is
no residual interest after the final month in a series of payments).
(v) The average daily balance method is used to calculate the
balance.
(vi) All months are the same length (i.e., 30.41667 days long).
Leap year is ignored.
(vii) Payments are credited on the last day of the month.
(b) Disclosing the generic repayment estimate to consumers.
(1) Required disclosures. Except as provided in paragraph (b)(3)
of this section, when responding to a request for generic repayment
estimates through a toll-free telephone number, credit card issuers
and the FTC must make the following disclosures:
(i) The generic repayment estimate. If the generic repayment
estimate calculated above is less than 2 years, credit card issuers
and the FTC must disclose the estimate in months. Otherwise, the
estimate must be disclosed in years. The estimate must be rounded
down to the nearest whole year if the estimate contains a fractional
year less than 0.5, and rounded up to the nearest whole year if the
estimate contains a fractional year equal to or greater than 0.5.
(ii) The beginning balance on which the generic repayment
estimate is calculated.
(iii) The APR on which the generic repayment estimate is
calculated.
(iv) The assumption that only minimum payments are made and no
other amounts are added to the balance.
(v) The fact that the repayment period is an estimate, and the
actual time it may take to pay off the balance by only making
minimum payments will differ based on the consumer's account terms
and future account activity.
(2) Model form. Credit card issuers and the FTC may use the
following disclosure to meet the requirements set forth in paragraph
(b)(1) of this section:
It will take approximately ---- [months/years] to pay off a ----
balance at ----% APR, assuming that you only make minimum payments
and no other amounts are added to the balance. This repayment period
is only an estimate. The actual time it may take you to pay off this
balance by only making minimum payments will differ based on your
account terms and future account activity.
(3) Negative amortization. If negative amortization occurs when
calculating the repayment estimate, credit card issuers and the FTC
must disclose to the consumer that based on the assumptions used to
calculate the repayment estimate, the consumer will not pay off the
balance by paying only the minimum payment. Card issuers and the FTC
may use the following disclosure to meet the requirements set forth
in this paragraph: ``Based on the assumptions that we used to
calculate the time to repay your balance, you will never repay the
balance if you only make the minimum payment.''
(4) Permissible disclosures. Credit card issuers and the FTC may
provide the following information when responding to a request for
the generic repayment estimate through a toll-free telephone number,
so long as the following information is provided after the
disclosures in paragraph (b)(1) of this section are given:
(i) A description of the assumptions used to calculate the
generic repayment estimate as described in paragraph (a)(5) of this
section.
(ii) The length of time it would take to repay the beginning
balance described in paragraph (b)(1)(ii) of this section if an
additional amount was paid each month in addition to the minimum
payment amount, allowing the consumer to select the additional
amount. In calculating this estimate, card issuers and the FTC must
use the same terms described in paragraph (a) of this section,
except they also must assume the additional amount was paid each
month in addition to the minimum payment amount.
(iii) The length of time it would take to repay the beginning
balance described in paragraph (b)(1)(ii) of this section if the
consumer made a fixed payment amount each month, allowing the
consumer to select the amount of the fixed payment. In calculating
this estimate, card issuers and the FTC must use the same terms
described in paragraph (a) of this section, except they also must
assume the consumer made a fixed payment amount each month.
(iv) The monthly payment amount that would be required to pay
off the outstanding balance within a specific number of months,
allowing the consumer to select the payoff period. In calculating
the monthly payment amount, card issuers and the FTC must use the
same terms described in paragraph (a) of this section, as
appropriate.
(v) Reference to web-based calculation tools that permit
consumers to obtain additional estimates of repayment periods.
(vi) The total interest that a consumer may pay if the consumer
makes minimum payments for the length of time disclosed in the
generic repayment estimate.
Appendix M2 to Part 226--Actual Repayment Disclosures
(a) Calculating actual repayment disclosures.
(1) Definitions. (i) ``Retail credit card'' means a credit card
that is issued by a retailer that can be used only in transactions
with the retailer or a group of retailers that are related by common
ownership or control, or a credit card where a retailer arranges for
a creditor to offer open-end credit under a plan that allows the
consumer to use the credit only in transactions with the retailer or
a group of retailers.
(ii) ``General purpose credit card'' means a credit card other
than a retail credit card.
[[Page 33085]]
(iii) ``Promotional terms'' means terms of a cardholder's
account that will expire in a fixed period of time, as set forth by
the card issuer.
(2) Minimum payment formulas. When calculating actual repayment
disclosures, credit card issuers must use the minimum payment
formula(s) that apply to a cardholder's account. If any promotional
terms related to payments currently apply to a cardholder's account,
such as a ``deferred payment plan,'' credit card issuers may assume
no promotional terms apply to the account.
(3) Annual percentage rate. When calculating annual repayment
estimates, a credit card issuer must use the annual percentage rates
that apply to a cardholder's account, based on the portion of the
balance to which the rate applies. If any promotional terms related
to annual percentage rates currently apply to a cardholder's
account, such as introductory rates or deferred interest plans,
credit card issuers may assume no promotional terms apply to the
account.
(4) Beginning balance. When calculating the actual repayment
disclosure, credit card issuers must use as the beginning balance
the outstanding balance on a consumer's account as of the closing
date of the last billing cycle.
(5) Assumptions. When calculating the actual repayment
disclosure, credit card issuers may make the following assumptions
regardless of whether they are the same as the actual terms of the
consumer's account.
(i) Only minimum monthly payments are made each month.
(ii) No additional extensions of credit are obtained, including
new purchases, transactions, fees, rebates, charges or other
activity.
(iii) The annual percentage rate or rates that apply to a
cardholder's account will not change, through either the operation
of a variable rate or the change to a rate.
(iv) There is no grace period.
(v) The final payment pays the account in full (i.e., there is
no residual finance charge after the final month in a series of
payments).
(vi) The average daily balance method is used to calculate the
balance.
(vii) All months are the same length (i.e., 30.41667 days long).
Leap year is ignored.
(viii) Payments are credited on the last day of the month.
(ix) Payments are allocated to lower APR balances before higher
APR balances.
(b) Disclosing the actual repayment disclosure to consumers
through a toll-free telephone number.
(1) Required disclosures. Except as provided in paragraph (b)(3)
of this section, when responding to a request for actual repayment
disclosures through a toll-free telephone number, credit card
issuers must make the following disclosures:
(i) The actual repayment disclosure. If the actual repayment
disclosure is less than 2 years, credit card issuers must disclose
the estimate in months. Otherwise, the estimate must be disclosed in
years. The estimate must be rounded down to the nearest whole year
if the estimate contains a fractional year less than 0.5, and
rounded up to the nearest whole year if the estimate contains a
fractional year equal or greater than 0.5.
(ii) The outstanding balance on which the actual repayment
disclosure is calculated.
(iii) The assumption that only minimum payments are made.
(iv) The fact that the repayment period is an estimate, and is
based on several assumptions about the consumer's account terms and
future activity.
(2) Model form. Credit card issuers may use the following
disclosure to meet the requirements set forth in paragraph (b)(1) of
this section:
Your outstanding balance as of the last billing statement was
$------. If you make only the minimum payment each month it would
take you about ------ [months/years] to repay this outstanding
balance. This repayment period is only an estimate and is based on
several assumptions about your account terms and future activity on
the account.
(3) Negative amortization. If negative amortization occurs when
calculating the repayment estimate, credit card issuers must
disclose to the consumer that based on the current terms applicable
to the consumer's account, the consumer will not pay off the balance
by paying only the minimum payment. Card issuers may use the
following disclosure to meet the requirements set forth in this
paragraph: ``Your outstanding balance as of the last billing
statement was $------. You will never repay the balance if you only
make the minimum payment.''
(4) Permissible disclosures. Credit card issuers may provide the
following information when responding to a request for the actual
repayment disclosure through a toll-free telephone number, so long
as the following information is provided after the disclosures in
paragraph (b)(1) of this section are given:
(i) A description of the assumptions used to calculate the
actual repayment disclosure as described in paragraph (a)(5) of this
section.
(ii) The length of time it would take to repay the beginning
balance described in paragraph (b)(1)(ii) of this section if an
additional amount was paid each month in addition to the minimum
payment amount, allowing the consumer to select the additional
amount. In calculating this estimate, credit card issuers must use
the same terms described in paragraph (a) of this section used to
calculate the actual repayment disclosure, except they also must
assume the additional amount was paid each month in addition to the
minimum payment amount.
(iii) The length of time it would take to repay the beginning
balance described in paragraph (b)(1)(ii) of this section if the
consumer made a fixed payment amount each month, allowing the
consumer to select the amount of the fixed payment. In calculating
this estimate, card issuers must use the same terms described in
paragraph (a) of this section to calculate the actual repayment
disclosure, except they also must assume the consumer made a fixed
payment amount each month.
(iv) The monthly payment amount that would be required to pay
off the outstanding balance within a specific number of months,
allowing the consumer to select the payoff period. In calculating
the monthly payment amount, card issuers must use the same terms
described in paragraph (a) of this section, as appropriate.
(v) Reference to web-based calculation tools that permit
consumers to obtain additional estimates of repayment periods.
(vi) The total interest that a consumer may pay if the consumer
makes minimum payments for the length of time disclosed in the
actual repayment disclosure.
(c) Disclosing the actual repayment disclosures on periodic
statements.
(1) Required disclosures. Except as provided in paragraph (c)(3)
of this section, when providing the actual repayment disclosure on
the periodic statement, credit card issuers must make the following
disclosures:
(i) The actual repayment disclosure. If the actual repayment
disclosure is less than 2 years, credit card issuers must disclose
the estimate in months. Otherwise, the estimate must be disclosed in
years. The estimate must be rounded down to the nearest whole year
if the estimate contains a fractional year less than 0.5, and
rounded up to the nearest whole year if the estimate contains a
fractional year equal to or greater than 0.5.
(ii) The fact that the repayment period is based on the current
outstanding balance shown on the account.
(iii) The assumption that only minimum payments are made.
(2) Model form. Credit card issuers may use the disclosure in
appendix G-18(D) to meet the requirements set forth in paragraph
(c)(1) of this section.
(3) Negative amortization. If negative amortization occurs when
calculating the actual repayment disclosure, credit card issuers
must disclose to the consumer that based on the current terms
applicable to the consumer's account, the consumer will not pay off
the balance by making only the minimum payment. Card issuers may use
the disclosure in appendix G-18(D) to meet the requirements set
forth in this paragraph.
(4) Permissible disclosures. Card issuers may provide the
following information on the periodic statement, so long as the
following information is provided after the disclosures in paragraph
(c)(1) are given:
(i) The fact that the repayment period is an estimate, and is
based on several assumptions about the consumer's account terms and
future activity.
(ii) A reference to another location on the statement where the
consumer may find additional information about the repayment
estimate.
(iii) A description of the assumptions used to calculate the
actual repayment disclosure as described in paragraph (a)(5) of this
section.
(iv) The length of time it would take to repay the outstanding
balance shown on the statement if an additional amount was paid each
month in addition to the minimum payment amount. Card issuers may
choose the additional amount. In calculating this estimate, card
issuers must use the same terms described in paragraph (a) of this
section used to calculate the actual repayment period, except they
also must assume the additional amount was paid each
[[Page 33086]]
month in addition to the minimum payment amount.
(v) The length of time it would take to repay the outstanding
balance shown on the statement if the consumer made a fixed payment
amount each month. Card issuers may choose the amount of the fixed
payment. In calculating this estimate, card issuers must use the
same terms described in (a) of this section used to calculate the
actual repayment disclosure, except they also must assume the
consumer made a fixed payment amount each month.
(vi) The monthly payment amount that would be required to pay
off the outstanding balance within a specific number of months. Card
issuers may choose the specific number of months used in the
calculation. In calculating the monthly payment amount, card issuers
must use the same terms described in paragraph (a) of this section,
as appropriate.
(vii) Reference to web-based calculation tools that permit
consumers to obtain additional estimates of repayment periods.
(viii) The total interest that a consumer may pay if the
consumer makes minimum payments for the length of time disclosed in
the actual repayment disclosure.
Appendix M3 to Part 226--Sample Calculations of Generic Repayment
Estimates and Actual Repayment Disclosures
(a) Generic repayment estimates. The following is an example of
how to calculate the generic repayment estimates using the guidance
in appendix M1 where the APR is 17 percent, the outstanding balance
is $1,000, and the minimum payment formula is 2 percent of the
outstanding balance or $20, whichever is greater. The following
calculation is written in SAS code.
DATA ONE;
RATE1=0.17; *APR;
TBAL=1000; *OUTSTANDING BALANCE;
*INITIALIZE COUNTER OF MONTHS, PERIODIC RATE AND FINANCE CHARGES;
MONTHS=0;
PERRATE1=0;
FC1=0;
*ABSOLUTE MINIMUM PAYMENT RULE USED;
MINPMT=20;
*CALCULATE PERIODIC RATE;
PERRATE1=((1+(RATE1/365))**30.41667)-1; *ADB METHOD;
*CALCULATE MONTHS TO PAYOFF;
DO WHILE (TBAL GT 0);
MONTHS=MONTHS+1;
PMT=0.02*TBAL; *TWO PERCENT MIN PAYMENT RULE;
FC1=TBAL*PERRATE1; *CALCULATE FINANCE CHARGE;
TBAL=TBAL+FC1; *ADD FINANCE CHARGE TO BALANCE;
IF PMT LT MINPMT THEN PMT=MINPMT;
TBAL = TBAL-PMT;
END;
*RESULTS;
PROC PRINT DATA=ONE;
VAR MONTHS;
PROC PRINT DATA=ONE;
VAR PMT FC1 TBAL PERRATE1;
(b) Actual Repayment Disclosures. The following is an example of
how to calculate the actual repayment disclosures using the guidance
in M2 where three APRs apply, the total outstanding balance is
$1000, and the minimum payment formula is 2 percent of the
outstanding balance or $20, whichever is greater. The following
calculation is written in SAS code.
DATA ONE;
*INITIALIZE NUMBERS OF APRS, PERIODIC RATES, BALANCES, AND PERIODIC
FINANCE CHARGES;
ARRAY RATE(3);
ARRAY PERRATE(3);
ARRAY BAL(3);
ARRAY FC(3);
*INITIALIZE APRS AND BALANCES, PLACING RATES FROM LOWEST TO HIGHEST;
RATE1=0.019; *APR 1;
RATE2=0.17; *APR 2;
RATE3=0.21; *APR 3;
BAL1=500; *BALANCE ASSOCIATED WITH APR 1;
BAL2=250; *BALANCE ASSOCIATED WITH APR 2;
BAL3=250; *BALANCE ASSOCIATED WITH APR 3;
*INITIALIZE TOTAL BALANCE AND COUNTER OF MONTHS;
TBAL=0;
MONTHS=0;
*ABSOLUTE MINIMUM PAYMENT RULE USED;
MINPMT=20;
*CALCULATE PERIODIC RATES AND INITIAL TOTAL BALANCE;
DO I=1 TO 3;
PERRATE(I)=((1+(RATE(I)/365))**30.41667)-1; *ADB METHOD;
TBAL=TBAL+BAL(I);
END;
*CALCULATE MONTHS TO PAYOFF FOR LOWEST RATE BALANCE;
DO WHILE (BAL(1) GT 0);
MONTHS=MONTHS+1;
PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
DO I=1 TO 3; FC(I)=BAL(I)*PERRATE(I); *CALCULATE FINANCE
CHARGES;
END;
DO I=1 TO 3; BAL(I)=BAL(I)+FC(I); TBAL=TBAL+FC(I); *ADD FINANCE
CHARGES TO BALANCES;
END;
IF PMT LT MINPMT THEN PMT=MINPMT;
BAL(1)=BAL(1)-PMT; *APPLYING PAYMENT TO LOWEST APR BALANCE;
TBAL=TBAL-PMT;
END;
*CALCULATE MONTHS TO PAYOFF FOR NEXT LOWEST RATE BALANCE, IF ANY,
CARRYING OVER NUMBER FROM LOWER RATE BALANCE;
BAL(2)=BAL(2)+BAL(1);
DO WHILE (BAL(2) GT 0);
MONTHS=MONTHS+1;
PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
DO I=2 TO 3; FC(I)=BAL(I)*PERRATE(I); *CALCULATE FINANCE
CHARGES;
END;
DO I=2 TO 3; BAL(I)=BAL(I)+FC(I); TBAL=TBAL+FC(I); *ADD FINANCE
CHARGES TO BALANCES;
END;
IF PMT LT MINPMT THEN PMT=MINPMT;
BAL(2)=BAL(2)-PMT; *APPLYING PAYMENT TO SECOND LOWEST APR
BALANCE;
TBAL=TBAL-PMT;
END;
*CALCULATE MONTHS TO PAYOFF FOR NEXT LOWEST RATE BALANCE, IF ANY,
CARRYING OVER NUMBER FROM LOWER RATE BALANCES;
BAL(3)=BAL(3)+BAL(2);
DO WHILE (BAL(3) GT 0);
MONTHS=MONTHS+1;
PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
FC(3)=BAL(3)*PERRATE(3); *CALCULATE FINANCE CHARGE;
BAL(3)=BAL(3)+FC(3); *ADD FINANCE CHARGES TO BALANCE;
TBAL=TBAL+FC(3);
IF PMT LT MINPMT THEN PMT=MINPMT;
BAL(3)=BAL(3)-PMT; *APPLYING PAYMENT TO REMAINING BALANCE;
TBAL=TBAL-PMT;
END;
*RESULTS;
PROC PRINT DATA=ONE;
VAR MONTHS;
PROC PRINT DATA=ONE;
VAR PMT FC1 BAL1 FC2 BAL2 FC3 BAL3 TBAL; [ltrif]
23. In Supplement I to Part 226:
A. Revise the Introduction.
B. Revise subpart A.
C. In Subpart B, revise sections 226.5 through 226.14 and 226.16.
D. Revise Appendix F, and Appendixes G and H.
E. Amend Appendix G by revising paragraphs 1. through 3. and 5.
through 6., republishing paragraph 7., and adding paragraph 8.
F. Remove the References paragraph at the end of sections 226.1,
226.2, 226.3, 226.4, 226.5, 226.6, 226.7, 226.8, 226.9, 226.10, 226.11,
226.12, 226.13, 226.14, 226.16, Appendix E and Appendix F.
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.
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
[[Page 33087]]
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.
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.]
[rtrif]3.[ltrif] [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.
[rtrif]4. [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 subparagraph, 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 [rtrif]I-4[ltrif] [I-
7]. Comments to the appendixes 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.
For those creditors wishing to use the annual billing
rights statement, the creditor may count from the date on which it sent
its last statement under the previous regulation in determining when to
give the first statement under the new regulation. For example, if the
creditor sent a semiannual statement in June 1981 and converts to the
new 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.
[rtrif]For example, if a U.S. resident has a credit card account issued
by a bank (whether U.S.- or foreign-based) located in the consumer's
state, the account is covered by the regulation, including extensions
of credit under the account that occur outside the United States. In
contrast, if a U.S. resident residing or visiting abroad, or a foreign
national abroad, opens a credit card
[[Page 33088]]
account issued by a foreign branch of a U.S. bank, the account is not
covered by the regulation.[ltrif] [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.]
Section 226.2--Definitions and Rules of Construction
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. [rtrif]Electronic advertisements[ltrif] [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 [rtrif]or potential customers[ltrif]
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 Sec. Sec. 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)(4) Billing cycle or cycle.
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 four 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 [rtrif]first billing cycle on an open-end account or to
a[ltrif] transitional billing cycle that can occur [rtrif]if[ltrif]
[when] the creditor occasionally changes its billing cycles so as to
establish a new statement day or date. (See comments 9(c)(1)-3 and
9(c)(2)-3[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's merely
accepting credit cards for purchases or a bank's 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
[[Page 33089]]
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.
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 four
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 Sec. 226.15
and Sec. 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 contract 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:
i. 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.
ii. 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.
iii. 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.
iv. 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
v. Borrowing against the accrued cash value of an insurance policy
or a pension account, if there is no independent obligation to repay.
vi. Letters of credit.
vii. 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.
viii. 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.
ix. 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
[[Page 33090]]
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, 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 Sec. Sec. 226.5a,
[rtrif]226.7(b)(11), 226.7(b)(12)[ltrif] 226.9(e), 226.9(f) and
226.28(d), and appendixes 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 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 two requirements, both
of which must be met in order for a particular credit extension to be
subject to the regulation and for the credit extension to count towards
satisfaction of the numerical tests mentioned in [rtrif]Sec.
226.2(a)(17)(v)[ltrif] [footnote 3 to Sec. 226.2(a)(17)].
i. First, there must be either or both of the following:
A. A written (rather than oral) agreement to pay in more than four
installments. A letter that merely confirms an oral agreement does not
constitute a written agreement for purposes of the definition.
B. A finance charge imposed for the credit. The obligation to pay
the finance charge need not be in writing.
ii. 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:
i. 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 [rtrif]Sec. 226.2(a)(17)(v)[ltrif] [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
[rtrif]2006[ltrif] [1982].
[[Page 33091]]
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 [rtrif]2007[ltrif] [1983], it is a creditor
for purposes of the regulation for the last extension of credit in
[rtrif]2007[ltrif] [1983] and for all extensions of consumer credit in
[rtrif]2008[ltrif] [1984]. On the other hand, if a business begins in
[rtrif]2007[ltrif] [1983] and extends consumer credit 20 times, it is
not a creditor for purposes of the regulation in [rtrif]2007[ltrif]
[1983]. If it extends consumer credit 75 times in [rtrif]2008[ltrif]
[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
[rtrif]2009[ltrif] [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
[rtrif]2007[ltrif] [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
[rtrif]2007[ltrif] [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 [rtrif]2007[ltrif] [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:
i. A bank is the trustee for three trusts. Trust A makes 15
extensions of consumer credit annually; Trust B makes 10 extensions of
consumer credit annually; and Trust C makes 30 extensions of consumer
credit annually. Only Trust C is a creditor for purposes of the
regulation.
[8. Loans from employee savings plans. 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) 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 four 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. i. Creditors may treat the deferred portion of
the downpayment, often referred to as pick-up payments, in a number of
ways. If the pick-up payment is treated as part of the downpayment:
A. It is subtracted in arriving at the amount financed under Sec.
226.18(b).
B. It may, but need not, be reflected in the payment schedule under
Sec. 226.18(g).
ii. 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:
A. It must be included in the amount financed.
B. It must be shown in the payment schedule. iii. 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.
[[Page 33092]]
See the commentary to Sec. Sec. 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. [rtrif]The consumer has a single account with the
creditor, although there may be separate sub-accounts maintained under
that single account. Advances and payments may be allocated to
different sub-accounts for the purpose of prescribing different terms
(such as different periodic rates or other payment options) for those
advances. Repayments of an advance for any sub-account must generally
replenish the credit line for that sub-account so that a consumer may
continue to borrow and take advances under the plan to the extent that
he or she repays outstanding balances without having to obtain separate
approval for each subsequent advance. For example, a credit card
account may permit cash advances and purchase transactions with
different periodic rates and payment terms. Repayments allocated to the
cash advance sub-accounts must generally replenish the consumer's cash
advance credit line and repayment allocated to the purchase transaction
sub-account must generally replenish the consumer's purchase
transaction credit line, so that the consumer may continue to take
advances under each sub-account to the extent that its outstanding
balance is repaid.[ltrif] [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 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] [rtrif]For example, it[ltrif] would be
more reasonable for a [rtrif]bank or depository institution[ltrif]
[thrift institution chartered for the benefit of its members] to
contemplate repeated transactions with a [member]
[rtrif]customer[ltrif] 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
[rtrif]occasionally or routinely[ltrif] verify credit information such
as the consumer's continued income and employment status or information
for security purposes [rtrif]but, to meet the definition of open-end
credit, such verification of credit information may not be done as a
condition of granting a consumer's request for a particular advance
under the plan. In general, a credit line is self-replenishing if the
consumer can take further advances as outstanding balances are repaid
without being required to separately apply for those additional
advances.[ltrif]. This criterion of unlimited credit distinguishes
open-end credit from a series of advances made pursuant to a closed-end
credit loan commitment. For example:
i. 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.
ii. 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
[[Page 33093]]
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.
1. Basis. The periodic rate may be stated as a percentage (for
example, 1 \1/2\ percent 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:
i. 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.
ii. 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. i. Common examples of prepaid finance charges include:
A. Buyer's points.
B. Service fees.
C. Loan fees.
D. Finder's fees.
E. Loan-guarantee insurance.
F. Credit-investigation fees.
ii. 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 Sec. Sec. 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
[rtrif]seven[ltrif] [six] provisions in the regulation:
i. Section 226.4(c)(7)--exclusions from the finance charge.
ii. Section 226.15(f)--exemption from the right of rescission.
iii. Section 226.18(q)--whether or not the obligation is assumable.
iv. Section 226.19--special timing rules.
v. Section 226.20(b)--disclosure requirements for assumptions.
vi. Section 226.23(f)--exemption from the right of rescission.
[rtrif]vii. Section 226.32(a)--exemption from rules for certain
mortgages.[ltrif]
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 have only one principal
dwelling at a time. Thus, a vacation or other second home would not be
a principal dwelling. However, if a consumer buys or builds a new
dwelling that will 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
Sec. Sec. 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 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:
i. The creditor makes a construction loan to finance the initial
construction of the consumer's principal dwelling, and the loan will be
disbursed in five advances. The creditor gives six sets of disclosures
(five for the construction phase and one for the permanent phase). Each
one is a residential mortgage transaction.
ii. 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
[[Page 33094]]
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 Sec. Sec.
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. i. Incidental interests in property that
are not security interests include, among other things:
A. Assignment of rents.
B. Right to condemnation proceeds.
C. Interests in accessories and replacements.
D. Interests in escrow accounts, such as for taxes and insurance.
E. Waiver of homestead or personal property rights.
ii. 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.
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.
2. Amount. The numerical amount must be a dollar amount unless
otherwise indicated. For example, in a closed-end transaction (Subpart
C), the amount financed and the amount of any payment must be expressed
as a dollar amount. In some cases, an amount should be expressed as a
percentage. For example, in disclosures provided before the first
transaction under an open-end plan (Subpart B), creditors are permitted
to explain how the amount of any finance charge will be determined;
where a cash-advance fee (which is a finance charge) is a percentage of
each cash advance, the amount of the finance charge for that fee is
expressed as a percentage.
Section 226.3--Exempt Transactions
[rtrif]1. Relationship to Sec. 226.12. The provisions in Sec.
226.12(a) and (b) governing the issuance of credit cards and the
liability for their unauthorized use apply to all credit cards, even if
the credit cards are issued for use in connection with extensions of
credit that otherwise are exempt under this section.[ltrif]
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.
[[Page 33095]]
[rtrif]2. Business purpose purchases.
i. Business-purpose credit cards--extensions of credit for consumer
purposes. If a business-purpose credit card is issued to a person,
other than as provided in Sec. Sec. 226.12(a) and 226.12(b), the
provisions of the regulation do not apply, even if extensions of credit
for consumer purposes are made using that business-purpose credit card.
For example, the billing error provisions set forth in Sec. 226.13 do
not apply to consumer-purpose extensions of credit using a business-
purpose credit card or a business-purpose open-end credit plan.
ii. Consumer-purpose credit cards --extensions of credit for
business purposes. If a consumer-purpose credit card is issued to a
person, the provisions of the regulation apply, even to extensions of
credit for business purposes made using that consumer-purpose credit
card. For example, a consumer may assert a billing error with respect
to any extension of credit using a consumer-purpose credit card or a
consumer-purpose open-end credit plan, even if the specific extension
of credit on such credit card or open-end credit plan that is the
subject of the dispute was made for business purposes.[ltrif]
[2][rtrif]3[ltrif]. 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:
[rtrif]i. General[ltrif]
A. The relationship of the borrower s primary occupation to the
acquisition. The more closely related, the more likely it is to be
business purpose.
B. 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.
C. 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.
D. The size of the transaction. The larger the transaction, the
more likely it is to be business purpose.
E. The borrower's statement of purpose for the loan.
[rtrif]ii. Business-purpose examples.[ltrif] Examples of business-
purpose credit include:
A. A loan to expand a business, even if it is secured by the
borrower s residence or personal property.
B. A loan to improve a principal residence by putting in a business
office.
C. A business account used occasionally for consumer purposes.
[rtrif] iii. Consumer-purpose examples.[ltrif] Examples of
consumer-purpose credit include:
A. Credit extensions by a company to its employees or agents if the
loans are used for personal purposes.
B. A loan secured by a mechanic's tools to pay a child's tuition.
C. A personal account used occasionally for business purposes.
[3] [rtrif]4[ltrif]. 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]
[rtrif]5[ltrif], however, for rules relating to owner-occupied rental
property.
[4] [rtrif]5[ltrif]. 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:
i. Credit extended to acquire the rental property is deemed to be
for business purposes if it contains more than 2 housing units.
ii. 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)-
''[rtrif]3[ltrif] [2].
[5] [rtrif]6[ltrif]. 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.
[rtrif]7. Credit card renewal. A consumer-purpose credit card that
is subject to the regulation may be converted into a business-purpose
credit card at the time of its renewal, and the resulting business-
purpose credit card would be exempt from the regulation. Conversely, a
business-purpose credit card that is exempt from the regulation may be
converted into a consumer-purpose credit card at the time of its
renewal, and the resulting consumer-purpose credit card would be
subject to the regulation.[ltrif]
[6] [rtrif]8[ltrif]. 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.
[7] [rtrif]9[ltrif]. 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] [rtrif]10[ltrif]. 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
[[Page 33096]]
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. i. 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:
A. The creditor makes a firm commitment to lend over $25,000 with
no requirement of additional credit information for any advances
[rtrif](except as permitted from time to time pursuant to Sec.
226.2(a)(20))[ltrif].
B. The initial extension of credit on the line exceeds $25,000.
ii. 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:
i. General.
A. Gas, water, or electrical services.
B. Cable television services.
C. Installation of new sewer lines, water lines, conduits,
telephone poles, or metering equipment in an area not already serviced
by the utility.
[rtrif]ii. Extensions of credit not covered.[ltrif] The exemption
does not apply to extensions of credit, for example:
A. To purchase appliances such as gas or electric ranges, grills,
or telephones.
B. 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.
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:
i. 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).)
ii. 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
[[Page 33097]]
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:
i. 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.
ii. 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:
iii. 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.
iv. 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. [rtrif]Treatment of transaction fees on credit card plans. Any
transaction charge imposed on a cardholder by a card issuer is a
finance charge, regardless of whether the issuer imposes the same,
greater, or lesser charge on withdrawals of funds from an asset account
such as a checking or savings account. For example, any charge imposed
on a credit 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 a finance charge
regardless of whether the card issuer imposes a charge on its debit
cardholders for using the ATM to withdraw cash from a consumer asset
account, such as a checking or savings account. Similarly, any charge
imposed on a credit cardholder by a card issuer for making a purchase
outside the United States or in a foreign currency is a finance charge
regardless of whether the card issuer imposes a charge on its debit
cardholders for such transactions.[ltrif] [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 it is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly; or
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 another 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 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
[[Page 33098]]
consumer credit transaction secured by real property or a dwelling.
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:
i. 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.
ii 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 [rtrif]home equity plan subject to the requirements of
Sec. 226.5b[ltrif] [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
[rtrif]home equity[ltrif] plan [rtrif]subject to the requirements of
Sec. 226.5b[ltrif] (although credit-sale disclosures may be required
for the insurance sold after consummation if it is financed).
[rtrif]Credit insurance sold before or after an open-end (not home-
secured) plan is opened is considered ``written in connection with a
credit transaction.''[ltrif]
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:
i. The premium for a hospitalization insurance policy, if it is
required to be purchased 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:
i. 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.
i. [rtrif]Creditors may exclude from the finance charge discounts
offered to consumers for using cash or another means of payment instead
of using a credit card or an open-end plan.[ltrif] [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. [rtrif]Pursuant to section 167(b) of the Act,
this[ltrif] [This] provision applies only to transactions involving an
open-end credit plan or a credit card [rtrif](whether open-end or
closed-end credit is extended on the card)[ltrif]. The merchant must
offer the discount to prospective buyers whether or not they are
cardholders or members of the open-end
[[Page 33099]]
credit plan. The merchant may, however, make other distinctions. For
example:
A. 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.
B. 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.
ii. [rtrif]Pursuant to section[ltrif] [Section] 171(c) of the act,
[excludes section 167(b)] discounts [rtrif]excluded from the finance
charge under this paragraph are also excluded[ltrif] from treatment as
a finance charge or other charge for credit under any state usury or
disclosure laws.
3. Determination of the regular price.
i. 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 * * *.
ii. 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 [rtrif]and debt suspension[ltrif] 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 [rtrif]``debt cancellation coverage''[ltrif] includes
guaranteed automobile protection, or ``GAP,'' agreements, which pay or
satisfy the remaining debt after property insurance benefits are
exhausted. [rtrif]Debt suspension coverage provides for suspension of
the obligation to make one or more payment on the date(s) otherwise
required by the credit agreement, when a specified even occurs. The
term ``debt suspension'' does not include loan payment deferral
arrangements in which the triggering event is the borrower's unilateral
election to defer repayment (``skip payments''), or the bank's
unilateral decision to allow a deferral of payment.[ltrif]
[rtrif]2. Coverage written in connection with a transaction.
Coverage sold after consummation in closed-end credit transactions or
after the opening of a home equity plan subject to the requirements of
Sec. 226.5b is not written in connection with the credit transaction
if the coverage is written because the consumer requests coverage after
consummation or the opening of a home equity plan subject to the
requirements of Sec. 226.5b (although credit-sale disclosures may be
required for the coverage sold after consummation if it is financed).
Coverage sold before or after an open-end (not home-secured) plan is
opened is considered ``written in connection with a credit
transaction.''[ltrif]
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.
i. 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:
A. 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.
B. 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.
ii. 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 submitting 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 [rtrif]14(c)-2[ltrif] [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
[[Page 33100]]
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 noncreditor 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 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 [rtrif]or debt
suspension[ltrif] coverage.
1. General. Section 226.4(d) permits insurance premiums and charges
and debt cancellation [rtrif]and debt suspension[ltrif] charges to be
excluded from the finance charge. The required disclosures must be made
in writing[rtrif], except as provided in Sec. 226.4(d)(4)[ltrif]. The
rules on location of insurance and debt cancellation [rtrif]and debt
suspension[ltrif] 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 [rtrif]and debt suspension[ltrif]
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 [rtrif]or debt suspension[ltrif] 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 [rtrif]; debt cancellation or
suspension coverage[ltrif]. Credit life, accident, health, or loss-of-
income insurance[rtrif], and debt cancellation and suspension coverage
described in Sec. 226.4(b)(10),[ltrif] must be voluntary in order for
the premium or charges to be excluded from the finance charge. Whether
the insurance [rtrif]or coverage[ltrif] is in fact required or optional
is a factual question. If the insurance [rtrif]or coverage[ltrif] is
required, the premiums must be included in the finance charge, whether
the insurance [rtrif]or coverage[ltrif] 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
[[Page 33101]]
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) [rtrif](1)[ltrif] 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 the premium for such insurance is not
[rtrif]imposed[ltrif] [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 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:
i. The insurer waives any right of subrogation.
ii. 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 multiyear policy).
11. Initial term.
i. The initial term of insurance or debt cancellation [rtrif]or
debt suspension[ltrif] coverage determines the period for which a
premium amount 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 one year of insurance or debt cancellation [rtrif]or
debt suspension[ltrif] 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 [rtrif]or debt
suspension[ltrif] 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 [rtrif]or debt
suspension[ltrif] coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation [rtrif]or debt suspension[ltrif] coverage
constitutes insurance under state law. [rtrif]See Model Clauses and
Samples at G-16 and H-17 in appendix G and appendix H for guidance on
how to provide the disclosure required by Sec. 226.4(d)(3)(iii) for
debt suspension products.[ltrif]
[rtrif]3. Multiple events. If debt cancellation or debt suspension
coverage for two or more events is provided at a single charge, the
entire charge may be excluded from the finance charge if at least one
of the events is accident or loss of life, health, or income and the
conditions specified in Sec. 226.4(d)(3) or, as applicable, Sec.
226.4(d)(4), are satisfied.[ltrif]
[rtrif]4(d)(4) Telephone purchases.
1. Affirmative request. A creditor would not satisfy the
requirement to obtain a consumer's affirmative request
[[Page 33102]]
if the ``request'' was a response to a script that uses leading
questions or negative consent.[ltrif]
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 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 agreement). (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:
i. The document to be notarized is one used to perfect, release, or
continue a security interest.
ii. The document is required by law to be notarized.
iii. A notary is considered a public official under applicable law.
iv. The amount of the fee is set or authorized by law.
4. Nonfiling insurance. The exclusion in Sec. 226.4(e)(2) is
available only if nonfiling insurance is purchased. If the creditor
collects and simply retains a fee as a sort of ``self-insurance''
against nonfiling, it may not be excluded from the finance charge. If
the nonfiling 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:
i. The fee for perfecting a security interest is $5.00 and the fee
for releasing the security interest is $3.00. The creditor charges
$10.00 for nonfiling insurance. Only $8.00 of the $10.00 is excludable
from the 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 on deposits or
investments applies whether or not the creditor has a security interest
in the property.
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
5(a) Form of disclosures.
[Paragraph] 5(a)(1) [rtrif]--General.[ltrif]
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard [rtrif]generally[ltrif] requires that disclosures be in a
reasonably understandable form. [rtrif]Disclosures for credit card
applications and solicitations under Sec. 226.5a, highlighted account-
opening disclosures under Sec. 226.6(b)(4), highlighted disclosure on
checks that access a credit card under Sec. 226.9(b)(3); highlighted
change-in-terms disclosures under Sec. 226.9(c)(2)(iii)(B), and
highlighted disclosures when a rate is increased due to delinquency,
default or for a penalty under Sec. 226.9(g)(3)(ii) must also be
readily noticeable to the consumer.[ltrif] [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 comment 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.]
[rtrif]2. Clear and conspicuous--reasonably understandable form.
Except where otherwise provided, the reasonably understandable form
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. For disclosures that are given orally, the
standard requires that they be given at a speed and volume sufficient
for a consumer to hear and comprehend them. See comment 5(b)(1)(ii)-1.
Except where otherwise provided, the standard does not prohibit:
i. Pluralizing required terminology (``finance charge'' and
``annual percentage rate'')
ii. Adding to the required disclosures such items as contractual
provisions, explanations of contract terms, state disclosures, and
translations
iii. Sending promotional material with the required disclosures
iv. Using commonly accepted or readily understandable abbreviations
(such as ``mo.'' for ``month'' or ``Tx.'' for ``Texas'') in making any
required disclosures
v. 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.[ltrif]
[rtrif]3. Clear and conspicuous--readily noticeable standard. To
meet the readily noticeable standard, disclosures for credit card
applications and solicitations under Sec. 226.5a, highlighted account-
opening disclosures under Sec. 226.6(b)(4), highlighted disclosures on
checks that access a credit card account under Sec. 226.9(b)(3),
highlighted change-in-terms disclosures under Sec.
226.9(c)(2)(iii)(B), and highlighted disclosures when a rate is
increased due to delinquency, default or penalty pricing under Sec.
226.9(g)(3)(ii) must be given in a minimum of 10-point font. (See
special rule for font size requirements for the annual percentage rate
for purchases under Sec. Sec. 226.5a(b)(1) and 226.6(b)(4).)[ltrif]
[rtrif]4.[ltrif] [2.] Integrated document. The creditor may make
both the [rtrif]account-opening[ltrif] [initial] disclosures (Sec.
226.6) and the periodic-statement disclosures (Sec. 226.7) on more
than one page, and use both the front and the reverse sides,
[rtrif]except where otherwise indicated,[ltrif] 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:
i. Multiple pages provided in the same envelope that cover related
material and are folded together, numbered consecutively, or clearly
labeled to show that they relate to one another
[[Page 33103]]
ii. 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
[rtrif]5. Disclosures covered. Disclosures that must meet the
``clear and conspicuous'' standard include all required communications
under this subpart. Therefore, disclosures made by a person other than
the card issuer, such as disclosures of finance charges imposed at the
time of honoring a consumer's credit card under Sec. 226.9(d), and
notices, such as the correction notice required to be sent to the
consumer under Sec. 226.13(e), must also be clear and
conspicuous.[ltrif]
[Paragraph] 5(a)(2) [rtrif]--Terminology[ltrif].
1. When disclosures must be more conspicuous. The terms 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 [rtrif]Sec.
226.5(a)(2)(ii)[ltrif] [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:
i. In disclosing the annual percentage rate as required by [Sec.
226.6(a)(2)] [rtrif]Sec. 226.6(a)(1)(ii)[ltrif], the term annual
percentage rate is subject to the more conspicuous rule.
ii. In disclosing the amount of the finance charge, required by
[rtrif]Sec. 226.7(a)(6)(i)[ltrif] [Sec. 226.7(f)], the term finance
charge is subject to the more conspicuous rule.
iii. 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)] [rtrif]Sec.
226.6(a)(1)(iii) and (iv)[ltrif], they may be equally conspicuous as
the disclosures required under Sec. Sec. [226.6(a)(2) and 226.7(g)]
[rtrif]226.6(a)(1)(ii) and 226.7(a)(7)[ltrif].
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:
i. Capitalizing the words when other disclosures are printed in
lower case.
ii. Putting them in bold print or a contrasting color.
iii. Underlining them.
iv. Setting them off with asterisks.
v. 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).
[rtrif]4. Consistent terminology. Language used in disclosures
required in this subpart must be close enough in meaning to enable the
consumer to relate the different disclosures; however, the language
need not be identical.[ltrif]
5(b) Time of disclosures.
5(b)(1) [Initial] [rtrif]Account-opening[ltrif] disclosures.
[rtrif]5(b)(1)(i) General rule.[ltrif]
1. Disclosure before the first transaction. [rtrif]When disclosures
must be furnished ``before the first transaction,'' the disclosures
must be delivered before the consumer becomes obligated on the
plan.[ltrif] [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] [rtrif]account-opening[ltrif]
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) [rtrif]except when the consumer
places a telephone call to make the purchase and opens the plan
contemporaneously (see commentary to paragraph 5(b)(1)(iii)
below);[ltrif] receives the first advance [rtrif];[ltrif] [,] 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 account-opening 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).
Account-opening disclosures need not be given before the imposition
of an application fee under Sec. 226.4(c)(1).]
i. 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.
[rtrif]If the only ``use'' of the account is the creditor's assessment
of fees (such as start-up fees), the consumer is not considered to have
accepted the account until the consumer is provided with a billing
statement and makes a payment.[ltrif]
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] [rtrif]account-opening[ltrif] disclosures
are required.
3. Reopening closed account. If an account has been closed (for
example, due to inactivity, cancellation, or expiration) and then is
reopened, new [initial] [rtrif]account-opening[ltrif] disclosures are
required. No new [initial] [rtrif]account-opening[ltrif] 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, [initial] [rtrif]account-opening[ltrif]
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 [rtrif]furnish the disclosures required by Sec.
226.6 so that the consumer has an opportunity, after reviewing the
disclosures, to contact the creditor before the balance is transferred
and decline the transfer.[ltrif] [comply with
[[Page 33104]]
Sec. 226.6 before the balance transfer occurs.] [rtrif]For example,
assume a consumer responds to a card issuer's solicitation for a credit
card account subject to Sec. 226.5a that offers a range of balance
transfer annual percentage rates, based on the consumer's
creditworthiness. If the creditor opens an account for the consumer,
the card issuer would comply with the timing rules of this section by
providing the consumer with the annual percentage rate (along with the
fees and other required disclosures) that would apply to the balance
transfer in time for the consumer to contact the card issuer and
withdraw the request.[ltrif] 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.
[rtrif]5(b)(1)(ii) Charges imposed as part of an open-end (not
home-secured) plan.
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end (not home-secured) plan
orally or in writing at any time before a consumer agrees to pay the
fee or becomes obligated for the charge, unless the charge is specified
under Sec. 226.6(b)(4)(ii). Creditors meet the standard to provide
disclosures at a relevant time if the oral or written disclosure of
such a charge is given when a consumer would likely notice it, such as
when deciding whether to purchase the service that would trigger the
charge. For example, if a consumer telephones a card issuer to discuss
a particular service, a creditor would meet the standard if the
creditor clearly and conspicuously discloses the fee associated with
the service that is the topic of the telephone call.[ltrif]
[rtrif]5(b)(1)(iii) Telephone purchases.
1. Return policies. Creditors that choose to provide disclosures in
accordance with the timing requirements of this paragraph must maintain
a return policy that provides for the return of merchandise purchased
at the time the plan was established without mailing or return-shipment
costs. Creditors may impose costs to return subsequent purchases of
merchandise under the plan, or to return merchandise purchased by other
means such as a credit card issued by another creditor. A reasonable
return policy would be of sufficient duration that the consumer is
likely to have received the disclosures and had sufficient time to make
a decision about the financing plan before his or her right to return
the goods expires. Creditors, policies regarding the return of
merchandise need not provide a right to return goods if the consumer
consumes or damages the goods.[ltrif]
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:
i. 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.
ii. 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 [rtrif]draw[ltrif] [credit] privileges. When
[rtrif]a consumer's ability to draw on[ltrif] 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)[
(][rtrif], for example, when [rtrif]the draw period of[ltrif] an open-
end credit plan ends and consumers are paying off outstanding balances
[rtrif]according to the account agreement or under the terms of a
workout agreement that is not converted to a closed-end transaction.
[ltrif][) and][rtrif] In addition, creditors must[ltrif] continue to
follow all of the other open-end credit requirements and procedures in
subpart B.
[rtrif]3. Instituting collection proceedings. Creditors institute a
delinquency collection proceeding by filing a court action or
initiating an adjudicatory process with a third party. Assigning a debt
to a debt collector or other third party would not constitute
instituting a collection proceeding.[ltrif]
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:
i. If current debits retroactively become subject to finance
charges when the balance is not paid in full by a specified date.
ii. 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.]
[rtrif]Paragraph 5(b)(2)(iii).[ltrif]
[rtrif]1.[ltrif] [2.] Computer malfunction. The exceptions
identified in paragraph 5(b)(2)(iii) of this section do not extend to
the failure to provide a periodic statement because of computer
malfunction.
[rtrif]2.[ltrif] [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 in section 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.
i. The legal obligation is determined by applicable state or other
law.
ii. 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.
iii. 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,
[[Page 33105]]
redisclosure is not required for that consumer, even though more
accurate information becomes available before the first transaction.
For example, in an open-end plan to be secured by real estate, the
creditor may estimate the appraisal fees to be charged; such an
estimate might reasonably be based on the prevailing market rates for
similar appraisals. If the exact appraisal fee is determinable after
the estimate is furnished 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):
i. Creditors must choose which of them will make the disclosures.
ii. A single, complete set of disclosures must be provided, rather
than partial disclosures from several creditors.
iii. 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.
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.
[rtrif]3. Card issuer and person extending credit not the same
person. Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C.
1637(c)(4)(D)) contains rules pertaining to charge card issuers with
plans that allow access to an open-end credit plan that is maintained
by a person other than the charge card issuer. These rules are not
implemented in Regulation Z (although they were formerly implemented in
Sec. 226.5a(f)). However, the statutory provisions remain in effect
and may be used by charge card issuers with plans meeting the specified
criteria.[ltrif]
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:
i. Should clearly refer to the disclosure provision it replaces.
ii. Need not be physically attached or affixed to the basic
disclosure statement.
iii. May be used only until the supply of outdated forms is
exhausted.
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)
[rtrif](5)[ltrif] [(3)] and (e) [rtrif](2)[ltrif] for exceptions; see
[rtrif]Sec. 226.5a(a)(1) and accompanying commentary for the
definition of solicitation;[ltrif] see also Sec. 226.2(a)(15) and
accompanying commentary for the definition of charge card.)
2. [rtrif]Substitution of account-opening summary table for the
disclosures required by Sec. 226.5a. In complying with Sec.
226.5a(c), Sec. 226.5a(d)(2), Sec. 226.5a(e)(1) or Sec. 226.5a(f), a
card issuer may provide the account-opening summary table described in
Sec. 226.6(b)(4) in lieu of the disclosures required by Sec. 226.5a,
if the issuer provides the disclosures required by Sec. 226.6 on or
with the application or solicitation.[ltrif] [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 Sec. Sec. 226.5a and 226.6.]
[rtrif]3. Clear and conspicuous standard. See comment 5(a)(1)-1 for
the clear and conspicuous standard applicable to Sec. 226.5a
disclosures.[ltrif]
5a(a) General Rules.
[rtrif]5a(a)(1) Definition of Solicitation.
1. Invitations to apply. A card issuer may contact a consumer who
has not been preapproved for a card account about opening an account
(whether by direct mail, telephone, or other means) and invite the
consumer to complete an application. Such a contact does not meet the
definition of solicitation, nor is it covered by this section, unless
the contact itself includes an application form in a direct mailing,
electronic communication or ``take one'', an oral application in a
telephone contact initiated by the card issuer, or an application in an
in-person contact initiated by the card issuer.[ltrif]
5a(a)(2) Form of Disclosures[rtrif]; tabular format[ltrif]
[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-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.] [rtrif]1. Location of table. i. General. Except
for disclosures given electronically, disclosures in Sec. 226.5a(b)
that are required to be provided in a table must be prominently located
on or with the application or solicitation.[ltrif] 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.]
[[Page 33106]]
ii. Electronic disclosures. [Electronic disclosures are deemed to
be prominently located if:] [rtrif]If the table is provided
electronically, the table must be provided in close proximity to the
application or solicitation. Electronic disclosures are deemed to be
closely proximate to an application or solicitation if:
(A) They automatically appear on the screen when the application or
reply form appears;
(B) They are located on the same Web ``page'' as the application or
reply form without necessarily appearing on the initial screen, if the
application or reply form contains a clear and conspicuous reference to
the location of the disclosures and indicates that the disclosures
contain rate, fee, and other cost information, as applicable; or
(C) [ltrif][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 [rtrif].[ltrif][; 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 the
disclosures contain rate, fee, and other cost information, as
applicable.]
[rtrif]2.[ltrif] [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.
[rtrif]3. Information permitted in the table. See the commentary to
Sec. 226.5a(b), (d)(2)(ii) and (e)(1) for guidance on additional
information permitted in the table.
4. Deletion of inapplicable disclosures. Generally, disclosures
need only be given as applicable. Card issuers may, therefore, omit
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
disclosure showing none, or the heading and disclosure may be deleted
from the table. There is an exception for the grace period disclosure;
even if no grace period exists, that fact must be stated.
5. Highlighting of annual percentage rates and fee amounts. See
Samples G-10(B) and G-10(C) for guidance on providing the disclosures
described in Sec. 226.5a(a)(2)(vi) in bold text. Other annual
percentage rates or fee amounts disclosed in the table may not be in
bold text. Samples G-10(B) and G-10(C) also provide guidance to issuers
on how to disclose the rates and fees described in Sec.
226.5a(a)(2)(iv) in a clear and conspicuous manner, by including these
rates and fees generally as the first text in the applicable rows of
the table so that the highlighted rates and fees generally are aligned
vertically on the table.
6. Form of disclosures. If a consumer accesses an application or
solicitation in electronic form, the required disclosures must be
provided to the consumer in electronic form on or with the application
or solicitation; providing the disclosures at a different time or
place, or in paper form, would not comply. Conversely, if a consumer is
provided with a paper application or solicitation, the required
disclosures must be provided in paper form on or with the application
or solicitation. For example, if a consumer receives an application or
solicitation in the mail, the creditor would not satisfy its obligation
to provide Sec. 226.5a disclosures at that time by including a
reference in the application or solicitation to the Web site where the
disclosures are located.
7. Terminology. Section 226.5a(a)(2)(i) generally requires that the
headings, content and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in G-10; but see Sec. 226.5(a)(2) for terminology requirements
applicable to Sec. 226.5a disclosures.
8. Form of electronic disclosures provided on or with electronic
applications or solicitations. Card issuers must provide the
disclosures required by this section on or with a blank application or
reply form that is made available to the consumer in electronic form,
such as on a card issuer's Internet Web site. Card issuers have
flexibility in satisfying this requirement. For example, the
disclosures could automatically appear on the screen when the
application or reply form appears. Alternatively, the disclosures could
be located on the same Web ``page'' as the application or reply form
without necessarily appearing on the initial screen, if the application
or reply form contains a clear and conspicuous reference to the
location of the disclosures and indicates that the disclosures contain
rate, fee, and other cost information, as applicable. Or, card issuers
could provide a link to the 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. Whatever
method is used, a card issuer need not confirm that the consumer has
read the disclosures. For disclosures required to be provided in
tabular form, card issuers must satisfy the requirements with respect
to electronic disclosures set forth in comment 5a(a)(2)-1(ii).[ltrif]
[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 Sec. Sec. 226.6
and 226.7. This standard requires that the Sec. 226.5a(b) disclosures
be close in meaning to those under Sec. Sec. 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
[[Page 33107]]
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. Consumer initiated requests not covered. 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 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.]
[rtrif][5a(a)(5)] [rtrif]5a(a)(4)[ltrif] 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.
[rtrif]5a(a)(5) Exceptions.
1. 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
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). Likewise, if the card issuer initiates an
in-person discussion with a consumer about opening a card account and
contemporaneously takes an application, such applications are subject
to Sec. 226.5a, specifically Sec. 226.5a(f).[ltrif]
5a(b) Required Disclosures.
[rtrif]1. Tabular format. Provisions in Sec. 226.5a(b) and its
commentary provide that certain information must appear or is permitted
to appear in a table. The tabular format is required for Sec.
226.5a(b) disclosures given pursuant to paragraphs (c), (d)(2), (e)(1)
and (f) of this section. The tabular format does not apply to oral
disclosures given pursuant to paragraph (d)(1) of this section. See
Sec. 226.5a(a)(2).
2. Accuracy. Rules concerning accuracy of the disclosures required
by Sec. 226.5a(b), including variable rate disclosures, are stated in
Sec. 226.5a(c), (d), and (e), as applicable.[ltrif]
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.] [rtrif]1.[ltrif] 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.)
[rtrif]2. Variable-rate accounts--fact that rate varies and how the
rate will be determined. In describing how the applicable rate will be
determined, the card issuer must identify in the table the type of
index or formula used, such as the prime rate. In describing the index,
the issuer may not include in the table details about the index. For
example, if the issuer uses a prime rate, the issuer must disclose the
rate as a ``prime rate'' and may not disclose in the table other
details about the prime rate, such as the fact that it is the highest
prime rate published in the Wall Street Journal two business days
before the closing date of the statement for each billing period. The
issuer shall not disclose in the table the current value of the index
(such as that the prime rate is currently 7.5 percent) or the amount of
the margin or spread added to the index or formula in setting the
applicable rate. See Samples G-10(B) and G-10(C) for guidance on how to
disclose the fact that the applicable rate varies and how it is
determined.
3. Discounted initial rates. If the term ``introductory'' is in the
same phrase as the discounted initial annual percentage rate, it will
be deemed to be in immediate proximity of the listing. For example, an
issuer that uses the phrase ``introductory balance transfer rate X
percent'' has used the word ``introductory'' within the same phrase as
the rate. See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the expiration date of the
discounted initial rate and the rate that will apply after the
discounted initial rate expires, if an initial discounted rate is
disclosed in the table.[ltrif]
[7.] [rtrif]4.[ltrif] Increased penalty rates. [rtrif]This
paragraph applies if any rate, including a discounted initial rate,
could be increased because of one or more events specified in the
account agreement, such as a late payment or an extension of credit
that exceeds the credit limit. The description of the specific event or
events that may result in an increased rate should be brief. For
example, if an issuer may increase a rate to the penalty rate if the
consumer does not make the minimum payment by 5 p.m., Eastern Time, on
its payment due date, the issuer should describe this circumstance in
the table as ``make a late payment.'' See Samples G-10(B) and G-10(C)
for additional guidance on the level of detail in which the specific
event or events should be described. The description of how long the
increased rate will remain in effect also should be brief. If a card
issuer reserves the right to apply the increased rate indefinitely,
that fact should be stated. See Samples G-10(B) and G-10(C) for
additional guidance on the level of detail in which the issuer should
use to describe how long the increased rate will remain in effect. A
card issuer will be deemed to meet the standard to clearly and
conspicuously disclose the
[[Page 33108]]
information required by Sec. 226.5a(b)(1)(iv) if the issuer uses the
format shown in Samples G-10(B) and G-10(C) to disclose this
information.[ltrif] [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 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.]
[rtrif]5. Rate depends on consumer's creditworthiness. The card
issuer, at its option, may disclose the possible rates that may apply
as either specific rates, or a range of rates. For example, if there
are three possible rates that may apply (9.99, 12.99 or 17.99 percent),
an issuer may disclose specific rates (9.99, 12.99 or 17.99 percent) or
a range of rates (9.99 to 17.99 percent). See Samples G-10(B) and G-
10(C) for guidance on how to disclose a range of rates.
6. Cross-reference between rates and fees. If a rate and fee both
apply to a balance transfer or cash advance transaction, the card
issuer must disclose that a fee also applies when disclosing the rate,
and a cross-reference to the fee. See Sample G-10(B) and G-10(C) for
guidance on how to provide these disclosures.[ltrif]
[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.]
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] [rtrif]shall[ltrif] not be disclosed
[rtrif]in the table[ltrif] 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]
[rtrif]shall[ltrif] 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
[rtrif]or participation[ltrif] fees. The following are examples of fees
that [should] [rtrif]shall[ltrif] not be disclosed in the table:
i. Fees for reissuing a lost or stolen card.
ii. 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. [rtrif]Periodic fees and one-time fees. A card issuer disclosing
a periodic fee must disclose the amount of the fee, how frequently it
will be imposed, and the annualized amount of the fee. A card issuer
disclosing a non-periodic fee must disclose that the fee is a one-time
fee. See Sample G-10(B) for guidance on how to meet these
requirements.[ltrif] [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.)]
[rtrif]5a(b)(3) Minimum Finance Charge.
1. Example of brief statement. See Samples G-10(B) and G-10(C) for
guidance on how to provide a brief description of a minimum interest
charge.[ltrif]
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]
[rtrif]shall[ltrif] not be disclosed [rtrif]in
[[Page 33109]]
the table[ltrif] 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. [rtrif]The card issuer must state any
conditions on the applicability of the grace period. An issuer that
conditions the grace period on the consumer paying his or her balance
in full by the due date each month, or on the consumer paying the
previous balance in full by the due date the prior month will be deemed
to meet these requirements by providing the following disclosure: ``If
you pay your entire balance in full each month, you have [at least] --
-- days after the close of each period to pay your balance on purchases
without being charged interest.''[ltrif] [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 computation method that is identified by name in the
regulation, the card issuer must [only] disclose [rtrif]below the
table[ltrif] only 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 below the table
must clearly explain the method in as much detail as set forth in the
descriptions of balance methods in Sec. 226.5a(g). The explanation
need not be as detailed as that required for the disclosures under
[Sec. 226.6(a)(3)] [rtrif]Sec. 226.6(b)(2)(i)(D)[ltrif]. (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
must 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. [rtrif]Content. See Samples G-10(B) and G-10(C) for guidance on
how to disclose clearly and conspicuously the cash advance fee.[ltrif]
[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
late payments. (See the commentary to Sec. 226.4(c)(2) for additional
guidance on late payment fees.) [rtrif]See Samples G-10(B) and G-10(C)
for guidance on how to disclose clearly and conspicuously the late
payment fee.[ltrif]
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. [rtrif]See Samples G-10(B) and G-10(C) for guidance on how to
disclose clearly and conspicuously the over-the-limit fee.[ltrif]
[rtrif]5a(b)(13) Cross References from Fees to Penalty Rates.
1. Content. See Samples G-10(B) and G-10(C) for guidance on how to
provide the disclosure in Sec. 226.5a(b)(13).[ltrif]
[rtrif]5a(b)(14) Required Insurance or Debt Cancellation or
Suspension Plans.
1. Content. See Sample G-10(B) for guidance on how to comply with
the requirements in Sec. 226.5a(b)(14).[ltrif]
[rtrif]5a(b)(15) Payment Allocation.
1. Examples. i. The following are examples of situations where
these disclosures would apply (assuming there is a grace period that
applies to purchases, and consumers may transfer balances as part of
accepting the offer):
A. A card issuer offers a discounted initial rate on balance
transfers that is lower than the rate that applies for purchases.
B. A card issuer offers the same discounted initial rate on balance
transfers and purchases for a specified period of time, but the
discounted initial rate on balance transfers (and not the discounted
initial rate for purchases) may be extended until the balance transfer
is paid off in certain circumstances (e.g., if the consumer makes two
purchases each billing cycle).
ii. The following is an example of a situation where these
disclosures do not apply (assuming there is a grace period that applies
to purchases): A card issuer offers a discounted initial rate on
balance transfers that is lower than the rate that applies for
purchases, but this discounted initial rate does not apply to balance
transfers that can be initiated with the offer and only applies to
subsequent balance transfers.
2. Content. See Samples G-10(B) or G-10(C) for guidance on how to
meet the requirements set forth in Sec. 226.5a(b)(15).[ltrif]
[rtrif]5a(b)(16) Available Credit.
1. Calculating available credit. If the 25 percent threshold test
is met, the issuer must disclose the available credit excluding
optional fees, and the available credit including optional fees. In
calculating the available credit to disclose in the table, the issuer
must consider all fees for the issuance or availability of credit
described in Sec. 226.5a(b)(2), and any security deposit, that will be
imposed when the account is opened and charged to the account, such as
one-time issuance and set-up fees that will be imposed when the card is
opened. For example, in calculating the available credit, issuers must
consider the first year's annual fee and the first month's maintenance
fee (as applicable) if they are charged to the account on the first
billing statement.
2. Content. See Sample G-10(B) for guidance on how to provide the
disclosure required by Sec. 226.5a(b)(16) clearly and
conspicuously.[ltrif]
[rtrif]5a(b)(17) Reference to Web Site for Additional Information.
1. Content. See Samples G-10(B) and G-10(C) for guidance on
disclosing a reference to the Web site established by the Board and a
statement that consumers may obtain on the Web site information about
shopping for and using credit cards.[ltrif]
[[Page 33110]]
5a(c) Direct Mail [rtrif]and Electronic[ltrif] 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.] [rtrif]1.[ltrif] Mailed publications. Applications or
solicitations contained in generally available publications mailed to
consumers (such as subscription magazines) are subject to the
requirements applicable 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. i. This paragraph applies if:
A. 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 prescreened telephone
solicitation).
B. The card issuer initiates the contact and at the same time takes
application information over the telephone.
ii. This paragraph does not apply to:
A. Telephone applications initiated by the consumer.
B. 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.
[rtrif]2. Form of disclosures. The disclosure specified in Sec.
226.5a(d)(2)(ii) may appear either in or outside the table containing
the required credit disclosures.[ltrif]
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:
i. 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.
ii. 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.]
[rtrif]2. In-person applications and solicitations. In-person
applications and solicitations initiated by a card issuer are subject
to Sec. 226.5a(f), not Sec. 226.5a(e). See Sec. 226.5a(f) and
accompanying commentary for rules relating to in-person applications
and solicitations.[ltrif]
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 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)] [rtrif]5a(e)(2)[ltrif] 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)] [rtrif]5a(e)(3)[ltrif] 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
[[Page 33111]]
accordance with the option in Sec. 226.5a(e) [rtrif](2)[ltrif] [(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 [rtrif]must[ltrif] [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.
[rtrif]5a(f) In-person applications and solicitations.
1. Coverage. i. This paragraph applies if:
A. An in-person 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 in-person
solicitation).
B. The card issuer initiates the contact and at the same time takes
application information in person. For example, the following are
covered:
1. 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 and
submits an application.
2. 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 and submits an
application.
ii. This paragraph does not apply to:
A. In-person applications initiated by the consumer.
B. 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 during the in-person conversation not to issue the
card.[ltrif]
[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 charge for the prior cycle, figured on an average
daily balance of only new purchases during that prior cycle.
Section 226.6--[rtrif]Account-opening Disclosures[ltrif] [Initial
Disclosure Statement]
[1. Consistent terminology. Language on the initial account-opening
and periodic disclosure statements must be close enough in meaning to
enable the consumer to relate the two 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) [rtrif]Rules affecting home equity plans[ltrif] [Finance
charge].
[rtrif]6(a)(1) Finance charge.[ltrif]
Paragraph [rtrif]6(a)(1)(i).[ltrif]
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] [rtrif]Creditors
are not required to disclose a specific date when finance charges will
begin to accrue. Creditors may provide a general explanation such
as[ltrif] 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] [rtrif]Grace[ltrif] periods. In disclosing whether
or not a [rtrif]grace[ltrif] [free-ride] period exists, the creditor
need not use ``free period'', ``free-ride'' period, [rtrif]grace
period[ltrif] 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 [rtrif]grace[ltrif] [free-ride] period exists in the
interim.
Paragraph [rtrif]6(a)(1)(ii)[ltrif] [6(a)(2)].
1. Range of balances. The range of balances disclosure is
inapplicable:
i. If only one periodic rate may be applied to the entire account
balance.
ii. 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 two rates (a 1.5%
[rtrif]monthly[ltrif] periodic rate on purchase balances of $0-$500,
[rtrif]and a 1% monthly periodic rate for balances above $500)[ltrif]
[while balances above $500 are subject to a 1% periodic rate)]. [Of
course] [rtrif]In this example[ltrif], the creditor must give a range
of
[[Page 33112]]
balances disclosure for the purchase feature.
2. Variable-rate disclosures--coverage.
[rtrif]i. Examples.[ltrif] This section covers open-end credit
plans under which rate changes are specifically set forth in the
account agreement 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:
A. Rate changes that are tied to the rate the creditor pays on its
[rtrif]six-month certificate of deposits[ltrif] [six-month money market
certificates].
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. [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] [rtrif]An[ltrif] 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 [rtrif]account-opening[ltrif] [initial]
disclosures (as is required by Sec. [rtrif]226.6(a)(1)(ii)[ltrif]
[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 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 [rtrif]account-
opening[ltrif] [initial] disclosures, the disclosures under
[rtrif]Sec. 226.6(a)(1)(ii)[ltrif] [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.
i. Circumstances under which the rate(s) may increase include, for
example:
A. An increase in the Treasury bill rate.
B. An increase in the Federal Reserve discount rate.
ii. The creditor must disclose when the increase will take effect;
for example:
A. ``An increase will take effect on the day that the Treasury bill
rate increases,'' or
B. ``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:
i. ``The rate on the plan will not exceed 25 % annual percentage
rate.''
ii. ``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
[rtrif]of rate increases[ltrif] that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. 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 [rtrif]6(a)(1)(ii)-2[ltrif]
[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.
i. 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 forgo 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.
ii. When creditors use an initial rate that is not calculated using
the index or formula for later rate adjustments, the [initial]
[rtrif]account-opening[ltrif] disclosure statement should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long [it] [rtrif]the initial rate[ltrif] will remain in effect;
B. 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
C. The other variable-rate information required [by footnote 12 to]
[rtrif]in Sec. 226.6(a)(1)(ii)[ltrif].
iii. 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 [rtrif]6(a)(1)(ii)-
3[ltrif] [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 [rtrif]6(a)(1)(iii)[ltrif] [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
[[Page 33113]]
[rtrif]Model Clauses in[ltrif] appendix G-1[ for model clauses].)
2. Allocation of payments. [rtrif]Creditors may, but need not,
explain how payments and other credits are allocated to outstanding
balances.[ltrif] [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 advances. (See comment 7-1 for
definition of multifeatured plan.)
Paragraph [rtrif]6(a)(1)(iv)[ltrif] [6(a)(4)].
1. Finance charges. In addition to disclosing the periodic rate(s)
under [Sec. 226.6(a)(2),] [rtrif]Sec. 226.6(a)(1)(ii), creditors must
disclose[ltrif] [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).)
[rtrif]Creditors are not required to disclose the fact that no finance
charge is imposed when the outstanding balance is less than a certain
amount or the balance below which no finance charge will be
imposed.[ltrif]
[rtrif]6(a)(2)[ltrif] [6(b)] Other charges.
1. General; examples of other charges. Under [rtrif]Sec.
226.6(a)(2)[ltrif] [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 [rtrif]residential mortgage
transactions or[ltrif] 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 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 be disclosed as an ``other
charge.''
[vi. Automated teller machine (ATM) charges described in comment
4(a)-4 that are not finance charges.]
[rtrif]vi.[ltrif] [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'':
i. Fees charged for documentary evidence of transactions for income
tax purposes.
ii. 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.
iii. Premiums for voluntary credit life or disability insurance, or
for property insurance, that are not part of the finance charge.
iv. Application fees under Sec. 226.4(c)(1).
v. 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.
vi. Charges for submitting as payment a check that is later
returned unpaid (see commentary to Sec. 226.4(c)(2).
vii. 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.)
viii. Taxes and filing or notary fees excluded from the finance
charge under Sec. 226.4(e).
ix. A fee to expedite delivery of a credit card, either at account
opening or during the life of the account, provided delivery of the
card is also available by standard mail service (or other means at
least as fast) without paying a fee for delivery.
x. A fee charged for arranging a single payment on the credit
account, upon the consumer's request (regardless of how frequently the
consumer requests the service), if the credit plan provides that the
consumer may make payments on the account by another reasonable means,
such as by standard mail service, without paying a fee to the creditor.
[rtrif]6(a)(3)[ltrif] [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.
i. 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 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.
ii. 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 Sec. 226.5b(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 226.5b(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 226.5b(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 [rtrif]Sec. 226.6(a)(3)[ltrif] [Sec. 226.6(e)], state
the corresponding annual percentage rate and provide the variable-rate
information required in [rtrif]Sec. 226.6(a)(1)(ii)[ltrif] [footnote
12] for the
[[Page 33114]]
repayment phase. To the extent the corresponding annual percentage
rate, the information in [rtrif]Sec. 226.6(a)(1)(ii)[ltrif] [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.
[rtrif]6(b) Rules affecting open-end (not home-secured)
plans[ltrif] [Other charges].
[rtrif]6(b)(1) Charges imposed as part of open-end (not home-
secured) plans.
1. When finance charges accrue. Creditors are not required to
disclose a specific date when a cost that is a finance charge under
Sec. 226.4 will begin to accrue.
2. Grace periods. In disclosing in the account agreement or
disclosure statement whether or not a grace period exists, the creditor
need not use any particular descriptive phrase or term. For example, a
statement that ``interest begins on the date the transaction is posted
to your account'' adequately discloses that no grace period exists. In
the same fashion, a statement that ``interest will be imposed on any
new purchases only if the new balance from the previous statement was
not paid in full within 25 days after the close of the billing cycle''
indicates that a grace period exists in the interim.
[rtrif]3. No finance charge imposed below certain balance.
Creditors are not required to disclose the fact that no finance charge
is imposed when the outstanding balance is less than a certain amount
or the balance below which no finance charge will be imposed.[ltrif]
Paragraph 6(b)(1)(i).
1. Failure to use the plan as agreed. Late payment fees, over-the-
credit-limit fees, and fees for payments returned unpaid are examples
of charges resulting from consumers' failure to use the plan as agreed.
2. Examples of fees that affect the plan. Examples of charges the
payment, or nonpayment, of which affects the consumer's account are:
i. Access to the plan. Fees for using the card at the creditor's
ATM to obtain a cash advance, fees to obtain additional cards including
replacements for lost or stolen cards, fees to expedite delivery of
cards or other credit devices, application and membership fees, and
annual or other participation fees identified in Sec. 226.4(c)(4).
ii. Amount of credit extended. Fees for increasing the credit limit
on the account, whether at the consumer's request or unilaterally by
the creditor.
iv. Timing or method of billing or payment. Fees to pay by
telephone or via the Internet, and fees to receive paper statements.
Paragraph 6(b)(1)(ii).
1. Fees for package of services. A fee to join a credit union is an
example of a fee for a package of services that is not imposed as part
of the plan, even if the consumer must join the credit union to apply
for credit. In contrast, a membership fee is an example of a fee for a
package of services that is considered to be imposed as part of a plan
where the primary benefit of membership in the 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.[ltrif]
[rtrif]6(b)(2) Rules relating to rates for open-end (not home-
secured) plans.
Paragraph 6(b)(2)(i)(B).
1. Range of balances. Creditors are not required to disclose the
range of balances:
i. If only one periodic interest rate may be applied to the entire
account balance.
ii. If only one periodic interest 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 two rates (a
1.5% monthly periodic interest rate on purchase balances of $0-$500,
and a 1% periodic interest rate for balances above $500). In this
example, the creditor must give a range of balances disclosure for the
purchase feature.
Paragraph 6(b)(2)(i)(D).
1. Explanation of balance computation method. Creditors do not
provide a sufficient explanation of a balance computation method by
using a shorthand phrase such as ``previous balance method'' or the
name of a balance computation method listed in Sec. 226.5a(g). (See
Model Clauses G-1 in appendix G.) See Sec. 226.6(b)(4) regarding
balance computation descriptions in the account-opening summary.
2. Allocation of payments. Except as required by Sec.
226.6(b)(4)(vi), creditors may, but need not, explain how payments and
other credits are allocated to outstanding balances. 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
advances. (See comment 7-1 for definition of multifeatured plan.)
Paragraph 6(b)(2)(ii).
1. Variable-rate disclosures--coverage.
i. Examples. Examples of open-end plans that permit the rate to
change and are considered variable-rate plans include:
A. Rate changes that are tied to the rate the creditor pays on its
six-month certificate of deposits.
B. Rate changes that are tied to Treasury bill rates.
C. Rate changes that are tied to changes in the creditor's
commercial lending rate.
ii. Examples of open-end plans that permit the rate to change and
are not considered variable-rate include:
A. Rate changes that are invoked under a 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).
B. Rate changes that are triggered by a specific event such as an
open-end credit plan in which the employee receives a lower rate
contingent upon employment, and the rate increases upon termination of
employment.
2. Variable-rate plan--circumstances for increase.
i. The following are examples that comply with the requirement to
disclose circumstances under which the rate(s) may increase:
A. ``The Treasury bill rate increases.''
B. ``The Federal Reserve discount rate increases.''
ii. Disclosing the frequency with which the rate may increase
includes disclosing when the increase will take effect; for example:
A. ``An increase will take effect on the day that the Treasury bill
rate increases''
B. ``An increase in the Federal Reserve discount rate will take
effect on the first day of the creditor's billing cycle.''
3. 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. 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:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\ of 1% increase in the annual percentage
rate per year will occur.''
4. Variable-rate plan--effects of increase. Examples of effects of
rate increases that must be disclosed include:
[[Page 33115]]
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment amount.
5. 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.
i. 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 forgo 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.
ii. When creditors use an initial rate that is not calculated using
the index or formula for later rate adjustments, the account-opening
disclosure should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long the initial rate will remain in effect;
B. 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
C. The other variable-rate information required by Sec.
226.6(b)(2)(ii).
Paragraph 6(b)(2)(iii).
1. Events that cause the initial rate to change.
i. Changes based on expiration of time period. If the initial rate
will change at the expiration of a time period, creditors must identify
the expiration date and the fact that the initial rate will end at that
time.
ii. Changes based on specified contract terms. If the account
agreement provides that the creditor may change the initial rate upon
the occurrence of specified event or events, the creditor must identify
the events or events. Examples include the consumer not making the
required minimum payment when due, or the termination of an employee
preferred rate when the employment relationship is terminated.
2. Rate that will apply after initial rate changes.
i. Increased margins. If the initial rate is based on an index and
the rate may increase due to a change in the margin applied to the
index, the creditor must disclose the increased margin. If more than
one margin could apply, the creditor may disclose the highest margin.
ii. Risk-based pricing. In some plans, the amount of the rate
change depends on how the creditor weighs the occurrence of events
specified in the account agreement that authorize the creditor to
change rates, as well as other factors. Creditors must state the
increased rate that may apply. At the creditor's option, the creditor
may state the possible rates as a range, or by stating the highest rate
that could be assessed. The creditor must disclose the period for which
the increased rate will remain in effect, such as ``until you make
three timely payments,'' or if there is no limitation, the fact that
the increased rate may remain indefinitely.
iii. Terminating credit privileges. Creditors need not disclose an
increased rate that is imposed if credit privileges are permanently
terminated.
3. Effect of rate change on balances. Creditors must disclose
whether the rate change will affect outstanding balances, by type.
6(b)(4) Tabular format requirements for open-end (not home-secured)
plans.
1. Relation to tabular summary for applications and solicitations.
See commentary to Sec. 226.5a(a), (b), and (c) regarding format and
content requirements, except for the following:
i. Creditors must disclose any initial discounted rate that is
offered and the time period during which the rate will remain in
effect.
ii. Creditors must use the accuracy standard for annual percentage
rates in Sec. 226.6(b)(ii)(G).
iii. Creditors must disclose the specific rate for each feature
that applies to the account if, at the time of application or
solicitation, the creditor disclosed a number of specific rates or
range of rates that might apply after the creditor has later determined
the consumer's creditworthiness.
iv. Creditors must disclose fees imposed for transactions in a
foreign currency or that take place in a foreign country.
v. Creditors must explain whether or not a grace period exists for
all features on the account.
vi. Creditors must, in addition to naming the balance computation
method used, state that an explanation of the balance computation
method is provided in the account-opening disclosures.
vii. Creditors must state that consumers' billing rights are
provided in the account-opening disclosures.
viii. The applicable forms providing safe harbors for account-
opening tables are under appendix G-17.
2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.6 disclosures.
3. Terminology. Section 226.6(b)(4)(i) generally 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; but see Sec. 226.5(a)(2) for special rules that apply to
the penalty rate disclosure required by Sec. 226.6(b)(4)(ii)(C), the
grace period disclosure required by Sec. 226.6(b)(4)(iv), and to the
disclosure of required insurance products or debt cancellation or
suspension products pursuant to Sec. 226.6(b)(4)(v).
6(b)(4)(ii) Annual percentage rates.
1. Rates. The only rates that shall be disclosed in the account-
opening table are annual percentage rates determined under Sec.
226.14(b). Periodic rates shall not be disclosed in the table. The
index and margin values shall not be disclosed in the table.[ltrif]
[rtrif]6(c) Rules of general applicability.[ltrif]
6(c) [rtrif](1)[ltrif] Security interests.
1. General. [rtrif]Creditors are not required to use specific terms
to describe a security interest, or to explain the type of security or
the creditor s rights with respect to the collateral.[ltrif]
[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 interests by using, for example, pledge, lien, or
mortgage (instead of security interest)].
2. Identification of property. [rtrif]Creditors sufficiently
identify collateral by type[ltrif] [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. [rtrif]If collateral for preexisting credit
with the creditor will secure the plan being opened, the creditor must
disclose that fact. (Such security interests may be known as
``spreader'' or ``dragnet'' clauses, or as ``cross-collateralization''
clauses.) The creditor need not specifically identify the collateral; a
reminder such as ``collateral securing other loans with us may also
secure this loan'' is sufficient.[ltrif][The fact that collateral for
[[Page 33116]]
preexisting 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 [rtrif]account-opening[ltrif] [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 Sec.
226.9(c) at the time the security is taken. (See comment 6(c)
[rtrif](1)[ltrif] -2.)
5. Collateral from third party. [rtrif]Security interests taken in
connection with the plan must be disclosed, whether the collateral is
owned by the consumer or a third party.[ltrif] [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)] [rtrif]6(c)(2)[ltrif] Statement of billing rights.
See the commentary to appendix G-3[rtrif], G-3(A), G-4,and G-
4(A)[ltrif].
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 [rtrif]additional guidance[ltrif]
[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 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
[[Page 33117]]
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) [rtrif]Rules affecting home equity plans[ltrif] [Previous
balance].
[rtrif]7(a)(1) Previous balance.[ltrif]
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
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.
[rtrif]7(a)(2)[ltrif] [7(b)] Identification of transactions.
1. Multifeatured plans. In identifying transactions under
[rtrif]Sec. 226.7(a)(2)[ltrif] [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.
[rtrif]7(a)(3)[ltrif] [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. 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.
3. Totals. [rtrif]A total of amounts credited during the billing
cycle is not required.[ltrif] [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.]
[rtrif]7(a)(4)[ltrif] [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:
i. 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.
ii. 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:
i. 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
[rtrif]Sec. 226.7(a)(4)[ltrif] [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%, but the
creditor will increase the rate to 1.8% effective June 1, 1.5% (and its
corresponding annual percentage rate) is the only required disclosure
under [rtrif]Sec. 226.7(a)(4)[ltrif] [Sec. 226.7(d)] for the periodic
statement reflecting the May account activity.
ii. [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.
iii.] 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:
i. 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.)
ii. Disclose one composite periodic rate (that is, 1.6% per month)
along with the applicable range of balances and corresponding annual
percentage rate.
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 ([rtrif]Sec.
226.7(a)(7)[ltrif] [Sec. 226.7(g)]), the creditor need disclose only
one annual percentage rate, but must use the phrase ``annual percentage
rate.''
6. See comment [rtrif]6(a)(1)(ii)-1[ltrif] [6(a)(2)-1]. [rtrif]A
creditor is not required to adjust the range of balances disclosure to
reflect the balance below
[[Page 33118]]
which only a minimum charge applies.[ltrif]
[7. Deferred-payment transactions. See comment 7-3.i.]
[rtrif]7(a)(5)[ltrif] [7(e)] Balance on which finance charge
computed.
1. Limitation to periodic rates. Section [rtrif]Sec.
226.7(a)(5)[ltrif] [Sec. 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%
applied to the first $500, and a monthly periodic rate of 1% 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 [rtrif]7(a)(5)-5[ltrif] [7(e)-5].)
3. Monthly rate on average daily balance. [rtrif]Creditors may
apply a monthly periodic rate to an average daily balance.[ltrif] [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
[rtrif]grace[ltrif] [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
[rtrif]7(a)(5)-5[ltrif] [7(e)-5].)
5. Daily rate on daily balances. i. 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:
ii. If a single daily periodic rate is imposed, the balance to
which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
D. 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.
iii. If two or more daily periodic rates may be imposed, the
balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. 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
[rtrif]6(a)(1)(iii)[ltrif] [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 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 ([rtrif]Sec.
226.7(a)(3)[ltrif] [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 [rtrif]7(a)(5)-2[ltrif] [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.]
[rtrif]7(a)(6) Amount of finance charge and other charges.[ltrif]
[7(f) Amount of finance charge.]
[rtrif]Paragraph 7(a)(6)(i).[ltrif]
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, five 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
[[Page 33119]]
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
[rtrif]6(a)(1)(iv)-1[ltrif] [6(a)(4)-] 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 [rtrif]Sec. 226.14(c)(3)[ltrif] [footnote 33] in
the regulation.)
[9. Deferred-payment transactions. See comment 7-3.iii.]
[rtrif]Paragraph 7(a)(6)(ii).[ltrif] [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 [rtrif]Sec. 226.6(a)(2)[ltrif] [Sec. 226.6(b)],
these charges may be included in 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 [rtrif]6(a)(2)-
1[ltrif] [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 [rtrif]fees of $3 for providing copies
related to the resolution of a billing error could be listed separately
or as $9[ltrif] [ATM fees of $1 may be listed separately or as $3].
[rtrif]7(a)(7)[ltrif] [7(g)] Annual percentage rate.
1. Rate same as corresponding annual percentage rate. See comment
[rtrif]7(a)(4)-5[ltrif] [7(d)-5].
2. Multifeatured plans. In a multifeatured plan, the [actual]
[rtrif]effective[ltrif] annual percentage rate [rtrif]determined under
Sec. 226.14(c)[ltrif] 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. [rtrif]Where more than one rate
applies for each feature, creditors may describe the annual percentage
rate as a composite for each feature.[ltrif]
ALTERNATIVE 2--PARAGRAPH 7(a)(7)3.
[rtrif]3. Plans not subject to the requirements of Sec. 226.5b.
For home equity plans not subject to the requirements of Sec. 226.5b,
creditors are not required to disclose an effective APR.[ltrif]
[rtrif]7(a)(8)[ltrif] [7(j)] Grace [free-ride] period.[ltrif]
1. [rtrif]Terminology[ltrif] [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 [rtrif]account-opening[ltrif]
[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.]
[rtrif]7(a)(9)[ltrif] [7(k)] Address for notice of billing errors.
1. [rtrif]Terminology[ltrif] [Wording]. The periodic statement
l[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
[rtrif]for billing-error inquiries[ltrif], although [rtrif]a
detailed[ltrif] [no elaborate] explanation or particular wording is
[rtrif]not[ltrif] required.
2. Telephone number. A telephone number [rtrif], e-mail address, or
Web site location[ltrif] may be included, but the [rtrif]mailing[ltrif]
address for billing-error inquiries, which is the required disclosure,
must be clear and conspicuous. [rtrif]The address is deemed to be clear
and conspicuous if a precautionary instruction is included that
telephoning or notifying the creditor by e-mail or Web site will not
preserve the consumer's billing rights, unless the creditor has agreed
to treat billing error notices provided by electronic means as written
notices, in which case the precautionary instruction is required only
for telephoning.[ltrif] [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.]
[rtrif]7(a)(10)[ltrif] [7(i)] Closing date of billing cycle; new
balance.
1. Credit balances. See comment [rtrif]7(a)(1)-1[ltrif] [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
[[Page 33120]]
balance need not reflect finance charges accrued since the last
payment.
[rtrif]7(b) Rules affecting open-end (not home-secured) plans.
1. Deferred payment transactions. Creditors offer a variety of
payment plans for purchases that permit consumers to avoid interest
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 interest charge is imposed on a $500 purchase
made in January if the $500 balance is paid by March 31.
i. Annual percentage rates. Under Sec. 226.7(b)(4), creditors must
disclose each annual percentage rate that may be used to compute the
interest charge. Under some plans with a deferred-payment feature, if
the deferred-payment balance is not paid by the payment-due date,
interest charges applicable to the billing cycles between the date of
purchase and the payment-due date (January through March in this
example) may be imposed. Annual percentage 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 interest charge for the deferred-
payment balance, annual percentage 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(b)(5),
creditors must disclose the balances subject to interest during a
billing cycle. The deferred-payment balance ($500 in this example) is
not subject to interest 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(b)(5). 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(b)(5) (such as ``deferred-payment
balance''). During any billing cycle in which a interest charge on the
deferred-payment balance is debited to the account, the balance
disclosed under Sec. 226.7(b)(5) should include the deferred-payment
balance for that billing cycle.
iii. Amount of interest charge. Under Sec. 226.7(b)(6)(ii),
creditors must disclose interest charges imposed during a billing
cycle. For some deferred-payment purchases, the creditor may impose
interest 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 interest 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
interest charge disclosed under Sec. 226.7(b)(6)(ii) 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 interest 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 ``interest charge'' (such as ``contingent interest charge''
or ``deferred interest charge''). The interest charge on a deferred-
payment balance should be reflected on the periodic statement under
Sec. 226.7(b)(6)(ii) for the billing cycle in which the interest
charge is debited to the account.
iv. Grace period. Assuming monthly billing cycles ending at month-
end and a grace 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 grace 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.[ltrif]
[rtrif]7(b)(1) Previous balance.
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
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.[ltrif]
[rtrif]7(b)(2) Identification of transactions.
1. Multifeatured plans. Creditors must arrange transactions by
feature (such as disclosing sale transactions separately from cash
advance transactions).
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.[ltrif]
[rtrif]7(b)(3) 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. Sec. 226.13(e) and (f).)
2. 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.
[[Page 33121]]
3. Totals. A total of amounts credited during the billing cycle is
not required.[ltrif]
[rtrif]7(b)(4) Periodic rates.
1. Disclosure of periodic interest rates--whether or not actually
applied. Except as provided in Sec. 226.7(b)(4)(ii), any periodic
interest rate that may be used to compute finance charges, expressed as
and labeled ``Annual Percentage Rate,'' must be disclosed whether or
not it is applied during the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a cash
advance feature, the creditor must disclose the interest rate for each,
even if the consumer only makes purchases on the account during the
billing cycle.
ii. If the interest rate varies (such as when it is tied to a
particular index), the creditor must disclose each interest rate in
effect during the cycle for which the statement was issued.
2. Disclosure of periodic interest rates required only if
imposition possible. With regard to the periodic interest 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:
i. If the creditor is changing interest rates effective during the
next billing cycle (either because it is changing terms or because of a
variable-rate plan), the annual percentage rates required to be
disclosed under Sec. 226.7(b)(4) are only those in effect during the
billing cycle reflected on the periodic statement. For example, if the
annual percentage rate applied during May was 18%, but the creditor
will increase the rate to 21% effective June 1, 18% is the only
required disclosure under Sec. 226.7(b)(4) for the periodic statement
reflecting the May account activity.
ii. 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.
iii. If interest 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 interest charge consists of a monthly periodic interest
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), creditors must disclose the interest periodic
rate, expressed as an 18% annual percentage rate and the range of
balances to which it is applicable. Costs attributable to the credit
life insurance component must be disclosed as a fee under Sec.
226.7(b)(6)(iii).
ALTERNATIVE 1--PARAGRAPH 7(b)(4)4.
4. Rate same as effective annual percentage rate. When the
effective annual percentage rate disclosed under Sec. 226.7(b)(7) is
computed solely by application of periodic rates, the effective annual
percentage rate is the same as the corresponding annual percentage
rate. In that case, only one annual percentage rate needs to be
disclosed, labeled as ``annual percentage rate.''
ALTERNATIVE 2--PARAGRAPH 7(b)(4)4.
4. [Reserved.]
5. Ranges of balances. See comment 6(b)(2)(ii)-1. A creditor is
not required to adjust the range of balances disclosure to reflect the
balance below which only a minimum charge applies.
6. Deferred-payment transactions. See comment 7-2.i.
7. Fees. Creditors that identify fees in accordance with Sec.
226.7(b)(6)(iii) need not identify the periodic rate at which a fee
would accrue if the fee remains unpaid. For example, assume a fee is
imposed for a late payment in the previous cycle and that the fee,
unpaid, would be included in the purchases balance and accrue interest
at the rate for purchases. The creditor need not separately disclose
that the purchase rate applies to the portion of the purchases balance
attributable to the unpaid fee.[ltrif]
[rtrif] 7(b)(5) Balance on which finance charge computed.
1. 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%
applied to the first $500, and a monthly periodic rate of 1% to the
remainder. This option to disclose a combined balance does not apply
when the interest 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(b)(5)-4.)
2. Monthly rate on average daily balance. Creditors may apply a
monthly periodic rate to an average daily balance. [ltrif]
3. 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. Separate balances are not
required, however, merely because a grace 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(b)(5)-4 and 7(b)(4)-5.)
4. Daily rate on daily balance. i. If a finance charge is computed
on the balance each day by application of one or more daily periodic
interest rates, the balance on which the interest charge was computed
may be disclosed in any of the following ways for each feature:
ii. If a single daily periodic interest rate is imposed, the
balance to which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
D. The average daily balance during the billing cycle, in which
case the creditor may, at its option 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 interest.
iii. If two or more daily periodic interest rates may be imposed,
the balances to which the rates are applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. Two or more average daily balances, each applicable to the daily
periodic interest rates imposed for the time that those rates were in
effect. The creditor may, at its option, explain that interest 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
[[Page 33122]]
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.
5. 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 from the date they are posted to the account,
the posting date need not be disclosed.
6. 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(b)(3)) 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.'').
7. 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 or a single
identification of the name 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(b)(5)-1. In these cases, one explanation or a single identification
of the name of the balance computation method is also sufficient
(assuming, of course, that all portions of the balance were computed
using the same method).
8. Deferred payment transactions. See comment 7(b)-1.[ltrif]
[rtrif]7(b)(6) Charges imposed.
1. Examples of charges. See commentary to Sec. 226.6(b)(1).
2. Fees. Costs attributable to periodic rates other than interest
charges shall be disclosed as a fee. For example, if a consumer is
required to obtain credit life insurance that is calculated at 0.1% per
month on an outstanding balance and a monthly interest rate of 1.5%
applies to the same balance, the creditor must disclose the dollar cost
attributable to interest as an ``interest charge'' and the credit
insurance cost as a ``fee.''
3. Total fees for calendar year to date. Some creditors'' statement
periods do not coincide with the calendar month. In such cases, the
creditor may disclose a calendar-year-to-date total at the end of the
calendar year by aggregating fees for 12 monthly cycles, starting with
the period that begins during January and finishing with the period
that begins during December. For example, if statement periods begin on
the 10th day of each month, the statement covering December 10, 2008,
through January 9, 2009, may disclose the year-to-date total for fees
imposed from January 10, 2008, through January 9, 2009. Alternatively,
the institution could provide a statement for the cycle ending January
9, 2009, showing the year-to-date total for fees imposed January 1,
2008, through December 31, 2008.
4. Minimum charge in lieu of interest. A minimum charge imposed if
a charge would otherwise have been determined by applying a periodic
rate to a balance except for the fact that such charge is smaller than
the minimum must be disclosed as a fee. For example, assume a creditor
imposes a minimum charge of $1.50 in lieu of interest if the calculated
interest for a billing period is less than that minimum charge. If the
interest calculated on a consumer's account for a particular billing
period is 50 cents, the minimum charge of $1.50 would apply. In this
case, the entire $1.50 would be disclosed as a fee; the periodic
statement would reflect the $1.50 as a fee, and $0 in interest.
ALTERNATIVE 1--PARAGRAPH 7(b)(6)5.
5. Purchase transactions. If there are several features relating to
purchase transactions (such as a standard purchase feature and a
promotional purchase feature), any minimum, fixed or other charges
identified in Sec. 226.14(e) that is not due to the application of
periodic rates used to calculate interest and not related to a specific
transaction must be grouped together with any other charges relating to
standard purchase balances for purchases of Sec. 226.7(b)(6)(iv)(B).
[rtrif] 7(b)(7) Effective annual percentage rate.
ALTERNATIVE 1--PARAGRAPH. 7(b)(7).
1. Rate same as corresponding annual percentage rate when Sec.
226.14(d)(1) is applicable. See comment 7(b)(4)-4.
2. Itemized by type of transaction. In a multifeatured plan, the
effective annual percentage rate determined under Sec. 226.14(d) must
be separately stated for each type of transaction, for example,
purchases, balance transfers, and cash advances.
ALTERNATIVE 2--PARAGRAPH 7(b)(7).
1. Plans not subject to the requirements of Sec. 226.5b. For plans
not subject to the requirements of Sec. 226.5b, creditors are not
required to disclose an effective annual percentage rate.[ltrif]
[rtrif]7(b)(8) Grace period.
1. Terminology. In describing the grace period, the language used
must be consistent with that used on the account-opening disclosure
statement. See Sec. 226.5(a)(2)(i).
2. Deferred-payment transactions. See comment 7(b)-1. [ltrif]
[rtrif]7(b)(9) Address for notice of billing errors.
1. Terminology. The periodic statement should indicate the general
purpose for the address for billing-error inquiries, although a
detailed explanation or particular wording is not required.
2. Telephone number. A telephone number, e-mail address, or Web
site location may be included, but the mailing address for billing-
error inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by e-mail or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.[ltrif]
[rtrif]7(b)(10) Closing date of billing cycle; new balance.
1. Credit balances. See comment 7(b)(1)-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.[ltrif]
[rtrif]7(b)(11) Due date; late payment costs.
1. Informal periods affecting late payments. Although the terms of
the
[[Page 33123]]
account agreement may provide that a creditor may assess a late-payment
fee if a payment is not received by a certain date, creditors sometimes
have an informal policy that delays the assessment of the late-payment
fee for payments received a brief period of time after the date upon
which a creditor has the contractual right to impose the fee. Creditors
must disclose the due date according to the legal obligation between
the parties, and need not consider the end of an informal ``courtesy
period'' as the due date under paragraph 7(b)(11) of this
section.[ltrif]
[rtrif]7(b)(12) Minimum payment.
7(b)(12)(iii) Exemptions.
1. Exemption for credit card accounts with a fixed repayment
period. The exemption in Sec. 226.7(b)(12)(iii)(E) applies only if the
account agreement specifies a fixed repayment period, such as providing
that the minimum payment will pay off the entire balance on the account
in one year. This exemption would apply, for example, to accounts where
the account has been closed due to delinquency and the required monthly
payment has been reduced or the balance decreased to accommodate a
fixed payment for a fixed period of time designed to pay off the
outstanding balance. This exemption would not apply where a feature of
a credit card may have a fixed repayment period, but the account as a
whole does not. For example, assume a retail credit card has several
features. One feature is a general revolving feature, where the minimum
payment for this feature does not pay off the balance in a fixed period
of time. Another feature allows consumers to make specific types of
purchases (such as furniture purchases, or other large purchases), with
a minimum payment that will pay off the purchase within a fixed period
of time, such as one year. This exemption would not apply because the
retail card account as a whole does not have a fixed repayment period.
Nonetheless, these types of retail cards may qualify for the exemption
in Sec. 226.7(b)(12)(iii)(G).
2. Exemption for certain credit card accounts with fixed repayment
period feature. The exemption applies if the entire outstanding balance
for a particular billing cycle falls within a feature with a fixed
repayment period that is specified in the account agreement, such as
providing that the minimum payment will pay off the entire balance on
that feature in one year. For example, assume a retail card card has
several features. One feature is a general revolving feature, where the
minimum payment for this feature does not pay off the balance in a
fixed period of time. Another feature allows consumers to make specific
types of purchases (such as furniture purchases, or other large
purchases), with a minimum payment that will pay off the purchase
within a fixed period of time, such as one year. This exemption applies
if the entire outstanding balance for a particular billing cycle falls
with the feature with the fixed repayment period. In that case, the
issuer would not need to provide the minimum payment disclosures for
that billing cycle. If the consumer used a general revolving feature
during a billing period, this exemption would not apply.
7(b)(12)(iv) Toll-free telephone numbers.
1. Third parties. At their option, card issuers and the Federal
Trade Commission (FTC) may use a third-party to establish and maintain
a toll-free telephone number for use by the issuer or the FTC to
provide the generic repayment estimates or actual repayment
disclosures, as applicable.
2. Automated response systems or devices. At their option, card
issuers and the FTC may use toll-free telephone numbers that connect
consumers to automated systems, such as an interactive voice response
system, through which consumers may obtain the generic repayment
estimates or actual repayment disclosures described in appendix M1 or
M2, as applicable, by inputting information using a touch-tone
telephone or similar device. However, consumers whose telephones are
not equipped to use such automated device must be provided the
opportunity to be connected to an individual from whom the information
may be obtained.
3. Advertising or marketing information. If a consumer requests the
generic repayment estimate or the actual repayment disclosure, as
applicable, the card issuer may not provide advertisements or marketing
materials to the consumer prior to providing the information required
or permitted by appendix M1 or M2, as applicable.[ltrif]
Section 226.8--[Identification of Transactions] [rtrif]Identifying
Transactions on Periodic Statements[ltrif]
[rtrif]8(a) Sale credit.
1. 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(b)-1 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'' includes:
i. Premiums for voluntary credit life insurance whether sold by the
card issuer or another person.
ii. The purchase of funds-transfer services (such as telegrams)
from an intermediary or an expedited payment service from a creditor.
2. Amount--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 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.
3. Date--when a transaction takes place.
i. 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.
ii. 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.
iii. For mail, Internet, 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 or via the
Internet.
iv. In a foreign transaction, the debiting date may be considered
the transaction date.
4. Date--sufficiency of description.
i. If the creditor discloses only the date of the 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.
ii. The month and day sufficiently identify the transaction date,
unless the posting of the transaction is delayed so long that the year
is needed for a clear disclosure to the consumer.
5. Same or related persons. i. For purposes of identifying
transactions, the
[[Page 33124]]
term same or related persons refers to, for example:
A. Franchised or licensed sellers of a creditor's product or
service.
B. 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.
ii. 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. Brief identification--sufficiency of description. The ``brief
identification'' provision in Sec. 226.8(a)(2)(i) 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:
i. 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.
ii. 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,'' or ``sporting goods.''
iii. A number or symbol that is related to an identification list
printed elsewhere on the statement that reasonably identifies the
transaction with the creditor is sufficient.
7. Seller's name--sufficiency of description. 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:
i. A more complete spelling of the name that was alphabetically
abbreviated on the receipt or other credit document.
ii. 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.
8. Location of transaction.
i. If the seller has multiple stores or branches within a city, the
creditor need not identify the specific branch at which the sale
occurred.
ii. 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, or may provide some other identifying
designation, such as ``aboard plane,'' ``ABC Airways Flight,''
``customer's home,'' ``telephone order,'' ``Internet order or mail
order.''[ltrif]
[rtrif]8(b) Nonsale credit.
1. Nonsale credit. The term nonsale credit refers to any form of
loan credit including, for example:
i. A cash advance.
ii. An advance on a credit plan that is accessed by overdrafts on a
checking account.
iii. The use of a ``supplemental credit device'' in the form of a
check or draft or the use of the overdraft credit plan accessed by a
debit card, even if such use is in connection with a purchase of goods
or services.
iv. Miscellaneous debits to remedy mispostings, returned checks,
and similar entries.
2. Amount--overdraft credit plans. If credit is extended under an
overdraft credit plan tied to a checking account or by means of a debit
card tied to an overdraft credit plan:
i. 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.
ii. 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 card that accesses the credit plan.
3. Date of transaction. See comment 8(a)-4.
4. Nonsale transaction--sufficiency of identification. The creditor
sufficiently identifies a nonsale 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.[ltrif]
[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.
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 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 ``nonrelated'' 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
[[Page 33125]]
rule in Sec. 226.8(a)(2) for related sellers and creditors, or the
rule in Sec. 226.8(a)(3) for nonrelated 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 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
[[Page 33126]]
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.]
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:
i. By sending it in one billing period per year to each consumer
that gets a periodic statement for that period; or
ii. By sending a copy to all of its accountholders 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]
[rtrif]Model Form G-3 and G-3(A) in appendix G[ltrif].
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]
[rtrif]Model Forms G-4 and G-4(A) in appendix G[ltrif].
9(b) Disclosures for Supplemental Credit [rtrif]Access[ltrif]
Devices and Additional Features.
1. Credit [rtrif]access[ltrif] device--examples. Credit
[rtrif]access[ltrif] 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 [rtrif]account[ltrif] feature examples. A new credit
[rtrif]account[ltrif] feature would include, for example:
[rtrif]i.[ltrif] The addition of overdraft checking to an existing
account (although the regular checks that could trigger the overdraft
feature are not themselves ``devices'' )
[rtrif]ii.[ltrif] 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 section 226.6(a) finance charge
disclosures.]
Paragraph 9(b)(2)
1. Different finance charge terms. [rtrif]Except as provided in
Sec. 226.9(b)(3) for checks that access a credit card account,
if[ltrif] [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] [rtrif]account-opening[ltrif] disclosures reflecting the
terms of the added device or feature or by giving only the finance
charge disclosures for the added device or feature.
[rtrif]Paragraph 9(b)(3)
1. Discounted initial rate. If the term ``introductory'' or
``intro'' is in the same phrase as the discounted initial annual
percentage rate, it will be deemed to be in immediate proximity of the
listing of the discounted rate.[ltrif]
9(c) Change in Terms.
[rtrif]9(c)(1) Rules Affecting Home equity Plans[ltrif]
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 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:
i. The types of changes a creditor may make. (But see Sec.
226.5b(f))
ii. 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 required to be disclosed under
Sec. 226.6 [rtrif](a)[ltrif] or increases the minimum payment, unless
an exception under [rtrif]Sec. 226.9(c)(1)(ii)[ltrif] [Sec.
226.9(c)(2)] applies; for example, the creditor must give advance
notice if the creditor initially disclosed a 25-day [rtrif]grace[ltrif]
[free-ride] period on purchases and the consumer will have fewer days
during the billing cycle change.
9(c)(1) [rtrif](i)[ltrif] 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:
[[Page 33127]]
i. If there is an increased periodic rate or any other finance
charge attributable to the consumer's delinquency or default.
ii. 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)
[rtrif](i)[ltrif]: 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) [rtrif](1)(i)[ltrif] 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) [rtrif](1)[ltrif] 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:
i. 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.
ii. If the minimum payment requirement is changed, the creditor
must include the disclosures required by Sec.
226.5[rtrif]b[ltrif](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.)
iii. 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)] [rtrif]9(c)(1)(ii)[ltrif] Notice Not Required
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer's credit limit.
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges. (But see
Sec. 226.5b(f))
v. 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 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.
[rtrif]9(c)(1)(iii) Notice to Restrict Credit[ltrif] [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 [rtrif]Sec. 226.9(c)(1)(iii)[ltrif] [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.
[rtrif]9(c)(2) Rules Affecting Open-end (Not Home-secured) Plans
1. Changes initially disclosed. Except as provided in Sec.
226.9(g)(1), 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.
2. State law issues. Some issues are not addressed by Sec.
226.9(c)(2) because they are controlled by state or other applicable
law. These issues include:
i. The types of changes a creditor may make.
ii. 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 described in Sec.
226.9(c)(2)(i), unless an exception under Sec. 226.9(c)(2)(ii) or
(c)(2)(iv) applies; for example, the creditor must give advance notice
if the creditor initially disclosed a 25-day grace period on purchases
and the consumer will have fewer days during the billing cycle change.
9(c)(2)(i) Changes Where Written Advance Notice Is 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
[[Page 33128]]
accounts. If a single credit account involves multiple consumers that
may be affected by the change, the creditor should refer to Sec.
226.5(d) to determine the number of notices that must be given.
2. Timing--effective date of change. The rule that the notice of
the change in terms be provided at least 45 days before the change
takes effect permits midcycle 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 45 days prior to the billing cycle in which the
change is to be implemented.
3. Timing--advance notice not required. Advance notice of 45 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 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)(2)[rtrif](i)[ltrif]: 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. Except if Sec. 226.9(c)(2)(iii)
applies, a complete new set of the initial disclosures containing the
changed term complies with Sec. 226.9(c)(2)(i) 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 being changed.
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.
9(c)(2)(ii) Charges not covered by Sec. 226.6(b)(4).
1. Applicability. Generally, if a creditor increases any component
of a charge, or introduces a new charge, that is imposed as part of the
plan under Sec. 226.6(b)(1) but is not required to be disclosed as
part of the account-opening summary table under Sec. 226.6(b)(4), the
creditor may either, at its option (1) provide at least 45 days written
advance notice before the change becomes effective to comply with the
requirements of Sec. 226.9(c)(2)(i), or (2) provide notice orally or
in writing of the amount of the charge to an affected consumer any time
before the consumer agrees to or becomes obligated to pay the charge.
For example, a fee for expedited delivery of a credit card is a charge
imposed as part of the plan under Sec. 226.6(b)(1) but is not required
to be disclosed in the account-opening summary table under Sec.
226.6(b)(4). If a creditor changes the amount of that expedited
delivery fee, the creditor may provide written advance notice of the
change to affected consumers at least 45 days before the change becomes
effective. Alternatively, the creditor may provide oral or written
notice of the amount of the charge to an affected consumer any time
before the consumer agrees to or becomes obligated to pay the charge.
2. Relevant time. Creditors meet the standard to provide the notice
under Sec. 226.9(c)(2)(ii)(B) at a relevant time if the oral or
written notice of a charge is given when a consumer would likely notice
it, such as when deciding whether to purchase the service that would
trigger the charge. For example, if a consumer telephones a card issuer
to discuss a particular service, a creditor would meet the standard if
the creditor clearly and conspicuously discloses the fee associated
with the service that is the topic of the telephone call.
9(c)(2)(iii) Disclosure Requirements
9(c)(2)(iii)(A) Changes to Terms in Sec. 226.6(b)(4).
1. Changing margin for calculating a variable rate. If a creditor
is changing a margin used to calculate a variable rate, the creditor
must disclose the amount of the new rate (as calculated using the new
margin) in the table described in Sec. 226.9(c)(2)(iii), and include a
reminder that the rate is a variable rate. For example, if a creditor
is changing the margin for a variable rate that uses the prime rate as
an index, the creditor must disclose in the table the new rate (as
calculated using the new margin) and indicate that the rate varies with
the market based on the prime rate.
2. Changing index for calculating a variable rate. If a creditor is
changing the index used to calculate a variable rate, the creditor must
disclose the amount of the new rate (as calculated using the new index)
and indicate that the rate varies and how the rate is determined, as
explained in Sec. 226.6(b)(4). For example, if a creditor is changing
from using a prime rate in calculating a variable rate to using the
LIBOR, the creditor would disclose in the table the new rate (using the
new index) and indicate that the rate varies with the market based on
the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing from a variable rate to a non-variable rate, the
creditor must disclose the amount of the new rate (that is, the non-
variable rate) in the table.
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing from a non-variable rate to a variable rate, the
creditor must disclose the amount of the new rate (the variable rate
using the index and margin), and indicate that the rate varies with the
market based on the [insert the index used, such as the prime rate or
the LIBOR.]
5. Changes in the penalty rate, the triggers for the penalty rate,
or how long the penalty rate applies. If a creditor is changing the
amount of the penalty rate, the creditor must also redisclose the
triggers for the penalty rate and the information about how long the
penalty rate applies even if those terms are not changing. Likewise, if
a creditor is changing the triggers for the penalty rate, the creditor
must redisclose the amount of the penalty rate and information about
how long the penalty rate applies. If a creditor is changing how long
the penalty rate applies, the creditor must redisclose the amount of
the penalty rate and the triggers for the penalty rate, even if they
are not changing.
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 226.6(b)(4) is
determined, the creditor must redisclose all relevant information
related to that fee regardless of whether this other information is
changing. For example, if a creditor currently charges a cash advance
fee of ``Either $5 or 3% of the transaction amount, whichever is
greater. (Max: $100)'', and the creditor is only changing the minimum
dollar amount from $5 to $10, the issuer must redisclose the other
information related to how the fee is determined. For example, the
creditor in this example would disclose the following: ``Either $10 or
3% of the transaction amount, whichever is greater. (Max: $100).''
7. Combining a notice described in Sec. 226.9(c)(2)(iii) with a
notice described in Sec. 226.9(g)(3). If a creditor is required to
provide a notice described in Sec. 226.9(c)(2)(iii) and a notice
described in Sec. 226.9(g)(3) to a consumer, the
[[Page 33129]]
creditor may combine the two notices. This would occur if a consumer's
actions trigger penalty pricing, and other terms are changing on the
consumer's account at the same time.
8. Content. Model Clause G-20 contains an example of how to comply
with the requirements in Sec. 226.9(c)(2)(iii) when the following
terms are being changed: (1) A variable rate is being changed to a non-
variable rate of 16.99%; and (2) the late payment fee is being
increased to $32 if the consumer's balance is less than or equal to
$1,000 and $39 if the consumer's balance is more than $1,000.
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(c)(2)(iii)(A)(1).
10. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to disclosures required under Sec.
226.9(c)(2)(iii)(A)(1).[ltrif]
[rtrif]9(c)(2)(iv) Notice Not Required.
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
i. A change in the consumer s credit limit except as otherwise
required by Sec. 226.9(c)(2)(v).
ii. A change in the name of the credit card or credit card plan.
iii. The substitution of one insurer for another.
iv. A termination or suspension of credit privileges.
v. 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 account-
opening disclosure statement (including an explanation of the terms
upon resumption). For example, a merchant may allow consumers to skip
the December payment to encourage holiday shopping, or a teacher's
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 interest charges for January
may serve as the change-in-terms notice.[ltrif]
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 Sec. 226.5a. (See Sec. 226.5a(a)
[rtrif](5)[ltrif] [(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 [rtrif]within the last
30 days before the disclosure is provided[ltrif] [(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 12 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 the 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 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,
[[Page 33130]]
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 Sec. 226.9(e) and Sec. 226.7, the periodic statement must
comply with the rules in Sec. 226.5a and Sec. 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 [rtrif]the disclosures[ltrif] [they]
relate to one another. [rtrif]An example of a sufficient reference for
creditors using the delayed notice method is: ``Your annual fee of [$
amount] is billed on this statement. Please see [other side/inserts]
for important information about the terms that apply to the renewal of
your account and how to close your account to avoid paying the annual
fee.''[ltrif] 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.
[rtrif]9(g) Increase in Rates Due to Delinquency or Default or as a
Penalty.
1. Applicability. Section 226.9(g) requires a creditor to provide
written notice to a consumer when (1) a rate is increased due to the
consumer's delinquency or default, or (2) a rate is increased as a
penalty for one or more events specified in the account agreement, such
as making a late payment or obtaining an extension of credit that
exceeds the credit limit. This notice must be provided after the
occurrence of the event that triggered the imposition of the rate
increase and at least 45 days prior to the effective date of the
increase. For example, assume a credit card account agreement indicates
that the annual percentage rates on the account may increase to 28
percent if the consumer pays late once, and assume that the consumer
pays late one month. If the creditor will increase the rates on the
account because of this late payment, the creditor must provide the
consumer written notice of the increase at least 45 days before the
increase becomes effective.
2. Affected consumers. If a single credit account involves multiple
consumers that may be affected by the change, the creditor should refer
to Sec. 226.5(d) to determine the number of notices that must be
given.
3. Combining a notice described in Sec. 226.9(g)(3) with a notice
described in Sec. 226.9(c)(2)(iii). If a creditor is required to
provide a notice described in Sec. 226.9(c)(2)(iii) and a notice
described in Sec. 226.9(g)(3) to a consumer, the creditor may combine
the two notices. This would occur when a consumer has triggered penalty
pricing, and other terms are changing on the consumer's account at the
same time.
4. Content. Model Clause G-21 contains an example of how to comply
with the requirements in Sec. 226.9(g)(3)(i) when the rate on a
consumer's account is being increased to a penalty rate as described in
Sec. 226.9(g)(1)(ii).
5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(g).
6. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 226.9(g).[ltrif]
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:
i. Payment by check is received when the creditor gets it, not when
the funds are collected.
ii. 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.
iii. If the consumer elects to have payment made by a third party
payor such as a financial institution, through
[[Page 33131]]
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
section 226.10(b).
[rtrif]iv. Payment made via the creditor's Web site is received on
the date on which the consumer authorizes the creditor to effect the
payment, even if the consumer gives the instruction authorizing that
payment in advance of the date on which the creditor is authorized to
effect the payment. If the consumer authorizes the creditor to effect
the payment immediately, but the consumer's instruction is received
after any cut-off time specified by the creditor, the date on which the
consumer authorizes the creditor to effect the payment is deemed to be
the next business day.[ltrif]
10(b) Specific requirements for payments.
1. Payment requirements. i. The creditor may specify requirements
for making payments, such as:
A. Requiring that payments be accompanied by the account number or
the payment stub.
B. Setting a cut-off time for payment to be received, or set a
different time for payments by mail[rtrif], payments by electronic
means,[ltrif] and payments made in person.
C. Specifying that only checks or money orders should be sent by
mail.
D. Specifying that payment is to be made in U.S. dollars.
E. Specifying one particular address for receiving payments, such
as a post office box.
ii. The creditor may be prohibited, however, from specifying
payment for preauthorized electronic fund transfer. (See section 913 of
the Electronic Fund Transfer Act.)
2. Payment requirements--limitations. 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. [rtrif]If a creditor promotes
electronic payment via its Web site (such as by disclosing on the Web
site itself that payments may be made via the Web site), any payments
made via the creditor's Web site would generally be conforming payments
for purposes of Sec. 226.10(b).[ltrif]
3. Acceptance of nonconforming payments. If the creditor accepts a
nonconforming 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)):
i. Payments may be made at any location where the creditor conducts
business.
ii. Payments may be made any time during the creditor's normal
business hours.
iii. Payment may be 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.
Section 226.11--Treatment of Credit Balances[rtrif]; Account
Termination[ltrif]
[rtrif]11(a) Credit balances.[ltrif]
1. Timing of refund. The creditor may also fulfill its obligations
under Sec. 226.11 by:
i. Refunding any credit balance to the consumer immediately.
ii. Refunding any credit balance prior to receiving a written
request (under Sec. 226.11(b)) from the consumer.
[rtrif]iii. Refunding any credit balance upon the consumer's oral
or electronic request.[ltrif]
iv. Making a good faith effort to refund any credit balance before
6 months have passed. If that attempt is unsuccessful, the creditor
need not try again to refund the credit balance at the end of the 6-
month period.
2. Amount of refund. The phrase any part of the credit balance
remaining in the account in Sec. 226.11(b) and (c) means the amount of
the credit balance at the time the creditor is required to make the
refund. The creditor may take into consideration intervening purchases
or other debits to the consumer's account (including those that have
not yet been reflected on a periodic statement) that decrease or
eliminate the credit balance.
Paragraph [rtrif]11(a)(2)[ltrif] [11(b)].
1. Written requests--standing orders. The creditor is not required
to honor standing orders requesting refunds of any credit balance that
may be created on the consumer's account.
Paragraph [rtrif]11(a)(3)[ltrif] [11(c)].
1. Good faith effort to refund. The creditor must take positive
steps to return any credit balance that has remained in the account for
over 6 months. This includes, if necessary, attempts to trace the
consumer through the consumer's last known address or telephone number,
or both.
2. Good faith effort unsuccessful. Section 226.11 imposes no
further duties on the creditor if a good faith effort to return the
balance is unsuccessful. The ultimate disposition of the credit balance
(or any credit balance of $1 or less) is to be determined under other
applicable law.
[rtrif]11(b) Account termination.
Paragraph 11(b)(1).
1. Expiration Date. The credit agreement determines whether or not
an open-end plan has a stated expiration (maturity) date. Creditors
that offer accounts with no stated expiration date are prohibited from
terminating those accounts solely because a consumer uses the account
and does not incur a finance charge, even if credit cards or other
access devices associated with the account expire after a stated
period.[ltrif]
Section 226.12--Special Credit Card Provisions
1. Scope. Sections 226.12(a) and (b) deal with the issuance and
liability rules for credit cards, whether the card is intended for
consumer, business, or any other purposes. Sections 226.12(a) and (b)
are exceptions to the general rule that the regulation applies only to
consumer credit. (See Sec. Sec. 226.1 and 226.3.)
[rtrif]2. Definition of ``accepted credit card''. For purposes of
this section, accepted credit card means any credit card that a
cardholder has requested or applied for and received, or has signed,
used, or authorized another person to use to obtain credit. Any credit
card issued as a renewal or substitute in accordance with this
paragraph becomes an accepted credit card when received by the
cardholder.[ltrif]
12(a) Issuance of credit cards.
Paragraph 12(a)(1)
1. Explicit request. A request or application for a card must be
explicit. For example, a request for [rtrif]an overdraft plan tied
to[ltrif] [overdraft privileges on] a checking account does not
constitute an application for a credit card with overdraft checking
features.
2. Addition of credit features. If the consumer has a non-credit
card, the addition of credit features to the card (for example, the
granting of overdraft privileges on a checking account when the
consumer already has a check guarantee card) constitutes issuance of a
credit card.
3. Variance of card from request. The request or application need
not correspond exactly to the card that is issued. For example:
i. The name of the card requested may be different when issued.
ii. The card may have features in addition to those reflected in
the request or application.
[[Page 33132]]
4. Permissible form of request. The request or application may be
oral (in response to a telephone solicitation by a card issuer, for
example) or written.
5. Time of issuance. A credit card may be issued in response to a
request made before any cards are ready for issuance (for example, if a
new program is established), even if there is some delay in issuance.
6. Persons to whom cards may be issued. A card issuer may issue a
credit card to the person who requests it, and to anyone else for whom
that person requests a card and who will be an authorized user on the
requester's account. In other words, cards may be sent to consumer A on
A's request, and also (on A's request) to consumers B and C, who will
be authorized users on A's account. In these circumstances, the
following rules apply:
i. The additional cards may be imprinted in either A's name or in
the names of B and C.
ii. No liability for unauthorized use (by persons other than B and
C), not even the $50, may be imposed on B or C since they are merely
users and not cardholders as that term is defined in Sec. 226.2 and
used in Sec. 226.12(b); of course, liability of up to $50 for
unauthorized use of B's and C's cards may be imposed on A.
iii. Whether B and C may be held liable for their own use, or on
the account generally, is a matter of state or other applicable law.
7. Issuance of non-credit cards.
i. General. Under Sec. 226.12(a)(1), a credit card cannot be
issued except in response to a request or an application. (See comment
2(a)(15)-2 for examples of cards or devices that are and are not credit
cards.) A non-credit card may be sent on an unsolicited basis by an
issuer that does not propose to connect the card to any credit plan; a
credit feature may be added to a previously issued non-credit card only
upon the consumer's specific request.
ii. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements and
disclosures required by Sec. 226.6. The issuer will violate the rule
against unsolicited issuance if, for example, at the time the card is
sent a credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
8. Unsolicited issuance of PINs. A card issuer may issue personal
identification numbers (PINs) to existing credit cardholders without a
specific request from the cardholders, provided the PINs cannot be used
alone to obtain credit. For example, the PINs may be necessary if
consumers wish to use their existing credit cards at automated teller
machines or at merchant locations with point-of-sale terminals that
require PINs.
Paragraph 12(a)(2)
1. Renewal. Renewal generally contemplates the regular replacement
of existing cards because of, for example, security reasons or new
technology or systems. It also includes the re-issuance of cards that
have been suspended temporarily, but does not include the opening of a
new account after a previous account was closed.
2. Substitution--examples. Substitution encompasses the replacement
of one card with another because the underlying account relationship
has changed in some way--such as when the card issuer has:
i. Changed its name.
ii. Changed the name of the card.
iii. Changed the credit or other features available on the account.
For example, the original card could be used to make purchases and
obtain cash advances at teller windows. The substitute card might be
usable, in addition, for obtaining cash advances through automated
teller machines. (If the substitute card constitutes an access device,
as defined in Regulation E, then the Regulation E issuance rules would
have to be followed.) The substitution of one card with another on an
unsolicited basis is not permissible, however, where in conjunction
with the substitution an additional credit card account is opened and
the consumer is able to make new purchases or advances under both the
original and the new account with the new card. For example, if a
retail card issuer replaces its credit card with a combined retailer/
bank card, each of the creditors maintains a separate account, and both
accounts can be accessed for new transactions by use of the new credit
card, the card cannot be provided to a consumer without solicitation.
iv. Substituted a card user's name on the substitute card for the
cardholder's name appearing on the original card.
v. Changed the merchant base. However, the new card must be honored
by at least one of the persons that honored the original card.
3. Substitution--successor card issuer. Substitution also occurs
when a successor card issuer replaces the original card issuer (for
example, when a new card issuer purchases the accounts of the original
issuer and issues its own card to replace the original one). A
permissible substitution exists even if the original issuer retains the
existing receivables and the new card issuer acquires the right only to
future receivables, provided use of the original card is cut off when
use of the new card becomes possible.
4. Substitution--non-credit-card plan. A credit card that replaces
a retailer's open-end credit plan not involving a credit card is not
considered a substitute for the retailer's plan--even if the consumer
used the retailer's plan. A credit card cannot be issued in these
circumstances without a request or application.
5. One-for-one rule. An accepted card may be replaced by no more
than one renewal or substitute card. For example, the card issuer may
not replace a credit card permitting purchases and cash advances with
two cards, one for the purchases and another for the cash advances.
6. One-for-one rule--exceptions. The regulation does not prohibit
the card issuer from:
i. Replacing a debit/credit card with a credit card and another
card with only debit functions (or debit functions plus an associated
overdraft capability), since the latter card could be issued on an
unsolicited basis under Regulation E.
ii. Replacing an accepted card with more than one renewal or
substitute card, provided that:
A. No replacement card accesses any account not accessed by the
accepted card;
B. For terms and conditions required to be disclosed under Sec.
226.6, all replacement cards are issued subject to the same terms and
conditions, except that a creditor may vary terms for which no change
in terms notice is required under Sec. 226.9(c); and
C. Under the account's terms the consumer's total liability for
unauthorized use with respect to the account does not increase.
7. Methods of terminating replaced card. The card issuer need not
physically retrieve the original card, provided the old card is voided
in some way; for example:
i. The issuer includes with the new card a notification that the
existing card is no longer valid and should be destroyed immediately.
ii. The original card contained an expiration date.
iii. The card issuer, in order to preclude use of the card,
reprograms computers or issues instructions to authorization centers.
8. Incomplete replacement. If a consumer has duplicate credit cards
on
[[Page 33133]]
the same account (Card A--one type of bank credit card, for example),
the card issuer may not replace the duplicate cards with one Card A and
one Card B (Card B--another type of bank credit card) unless the
consumer requests Card B.
9. Multiple entities. Where multiple entities share
responsibilities with respect to a credit card issued by one of them,
the entity that issued the card may replace it on an unsolicited basis,
if that entity terminates the original card by voiding it in some way,
as described in comment 12(a)(2)-7. The other entity or entities may
not issue a card on an unsolicited basis in these circumstances.
12(b) Liability of cardholder for unauthorized use.
1. Meaning of cardholder. For purposes of this provision,
cardholder includes any person (including organizations) to whom a
credit card is issued for any purpose, including business. When a
corporation is the cardholder, required disclosures should be provided
to the corporation (as opposed to an employee user).
2. Imposing liability. A card issuer is not required to impose
liability on a cardholder for the unauthorized use of a credit card; if
the card issuer does not seek to impose liability, the issuer need not
conduct any investigation of the cardholder's claim.
3. Reasonable investigation. If a card issuer seeks to impose
liability when a claim of unauthorized use is made by a cardholder, the
card issuer must conduct a reasonable investigation of the claim. In
conducting its investigation, the card issuer may reasonably request
the cardholder's cooperation. The card issuer may not automatically
deny a claim based solely on the cardholder's failure or refusal to
comply with a particular request; however, if the card issuer otherwise
has no knowledge of facts confirming the unauthorized use, the lack of
information resulting from the cardholder's failure or refusal to
comply with a particular request may lead the card issuer reasonably to
terminate the investigation. The procedures involved in investigating
claims may differ, but actions such as the following represent steps
that a card issuer may take, as appropriate, in conducting a reasonable
investigation:
i. Reviewing the types or amounts of purchases made in relation to
the cardholder's previous purchasing pattern.
ii. Reviewing where the purchases were delivered in relation to the
cardholder's residence or place of business.
iii. Reviewing where the purchases were made in relation to where
the cardholder resides or has normally shopped.
iv. Comparing any signature on credit slips for the purchases to
the signature of the cardholder or an authorized user in the card
issuer's records, including other credit slips.
v. Requesting documentation to assist in the verification of the
claim.
vi. Requesting a written, signed statement from the cardholder or
authorized user.
vii. Requesting a copy of a police report, if one was filed.
viii. Requesting information regarding the cardholder's knowledge
of the person who allegedly used the card or of that person's authority
to do so.
[rtrif]4. Checks that access a credit card account. The liability
provisions for unauthorized use under paragraph (b)(1) of this section
only apply to transactions involving the use of a credit card, and not
if an unauthorized transaction is made using a check accessing the
credit card account. However, the billing error provisions in Sec.
226.13 apply to both of these types of transactions.[ltrif]
12(b)(1)(ii) Limitation on amount.
1. Meaning of authority. [Footnote 22] [rtrif]Section
226.12(b)(1)(i)[ltrif] defines unauthorized use in terms of whether the
user has actual, implied, or apparent authority. Whether such authority
exists must be determined under state or other applicable law.
2. Liability limits--dollar amounts. As a general rule, the
cardholder's liability for a series of unauthorized uses cannot exceed
either $50 or the value obtained through the unauthorized use before
the card issuer is notified, whichever is less.
[rtrif]3. Implied or apparent authority. If a cardholder furnishes
a credit card and grants authority to make credit transactions to a
person (such as a family member or co-worker) who exceeds the authority
given, the cardholder is liable for the transaction(s) unless the
cardholder has notified the creditor that use of the credit card by
that person is no longer authorized.
4. Credit card obtained through robbery or fraud. An unauthorized
use includes a transaction initiated by a person who obtained the
credit card from the consumer, or otherwise initiated the transaction,
through fraud or robbery.[ltrif]
12(b)(2) Conditions of liability.
1. Issuer s option not to comply. A card issuer that chooses not to
impose any liability on cardholders for unauthorized use need not
comply with the disclosure and identification requirements discussed
[below] [rtrif]in Sec. 226.12(b)(2)[ltrif].
Paragraph 12(b)(2)(ii).
1. Disclosure of liability and means of notifying issuer. The
disclosures referred to in Sec. 226.12(b)(2)(ii) may be given, for
example, with the initial disclosures under Sec. 226.6, on the credit
card itself, or on periodic statements. They may be given at any time
preceding the unauthorized use of the card.
[rtrif]2. Meaning of ``adequate notice''. For purposes of this
provision, ``adequate notice'' means a printed notice to a cardholder
that sets forth clearly the pertinent facts so that the cardholder may
reasonably be expected to have noticed it and understood its meaning.
The notice may be given by any means reasonably assuring receipt by the
cardholder.[ltrif]
Paragraph 12(b)(2)(iii).
1. Means of identifying cardholder or user. To fulfill the
condition set forth in Sec. 226.12(b)(2)(iii), the issuer must provide
some method whereby the cardholder or the authorized user can be
identified. This could include, for example, signature, photograph, or
fingerprint on the card [rtrif]or other biometric means[ltrif], or
electronic or mechanical confirmation.
2. Identification by magnetic strip. Unless a magnetic strip (or
similar device not readable without physical aids) must be used in
conjunction with a secret code or the like, it would not constitute
sufficient means of identification. Sufficient identification also does
not exist if a ``pool'' or group card, issued to a corporation and
signed by a corporate agent who will not be a user of the card, is
intended to be used by another employee for whom no means of
identification is provided.
3. Transactions not involving card. The cardholder may not be held
liable under Sec. 226.12(b) when the card itself (or some other
sufficient means of identification of the cardholder) is not presented.
Since the issuer has not provided a means to identify the user under
these circumstances, the issuer has not fulfilled one of the conditions
for imposing liability. For example, when merchandise is ordered by
telephone [rtrif]or the Internet[ltrif] by a person without authority
to do so, using a credit card account number [rtrif]by itself or with
other information that appears on the card (for example, the card
expiration date and a 3- or 4-digit cardholder identification
number)[ltrif] [or other number only (which may be widely available)],
no liability may be imposed on the cardholder.
12(b)(3) Notification to card issuer.
1. How notice must be provided. Notice given in a normal business
manner--for example, by mail,
[[Page 33134]]
telephone, or personal visit--is effective even though it is not given
to, or does not reach, some particular person within the issuer's
organization. Notice also may be effective even though it is not given
at the address or phone number disclosed by the card issuer under Sec.
226.12(b)(2)(ii).
2. Who must provide notice. Notice of loss, theft, or possible
unauthorized use need not be initiated by the cardholder. Notice is
sufficient so long as it gives the ``pertinent information'' which
would include the name or card number of the cardholder and an
indication that unauthorized use has or may have occurred.
3. Relationship to Sec. 226.13. The liability protections afforded
to cardholders in Sec. 226.12 do not depend upon the cardholder's
following the error resolution procedures in Sec. 226.13. For example,
the written notification and time limit requirements of Sec. 226.13 do
not affect the Sec. 226.12 protections. [rtrif]See also comment
12(b)(1)-4.[ltrif]
12(b)(5) Business use of credit cards.
1. Agreement for higher liability for business use cards. The card
issuer may not rely on Sec. 226.12(b)(5) if the business is clearly
not in a position to provide 10 or more cards to employees (for
example, if the business has only 3 employees). On the other hand, the
issuer need not monitor the personnel practices of the business to make
sure that it has at least 10 employees at all times.
2. Unauthorized use by employee. The protection afforded to an
employee against liability for unauthorized use in excess of the limits
set in Sec. 226.12(b) applies only to unauthorized use by someone
other then the employee. If the employee uses the card in an
unauthorized manner, the regulation sets no restriction on the
employee's potential liability for such use.
12(c) Right of cardholder to assert claims or defenses against card
issuer.
1. Relationship to Sec. 226.13. The Sec. 226.12(c) credit card
``holder in due course'' provision deals with the consumer's right to
assert against the card issuer a claim or defense concerning property
or services purchased with a credit card, if the merchant has been
unwilling to resolve the dispute. Even though certain merchandise
disputes, such as non-delivery of goods, may also constitute ``billing
errors'' under Sec. 226.13, that section operates independently of
Sec. 226.12(c). The cardholder whose asserted billing error involves
undelivered goods may institute the error resolution procedures of
Sec. 226.13; but whether or not the cardholder has done so, the
cardholder may assert claims or defenses under Sec. 226.12(c).
Conversely, the consumer may pay a disputed balance and thus have no
further right to assert claims and defenses, but still may assert a
billing error if notice of that billing error is given in the proper
time and manner. An assertion that a particular transaction resulted
from unauthorized use of the card could also be both a ``defense'' and
a billing error.
2. Claims and defenses assertible. Section 226.12(c) merely
preserves the consumer's right to assert against the card issuer any
claims or defenses that can be asserted against the merchant. It does
not determine what claims or defenses are valid as to the merchant;
this determination must be made under state or other applicable law.
[rtrif]3. Transactions excluded. This paragraph does not apply to
the use of a check-guarantee card or a debit card in connection with an
overdraft credit plan, or to a check-guarantee card used in connection
with cash-advance checks.
4. Method of calculating the amount of credit outstanding. The
amount of the claim or defense that the cardholder may assert shall not
exceed the amount of credit outstanding for the disputed transaction at
the time the cardholder first notifies the card issuer or the person
honoring the credit card of the existence of the claim or defense. To
determine the amount of credit outstanding for purposes of this
section, payments and other credits shall be applied to: (1) Late
charges in the order of entry to the account; then to (2) finance
charges in the order of entry to the account; and then to (3) any other
debits in the order of entry to the account. If more than one item is
included in a single extension of credit, credits are to be distributed
pro rata according to prices and applicable taxes.[ltrif]
12(c)(1) General rule.
1. Situations excluded and included. The consumer may assert claims
or defenses only when the goods or services are ``purchased with the
credit card.'' This could include mail[rtrif], the Internet[ltrif] or
telephone orders, if the purchase is charged to the credit card
account. But it would exclude:
i. Use of a credit card to obtain a cash advance, even if the
consumer then uses the money to purchase goods or services. Such a
transaction would not involve ``property or services purchased with the
credit card.''
ii. The purchase of goods or services by use of a check accessing
an overdraft account and a credit card used solely for identification
of the consumer. (On the other hand, if the credit card is used to make
partial payment for the purchase and not merely for identification, the
right to assert claims or defenses would apply to credit extended via
the credit card, although not to the credit extended on the overdraft
line.)
iii. Purchases made by use of a check guarantee card in conjunction
with a cash advance check (or by cash advance checks alone). See
[rtrif]comment 12(c)-3[ltrif] [footnote 24]. A cash advance check is a
check that, when written, does not draw on an asset account; instead,
it is charged entirely to an open-end credit account.
iv. Purchases effected by use of either a check guarantee card or a
debit card when used to draw on overdraft credit [lines]
[rtrif]plans[ltrif] (see [rtrif]comment 12(c)-3[ltrif] [footnote 24]).
The debit card exemption applies whether the card accesses an asset
account via point-of-sale terminals, automated teller machines, or in
any other way[, and whether the card qualifies as an ``access device''
under Regulation E or is only a paper-based debit card]. If a card
serves both as an ordinary credit card and also as check guarantee or
debit card, a transaction will be subject to this rule on asserting
claims and defenses when used as an ordinary credit card, but not when
used as a check guarantee or debit card.
12(c)(2) Adverse credit reports prohibited.
1. Scope of prohibition. Although an amount in dispute may not be
reported as delinquent until the matter is resolved:
i. That amount may be reported as disputed.
ii. Nothing in this provision prohibits the card issuer from
undertaking its normal collection activities for the delinquent and
undisputed portion of the account.
2. Settlement of dispute. A card issuer may not consider a dispute
settled and report an amount disputed as delinquent or begin collection
of the disputed amount until it has completed a reasonable
investigation of the cardholder's claim. A reasonable investigation
requires an independent assessment of the cardholder's claim based on
information obtained from both the cardholder and the merchant, if
possible. In conducting an investigation, the card issuer may request
the cardholder's reasonable cooperation. The card issuer may not
automatically consider a dispute settled if the cardholder fails or
refuses to comply with a particular request. However, if the card
issuer otherwise has no means of obtaining information necessary to
resolve the dispute, the lack of information resulting from the
[[Page 33135]]
cardholder's failure or refusal to comply with a particular request may
lead the card issuer reasonably to terminate the investigation.
12(c)(3) Limitations.
Paragraph 12(c)(3)(i) [rtrif](A)[ltrif].
1. Resolution with merchant. The consumer must have tried to
resolve the dispute with the merchant. This does not require any
special procedures or correspondence between them, and is a matter for
factual determination in each case. The consumer is not required to
seek satisfaction from the manufacturer of the goods involved. When the
merchant is in bankruptcy proceedings, the consumer is not required to
file a claim in those proceedings[rtrif], and may instead file a claim
for the property or service purchased with the credit card with the
card issuer directly[ltrif].
Paragraph 12(c)(3)[(ii)] [rtrif](i)(B)[ltrif].
1. Geographic limitation. The question of where a transaction
occurs (as in the case of mail[rtrif], Internet,[ltrif] or telephone
orders, for example) is to be determined under state or other
applicable law.
[rtrif]Paragraph 12(c)(3)(ii).[ltrif]
[rtrif]1.[ltrif] [2.] Merchant honoring card. The exceptions
(stated in [rtrif]Sec. 226.13(c)(3)(ii)[ltrif] [footnote 26]) to the
amount and geographic limitations [rtrif]in Sec.
226.13(c)(3)(i)(B)[ltrif] do not apply if the merchant merely honors,
or indicates through signs or advertising that it honors, a particular
credit card.
12(d) Offsets by card issuer prohibited.
Paragraph 12(d)(1).
1. Holds on accounts. ``Freezing'' or placing a hold on funds in
the cardholder's deposit account is the functional equivalent of an
offset and would contravene the prohibition in Sec. 226.12(d)(1),
unless done in the context of one of the exceptions specified in Sec.
226.12(d)(2). For example, if the terms of a security agreement
permitted the card issuer to place a hold on the funds, the hold would
not violate the offset prohibition. Similarly, if an order of a
bankruptcy court required the card issuer to turn over deposit account
funds to the trustee in bankruptcy, the issuer would not violate the
regulation by placing a hold on the funds in order to comply with the
court order.
2. Funds intended as deposits. If the consumer tenders funds as a
deposit (to a checking account, for example), the card issuer may not
apply the funds to repay indebtedness on the consumer's credit card
account.
3. Types of indebtedness; overdraft accounts. The offset
prohibition applies to any indebtedness arising from transactions under
a credit card plan, including accrued finance charges and other charges
on the account. The prohibition also applies to balances arising from
transactions not using the credit card itself but taking place under
plans that involve credit cards. For example, if the consumer writes a
check that accesses an overdraft line of credit, the resulting
indebtedness is subject to the offset prohibition since it is incurred
through a credit card plan, even though the consumer did not use an
associated check guarantee or debit card.
4. When prohibition applies in case of termination of account. The
offset prohibition applies even after the card issuer terminates the
cardholder's credit card privileges, if the indebtedness was incurred
prior to termination. If the indebtedness was incurred after
termination, the prohibition does not apply.
Paragraph 12(d)(2).
1. Security interest--limitations. In order to qualify for the
exception stated in Sec. 226.12(d)(2), a security interest must be
affirmatively agreed to by the consumer and must be disclosed in the
issuer's initial disclosures under Sec. 226.6. The security interest
must not be the functional equivalent of a right of offset; as a
result, routinely including in agreements contract language indicating
that consumers are giving a security interest in any deposit accounts
maintained with the issuer does not result in a security interest that
falls within the exception in Sec. 226.12(d)(2). For a security
interest to qualify for the exception under Sec. 226.12(d)(2), the
following conditions must be met:
i. The consumer must be aware that granting a security interest is
a condition for the credit card account (or for more favorable account
terms) and must specifically intend to grant a security interest in a
deposit account. Indicia of the consumer's awareness and intent could
include, for example:
A. Separate signature or initials on the agreement indicating that
a security interest is being given
B. Placement of the security agreement on a separate page, or
otherwise separating the security interest provisions from other
contract and disclosure provisions
C. Reference to a specific amount of deposited funds or to a
specific deposit account number
ii. The security interest must be obtainable and enforceable by
creditors generally. If other creditors could not obtain a security
interest in the consumer's deposit accounts to the same extent as the
card issuer, the security interest is prohibited by Sec. 226.12(d)(2).
2. Security interest--after-acquired property. As used in Sec.
226.12(d), the term ``security interest'' does not exclude (as it does
for other Regulation Z purposes) interests in after-acquired property.
Thus, a consensual security interest in deposit-account funds,
including funds deposited after the granting of the security interest
would constitute a permissible exception to the prohibition on offsets.
3. Court order. If the card issuer obtains a judgment against the
cardholder, and if State and other applicable law and the terms of the
judgment do not so prohibit, the card issuer may offset the
indebtedness against the cardholder's deposit account.
Paragraph 12(d)(3).
1. Automatic payment plans--scope of exception. With regard to
automatic debit plans under Sec. 226.12(d)(3), the following rules
apply:
i. The cardholder's authorization must be in writing and signed or
initialed by the cardholder.
ii. The authorizing language need not appear directly above or next
to the cardholder's signature or initials, provided it appears on the
same document and that it clearly spells out the terms of the automatic
debit plan.
iii. If the cardholder has the option to accept or reject the
automatic debit feature (such option may be required under section 913
of the Electronic Fund Transfer Act), the fact that the option exists
should be clearly indicated.
2. Automatic payment plans--additional exceptions. The following
practices are not prohibited by Sec. 226.12(d)(1):
i. Automatically deducting charges for participation in a program
of banking services (one aspect of which may be a credit card plan).
ii. Debiting the cardholder's deposit account on the cardholder's
specific request rather than on an automatic periodic basis (for
example, a cardholder might check a box on the credit card bill stub,
requesting the issuer to debit the cardholder's account to pay that
bill).
12(e) Prompt notification of returns and crediting of refunds.
Paragraph 12(e)(1).
1. Normal channels. The term normal channels refers to any network
or interchange system used for the processing of the original charge
slips (or equivalent information concerning the transaction).
Paragraph 12(e)(2).
1. Crediting account. The card issuer need not actually post the
refund to the consumer's account within three business days after
receiving the credit statement, provided that it credits the
[[Page 33136]]
account as of a date within that time period.
Section 226.13--Billing-Error Resolution
[1. General prohibitions. Footnote 27 prohibits a creditor from
responding to a consumer's billing error allegation by accelerating the
debt or closing the account, and reflects protections authorized by
section 161(d) of the Truth in Lending Act and section 701 of the Equal
Credit Opportunity Act. The footnote also alerts creditors that failure
to comply with the error resolution procedures may result in the
forfeiture of disputed amounts as prescribed in section 161(e) of the
Act. (Any failure to comply may also be a violation subject to the
liability provisions of section 130 of the Act.)]
[rtrif]1.[ltrif] [2.] Charges for error resolution. If a billing
error occurred, whether as alleged or in a different amount or manner,
the creditor may not impose a charge related to any aspect of the error
resolution process (including charges for documentation or
investigation) and must credit the consumer's account if such a charge
was assessed pending resolution. Since the Act grants the consumer
error resolution rights, the creditor should avoid any chilling effect
on the good faith assertion of errors that might result if charges are
assessed when no billing error has occurred.
13(a) Definition of billing error.
[rtrif]Paragraph 13(a)(1).[ltrif]
1. Actual, implied, or apparent authority. Whether use of a credit
card or open-end credit plan is authorized is determined by state or
other applicable law. [rtrif]See comments 12(b)(1)-1, -2.[ltrif]
Paragraph 13(a)(3).
1. Coverage. Section 226.13(a)(3) covers disputes about goods or
services that are ``not accepted'' or ``not delivered * * * as
agreed''; for example:
i. The appearance on a periodic statement of a purchase, when the
consumer refused to take delivery of goods because they did not comply
with the contract.
ii. Delivery of property or services different from that agreed
upon.
iii. Delivery of the wrong quantity.
iv. Late delivery.
v. Delivery to the wrong location.
Section 226.13(a)(3) does not apply to a dispute relating to the
quality of property or services that the consumer accepts. Whether
acceptance occurred is determined by state or other applicable law.
[rtrif]2. Application to purchases made using a third-party payment
intermediary. Section 226.13(a)(3) applies to disputes about goods and
services that are purchased using a third-party payment intermediary,
such as a person-to-person Internet payment service, funded through use
of a consumer's open-end credit plan when the goods or services are not
accepted by the consumer or not delivered to the consumer as agreed.
Under these circumstances, the property or service for which the
extension of credit is made is not the payment service, but rather the
good or service that the consumer has purchased using the payment
service.
3. Notice to merchant not required. A consumer is not required to
first notify the merchant or other payee from whom they have purchased
goods or services in order to provide a billing-error notice to the
creditor under paragraph (a)(3) of this section asserting that the
goods or services were not accepted or delivered as agreed.[ltrif]
Paragraph 13(a)(5).
1. Computational errors. In periodic statements that are combined
with other information, the error resolution procedures are triggered
only if the consumer asserts a computational billing error in the
credit-related portion of the periodic statement. For example[:
i. If][rtrif] if[ltrif] a bank combines a periodic statement
reflecting the consumer's credit card transactions with the consumer's
monthly checking statement, a computational error in the checking
account portion of the combined statement is not a billing error.
Paragraph 13(a)(6).
1. Documentation requests. A request for documentation such as
receipts or sales slips, unaccompanied by an allegation of an error
under Sec. 226.13(a) or a request for additional clarification under
Sec. 226.13(a)(6), does not trigger the error resolution procedures.
For example, a request for documentation merely for purposes such as
tax preparation or recordkeeping does not trigger the error resolution
procedures.
13(b) Billing error notice.
1. Withdrawal [rtrif]of billing error notice by consumer[ltrif].
[rtrif]The creditor need not comply with the requirements of paragraphs
(c) through (g) of this section if the consumer concludes that no
billing error occurred and voluntarily withdraws the billing error
notice.[ltrif] The consumer's withdrawal of a billing error notice may
be oral or written.
[rtrif]2. Form of written notice. The creditor may require that the
written notice not be made on the payment medium or other material
accompanying the periodic statement if the creditor so stipulates in
the billing rights statement required by Sec. Sec. 226.6(d) and
226.9(a). In addition, if the creditor stipulates in the billing rights
statement that it accepts billing error notices submitted
electronically, and states the means by which a consumer may
electronically submit a billing error notice, a notice sent in such
manner will be deemed to satisfy the written notice requirement for
purposes of Sec. 226.13(b).[ltrif]
Paragraph 13(b)(1).
1. Failure to send periodic statement--timing. If the creditor has
failed to send a periodic statement, the 60-day period runs from the
time the statement should have been sent. Once the statement is
provided, the consumer has another 60 days to assert any billing errors
reflected on it. [rtrif]See also Sec. 226.12(e).[ltrif]
2. Failure to reflect credit--timing. If the periodic statement
fails to reflect a credit to the account, the 60-day period runs from
transmittal of the statement on which the credit should have appeared.
3. Transmittal. If a consumer has arranged for periodic statements
to be held at the financial institution until called for, the statement
is ``transmitted'' when it is first made available to the consumer.
Paragraph 13(b)(2).
1. Identity of the consumer. The billing error notice need not
specify both the name and the account number if the information
supplied enables the creditor to identify the consumer's name and
account.
13(c) Time for resolution; general procedures.
1. Temporary or provisional corrections. A creditor may temporarily
correct the consumer's account in response to a billing error notice,
but is not excused from complying with the remaining error resolution
procedures within the time limits for resolution.
2. Correction without investigation. A creditor may correct a
billing error in the manner and amount asserted by the consumer without
the investigation or the determination normally required. The creditor
must comply, however, with all other applicable provisions. If a
creditor follows this procedure, no presumption is created that a
billing error occurred.
[rtrif]3. Relationship with Sec. 226.12. The consumer s rights
under the billing error provisions in Sec. 226.13 are independent of
the provisions set forth in Sec. 226.12(b) and (c). See comments
12(b)(1)-4, 12(b)(4)-3, and 12(c)-1.[ltrif]
Paragraph 13(c)(2).
1. Time for resolution. The phrase two complete billing cycles
means 2 actual billing cycles occurring after receipt of the billing
error notice, not a measure of time equal to 2 billing cycles. For
[[Page 33137]]
example, if a creditor on a monthly billing cycle receives a billing
error notice mid-cycle, it has the remainder of that cycle plus the
next 2 full billing cycles to resolve the error.
[rtrif]2. Finality of error resolution procedure. A creditor must
complete its investigation and conclusively determine whether an error
occurred within the time period set forth in paragraph (c)(2) of this
section. Thus, for example, once the two-billing cycle period for
completing an investigation of an alleged billing error has expired, a
creditor may not reverse any amounts previously credited related to
that alleged billing error, even if the creditor subsequently obtains
evidence indicating that the billing error did not occur as asserted by
the consumer.[ltrif]
13(d) Rules pending resolution.
1. Disputed amount. Disputed amount is the dollar amount alleged by
the consumer to be in error. When the allegation concerns the
description or identification of the transaction (such as the date or
the seller's name) rather than a dollar amount, the disputed amount is
the amount of the transaction or charge that corresponds to the
disputed transaction identification. If the consumer alleges a failure
to send a periodic statement under Sec. 226.13(a)(7), the disputed
amount is the entire balance owing.
13(d)(1) Consumer's right to withhold disputed amount; collection
action prohibited.
1. Prohibited collection actions. During the error resolution
period, the creditor is prohibited from trying to collect the disputed
amount from the consumer. Prohibited collection actions include, for
example, instituting court action, taking a lien, or instituting
attachment proceedings.
2. Right to withhold payment. If the creditor reflects any disputed
amount or related finance or other charges on the periodic statement,
and is therefore required to make the disclosure under [rtrif]paragraph
(d)(4) of this section[ltrif] [footnote 30], the creditor may comply
with that disclosure requirement by indicating that payment of any
disputed amount is not required pending resolution. Making a disclosure
that only refers to the disputed amount would, of course, in no way
affect the consumer s right under Sec. 226.13(d)(1) to withhold
related finance and other charges. The disclosure under
[rtrif]paragraph (d)(4) of this section[ltrif] [footnote 30] need not
appear in any specific place on the periodic statement, need not state
the specific amount that the consumer may withhold, and may be
preprinted on the periodic statement.
3. Imposition of additional charges on undisputed amounts. The
consumer's withholding of a disputed amount from the total bill cannot
subject undisputed balances (including new purchases or cash advances
made during the present or subsequent cycles) to the imposition of
finance or other charges. For example, if on an account with a
[rtrif]grace[ltrif] [free-ride] period (that is, an account in which
paying the new balance in full allows the consumer to avoid the
imposition of additional finance charges), a consumer disputes a $2
item out of a total bill of $300 and pays $298 within the
[rtrif]grace[ltrif] [free-ride] period, the consumer would not lose the
[rtrif]grace period[ltrif] [free-ride] as to any undisputed amounts,
even if the creditor determines later that no billing error occurred.
Furthermore, finance or other charges may not be imposed on any new
purchases or advances that, absent the unpaid disputed balance, would
not have finance or other charges imposed on them. Finance or other
charges that would have been incurred even if the consumer had paid the
disputed amount would not be affected.
4. Automatic payment plans--coverage. The coverage of this
provision is limited to the card issuer's [rtrif]automatic[ltrif]
[intra-institutional] payment plans[rtrif], whether or not the
consumer's asset account is held by the card issuer or by another
financial institution[ltrif]. It does not apply to[:
[ Inter-institutional payment plans that permit a
cardholder to pay automatically any credit card indebtedness from an
asset account not held by the card issuer receiving payment.
I][rtrif] i[ltrif]ntra-institutional automatic payment
plans offered by financial institutions that are not credit card
issuers.
5. Automatic payment plans--time of notice. While the card issuer
does not have to restore or prevent the debiting of a disputed amount
if the billing error notice arrives after the 3-business-day cut-off,
the card issuer must, however, prevent the automatic debit of any part
of the disputed amount that is still outstanding and unresolved at the
time of the next scheduled debit date.
13(d)(2) Adverse credit reports prohibited.
1. Report of dispute. Although the creditor must not issue an
adverse credit report because the consumer fails to pay the disputed
amount or any related charges, the creditor may report that the amount
or the account is in dispute. Also, the creditor may report the account
as delinquent if undisputed amounts remain unpaid.
2. Person. During the error resolution period, the creditor is
prohibited from making an adverse credit report about the disputed
amount to any person--including employers, insurance companies, other
creditors, and credit bureaus.
3. Creditor's agent. Whether an agency relationship exists between
a creditor and an issuer of an adverse credit report is determined by
State or other applicable law.
13(e) Procedures if billing error occurred as asserted.
1. Correction of error. The phrase as applicable means that the
necessary corrections vary with the type of billing error that
occurred. For example, a misidentified transaction (or a transaction
that is identified by one of the alternative methods in Sec. 226.8) is
cured by properly identifying the transaction and crediting related
finance and any other charges imposed. The creditor is not required to
cancel the amount of the underlying obligation incurred by the
consumer.
2. Form of correction notice. The written correction notice may
take a variety of forms. It may be sent separately, or it may be
included on or with a periodic statement that is mailed within the time
for resolution. If the periodic statement is used, the amount of the
billing error must be specifically identified. If a separate billing
error correction notice is provided, the accompanying or subsequent
periodic statement reflecting the corrected amount may simply identify
it as credit.
[rtrif]3. Discovery of information after investigation period. See
comment 13(c)(2)-2.[ltrif]
13(f) Procedures if different billing error or no billing error
occurred.
1. Different billing error. Examples of a different billing error
include:
i. Differences in the amount of an error (for example, the customer
asserts a $55.00 error but the error was only $53.00).
ii. Differences in other particulars asserted by the consumer (such
as when a consumer asserts that a particular transaction never
occurred, but the creditor determines that only the seller's name was
disclosed incorrectly).
2. Form of creditor's explanation. The written explanation (which
also may notify the consumer of corrections to the account) may take a
variety of forms. It may be sent separately, or it may be included on
or with a periodic statement that is mailed within the time for
resolution. If the creditor uses the periodic statement for the
explanation and correction(s), the corrections must be specifically
identified. If a separate explanation, including the correction
[[Page 33138]]
notice, is provided, the enclosed or subsequent periodic statement
reflecting the corrected amount may simply identify it as a credit. The
explanation may be combined with the creditor's notice to the consumer
of amounts still owing, which is required under Sec. 226.13(g)(1),
provided it is sent within the time limit for resolution. (See
Commentary to Sec. 226.13(e).)
13(g) Creditor's rights and duties after resolution.
Paragraph 13(g)(1).
1. Amounts owed by consumer. Amounts the consumer still owes may
include both minimum periodic payments and related finance and other
charges that accrued during the resolution period. As explained in the
commentary to Sec. 226.13(d)(1), even if the creditor later determines
that no billing error occurred, the creditor may not include finance or
other charges that are imposed on undisputed balances solely as a
result of a consumer's withholding payment of a disputed amount.
2. Time of notice. The creditor need not send the notice of amount
owed within the time period for resolution, although it is under a duty
to send the notice promptly after resolution of the alleged error. If
the creditor combines the notice of the amount owed with the
explanation required under Sec. 226.13(f)(1), the combined notice must
be provided within the time limit for resolution.
Paragraph 13(g)(2).
1. [rtrif]Grace period if no error occurred. If the creditor
determines, after a reasonable investigation, that a billing error did
not occur as asserted, and the consumer was entitled to a grace period
at the time the consumer provided the billing error notice, the
consumer must be given a period of time equal to the grace period
disclosed under Sec. Sec. 226.6(a)(1) and 226.7(j) to pay any disputed
amounts due without incurring additional finance or other charges.
However, the[ltrif] [The] creditor need not allow a [rtrif]grace[ltrif]
[free-ride] period disclosed under Sec. Sec. 226.6(a)(1) and 226.7(j)
to pay the amount due under Sec. 226.13(g)(1) if no error occurred and
the consumer was not entitled to a [rtrif]grace[ltrif] [free-ride]
period at the time the consumer asserted the error. [rtrif]For example,
assume that a creditor provides a consumer a grace period of 20 days to
pay a new balance to avoid finance charges, and that the consumer did
not carry an outstanding balance from the prior month. If the consumer
subsequently asserts a billing error for the current statement period
within the 20-day grace period, and the creditor determines that no
billing error in fact occurred, the consumer must be given at least 20
days (i.e., the full disclosed grace period) to pay the amount due
without incurring additional finance charges. Conversely, if the
consumer was not entitled to a grace period at the time the consumer
asserted the billing error, for example, if the consumer did not pay
the previous monthly balance of undisputed charges in full, the
creditor may assess finance charges on the disputed balance.[ltrif]
Paragraph 13(g)(3).
1. Time for payment. The consumer has a minimum of 10 days to pay
(measured from the time the consumer could reasonably be expected to
have received notice of the amount owed) before the creditor may issue
an adverse credit report; if an initially disclosed [rtrif]grace[ltrif]
[free-ride] period allows the consumer a longer time in which to pay,
the consumer has the benefit of that longer period.
Paragraph 13(g)(4).
1. Credit reporting. Under Sec. 226.13(g)(4)(i) and (iii) the
creditor's additional credit reporting responsibilities must be
accomplished promptly. The creditor need not establish costly
procedures to fulfill this requirement. For example, a creditor that
reports to a credit bureau on scheduled updates need not transmit
corrective information by an unscheduled computer or magnetic tape; it
may provide the credit bureau with the correct information by letter or
other commercially reasonable means when using the scheduled update
would not be ``prompt.'' The creditor is not responsible for ensuring
that the credit bureau corrects its information immediately.
2. Adverse report to credit bureau. If a creditor made an adverse
report to a credit bureau that disseminated the information to other
creditors, the creditor fulfills its Sec. 226.13(g)(4)(ii) obligations
by providing the consumer with the name and address of the credit
bureau.
13(i) Relation to Electronic Fund Transfer Act and Regulation E.
1. Coverage. Credit extended directly from a non-overdraft credit
line is governed solely by Regulation Z, even though a combined credit
card/access device is used to obtain the extension.
2. Incidental credit under agreement. Credit extended incident to
an electronic fund transfer under an agreement between the consumer and
the financial institution is governed by Sec. 226.13(i), which
provides that certain error resolution procedures in both this
regulation and Regulation E apply. Incidental credit that is not
extended under an agreement between the consumer and the financial
institution is governed solely by the error resolution procedures in
Regulation E. For example[rtrif] ,[ltrif] [:
C][rtrif]c[ltrif] redit inadvertently extended incident to
an electronic fund transfer[rtrif], such as under an overdraft
protection plan not subject to Regulation Z,[ltrif] is governed solely
by the Regulation E error resolution procedures, if the bank and the
consumer do not have an agreement to extend credit when the consumer's
account is overdrawn.
3. Application to debit/credit transactions-examples. If a consumer
withdraws money at an automated teller machine and activates an
overdraft credit feature on the checking account:
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 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. Sec. 226.13(d) and (g) apply only to
the credit portion of the transaction.
Section 226.14--Determination of Annual Percentage Rate
14(a) General rule.
1. Tolerance. The tolerance of \1/8\ of 1 percentage point above or
below the annual percentage rate applies to any required disclosure of
the annual percentage rate. The disclosure of the annual percentage
rate is required in Sec. Sec. [rtrif]226.5a, 226.5b, [ltrif] 226.6,
226.7, 226.9, 226.15, 226.16, and 226.26.
2. Rounding. The regulation does not require that the annual
percentage rate be calculated to any particular number of decimal
places; rounding is permissible within \1/8\ of the of 1 percent
tolerance. For example, an exact annual percentage rate of 14.33333%
may be stated as 14.33% or as 14.3%, or even as 14\1/4\%; but it could
not be stated as 14.2% or 14%, since each varies by more than the
permitted tolerance.
3. Periodic rates. No explicit tolerance exists for any periodic
rate as such; a disclosed periodic rate may vary from precise accuracy
(for example, due to rounding) only to the extent that its annualized
equivalent is within the tolerance permitted by Sec. 226.14(a).
Further, a periodic rate need not be calculated to any particular
number of decimal places.
[[Page 33139]]
4. Finance charges. The regulation does not prohibit creditors from
assessing finance charges on balances that include prior, unpaid
finance charges; state or other applicable law may do so, however.
5. Good faith reliance on faulty calculation tools. [rtrif]The
regulation[ltrif] [Footnote 31a] relieves a creditor of liability for
an error in the annual percentage rate or finance charge that resulted
from a corresponding error in a calculation tool used in good faith by
the creditor. Whether or not the creditor's use of the tool was in good
faith must be determined on a case-by-case basis, but the creditor must
in any case have taken reasonable steps to verify the accuracy of the
tool, including any instructions, before using it. Generally, the safe
harbor from liability is available only for errors directly
attributable to the calculation tool self, including software programs;
it is not intended to absolve a creditor of liability for its own
errors, or for errors arising from improper use of the tool, from
incorrect data entry, or from misapplication of the law.
14(b) Annual percentage rate [rtrif]--in general[ltrif] [for
Sec. Sec. 226.5a and 226.5b disclosures, for initial disclosures and
for advertising purposes].
1. Corresponding annual percentage rate computation. For purposes
of Sec. Sec. 226.5a, 226.5b, 226.6[rtrif], 226.7(d), 226.9,
226.15,[ltrif] [and] 226.16, and [rtrif]226.26,[ltrif] the annual
percentage rate is determined by multiplying the periodic rate by the
number of periods in the year. This computation reflects the fact that,
in such disclosures, the rate (known as the corresponding annual
percentage rate) is prospective and does not involve any particular
finance charge or periodic balance. [This computation also is used to
determine any annual percentage rate for oral disclosures under Sec.
226.26(a).]
14(c) [rtrif]Effective[ltrif] annual percentage rate [rtrif]for
home equity plans[ltrif] [for periodic statements].
1. General rule. [Section 226.14(c) requires disclosure of the
corresponding annual percentage rate for each periodic rate (under
Sec. 226.7(d)). It is figured by multiplying each periodic rate by the
number of periods per year. This disclosure is like that provided on
the initial account-opening disclosure statement.] The periodic
statement [also] must reflect (under Sec. 226.7(g)) the annualized
equivalent of the rate actually applied during a particular cycle [(the
historical rate)]; this rate may differ from the corresponding annual
percentage rate because of the inclusion of[rtrif], for example,[ltrif]
fixed, minimum, or transaction charges. Sections 226.14(c)(1) through
(c)[(4)] [rtrif](5)[ltrif] state the computation rules for the
[rtrif]effective[ltrif] [historical] rate.
[rtrif]2.[ltrif] [7.] Charges related to opening, renewing, or
continuing an account. [Footnote 33 is applicable to Sec. 226.14(c)(2)
and (c)(3).] [rtrif]Section 226.14(c)(2) and 226.14(c)(3) excludes from
the calculation of the effective annual percentage rate finance charges
that are imposed during the billing cycle such as a loan fee, points,
or similar charge that relates to opening, renewing, or continuing an
account.[ltrif] The charges involved here do not relate to a specific
transaction or to specific activity on the account, but relate solely
to the opening, renewing, or continuing of the account. For example, an
annual fee to renew an open-end credit account that is a percentage of
the credit limit on the account, or that is charged only to consumers
that have not used their credit card for a certain dollar amount in
transactions during the preceding year, would not be included in the
calculation of the annual percentage rate, even though the fee may not
be excluded from the finance charge under Sec. 226.4(c)(4). (See
comment 4(c)(4)-2.) [Inclusion of these charges in the annual
percentage rate calculation results in significant distortions of the
annual percentage rate and delivery of a possibly misleading disclosure
to consumers. The] [rtrif]This[ltrif] rule [in footnote 33] applies
even if the loan fee, points, or similar charges are billed on a
subsequent periodic statement or withheld from the proceeds of the
first advance on the account.
[rtrif]3.[ltrif] [8.] Classification of charges. If the finance
charge includes a charge not due to the application of a periodic rate,
the creditor must use the annual percentage rate computation method
that corresponds to the type of charge imposed. If the charge is tied
to a specific transaction (for example, 3% of the amount of each
transaction), then the method in Sec. 226.14(c)(3) must be used. If a
fixed or minimum charge is applied, that is, one not tied to any
specific transaction, then the formula in Sec. 226.14(c)(2) is
appropriate.
[rtrif]4.[ltrif] [9.] Small finance charges. Section 226.14(c)(4)
gives the creditor an alternative to Sec. 226.14(c)(2) and (c)(3) if
small finance charges (50 cents or less) are involved; that is, if the
finance charge includes minimum or fixed fees not due to the
application of a periodic rate and the total finance charge for the
cycle does not exceed 50 cents. For example, while a monthly activity
fee of 50 cents on a balance of $20 would produce an annual percentage
rate of 30 percent under the rule in Sec. 226.14(c)(2), the creditor
may disclose an annual percentage rate of 18 percent if the periodic
rate generally applicable to all balances is 1\1/2\ percent per month.
[This option is consistent with the provision in footnote 11 to
Sec. Sec. 226.6 and 226.7 permitting the creditor to disregard the
effect of minimum charges in disclosing the ranges of balances to which
periodic rates apply.]
[rtrif]5.[ltrif] [10.] Prior-cycle adjustments. i. The annual
percentage rate reflects the finance charges imposed during the billing
cycle. However, finance charges imposed during the billing cycle may
relate to activity in a prior cycle. Examples of circumstances when
this may occur are:
A. A cash advance occurs on the last day of a billing cycle on an
account that uses the transaction date to figure finance charges, and
it is impracticable to post the transaction until the following cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are
imposed from the date of purchase.
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing cycles (such
as when a deferred payment balance was not paid in full by the payment
due date and finance charges from the date of purchase are now being
debited to the account, or when a cash advance occurs on the last day
of a billing cycle on an account that uses the transaction date to
figure finance charges and it is impracticable to post the transaction
until the following cycle), and the creditor uses the quotient method
to calculate the annual percentage rate, the numerator would include
the amount of any transaction charges plus any other finance charges
posted during the billing cycle. At the creditor's option, balances
relating to the finance charge adjustment may be included in the
denominator if permitted by the legal obligation, if it was
impracticable to post the transaction in the previous cycle because of
timing, or if the adjustment is covered by comment 14(c)-10.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance charge
relates to an adjustment such as the resolution of a billing error
dispute, or
[[Page 33140]]
an unintentional posting error, or a payment by check that was later
returned unpaid for insufficient funds or other reasons), the creditor
shall at its option:
1. Calculate the annual percentage rate in accord with ii.A. of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.
[rtrif]6. Calculations where daily periodic rate applied. Section
226.14(c)(5) addresses use of a daily periodic rate(s) to determine
some or all of the finance charge and use of the quotient method to
determine the annual percentage rate. Since the quotient formula in
Sec. Sec. 226.14(c)(1)(ii) and (c)(2) cannot be used when a daily rate
is being applied to a series of daily balances, Sec. 226.14(c)(5)
provides two alternative ways to calculate the annual percentage rate--
either of which satisfies the requirement in Sec. 226.7(b)(i). If the
finance charge results from a charge relating to a specific transaction
and the application of a daily periodic rate, see comment 14(c)(3)-2
for guidance on an appropriate calculation method.[ltrif]
[rtrif]14(c)(1) Solely periodic rates imposed.[ltrif]
[rtrif]1.[ltrif] [2.] Periodic rates. Section 226.14(c)(1) applies
if the only finance charge imposed is due to the application of a
periodic rate to a balance. The creditor may compute the annual
percentage rate either:
i. By multiplying each periodic rate by the number of periods in
the year; or
ii. By the ``quotient'' method. This method refers to a composite
annual percentage rate when different periodic rates apply to different
balances. For example, a particular plan may involve a periodic rate of
1\1/2\% on balances up to $500, and 1% on balances over $500. If, in a
given cycle, the consumer has a balance of $800, the finance charge
would consist of $7.50 (500 x .015) plus $3.00 (300 x .01), for a total
finance charge of $10.50. The annual percentage rate for this period
may be disclosed either as 18% on $500 and 12% on $300, or as 15.75% on
a balance of $800 (the quotient of $10.50 divided by $800, multiplied
by 12).
[rtrif]14(c)(2) Minimum or fixed charge, but not transaction
charge, imposed.[ltrif]
[rtrif]1.[ltrif] [3.] [rtrif]Certain charges[ltrif] [Charges] not
based on periodic rates. Section 226.14(c)(2) [applies] [rtrif]requires
use of the quotient method to determine the annual percentage
rate[ltrif] if the finance charge imposed includes a certain charge not
due to the application of a periodic rate (other than a charge relating
to a specific transaction). For example, if the creditor imposes a
minimum $1 finance charge on all balances below $50, and the consumer's
balance was $40 in a particular cycle, the creditor would disclose an
annual percentage rate of 30% (1/40 x 12).
[rtrif]2.[ltrif] [4.] No balance. [Footnote 32 to Sec.
226.14(c)(2) would apply not only] [rtrif]If there is no balance to
which the finance charge is applicable, an annual percentage rate
cannot be determined under Sec. 226.14(c)(2). This could occur not
only[ltrif] when minimum charges are imposed on an account with no
balance, but also when a periodic rate is applied to advances from the
date of the transaction. For example, if on May 19 the consumer pays
the new balance in full from a statement dated May 1, and has no
further transactions reflected on the June 1 statement, that statement
would reflect a finance charge with no account balance.
[rtrif]14(c)(3) Transaction charge imposed.[ltrif]
[rtrif]1.[ltrif] [5.] Transaction charges. i. Section 226.14(c)(3)
transaction charges include, for example:
A. A loan fee of $10 imposed on a particular advance.
B. A charge of 3% of the amount of each transaction.
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which transaction charges
were imposed not be included both in the amount of total balances and
in the ``other amounts on which a finance charge was imposed'' figure.
In a multifeatured plan, creditors may consider each bona fide feature
separately in the calculation of the denominator. A creditor has
considerable flexibility in defining features for open-end plans, as
long as the creditor has a reasonable basis for the distinctions. For
further explanation and examples of how to determine the components of
this formula, see Appendix F.
[rtrif]2.[ltrif] [6.] Daily rate with specific transaction charge.
Section 226.14(c)(3) sets forth an acceptable method for calculating
the annual percentage rate if the finance charge results from a charge
relating to a specific transaction and the application of a daily
periodic rate. This section includes the requirement that the creditor
follow the rules in Appendix F in calculating the annual percentage
rate, especially [rtrif]the provision in the introductory section of
[ltrif][footnote 1 to] Appendix F which addresses the daily rate/
transaction charge situation by providing that the ``average of daily
balances'' shall be used instead of the ``sum of the balances.''
ALTERNATIVE 1--PARAGRAPH 14(d).
14(d) [rtrif]Effective annual percentage rate for open-end (not
home-secured) plans [ltrif][Calculations where daily periodic rate
applied].
[rtrif]1. General rule. The periodic statement must reflect under
Sec. 226.7(b)(7) the annualized equivalent of the rate actually
applied during a particular cycle (the effective rate); this rate may
differ from the corresponding annual percentage rate because of the
inclusion of minimum, fixed, or transaction charges. Sections 226.14
(d)(1) through (d)(5) state the computation rules for the effective
rate.
2. Classification of charges. If the finance charge includes a
charge not attributable to a periodic rate used to calculate interest,
the creditor must use the annual percentage rate computation method
that corresponds to the type of charge imposed. If the charge is tied
to a specific transaction (for example, 3% of the amount of each
transaction), then the method in Sec. 226.14(d)(3) must be used. If a
fixed or minimum charge is applied, that is, one not related to any
specific transaction, then the formula in Sec. 226.14(d)(2) is
appropriate.
3. Calculated by feature. For multifeatured plans, the effective
annual percentage rate(s) calculated pursuant to Sec. 226.14(d) must
be separately calculated by feature.
4. Prior-cycle adjustments. i. The annual percentage rate reflects
the finance charges identified in Sec. 226.14(e) imposed during the
billing cycle. However, such finance charges imposed during the billing
cycle may relate to activity in a prior cycle. Examples of
circumstances when this may occur are:
A. A cash advance occurs on the last day of a billing cycle on an
account that uses the transaction date to figure finance charges, and
it is impracticable to post the transaction until the following cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are
imposed from the date of purchase.
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing
[[Page 33141]]
cycles (such as when a deferred payment balance was not paid in full by
the payment due date and finance charges from the date of purchase are
debited to the account, or when a cash advance occurs on the last day
of a billing cycle on an account that uses the transaction date to
figure finance charges and it is impracticable to post the transaction
until the following cycle), and the creditor uses the quotient method
to calculate the annual percentage rate, the numerator would include
the amount of any transaction charges plus any other finance charges
posted during the billing cycle. At the creditor's option, balances
relating to the finance charge adjustment may be included in the
denominator if permitted by the legal obligation, if it was
impracticable to post the transaction in the previous cycle because of
timing, or if the adjustment is covered by comment 14(d)-3.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance charge
relates to an adjustment such as the resolution of a billing error
dispute, or an unintentional posting error, or a payment by check that
was later returned unpaid for insufficient funds or other reasons), the
creditor shall at its option:
1. Calculate the annual percentage rate in accordance with ii.A. of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.[ltrif]
[1. Quotient Method. Section 226.14(d) addresses use of a daily
periodic rate(s) to determine some or all of the finance charge and use
of the quotient method to determine the annual percentage rate. Since
the quotient formula in Sec. 226.14(c)(1)(ii) does not work when a
daily rate is being applied to a series of daily balances, Sec.
226.14(d) gives the creditor 2 alternative ways to figure the annual
percentage rate--either of which satisfies the requirement in Sec.
226.7(g).
2. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and the
application of a daily periodic rate, see comment 14(c)-6 for guidance
on an appropriate calculation method.]
[rtrif]14(d)(1) Solely periodic rates imposed.
1. Periodic rates. Section 226.14(d)(1) applies if the only finance
charge identified in Sec. 226.14(e) imposed in a billing cycle is
attributable solely to one or more periodic rates used to calculate
interest. The creditor must compute the effective annual percentage
rate(s) by multiplying each periodic rate by the number of periods in
the year.[ltrif] [rtrif]14(d)(2) Minimum or fixed charge, but not
transaction charge, imposed.
1. Purchase features. If there are several features relating to
purchase transactions (such as a standard purchase feature and a
promotional purchase feature), the minimum charges or other charges
identified in Sec. 226.14(e) that are not attributable to periodic
rates used to calculate interest and not related to a specific
transaction must be included in the calculation of the effective annual
percentage rate for the standard purchase feature. The effective annual
percentage rate for the promotional purchase feature, for example, must
be calculated under Sec. 226.14(d)(2)(i)(B).
2. No balance. If there is no purchase balance to which the finance
charge is applicable, an annual percentage rate cannot be determined
under Sec. 226.14(d)(2)(i) or (ii). This could occur not only when
minimum charges are imposed on an account with no balance, but also to
a plan in which a periodic rate is applied to balances from the date of
the transaction. For example, if on May 19 the consumer pays the new
balance in full from a statement dated May 1, and has no further
transactions reflected on the June 1 statement, that statement would
reflect a finance charge with no account balance.
3. Calculations where daily periodic rate applied. Section
226.14(d)(2)(i) and Sec. 226.14(d)(2)(ii) address use of a daily
periodic rate(s) to determine some or all of the finance charge
identified in Sec. 226.14(e) and use of the quotient method to
determine the annual percentage rate. Since the quotient formula does
not work when a daily rate is being applied to a series of daily
balances, Sec. 226.14(d)(2)(i) and Sec. 226.14(d)(2)(ii) give the
creditor two alternative ways to compute the annual percentage rate--
either of which satisfies the requirement in Sec. 226.7(b)(7). If the
finance charge results from a charge relating to a specific transaction
and the application of a daily periodic rate, see comment 14(d)(3)-3
for guidance on an appropriate calculation method.[ltrif]
[rtrif]14(d)(3) Transaction charge imposed.
1. Purchase features. If there are several features relating to
purchase transactions (such as a standard purchase feature and a
promotional purchase feature), any minimum charges or other charges
identified in Sec. 226.14(e) that are not attributable to periodic
rates used to calculate interest and not related to a specific
transaction must be included in the calculation of the effective annual
percentage rate for the standard purchase feature. Charges that relate
to a specific transaction must be included in the calculation of the
effective annual percentage rate for that type of transaction. For
example, if a charge is applicable to a specific promotional purchase
transaction, that charge must be included in calculating the effective
annual percentage rate for the promotional purchase feature.
2. Duplication. The reference to avoiding duplication in the
computation requires that the amounts of transactions on which
transaction charges were imposed not be included both in the amount of
total balances and in the ``other amounts on which a finance charge was
imposed'' figure. For further explanation and examples of how to
determine the components of this formula, see appendix F.
3. Daily rate with specific transaction charge. Section
226.14(d)(3) sets forth an acceptable method for calculating the annual
percentage rate if the finance charge results from a charge relating to
a specific transaction and the application of a daily periodic rate.
This section includes the requirement that the creditor follow the
rules in appendix F in calculating the annual percentage rate,
especially the provision in the introductory section of appendix F
which addresses the daily rate/transaction charge situation by
providing that the ``average of daily balances'' shall be used instead
of the ``sum of the balances.''[ltrif]
[rtrif]Paragraph 14(d)(4)
1. Small finance charges. Section 226.14(d)(4) gives the creditor
an alternative to Sec. 226.14(d)(2) and (d)(3) if the sum of charges
identified in paragraph (d)(2) or (d)(3) does not exceed $1.00 for a
monthly or longer billing cycle, or the pro rata part of $1.00 for a
billing cycle shorter than monthly. In that case, the creditor may
determine the annual percentage rate by multiplying each applicable
periodic rate by the number of periods in a year.[ltrif]
[rtrif]Finance charges to be included in the calculation of the
effective annual percentage rate under Sec. 226.14(d).
Paragraph 14(e)(1)
1. Transaction charges. i. For purposes of Sec. 226.14,
transaction charges include, for example:
i. A loan fee of $10 imposed on a particular advance.
[[Page 33142]]
ii. A charge of 3% of the amount of each transaction.
Paragraph 14(e)(2).
1. Charges imposed as a condition to opening an account. Section
226.14(e)(2) provides that the finance charges that trigger the
requirement to calculate an effective annual percentage rate under
Sec. 226.14(d)(2) or (3) do not include a charge related to opening
the account. This rule applies even if loan fees, points, or similar
charges are billed on a subsequent periodic statement or withheld from
the proceeds of the first advance on the account.
2. Annual charges. Section 226.14(e)(2) provides that the finance
charges that trigger the requirement to calculate an effective annual
percentage rate under Sec. 226.14(d)(2) or (3) do not include a charge
related to continuing or renewing the account, unless the charge is
imposed more often than annually. For example, a fee imposed annually
to renew an open-end credit account that is a percentage of the credit
limit on the account, or that is charged only to consumers that have
not used their credit card for a certain dollar amount in transactions
during the preceding year, would not be included in the calculation of
the annual percentage rate, even though the fee may not be excluded
from the finance charge under Sec. 226.4(c)(4). (See comment 4(c)(4)-
2.)[ltrif]
* * * * *
Section 226.16--Advertising
1. Clear and conspicuous standard [rtrif]--general[ltrif]. Section
226.16 is subject to the general ``clear and conspicuous'' standard for
subpart B (see Sec. 226.5(a)(1)) but prescribes no specific rules for
the format of the necessary disclosures[rtrif], other than the format
requirements related to the disclosure of an introductory rate under
Sec. 226.16(e)[ltrif]. [rtrif]Other than the terms described in Sec.
226.16(e),[ltrif] the credit terms need not be printed in a certain
type size nor need they appear in any particular place in the
advertisement.
[rtrif]2. Clear and conspicuous standard--introductory rates. For
purposes of Sec. 226.16(e), a clear and conspicuous disclosure means
the required information in Sec. Sec. 226.16(e)(4)(i) and (ii) must be
equally prominent to the introductory rate to which it applies. If the
information in Sec. Sec. 226.16(e)(4)(i) and (ii) is the same type
size as the introductory rate to which it applies, the disclosures
would be deemed to be equally prominent.[ltrif]
[rtrif]3.[ltrif] [2]. Expressing the annual percentage rate in
abbreviated form. Whenever the annual percentage rate is used in an
advertisement for open-end credit, it may be expressed using a readily
understandable abbreviation such as APR.
16(a) Actually available terms.
1. General rule. To the extent that an advertisement mentions
specific credit terms, it may state only those terms that the creditor
is actually prepared to offer. For example, a creditor may not
advertise a very low annual percentage rate that will not in fact be
available at any time. Section 226.16(a) is not intended to inhibit the
promotion of new credit programs, but to bar the advertising of terms
that are not and will not be available. For example, a creditor may
advertise terms that will be offered for only a limited period, or
terms that will become available at a future date.
2. Specific credit terms. Specific credit terms is not limited to
the disclosures required by the regulation but would include any
specific components of a credit plan, such as the minimum periodic
payment amount or seller's points in a plan secured by real estate.
16(b) Advertisement of terms that require additional disclosures.
1. [rtrif]Triggering terms. Negative as well as affirmative
references trigger the requirement for additional information. For
example, if a creditor states no interest or no annual membership fee
in an advertisement, additional information must be provided. Other
examples of terms that trigger additional disclosures are:
i. Small monthly service charge on the remaining balance, which
describes how the amount of a finance charge will be determined.
ii. 12 percent Annual Percentage Rate or A $15 annual membership
fee buys you $2,000 in credit,'' which describe required disclosures
under Sec. 226.6.[ltrif]
[Terms requiring additional disclosures. In Sec. 226.16(b) the
phrase ``the terms required to be disclosed under Sec. 226.6'' refers
to the terms in Sec. 226.6(a) and Sec. 226.6(b).]
[2. Use of positive terms. An advertisement must state a credit
term as a positive number in order to trigger additional disclosures.
For example, ``no annual membership fee'' would not trigger the
additional disclosures required by Sec. 226.16(b). (See, however, the
rules in Sec. 226.16(d) relating to advertisements for home equity
plans.)]
[rtrif]2.[ltrif] [3.] Implicit terms. Section 226.16(b) applies
even if the triggering term is not stated explicitly, but may be
readily determined from the advertisement.
[rtrif]3.[ltrif] [4.] Membership fees. A membership fee is not a
triggering term nor need it be disclosed under Sec. 226.16(b)(3) if it
is required for participation in the plan whether or not an open-end
credit feature is attached. (See comment [rtrif]6(a)(2)-2 and Sec.
226.6(b)(1)(ii)(B)[ltrif] [6(b)-1]).
[rtrif]4. Deferred-billing and deferred-payment programs.
Statements such as ``Charge it--you won't be billed until May'' or
``You may skip your January payment'' are not in themselves triggering
terms, since the timing for initial billing or for monthly payments are
not terms required to be disclosed under Sec. 226.6. However, a
statement such as ``No interest charges until May'' or any other
statement regarding when interest or finance charges begin to accrue is
a triggering term, whether appearing alone or in conjunction with a
description of a deferred billing or deferred payment program such as
the examples above.[ltrif]
5. Variable-rate plans. In disclosing the annual percentage rate in
an advertisement for a variable-rate plan, as required by Sec.
226.16(b)(2), the creditor may use an insert showing the current rate;
[rtrif]or[ltrif] may give the rate as of a specified recent date[; or
may disclose an estimated rate under Sec. 226.5(c)]. The additional
requirement in Sec. 226.16(b) [rtrif](1)(ii)[ltrif] [(2)] to disclose
the variable-rate feature may be satisfied by disclosing that the
annual percentage rate may vary or a similar statement, but the
advertisement need not include the information required by [footnote 12
to Sec. 226.6(a)(2)][rtrif]Sec. 226.6(a)(1)(ii) or Sec. 226.6(b)(2)
[ltrif].
[6. Discounted variable-rate plans--disclosure of the annual
percentage rates. The advertised annual percentage rates for discounted
variable-rate plans must, in accordance with comment 6(a)(2)-10,
include both the initial rate (with the statement of how long it will
remain in effect) and the current indexed rate (with the statement that
this second rate may vary). The options listed in comment 16(b)-5 may
be used in disclosing the current indexed rate.]
[7. Triggering terms. The following are examples of terms that
trigger additional disclosures:
``Small monthly service charge on the remaining balance,''
which describes how the amount of a finance charge will be determined.
``12 percent Annual Percentage Rate'' or ``A $15 annual
membership fee buys you $2,000 in credit,'' which describe required
disclosures using positive numbers.]
[8. Minimum, fixed, transaction, activity, or similar charge. The
charges to be disclosed under Sec. 226.16(b)(1) are those that are
considered finance charges under Sec. 226.4.]
[[Page 33143]]
[9. Deferred-billing and deferred-payment programs. Statements such
as ``Charge it--you won't be billed until May'' or ``You may skip your
January payment'' are not in themselves triggering terms, since the
timing for initial billing or for monthly payments are not terms
required to be disclosed under Sec. 226.6. However, a statement such
as ``No finance charge until May'' or any other statement regarding
when finance charges begin to accrue is a triggering term, whether
appearing alone or in conjunction with a description of a deferred
billing or deferred payment program such as the examples above.]
16(c) Catalogs or other multiple-page advertisements; electronic
advertisements.
1. Definition. The multiple-page advertisements to which Sec.
226.16(c) refers are advertisements consisting of a series of
sequentially numbered pages--for example, a supplement to a newspaper.
A mailing consisting of several separate flyers or pieces of
promotional material in a single envelope does not constitute a single
multiple-page advertisement for purposes of Sec. 226.16(c).
Paragraph 16(c)(1).
1. General. Section 226.16(c)(1) permits creditors to put credit
information together in one place in a catalog or other multiple-page
advertisement or an electronic advertisement [rtrif](such as an
advertisement appearing on an Internet Web site)[ltrif]. The rule
applies only if the advertisement contains one or more of the
triggering terms from Sec. 226.16(b).
2. Electronic [rtrif]advertisement[ltrif] [communication]. If an
[rtrif]electronic advertisement (such as an advertisement appearing on
an Internet Web site)[ltrif] [advertisement using electronic
communication] contains the table or schedule permitted under Sec.
226.16(c)(1), any statement of terms set forth in Sec. 226.6 appearing
anywhere else in the advertisement must clearly direct the consumer to
the location where the table or schedule begins. For example, a term
triggering additional disclosures may be accompanied by a link that
directly takes the consumer to the additional information.
Paragraph 16(c)(2).
1. Table or schedule if credit terms depend on outstanding balance.
If the credit terms of a plan vary depending on the amount of the
balance outstanding, rather than the amount of any property purchased,
a table or schedule complies with Sec. 226.16(c)(2) if it includes the
required disclosures for representative balances. For example, a
creditor would disclose that a periodic rate of 1.5% is applied to
balances of $500 or less, and a 1% rate is applied to balances greater
than $500.
[rtrif]Paragraph 16(c)(3).
1. Form of disclosures. If a consumer accesses an advertisement in
electronic form, the required disclosures must be provided to the
consumer in electronic form on or with the advertisement; providing the
disclosures at a different time or place, or in paper form, would not
comply. Conversely, if a consumer views a paper advertisement, the
required disclosures must be provided in paper form on or with the
advertisement. For example, if a consumer receives an advertisement in
the mail, the creditor would not satisfy its obligation to provide
Sec. 226.16 disclosures at that time by including a reference in the
advertisement to the Web site where the disclosures are located.[ltrif]
16(d) Additional requirements for home equity plans.
1. Trigger terms. Negative as well as affirmative references
trigger the requirement for additional information. For example, if a
creditor states no annual fee, no points, or we waive closing costs in
an advertisement, additional information must be provided. (See comment
16(d)-4 regarding the use of a phrase such as no closing costs.)
Inclusion of a statement such as low fees, however, would not trigger
the need to state additional information. References to payment terms
include references to the draw period or any repayment period, to the
length of the plan, to how the minimum payments are determined and to
the timing of such payments.
2. Fees to open the plan. Section 226.16(d)(1)(i) requires a
disclosure of any fees imposed by the creditor or a third party to open
the plan. In providing the fee information required under this
paragraph, the corresponding rules for disclosure of this information
apply. For example, fees to open the plan may be stated as a range.
Similarly, if property insurance is required to open the plan, a
creditor either may estimate the cost of the insurance or provide a
statement that such insurance is required. (See the commentary to Sec.
226.5b(d)(7) and (8).)
3. Statements of tax deductibility. An advertisement referring to
deductiblity for tax purposes is not misleading if it includes a
statement such as ``consult a tax advisor regarding the deductibility
of interest.''
4. Misleading terms prohibited. Under Sec. 226.16(d)(5),
advertisements may not refer to home equity plans as free money or use
other misleading terms. For example, an advertisement could not state
``no closing costs'' or ``we waive closing costs'' if consumers may be
required to pay any closing costs, such as recordation fees. In the
case of property insurance, however, a creditor may state, for example,
``no closing costs'' even if property insurance may be required, as
long as the creditor also provides a statement that such insurance may
be required. (See the commentary to this section regarding fees to open
a plan.)
5. Relation to other sections. Advertisements for home equity plans
must comply with all provisions in Sec. 226.16, not solely the rules
in Sec. 226.16(d). If an advertisement contains information (such as
the payment terms) that triggers the duty under Sec. 226.16(d) to
state the annual percentage rate, the additional disclosures in Sec.
226.16(b) must be provided in the advertisement. While Sec. 226.16(d)
does not require a statement of fees to use or maintain the plan (such
as membership fees and transaction charges), such fees must be
disclosed under Sec. 226.16(b)(1) and (3).
6. Inapplicability of closed-end rules. Advertisements for home
equity plans are governed solely by the requirements in Sec. 226.16,
and not by the closed-end advertising rules in Sec. 226.24. Thus, if a
creditor states payment information about the repayment phase, this
will trigger the duty to provide additional information under Sec.
226.16, but not under Sec. 226.24.
7. Balloon payment. In some programs, a balloon payment will occur
if only the minimum payments under the plan are made. If an
advertisement for such a program contains any statement about a minimum
periodic payment, the advertisement must also state that a balloon
payment will result (not merely that a balloon payment ``may'' result).
(See comment 5b(d)(5)(ii)-3 for guidance on items not required to be
stated in the advertisement, and on situations in which the balloon
payment requirement does not apply.)
[rtrif]16(e) Introductory rates.
1. Use of term ``introductory''. Advertisers may use the term
``intro'' in place of the term ``introductory.''
2. Immediate proximity. Including the term ``introductory'' or
``intro'' in the same phrase as the listing of the introductory rate is
deemed to be in immediate proximity of the listing.
3. Prominent location closely proximate. Information required to be
disclosed in Sec. Sec. 226.16(e)(4)(i) and (ii) that is in the same
paragraph as the first listing of the introductory rate is deemed to be
in a prominent location closely proximate to the listing. Information
disclosed in a footnote will
[[Page 33144]]
not be considered in a prominent location closely proximate to the
listing.
4. First listing. For purposes of Sec. 226.16(e)(4), the first
listing of the introductory rate is the most prominent listing of the
rate on the front side of the first page of the principal promotional
document. The principal promotional document is the document designed
to be seen first by the consumer in a mailing, such as a cover letter
or solicitation letter. If the introductory rate is not listed on the
principal promotional document or there is no principal promotional
document, the first listing is the most prominent listing of the rate
on the front side of the first page of each document listing the
introductory rate. If the listing of the introductory rate with the
largest type size on the front side of the first page of the principal
promotional document (or each document listing the introductory rate if
the introductory rate is not listed on the principal promotional
document or there is no principal promotional document) is used as the
most prominent listing, it will be deemed to be the first listing.
5. Post-introductory rate depends on consumer's creditworthiness.
For purposes of disclosing the rate that may apply after the end of the
temporary rate period, at the advertiser's option, the advertisement
may disclose the rates that may apply as either specific rates, or a
range of rates. For example, if there are three rates that may apply
(9.99%, 12.99% or 17.99%), an issuer may disclose these three rates as
specific rates (9.99%, 12.99% or 17.99%) or as a range of rates (9.99%-
17.99%).[ltrif]
[rtrif]16(f) Alternative disclosures television or radio
advertisements.
1. Toll-free number, local or collect calls. In complying with the
disclosure requirements of Sec. 226.16(f)(1), an advertisement must
provide a toll-free telephone number. Alternatively, an advertiser may
provide any telephone number that allows a consumer to reverse the
phone charges when calling for information.
2. Multi-purpose number. When an advertised toll-free telephone
number provides a recording, disclosures must be provided early in the
sequence to ensure that the consumer receives the required disclosures.
For example, in providing several dialing options--such as providing
directions to the advertiser's place of business--the option allowing
the consumer to request disclosures should be provided early in the
telephone message to ensure that the option to request disclosures is
not obscured by other information.
3. Statement accompanying toll free number. Language must accompany
a telephone and television number indicating that disclosures are
available by calling the toll-free number, such as ``call 1-800-000-
0000 for details about credit costs and terms.''[ltrif]
* * * * *
Appendix F--Annual Percentage Rate Computations for Certain Open-End
Credit Plans
1. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and
the application of a daily periodic rate, see [rtrif] comments
14(c)-6 and 14(d)(3)-3 [ltrif][comment 14(c)-6] for guidance on an
appropriate calculation method.
[rtrif]Appendices[ltrif] [Appendixes] G and H--Open-End and Closed-End
Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the act's
protection from liability[rtrif], except formatting changes may not
be made to model forms and samples in G-2(A), G-3(A), G-4(A), G-
10(A)-(E), G-17(A)-(C), G-18(A)-(F), G-19, G-20, and G-21.[ltrif]
[(But see appendix G comment 5 for special rules concerning certain
disclosures required under Sec. 226.5a for credit and charge card
applications and solicitations.)] The rearrangement of the model
forms and clauses may not be so extensive as to affect the
substance, clarity, or meaningful sequence of the forms and clauses.
Creditors making revisions with that effect will lose their
protection from civil liability. Acceptable changes include, for
example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms.)
[vii. Substituting appropriate references, such as ``bank,''
``we,'' or a specific name, for ``creditor'' in the initial open-end
disclosures.]
[rtrif]vii[ltrif] [viii.] Using a vertical, rather than a
horizontal, format for the boxes in the closed-end disclosures.
2. Debt-cancellation coverage. This regulation does not
authorize creditors to characterize debt-cancellation fees as
insurance premiums for purposes of this regulation. Creditors may
provide a disclosure that refers to debt cancellation[rtrif] or debt
suspension[ltrif] 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.
Appendix G--Open-End Model Forms and Clauses
1. Model G-1. The model disclosures in G-1 (different balance
computation methods) may be used in both the [rtrif]account-opening
[ltrif][initial] disclosures under Sec. 226.6 and the periodic
disclosures under Sec. 226.7. As is clear from the models given,
``shorthand'' descriptions of the balance computation methods are
not sufficient[rtrif], except where Sec. 226.7(b)(5)
applies[ltrif]. The phrase ``a portion of'' the finance charge
should be included if the total finance charge includes other
amounts, such as transaction charges, that are not due to the
application of a periodic rate. In addition, if unpaid finance
charges are subtracted in calculating the balance, that fact must be
stated so that the disclosure of the computation method is accurate.
Only model G-1(b) contains a final sentence appearing in brackets
which reflects the total dollar amount of payments and credits
received during the billing cycle. The other models do not contain
this language because they reflect plans in which payments and
credits received during the billing cycle are subtracted. If this is
not the case, however, the language relating to payments and credits
should be changed, and the creditor should add either the disclosure
of the dollar amount as in model G-1(b) or an indication of which
credits (disclosed elsewhere on the periodic statement) will not be
deducted in determining the balance. (Such an indication may also
substitute for the bracketed sentence in model G-1(b).) (See the
commentary to section 226.7[rtrif] (a)(5) and 226.7(b)(5)
[ltrif][(e)].)
2. Models G-2[rtrif] and G-2(A)[ltrif]. [rtrif]These models
contain[ltrif] [This model contains] the notice of liability for
unauthorized use of a credit card. [rtrif]For home equity plans
subject to the requirements of Sec. 226.5b, at the creditor's
option, a creditor either may use G-2 or G-2(A). For open-end plans
not subject to the requirements of Sec. 226.5b, creditors may use
G-2(A).[ltrif]
3. Models G-3, [rtrif]G-3(A),[ltrif] [and] G-4 [rtrif]and G-
4(A)[ltrif]. i. These set out models for the long-form billing-error
rights statement (for use with the [rtrif]account-opening[ltrif]
[initial] disclosures and as an annual disclosure or, at the
creditor's option, [with each periodic statement) and the
alternative billing-error rights statement (for use with each
periodic statement), respectively. [rtrif]For home equity plans
subject to the requirements of Sec. 226.5b, at the creditor's
option,] a creditor either may use G-3 or G-3(A), and for creditors
that use the short form, G-4 or G-4(A). For open-end plans not
subject to the requirements of Sec. 226.5b, creditors may use G-
3(A) and G-4(A).[ltrif] Creditors must provide the billing-error
rights statements in a form substantially similar to the models in
order to comply with the regulation. The model billing-rights
statements may be modified in any of the ways set forth in the first
paragraph to the commentary on appendices G and H. The models may,
furthermore, be modified by deleting inapplicable information, such
as:
[[Page 33145]]
A. The paragraph concerning stopping a debit in relation to a
disputed amount, if the creditor does not have the ability to debit
automatically the consumer's savings or checking account for
payment.
B. The rights stated in the special rule for credit card
purchases and any limitations on those rights.
ii. The model billing rights statements also contain optional
language that creditors may use. For example, the creditor may:
A. Include a statement to the effect that notice of a billing
error must be submitted on something other than the payment ticket
or other material accompanying the periodic disclosures.
B. Insert its address or refer to the address that appears
elsewhere on the bill.
iii. Additional information may be included on the statements as
long as it does not detract from the required disclosures. For
instance, information concerning the reporting of errors in
connection with a checking account may be included on a combined
statement as long as the disclosures required by the regulation
remain clear and conspicuous.
* * * * *
5. Model G-10(A), sample[rtrif]s[ltrif] G-10(B) and [model] G-
10(C) [rtrif], model G-10(D), sample G-10(E), model G-17(A), and
samples G-17(B) and 17(C)[ltrif] . i. Model G-10(A) and
sample[rtrif]s[ltrif] G-10(B) [rtrif]and G-10(C)[ltrif] illustrate,
in the tabular format, [all of] the disclosures required under Sec.
226.5a for applications and solicitations for credit cards other
than charge cards. [Model G-10(B) is a sample disclosure
illustrating an account with a lower introductory rate and penalty
rate.] Model G-10 [rtrif](D)[ltrif] [(C)] [rtrif]and sample G-
10(E)[ltrif] illustrate[s] the tabular format disclosure for charge
card applications and solicitations and reflects [all of] the
disclosures in the table. [rtrif]Model G-17(A) and samples G-17(B)
and G-17(C) illustrate, in the tabular format, the disclosures
required under Sec. 226.6(b)(4) for account-opening
disclosures.[ltrif]
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to model forms G
10(A)[rtrif], G-10(D) [ltrif]and [rtrif]G-17(A)[ltrif]. [The
disclosures may, however, be arranged vertically or horizontally and
need not be highlighted aside from being included in the table.]
While proper use of the model forms will be deemed in compliance
with the regulation, card issuers are permitted to use headings [and
disclosures] other than those in the forms (with an exception
relating to the use of ``grace period'' [rtrif]``penalty APR'', and
in relation to required insurance, or debt cancellation or
suspension coverage, the term ``required'' and the name of the
product[ltrif]) if they are clear and concise and are substantially
similar to the headings [and disclosures] contained in model forms.
[rtrif]iii. Models G-10(A) and G-17(A) contain two alternative
headings (``Minimum Interest Charge'' and ``Minimum Charge'') for
disclosing a minimum finance charge under Sec. 226.5a(b)(3) and
Sec. 226.6(b)(4)(iii)(D). If a creditor imposes a minimum finance
charge in lieu of interest in those months where a consumer would
otherwise incur an interest charge but that interest charge is less
than the minimum charge, the creditor should disclose this charge
under the heading ``Minimum Interest Charge.'' Other minimum finance
charges should be disclosed under the heading ``Minimum Charge.''
iv. Models G-10(A), G-10(D) and G-17(A) contain two alternative
headings (``Annual Fees'' and ``Set-up and Maintenance Fees'') for
disclosing fees for issuance or availability of credit under Sec.
226.5a(b)(2) or Sec. 226.6(b)(4)(iii)(A). If the only fee for
issuance or availability of credit disclosed under Sec.
226.5a(b)(2) or Sec. 226.6(b)(4)(iii)(A) is an annual fee, a
creditor should use the heading ``Annual Fee'' to disclose this fee.
If a creditor imposes fees for issuance or availability of credit
disclosed under Sec. 226.5a(b)(2) or Sec. 226.6(b)(4)(iii)(A)
other than, or in addition to, an annual fee, the creditor should
use the heading ``Set-up and Maintenance Fees'' to disclose fees for
issuance or availability of credit, including the annual fee.
v. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 226.5a or 226.6(b)(4) disclosures,
samples G-10(B), G-10(C), G-17(B) and G-17(C) are designed to be
printed on an 8 x 14 sheet of paper. In addition, the following
formatting techniques were used in presenting the information in the
sample tables to ensure that the information is readable:
A. A readable font style and font size (10-point Ariel font
style, except for the purchase annual percentage rate which is shown
in 16-point type);
B. Sufficient spacing between lines of the text;
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate. For example, in the samples in the row of the tables
with the heading ``APR for Balance Transfers,'' the forms disclose
three components: The applicable balance transfer rate, a cross
reference to the balance transfer fee, and a notice about payment
allocation. The samples show these three components on separate
lines with adequate space between each component. On the other hand,
in the samples, in the disclosure of the late payment fee, the forms
disclose two components: the late-payment fee, and the cross
reference to the penalty rate. Because the disclosure of both these
components is short, these components are disclosed on the same line
in the tables;
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type;
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text; and
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
vi. While the Board is not requiring issuers to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font requirement), the Board
encourages issuers to consider these techniques when deciding how to
disclose information in the table, to ensure that the information is
presented in a readable format.[ltrif]
6. Model[s] G-11 [and G-12]. Model G-11 contains clauses that
illustrate the general disclosures required under Sec. 226.5a(e) in
applications and solicitations made available to the general public.
[Model G-12 is a model clause for the disclosure required under
Sec. 226.5a(f) when a charge card accesses an open-end plan offered
by another creditor.]
7. Models G-13(A) and G-13(B). These model forms illustrate the
disclosures required under Sec. 226.9(f) when the card issuer
changes the entity providing insurance on a credit card account.
Model G-13(A) contains the items set forth in Sec. 226.9(f)(3) as
examples of significant terms of coverage that may be affected by
the change in insurance provider. The card issuer may either list
all of these potential changes in coverage and place a check mark by
the applicable changes, or list only the actual changes in coverage.
Under either approach, the card issuer must either explain the
changes or refer to an accompanying copy of the policy or group
certificate for details of the new terms of coverage. Model G-13(A)
also illustrates the permissible combination of the two notices
required by Sec. 226.9(f)--the notice required for a planned change
in provider and the notice required once a change has occurred. This
form may be modified for use in providing only the disclosures
required before the change if the card issuer chooses to send two
separate notices. Thus, for example, the references to the attached
policy or certificate would not be required in a separate notice
prior to a change in the insurance provider since the policy or
certificate need not be provided at that time. Model G-13(B)
illustrates the disclosures required under Sec. 226.9(f)(2) when
the insurance provider is changed.
[rtrif]8. Samples G-18(A)-(F). For home equity plans subject to
the requirements of Sec. 226.5b, if a creditor chooses to comply
with the requirements in Sec. 226.7(b), the creditor may use
Samples G-18(A)-(F) to comply with these requirements, as
applicable.[ltrif]
* * * * *
By order of the Board of Governors of the Federal Reserve
System.
Dated: May 23, 2007.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 07-2656 Filed 6-13-07; 8:45 am]
BILLING CODE 6210-01-P