[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Rules and Regulations]
[Pages 5244-5498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31185]



  Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / 
Rules and Regulations  

[[Page 5244]]


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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: Final rule.

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SUMMARY: The Board is amending 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. Consumer testing was 
conducted as a part of the review.
    Except as otherwise noted, the changes apply solely to open-end 
credit. Disclosures accompanying credit card applications and 
solicitations must highlight fees and reasons penalty rates might be 
applied, such as for paying late. Creditors are required to summarize 
key terms at account opening and when terms are changed. Specific fees 
are identified that must be disclosed to consumers in writing before an 
account is opened, and creditors are given flexibility regarding how 
and when to disclose other fees imposed as part of the open-end plan. 
Costs for interest and fees are separately identified for the cycle and 
year to date. Creditors are required to give 45 days' advance notice 
prior to certain changes in terms and before the rate applicable to a 
consumer's account is increased as a penalty. Rules of general 
applicability such as the definition of open-end credit, dispute 
resolution procedures, and payment processing limitations apply to all 
open-end plans, including home-equity lines of credit. Rules regarding 
the disclosure of debt cancellation and debt suspension agreements are 
revised for both closed-end and open-end credit transactions. Loans 
taken against employer-sponsored retirement plans are exempt from TILA 
coverage.

DATES: The rule is effective July 1, 2010.

FOR FURTHER INFORMATION CONTACT: Benjamin K. Olson, Attorney, Amy Burke 
or Vivian Wong, Senior Attorneys, or Krista Ayoub, Ky Tran-Trong, or 
John Wood, Counsels, 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 Changes

    The goal of the 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 changes are the result of the Board's review of the 
provisions that apply to open-end (not home-secured) credit. The Board 
is adopting 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. The Board 
is also adopting additional protections that complement rules issued by 
the Board and other federal banking agencies published elsewhere in 
today's Federal Register regarding certain credit card practices.
    Applications and solicitations. Format and content changes are 
adopted to make the credit and charge card application and solicitation 
disclosures more meaningful and easier for consumers to use. The 
changes include:

     Adopting new format requirements for the summary table, 
including rules regarding: type size and use of boldface type for 
certain key terms, and placement of information.
     Revising content, including: a requirement that 
creditors disclose the duration that penalty rates may be in effect, 
a shorter disclosure about variable rates, new descriptions when a 
grace period is offered on purchases or when no grace period is 
offered, and a reference to consumer education materials on the 
Board's Web site.
    Account-opening disclosures. Requirements for cost disclosures 
provided at account opening are adopted to make the information more 
conspicuous and easier to read. The changes include:

     Disclosing certain key terms in a summary table at 
account opening, in order to summarize for consumers key information 
that is most important to informed decision-making. The table is 
substantially similar to the table required for credit and charge 
card applications and solicitations.
     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. Revisions are adopted to make 
disclosures on periodic statements more understandable, primarily by 
making changes to the format requirements, such as by grouping fees and 
interest charges together. The changes include:

     Itemizing interest charges for different types of 
transactions, such as purchases and cash advances, grouping interest 
charges and fees separately, and providing separate totals of fees 
and interest for the month and year-to-date.
     Eliminating the requirement to disclose an ``effective 
APR.''
     Requiring disclosure of the effect of making only the 
minimum required payment on the time to repay balances, as required 
by the Bankruptcy Act.

    Changes in consumer's interest rate and other account terms. The 
final rule expands 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 changes include:

     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 either due to a change in the 
terms applicable to the consumer's account or due to the consumer's 
delinquency or default or as a penalty.
     When a change-in-terms notice accompanies a periodic 
statement, requiring

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a tabular disclosure on the front side of the periodic statement of 
the key terms being changed.

    Advertising provisions. Rules governing advertising of open-end 
credit are revised to help ensure consumers better understand the 
credit terms offered. These revisions include:

     Requiring advertisements that state a periodic payment 
amount on a plan offered to finance the purchase of goods or 
services to state, in equal prominence to the periodic payment 
amount, the time period required to pay the balance and the total of 
payments if only periodic 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.

    Additional protections. Rules are adopted that provide additional 
protections to consumers. These include:

     In setting reasonable cut-off hours for mailed payments 
to be received on the due date and be considered timely, deeming 5 
p.m. to be a reasonable time.
     Requiring creditors that do not accept mailed payments 
on the due date, such as on weekends or holidays, to treat a mailed 
payment received on the next business day as timely.
     Clarifying that advances that are separately 
underwritten are generally not open-end credit, but closed-end 
credit for which closed-end disclosures must be given.

III. The Board's Review of Open-end Credit Rules

A. Advance Notices of Proposed Rulemaking

    December 2004 ANPR. 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. A summary of the 
comments received in response to the December 2004 ANPR is contained in 
the supplementary information to proposed revisions to Regulation Z 
published by the Board in June 2007 (June 2007 Proposal). 72 FR 32948, 
32949, June 14, 2007.
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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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    October 2005 ANPR. 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. A summary of the comments received in response to the October 
2005 ANPR also is contained in the supplementary information to the 
June 2007 Proposal. 72 FR 32948, 32950, June 14, 2007.

B. Notices of Proposed Rulemakings

    June 2007 Proposal. The Board published proposed amendments to 
Regulation Z's rules for open-end plans that are not home-secured in 
June 2007. 72 FR 32948, June 14, 2007. The goal of the proposed 
amendments to Regulation Z was 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. In 
developing the proposal, the Board conducted consumer research, in 
addition to considering comments received on the two ANPRs. 
Specifically, the Board retained a research and consulting firm (Macro 
International) to assist the Board in using consumer testing to develop 
proposed model forms, as discussed in C. Consumer Testing of this 
section, below. The proposal would have made 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.
    For credit and charge card application and solicitation 
disclosures, the June 2007 Proposal included new format requirements 
for the summary table, such as rules regarding type size and use of 
boldface type for certain key terms, placement of information, and the 
use of cross-references. Content revisions included requiring creditors 
to disclose the duration that penalty rates may be in effect and a 
shorter disclosure about variable rates.
    For disclosures provided at account opening, the June 2007 Proposal 
called for creditors to disclose certain key terms in a summary table 
that is substantially similar to the table required for credit and 
charge card applications and solicitations. A different approach to 
disclosing fees was proposed, to provide greater clarity for 
identifying fees that must be disclosed, and to provide creditors with 
flexibility to disclose charges (other than those in the summary table) 
in writing or orally.
    The June 2007 Proposal also included changes to the format 
requirements for periodic statements, such as by grouping fees, 
interest charges, and transactions together and providing separate 
totals of fees and interest for the month and year-to-date. The 
proposal also modified 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 also solicited comment on whether 
this rate should be required to be disclosed. The proposal required 
card issuers to disclose the effect of making only the minimum required 
payment on repayment of balances, as required by the Bankruptcy Act.
    For changes in consumer's interest rate and other account terms, 
the June 2007 Proposal expanded 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 to include increases of 
a rate due to the consumer's delinquency or default, and increased the 
amount of time (from 15 to 45 days) these notices must be sent before 
the change becomes effective.
    For advertisements that state a minimum monthly payment on a plan 
offered to finance the purchase of goods or services, the June 2007 
Proposal required additional information about

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the time period required to pay the balance and the total of payments 
if only minimum payments are made. The proposal also limited the 
circumstances under which an advertisement may refer to a rate as 
``fixed.''
    The Board received over 2,500 comments on the June 2007 Proposal. 
About 85% of these were from consumers and consumer groups, and of 
those, nearly all (99%) were from individuals. Of the approximately 15% 
of comment letters received from industry representatives, about 10% 
were from financial institutions or their trade associations. The vast 
majority (90%) of the industry letters were from credit unions and 
their trade associations. Those latter comments mainly concerned a 
proposed revision to the definition of open-end credit that could 
affect how many credit unions currently structure their consumer loan 
products.
    In general, commenters generally supported the June 2007 Proposal 
and the Board's use of consumer testing to develop revisions to 
disclosure requirements. There was opposition to some aspects of the 
proposal. For example, industry representatives opposed many of the 
format requirements for periodic statements as being overly 
prescriptive. They also opposed the Board's proposal to require 
creditors to provide at least 45 days' advance notice before certain 
key terms change or interest rates are increased due to default or 
delinquency or as a penalty. Consumer groups opposed the Board's 
proposed alternative that would eliminate the effective annual 
percentage rate (effective APR) as a periodic statement disclosure. 
Consumers and consumer groups also believed the Board's proposal was 
too limited in scope and urged the Board to provide more substantive 
protections and prohibit certain card issuer practices. Comments on 
specific proposed revisions are discussed in VI. Section-by-Section 
Analysis, below.
    May 2008 Proposal. In May 2008, the Board published revisions to 
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73 
FR 28866, May 19, 2008. In developing these revisions, the Board 
considered comments received on the June 2007 Proposal and worked with 
its testing consultant, Macro International, to conduct additional 
consumer research, as discussed in C. Consumer Testing of this section, 
below. In addition, the May 2008 Proposal contained proposed amendments 
to Regulation Z that complemented a proposal published by the Board, 
along with the Office of Thrift Supervision and the National Credit 
Union Administration, to adopt rules prohibiting specific unfair acts 
or practices with respect to consumer credit card accounts under their 
authority under the Federal Trade Commission Act (FTC Act). See 15 
U.S.C. 57a(f)(1). 73 FR 28904, May 19, 2008.
    The May 2008 Proposal would have, among other things, required 
changes for the summary table provided on or with application and 
solicitations for credit and charge cards. Specifically, it would have 
required different terminology than the term ``grace period'' as a 
heading that describes whether the card issuer offers a grace period on 
purchases, and added a de minimis dollar amount trigger of more than 
$1.00 for disclosing minimum interest or finance charges.
    Under the May 2008 Proposal, creditors assessing fees at account 
opening that are 25% or more of the minimum credit limit would have 
been required to provide in the account-opening summary table a notice 
of the consumer's right to reject the plan after receiving disclosures 
if the consumer has not used the account or paid a fee (other than 
certain application fees).
    Currently, creditors may require consumers to comply with 
reasonable payment instructions. The May 2008 Proposal would have 
deemed a cut-off hour for receiving mailed payments before 5 p.m. on 
the due date to be an unreasonable instruction. The proposal also would 
have prohibited creditors that set due dates on a weekend or holiday 
but do not accept mailed payments on those days from considering a 
payment received on the next business day as late for any reason.
    For deferred interest plans that advertise ``no interest'' or 
similar terms, the May 2008 Proposal would have added notice and 
proximity requirements to require advertisements to state the 
circumstances under which interest is charged from the date of purchase 
and, if applicable, that the minimum payments required will not pay off 
the balance in full by the end of the deferral period.
    The Board received over 450 comments on the May 2008 Proposal. 
About 88% of these were from consumers and consumer groups, and of 
those, nearly all (98%) were from individuals. Six comments (1%) were 
from government officials or organizations, and the remaining 11% 
represented industry, such as financial institutions or their trade 
associations and payment system networks.
    Commenters generally supported the May 2008 Proposal, although like 
the June 2007 Proposal, some commenters opposed aspects of the 
proposal. For example, operational concerns and costs for system 
changes were cited by industry representatives that opposed limitations 
on when creditors may consider mailed payments to be untimely. 
Regarding revised disclosure requirements, some industry and consumer 
group commenters opposed proposed heading descriptions for accounts 
offering a grace period, although these commenters were split between 
those that favor retaining the current term (``grace period'') and 
those that suggested other heading descriptions. Consumer groups 
opposed the May 2008 proposal to permit card issuers and creditors to 
omit charges in lieu of interest that are $1.00 or less from the table 
provided with credit or charge card applications and solicitations and 
the table provided at account opening. Some retailers opposed the 
proposed advertising rules for deferred interest offers. Comments on 
specific proposed revisions are discussed in VI. Section-by-Section 
Analysis, below.

C. Consumer Testing

    Developing the June 2007 Proposal. A principal goal for the 
Regulation Z review was 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 model forms that were proposed 
in June 2007 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, and credit card behavior. The consumer testing groups also 
contained participants likely to have subprime credit cards as well as 
those likely to have prime credit cards.

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    Initial research and design of disclosures for testing. In advance 
of testing a series of revised disclosures, the Board conducted 
research to learn what information consumers currently use in making 
decisions about their credit card accounts, and how they currently use 
disclosures that are provided to them. In May and June 2006, the Board 
worked with Macro International to conduct two sets of focus groups 
with credit card consumers. 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. In August 2006, the Board worked 
with Macro International to conduct one-on-one discussions with credit 
card account holders. 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. 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 one-on-one interviews.
    Additional testing and revisions to disclosures. In late 2006 and 
early 2007, the Board worked with Macro International to conduct four 
rounds of one-on-one interviews (seven to 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.
    Several of the model forms contained in the June 2007 Proposal 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 (May 2007 Macro Report).\2\ See also VI. 
Section-by-Section Analysis, below. To illustrate by example:
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    \2\ Design and Testing of Effective Truth in Lending 
Disclosures, Macro International, May 16, 2007.

     Testing participants generally read the summary table 
provided in direct-mail credit card solicitations and applications 
and ignored information presented outside of the table. The June 
2007 Proposal would have required 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 currently are often in small print 
and dense prose. The June 2007 Proposal would have required 
creditors to include a table summarizing the key terms applicable to 
the account, similar to the table required for credit card 
applications and solicitations. The goal of setting apart the most 
important terms in this way is to better ensure that consumers are 
apprised of those terms.
     With respect to periodic statement disclosures, 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. The June 2007 Proposal would have required creditors 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, 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. In such cases 
under the June 2007 Proposal, a table summarizing the change would 
have been required on the periodic statement directly above the 
transaction list, where consumers are more likely to notice the 
changes.

    Developing the May 2008 Proposal. In early 2008, the Board worked 
with a testing consultant, Macro International, to revise model 
disclosures published in the June 2007 Proposal in response to comments 
received. In March 2008, the Board conducted an additional round of 
one-on-one interviews on revised disclosures provided with applications 
and solicitations, on periodic statements, and with checks that access 
a credit card account. A report summarizing the results of the testing 
is available on the Board's public Web site: http://www.federalreserve.gov (December 2008 Macro Report on Qualitative 
Testing).\3\
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    \3\ Design and Testing of Effective Truth in Lending 
Disclosures: Findings from Qualitative Consumer Research, Macro 
International, December 15, 2008.
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    With respect to the summary table provided in direct-mail credit 
card solicitations and applications, participants who read the heading 
``How to Avoid Paying Interest on Purchases'' on the row describing a 
grace period generally understood what the phrase meant. The May 2008 
Proposal would have required issuers to use that phrase, or a 
substantially similar phrase, as the row heading to describe an account 
with a grace period for purchases, and the phrase ``Paying Interest,'' 
or a substantially similar phrase, if no grace period is offered. (The 
same row headings were also proposed for tables provided at account-
opening and with checks that access credit card accounts.)
    Prior to the May 2008 Proposal, the Board also tested a disclosure 
of a use-by date applicable to checks that access a credit card 
account. The responses given by testing participants indicated that 
they generally did not understand prior to the testing that there may 
be a use-by date applicable to an offer of a promotional rate for a 
check that accesses a credit card account. However, the participants 
that saw and read the tested language understood that a standard cash 
advance rate, not the promotional rate, would apply if the check was 
used after the date disclosed. Thus, in May 2008 the Board proposed to 
require that creditors disclose any use-by date applicable to an offer 
of a promotional rate for access checks.
    Testing conducted after May 2008. In July and August 2008, the 
Board worked with Macro International to conduct two additional rounds 
of one-on-one interviews. See the December 2008 Macro Report on 
Qualitative Testing, which summarizes the results of these interviews. 
The results of this consumer testing were used to develop the final 
rule, and are discussed in more detail in VI. Section-by-Section 
Analysis.
    For example, these rounds of interviews examined, among other 
things, whether consumers understand the meaning of a minimum interest 
charge disclosed in the summary table provided in direct-mail credit 
card solicitations and applications. Most participants could correctly 
explain the meaning of a minimum interest charge, and most participants 
indicated that a minimum interest charge would not be important to them 
because it is a relatively small sum of money ($1.50 on the forms 
tested). The final rule accordingly establishes a threshold of $1.00; 
if the minimum interest charge is $1.00 or less it is not required to 
be disclosed in the table.
    Consumers also were asked to review periodic statements that 
disclosed an impending rate increase, with a tabular summary of the 
change appearing on statement, as proposed by the Board in

[[Page 5248]]

June 2007. This testing was used in the development of final Samples G-
20 and G-21, which give creditors guidance on how advance notice of 
impending rate increases or changes in terms should be presented.
    Quantitative testing. In September 2008, the Board worked with 
Macro International to develop a survey to conduct quantitative 
testing. The goal of quantitative testing was to measure consumers' 
comprehension and the usability of the newly-developed disclosures 
relative to existing disclosures and formats. A report summarizing the 
results of the testing is available on the Board's public Web site: 
http://www.federalreserve.gov (December 2008 Macro Report on 
Quantitative Testing).\4\
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    \4\ Design and Testing of Effective Truth in Lending 
Disclosures: Findings from Experimental Study, Macro International, 
December 15, 2008.
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    The quantitative consumer testing conducted for the Board consisted 
of mall-intercept interviews of a total of 1,022 participants in seven 
cities: Dallas, TX; Detroit, MI; Los Angeles, CA; Seattle, WA; 
Springfield, IL; St. Louis, MO; and Tallahassee, FL. Each interview 
lasted approximately fifteen minutes and consisted of showing the 
participant models of the summary table provided in direct-mail credit 
card solicitations and applications and the periodic statement and 
asking a series of questions designed to assess the effectiveness of 
certain formatting and content requirements proposed by the Board or 
suggested by commenters.
    With regard to the summary table provided in direct-mail credit 
card solicitations and applications, consumers were asked questions 
intended to gauge the impact of (i) combining rows for APRs applicable 
to different transaction types, (ii) the inclusion of cross-references 
in the table, and (iii) the impact of splitting the table onto two 
pages instead of presenting the table entirely on a single page. More 
details about the specific forms used in the testing as well as the 
questions asked are available in the December 2008 Macro Report on 
Quantitative Testing.
    The results of the testing demonstrated that combining the rows for 
APRs applicable to different transaction types that have the same 
applicable rate did not have a statistically significant impact on 
consumers' ability to identify those rates. Thus, the final rule 
permits creditors to combine rows disclosing the rates for different 
transaction types to which the same rate applies.
    Similarly, the testing indicated that the inclusion of cross-
references in the table did not have a statistically significant impact 
on consumers' ability to identify fees and rates applicable to their 
accounts. As a result, the Board has not adopted the proposed 
requirement that certain cross-references between certain rates and 
fees be included in the table.
    Finally, the testing demonstrated that consumers have more 
difficulty locating fees applicable to their accounts when the table is 
split on two pages and the fee appears on the second page of the table. 
As discussed further in VI. Section-by-Section Analysis, the Board is 
not requiring that creditors use a certain paper size or present the 
entire table on a single page, but is requiring creditors that split 
the table onto two or more pages to include a reference indicating that 
additional important information regarding the account is presented on 
a separate page.
    The Board also tested whether consumers' understanding of payment 
allocation practices could be improved through disclosure. The testing 
showed that a disclosure, even of the relatively simple payment 
allocation practice of applying payments to lower-interest balances 
before higher-interest balances,\5\ improved understanding for very few 
consumers. The disclosure also confused some consumers who had 
understood payment allocation based on prior knowledge before reviewing 
the disclosure. Based on this result, and because of substantive 
protections adopted by the Board and other federal banking agencies 
published elsewhere in this Federal Register, the Board is not 
requiring a payment allocation disclosure in the summary table provided 
in direct-mail solicitations and applications or at account-opening.
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    \5\ Under final rules issued by the Board and other federal 
banking agencies published elsewhere in today's Federal Register, 
issuers are prohibited from allocating payments to low-interest 
balances before higher-interest balances. However, the Board chose 
to test a disclosure of this practice in quantitative consumer 
testing because (i) it is currently the practice of many issuers and 
(ii) to test one of the simpler payment allocation methods on the 
assumption that consumers might be more likely to understand 
disclosure of a simpler payment allocation method than a more 
complex one.
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    With regard to periodic statements, the Board's testing consultant 
examined (i) the effectiveness of grouping transactions and fees on the 
periodic statement, (ii) consumers' understanding of the effective APR 
disclosure, (iii) the formatting and location of change-in-terms 
notices included with periodic statements, and (iv) the formatting and 
grouping of various payment information, including warnings about the 
effect of late payments and making only the minimum payment.
    The testing demonstrated that grouping of fees and transactions, by 
type, separately on the periodic statement improved consumers' ability 
to find fees that were charged to the account and also moderately 
improved consumers' ability to locate transactions. Grouping fees 
separately from transactions made it more difficult for some consumers 
to match a transaction fee to the relevant transaction, although most 
consumers could successfully match the transaction and fee regardless 
of how the transaction list was presented. As discussed in more detail 
in VI. Section-by-Section Analysis, the final rule requires grouping of 
fees and interest separate from transactions on the periodic statement, 
but the Board has provided flexibility for issuers to disclose 
transactions on the periodic statement.
    With regard to the effective APR, testing overwhelmingly showed 
that few consumers understood the disclosure and that some consumers 
were less able to locate the interest rate applicable to cash advances 
when the effective APR also was disclosed on the periodic statement. 
Accordingly, and for the additional reasons discussed in more detail in 
VI. Section-by-Section Analysis, the final rule eliminates the 
requirement to disclose an effective APR for open-end (not home-
secured) credit.
    When a change-in-terms notice for the APR for purchases was 
included with the periodic statement, disclosure of a tabular summary 
of the change on the front of the statement moderately improved 
consumers' ability to identify the rate that would apply when the 
changes take effect. However, whether the tabular summary was presented 
on page one or page two of the statement did not have an effect on the 
ability of participants to notice or comprehend the disclosure. Thus, 
the final rule requires a tabular summary of key changes on the 
periodic statement, when a change-in-terms notice is included with the 
periodic statement, but permits creditors to disclose that summary on 
the front of any page of the statement.
    The formatting of certain grouped information regarding payments, 
including the amount of the minimum payment, due date, and warnings 
regarding the effect of making late or minimum payments did not have an 
effect on consumers' ability to notice or comprehend these disclosures. 
Thus, while the final rule requires that this

[[Page 5249]]

information be grouped, creditors are not required to format this 
information in any particular manner.

D. Other Outreach and Research

    Throughout the Board's review of Regulation Z's rules affecting 
open-end (not home-secured) plans, the Board solicited input from 
members of the Board's Consumer Advisory Council on various issues. 
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 2007 and 2008, the Council 
discussed the June 2007 and May 2008 Proposals, respectively, and 
comments received by the Board in response to the proposals. In 
addition, Board met or conducted conference calls with various industry 
and consumer group representatives throughout the review process 
leading to the June 2007 and May 2008 Proposals. Consistent with the 
Bankruptcy Act, the Board also met with the other federal banking 
agencies, the National Credit Union Administration (NCUA), and the 
Federal Trade Commission (FTC) regarding the clear and conspicuous 
disclosure of certain information required by the Bankruptcy Act. 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 June 2007 Proposal.\6\
---------------------------------------------------------------------------

    \6\ 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).
---------------------------------------------------------------------------

E. Reviewing Regulation Z in Stages

    The Board is proceeding with a review of Regulation Z in stages. 
This final rule largely contains revisions to rules affecting open-end 
plans other than home-equity lines of credit (HELOCs) subject to Sec.  
226.5b. 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 have been reorganized 
to delineate clearly the requirements for HELOCs and other forms of 
open-end credit. Although this reorganization increases 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.
    In addition, as discussed elsewhere in this section and in VI. 
Section-by-Section Analysis, the Board has eliminated the requirement 
to disclose an effective annual percentage rate for open-end (not home-
secured) credit. For a home-equity plan subject to Sec.  226.5b, under 
the final rule a creditor has the option to disclose an effective APR 
(according to the current rules in Regulation Z for computing and 
disclosing the effective APR), or not to disclose an effective APR. The 
Board notes that the rules for computing and disclosing the effective 
APR for HELOCs could be the subject of comment during the review of 
rules affecting HELOCs.

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 adopting this final rule, the Board has considered the 
information collected from comment letters submitted in response to its 
ANPRs and the June 2007 and May 2008 Proposals, 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 final 
rule 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 adopted 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 exemptions are 
explained in VI. Section-by-Section Analysis, below.

V. Discussion of Major Revisions

    The goal of the revisions adopted in this final rule 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. 
However, the terms and conditions that impact credit card account 
pricing can be complex. The 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 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

[[Page 5250]]

connection with the review of Regulation Z.
    In considering whether to adopt the revisions, the Board has also 
sought to balance the potential benefits for consumers with the 
compliance burdens imposed on creditors. For example, the 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. The Board has adopted the proposal that fees must be 
grouped on periodic statements, but has withdrawn from the final rule 
proposed requirements that would have required additional formatting 
changes to the periodic statement, such as the grouping of 
transactions, for which the burden to creditors may exceed the benefit 
to consumers. 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.\7\ 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, generally before the first transaction 
occurs.
---------------------------------------------------------------------------

    \7\ 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.
    Proposal. The proposal added new format requirements for the 
summary table,\8\ including rules regarding type size and use of 
boldface type for certain key terms, placement of information, and the 
use of cross-references. Content revisions included a requirement that 
creditors disclose the duration that penalty rates may be in effect, a 
shorter disclosure about variable rates, and a reference to consumer 
education materials available on the Board's Web site.
---------------------------------------------------------------------------

    \8\ This table is commonly referred to as the ``Schumer box.''
---------------------------------------------------------------------------

    Summary of final rule.
    Penalty pricing. The final rule makes 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 final rule, card issuers are required to include in 
the table the specific actions that trigger penalty APRs (such as a 
late payment), the rate that 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 requires card 
issuers to use the term ``penalty APR'' because the testing 
demonstrated that some consumers are confused by the term ``default 
rate.''
    Similarly, the final rule 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. Cash advance fees 
and balance transfer fees also must be disclosed inside the table. This 
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, required credit insurance, debt 
suspension, or debt cancellation coverage fees, and foreign transaction 
fees are new disclosures.
    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 final rule, 
information about variable APRs is 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.
    Subprime accounts. The final rule 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 subprime cards of how little credit would be available 
after all the fees were assessed at account opening.
    The final rule requires additional disclosures if the card issuer 
requires fees or a security deposit to issue the card that are 15 
percent or more of the minimum credit limit offered for the account. In 
such cases, the card issuer is 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 
demonstrates that these names hold little meaning for consumers, and 
that consumers do not consider such information when shopping for 
accounts. The final 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.
    Description of grace period. The final rule requires card issuers 
to use the heading ``How to Avoid Paying Interest on Purchases'' on the 
row describing a grace period offered on all purchases, and the phrase 
``Paying Interest'' if a grace period is not offered on all purchases. 
Consumer testing indicates consumers do not understand the term ``grace 
period'' as a description of actions consumers must take to avoid 
paying interest.

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

[[Page 5251]]

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. In addition, they 
must 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.
    Proposal. Certain key terms were proposed to be disclosed in a 
summary table at account opening, which would be substantially similar 
to the table required for applications and solicitations. A different 
approach to disclosing fees was proposed, including providing creditors 
with flexibility to disclose charges (other than those in the summary 
table) in writing or orally after the account is opened, but before the 
charge is imposed.
    Summary of final rule.
    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. To address this concern and make the 
information more conspicuous, the final rule requires creditors to 
provide at account-opening a table summarizing key terms. 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 is substantially similar 
to the table provided with direct-mail credit card applications and 
solicitations. Consumer testing indicates 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 includes more information 
than the table required at application. For example, it includes a 
disclosure whether or not there is a grace period for all features of 
an account. For subprime credit cards, to give consumers the 
opportunity to avoid fees, the final rule also requires issuers to 
provide consumers at account opening, a notice about the right to 
reject a plan when fees have been charged but the consumer has not used 
the plan. However, to reduce compliance burden for creditors that 
provide account-opening disclosures at application, the final rule 
allows 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 account-
opening disclosures. A subsequent 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 
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 under-disclosing the finance charge or otherwise making 
erroneous disclosures, so the consequences of an error can be 
significant. Furthermore, over-disclosure 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 final 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, the rules are 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 
must 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 
final rule permits 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 final rule, some charges are 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 will be useful to consumers to cover 
such charges under TILA as part of a rule that permits their disclosure 
at a time and in a manner that consumers would be likely to notice the 
disclosure of the charge. Further, as new services (and associated 
charges) are developed, the proposal minimizes risk of civil liability 
as well as inconsistency among creditors 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''

[[Page 5252]]

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.
    Proposal. Interest charges for different types of transactions, 
such as purchases and cash advances would be itemized, and separate 
totals of fees and interest for the month and year-to-date would be 
disclosed. The proposal offered two approaches regarding the 
``effective APR.'' One modified the provisions for disclosing the 
``effective APR,'' including format and terminology requirements,\9\ 
and the other solicited comment on whether this rate should be required 
to be disclosed. To implement changes required by the Bankruptcy Act, 
the proposal required creditors to disclose of the effect of making 
only the minimum required payment on repayment of balances.
---------------------------------------------------------------------------

    \9\ The ``effective'' APR reflects interest and other finance 
charges such as cash advance fees or balance transfer fees imposed 
for the billing cycle.
---------------------------------------------------------------------------

    Summary of final rule.
    Fees and interest costs. The final rule 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'' added to the account during 
the billing cycle, and creditors typically intersperse 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 final rule, creditors are required to group all 
fees together and to separately itemize interest charges by transaction 
type, and describe them in a manner consistent with consumers' general 
understanding of costs (``interest charge'' or ``fee''), without regard 
to whether the charges are considered ``finance charges,'' ``other 
charges,'' or neither. Interest charges must be identified by type (for 
example, interest on purchases or interest on balance transfers) as 
must 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 final rule requires creditors to disclose the (1) 
total fees and (2) total interest imposed for the cycle. Creditors must 
also disclose 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 are an important disclosure and an 
effective aid in understanding annualized costs. The Board believes 
these figures will better ensure consumers understand the cost of 
credit than the effective APR currently provided on periodic 
statements.
    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 eliminating the 
requirement to disclose the effective APR.
    Consumer testing conducted prior to the June 2007 Proposal, in 
March 2008, and after the May 2008 Proposal demonstrates that consumers 
find the current disclosure of an APR that combines rates and fees to 
be confusing. The June 2007 Proposal would have required disclosure of 
the nominal interest rate and fees in a manner that is more readily 
understandable and comparable across institutions. The Board believes 
that this approach can better inform consumers and further the goals of 
consumer protection and the informed use of credit for all types of 
open-end credit.
    The Board also considered whether there were potentially competing 
considerations that would suggest retention of the requirement to 
disclose an effective APR. First, the Board considered the extent to 
which ``sticker shock'' from the effective APR benefits consumers, even 
if the disclosure may not enable consumers to meaningfully compare 
costs from month to month or between different credit products. A 
second consideration is whether the effective APR may be 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 eliminating the requirement to disclose the 
effective APR outweigh these considerations.
    The consumer testing conducted for the Board strongly supports this 
determination. Although in one round of testing conducted prior to the 
June 2007 Proposal a majority of participants evidenced some 
understanding of the effective APR, the overall results of the testing 
show that most consumers do not correctly understand the effective APR. 
Some consumers in the testing offered no explanation of the difference 
between the corresponding and effective APR, and others appeared to 
have an incorrect understanding. The results were similar in the 
consumer testing conducted in March 2008 and after the May 2008 
proposal; in all rounds of the testing, a majority of participants did 
not offer a correct explanation of the effective APR. In quantitative 
testing conducted for the Board in the fall of 2008, only 7% of 
consumers answered a question correctly that was designed to test their 
understanding of the effective APR. In addition, including the 
effective APR on the statement had an adverse effect on some consumers' 
ability to identify the interest rate applicable to the account.
    Even if some consumers have some understanding of the effective 
APR, the Board believes sound reasons support eliminating the 
requirement for its disclosure. Disclosure of the effective APR on 
periodic statements does not assist consumers in credit shopping, 
because the effective APR disclosed on a statement on one credit card 
account cannot be compared to the nominal APR disclosed on a 
solicitation or application for another credit card account. In 
addition, even for the same account, the effective APR for a given 
cycle is unlikely to accurately indicate the cost of credit in a future 
cycle, because if any of several factors (such as timing of 
transactions and payments) is different in the future cycle, the 
effective APR will be different even if the amount of the transaction 
is the same. As to suggestions that the effective APR for a particular 
billing cycle provides the consumer a rough indication that it is 
costly to engage in transactions that trigger transaction fees, the 
Board believes the requirements adopted in the final rule to disclose

[[Page 5253]]

interest and fee totals for the cycle and year-to-date will better 
serve the same purpose. In addition, the interest and fee total 
disclosure requirements should address concerns that elimination of the 
effective APR would remove disincentives for creditors to introduce new 
fees.
    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 final rule 
requires creditors to group fees and interest charges together, 
itemized by type, with the list of transactions. The Board has not 
adopted the proposed requirement that creditors group transactions by 
type on the periodic statement. In consumer testing, most consumers 
indicated that they review the transactions on their periodic 
statements, and grouping transactions together only moderately improved 
consumers' ability to locate transactions compared to when the 
transaction list was presented chronologically. In addition, the cost 
to creditors of reformatting periodic statements to group transactions 
by type appears to outweigh any benefit to consumers.
    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 final rule, creditors are required to disclose the 
payment due date on the front side of the periodic statement. Creditors 
also are 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, to alert consumers 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 final rule, 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 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 final rule 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 final rule also allows card issuers to provide the actual 
repayment disclosure on their periodic statements. Card issuers are 
encouraged to use this approach. Participants in consumer testing who 
typically carry 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 final rule 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 
final rule contains guidance for how to calculate generic repayment 
estimates. Consumers that call the toll-free telephone number may 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 M1 to part 226, the final rule 
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 included 
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.
    Proposal. The proposal generally would have increased advance 
notice before a changed term, such as a rate increase due to a change 
in the contract, can be imposed from 15 to 45 days. The proposal also 
would have required creditors to provide 45 days' prior notice before 
the creditor increases a rate due to the consumer's delinquency

[[Page 5254]]

or default or as a penalty. When a change-in-terms notice accompanies a 
periodic statement, the proposal would have required a tabular 
disclosure on the front of the first page of the periodic statement of 
the key terms being changed.
    Summary of final rule.
    Timing. Under the final rule, creditors generally must provide 45 
days' advance notice prior to a change in any term required to be 
disclosed in the tabular disclosure provided at account-opening, as 
discussed above. This increase in the advance notice for a change in 
terms is intended to give consumers approximately a month to act, 
either to change their usage of the account or to find an alternative 
source of financing before the change takes effect.
    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 currently penalty pricing commonly 
applies to all existing balances, including low-rate promotional 
balances.
    The final rule generally requires creditors to provide 45 days' 
advance notice before rate increases due to the consumer's delinquency 
or default or as a penalty, as proposed. Permitting creditors to apply 
the penalty rate immediately upon the consumer triggering the rate may 
lead to undue surprise and insufficient time for a consumer to consider 
alternative options regarding use of the card. Even though the final 
rule contain provisions intended to improve disclosure of penalty 
pricing at account opening, the Board believes that consumers will be 
more likely to notice and be motivated to act if they receive a 
specific notice alerting them of an imminent rate increase, rather than 
a general disclosure stating the circumstances when a rate might 
increase.
    When asked which terms were the most important to them when 
shopping for an account, participants in consumer testing seldom 
mentioned the penalty rate or penalty rate triggers. Some consumers may 
not find this information relevant when shopping for or opening an 
account because they do not anticipate that they will trigger penalty 
pricing. As a result, they may not recall this information later, after 
they have begun using the account, and may be surprised when penalty 
pricing is subsequently imposed.
    In addition, the Board believes that the notice required by Sec.  
226.9(g) is the most effective time to inform consumers of the 
circumstances under which penalty rates can be applied to their 
existing balances for the reasons discussed above and in VI. Section-
by-Section Analysis.
    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 final rule, creditors may continue to notify consumers 
about changes to terms required to be disclosed by Regulation Z, 
together 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. Consumer 
testing conducted for the Board suggests that consumer understanding of 
change in terms notices is improved by presentation of that information 
in a tabular format.
    Creditors commonly enclose notices about changes to terms or rates 
with periodic statements. Under the final rule, 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 must 
appear on the front of the periodic statement, although it is not 
required to appear on the first page. Consumers who participated in 
testing often set aside change-in-terms pamphlets that accompanied 
periodic statements, while participants uniformly looked at the front 
side of periodic statements.

E. Advertisements

    Currently, creditors that disclose certain terms in advertisements 
must disclose additional information, to help ensure consumers 
understand the terms of credit being offered.
    Proposal. For advertisements that state a minimum monthly payment 
on a plan offered to finance the purchase of goods or services, 
additional information must also be stated about the time period 
required to pay the balance and the total of payments if only minimum 
payments are made. The proposal also limited the circumstances under 
which advertisements may refer to a rate as ``fixed.''
    Summary of final rule.
    Advertising periodic 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 periodic 
payments (such as $20 a week or $45 per month) 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 periodic 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 final rule, 
advertisements stating a periodic payment amount 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 periodic payment 
amount, the time period required to pay the balance and the total of 
payments if only periodic 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 final rule, 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.

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, the consumer 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.
    Proposal. The proposal would have revised these provisions to 
indicate

[[Page 5255]]

closed-end disclosures rather than open-end disclosures are appropriate 
when advances that are individually approved and underwritten are being 
extended, or if payments made on a particular sub-account do not 
replenish the credit line available for that sub-account.
    Summary of final rule. The final rule generally adopts the proposal 
that would clarify that credit is not properly characterized as open-
end credit if individual advances are separately underwritten. The 
proposed revision that would have required that payments on a sub-
account of an open-end credit plan replenish that sub-account has been 
withdrawn, because of concerns that this revision would have had 
unintended consequences for credit cards and HELOCs that the Board 
believes are appropriately treated as open-end credit.
    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 promotional 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 rates and dollar figures when reviewing 
the information accompanying access checks.
    Proposal. Under the proposal, checks that can access credit card 
accounts would have been required to be accompanied by information 
about the rates and fees that will apply if the checks are used, about 
whether a grace period exists, and any date by which the consumer must 
use the checks in order to receive any discounted initial rate offered 
on the checks. This information would have been required to be 
presented in a table, on the front side of the page containing the 
checks.
    Summary of final rule. The final rule requires the following key 
terms to be disclosed in a summary table on the front of the page 
containing checks that access credit card accounts: (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 APR; (3) any transaction fees 
applicable to the checks; (4) whether a grace period applies to the 
checks, and if one does not apply, that interest will be charged 
immediately; and (5) any date by which the consumer must use the checks 
in order to receive any discounted initial rate offered on the checks.
    The final rule requires that the tabular disclosure accompanying 
checks that access a credit card account include a disclosure of the 
actual rate or rates applicable to the checks. While the actual post-
promotional rate disclosed at the time the checks are sent to a 
consumer may differ from the rate disclosed by the time it becomes 
applicable to the consumer's account (if it is a variable rate tied to 
an index), disclosure of the actual post-promotional rate in effect at 
the time that the checks are sent to the consumer is an important piece 
of information for the consumer to use in making an informed decision 
about whether to use the checks. Consumer testing suggests that a 
disclosure of the actual rate, rather than a toll-free number, also 
will help to enhance consumer understanding regarding the rate that 
will apply when the promotional rate expires.
    Cut-off times and due dates for mailing payments. TILA generally 
requires that payments be credited to a consumer's account as of the 
date of receipt, provided the payment conforms to the creditor's 
instructions. Under Regulation Z, creditors are permitted to specify 
reasonable cut-off times for receiving payments on the due date. Some 
creditors use different cut-off times depending on the payment method. 
Consumer groups and others have raised concerns that the use of certain 
cut-off times may effectively result in a due date that is one day 
earlier than the due date disclosed. In addition, in response to the 
June 2007 Proposal, consumer commenters urged the Board to address 
creditors' practice of using due dates on days that the creditor does 
not accept payments, such as weekends or holidays.
    Proposal. The May 2008 Regulation Z Proposal provided that it would 
be unreasonable for a creditor to require that mailed payments be 
received earlier than 5 p.m. on the due date in order to be considered 
timely. In addition, the proposal would have provided that if a 
creditor does not receive and accept mailed payments on the due date 
(e.g., a Sunday or holiday), a payment received on the next business 
day is timely.
    Recommendation. The draft final rule adopts the proposal regarding 
weekend and holiday due dates. In addition, the draft final rule adopts 
a modified version of the 5 p.m. cut-off time proposal to provide that 
a 5 p.m. cut-off time is an example of a reasonable requirement for 
payments.
    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.
    Proposal and summary of final rule. As proposed, the existing rules 
for debt cancellation coverage were 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 products. 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 would have been required to 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

[[Page 5256]]

transaction is consummated because the coverage is deemed not to be 
``written in connection'' with the credit transaction. Since the 
charges are defined as non-finance charges in such cases, Regulation Z 
does not require a disclosure or written evidence of consent to exclude 
them from the finance charge. The proposal would have implemented a 
broader interpretation of ``written in connection'' with a credit 
transaction and required 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 would have been 
permitted to provide the disclosures orally, but in that case they 
would have been required to mail written disclosures within three days 
of the call.\10\ The final rule is unchanged from the proposal.
---------------------------------------------------------------------------

    \10\ The 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.
---------------------------------------------------------------------------

VI. Section-by-Section Analysis

    In reviewing the rules affecting open-end credit, the Board 
proposed in June 2007 to reorganize some provisions to make the 
regulation easier to use. Rules affecting home-equity lines of credit 
(HELOCs) subject to Sec.  226.5b would have been separately delineated 
in Sec.  226.6 (account-opening disclosures), Sec.  226.7 (periodic 
statements), and Sec.  226.9 (subsequent disclosures). Rules contained 
in footnotes would have been moved to the text of the regulation or 
commentary, as appropriate, and the footnotes designated as reserved. 
Commenters generally supported this approach. One commenter questioned 
retaining the footnotes as reserved and suggested deleting references 
to the footnotes entirely. The final rule is organized, and rules 
currently stated in footnotes have been moved, as proposed. These 
revisions are identified in a table below. See X. Redesignation Table. 
The Board retains footnotes as ``reserved'' to preserve the current 
footnote numbers in provisions of Regulation Z that will be the subject 
of future rulemakings. When rules contained in all footnotes have been 
moved to the regulation or commentary, as appropriate, references to 
the footnotes will be removed.

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 50288, 
Oct. 9, 1981. The references were intended as a compliance aid during 
the transition to the 1981 revisions to Regulation Z. In June 2007, the 
Board proposed to delete provisions addressing references and 
transition rules applicable to 1981 revisions to Regulation Z. No 
comments were received. Thus, the Board deletes the references and 
comments I-3, I-4(b), I-6, and I-7, as obsolete and renumbers the 
remaining comments accordingly.

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. In June 2007, technical revisions were 
proposed for clarity, and comment was requested if further guidance on 
the scope of coverage would be helpful. No comments were received and 
the comment is adopted with technical revisions for clarity.
    Section 226.1(d)(2), which summarizes the organization of the 
regulation's open-end credit rules (Subpart B), is amended to reinsert 
text inadvertently deleted in a previous rulemaking, as proposed. See 
54 FR 24670, June 9, 1989. Section 226.1(d)(4), which summarizes 
miscellaneous provisions in the regulation (Subpart D), is updated to 
describe amendments made in 2001 to Subpart D relating to disclosures 
made in languages other than English, as proposed. See 66 FR 17339, 
Mar. 30, 2001. The substance of Footnote 1 is deleted as unnecessary, 
as proposed.
    In July 2008, the Board revised Subpart E to address certain 
mortgage practices and disclosures. These changes are reflected in 
Sec.  226.1(d)(5), as amended in the July 2008 Final HOEPA Rule. In 
addition, transition rules for the July 2008 rulemaking are added as 
comment 1(d)(5)-1. 73 FR 44522, July 30, 2008.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(2) Advertisement
    In the June 2007 Proposal, the Board proposed technical revisions 
to the commentary to Sec.  226.2(a)(2), with no intended change in 
substance or meaning. No changes were proposed for the regulatory text. 
The Board received no comments on the proposed changes, and the changes 
are adopted as proposed.
2(a)(4) Billing Cycle or Cycle
    Section 226.2(a)(4) defines ``billing cycle'' as the interval 
between the days or dates of regular periodic statements, and requires 
that billing cycles be equal (with a permitted variance of up to four 
days from the regular day or date) and no longer than a quarter of a 
year. Comment 2(a)(4)-3 states that the requirement for equal cycles 
does not apply to transitional billing cycles that occur when a 
creditor occasionally changes its billing cycles to establish a new 
statement day or date. The Board proposed in June 2007 to revise 
comment 2(a)(4)-3 to clarify that this exception also applies to the 
first billing cycle that occurs when a consumer opens an open-end 
credit account.
    Few commenters addressed this provision. One creditor requested 
that the Board clarify that the proposed revision applies to the time 
period between the opening of the account and the generation of the 
first periodic statement (as opposed to the period between the 
generation of the first statement and the generation of the second 
statement). The comment has been revised to provide the requested 
clarification.
    The same commenter also requested clarification that the same 
exception would apply when a previously closed account is reopened. The 
reopening of a previously closed account is no different, for purposes 
of comment 2(a)(4)-3, from the original opening of an account; 
therefore, this clarification is unnecessary. A consumer group 
suggested that an irregular first billing cycle should be limited to no 
longer than twice the length of a regular billing cycle, and that 
irregular billing cycles should permitted no more than once per year. 
The Board believes that these limitations might unduly restrict 
creditors' operations. Although it would be unlikely for a creditor to 
utilize a billing cycle more than twice the length of the regular 
cycle, or an irregular billing cycle more often than once per year, 
such cycles might need to be used on rare occasions for operational 
reasons.
2(a)(6) Business Day
    Section 226.2(a)(6) and comment 2(a)(6)-2, as reprinted, reflect 
revisions adopted in the Board's July 2008 Final HOEPA Rule to address 
certain

[[Page 5257]]

mortgage practices and disclosures. 73 FR 44522, 44599, 44605, July 30, 
2008.
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 currently provides that a 
credit card is a ``card, plate, coupon book, or other single credit 
device that may be used from time to time to obtain credit.'' See Sec.  
226.2(a)(15).
    Checks that access credit card accounts. Credit card issuers 
sometimes provide cardholders with checks that access a credit card 
account (access checks), 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 cardholders on an unsolicited basis, 
sometimes with their monthly statements. When a consumer uses an access 
check, the amount of the check is billed to the consumer's credit card 
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 transactions 
involving these checks. See Sec.  226.12. Nevertheless, billing error 
rights apply with to these check transactions. See Sec.  226.13. In the 
June 2007 Proposal, the Board declined to extend TILA's protections for 
credit cards to access checks.
    While industry commenters generally supported the Board's approach, 
consumer groups asserted that excluding access checks from treatment as 
credit cards does not adequately protect consumers, particularly 
insofar as consumers would not be able to assert unauthorized use 
claims under Sec.  226.12(b). Consumer groups thus observed that the 
current rules lead to an anomalous result where a consumer would be 
protected from unauthorized use under Sec.  226.12(b) if a thief used 
the consumer's credit card number to initiate a credit card transaction 
by telephone or on-line, but would not be similarly protected if the 
thief used the consumer's access check to complete the same 
transaction. Consumer groups also observed that consumers would be 
unable to assert a merchant claim or defense under Sec.  226.12(c) in 
connection with a good or service purchased with an access check, nor 
would they be protected by the unsolicited issuance provisions in Sec.  
226.12(a).
    As stated in the proposal, the Board believes that existing 
provisions under state law governing checks, specifically the Uniform 
Commercial Code (UCC), coupled with the billing error provisions under 
Sec.  226.13, provide consumers with appropriate protections from the 
unauthorized use of access checks. For example, a consumer generally 
would not have any liability for a forged access check under the UCC, 
provided that the consumer complies with certain timing requirements in 
reporting the forgery. In addition, in the event the consumer asserts a 
timely notice of error for an unauthorized transaction involving an 
access check under Sec.  226.13, the consumer would not have any 
liability if the creditor's investigation determines that the 
transaction was in fact unauthorized. Lastly, the Board understands 
that, in most instances, consumers may ask their creditor to stop 
sending access checks altogether, and these opt-out requests will be 
honored by the creditor.
    Coupon books. The Board stated in the supplementary information for 
the June 2007 Proposal that it is unaware of devices existing today 
that would qualify as a ``coupon book'' for purposes of the definition 
of ``credit card'' under Sec.  226.2(a)(15). In addition, the Board 
noted that elimination of this obsolete term from the definition of 
``credit card'' would help to reduce potential confusion regarding 
whether an access check or other single credit device that is used 
once, if connected in some way to other checks or devices, becomes a 
``coupon book,'' thus becoming a ``credit card'' for purposes of the 
regulation. For these reasons, the June 2007 Proposal would have 
deleted the reference to the term ``coupon book'' from the definition 
of ``credit card'' under Sec.  226.2(a)(15).
    Consumer groups opposed the Board's proposal, citing the statutory 
reference in TILA Section 103(k) to a ``coupon book,'' and noting that 
even if such products were not currently being offered, the proposed 
deletion could provide issuers an incentive to develop such products 
and in that event, consumers would be unable to avail themselves of the 
protections against unauthorized use and unsolicited issuance.
    The final rule removes the reference to ``coupon book'' in the 
definition of ``credit card,'' as proposed. Commenters did not cite any 
examples of products that could potentially qualify as a ``coupon 
book.'' Thus, in light of the confusion today regarding whether access 
checks are ``credit cards'' as a result of the existing reference to 
``coupon books,'' the Board believes removal of the term is appropriate 
in the final rule, and that the removal will not limit the availability 
of Regulation Z protections overall.
    Plans in which no physical device is issued. The June 2007 Proposal 
did not explicitly address circumstances where a consumer may conduct a 
transaction on an open-end plan that does not have a physical device. 
In response, industry commenters agreed that it was premature and 
unnecessary to address such open-end plans. Consumer groups in contrast 
stated that it was appropriate to amend the regulation at this time to 
explicitly cover such plans, particularly in light of the Board's 
decision elsewhere to update the commentary to refer to biometric means 
of verifying the identity of a cardholder or authorized user. See 
comment 12(b)(2)(iii)-1, discussed below. While the final rule does not 
explicitly address open-end plans in which no physical device is 
issued, the Board will continue to monitor developments in the 
marketplace and may update the regulation if and when such products 
become common. Of course, to the extent a creditor has issued a device 
that meets the definition of a ``credit card'' for an account, the 
provisions that require use of a ``credit card,'' could apply even 
though a particular transaction itself is not conducted using the 
device (for example, in the case of telephone and Internet 
transactions; see comments 12(b)(2)(iii)-3 and 12(c)(1)-1).
    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. The June 2007 Proposal would have 
updated comment 2(a)(15)-3 to reflect that the new late payment and 
minimum payment disclosure requirements set forth by the Bankruptcy Act 
do not apply to charge card issuers. As further discussed in more 
detail below under Sec.  226.7, comment 2(a)(15)-3 is adopted as 
proposed.
2(a)(17) Creditor
    In June 2007, the Board proposed to exempt from TILA coverage 
credit extended under employee-sponsored retirement plans. For reasons 
explained in the section-by-section analysis to Sec.  226.3, this 
provision is adopted with modifications, as discussed below. Comment 
2(a)(17)(i)-8, which provides guidance on whether such a plan is a

[[Page 5258]]

creditor for purposes of TILA, is deleted as unnecessary, as proposed.
    In addition, the substance of footnote 3 is moved to a new Sec.  
226.2(a)(17)(v), and references revised, accordingly, as proposed. The 
dates used to illustrate numerical tests for determining whether a 
creditor ``regularly'' extends consumer credit are updated in comments 
2(a)(17)(i)-3 through -6, as proposed. References in Sec.  
226.2(a)(17)(iv) to provisions in Sec.  226.6 and Sec.  226.7 are 
renumbered consistent with this final rule.
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.
    ``Open-end'' plans comprised of closed-end features. In the June 
2007 Proposal, the Board proposed several revisions to the commentary 
regarding Sec.  226.2(a)(20) to address the concern that currently 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. The proposal was 
based on the Board's belief that closed-end disclosures are more 
appropriate than open-end disclosures when the credit being extended is 
individual loans that are individually approved and underwritten. As 
stated in the June 2007 Proposal, the Board was 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.
    In the June 2007 Proposal, the Board proposed, among other things, 
two main substantive revisions to the commentary to Sec.  226.2(a)(20). 
First, the Board proposed 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. Proposed comment 
2(a)(20)-2 would have provided 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.
    Second, the Board proposed in June 2007 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 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. 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). As stated in the June 2007 Proposal, 
however, 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.
    General comments. The Board received approximately 300 comment 
letters, mainly from credit unions, on the proposed changes to Sec.  
226.2(a)(20). (See below for a discussion of the comments specific to 
each portion of the proposed changes to Sec.  226.2(a)(20); more 
general comments pertaining to the overall impact of recharacterizing 
certain multifeatured plans as closed-end credit are discussed in this 
subsection.)
    Consumer groups and one credit union supported the proposed 
changes. The credit union commenter noted that it currently uses a 
multifeatured open-end lending program, but that it believes the 
changes would be beneficial to consumers and financial institutions, 
and that the benefit to consumers would outweigh any inconvenience and 
cost imposed on the credit union. This commenter noted that under a 
multifeatured open-end lending program, a consumer signs a master loan 
agreement but does not receive meaningful disclosures with each 
additional extension of credit. This commenter believes that consumers 
often do not realize that subsequent extensions of credit are subject 
to the terms of the master loan agreement.
    Consumer groups stated that there is no meaningful difference 
between a customer who obtains a conventional car loan from a bank 
versus one who receives an advance to purchase a car via a sub-account 
from an open-end plan. Consumer groups further noted that to the extent 
a sub-account has fixed payments, fixed terms, and no replenishing 
line, it is functionally indistinguishable from any other closed-end 
loan for which closed-end disclosures must be given. The consumer 
groups' comments stated that there is no legitimate basis on which to 
continue to classify these plans as open-end credit.
    Most comment letters opposed the proposed changes to the definition 
of ``open-end credit.'' Many credit union commenters questioned the 
need for the proposed changes, and stated that the Board had not 
identified a specific harm arising out of multifeatured open-end 
lending. These commenters stated that there is no evidence of harm to 
consumers associated with these plans, such as complaints, information 
about credit union members paying higher rates or purchasing 
unnecessary products, or evidence of higher default rates. These 
commenters noted that such plans have been offered by credit unions for 
more than 25 years. These commenters also stated that open-end credit 
disclosures are adequate and provide members with the information they 
need on a timely basis, and that open-end lending members receive 
frequent reminders, via periodic statements, of key financial terms 
such as the APR. Also, commenters stated that to the extent credit 
unions do not charge fees for advances with fixed repayment periods, 
the APR disclosed for purposes of the open-end credit disclosures is 
the same as the APR that would be disclosed if the transaction were 
characterized as closed-end.
    The National Credit Union Administration (NCUA) commented that 
there are no problems that appear to be generated by or inherent to the 
multifeatured aspect of credit unions' multifeatured open-end plans. 
This agency urged the Board not to ignore the identity of the creditor 
in considering

[[Page 5259]]

the appropriateness of disclosures because doing so ignores the 
circumstances in which the disclosures are made; the comment letter 
further noted that multifeatured open-end plans offered by credit 
unions involve circumstances where there is an ongoing relationship 
between the consumer-member and a regulated financial institution.
    Credit union commenters and the NCUA also stated that the proposed 
revisions would result in a loss of convenience to consumers because 
credit unions generally would not be able to continue to offer 
multifeatured open-end lending programs, and consumers would have to 
sign additional paperwork in order to obtain closed-end advances. 
Several of these commenters specifically noted that loss of convenience 
would be a concern with respect to military personnel and other 
customers they serve in geographically remote locations. Credit union 
commenters stated that the proposed revisions, if adopted, would result 
in increased costs of borrowing for consumers. Some comment letters 
noted that credit unions' rates would become less competitive and that 
consumers would be more likely to obtain financing from more expensive 
sources, such as auto dealers, check cashing shops, or payday lenders.
    Several credit union commenters discussed the likely cost 
associated with providing closed-end disclosures instead of open-end 
disclosures. The commenters indicated that such costs would include re-
training personnel, changing lending documents and data-processing 
systems, purchasing new lending forms, potentially increased staffing 
requirements, updating systems, and additional paperwork. Several 
commenters offered estimates of the probable cost to credit unions of 
converting multifeatured open-end plans to closed-end credit. Those 
comments with regard to small entities are discussed in more detail 
below in VIII. Final Regulatory Flexibility Analysis. One major service 
provider to credit unions estimated that the conversion in loan 
products would cost a credit union approximately $100,000, with total 
expenses of at least $350 million for all credit unions and their 
members. This commenter further noted that there would be annual 
ongoing costs totaling millions of dollars, largely due to additional 
staff costs that would arise because more business would take place in 
person at the credit union.
    One commenter indicated that the proposed changes to the commentary 
could give rise to litigation risk, and may create more confusion and 
unintended consequences than currently exist under the existing 
commentary to Regulation Z. This commenter stated that changing the 
definition of open-end credit would jeopardize many legitimate open-end 
credit plans.
    Comments regarding hybrid disclosure. Several comment letters from 
credit unions, one credit union trade association, and the NCUA 
suggested that the Board should adopt a hybrid disclosure approach for 
multifeatured open-end plans. Under this approach, these commenters 
indicated that the Board should continue to permit multifeatured open-
end plans, as they are currently structured, to provide open-end 
disclosures to consumers, but should also impose a new subsequent 
disclosure requirement. Shortly after obtaining credit, such as for an 
auto loan, that is individually underwritten or not self-replenishing, 
the creditor would be required to give disclosures that mirror the 
disclosures given for closed-end credit.
    The Board is not adopting this hybrid disclosure approach. The 
Board believes that the statutory framework clearly provides for two 
distinct types of credit, open-end and closed-end, for which different 
types of disclosures are deemed to be appropriate. Such a hybrid 
disclosure regime would be premised on the fact that the closed-end 
disclosures are beneficial to consumers in connection with certain 
types of advances made under these plans. If this is the case, the 
Board believes that consumers should receive the closed-end disclosures 
prior to consummation of the transaction, when a consumer is shopping 
for credit.
    Replenishment. As discussed above, the Board proposed in June 2007 
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.
    Several industry commenters specifically objected to the new 
requirement in proposed comment 2(a)(20)-2 that open-end credit 
replenish on a sub-account by sub-account basis. Some commenters 
expressed concern about the applicability of proposed comment 2(a)(20)-
2 to promotional rate offers. The commenters noted that a creditor may 
make a balance transfer offer or send out convenience checks at a 
promotional APR. As the balance subject to the promotional APR is 
repaid, the available credit on the account will be replenished, 
although the available credit for the original promotional rate offer 
is not replenished. These commenters stated that unless the Board can 
define sub-accounts in a manner that excludes balances subject to 
special terms, the Board should withdraw the proposed revision to 
comment 2(a)(20)-2. Other commenters indicated that the critical 
requirement should be that repayment of balances in any sub-account 
replenishes the overall account, not that each sub-account itself must 
be replenishing.
    Similarly, the Board received several industry comment letters 
indicating that the proposed changes to comment 2(a)(20)-2 would have 
adverse consequences for certain HELOCs. The comments noted that many 
creditors use multiple features or sub-accounts in order to provide 
consumers with flexibility and choices regarding the terms applicable 
to certain portions of an open-end credit balance. They noted as an 
example a feature on a HELOC that permits a consumer to convert a 
portion of the balance into a fixed-rate, fixed-term sub-account; the 
sub-account is never replenished but payments on the sub-account 
replenish the master open-end account.
    In addition, the Board received a comment from an association of 
state regulators of credit unions raising concerns that proposed 
comment 2(a)(20)-2 would present a safety and soundness concern for 
institutions. These comments noted that a self-replenishing sub-account 
for an auto loan, for example, would be a safety and soundness concern 
because the value of the collateral would decline and eventually be 
less than the credit limit.
    In light of the comments received and upon further analysis, the 
Board has withdrawn the proposed changes to comment 2(a)(20)-2 from the 
final rule. The Board believes that one unintended consequence of the 
proposed requirement that payments on each sub-account replenish is 
that some sub-accounts (like HELOCs) would be re-characterized as 
closed-end credit when they are properly treated as open-end credit. 
Generally, the proposed changes to comment 2(a)(20)-2 were intended to 
ensure that repayments of advances on an open-end credit plan generally 
would replenish the credit available to the consumer. The Board 
believes that replenishment of an open-end plan on an overall basis 
achieves this purpose and that, as discussed below, the best way to 
address loans that are more properly characterized as closed-end credit 
being treated as features of open-end plans is through clarifications

[[Page 5260]]

regarding verification of credit information and separate underwriting 
of individual advances.
    Verification and underwriting of separate advances. As discussed 
above, the Board proposed in June 2007 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 
apply for those additional advances, and without undergoing a separate 
review by the creditor of that consumer's credit information, in order 
to obtain such additional advance.
    Notwithstanding this proposed change, the Board noted that a 
creditor would be permitted to 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). This is 
consistent with the statutory definition of ``open end credit plan,'' 
which provides that a credit plan may be an open end credit plan even 
if credit information is verified from time to time. See 15 U.S.C. 
1602(i). However, the Board noted in the June 2007 Proposal its belief 
that performing a distinct underwriting analysis for each specific 
credit request would go beyond the verification contemplated by the 
statute and would more closely resemble underwriting of closed-end 
credit. For example, assume that based on the initial underwriting of 
an open-end plan, a consumer were initially approved for a line of 
credit with a $20,000 credit limit. Under the proposal, if that 
consumer subsequently took a large advance of $10,000, it would be 
inconsistent with the definition of open-end credit for the creditor to 
independently evaluate the consumer's creditworthiness in connection 
with that advance. However, proposed comment 2(a)(20)-5 would have 
stated that a creditor could continue 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.
    The NCUA agreed with the Board that the statutory provision 
regarding verification is not intended to permit separate underwriting 
and applications for each sub-account. The agency encouraged the Board 
to focus any commentary changes regarding the definition of open-end 
credit on the distinctions between verification versus a credit 
evaluation as a more appropriate and less burdensome response to its 
concerns than the proposed revisions regarding replenishment.
    Several industry commenters indicated that proposed comment 
2(a)(20)-5 could have unintended adverse consequences for legitimate 
open-end products. One industry trade association and several industry 
commenters stated creditors finance purchases that may utilize a 
substantial portion of available credit or even exceed the credit line 
under pre-established credit criteria. According to these commenters, 
creditors may have over-the-limit buffers or strategies in place that 
contemplate such purchases, and these transactions should not be 
considered a separate underwriting. The commenters further stated that 
any legitimate authorization procedures or consideration of a credit 
line increase should not exclude a transaction from open-end credit.
    One credit card association and one large credit card issuer 
commented that some credit cards have no preset spending limits, and 
issuers may need to review a cardholder's credit history in connection 
with certain transactions on such accounts. These commenters stated 
that regardless of how an issuer handles individual transactions on 
such accounts, they should be characterized as open-end.
    One other industry commenter stated that a creditor should be able 
to verify the consumer's creditworthiness in connection with a request 
for an advance on an open-end credit account. This creditor noted that 
the statute does not impose any limitation on the frequency with which 
verification is made, nor does it indicate that verification can be 
made only as part of an account review, and not also when a consumer 
requests an advance. The commenter stated that the most important time 
to conduct verification is when an advance is requested.
    This commenter further suggested that the concept of 
``verification'' is, by itself, distinguishable from a de novo credit 
decision on an application for a new loan. This commenter posited that 
comment 2(a)(20)-5 recognizes this insofar as it contemplates a 
determination of whether the consumer continues to meet the lender's 
credit standards and provides that the consumer should have a 
reasonable expectation of obtaining additional credit as long as the 
consumer continues to meet those credit standards. An application for a 
new extension of credit contemplates a de novo credit determination, 
while verification involves a determination of whether a borrower 
continues to meet the lender's credit standards.
    The changes to comment 2(a)(20)-5 are adopted as proposed, with one 
revision discussed below in the subsection titled Credit cards. Under 
revised comment 2(a)(20)-5, verification of a consumer's 
creditworthiness consistent with the statute continues to be permitted 
in connection with an open-end plan; however, underwriting of specific 
advances is not permitted for an open-end plan. The Board believes that 
underwriting of individual advances exceeds the scope of the 
verification contemplated by the statute and is inconsistent with the 
definition of open-end credit. The Board believes that the rule does 
not undermine safe and sound lending practices, but simply clarifies 
that certain types of advances for which underwriting is done must be 
treated as closed-end credit with closed-end disclosures provided to 
the consumer.
    The revisions to comment 2(a)(20)-5 are intended only to have 
prospective application to advances made after the effective date of 
the final rule. A creditor may continue to give open-end disclosures in 
connection with an advance that met the definition of ``open-end 
credit'' under current Sec.  226.2(a)(20) and the associated 
commentary, if that advance was made prior to the effective date of the 
final rule. However, a creditor that makes a new advance under an 
existing credit plan after the effective date of the final rule will 
need to determine whether that advance is properly characterized as 
open-end or closed-end credit under the revised definition, and give 
the appropriate disclosures.
    One commenter asked the Board to clarify the ``reasonable 
expectation'' language in comment 2(a)(20)-5. This commenter noted that 
a consumer should not expect to obtain additional advances if the 
consumer is in default in any provision of the loan agreement (it is 
not enough to merely be ``current'' in their payments), and otherwise 
does not comply with the requirements for advances in the loan 
agreement (such as minimum advance requirements or the method for 
requesting advances). The Board believes that under the current rule a 
creditor may suspend a consumer's credit privileges or reduce a 
consumer's credit limit if the consumer is in default under his or her 
loan agreement. Thus, the Board does not believe that this 
clarification is necessary and has not adopted it in the final rule.
    Verification of collateral. Several commenters stated that comment 
2(a)(20)-5 should expressly permit routine collateral valuation and 
verification procedures at any time, including as a condition of 
approving an advance. One of these commenters

[[Page 5261]]

stated that Regulation U (Credit by Banks and Persons Other than 
Brokers or Dealers for the Purpose of Purchasing or Carrying Margin 
Stock) requires a bank in connection with margin lending, to not 
advance funds in excess of a certain collateral value. 12 CFR part 221. 
The commenter also pointed out that for some accounts, a borrower's 
credit limit is determined from time to time based on the market value 
of the collateral securing the account.
    In response to commenters' concerns, new comment 2(a)(20)-(6) is 
added to clarify that creditors that otherwise meet the requirements of 
Sec.  226.2(a)(20) extend open-end credit notwithstanding the fact that 
the creditor must verify collateral values to comply with federal, 
state, or other applicable laws or verifies the value of collateral in 
connection with a particular advance under the plan. Current comment 
2(a)(20)-6 is renumbered as comment 2(a)(20)-7.
    Credit cards. Several credit and charge card issuers commented that 
the proposal could have adverse effects on those products. One credit 
card issuer indicated that the proposed changes could have unintended 
adverse consequences for certain credit card securitizations. This 
commenter noted that securitization documentation for credit cards 
typically provides that an account must be a revolving credit card 
account for the receivables arising in that account to be eligible for 
inclusion in the securitization. If the proposal were to recharacterize 
accounts that are currently included in securitizations as closed-end 
credit, this commenter stated that it could require restructuring of 
existing and future securitization transactions.
    As discussed above, several industry commenters noted other 
circumstances in which proposed comment 2(a)(20)-5 could have adverse 
consequences for credit cards. Several commenters stated that creditors 
may have over-the-limit buffers or strategies in place that contemplate 
purchases utilizing a substantial portion of, or even exceed, the 
credit line, and these transactions should not be considered a separate 
underwriting. Commenters also stated that any legitimate authorization 
procedures or consideration of a credit line increase should not 
exclude a transaction from open-end credit. Finally, one credit card 
association and one large credit card issuer commented that some credit 
cards have no preset spending limits, and issuers may need to review a 
cardholder's credit history in connection with certain transactions on 
such accounts. These commenters stated that regardless of how an issuer 
handles individual transactions on such accounts, they should be 
characterized as open-end.
    The Board has addressed credit card issuers' concerns about 
emergency underwriting and underwriting of amounts that may exceed the 
consumer's credit limit by expressly providing in comment 2(a)(20)-5 
that a credit card account where the plan as a whole replenishes meets 
the self-replenishing criterion, notwithstanding the fact that a credit 
card issuer may verify credit information from time to time in 
connection with specific transactions. The Board did not intend in the 
June 2007 Proposal and does not intend in the final rule to exclude 
credit cards from the definition of open-end credit and believes that 
the revised final rule gives certainty to creditors offering credit 
cards. The Board believes that the strategies identified by commenters, 
such as over-the-limit buffers, treatment of certain advances for cards 
without preset spending limits, and consideration of credit line 
increases generally do not constitute separate underwriting of 
advances, and that open-end disclosures are appropriate for credit 
cards for which the plan as a whole replenishes. The Board also 
believes that this clarification will help to promote uniformity in 
credit card disclosures by clarifying that all credit cards are subject 
to the open-end disclosure rules. The Board notes that charge card 
accounts may not meet the definition of open-end credit but pursuant to 
Sec.  226.2(a)(17)(iii) are subject to the rules that apply to open-end 
credit.
    Examples regarding repeated transactions. Due to the concerns noted 
above regarding closed-end automobile loans being characterized as 
features of so-called open-end plans, the Board also proposed in June 
2007 to delete comment 2(a)(20)-3.ii., which states that it would be 
more reasonable for a financial institution to make advances from a 
line of credit for the purchase of an automobile than it would be for 
an automobile dealer to sell a car under an open-end plan. As stated in 
the proposal, the Board was concerned that the current example placed 
inappropriate emphasis on the identity of the creditor rather than the 
type of credit being extended by that creditor. Similarly, the Board 
proposed to revise current comment 2(a)(20)-3.i., which referred to a 
thrift institution, to refer more generally to a bank or financial 
institution and to move the example into the body of comment 2(a)(20)-
3. The Board received no comments opposing the revisions to these 
examples, and the changes are adopted as proposed.
    Technical amendments. The Board also proposed in the June 2007 
Proposal a technical update to comment 2(a)(20)-4 to delete, without 
intended substantive change, a reference to ``china club plans,'' which 
may no longer be very common. No comments were received on this aspect 
of the proposal, and the update to comment 2(a)(20)-4 is adopted as 
proposed.
    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 have deleted the reference 
to changes in the economy to simplify this provision. No comments were 
received on this change, which is adopted as proposed.
    Implementation date. Many credit union commenters on the June 2007 
Proposal expressed concern about the effect of successive regulatory 
changes. These commenters stated that the June 2007 Proposal, if 
adopted, would require them to give closed-end disclosures in 
connection with certain advances, such as the purchase of an 
automobile, for which they currently give open-end disclosures. The 
commenters noted that because the Board is also considering regulatory 
changes to closed-end lending, it could require such creditors to make 
two sets of major systematic changes in close succession. These 
commenters stated that such successive regulatory changes could impose 
a significant burden that would impair the ability of credit unions to 
serve their members effectively. The Board expects all creditors to 
provide closed-end or open-end disclosures, as appropriate in light of 
revised Sec.  226.2(a)(20) and the associated commentary, as of the 
effective date of the final rule. The Board has not delayed the 
effectiveness of the changes to the definition of ``open-end credit.'' 
The Board is mindful that the changes to the definition may impose 
costs on certain credit unions and other creditors, and that any future 
changes to the provisions of Regulation Z dealing with closed-end 
credit may impose further costs. However, the Board believes that it is 
important that consumers receive the appropriate type of disclosures 
for a given extension of credit, and that it is not appropriate to 
delay effectiveness of these changes pending the Board's review of the 
rules pertaining to closed-end credit.

[[Page 5262]]

2(a)(24) Residential Mortgage Transaction
    Comment 2(a)(24)-1, which identifies key provisions affected by the 
term ``residential mortgage transaction,'' and comment 2(a)(24)-5.ii., 
which provides guidance on transactions financing the acquisition of a 
consumer's principal dwelling, are revised from the June 2007 Proposal 
to conform to changes adopted by the Board in the July 2008 Final HOEPA 
Rule to address certain mortgage practices and disclosures. 73 FR 
44522, 44605, July 30, 2008.

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.
    In June 2007, the Board proposed several substantive and technical 
revisions to Sec.  226.3 as described below. The Board also proposed to 
move the substance of footnote 4 to the commentary. See comment 3-1. No 
comments were received on moving footnote 4 to the commentary, and that 
change is adopted in the final rule.
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. As the Board noted in the supplementary 
information to the June 2007 Proposal, questions have arisen from time 
to time regarding whether transactions made for business purposes on a 
consumer-purpose credit card are exempt from TILA. The Board proposed 
to add a new comment 3(a)-2 to clarify 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). The Board received several 
comments on proposed comment 3(a)-2. One consumer group and one large 
financial institution commented in support of the change. One industry 
trade association stated that the proposed clarification was anomalous 
given the general exclusion of business credit from TILA coverage. The 
Board acknowledges that this clarification will result in certain 
business purpose transactions being subject to TILA, and certain 
consumer purpose transactions being exempt from TILA. However, the 
Board believes that the determination as to whether a credit card 
account is primarily for consumer purposes or business purposes is best 
made when an account is opened (or when an account is reclassified as a 
business-purpose or consumer-purpose account) and that comment 3(a)-2 
provides important clarification and certainty to consumers and 
creditors. In addition, determining whether specific transactions 
charged to the credit card account are for consumer or business 
purposes could be operationally difficult and burdensome for issuers. 
Accordingly, the Board adopts new comment 3(a)-2 as proposed with 
several technical revisions described below. Other sections of the 
commentary regarding Sec.  226.3(a) are renumbered accordingly. The 
Board also adopts new comment 3(a)-7, which provides guidance on credit 
card renewals consistent with new comment 3(a)-2, as proposed.
    The examples in proposed comment 3(a)-2 contained several 
references to credit plans, which are deleted from the final rule as 
unnecessary because comment 3(a)-2 was intended to address only credit 
cards. Credit plans are addressed by the examples in redesignated 
comment 3(a)-3, which is unaffected by this rulemaking.
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 June 2007 Proposal included a new Sec.  226.3(g), which would 
have exempted 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 stated several reasons for 
this proposed exemption in the supplementary information to the June 
2007 Proposal, including the fact that 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. In addition, 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.
    The Board received several comments regarding proposed Sec.  
226.3(g), which generally supported the proposed exemption for loans 
taken by employees against their employer-sponsored retirement plans. 
Two commenters asked the Board to expand the proposed exemption to 
include loans taken against governmental 457(b) plans, which are a type 
of retirement plan offered by certain state and local government 
employers. 26 U.S.C. 457(b). The comments noted that governmental 
457(b) plans may permit participant loans, subject to the requirements 
of section 72(p) of the Internal Revenue Code (26 U.S.C. 1 et seq.), 
which are the same requirements that are applicable to qualified 401(a) 
plans and 403(b) plans. The comments also stated that the Board's 
reasons for proposing the exemption apply equally to governmental 
457(b) plans. The final rule expands the scope of the exemption to 
include loans taken against governmental 457(b) plans. The exemption 
for loans taken against employer-sponsored retirement plans was 
intended to cover all such similar plans, and the omission of 
governmental 457(b) plans from the proposed exemption was 
unintentional. The Board believes the rationales stated above and in 
the June 2007 Proposal for the proposed exemption for qualified 401(a) 
plans and 403(b) plans apply equally to governmental 457(b) plans.
    In addition to the rationales stated above, another reason given 
for the proposed exception in the June 2007 Proposal was a statement 
that plan administration fees must be disclosed under applicable 
Department of Labor regulations. One commenter noted that the 
Department of Labor regulations cited in the supplementary information 
to the June 2007 Proposal do not apply to governmental 403(b) plans, 
governmental 457(b) plans, and certain other 403(b) programs that are 
not subject to the Employee Retirement Income Security Act of 1974 
(ERISA). 29 U.S.C. 1001 et seq. The commenter asked for clarification 
regarding whether the exemption will apply to loans taken from plans 
and programs which are not subject to ERISA. Section 226.3(g) itself 
does not contain a reference to ERISA or the Department of Labor 
regulations pertaining to ERISA, and, accordingly,

[[Page 5263]]

the exemption applies even if the particular plan is not subject to 
ERISA. For the other reasons stated above and in the June 2007 
Proposal, the Board believes that the exemption for the plans specified 
in new Sec.  226.3(g) is appropriate even for those plans to which 
ERISA disclosure requirements do not apply.

Section 226.4 Finance Charge

    Various provisions of TILA and Regulation Z specify how and when 
the cost of consumer credit expressed 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, the Board did not propose in 
June 2007 to change Sec.  226.4 for either closed-end credit or open-
end credit. The areas in which the Board did propose to revise Sec.  
226.4 and related commentary relate to (1) transaction charges imposed 
by credit card issuers, such as charges for obtaining cash advances 
from automated teller machines (ATMs) and for making purchases in 
foreign currencies or foreign countries, and (2) charges for credit 
insurance, debt cancellation coverage, and debt suspension coverage.
4(a) Definition
    Transaction charges. 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, under current comment 4(a)-4, a 
fee charged by a card issuer for using an ATM to obtain a cash advance 
on a credit card account 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 is it included in the effective APR.
    In the June 2007 Proposal, the Board proposed new comment 4(a)-4 to 
address questions that have been raised about the scope and application 
of the existing comment. For example, assume the issuer assesses an ATM 
fee for one kind of deposit account (for example, an account with a low 
minimum balance) but not for another. The existing comment does not 
indicate which account is the proper basis for comparison, nor is it 
clear in all cases which account should be the appropriate one to use.
    Questions have also been raised about whether disclosure of an ATM 
cash advance fee pursuant to comments 4(a)-4 and 6(b)-1.vi. is 
meaningful to consumers. Under the comments, the disclosure a consumer 
receives after incurring a fee for taking a cash advance through an ATM 
depends on whether the credit card issuer provides asset accounts and 
offers debit cards on those accounts and whether the fee for using the 
ATM for the cash advance exceeds the fee for using the ATM for a cash 
withdrawal from an asset account. It is not clear that these 
distinctions are meaningful to consumers.
    In addition, questions have arisen about the proper disclosure of 
fees that cardholders are assessed for making purchases in a foreign 
currency or outside the United States--for example, when the cardholder 
travels abroad. The question has arisen in litigation between consumers 
and major card issuers.\11\ Some card issuers have reasoned 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.
---------------------------------------------------------------------------

    \11\ See, e.g., 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. See also, 
e.g., LiPuma v. American Express Company, 406 F. Supp. 2d 1298 
(S.D.Fla. 2005).
---------------------------------------------------------------------------

    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. In June 2007, the Board proposed to replace comment 4(a)-4 
with a new comment of the same number stating a simple interpretive 
rule that any transaction fee on a credit card plan is a finance 
charge, regardless of whether the issuer imposes the same or lesser 
charge on withdrawals of funds from an asset account, such as a 
checking or savings account. The proposed comment would have provided 
as examples of such finance charges a fee imposed by the issuer for 
taking a cash advance at an ATM,\12\ as well as a fee imposed by the 
issuer for foreign transactions. The Board stated its belief that 
clearer guidance might 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, and accordingly proposed new 
comment 4(a)-4.
---------------------------------------------------------------------------

    \12\ The change to comment 4(a)-4 does not affect disclosure of 
ATM fees assessed by institutions other than the credit card issuer. 
See proposed Sec.  226.6(b)(1)(ii)(A), adopted in the final rule as 
Sec.  226.6(b)(3)(iii)(A).
---------------------------------------------------------------------------

    Few commenters addressed proposed comment 4(a)-4. Some commenters 
supported the proposed comment, including a financial institution 
(although the commenter noted that its support of the proposal was 
predicated on the effective APR disclosure requirements being 
eliminated, as the Board proposed under one alternative). Other 
commenters opposed the proposed comment, some expressing concern that 
including all transaction fees as finance charges might cause the 
effective APR to exceed statutory interest rate limits contained in 
other laws (for example, the 18 percent statutory interest rate ceiling 
applicable to federal credit unions).
    One commenter stated particular concerns about the proposed 
inclusion of foreign transaction fees as finance charges. The commenter 
stated that the settlements in the litigation referenced above have 
already resolved the issues involved and that adopting the proposal 
would cause disruption to disclosure practices established under the 
settlements. A consumer group that supported including all transaction 
fees in the finance charge noted its concern that the positive effect 
of the proposal would be nullified by specifying a limited list of fees 
that must be disclosed in writing at account opening (see the section-
by-section analysis to Sec.  226.6(b)(2) and (b)(3), below), and by 
eliminating the effective APR assuming the Board adopted that 
alternative. The commenter urged the Board to go further and include a 
number of other types of fees in the finance charge.
    The Board is adopting proposed comment 4(a)-4 with some changes for 
clarification. As adopted in final form, comment 4(a)-4 includes 
language clarifying that foreign transaction fees include charges 
imposed when transactions are made in foreign currencies and converted 
to U.S. dollars, as well as charges imposed when transactions are made 
in U.S. dollars outside the United States and charges imposed when 
transactions are made (whether in a foreign currency or

[[Page 5264]]

in U.S. dollars) with a foreign merchant, such as via a merchant's Web 
site. For example, a consumer may use a credit card to make a purchase 
in Bermuda, in U.S. dollars, and the card issuer may impose a fee 
because the transaction took place outside the United States. The 
comment also clarifies that foreign transaction fees include charges 
imposed by the card issuer and charges imposed by a third party that 
performs the conversion, such as a credit card network or the card 
issuer's corporate parent. (For example, in a transaction processed 
through a credit card network, the network may impose a 1 percent 
charge and the card-issuing bank may impose an additional 2 percent 
charge, for a total of a 3 percentage point foreign transaction fee 
being imposed on the consumer.)
    However, the comment also clarifies that charges imposed by a third 
party are included only if they are directly passed on to the consumer. 
For example, if a credit card network imposes a 1 percent fee on the 
card issuer, but the card issuer absorbs the fee as a cost of doing 
business (and only passes it on to consumers in the general sense that 
the interest and fees are imposed on all its customers to recover its 
costs), then the fee is not a foreign transaction fee that must be 
disclosed. In another example, if the credit card network imposes a 1 
percent fee for a foreign transaction on the card issuer, and the card 
issuer imposes this same fee on the consumer who engaged in the foreign 
transaction, then the fee is a foreign transaction fee and must be 
included in finance charges to be disclosed. The comment also makes 
clear that a card issuer is not required to disclose a charge imposed 
by a merchant. For example, if the merchant itself performs the 
currency conversion and adds a fee, this would be not be a foreign 
transaction fee that card issuers must disclose. Under Sec.  226.9(d), 
the card issuer is not required to disclose finance charges imposed by 
a party honoring a credit card, such as a merchant, although the 
merchant itself is required to disclose such a finance charge (assuming 
the merchant is covered by TILA and Regulation Z generally).
    The foreign transaction fee is determined by first calculating the 
dollar amount of the transaction, using a currency conversion rate 
outside the card issuer's and third party's control. Any amount in 
excess of that dollar amount is a foreign transaction fee. The comment 
provides examples of conversion rates outside the card issuer's and 
third party's control. (Such a rate is deemed to be outside the card 
issuer's and third party's control, even if the card issuer or third 
party could arguably in fact have some degree of control over the rate 
used, by selecting the rate from among a number of rates available.)
    With regard to the conversion rate, the comment also clarifies that 
the rate used for a particular transaction need not be the same rate 
that the card issuer (or third party) itself obtains in its currency 
conversion operations. The card issuer or third party may convert 
currency in bulk amounts, as opposed to performing a conversion for 
each individual transaction. The comment also clarifies that the rate 
used for a particular transaction need not be the rate in effect on the 
date of the transaction (purchase or cash advance), because the 
conversion calculation may take place on a later date.
    Concerns of some commenters that inclusion of all transaction 
charges in the finance charge would cause the effective APR to exceed 
permissible ceilings are moot due to the fact that the final rule 
eliminates the effective APR requirements as to open-end (not home-
secured) credit, as discussed in the general discussion on the 
effective APR in the section-by-section analysis to Sec.  226.7(b). As 
to the consumer group comment that eliminating the effective APR would 
negate the beneficial impact of the proposed comment for consumers, the 
Board believes that adoption of the comment will nevertheless result in 
better and more meaningful disclosures to consumers. Transaction fees 
such as ATM cash advance fees and foreign transaction fees will be 
disclosed more consistently. The Board also believes that the comment 
will provide clearer guidance to card issuers, as discussed above.
    With regard to foreign transaction fees, the Board believes that 
although the settlements in the litigation mentioned above may have led 
to some standardization of disclosure practices, the proposed comment 
is appropriate because it will bring a uniform disclosure approach to 
foreign transaction fees (as opposed to possibly differing approaches 
under the different settlement terms), and will be a continuing federal 
regulatory requirement (whereas settlements can be modified or expire).
    Existing comment 4(b)(2)-1 (which is not revised in the final rule) 
states that if a checking or transaction account charge imposed on 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. Comment 
4(b)(2)-1 and revised comment 4(a)-4 address different situations.
    Charges in comparable cash transactions. 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. In the June 2007 Proposal, the Board solicited comment on 
whether the example is still useful, or should be deleted as 
unnecessary or obsolete. No comments were received on this issue. 
Nonetheless, because many of the examples provide guidance to creditors 
offering closed-end credit, comment 4(a)-1 is retained in the final 
rule and the examples will be reviewed in a future rulemaking 
addressing closed-end credit.
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) and (d)(3). See also 61 FR 49237, Sept. 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.
    In June 2007, the Board proposed a number of revisions to these 
rules:
    (1) The same rules that apply to debt cancellation coverage would 
have been applied explicitly to debt suspension coverage. However, to 
exclude the cost of debt suspension coverage from the finance charge, 
creditors would have been required to inform consumers, as

[[Page 5265]]

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 proposed revisions would have applied 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 in addition to 
those permitted today, namely, life, accident, health, or loss-of-
income. This proposed revision would also have applied 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 have been expanded to cover sales made 
throughout the life of an open-end (not home-secured) plan. 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 have received disclosures about the cost and 
optional nature of the product at the time of the consumer's request to 
purchase the insurance or coverage. HELOCs subject to Sec.  226.5b and 
closed-end transactions would not have been affected by this proposed 
revision.
    (4) For telephone sales, creditors offering open-end (not home-
secured) plans would have been 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 Sec.  208.81 et seq. regarding insurance sales; 12 CFR part 
37 regarding debt cancellation and debt suspension products. For 
telephone sales, creditors could have provided disclosures orally, and 
consumers could have requested the insurance or coverage orally, if the 
creditor maintained evidence of compliance with the requirements, and 
mailed written information within three days after the sale. HELOCs 
subject to Sec.  226.5b and closed-end transactions would not have been 
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 were intended to provide consistency 
in how creditors deliver, and consumers receive, information about the 
cost and optional nature of similar products. The revisions are 
discussed in detail below.
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 
(b)(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. As stated 
in the June 2007 Proposal, 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, in June 2007 the Board proposed revisions to comment 
4(b)(7) and (8)-2, to state that 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 have given the same treatment to purchases of debt 
cancellation or suspension coverage. As proposed, therefore, purchases 
of voluntary insurance or debt cancellation or suspension coverage 
after account opening would trigger disclosure and consent 
requirements.
    Few commenters addressed this issue. One financial institution 
trade association supported the proposed revisions to comments 4(b)(7) 
and (8)-2 and 4(b)(10)-2, while two other commenters (a financial 
institution and a trade association) opposed them, arguing that the 
rules for open-end (not home-secured) plans should remain consistent 
with the rules for home-equity and closed-end credit, that there is no 
demonstrable harm to consumers from the existing rule, and that other 
state and federal law provides adequate protection.
    The revisions to comments 4(b)(7) and (8)-2 and 4(b)(10)-2 are 
adopted as proposed. In an open-end plan, where consumers can engage in 
credit transactions after the opening of the plan, a creditor may have 
a greater opportunity to influence a consumer's decision whether or not 
to purchase credit insurance or debt cancellation or suspension 
coverage than in the case of closed-end credit. Accordingly, the 
disclosure and consent requirements are important in open-end plans, 
even after the opening of the plan, to ensure that the consumer is 
fully informed about the offer of insurance or coverage and that the 
decision to purchase it is voluntary. In addition, under the final 
rule, creditors will be permitted to provide disclosures and obtain 
consent by telephone (provided they mail written disclosures to the 
consumer after the purchase), so long as they meet requirements 
intended to ensure the purchase is voluntary. See the section-by-
section analysis to Sec.  226.4(d)(4) below. As to consistency between 
the rules for open-end (not home-secured) plans and home-equity plans, 
the Board intends to consider this issue when the home-equity credit 
plan rules are reviewed in the future.
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 
other open-end plans is revised for clarity, as proposed in June 2007. 
No substantive change is intended. No comments were received on this 
change.
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. This same rule applies to charges 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).
    The Board proposed in June 2007 to revise the regulation to provide 
the same treatment to debt suspension coverage as to credit insurance 
and debt cancellation coverage. Thus, under proposed Sec.  
226.4(b)(10), charges for debt suspension coverage would be finance 
charges. (The conditions under which debt suspension charges may be 
excluded from the finance charge are discussed in the section-by-
section

[[Page 5266]]

analysis to Sec.  226.4(d)(3), below.) Debt suspension is 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 addition, debt suspension may cover events 
other than loss of life, health, or income, such as a wedding, a 
divorce, the birth of child, or a medical emergency.
    In the June 2007 Proposal, debt suspension coverage would have been 
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. See proposed comment 
4(b)(10)-1. The comment would have clarified 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.
    This aspect of the proposal would have applied to closed-end as 
well as open-end credit transactions. As discussed in the supplementary 
information to the June 2007 Proposal, 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 reallocate the risk of nonpayment between the 
borrower and the creditor.
    Industry commenters supported the proposed approach of including 
charges for debt suspension coverage as finance charges generally, but 
permitting exclusion of such charges if the coverage is voluntary and 
meets the other conditions contained in the proposal. Consumer group 
commenters did not address this issue. Comment 4(b)(10)-1 is adopted as 
proposed with some minor changes for clarification. Exclusion of 
charges for debt suspension coverage from the definition of finance 
charge is discussed in the section-by-section analysis to Sec.  
226.4(d)(3) below.
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
    As explained in the section-by-section analysis to Sec.  
226.4(b)(10), debt cancellation fees and, as clarified in the final 
rule, 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 the consumer receives 
written disclosure 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).
    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.
    In June 2007, the Board proposed 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 proposed to add a disclosure (Sec.  
226.4(d)(3)(iii)), 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 proposed 
revisions would have applied to closed-end as well as open-end credit 
transactions. Model clauses and samples were proposed at Appendix G-
16(A) and G-16(B) and Appendix H-17(A) and H-17(B) to part 226.
    In addition, the Board proposed in the June 2007 Proposal 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 or 
for gap coverage. The Board also proposed, 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. The proposal is 
adopted in the final rule, with a few modifications discussed below.
    A few industry commenters suggested that the exclusion of debt 
cancellation or debt suspension coverage from the finance charge should 
not be limited to instances where one of the triggering events is 
accident or loss of life, health, or income. The commenters contended 
that such a rule would lead to an inconsistent result; for example, if 
debt cancellation or suspension coverage has only divorce as a 
triggering event, the charge could not be excluded from the finance 
charge, while if the coverage applied to divorce and loss of income, 
the charge could be excluded. The proposal is adopted without change in 
this regard. The identification of accident or loss of life, health, or 
income in current Sec.  226.4(d)(3)(ii) (renumbered Sec.  226.4(d)(3) 
in the final rule) with respect to debt cancellation coverage 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. The approach in 
the final rule is consistent with the purpose of Section 106(b), but 
also recognizes that debt cancellation and suspension coverage often 
are not limited by applicable law to the events allowed for insurance.
    A few commenters addressed the proposed disclosure for debt 
suspension programs that the obligation to pay loan principal and 
interest is only suspended, and that interest will continue to accrue 
during the period of suspension. A commenter suggested that in programs 
combining elements of debt cancellation and debt suspension, the 
disclosure should not be required. The final rule retains the 
disclosure requirement in Sec.  226.4(d)(3)(iii). However, comment 
4(d)(3)-4 has been added stating that if the debt can be cancelled 
under certain circumstances, the disclosure may be modified to reflect 
that fact. The disclosure could, for example, state (in addition to the 
language required by Sec.  226.4(d)(3)(iii)) that ``in some 
circumstances, my debt may be cancelled.'' However, the disclosure 
would not be permitted to list the specific events that would result in 
debt cancellation, to avoid ``information overload.''
    Another commenter noted that the model disclosures proposed at 
Appendix G-16(A), G-16(B), H-17(A),

[[Page 5267]]

and H-17(B) to part 226 were phrased assuming interest continues to 
accrue in all cases of debt suspension programs. The commenter 
contended that interest does not continue to accrue during the period 
of suspension in all cases, and suggested revising the forms. However, 
the disclosures under Sec.  226.4(d)(3)(iii) are only required as 
applicable; thus, if the disclosure that interest will continue to 
accrue during the period of suspension is not applicable, it need not 
be provided.
    A commenter noted that proposed model and sample forms G-16(A) and 
G-16(B), for open-end credit, and H-17(A) and H-17(B), for closed-end 
credit are virtually identical, but that the model language regarding 
cost of coverage is more appropriate for open-end credit. Model Clause 
H-17(A) and Sample H-17(B) have been revised in the final rule to 
include language regarding cost of coverage that is appropriate for 
closed-end credit.
    A consumer group suggested that in debt suspension programs where 
interest continues to accrue during the suspension period, periodic 
statements should be required to include a disclosure of the amount of 
the accrued interest. The Board believes that the requirement under 
Sec.  226.7, as adopted in the final rule, for each periodic statement 
to disclose total interest for the billing cycle as well as total year-
to-date interest on the account adequately addresses this concern.
    The Board noted in the June 2007 Proposal that the regulation 
provides guidance on how to disclose the cost of debt cancellation 
coverage (in proposed Sec.  226.4(d)(3)(ii)), and sought comment on 
whether additional guidance was needed for debt suspension coverage, 
particularly for closed-end loans. No commenters addressed this issue 
except for one industry commenter that responded that no additional 
guidance was needed.
    In a technical revision, as proposed in June 2007, the substance of 
footnotes 5 and 6 is moved to the text of Sec.  226.4(d)(3).
4(d)(4) Telephone Purchases
    Under Sec.  226.4(d)(1) and (d)(3), creditors may exclude from the 
finance charge premiums for credit insurance and debt cancellation or 
(as provided in revisions in the final rule) debt suspension coverage 
if, among other conditions, the consumer signs or initials an 
affirmative written request for the insurance or coverage. In the June 
2007 Proposal, the Board proposed 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 proposed new Sec.  
226.4(d)(4), for telephone purchases, the creditor would have been 
permitted to make the disclosures orally and the consumer could 
affirmatively request the insurance or coverage orally, provided that 
the creditor (1) maintained 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) mailed the disclosures under Sec.  
226.4(d)(1) or (d)(3) within three business days after the telephone 
purchase. Comment 4(d)(4)-1 would have provided 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.
    Commenters supported proposed Sec.  226.4(d)(4), with some 
suggested modifications, and it is adopted in final form with a few 
modifications discussed below. A few commenters requested that the 
Board expand the proposed telephone purchase rule to home-equity plans 
and closed-end credit for consistency. HELOCs and closed-end credit are 
largely separate product lines from credit card and other open-end (not 
home-secured) plans, and the Board anticipates reviewing the rules 
applying to these types of credit separately; the issue of telephone 
sales of credit insurance and debt cancellation or suspension coverage 
can better be addressed in the course of those reviews. In addition, as 
discussed above, comment 4(b)(7) and (8)-2, as amended in the final 
rule, provides that insurance is not written in connection with a 
credit transaction if the insurance is sold after consummation of a 
closed-end transaction, or after a home-equity plan is opened, and the 
consumer requests the insurance. Accordingly, the requirements for 
disclosure and affirmative written consent to purchase the insurance or 
coverage do not apply in these situations, and thus the relief that 
would be afforded by the telephone purchase rule appears less 
necessary.
    A commenter stated that the requirement (in Sec.  226.4(d)(4)(ii)) 
to mail the disclosures under Sec.  226.4(d)(1) or (d)(3) within three 
business days after the telephone purchase would be difficult 
operationally, and recommended that the rule allow five business days 
instead of three. The Board believes that three business days should 
provide adequate time to creditors to mail the written disclosures. In 
addition, the three-business-day period for mailing written disclosures 
is consistent with the rules published by the federal banking agencies 
to implement Section 305 of the Gramm-Leach-Bliley Act regarding the 
sale of insurance products by depository institutions, as well as with 
the OCC rules regarding the sale of debt cancellation and suspension 
products.
    A few commenters expressed concern about proposed comment 4(d)(4)-
1, prohibiting the use of leading questions or negative consent in 
telephone sales. The commenters stated that the leading questions rule 
would be difficult to comply with, because the distinction between a 
leading question and routine marketing language may not be apparent in 
many cases. The commenters were particularly concerned about being able 
to ensure that the enrollment question itself not be considered 
leading. The final comment includes an example of an enrollment 
question (``Do you want to enroll in this optional debt cancellation 
plan?'') that would not be considered leading.
    Section 226.4(d)(4)(i) in the June 2007 Proposal would have 
required that the creditor must, in addition to providing the required 
disclosures orally and maintaining evidence that the consumer 
affirmatively elected to purchase the insurance or coverage, also 
maintain reasonable procedures to provide the disclosures orally. The 
final rule does not contain the requirement to maintain procedures to 
provide the disclosures orally; this requirement is unnecessary because 
creditors must actually provide the disclosures orally in each case.
    The Board proposed 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 5268]]

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.
    As stated in the June 2007 Proposal, 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. Requiring a consumer's written signature or initials is 
intended to evidence that the consumer is purchasing the product 
voluntarily; the proposal contained safeguards intended to insure that 
oral purchases are voluntary. Under the proposal and as adopted in the 
final rule, 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 for the credit insurance or debt cancellation or debt 
suspension coverage 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, as discussed in 
the section-by-section analysis under Sec.  226.7, under the final rule 
fees, including insurance and debt cancellation or suspension coverage 
charges, will be better highlighted 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.
    At the same time, the amendments should facilitate the convenience 
to both consumers and creditors of conducting transactions by 
telephone. The amendments, therefore, have 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.

Section 226.5 General Disclosure Requirements

    Section 226.5 contains format and timing requirements for open-end 
credit disclosures. In the June 2007 Proposal, the Board proposed, 
among other changes to Sec.  226.5, to reform the rules governing the 
disclosure of charges before they are imposed in open-end (not home-
secured) credit. Under the proposal, all charges imposed as part of the 
plan would have had to be disclosed before they were imposed; however, 
while certain specified charges would have continued to be disclosed in 
writing in the account-opening disclosures, other charges imposed as 
part of the plan could have been disclosed orally or in writing at any 
time before the consumer becomes obligated to pay the charge.
5(a) Form of Disclosures
    In the June 2007 Proposal, the Board proposed changes to Sec.  
226.5(a) and the associated commentary regarding the standard to 
provide ``clear and conspicuous'' disclosures. In addition, in both the 
June 2007 Proposal and the May 2008 Proposal, the Board proposed 
changes to Sec.  226.5(a) and the associated commentary with respect to 
terminology. To improve clarity, the Board also proposed technical 
revisions to Sec.  226.5(a) in the June 2007 Proposal.
5(a)(1) General
    Clear and conspicuous standard. Under TILA Section 122(a), all 
required disclosures must be ``clear and conspicuous.'' 15 U.S.C. 
1632(a). The Board has interpreted ``clear and conspicuous'' for most 
open-end disclosures to mean that they must be in a reasonably 
understandable form. Comment 5(a)(1)-1. 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 
disclosures be in any particular type size. Certain disclosures in 
credit and charge card applications and solicitations subject to Sec.  
226.5a, however, must meet a higher standard of clear and conspicuous 
due to the importance of the disclosures and the context in which they 
are given. For these disclosures, the Board has required that they be 
both in a reasonably understandable form and readily noticeable to the 
consumer. Comment 5(a)(1)-1. In the June 2007 Proposal, the Board 
proposed to amend comment 5(a)(1)-1 to expand the list of disclosures 
that must be both in a reasonably understandable form and readily 
noticeable to the consumer.
    Readily noticeable standard. Certain disclosures in credit and 
charge card applications and solicitations subject to Sec.  226.5a are 
currently required to be in a tabular format. In the June 2007 
Proposal, the Board proposed to require information be highlighted in a 
tabular format in additional circumstances, including: In the account-
opening disclosures pursuant to Sec.  226.6(b)(4) (adopted as Sec.  
226.6(b)(1) below); with 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). 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 
proposed that these disclosures also be in a reasonably understandable 
form and readily noticeable to the consumer.
    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), many 
commenters supported the Board's proposal to require certain 
information to be presented in a tabular format, and consumer testing 
showed that tabular presentation of disclosures improved consumer 
attention to, and understanding of, the disclosures. As a result, the 
Board adopts the proposal to require a tabular format for certain 
information required by these sections as well as the proposal to amend 
comment 5(a)(1)-1. Technical amendments proposed under the June 2007 
Proposal, including moving the guidance on the meaning of ``reasonably 
understandable form'' to comment 5(a)(1)-2, and moving guidance on what 
constitutes an ``integrated document'' to comment 5(a)(1)-4, are also 
adopted.
    In the June 2007 Proposal, the Board also proposed to add comment 
5(a)(1)-3 to provide guidance on the meaning of the readily noticeable 
standard. Specifically, the Board proposed that to meet the readily 
noticeable standard, the following disclosures must be given in a 
minimum of 10-point font: Disclosures for credit card applications and 
solicitations under Sec.  226.5a, highlighted account-opening 
disclosures under Sec.  226.6(b)(4) (adopted as Sec.  226.6(b)(1) 
below), highlighted disclosures accompanying checks that access a 
credit card account under

[[Page 5269]]

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).
    The Board received numerous consumer comments that credit card 
disclosures are in fine print and that disclosures should be given in a 
larger font. Many consumer and consumer group commenters suggested that 
disclosures should be given in a minimum 12-point font. Several of 
these comments also suggested that the 12-point font minimum be applied 
to disclosures other than the highlighted disclosures proposed to be 
subjected to the readily noticeable standard as proposed in comment 
5(a)(1)-1. Industry commenters suggested that there be no minimum font 
size or that the minimum should be 9-point font. One industry commenter 
stated that the 10-point font minimum should not apply to any 
disclosures on a periodic statement.
    The Board adopts comment 5(a)(1)-3 as proposed. As discussed in the 
June 2007 Proposal, the Board believes that for certain 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 does not believe, however, 
that all TILA-required disclosures should be subject to this same 
standard. For certain disclosures, such as periodic statements, 
requiring all TILA-required disclosures to be highlighted in the same 
way could be burdensome for creditors because it would cause the 
disclosures to be longer and more expensive to provide to consumers. In 
addition, the benefits to consumers would not outweigh such costs. The 
Board believes that a more balanced approach is to require such 
highlighting only for certain important disclosures. The Board, thus, 
declines to extend the minimum font size requirement to disclosures 
other than those listed in proposed comment 5(a)(1)-3. Similarly, for 
disclosures that may appear on periodic statements, such as the 
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), the 
Board believes that the minimum 10-point font size for these 
disclosures is appropriate because these are disclosures that consumers 
do not expect to see each billing cycle. Therefore, the Board believes 
that it is especially important to highlight these disclosures.
    As discussed in the June 2007 Proposal, the Board proposed a 
minimum of 10-point font for these disclosures to be consistent with 
the approach taken 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 14940, Mar. 29, 2007. 
Furthermore, in consumer testing conducted for the Board, participants 
were able to read and notice information in a 10-point font. Therefore, 
the Board adopts the comment as proposed.
    Disclosures subject to the clear and conspicuous standard. The 
Board proposed comment 5(a)(1)-5 in the June 2007 Proposal to address 
questions on the types of communications that are subject to the clear 
and conspicuous standard. The comment would have clarified that all 
required disclosures and other communications under subpart B of 
Regulation Z are considered disclosures required to be clear and 
conspicuous, including 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 any correction notice 
required to be sent to the consumer under Sec.  226.13(e). No comments 
were received regarding the proposed comment, and the comment is 
adopted as proposed.
    Oral disclosure. In order to give guidance about the meaning of 
``clear and conspicuous'' for oral disclosures, the Board proposed in 
the June 2007 Proposal to amend the guidance on what constitutes a 
``reasonably understandable form,'' in proposed comment 5(a)(1)-2. 
Specifically, the Board proposed that oral disclosures 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. No comments were received on the Board's proposed guidance 
concerning clear and conspicuous oral disclosures. Comment 5(a)(1)-2 is 
adopted as proposed. The Board believes the comment provides necessary 
guidance not only for the oral disclosure of certain charges under 
Sec.  226.5(a)(1)(ii), but also for other oral disclosure, such as 
radio and television advertisements.
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. As discussed in the June 2007 Proposal, the Board 
proposed that certain charges may be disclosed after account opening 
and that disclosure of those charges may be provided orally or in 
writing before the cost is imposed. Many industry commenters supported 
the Board's proposal to permit oral disclosure of certain charges while 
consumer group commenters opposed the Board's proposal. Some of these 
consumer group commenters acknowledged the usefulness of oral 
disclosure of fees at a time when the consumer is about to incur the 
fee but suggested that it should be in addition to, but not take the 
place of, written disclosure.
    As the Board discussed in the June 2007 Proposal, in proposing to 
permit certain charges to be disclosed after account opening, the 
Board's goal was to better ensure that consumers receive disclosures at 
a time and in a manner that they would be likely to notice them. As 
discussed in the June 2007 Proposal, at account opening, written 
disclosure has obvious merit because it is a time when a consumer must 
assimilate information that may influence major decisions by the 
consumer about how, or even whether, to use the account. During the 
life of an account, however, a consumer will sometimes need to decide 
whether to purchase a single service from the creditor that may not be 
central to the consumer's use of the account (for example, the service 
of providing documentary evidence of transactions). The consumer may 
become accustomed to purchasing such services by telephone, and will, 
accordingly, expect to receive an oral disclosure of the charge for the 
service during the same telephone call. Permitting oral disclosure of 
charges that are not central to the consumer's use of the account would 
be consistent with consumer expectations and with the business 
practices of creditors. For these reasons, the Board adopts its 
proposal to permit creditors to disclose orally charges not 
specifically identified in the account-opening table in Sec.  
226.6(b)(2) (proposed as Sec.  226.6(b)(4)). Further, the Board adopts 
its proposal 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).
    One industry commenter stated its concerns that oral disclosure may 
make it difficult for creditors to demonstrate compliance with TILA. As 
the Board discussed in the June 2007 Proposal, creditors may continue 
to comply with

[[Page 5270]]

TILA by providing written disclosures at account opening for all fees. 
The Board anticipates that creditors will likely continue to identify 
fees in the account agreement for contract and other reasons even if 
the regulation does not specifically require creditors to do so.
    In technical revisions, as proposed in the June 2007 Proposal, the 
final rule moves to Sec.  226.5(a)(1)(ii)(A) the current exemption in 
footnote 7 under Sec.  226.5(a)(1) that disclosures required by Sec.  
226.9(d) need not be in writing. 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. Specific wording in Sec.  
226.5(a)(1)(ii)(A) also has been amended from the proposal in order to 
provide greater clarity, with no intended substantive change from the 
June 2007 Proposal. 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 Sec.  
226.5(a)(1)(ii)(B) as proposed.
    Electronic communication. Commenters on the June 2007 Proposal 
suggested that for disclosures that need not be provided in writing at 
account opening, creditors should be permitted to provide disclosures 
in electronic form, without having to comply with the consumer notice 
and consent procedures of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq., at the time 
an on-line or other electronic service is used. For example, commenters 
suggested, if a consumer wishes to make an on-line payment on the 
account, for which the creditor imposes a fee (which has not previously 
been disclosed), the creditor should be allowed to disclose the fee 
electronically, without E-Sign notice and consent, at the time the on-
line payment service is requested. Commenters contended that such a 
provision would not harm consumers and would expedite transactions, and 
also that it would be consistent with the Board's proposal to permit 
oral disclosure of such fees.
    Under section 101(c) of the E-Sign Act, if a statute or regulation 
requires that consumer disclosures be provided in writing, certain 
notice and consent procedures must be followed in order to provide the 
disclosures in electronic form. Accordingly because the disclosures 
under Sec.  226.5(a)(1)(ii)(A) are not required to be provided in 
writing, the Board proposed to add comment 5(a)(1)(ii)(A)-1 in May 2008 
to clarify that disclosures not required to be in writing may be 
provided in writing, orally, or in electronic form without regard to 
the consumer consent or other provisions of the E-Sign Act.
    Most commenters supported the Board's proposal. Some consumer group 
commenters, however, suggested that the Board require that any 
electronic disclosure be in a format that can be printed and retained. 
The Board declines to impose such a requirement. Disclosures that the 
Board permits to be made orally are not required to be in written or 
retainable form. The Board believes that the same standard should apply 
if such disclosures are made electronically. In order to clarify this 
point, the Board has amended Sec.  226.5(a)(1)(ii)(B) to specify that 
disclosures that need not be in writing also do not need to be in 
retainable form. This would encompass both oral and electronic 
disclosures.
5(a)(1)(iii)
    In a final rule addressing electronic disclosures published in 
November 2007 (November 2007 Final Electronic Disclosure Rule), the 
Board adopted amendments to Sec.  226.5(a)(1) to clarify 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. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, 
Dec. 14, 2007. These amendments also provide that the 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. These amendments have been moved to Sec.  
226.5(a)(1)(iii) for organizational purposes.
    Furthermore, in May 2008, the Board proposed comment 5(a)(1)(iii)-1 
to clarify that the disclosures specified in Sec.  226.5(a)(1)(ii)(A) 
also may be provided in electronic form without regard to the E-Sign 
Act when the consumer requests the service in electronic form, such as 
on a creditor's Web site. Consistent with the Board's decision to adopt 
comment 5(a)(1)(ii)(A)-1, as discussed above, the Board adopts comment 
5(a)(1)(iii)-1.
5(a)(2) Terminology
    Consistent terminology. As proposed in June 2007, disclosures 
required by the open-end provisions of Regulation Z (Subpart B) would 
have been required to use consistent terminology under proposed Sec.  
226.5(a)(2)(i). The Board also proposed comment 5(a)(2)-4 to 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.
    The Board received no comments objecting to this proposal. 
Accordingly, the Board adopts Sec.  226.5(a)(2)(i) and comment 5(a)(2)-
4 as proposed. The Board, however, received one comment requesting 
clarification on the implementation of this provision. Specifically, 
the commenter pointed out that creditors will likely phase in changes 
during a transitional period, and as a result, may not be able to align 
terminology in all their disclosures to consumers during this 
transitional period. The Board agrees; thus, some disclosures may 
contain existing terminology required currently under Regulation Z 
while other disclosures may contain new terminology required in this 
final rule or the final rules issued by the Board and other federal 
banking agencies published elsewhere in today's Federal Register. 
Therefore, during this transitional period, terminology need not be 
consistent across all disclosures. By the effective date of this rule, 
however, all disclosures must have consistent terminology.
    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) 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. Currently, 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 June 2007, the Board proposed to 
expand this list to include the account-opening disclosures that would 
be highlighted under proposed Sec.  226.6(b)(4) (adopted as Sec.  
226.6(b)(1) and (b)(2) below), the disclosure of the effective APR 
under proposed Sec.  226.7(b)(7) under one approach, 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), and the 
disclosures given when a rate is increased due to delinquency, default 
or as a penalty under proposed Sec.  226.9(g)(3)(ii). In addition, the 
Board sought comment in the June 2007 Proposal on ways to address 
criticism by the United States Government Accountability Office (GAO) 
that credit card disclosure

[[Page 5271]]

documents ``unnecessarily emphasized specific terms.'' \13\
---------------------------------------------------------------------------

    \13\ 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).
---------------------------------------------------------------------------

    As discussed in the June 2007 Proposal, the Board agreed with the 
GAO's assessment that overemphasis of these terms may make disclosures 
more difficult for consumers to read. One approach the Board had 
considered to remedy this problem was 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, the Board acknowledged in the June 
2007 Proposal that this approach could produce unintended consequences. 
Commenters agreed with the Board.
    Many industry commenters suggested that in light of the Board's 
requirement to disclose APRs and certain other finance charges at 
account-opening and at other times in the life of the account in a 
tabular format with a minimum 10-point font size pursuant to comment 
5(a)(1)-3 (or 16-point font size as required for the APR for purchases 
under Sec. Sec.  226.5a(b)(1) and 226.6(b)(2)), requiring the terms 
``annual percentage rate'' and ``finance charge'' to be more 
conspicuous than other disclosures to draw attention to the terms was 
not necessary. Furthermore, commenters pointed out that the Board is no 
longer requiring use of the term ``finance charge'' in TILA disclosures 
to consumers for open-end (not home-secured) plans, and in fact, is 
requiring creditors to disclose finance charges as either ``fees'' or 
``interest'' on periodic statements. As a result, creditors would, in 
many cases, no longer have the term ``finance charge'' to make more 
conspicuous than other terms.
    For the reasons discussed above, the Board is eliminating for open-
end (not home-secured) plans the requirement to disclose ``annual 
percentage rate'' and ``finance charge'' more conspicuously, using its 
authority under Section 105(a) of TILA to make ``such adjustments and 
exceptions for any class of transaction 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). Therefore, the requirement in Sec.  
226.5(a)(2)(ii) that ``annual percentage rate'' and ``finance charge'' 
be disclosed more conspicuously than any other required disclosures 
when disclosed with a corresponding amount or percentage rate applies 
only to home-equity plans subject to Sec.  226.5b. As is currently the 
case, even for home-equity plans subject to Sec.  226.5b, these terms 
need not be more conspicuous when used under Sec.  226.7(a)(4) on 
periodic statements and under section Sec.  226.16 in advertisements. 
Other exceptions currently in footnote 9 to Sec.  226.5(a)(2), which 
reference Sec. Sec.  226.5a and 226.9(e), have been deleted as 
unnecessary since these disclosures do not apply to home-equity plans 
subject to Sec.  226.5b. The requirement, as it applies to home-equity 
plans subject to Sec.  226.5b, may be re-evaluated when the Board 
conducts its review of the regulations related to home-equity plans.
    Use of the term ``grace period''. In the June 2007 Proposal, the 
Board proposed Sec.  226.5(a)(2)(iii) to require that the term ``grace 
period'' be used, as applicable, in any disclosure that must be in a 
tabular format under proposed Sec.  226.5(a)(3). The Board's proposal 
was meant to make other disclosures consistent with credit card 
applications and solicitations where use of the term ``grace period'' 
is required by TILA Section 122(c)(2)(C) and Sec.  226.5a(a)(2)(iii). 
15 U.S.C. 1632(c)(2)(C). Based on comments received as part of the June 
2007 Proposal and further consumer testing, the Board proposed in the 
May 2008 Proposal to delete Sec.  226.5a(a)(2)(ii) and withdraw the 
requirement to use the term ``grace period'' in proposed Sec.  
226.5(a)(2)(iii).
    As discussed in the section-by-section analysis to Sec.  
226.5a(b)(5), the Board is exercising its authority under TILA Sections 
105(a) and (f), and TILA Section 127(c)(5) to delete the requirement to 
use the term ``grace period'' in the table required by Sec.  226.5a. 15 
U.S.C. 1604(a) and (f), 1637(c)(5). The purpose of the proposed 
requirement was to provide consistency for headings in a tabular 
summary. Accordingly, the Board withdraws the requirement to use the 
term ``grace period'' in proposed Sec.  226.5(a)(2)(iii).
    Other required terminology. The Board proposed Sec.  
226.5(a)(2)(iii) in the June 2007 Proposal to provide 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. Therefore, the term 
``penalty APR'' would have been required when creditors 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)(1) and (b)(2) (proposed 
as Sec.  226.6(b)(4)), if the penalty rate is changing, in the summary 
table given on or with a 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).
    Commenters were generally supportive of the Board's efforts to 
develop some common terminology and the Board's proposal to require use 
of the term ``penalty APR'' to describe an increased rate resulting 
from the occurrence of one or more specific events. Some industry 
commenters, however, urged the Board to reconsider requiring use of the 
term ``penalty APR,'' especially when used to describe the loss of an 
introductory rate or promotional rate. As discussed in the June 2007 
Proposal, the term ``penalty APR'' proved the most successful of the 
terms tested with participants in the Board's consumer testing efforts. 
In the interest of uniformity, the Board adopts the provision as 
proposed, with one exception for promotional rates. To prevent consumer 
confusion over use of the term ``penalty rate'' to describe the loss of 
a promotional rate where the rate applied is the same or is calculated 
in the same way as the rate that would have applied at the end of the 
promotional period, the Board is amending proposed Sec.  
226.5(a)(2)(iii) to provide that the term ``penalty APR'' need not be 
used in reference to the APR that applies with the loss of a 
promotional rate, provided the APR that applies is no greater than the 
APR that would have applied at the end of the promotional period; or if 
the APR that applies is a variable rate, the APR is calculated using 
the same index and margin as would have been used to calculate the APR 
that would have applied at the end of the promotional period. In 
addition, the Board is also modifying the required disclosure related 
to the loss of an introductory rate as discussed below in the section-
by-section analysis to Sec.  226.5a, which should also address these 
concerns.
    Under the June 2007 Proposal, proposed Sec.  226.5(a)(2)(iii) also 
would have provided that 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, the term ``required'' shall be used in describing the 
coverage and the program shall be identified by its name. No comments 
were received on this provision, and the provision is adopted as 
proposed.

[[Page 5272]]

    Consistent with the Board's proposal under the advertising rules in 
the June 2007 Proposal, proposed Sec.  226.5(a)(2)(iii), would have 
provided that if required to be disclosed in a tabular format, an APR 
may be described as ``fixed,'' or using 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 to describe the rate 
unless the rate remains in effect unconditionally until the plan is 
closed. The final rule adopts Sec.  226.5(a)(2)(iii) as proposed, 
consistent with the Board's decision with respect to use of the term 
``fixed'' in describing an APR stated in an advertisement, as further 
discussed in the section-by-section analysis to Sec.  226.16(f) below.
5(a)(3) Specific Formats
    As proposed in June 2007, for clarity, the 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 have been consolidated in Sec.  226.5(a)(3) as proposed. 
In addition, as discussed below, the Board is requiring certain 
account-opening disclosures, periodic statement disclosures and 
subsequent disclosures, such as change-in-terms disclosures, to be 
provided in specific formats under Sec.  226.6(b)(1); Sec.  226.7(b)(6) 
and (b)(13); and Sec.  226.9(b), (c) and (g). The final rule includes 
these special format rules in Sec.  226.5(a)(3), as proposed in the 
June 2007 Proposal, with one exception. Because the Board is not 
requiring disclosure of the effective APR pursuant to Sec.  
226.7(b)(7), as discussed further in the general discussion on the 
effective APR in the section-by-section analysis to Sec.  226.7(b), the 
proposed special format rule relating to the effective APR is not 
contained in the final rule.
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
    Creditors are required to make certain disclosures to consumers 
``before opening any account.'' TILA Section 127(a) (15 U.S.C. 
1637(a)). Under Sec.  226.5(b)(1), these disclosures, as identified in 
Sec.  226.6, must be furnished ``before the first transaction is made 
under the plan,'' which the Board has interpreted as ``before the 
consumer becomes obligated on the plan.'' Comment 5(b)(1)-1. There are 
limited circumstances under which creditors may provide the disclosures 
required by Sec.  226.6 after the first transaction, and the Board 
proposed in the June 2007 Proposal to move this guidance from comment 
5(b)(1)-1 to proposed Sec.  226.5(b)(1)(iii)-(v). In the May 2008 
Proposal, the Board proposed additional revisions to Sec.  
226.5(b)(1)(iv) regarding membership fees.
    The Board also proposed revisions in the June 2007 Proposal 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. Furthermore, the Board proposed additional 
guidance on providing timely disclosures when the first transaction is 
a balance transfer. Finally, technical revisions were proposed to 
change references from ``initial'' disclosures required by Sec.  226.6 
to ``account-opening'' disclosures, without any intended substantive 
change.
5(b)(1)(i) General Rule
    Creditors generally must provide the account-opening disclosures 
before the first transaction is made under the plan. The renumbering of 
this rule as Sec.  226.5(b)(1)(i) is adopted as proposed in the June 
2007 Proposal.
    Balance transfers. Under existing commentary and consistent with 
the general rule on account-opening disclosures, creditors must provide 
account-opening disclosures before a balance transfer occurs. In the 
June 2007 Proposal, the Board proposed to update this commentary to 
reflect current business practices. As the Board discussed in the June 
2007 Proposal, some 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 are approved for the transfer later receive account-opening 
disclosures, including the actual APR that will apply to the 
transferred balance. The Board proposed to clarify in comment 
5(b)(1)(i)-5 that a creditor must provide disclosures sufficiently in 
advance of the balance transfer to allow the consumer to review and 
respond to the terms that will apply to the transfer, including to 
contact the creditor before the balance is transferred and decline the 
transfer. The Board, however, did not propose a specific time period 
that would be considered ``sufficiently in advance.''
    Industry commenters indicated that following the Board's guidance 
would cause delays in making transfers, which would be contrary to 
consumer expectations that these transfers be effected quickly. A 
consumer group commenter suggested that requiring the APR that will 
apply, as opposed to allowing a range, to be disclosed on the 
application or solicitation would be simpler. The Board notes that 
creditors may, at their option, provide account-opening disclosures, 
including the specific APRs, along with the balance transfer offer and 
account application to avoid delaying the transfer.
    The Board believes that, consistent with the general rule, 
consumers should receive account-opening information, including the APR 
that will apply, before the first transaction, which is the balance 
transfer. Comment 5(b)(1)(i)-5 is adopted as proposed, and states that 
a creditor must provide 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 
creditor and withdraw the request. The Board has made one revision to 
comment 5(b)(1)(i)-5 as adopted. In response to commenters' requests 
for additional guidance, comment 5(b)(1)(i)-5 provides a safe harbor 
that may be used by creditors that permit a consumer to decline the 
balance transfer by telephone. In such cases, a creditor has provided 
sufficient time to the consumer to contact the creditor and withdraw 
the request if the creditor does not effect the balance transfer until 
10 days after the creditor has sent out information, assuming the 
consumer has not canceled the transaction.
    Disclosure before the first transaction. Comment 5(b)(1)-1, 
renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal, addresses 
a creditor's general duty to provide account-opening disclosures 
``before the first transaction.'' In the May 2008 Proposal, the comment 
was proposed to be reorganized for clarity to provide existing examples 
of ``first transactions'' related to purchases and cash advances. Other 
guidance in current comment 5(b)(1)-1 was proposed to be amended and 
moved to proposed Sec.  226.5(b)(1)(iv) and associated commentary in 
the June 2007 and May 2008 Proposals, as discussed below in the 
section-by-section analysis to Sec.  226.5(b)(1)(iv).
    The Board did not receive comment on the proposed reorganization 
but received many comments on the guidance that was amended and moved 
to proposed Sec.  226.5(b)(1)(iv). These comments are discussed below 
in the section-by-section analysis to Sec.  226.5(b)(1)(iv). Some 
consumer group commenters noted that the Board's reorganization of this 
comment made them realize that they opposed current guidance on cash 
advances in comment 5(b)(1)-1 (now renumbered as comment 5(b)(1)(i)-1), 
which permits creditors to

[[Page 5273]]

provide account-opening disclosures along with the first cash advance 
check as long as the consumer can return the cash advance without 
obligation. The Board continues to believe that this approach is 
appropriate because of the lack of harm to consumers. Therefore, the 
Board declines to amend its current guidance on cash advances in 
comment 5(b)(1)(i)-1, which is renumbered as proposed without 
substantive change.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured) 
Plan
    Under the June 2007 Proposal, the Board proposed in new Sec.  
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 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) (adopted as Sec.  226.6(b)(2)), from 
the requirement to disclose charges before the first transaction. 
Creditors would have been permitted, at their option, to disclose those 
charges either before the first transaction or later, so long as they 
were disclosed before the cost was imposed. The current rule requiring 
the disclosure of costs before the first transaction (in writing and in 
a retainable form) would have continued to apply to certain specified 
costs. 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.
    Numerous industry commenters supported the Board's proposal. 
Consumer group commenters, on the other hand, opposed the Board's 
proposal, arguing that all charges should be required to be disclosed 
at account opening before the first transaction. While consumer group 
commenters acknowledged that disclosure of the amount of the fee at a 
time when the consumer is about to incur it is a good business 
practice, the commenters indicated that the Board's proposal would 
encourage creditors to create new fees that are not specified to be 
given in writing at account-opening. The final rule adopts Sec.  
226.5(b)(1)(ii) and comment 5(b)(1)(ii)-1 largely as proposed with some 
clarifying amendments and additional illustrative examples.
    As the Board discussed in the June 2007 Proposal, the charges 
covered by the proposed exception from disclosure at account opening 
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-terms 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. The rule would allow flexibility in the 
timing of certain cost disclosures by permitting creditors to disclose 
such charges--orally or in writing--before the fee is imposed. As a 
result, creditors would be disclosing the charge when the consumer is 
deciding whether to take the action that would trigger the charge, such 
as purchasing a service, which is a time at which consumers would 
likely notice the charge. The Board intends to continue monitoring 
credit card fees and practices, and could add additional fees to the 
specified costs that must be disclosed in the account-opening table 
before the first transaction, as appropriate.
    In addition, as discussed in the June 2007 Proposal, the Board 
believes the exception may facilitate compliance by creditors. 
Determining whether charges are a finance charge or an other charge or 
not covered by TILA (and thus whether advance notice is required) can 
be challenging, and the rule reduces these uncertainties and risks. The 
creditor will not have to determine whether a charge is a finance 
charge or other charge or not covered by TILA, so long as the creditor 
discloses the charge, orally or in writing, before the consumer becomes 
obligated to pay it, which creditors, in general, already do for 
business and other legal reasons.
    Electronic Disclosures. In the May 2008 Proposal, the Board 
proposed to revise comment 5(b)(1)(ii)-1 to clarify that for 
disclosures not required to be provided in writing at account opening, 
electronic disclosure, without regard to the E-Sign Act notice and 
consent requirements, is a permissible alternative to oral or written 
disclosure, when a consumer requests a service in electronic form, such 
as on a creditor's Web site. As discussed in the section-by-section 
analysis to comment 5(a)(1)(ii)(A)-1 above, the Board received many 
comments in support of permitting electronic disclosure, without regard 
to the E-Sign Act notice and consent requirements, for disclosures that 
are not required to be provided in writing at account opening. Some 
consumer group commenters objected to allowing any electronic 
disclosure without the protections of the E-Sign Act. As discussed in 
the May 2008 Proposal, since the disclosure of charges imposed as part 
of an open-end (not home-secured) plan, other than those specified in 
Sec.  226.6(b)(2), are not required to be provided in writing, the 
Board believes that E-Sign notice and consent requirements do not apply 
when the consumer requests the service in electronic form. The revision 
to comment 5(b)(1)(ii)-1 proposed in May 2008 is adopted as proposed.
5(b)(1)(iii) Telephone Purchases
    In the June 2007 Proposal, the Board proposed Sec.  
226.5(b)(1)(iii) to address situations where a consumer calls a 
merchant to order goods by telephone and concurrently establishes a new 
open-end credit plan to finance that purchase. Because TILA account-
opening disclosures must be provided before the first transaction under 
the current timing rule, merchants must delay the shipment of goods 
until a consumer has received the disclosures. Consumers who want goods 
shipped immediately may use another method to finance the purchase, but 
they may lose any incentives the merchant may offer with opening a new 
plan, such as discounted purchase prices or promotional payment plans. 
The Board's proposal was meant to provide additional flexibility to 
merchants and consumers in such cases.
    Under proposed Sec.  226.5(b)(1)(iii), merchants that established 
an open-end plan in connection with a telephone purchase of goods 
initiated by the consumer would have been able to provide account-
opening disclosures as soon as reasonably practicable after the first 
transaction if the merchant (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 merchant would 
have been able to delay shipping the goods until after the account 
disclosures have been provided.
    The Board also proposed comment 5(b)(1)(iii)-1 to provide that a 
return policy is 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 includes returns via the United States 
Postal Service for goods delivered by private couriers. The proposed 
commentary also clarified that retailers' policies regarding the return 
of merchandise need not provide a right to return goods if the consumer 
consumes or damages the goods. As discussed in

[[Page 5274]]

the June 2007 Proposal, the regulation and commentary would not have 
affected merchandise purchased after the plan was initially established 
or purchased by another means of financing, such as a credit card 
issued by another creditor.
    Consumer group commenters opposed the proposal arguing that 
providing a right to cancel is much less protective of consumers' 
rights than requiring that a consumer receive disclosures before goods 
are shipped. As discussed above and in the June 2007 Proposal, the 
Board believes proposed Sec.  226.5(b)(1)(iii) would provide consumers 
with greater flexibility. Consumers may have their goods shipped 
immediately, and in some cases, take advantage of merchant incentives, 
such as discounted purchase prices or promotional payment plans, but 
still retain the right to reject the plan, without cost, after 
receiving account-opening disclosures.
    Industry commenters were supportive of the Board's proposal, but 
several commenters asked for additional extensions or clarifications to 
the policy. First, commenters requested clarification that the 
exception is available for third-party creditors that are not 
retailers, arguing that few merchants are themselves creditors and that 
the same flexibility should be available to creditors offering private 
label or co-brand credit arrangements in connection with the purchase 
of a merchant's goods. The Board agrees, and revisions have been made 
to Sec.  226.5(b)(1)(iii) accordingly. Industry commenters also 
suggested that the provision in Sec.  226.5(b)(1)(iii) be available not 
only for telephone purchases ``initiated by the consumer,'' but also 
telephone purchases where the merchant contacts the consumer. Outbound 
calls to a consumer may raise many telemarketing issues and concerns 
about questionable marketing tactics. As a result, the Board declines 
to extend Sec.  226.5(b)(1)(iii) to telephone purchases that have not 
been initiated by the consumer.
    A few industry commenters also suggested that this exception be 
available for all creditors opening an account by telephone, regardless 
of whether it is in connection with the purchase of goods or not. These 
commenters stated that for certain consumers, such as active duty 
military members, immediate use of the account after it is opened may 
be necessary to take care of personal or family needs. The Board notes 
that the exception under Sec.  226.5(b)(1)(iii) turns on the ability of 
consumers to return any goods financed under the plan free of cost 
after receiving the written disclosures required by Sec.  226.6. In the 
case of an account opened by telephone that is not in connection with 
the purchase of goods from the creditor or an affiliated third party, a 
creditor would likely have no way to reverse any purchases or other 
transactions made before the disclosures required by Sec.  226.6 are 
received by the consumer should the consumer wish to reject the plan if 
the purchase was made with an unaffiliated third party. Thus, the Board 
declines to extend Sec.  226.5(b)(1)(iii) to accounts opened by 
telephone that are not in connection with the contemporaneous purchase 
of goods.
    The Board also received comments requesting that Sec.  
226.5(b)(1)(iii) be made applicable to the on-line purchase of goods or 
that merchants have the option to refer consumers purchasing by 
telephone to a Web site to obtain disclosures required by Sec.  226.6. 
This issue has been addressed in the November 2007 Final Electronic 
Disclosure Rule. The E-Sign Act clearly states that any consumer to 
whom written disclosures are required to be given must affirmatively 
consent to the use of electronic disclosures before such disclosures 
can be used in place of paper disclosures. The November 2007 Final 
Electronic Disclosure Rule created certain instances where E-Sign 
consent does not need to be obtained before disclosures may be provided 
electronically. Specifically, open-end credit disclosures required by 
Sec. Sec.  226.5a (credit card applications and solicitations), 226.5b 
(HELOC applications), and 226.16 (open-end credit advertising) 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 of the E-Sign Act. Disclosures required by Sec.  
226.6, however, may only be provided electronically if the creditor 
obtains consumer consent consistent with the E-Sign Act. 72 FR 63462, 
Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
    The Board also received comments requesting clarification of the 
return policy; in particular, whether this would cause creditors to 
provide those consumers who open a new credit plan concurrently with 
the purchase of goods over the telephone with a different return policy 
from other customers. For example, assume a merchant's customers are 
normally charged a restocking fee for returning goods, and the merchant 
does not wish to wait until the disclosures under Sec.  226.6 are sent 
out before shipping the goods. A commenter asked whether this means 
that a customer opening a new credit plan concurrently with the 
purchase of goods over the telephone is exempted from paying that 
restocking fee if the goods are returned. As proposed in the June 2007 
Proposal, the final rule requires that in order to use the exception 
from providing disclosures under Sec.  226.6 before the consumer 
becomes obligated on the account, the consumer must have sufficient 
time to reject the plan and return the items free of cost after 
receiving the written disclosures required by Sec.  226.6. This means 
that there can be no cost to the consumer for returning the goods even 
if for the merchant's other customers, a fee is normally charged. As 
the Board discussed in the June 2007 Proposal, merchants always have 
the option to delay shipping of the goods until after the disclosures 
are given if the merchant does not want to maintain a potentially 
different return policy for consumers opening a new credit plan 
concurrently with the purchase of goods over the telephone.
    Commenters also requested guidance on what would be considered 
``sufficient time'' for the consumer to reject the plan and return the 
goods. Because the amount of time that would be deemed to be sufficient 
would depend on the nature of the goods and the transaction, and the 
locations of the various parties to the transaction, the Board does not 
believe that it is appropriate to specify a particular time period 
applicable to all transactions.
    The Board also received requests for other clarifications. One 
commenter suggested that the Board expressly acknowledge that if the 
consumer rejects the credit plan, the consumer may substitute another 
reasonable form of payment acceptable to the merchant other than the 
credit plan to pay for the goods in full. This clarification has been 
included in comment 5(b)(1)(iii)-1. Furthermore, this commenter also 
suggested that the exception in comment 5(b)(1)(iii)-1 allowing for no 
return policy for consumed or damaged goods should be revised to 
expressly cover installed appliances or fixtures, provided a reasonable 
repair or replacement policy covers defective goods or installations. 
The Board concurs and changes have been made to comment 5(b)(1)(iii)-1 
accordingly.
5(b)(1)(iv) Membership Fees
    TILA Section 127(a) requires creditors to provide specified 
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. 
Currently and under the June 2007 and

[[Page 5275]]

May 2008 Proposals, creditors may collect or obtain the consumer's 
promise to pay a membership fee before the account-opening disclosures 
are provided, if the consumer can reject the plan after receiving the 
disclosures. If a consumer rejects the plan, the creditor must promptly 
refund the fee if it has been paid or take other action necessary to 
ensure the consumer is not obligated to pay the fee. In the June 2007 
Proposal, guidance currently in comment 5(b)(1)-1 about creditors' 
ability to assess certain membership fees before consumers receive the 
account-opening disclosures was moved to Sec.  226.5(b)(1)(iv).
    In the June 2007 and May 2008 Proposals, the Board proposed 
clarifications to the consumer's right not to pay membership fees that 
were assessed or agreed to be paid before the consumer received 
account-opening disclosures, if a consumer rejects a plan after 
receiving the account-opening disclosures. In the May 2008 Proposal, 
the Board proposed in revised Sec.  226.5(b)(1)(iv) and new comment 
5(b)(1)(iv)-1 that ``membership fee'' has the same meaning as fees for 
issuance or availability of a credit or charge card under Sec.  
226.5a(b)(2), including annual or other periodic fees, or ``start-up'' 
fees, such as account-opening fees. The Board also proposed in the May 
2008 Proposal under revised Sec.  226.5(b)(1)(iv) to clarify that if a 
consumer rejects an open-end (not home-secured) plan as permitted under 
that provision, consumers are not obligated to pay any membership fee, 
or any other fee or charge (other than an application fee that is 
charged to all applicants whether or not they receive the credit).
    Some consumer group commenters opposed the Board's clarification on 
the term ``membership fee'' and argued that the definition could expand 
the ability of creditors to charge additional types of fees prior to 
sending out account-opening disclosures. These consumer group 
commenters, however, supported that the Board's clarification could 
allow for a greater number of fees that consumers would not be 
obligated to pay should they reject the plan. One industry commenter 
opposed the Board's reference to annual fees as ``membership fees.'' 
The Board notes that the term ``membership fee'' is not currently 
defined, and, therefore, there is little guidance as to what fees would 
be covered by that term. As discussed in the May 2008 Proposal, the 
Board proposed that ``membership fee'' have the same meaning as fees 
for issuance or availability under Sec.  226.5a(b)(2) for consistency 
and ease of compliance. The Board continues to believe this 
clarification is warranted, and Sec.  226.5(b)(1)(iv) is adopted 
generally as proposed, with one change discussed below.
    The final rule expands the types of fees for which consumers must 
not be obligated if they reject an open-end (not home-secured) plan as 
permitted under Sec.  226.5(b)(1)(iv) to include application fees 
charged to all applicants. The Board believes that it is important that 
consumers have the opportunity, after receiving the account-opening 
disclosures which set forth the fees and other charges that will be 
applicable to the account, to reject the plan without being obligated 
for any charges. It is the Board's understanding that some creditors 
may debit application fees to the account, and thus these fees should 
be treated in the same manner as other fees debited at account opening. 
Conforming changes have been made to Sec.  226.5a(d)(2).
    Furthermore, in May 2008, the Board proposed to revise and move to 
comment 5(b)(1)(iv)-2, guidance in current comment 5(b)(1)-1 
(renumbered as comment 5(b)(1)(i)-1 in the June 2007 Proposal) 
regarding instances when a creditor may consider an account not 
rejected. In the May 2008 Proposal, the Board proposed to revise the 
guidance to provide that a consumer who has received the disclosures 
and uses the account, or makes a payment on the account after receiving 
a billing statement, is deemed not to have rejected the plan. In the 
May 2008 Proposal, the Board also proposed to provide a ``safe harbor'' 
that a creditor may deem the plan to be rejected if, 60 days after the 
creditor mailed the account-opening disclosures, the consumer has not 
used the account or made a payment on the account.
    The Board received mixed comments on the 60 day ``safe harbor'' 
proposal. Some industry commenters opposed the ``safe harbor'' citing 
operational complexity and uncertainty in account administration 
procedures. Some consumer group commenters and an industry trade group 
commenter supported the Board's proposal. These commenters also 
suggested that the Board either require or encourage as a ``best 
practice'' a notice to be given to consumers stating that inactivity 
for 60 days will cause an account to be closed. After considering 
comments on the proposal, the Board is amending comment 5(b)(1)(iv)-2 
to delete the 60 day ``safe harbor'' because the Board believes the 
potential confusion this guidance may cause and the operational 
difficulties the guidance could impose outweigh the benefits of the 
guidance.
    In the June 2007 Proposal, the Board proposed to provide guidance 
in comment 5(b)(1)(i)-1 on what it means to ``use'' the account. The 
June 2007 proposed clarification was intended to address concerns about 
some subprime card accounts that assess a large number of fees at 
account opening. In the May 2008 Proposal, this provision was moved to 
new proposed comment 5(b)(1)(iv)-3 and revised to clarify that a 
consumer does not ``use'' an account when the creditor assesses fees to 
the account (such as start-up fees or fees associated with credit 
insurance or debt cancellation or suspension programs agreed to as a 
part of the application and before the consumer receives account-
opening disclosures). The May 2008 Proposal also clarified in comment 
5(b)(1)(iv)-3 that the consumer does not ``use'' an account when, for 
example, a creditor sends a billing statement with start-up fees, there 
is no other activity on the account, the consumer does not pay the 
fees, and the creditor subsequently assesses a late fee or interest on 
the unpaid fee balances. In the May 2008 Proposal, the Board also 
proposed to add that a consumer is not considered to ``use'' an account 
when, for example, a consumer receives a credit card in the mail and 
calls to activate the card for security purposes.
    The Board received several comments regarding the guidance on 
whether activation of the card constitutes ``use'' of the account. Some 
commenters supported the Board's proposed guidance. Other commenters 
opposed the proposal noting that a consumer will have received account-
opening disclosures at the time the consumer activates the card. These 
commenters also stated that when a consumer affirmatively activates a 
card, it should constitute acceptance of the account. Some consumer 
group commenters suggested that the Board also include guidance that 
payment of fees on the first billing statement should not constitute 
acceptance of the account and that consumers should only be considered 
to have used an account by affirmatively using the credit, such as by 
making a purchase or obtaining a cash advance.
    The Board is adopting comment 5(b)(1)(iv)-3 as proposed with one 
modification. The Board believes that what constitutes ``use'' of the 
account should be consistent with consumer understanding of the term. A 
consumer is likely to think he or she has not ``used'' the account if 
the only action he or she has taken is to activate the account. 
Conversely, a consumer who has made a purchase or a payment on the 
account would likely believe that he

[[Page 5276]]

or she is ``using'' the account. The Board, however, is amending the 
comment to delete the phrase ``such as for security purposes'' in 
relation to the discussion about card activation. One industry 
commenter, while supportive of the Board's general guidance that 
activation alone does not indicate a consumer's acceptance of a credit 
plan, was concerned about any suggestion that a customer should 
activate, for security purposes, an account that a consumer does not 
intend to use.
    In technical revisions, comment 5(b)(1)-1, renumbered as comment 
5(b)(1)(i)-1 in the June 2007 Proposal, currently addresses a 
creditor's general duty to provide account-opening disclosures ``before 
the first transaction'' and provides that HELOCs are not subject to the 
prohibition on the payment of fees other than application or refundable 
membership fees before account-opening disclosures are provided. See 
Sec.  226.5b(h) regarding limitations on the collection of fees. In the 
May 2008 Proposal, the existing guidance about HELOCs was moved to 
revised Sec.  226.5(b)(1)(iv) and a new comment 5(b)(1)(iv)-4 for 
clarity. The Board received no comment on the proposed reorganization, 
and the reorganization of the guidance regarding HELOCs is adopted as 
proposed.
5(b)(2) Periodic Statements
    TILA Sections 127(b) and 163 set forth the timing requirements for 
providing periodic statements for open-end credit accounts. 15 U.S.C. 
1637(b) and 1666b. In the June 2007 Proposal, the Board proposed to 
retain the existing regulation and commentary related to the timing 
requirements for providing periodic statements for open-end credit 
accounts, with a few changes and clarifications as 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. 15 U.S.C. 1637(b). 
Section 226.5(b)(2)(i) provides for a number of exceptions to a 
creditor's duty to send periodic statements.
    De minimis amounts. Under the current regulation, creditors need 
not send periodic statements if an account balance, whether debit or 
credit, is $1 or less and no finance charge is imposed. The Board 
proposed no changes to and received no comments on this provision. As a 
result, the Board retains this provision as currently written.
    Uncollectible accounts. Creditors are not required to send periodic 
statements on accounts the creditor has deemed ``uncollectible,'' which 
is not specifically defined. In the June 2007 Proposal, the Board 
sought comment on whether guidance on the term ``uncollectible'' would 
be helpful.
    Commenters to the June 2007 Proposal stated that guidance would be 
helpful but differed on what that guidance should be. Several consumer 
group commenters suggested that an account should be deemed 
``uncollectible'' only when a creditor has ceased collection efforts, 
either directly or through a third party. These commenters stated that 
for a consumer whose account is delinquent but still subject to 
collection, a periodic statement is important to show the consumer when 
and how much interest is accruing and whether the consumer's payments 
have been credited. Industry commenters suggested instead that an 
account should be deemed ``uncollectible'' once the account is charged 
off in accordance with loan-loss provisions.
    Based on the plain language of the term ``uncollectible'' and the 
importance of periodic statements to show consumers when interest 
accrues or fees are assessed on the account, the Board is adopting new 
comment 5(b)(2)(i)-3 (accordingly, as discussed below comment 
5(b)(2)(i)-3 as proposed in the June 2007 Proposal is adopted as 
5(b)(2)(i)-4). The comment clarifies that an account is 
``uncollectible'' when a creditor has ceased collection efforts, either 
directly or through a third party.
    In addition, if an account has been charged off in accordance with 
loan-loss provisions and the creditor no longer accrues new interest or 
charges new fees on the account, the Board believes that the value of a 
periodic statement does not justify the cost of providing the 
disclosure because the amount of a consumer's obligation will not be 
increasing. As a result, the Board is modifying Sec.  226.5(b)(2)(i) to 
state that in such cases, the creditor also need not provide a periodic 
statement. However, this provision does not apply if a creditor has 
charged off the account but continues to accrue new interest or charge 
new fees.
    Instituting collection proceedings. Creditors need not send 
statements if ``delinquency collection proceedings have been 
instituted'' under Sec.  226.5(b)(2)(i). In the June 2007 Proposal, the 
Board proposed 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. Several consumer groups strongly supported the Board's 
proposal while industry commenters recommended that the Board provide 
greater flexibility in interpreting when delinquency collection 
proceedings have been instituted. In particular, an industry commenter 
stated that the minimum payment warning could conflict with the 
creditor's collection demand and create consumer confusion. 
Nonetheless, as discussed in more detail in the section-by-section 
analysis to Sec.  226.7(b)(12), the minimum payment disclosure is not 
required where a fixed repayment period has been specified in the 
account agreement, such as 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.
    The Board believes that clarifying that a collection proceeding 
entails the filing of a court action or other adjudicatory process with 
a third party provides clear and uniform guidance to creditors as to 
when periodic statements are no longer required. Accordingly, the Board 
adopts the comment as proposed, though for organizational purposes, the 
comment is renumbered as comment 5(b)(2)(i)-4.
    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 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.'' Comment 17(b)-2.
    To provide flexibility and reduce burden and uncertainty, the Board 
proposed to clarify in the June 2007 Proposal 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 comply with the open-end provisions 
for the work-out period. The Board received only one comment concerning 
workout arrangements, which supported the Board's proposal. Therefore, 
amendments to comment 5(b)(2)(i)-2 are adopted as proposed.
5(b)(2)(ii)
    TILA Section 163(a) requires creditors that provide a grace period 
to send statements at least 14 days before the

[[Page 5277]]

grace period ends. 15 U.S.C. 1666b(a). 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. As 
discussed in the June 2007 Proposal, the Board has anecdotal evidence 
that some consumers receive statements relatively close to the payment 
due date, which leaves consumers with little time to review the 
statement before payment must be mailed to meet the due date. As a 
result, the Board requested comment on (1) whether it should recommend 
to Congress that the 14-day period be increased to a longer time 
period, so that consumers 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.
    The Board received numerous comments on this issue. Consumer and 
consumer group commenters complained that the time period from when 
consumers received their statements to the payment due date was too 
short, causing consumers often to incur late fees and lose the benefit 
of the grace period, and creditors to raise consumers' rates to the 
penalty rate. Industry commenters, on the other hand, stated that the 
14-day period under TILA Section 163(a) was appropriate and that the 
Board should not recommend a longer time frame to Congress.
    Based in part on these comments, the Board and other federal 
banking agencies proposed in May 2008 to prohibit institutions from 
treating a payment as late for any purpose unless the consumer has been 
provided a reasonable amount of time to make that payment. Treating a 
payment as late for any purpose includes increasing the APR as a 
penalty, reporting the consumer as delinquent to a credit reporting 
agency, or assessing a late or any other fee based on the consumer's 
failure to make payment within the amount of time provided. 73 FR 
28904, May 19, 2008. The Board is opting not to address the 14-day 
period under TILA Section 163(a) and is retaining Sec.  226.5(b)(2)(ii) 
as currently written. Consumer comment letters mainly focused on the 
due date with respect to having their payments credited in time to 
avoid a late fee and an increase in their APR to the penalty rate and 
not with the loss of a grace period. Therefore, the Board has chosen to 
address these concerns in final rules issued by the Board and other 
federal banking agencies published elsewhere in today's Federal 
Register.
    Technical Revisions. Changes conforming with final rules issued by 
the Board and other federal banking agencies published elsewhere in 
today's Federal Register have been made to comment 5(b)(2)(ii)-1. In 
addition, the substance of comment 5(c)-4, which was inadvertently 
placed as commentary to Sec.  226.5(c), has been moved and renumbered 
as comment 5(b)(2)(ii)-2.
5(b)(2)(iii)
    As proposed in the June 2007 Proposal, 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.
    In the June 2007 Proposal, the Board did not propose any changes to 
these provisions, except the addition of 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).) No comments were received on comment 5(d)-3. The Board 
adopts this comment as proposed. In addition, comment 5(c)-4 is 
redesignated as comment 5(b)(2)(ii)-2 to correct a technical error in 
placement.

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.\14\ 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.
---------------------------------------------------------------------------

    \14\ 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 section of the supplementary information 
will refer to ``credit cards'' which includes charge cards.
---------------------------------------------------------------------------

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. In the June 2007 Proposal, the Board 
proposed to retain this comment, but to revise it to account for 
proposed revisions to Sec.  226.6. Specifically, the Board proposed 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. See 
proposed Sec.  226.6(b)(4). The account-opening table is substantially 
similar to the table required by Sec.  226.5a, but the content required 
is not identical. The account-opening table requires information that 
is not required in the Sec.  226.5a table, such as a reference to 
billing error rights. The Board adopts this comment provision as 
proposed, except for one technical edit which is discussed in the 
section-by-section analysis to Sec.  226.5a(d)(2). Commenters on the 
June 2007 Proposal generally supported the proposed comment allowing 
the account-opening summary table to substitute for the table required 
by Sec.  226.5a. For various reasons, card issuers may want to provide 
the account-opening disclosures with the card application or 
solicitation. To ease compliance burden on issuers, this comment allows 
them to provide the account-opening summary table in lieu of the table 
containing the Sec.  226.5a disclosures. Otherwise, issuers in these 
circumstances would be required to provide the table required by Sec.  
226.5a and the account-opening table. In addition, allowing issuers to 
substitute the account-opening table for the table required by Sec.  
226.5a would not undercut consumers' ability to compare the terms of 
two credit card accounts where one issuer provides the account-opening 
table and the other issuer provides the table required by Sec.  226.5a,

[[Page 5278]]

because the two tables are substantially similar.
    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 for 
the Sec.  226.5a disclosures. In the June 2007 Proposal, the Board 
proposed 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 have been deleted as 
unnecessary. The Board proposed to add comment 5a-3 to cross reference 
the clear and conspicuous guidance in comment 5(a)(1)-1. The final rule 
deletes current comment 5a(a)(2)-1 and adds comment 5a-3 as proposed.
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 or charge 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. In June 2007, the Board proposed to amend the 
definition of ``solicitation'' in Sec.  226.5a(a)(1) to clarify that 
such ``firm offers of credit'' for credit cards are solicitations for 
purposes of Sec.  226.5a. The final rule adopts the amendment to Sec.  
226.5a(a)(1) as proposed. 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. In the June 2007 Proposal, the Board also 
proposed 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 adopts comment 5a(a)(1)-1 as 
proposed. 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, 
comment 5a(a)(1)-1 clarifies that this ``invitation to apply'' is not 
covered by Sec.  226.5a unless the contact itself includes (1) an 
application form in a direct mailing, electronic communication or 
``take-one''; (2) an oral application in a telephone contact initiated 
by the card issuer; or (3) an application in an in-person contact 
initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
    Table must be substantially similar to model and sample forms in 
Appendix G-10. Currently and under the June 2007 Proposal, Sec.  
226.5a(a)(2)(i) provides that when making disclosures that are required 
to be disclosed in a table, issuers must use headings, content and 
format for the table substantially similar to any of the applicable 
tables found in Appendix G-10 to part 226. In response to the June 2007 
Proposal, several consumer groups suggested that the Board explicitly 
require that the disclosures be made in the order shown on the proposed 
model and sample forms in Appendix G-10 to part 226. These consumer 
groups also suggested that the Board require issuers to use the 
headings for the rows provided in the proposed model and sample form in 
Appendix G to part 226, and not allow issuers to use headings that are 
``substantially similar'' to the ones in the model and sample forms. 
The final rule adopts Sec.  226.5a(a)(2)(i), as proposed. The Board 
believes that issuers may need flexibility to change the order of the 
disclosures or the headings for the row provided in the table, such as 
to accommodate differences in account terms that may be offered on 
products and different terminology used by the issuer to describe those 
account terms. In addition, as discussed elsewhere in the section-by-
section analysis to Appendix G, the Board is permitting creditors in 
some circumstances to combine rows for APRs or fees, when the amount of 
the fee or rate is the same for two or more types of transactions. The 
Board believes that the ``substantially similar'' standard is 
sufficient to ensure uniformity of the tables used by different 
issuers.
    In response to the June 2007 Proposal, several commenters suggested 
changes to the formatting of the proposed model and sample forms in 
Appendix G-10 to part 226. These comments are discussed in the section-
by-section analysis to Appendix G.
    Fees for late payment, over-the-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-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 June 2007 Proposal, the Board proposed to amend Sec.  
226.5a(a)(2)(i) to require that these fees be disclosed in the table. 
In addition, the Board proposed to delete current Sec.  
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers 
to place the fees outside the table.
    The Board adopts Sec.  226.5a(a)(2)(i) and deletes current Sec.  
226.5a(a)(2)(ii) and comment 5a(a)(2)-5 as proposed. The final rule 
amends Sec.  226.5a(a)(2)(i) to require these fees to be disclosed in 
the table, so that consumers can easily identify them. In the consumer 
testing conducted for the Board prior to the June 2007 Proposal, 
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. These final revisions are adopted in part pursuant to TILA 
Section 127(c)(5), which authorizes the Board to add or modify Sec.  
226.5a disclosures as necessary to carry out the purposes of TILA. 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 card 
applications and solicitations. This information includes not only the 
APRs 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, in the June 2007 Proposal, the Board proposed 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 most fee 
amounts or percentages required to be disclosed.

[[Page 5279]]

The Board also proposed to add comment 5a(a)(2)-5 to explain that 
proposed Samples G-10(B) and G-10(C) provide guidance on how to show 
the rates and fees described in bold text. In addition, proposed 
comment 5a(a)(2)-5 also would have explained that proposed Samples G-
10(B) and G-10(C) 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 prior to the June 2007 Proposal, 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.
    The final rule adopts Sec.  226.5a(a)(2)(iv) and comment 5a(a)(2)-5 
with several technical revisions. Section 226.5a(a)(2)(iv) is amended 
to provide that maximum limits on fee amounts disclosed in the table 
that do not relate to fees that vary by state must not be disclosed in 
bold text. Comment 5a(a)(2)-5 provides guidance on when maximum limits 
must be disclosed in bold text. For example, assume an issuer will 
charge a cash advance fee of $5 or 3 percent of the cash advance 
transaction amount, whichever is greater, but the fee will not exceed 
$100. The maximum limit of $100 for the cash advance fee must not be 
highlighted in bold text. In contrast, assume that the amount of the 
late fee varies by state, and the range of amount of late fees 
disclosed is $15-$25. In this case, the maximum limit of $25 on the 
late fee amount must be highlighted in bold text. In both cases, the 
minimum fee amount (e.g., $5 or $15) must be disclosed in bold text.
    Comment 5a(a)(2)-5 also provides guidance on highlighting periodic 
fees. Section 226.5a(a)(2)(iv) provides that any periodic fee disclosed 
pursuant to Sec.  226.5a(b)(2) that is not an annualized amount must 
not be disclosed in bold. For example, if an issuer imposes a $10 
monthly maintenance fee for a card account, 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 this example, the $10 fee disclosure 
would not be disclosed in bold, but the $120 annualized amount must be 
disclosed in bold. In addition, if an issuer must disclose any annual 
fee in the table, the amount of the annual fee must be disclosed in 
bold.
    Section 226.5a(a)(2)(iv) is amended to refer to discounted initial 
rates as ``introductory'' rates, as that term is defined in Sec.  
226.16(g)(2)(ii), for consistency, and to clarify that introductory 
rates that are disclosed in the table under new Sec.  226.5a(b)(1)(vii) 
must be in bold text. Similarly, rates that apply after a premium 
initial rate expires that are disclosed in the table must also be in 
bold text.
    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 58903, Oct. 3, 2000. In March 2001, the Board 
issued interim final rules containing additional guidance for the 
electronic delivery of disclosures under Regulation Z. 66 FR 17329, 
Mar. 30, 2001. In November 2007, the Board adopted the November 2007 
Final Electronic Disclosure Rule, which withdrew portions of the 2001 
interim final rules and issued final rules containing additional 
guidance for the electronic delivery of disclosures under Regulation Z. 
72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
    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 all card 
offers that are provided to consumers in electronic form, such as via 
e-mail or a Web site.
    In addition, although this Bankruptcy Act provision refers to 
credit card solicitations (where no application is required), in the 
June 2007 Proposal, the Board proposed to apply the Bankruptcy Act 
provision relating to electronic offers to both electronic 
solicitations and applications pursuant to the Board's authority under 
TILA Section 105(a) to make adjustments that are necessary to 
effectuate the purposes of TILA. 15 U.S.C. 1601(a), 1604(a). 
Specifically, the Board proposed 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. 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 
final rule adopts this change to Sec.  226.5a(c), as proposed.
    With respect to the form of disclosures required under Sec.  
226.5a, in the June 2007 Proposal, the Board proposed 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. The Board 
also proposed to add comment 5a(a)(2)-6 to clarify this point and also 
to make clear that 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 (and not, for example, 
by including a reference in the paper application or solicitation to 
the Web site where the disclosures are located).
    In the November 2007 Final Electronic Disclosure Rule, the Board 
adopted the proposed changes to Sec.  226.5a(a)(2)(v) and comment 
5a(a)(2)-6 with several revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 
71058, Dec. 14, 2007. In the November 2007 Final Electronic Disclosure 
Rule, the guidance in proposed comment 5a(a)(2)-6 was contained in 
comment 5a(a)(2)-9. In this final rule, the guidance in comment 
5a(a)(2)-9 added by the November 2007 Final Electronic Disclosure Rule 
is moved to comment 5a(a)(2)-6.

[[Page 5280]]

    In the June 2007 Proposal, the Board also proposed to revise 
existing comment 5a(a)(2)-8 added by the 2001 interim final rule on 
electronic disclosures, 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 proposed to revise this comment to describe alternative 
methods for presenting electronic disclosures. This comment was 
intended to provide examples of the methods rather than an exhaustive 
list. In the November 2007 Final Electronic Disclosure Rule, the Board 
adopted the proposed changes to comment 5a(a)(2)-8 with several 
revisions. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
    In the June 2007 Proposal, the Board proposed 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. This guidance, contained in 
proposed comment 5a(a)(2)-1.ii, was 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 in electronic form.
    The final rule adopts Sec.  226.5a(a)(2)(vi)(B) and comment 
5a(a)(2)-1.ii as proposed, with several revisions. Specifically, 
comment 5a(a)(2)-1.ii is revised to be consistent with the revisions to 
comment 5a(a)(2)-8 made in the November 2007 Final Electronic 
Disclosure Rule. Comment 5a(a)(2)-1.ii provides that if the table 
required by Sec.  226.5a is provided electronically, the table must be 
provided in close proximity to the application or solicitation. Card 
issuers have flexibility in satisfying this requirement. Methods card 
issuers could use to satisfy the requirement include, but are not 
limited to, the following examples: (1) The disclosures could 
automatically appear on the screen when the application or reply form 
appears; (2) the disclosures could be located on the same Web page as 
the application or reply form (whether or not they appear 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; (3) 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. The link would take the consumer to the 
disclosures, but the consumer need not be required to scroll completely 
through the disclosures; or (4) the disclosures could be located on the 
same Web page as the application or reply form without necessarily 
appearing on the initial screen, immediately preceding the button that 
the consumer will click to submit the application or reply. Whatever 
method is used, a card issuer need not confirm that the consumer has 
read the disclosures. Comment 5a(a)(2)-8 is deleted as unnecessary.
    As discussed in the June 2007 Proposal, 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 on the Web page 
containing the application (or reply form), but not the disclosures 
themselves. Thus, the Board retains 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.
    Terminology. Section 226.5a currently requires terminology in 
describing the disclosures required by Sec.  226.5a to be consistent 
with terminology used in the account-opening disclosures (Sec.  226.6) 
and 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). In the June 2007 Proposal, the Board proposed that all 
guidance for terminology requirements for Sec.  226.5a disclosures be 
placed in proposed Sec.  226.5(a)(2)(iii). See section-by-section 
analysis to Sec.  226.5(a)(2). The Board also proposed to add comment 
5a(a)(2)-7 to cross reference the guidance in Sec.  226.5(a)(2). The 
Board adopts comment 5a(a)(2)-7 as proposed.
5a(a)(4) Fees That Vary by State
    Currently, under Sec.  226.5a, if the amount of a late-payment fee, 
over-the-limit fee, cash advance fee or balance transfer fee varies by 
state, a card issuer may either disclose in the table (1) the amount of 
the fee for all states; or (2) a range of fees and a statement that the 
amount of the fee varies by state. See current Sec.  226.5a(a)(5), 
renumbered as proposed Sec.  226.5a(a)(4); see also TILA Section 
127(f). As discussed below, in the June 2007 Proposal, the Board 
proposed 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 proposed 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 final rule adopts proposed Sec.  226.5a(a)(4) with several 
modifications. The Board is revising proposed Sec.  226.5a(a)(4) to 
provide that card issuers that impose a late-payment fee, over-the-
limit fee, cash advance fee, balance transfer fee or returned-payment 
fee where the amount of those fees vary by state may, at the issuer's 
option, disclose in the table required by Sec.  226.5a either (1) the 
specific fee applicable to the consumer's account, or (2) the range of 
the fees, if the disclosure includes a statement that the amount of the 
fee varies by state and refers the consumer to a disclosure provided 
with the Sec.  226.5a table where the amount of the fee applicable to 
the consumer's account is disclosed, for example in a list of fees for 
all states. Listing fees for multiple states in the table is not 
permissible. For example, a card issuer may not list fees for all 
states in the table. Similarly, a card issuer that does business in six 
states may not list fees for all six of those states in the table. 
(Conforming changes are also made to comment 5a(a)(4)-1.)
    As discussed in the section-by-section analysis to Sec.  
226.6(b)(1)(iii), the Board is adopting a similar rule for account-
opening disclosures, with one notable exception discussed below. In 
general, a creditor must disclose the fee applicable to the consumer's 
account; listing all fees for all states in the account-opening summary 
table is not permissible. The Board is concerned in each case that an 
approach of listing all fees for all states would detract from the 
purpose of the table: to provide key information in a simplified way.
    One difference between the fee disclosure requirement in Sec.  
226.5a(a)(4) and the similar requirement in Sec.  226.6(b)(1)(iii) is 
that Sec.  226.6(b)(1)(iii) limits use of the range of fees to point-
of-sale situations while Sec.  226.5a contains no similar limitation. 
As discussed further in the section-by-section analysis to Sec.  
226.6(b)(1)(iii), for creditors with retail stores in a number of 
states, it is not practicable to require fee-specific disclosures to be 
provided when an open-end (not home-secured) plan is established in 
person in connection with the purchase of goods or services. Thus, the 
final rule in Sec.  226.6(b)(1)(iii) provides that creditors imposing 
fees such as late-payment fees

[[Page 5281]]

or returned-payment fees that vary by state and providing the 
disclosures required by Sec.  226.6(b) in person at the time the open-
end (not home-secured) plan is established in connection with financing 
the purchase of goods or services may, at the creditor's option, 
disclose in the account-opening table either (1) the specific fee 
applicable to the consumer's account, or (2) the range of the fees, if 
the disclosure includes a statement that the amount of the fee varies 
by state and refers the consumer to the account agreement or other 
disclosure provided with the account-opening summary table where the 
amount of the fee applicable to the consumer's account is disclosed.
    As with the account-opening table, the Board is concerned that 
including all fees for all states in the table required by Sec.  226.5a 
would detract from the purpose of the table: to provide key information 
in a simplified way. Nonetheless, unlike with the account-opening 
table, the final rule does not limit the use of the range of fees for 
the table required by Sec.  226.5a only to point-of-sale situations. 
With respect to the application and solicitation disclosures, there may 
be many situations in which it is impractical to provide the fee-
specific disclosures with the application or solicitation, such as when 
the application is provided on the Internet or in ``take-one'' 
materials. For Internet or ``take-one'' applications or solicitations, 
a creditor will in most cases not be aware in which state the consumer 
resides and, consequently, will not be able to determine the amount of 
fees that would be charged to that consumer under applicable state law. 
The changes to Sec.  226.5a(a)(4) are adopted in part pursuant to TILA 
Section 127(c)(5), which authorizes the Board to add or modify Sec.  
226.5a disclosures as necessary to carry out the purposes of TILA. 15 
U.S.C. 1637(c)(5).
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, in 
the June 2007 Proposal, the Board proposed to place all exceptions in 
new Sec.  226.5a(a)(5). The final rule adopts new Sec.  226.5a(a)(5) as 
proposed.
5a(b) Required Disclosures
    Section 226.5a(b) specifies the disclosures that are required to be 
included on or with certain credit card applications and solicitations.
5a(b)(1) Annual Percentage Rate
    Section 226.5a requires card issuers to disclose the rates 
applicable to the account, for 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 the 
June 2007 Proposal, the Board proposed to amend Sec.  226.5a(b)(1) to 
reduce the 18-point font requirement to a 16-point font. Commenters 
generally did not object to the proposal to reduce the font size for 
the purchase APR. Several consumer groups suggested that the Board 
explicitly prohibit issuers from disclosing any discounted initial rate 
in 16-point font.
    The final rule adopts the 16-point font requirement in Sec.  
226.5a(b)(1) as proposed, with several revisions as described below. 
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. In consumer testing 
conducted for the Board prior to June 2007, 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 larger 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 Board 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 APR is effective in highlighting the purchase APR in the 
table.
    The final rule requires that discounted initial rates for purchases 
must be in 16-point font. Section 226.5a(b)(1), as proposed, did not 
specifically prohibit disclosing any discounted initial rate in 16-
point font but did not require such formatting. New Sec.  
226.5a(b)(1)(vii), discussed below, requires disclosure of the 
discounted initial rate in the table for issuers subject to final rules 
issued by the Board and other federal banking agencies published 
elsewhere in today's Federal Register. As a result, the Board believes 
that all rates that could apply to a purchase balance, other than a 
penalty rate, should be highlighted in 16-point font. For the same 
reasons, Sec.  226.5a(b)(1)(iii) also has been amended to clarify that 
both the premium initial rate for purchases and any rate that applies 
after the premium initial rate for purchases expires must be disclosed 
in 16-point font.
    The final rule in Sec.  226.5a(b)(1) has also been revised to refer 
to discounted initial rates as ``introductory'' rates, as that term is 
defined in Sec.  226.16(g)(2)(ii), for consistency.
    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. In the June 2007 Proposal, the 
Board proposed 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 prior to June 2007, 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.'' 
In an effort to streamline the information that appears in the table, 
the Board proposed to prohibit disclosure of the periodic rate in the 
table. Commenters generally did not oppose the Board's proposal to 
prohibit disclosure of the periodic rate in the table. Thus, the Board 
is deleting current comment 5a(b)(1)-1 as proposed. In addition, new 
comment 5a(b)(1)-8 is added to state that periodic rates must not be 
disclosed in the table. The Board notes that card issuers may disclose 
the periodic rate outside of the table. See Sec.  226.5a(a)(2)(ii).
    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). Under current comment 5a(b)(1)-4, 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

[[Page 5282]]

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.
    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 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 prior to the June 2007 Proposal, many 
participants who saw the variable rate information 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, in the June 2007 Proposal, the Board proposed 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 have been 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 have been 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 would have been precluded from including details 
about the index in the table. For example, if the issuer uses a prime 
rate, the issuer would have been allowed to describe the rate as tied 
to a ``prime rate'' and would not have been allowed to 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 proposal would have required 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) would have provided guidance to issuers on how to 
disclose the fact that the applicable rate varies and how it is 
determined.
    Commenters generally supported the Board's proposal 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. Several commenters asked the Board 
to clarify that issuers may include the index and margin outside of the 
table, given that some consumers are interested in knowing the index 
and margin. One commenter suggested that issuers be allowed to disclose 
in the table additional information about the index used, such as the 
publication source of the index used to calculate the rate (e.g.,. 
describing 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.) One commenter suggested that 
issuers be allowed to refer to an index as a ``prime rate'' only if it 
is a bank prime loan rate posted by the majority of the top 25 U.S. 
chartered commercial banks, as published by the Board.
    The final rule amends Sec.  226.5a(b)(1)(i) as proposed to specify 
that issuers may not disclose the amount of the index or margins in the 
table. Section 226.5a(b)(1)(i) is not amended to allow issuers to 
disclose in the table additional information about the index used, such 
as the publication source of the index. See comment 5a(b)(1)-2. The 
Board is concerned that allowing such information in the table could 
contribute to ``information overload'' for consumers, and may distract 
from more important information in the table. The Board notes that 
additional information about the variable rate, such as the amount of 
the index and margins and the publication source of the index used to 
calculate the rate, may be included outside of the table. See Sec.  
226.5a(a)(2)(ii).
    In addition, the Board did not amend the rule to provide that 
issuers only be allowed to refer to an index as a ``prime rate'' if it 
is a bank prime loan rate posted by the majority of the top 25 U.S. 
chartered commercial banks, as published by the Board. The Board 
believes that this rule is unnecessary at this time. Credit card 
issuers typically use a prime rate that is published in the Wall Street 
Journal, where that published prime rate is based on prime rates 
offered by the 30 largest U.S. banks, and is a widely accepted measure 
of prime rate.
    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), but could also disclose in the table that the rate would 
not go below 12 percent and above 24 percent. See current comment 
5a(b)(1)-4. In the June 2007 Proposal, the Board proposed to revise the 
commentary to prohibit the disclosure of the rate floors and ceilings 
in the table.
    Several consumer group commenters suggested that the Board require 
floors and ceilings to be disclosed in the table because such 
information has a significant effect on consumers' economic risk. 
Several industry commenters suggested that the Board permit (but not 
require) issuers to include the floors and ceiling of the variable rate 
in the table so that consumers are aware of the potential variations in 
the rate. Section 226.5a(b)(1)(i) is revised to prohibit explicitly the 
disclosure of the rate floors and ceilings in the table, as proposed. 
See also comment 5a(b)(1)-2. Based on consumer testing conducted for 
the Board prior to June 2007 and in March 2008, 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.'' Card issuers 
may, however, disclose this information outside of the table. See Sec.  
226.5a(a)(2)(ii).
    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 discounted initial rate will remain in 
effect. In the June 2007 Proposal, the Board proposed to move comment 
5a(b)(1)-5 to new Sec.  226.5a(b)(1)(ii). The Board also proposed to 
add new comment 5a(b)(1)-3 to specify that if a card issuer discloses 
the discounted

[[Page 5283]]

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).
    In addition, under TILA Sections 127(c)(6)(A) and 127(c)(7), as 
added by Sections 1303(a) and 1304 of the Bankruptcy Act, the term 
``introductory'' must be used in immediate proximity to each listing of 
a discounted initial rate in a direct mail or electronic application or 
solicitation; or promotional materials accompanying such application or 
solicitation. In the June 2007 Proposal, the Board proposed to expand 
the requirement to other applications or solicitations where a table 
under Sec.  226.5a is given, to promote the informed use of credit by 
consumers, pursuant to the Board's authority under TILA Section 105(a) 
to make adjustments that are necessary to effectuate the purposes of 
TILA. 15 U.S.C. 1604(a). Thus, the Board proposed to add 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. Because 
``intro'' is a commonly understood abbreviation of the term 
``introductory,'' and consumer testing indicates that consumers 
understand this term, the Board proposed to allow creditors to use 
``intro'' as an alternative to the requirement to use the term 
``introductory'' and proposed 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 proposed to provide a safe harbor 
for card issuers that place the word ``introductory'' or ``intro'' 
within the same phrase as each listing of the discounted initial rate. 
This guidance was set forth in proposed comment 5a(b)(1)-3.
    The Board adopts new Sec.  226.5a(b)(1)(ii) and comment 5a(b)(1)-3, 
as proposed, with several modifications. Discounted initial rates are 
referred to as ``introductory'' rates, as that term is defined in Sec.  
226.16(g)(2)(ii), for consistency. In addition, as discussed below with 
respect to disclosing penalty rates, an issuer is required to disclose 
directly beneath the table the circumstances under which any discounted 
initial rate may be revoked and the rate that will apply after the 
discounted initial rate is revoked, if the issuer discloses the 
discounted initial rate in the table or in any written or electronic 
promotional materials accompanying a direct mail, electronic or take-
one application or solicitation. See Sec.  226.5a(b)(1)(iv)(B).
    Comment 5a(b)(1)-3 has been amended to provide additional 
clarifications on discounted initial rates. Comment 5a(b)(1)-3.ii. has 
been added to clarify that an issuer's reservation of the right to 
change a rate after account opening, subject to the requirements of 
Sec.  226.9(c), does not by itself make that rate an introductory rate, 
even if the issuer subsequently increases the rate after providing a 
change-in-terms notice. The comment notes, however, that issuers 
subject to the final rules issued by the Board and other federal 
banking agencies published elsewhere in today's Federal Register are 
subject to limitations on such rate increases. In addition, comment 
5a(b)(1)-3.iii. has been added to clarify that if more than one 
introductory rate may apply to a particular balance in succeeding 
periods, the term ``introductory'' need only be used to describe the 
first introductory rate.
    Section 226.5a(b)(1)(ii) in the final rule has been revised, and a 
new Sec.  226.5a(b)(1)(vii) has been added as discussed below, to 
provide that certain issuers must disclose any introductory rate 
applicable to the account in the table. Creditors that are subject to 
the final rules issued by the Board and other federal banking agencies 
published elsewhere in today's Federal Register are required to state 
at account opening the annual percentage rates that will apply to each 
category of transactions on a consumer credit card account, and 
generally may not increase those rates, except as expressly permitted 
pursuant to those rules. This requirement is intended, among other 
things, to promote fairness in the pricing of consumer credit card 
accounts by enabling consumers to rely on the rates disclosed at 
account opening for at least the first year that an account is open.
    Consistent with those final rules, for such issuers, the Board 
believes that disclosure of introductory rates should be as prominent 
as other rates disclosed in the tabular summary given at account 
opening. Therefore, as discussed in the section-by-section analysis to 
Sec.  226.6(b)(2)(i), the Board is requiring that a creditor subject to 
those rules must disclose any introductory rate in the account-opening 
table provided pursuant to Sec.  226.6.
    For consistency, the Board also is requiring in the final rule that 
such issuers also disclose any introductory rate in the table provided 
with applications and solicitations. The Board believes that this will 
promote consistency throughout the life of an account and will enable 
consumers to better compare the terms that the consumer receives at 
account opening with the terms that were offered. Thus, Sec.  
226.5a(b)(1)(vii) has been added to the final rule to clarify that an 
issuer subject to 12 CFR 227.24 or similar law must disclose in the 
tabular disclosures given pursuant to Sec.  226.5a any introductory 
rate that will apply to a consumer's account. The Board believes that 
it is important that any issuer required to disclose an introductory 
rate applicable to a consumer's account highlights that introductory 
rate or rates by disclosing it in the Sec.  226.5a table.
    Similarly, and for the same reasons stated above, Sec.  
226.5a(b)(1)(vii) also requires that card issuers subject to the final 
rules issued by the Board and other federal banking agencies published 
elsewhere in today's Federal Register disclose in the table any rate 
that will apply after a premium initial rate (as described in Sec.  
226.5a(b)(1)(iii)) expires. A conforming change has been made to Sec.  
226.5a(b)(1)(iii). Consistent with comment 5a(b)(1)-3.ii., discussed 
above, a new comment 5a(b)(1)-4 has been added to the final rule to 
clarify that an issuer's reservation of the right to change rates after 
account-opening does not by itself make an initial rate a premium 
initial rate, even if the issuer subsequently decreases the rate. The 
comment notes, however, that issuers subject to the final rules issued 
by the Board and other federal banking agencies published elsewhere in 
today's Federal Register may be subject to limitations on rate 
decreases.
    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.
    Currently, the specific event or events must be described outside 
the table with a reference (an asterisk or other means) included with 
the penalty APR in the table to direct the consumer to the additional 
information. At its option, the issuer may include outside the table an 
explanation of 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.

[[Page 5284]]

    In the consumer testing conducted for the Board prior to June 2007, 
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 ``Other APRs'' row 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 prior to June 2007, 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 
trigger 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. In contrast, 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 of this testing, in the June 2007 Proposal, the Board 
proposed 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 imposition of a penalty rate. In addition, the Board proposed 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, the Board proposed to amend new comment 
5a(b)(1)-4 to provide 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 because the consumer does not make the minimum 
payment by 5 p.m., Eastern time, on its payment due date, the proposal 
would have indicated that the issuer should describe this circumstance 
in the table as ``make a late payment.'' Proposed Samples G-10(B) and 
G-10(C) would have provided additional guidance on the level of detail 
that issuers should use in describing the specific events can trigger 
the penalty rate.
    The Board also proposed 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. This proposal was 
based on the Board's understanding that, currently, card issuers 
typically apply the increased rate to all balances on the account. The 
Board believed that this information would help consumers better 
understand the consequences of triggering the penalty rate.
    In addition, the Board proposed 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. The Board 
proposed to amend proposed comment 5a(b)(1)-4 to provide that in 
describing how long the increased rate will remain in effect, the 
description should be brief, and referred 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 would have provided that if a card issuer 
reserves the right to apply the increased rate indefinitely, that fact 
should be stated. The Board stated its belief that this information may 
help consumers better understand the consequences of triggering the 
penalty rate.
    Also, the Board proposed 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. Sections 
1303(a) and 1304 of the Bankruptcy Act require that for a direct mail 
or electronic credit card application or solicitation, a clear and 
conspicuous 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 must 
be disclosed in a prominent location on or with the application or 
solicitation. 15 U.S.C. 1637(c)(6)(C). The Board proposed that this 
information be disclosed in the table along with other penalty rate 
information for all applications and solicitations where a table under 
Sec.  226.5a is given, to promote the informed use of credit by 
consumers, pursuant to the Board's authority under TILA Section 105(a) 
to make adjustments that are necessary to effectuate the purposes of 
TILA. 15 U.S.C. 1604(a).
    In response to the June 2007 Proposal, some consumer group 
commenters requested that the Board delete the statement that the card 
issuer need not disclose the increased rate that would be imposed if 
credit privileges are permanently terminated. They viewed this 
provision as inconsistent with the Board's other efforts to ensure that 
consumers are aware of penalty rates. They believed card issuers should 
be required to disclose this information in the table if the rate is 
different than the penalty rate that otherwise applies.
    In the May 2008 Proposal, the Board proposed to delete the current 
provision that an issuer need not disclose in the table an increased 
rate that would be imposed if credit privileges are permanently 
terminated. Most consumer groups and industry commenters supported this 
aspect of the proposal.
    The final rule adopts new Sec.  226.5a(b)(1)(iv) and comment 
5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) as proposed in the May 2008 
Proposal with several revisions. Section 226.5a(b)(1)(iv)(A) sets forth 
the disclosures that are required when rates that are not introductory 
rates may be increased as a penalty for one or more events specified in 
the account agreement. The final rule specifies that for rates that are 
not introductory 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, the card 
issuer must disclose the increased rate that would 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. Samples G-10(B) and G-10(C) (in the row labeled 
``Penalty APR and When it Applies'') provide guidance to card issuers 
on how to meet the requirements in Sec.  226.5a(b)(1)(iv)(A) and 
accompanying comment 5a(b)(1)-5. An issuer may use phrasing similar to 
either Sample G-10(B) or G-10(C) to disclose how long the increased 
rate will remain in effect, modified as appropriate to accurately 
reflect the terms offered by that issuer.
    The proposed requirement that issuers must disclose a description 
of the types of balances to which the

[[Page 5285]]

increased penalty rate will apply is not included in the final rule. 
When the Board proposed this requirement in June 2007, most issuers 
typically applied the increased penalty rate to all balances on the 
account. Nonetheless, under final rules issued by the Board and other 
federal banking agencies published elsewhere in today's Federal 
Register, most credit card issuers are precluded from applying an 
increased rate to existing balances, except in limited 
circumstances.\15\ In particular, most issuers may not increase the 
interest rate on existing credit card balances to the penalty rate 
unless the consumer is more than 30 days late on the account. Because 
most issuers are restricted from applying the increased penalty rate to 
existing balances, except in limited circumstances, the Board is 
withdrawing the proposed requirement to disclose in the table a 
description of the types of balances to which the increased penalty 
rate will apply. Requiring issuers to explain in the table the types of 
balances to which the increased penalty rate will apply--such as 
disclosing that the increased penalty rate will apply to new 
transactions, except if the consumer is more than 30 days late on the 
account, then the increased penalty rate will apply to all balances--
could lead to ``information overload'' for consumers. The Board notes 
if a penalty rate is triggered on an account, the issuer must provide 
the consumer with a notice under Sec.  226.9(g) prior to the imposition 
of the penalty rate, and this notice must include an explanation of the 
balances to which the increased penalty rate would apply.
---------------------------------------------------------------------------

    \15\ The final rules published elsewhere in today's Federal 
Register do not apply to all issuers, such as state-chartered credit 
unions that are not subject to the National Credit Union 
Administration's final rules.
---------------------------------------------------------------------------

    Similarly, issuers that apply penalty pricing only to some balances 
on the account, specifically issuers subject to the final rules issued 
by the Board and other federal banking agencies published elsewhere in 
today's Federal Register may not distinguish, in the disclosures 
required by Sec.  226.5a(b)(1)(iv), between the events that may result 
in an increased rate for one type of balances and the events that may 
result in an increased rate for other types of balances. Such issuers 
may provide a consolidated list of the event or events that may result 
in an increased rate for any balance.
    The Board has amended comment 5a(b)(1)-5.i. (proposed as comment 
5a(b)(1)-4) to provide specific guidance to issuers that are subject to 
the final rules issued by the Board and other federal banking agencies 
published elsewhere in today's Federal Register. Such an issuer may 
have penalty rate triggers that apply to new transactions that differ 
from the penalty rate triggers applicable to outstanding balances. For 
example, an issuer might apply the penalty rate to new transactions, 
subject to the notice requirements in Sec.  226.9(g), based on a 
consumer making a payment three days late, but may increase the rate 
applicable to outstanding balances only if the consumer pays more than 
30 days late. Comment 5a(b)(1)-5.i., as adopted, includes guidance 
stating that if an issuer may increase a rate that applies to a 
particular balance because the account is more than 30 days late, the 
issuer should describe this circumstance in the table as ``make a late 
payment.'' The comment has also been amended to clarify that the issuer 
may not distinguish between the events that may result in an increased 
rate for existing balances and the events that may result in an 
increased rate for new transactions.
    In addition, as proposed in May 2008, the final rule deletes the 
current provision that an issuer need not disclose an increased rate 
that would be imposed if credit privileges were permanently 
terminated.\16\ Thus, to the extent an issuer is charging an increased 
rate different from the penalty rate when credit privileges are 
permanently terminated, this different rate must be disclosed along 
with the penalty rate. The Board agrees with consumer group commenters 
that requiring the disclosure of the rate when credit privileges are 
permanently terminated is consistent with the Board's efforts to ensure 
that consumers are aware of the potential for increased rates.
---------------------------------------------------------------------------

    \16\ The Board notes that final rules published elsewhere in 
today's Federal Register would generally prohibit increases in rates 
applicable to outstanding balances, even if credit privileges have 
been terminated. However, if the consumer's account is 30 days late, 
those rules would permit a creditor to impose a rate increase on 
such balances.
---------------------------------------------------------------------------

    A commenter in response to the May 2008 Proposal asked for 
clarification of the interplay between the requirement to disclose an 
increased rate when credit privileges are permanently terminated and 
the restriction on issuers' ability to apply increased rates to 
existing balances, proposed by the Board and other federal banking 
agencies. See 73 FR 28904, May 19, 2008. As discussed above, under 
final rules issued by the Board and other federal banking agencies 
published elsewhere in today's Federal Register, most credit card 
issuers are precluded from applying an increased rate to existing 
balances, unless an exception applies, such as if the account is more 
than 30 days late. Nonetheless, for issuers subject to these 
restrictions, there still are cases where an issuer could impose on 
existing balances an increased rate when credit privileges are 
permanently terminated, for example when the account is more than 30 
days late.
    Section 226.5a(b)(1)(iv)(B) sets forth the disclosures that are 
required when discounted initial rates may be increased as a penalty 
for one or more events specified in the account agreement. (In Sec.  
226.5a(b)(1)(iv)(B), discounted initial rates are referred to as 
``introductory'' rates, as that term is defined in Sec.  
226.16(g)(2)(ii), for consistency.) Specifically, Sec.  
226.5a(b)(1)(iv)(B) of the final rule states that an issuer is required 
to disclose directly beneath the table the circumstances under which 
any discounted initial rate may be revoked and the rate that will apply 
after the discounted initial rate is revoked only if the issuer 
discloses the discounted initial rate in the table, or in any written 
or electronic promotional materials accompanying a direct mail, 
electronic or take-one application or solicitation. As revised, this 
provision is consistent with the Bankruptcy Act requirement that a 
credit card application or solicitation must clearly and conspicuously 
disclose in a prominent location on or with the application or 
solicitation a general description of the circumstances that may result 
in revocation of a discounted initial rate offered with the card. 
Therefore, to the extent that an issuer is promoting the discounted 
initial rate in the disclosure table provided with the application or 
solicitation or in the promotional materials accompanying the 
application or solicitation, the issuer must also disclose directly 
beneath the table the circumstances that may result in revocation of 
the discounted initial rate, and the rate that will apply after the 
discounted initial rate is revoked. Requiring issuers to disclose that 
information directly beneath the table will help consumers better 
understand the terms under which the discounted initial rate is being 
offered on the account.
    The final rule requires that the circumstances under which a 
discounted initial rate may be revoked be disclosed directly beneath 
the table, rather than in the table. Credit card issuers subject to the 
final rules issued by the Board and other federal banking agencies 
published elsewhere in today's Federal Register will be prohibited from 
increasing an introductory rate unless the consumer's account becomes 
more

[[Page 5286]]

than 30 days late. Accordingly, for most issuers subject to Sec.  
226.5a, the disclosure provided under this paragraph will be identical, 
because an introductory rate may be increased only if the account 
becomes more than 30 days late. As a result, the Board does not believe 
that most consumers will use the information about the revocation of a 
discounted initial rate in shopping for a credit card, since it will 
not vary from product to product. Therefore, while this information 
should be disclosed clearly and conspicuously with the table, the Board 
believes it should not be included in the table, where it may 
contribute to ``information overload'' and detract from the disclosure 
of other terms that may be of more use to consumers in shopping for 
credit.
    Comment 5a(b)(1)-5 (proposed as comment 5a(b)(1)-4) is restructured 
to be consistent with new Sec.  226.5a(b)(1)(iv). In addition, comment 
5a(b)(1)-5.ii. is revised to clarify that the information about 
revocation of a discounted initial rate and the rate that will apply 
after revocation must be provided even if the rate that will apply 
after the discounted initial rate is revoked is the rate that would 
have applied at the end of the promotional period, and not a higher 
``penalty rate.'' Also, comment 5a(b)(1)-5.ii. clarifies that in 
describing the rate that will apply after revocation of the discounted 
initial rate, if the rate that will apply after revocation of the 
discounted initial rate is already disclosed in the table, the issuer 
is not required to repeat the rate, but may refer to that rate in a 
clear and conspicuous manner. For example, if the rate that will apply 
after revocation of a discounted initial rate is the standard rate that 
applies to that type of transaction (such as a purchase or balance 
transfer transaction), and the standard rates are labeled in the table 
as ``standard APRs,'' the issuer may refer to the ``standard APR'' when 
describing the rate that will apply after revocation of a discounted 
initial rate.
    In addition, comment 5a(b)(1)-5.ii. is revised to specify that the 
description of the circumstances in which a discounted initial rate 
could be revoked should be brief. For example, if an issuer may 
increase a discounted initial rate because the consumer does not make 
the minimum payment within 30 days of the due date, the issuer should 
describe this circumstance directly beneath the table as ``make a late 
payment.'' In addition, if the circumstances in which a discounted 
initial rate could be revoked are already listed elsewhere in the 
table, the issuer is not required to repeat the circumstances again, 
but may refer to those circumstances in a clear and conspicuous manner. 
For example, if the circumstances in which an initial discounted rate 
could be revoked are the same as the event or events that may trigger a 
``penalty rate'' as described in Sec.  226.5a(b)(1)(iv)(A), the issuer 
may refer to the actions listed in the Penalty APR row, in describing 
the circumstances in which the introductory rate could be revoked. 
Sample G-10(C) sets forth a disclosure labeled ``Loss of Introductory 
APR'' directly below the table to provide guidance to card issuers on 
how to meet the requirements in Sec.  226.5a(b)(1)(iv)(B) and 
accompanying comment 5a(b)(1)-5.
    Comment 5a(b)(1)-5.iii. also has been included in the final rule to 
expressly note that issuers subject to the final rules issued by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register are prohibited by those rules from increasing or 
revoking an introductory rate prior to its expiration, unless the 
account is more than 30 days late. The comment gives guidance on how 
such an issuer should comply with Sec.  226.5a(b)(1)(iv)(B).
    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. 
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 or made available to the consumer.
    In the June 2007 Proposal, the Board proposed to add Sec.  
226.5(b)(1)(v) and comment 5a(b)(1)-5 to address the circumstances in 
which an issuer is not required to 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. In this 
situation, issuers would have been required to 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. Under the proposal, a card issuer would have been 
allowed to 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 would have been 
allowed to 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) would have provided guidance for issuers on how to meet these 
requirements. In addition, the Board solicited comment on whether card 
issuers 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).
    In response to the June 2007 Proposal, 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 issuer is offering the consumer, 
because otherwise, consumers do not know the rate for which they are 
applying. Industry commenters generally supported the proposal 
clarifying that issuers may disclose the specific rates or range of 
possible rates, with an explanation that the rate obtained by the 
consumer is based on the consumer's creditworthiness. Several 
commenters suggested that the Board also allow issuers to disclose the 
highest APR that may apply instead of a range of rates, because they 
believed that this approach might be less confusing to consumers than 
seeing a range of rates. For example, a consumer may focus on the 
lowest rate in a range and be surprised when the final rate is higher 
than this lowest rate. Also, if the highest rate was the only rate 
disclosed, a consumer would not be upset by obtaining a lower rate than 
the rate initially disclosed. Other commenters indicated that 
disclosing only the highest APR should not be allowed, because 
consumers may believe this would be the APR that applied to them even 
though the highest APR may apply only to a small group of consumers 
solicited.
    In addition, one commenter indicated that for some issuers, 
especially in the private label market, the actual rate for which a 
consumer qualifies may be determined using multiple factors, including 
the consumer's creditworthiness, whether the consumer is contemplating 
a purchase with the retailer named on the private label card, and other 
factors.
    The Board adopts Sec.  226.5a(b)(1)(v) and comment 5a(b)(1)-6 
(proposed as comment 5a(b)(1)-5) with several revisions. Consistent 
with the proposal, Sec.  226.5a(b)(1)(v) specifies that if a rate 
cannot be determined at the time disclosures are given because the rate

[[Page 5287]]

depends at least in part 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, and other factors if applicable. 
Generally, issuers are not allowed to disclose only the lowest rate, 
the median rate or the highest rate that could apply. See comment 
5a(b)(1)-6 (proposed as comment 5a(b)(1)-5). 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 only the 
lowest, median or highest APR. If a consumer sees a range or several 
specific rates, the consumer may be better able to understand the 
possible rates that may apply to the account.
    Nonetheless, if the rate is a penalty rate, the card issuer at its 
option may disclose the highest rate that could apply, instead of 
disclosing the specific rates or the range of rates that could apply. 
See Sec.  226.5a(b)(1)(v). With respect to penalty rates, issuers may 
set a highest rate for the penalty rate (such as 28 percent) but may 
either decide not to increase a consumer's rates based on a violation 
of a penalty rate trigger or may impose a penalty rate that is less 
than that highest rate, depending on factors at the time the penalty 
rate is imposed. It would be difficult for the issuer to disclose a 
range of possible rates for the penalty rate that is meaningful because 
the issuer might decide not to increase a consumer's rates based on a 
violation of a penalty rate trigger. In the penalty rate context, a 
range of possible penalty rates would likely be more confusing to 
consumers than only disclosing the highest penalty rate.
    Comment 5a(b)(1)-6 (proposed as comment 5a(b)(1)-5) also is revised 
to clarify that Sec.  226.5a(b)(1)(v) applies even if other factors are 
used in combination with a consumer's creditworthiness to determine the 
rate for which a consumer may qualify at account opening. For example, 
Sec.  226.5a(b)(1)(v) would apply if the issuer considers the type of 
purchase the consumer is making at the time the consumer opens the 
account, in combination with the consumer's creditworthiness, to 
determine the rate for which the consumer may qualify at account 
opening. If other factors are considered, the issuer must amend the 
statement about creditworthiness, to indicate that the rate for which 
the consumer may qualify at account opening will depend on the 
consumer's creditworthiness and other factors. Nonetheless, if a 
consumer's creditworthiness is not one of the factors that will 
determine the rate for which the consumer may qualify at account 
opening (for example, if the rate is based solely on the type of 
purchase that the consumer is making at the time the consumer opens the 
account, or is based solely on whether the consumer has other banking 
relationships with the card issuer), Sec.  226.5a(b)(1)(v) does not 
apply.
    The Board is not requiring an issuer to provide the actual rate 
that the issuer is offering the consumer if that rate is not known. As 
explained above, 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.
    Proposed Samples G-10(B) and G-10(C) would have provided guidance 
for issuers on how to meet the requirements to provide 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. Specifically, proposed Samples G-
10(B) and G-10(C) would have provided that issuers may meet these 
requirements by providing the specific rates or the range of rates and 
stating that the rate for which the consumer qualifies would be ``based 
on your creditworthiness.'' As discussed above, in response to the June 
2007 Proposal, one commenter indicated that for some issuers, 
especially in the private label market, the actual rate for which a 
consumer qualifies may be determined using multiple factors, including 
the consumer's creditworthiness, whether the consumer is contemplating 
a purchase with the retailer named on the private label card and other 
factors. Samples G-10(B) and G-10(C) as adopted contain the phrase 
``based on your creditworthiness,'' but pursuant to Sec.  
226.5a(b)(1)(v) discussed above, a creditor that considers other 
factors in addition to a consumer's creditworthiness in determining the 
APR applicable to a consumer's account would use language such as 
``based on your creditworthiness and other factors.''
    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 June 2007 Proposal, the Board proposed to add a new Sec.  
226.5a(b)(1)(vi) to require that if both a rate and fee apply to a 
balance transfer or cash advance transaction, a card issuer must 
disclose that a fee also applies when disclosing the rate, and provide 
a cross reference to the fee. In consumer testing conducted for the 
Board prior to the June 2007 Proposal, 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 the Board 
believed that a cross reference between the rate and the fee may help 
those consumers notice both the rate and the fee components.
    In response to the June 2007 Proposal, several industry commenters 
suggested that the cross reference be eliminated, as unnecessary and 
leading to ``information overload.'' In addition, one industry 
commenter suggested that the Board also require a cross reference from 
the purchase APR to any transaction fee on purchases. One industry 
commenter suggested that issuers be allowed to modify the cross 
reference to state when the cash advance fee or balance transfer fee 
will not apply, such as ``Cash advance fees will apply to cash advances 
except for convenience checks and fund transfers to other accounts with 
us.'' In addition, one industry commenter asked the Board for 
clarification on whether a 0 percent APR required the cross reference 
between the rate and the fee.
    In quantitative consumer testing conducted for the Board after the 
May 2008 Proposal, the Board investigated whether the presence of a 
cross reference from the balance transfer APR to the balance transfer 
fee improved consumers' awareness of and ability to identify the 
balance transfer fee. The results of the testing indicate that there 
was no statistically significant improvement in consumers' ability to 
identify the balance transfer fee if the cross reference was present. 
Given the results of the consumer testing and concerns about 
``information overload,'' the Board has withdrawn proposed Sec.  
226.5a(b)(1)(vi). Proposed comment 5a(b)(1)-6, which would have given 
guidance on how to present a cross reference between a rate and fee, 
also is withdrawn.
    APRs that vary by state. Currently, Sec.  226.5a(b) requires card 
issuers to disclose the rates applicable to the account, for purchases, 
cash advances, and balance transfers. For disclosures required to be 
provided with credit card applications and solicitations, if the rate

[[Page 5288]]

varies by state, card issuers must disclose in the table the rates for 
all states. Specifically, comment 5a(a)(2)-2 currently provides, in 
relevant part, that if rates or other terms vary by state, card issuers 
may list the states and the various disclosures in a single table or in 
separate tables.
    The Board is concerned that such an approach of disclosing the 
rates for all states in the table (or having a table for each state) 
would detract from the purpose of the table: To provide key information 
in a simplified way. Thus, consistent with the reasons discussed in the 
section-by-section analysis to Sec.  226.5a(a)(4) with respect to fees 
that vary by state, the final rule adds Sec.  226.5a(b)(1)(vi) to 
provide that card issuers imposing APRs that vary by state may, at the 
issuer's option, disclose in the table required by Sec.  226.5a either 
(1) the specific APR applicable to the consumer's account, or (2) the 
range of APRs, if the disclosure includes a statement that the APR 
varies by state and refers the consumer to a disclosure provided with 
the Sec.  226.5a table where the APR applicable to the consumer's 
account is disclosed, for example in a list of APRs for all states. 
Listing APRs for multiple states in the table (or having a table for 
each state) is not permissible. In addition, as discussed above, 
comment 5a(a)(2)-2 currently provides, in relevant part, that if rates 
or other terms vary by state, card issuers may list the states and the 
various disclosures in a single table or in a separate table. Because 
under the final rule, an issuer would no longer be allowed to list fees 
or rates for multiple states in the table (or have a table for each 
state), this provision in comment 5a(a)(2)-2 is deleted as obsolete. 
These changes to Sec.  226.5a and comment 5a(a)(2)-2 are adopted in 
part pursuant to TILA Section 127(c)(5), which authorizes the Board to 
add or modify Sec.  226.5a disclosures as necessary to carry out the 
purposes of TILA. 15 U.S.C. 1637(c)(5).
    Rate based on another rate on the account. In response to the June 
2007 Proposal, one commenter asked the Board to clarify how a rate 
should be disclosed if that rate is based on another rate on the 
account. For example, assume that a penalty rate as described in Sec.  
226.5a(b)(1)(iv)(A) is determined by adding 5 percentage points to the 
current purchase rate, which is 10 percent. The Board adopts new 
comment 5a(b)(1)-7 to clarify how such a rate should be disclosed. 
Pursuant to comment 5a(b)(1)-7, a card issuer, in this example, must 
disclose 15 percent as the current penalty rate. If the purchase rate 
is a variable rate, then the penalty rate also is a variable rate. In 
that case, the card issuer also must disclose the fact that the penalty 
rate may vary and how the rate is determined, such as ``This APR may 
vary with the market based on the Prime Rate.'' In describing the 
penalty rate, the issuer may not disclose in the table the amount of 
the margin or spread added to the current purchase rate to determine 
the penalty rate, such as describing, in this example, that the penalty 
rate is determined by adding 5 percentage points to the purchase rate.
    Typical APR. Several consumer groups have 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 product. 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.
    In the June 2007 Proposal, the Board did not propose that card 
issuers disclose the ``typical rate'' as part of the Sec.  226.5a 
disclosures because the Board did 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 
incur fees. Other consumers may use their cards for purchases, balance 
transfers or cash advances, but never incur late-payment fees, over-
the-limit fees or other penalty fees. Still others may incur penalty 
fees and penalty rates. A ``typical rate,'' however, would be based 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.
    In response to the June 2007 Proposal, several consumers groups 
again suggested that the Board reconsider the issue of disclosing a 
``typical rate'' in the table required by Sec.  226.5a. The Board 
continues to believe that the proposed typical APR would not be helpful 
to consumers that seek credit cards for the reasons stated above. Thus, 
a requirement to disclose a ``typical rate'' is not included in the 
final rule.
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 13855, Apr. 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.
    In the June 2007 Proposal, the Board proposed 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 proposed 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 account, 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 proposed 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 proposed 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. The final 
rule adopts Sec.  226.5a(b)(2) as proposed. The Board believes that 
this additional information

[[Page 5289]]

will allow consumers to better understand set-up and maintenance fees 
that are often imposed in connection with subprime credit cards. For 
example, the changes will provide consumers with additional information 
about how often 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 proposed 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. Comment 
5a(b)(2)-3 is adopted as proposed with stylistic changes. The Board 
believes that consumers should be aware of these fees when they are 
shopping for a credit card.
    Currently, and under the June 2007 and May 2008 Proposals, comment 
5a(b)(2)-2 provides that 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) shall not be 
disclosed in the table if the basic account may be opened without 
paying such fees. The Board is aware that some subprime cards may 
charge a fee for an additional card on the account, beyond the first 
card on the account. For example, if there were two primary cardholders 
listed on the account, only one card on the account would be issued, 
and the cardholders would be charged a fee for another card if the 
cardholders request an additional card, so that each cardholder would 
have his or her own card. The Board is amending comment 5a(b)(2)-2 to 
clarify that issuing a card to each primary cardholder (not authorized 
users) is considered a basic membership privilege and fees for 
additional cards, beyond the first card on the account, must be 
disclosed as a fee for issuance or availability. Thus, a fee to obtain 
an additional card on the account beyond the first card (so that each 
primary cardholder would have his or her own card) must be disclosed in 
the table as a fee for issuance or availability under Sec.  
226.5a(b)(2). This fee must be disclosed even if the fee is optional in 
that the fee is charged only if the cardholder requests one or more 
additional cards.
5a(b)(3) Fixed Finance Charge; Minimum Interest 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., $0.50) 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 the June 2007 Proposal, the Board proposed to retain the minimum 
finance charge disclosure in the table but refer to the charge as a 
``minimum interest charge'' or ``minimum charge'' in the table, as 
discussed in the section-by-section analysis to Appendix G. Although 
minimum charges currently may be small, the Board was concerned that 
card issuers may increase these charges in the future. Also, the Board 
noted that it was 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 were 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 and consumers would 
not receive important information about the cost of the credit card. 
The Board also did not propose a de minimis minimum finance charge 
threshold. The Board was concerned that this approach could undercut 
the uniformity of the table, and could be misleading to consumers. The 
Board also proposed 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. 
See also proposed comment 5a(b)(3)-1.
    In response to the June 2007 Proposal, several industry commenters 
recommended that the Board delete this disclosure from the table unless 
the minimum finance charge is over a certain nominal amount. They 
indicated that in most cases, the minimum finance charge is so small as 
to be irrelevant to consumers. They believed that it should only be in 
the table if the minimum finance charge is a significant amount. 
Consumer groups agreed with the Board's proposal to require the 
disclosure of the minimum finance charge in all cases and not to allow 
issuers to exclude the minimum finance charge from the table if the 
charge was under a certain specific amount.
    In consumer testing conducted by the Board in March 2008, 
participants were asked to compare disclosure tables for two credit 
card accounts and decide which account they would choose. In one of the 
disclosure tables, a small minimum finance charge, labeled as a 
``minimum interest charge,'' was disclosed. In the other disclosure 
table, no minimum finance charge was disclosed. None of the 
participants indicated that the small minimum finance charge on one 
card but not on the other would impact their decision to choose one 
card over the other.
    Based on this consumer testing, the Board proposed in May 2008 to 
revise proposed Sec.  226.5a(b)(3) to provide that an issuer must 
disclose in the table any minimum or fixed finance charge in excess of 
$1.00 that could be imposed during a billing cycle and a brief 
description of the charge, pursuant to the Board's authority under TILA 
Section 127(c)(5) which authorizes the Board to add or modify Sec.  
226.5a disclosures as necessary to carry out the purposes of TILA. 15 
U.S.C. 1637(c)(5). The proposed rule would have continued to require 
disclosure in the table if any minimum or fixed finance charge was over 
this de minimis amount to ensure that consumers are aware of larger 
minimum or fixed finance charges that might impact them. Under the 
proposal, the $1.00 amount would have been adjusted to the next whole 
dollar amount when the sum of annual percentage changes in the Consumer 
Price Index in effect on June 1 of previous years equals or exceeds 
$1.00. See proposed comment 5a(b)(3)-2. This approach in adjusting the 
dollar amount that triggers the disclosure of a minimum or fixed 
finance charge is similar to TILA's rules for adjusting a dollar amount 
of fees that trigger additional protections for certain home-secured 
loans. TILA Section 103(aa), 15 U.S.C. 1602(aa). Under the proposal, at 
the issuer's option, the issuer would have been allowed to disclose in 
the table any minimum or fixed finance charge below the threshold. This 
flexibility was intended to facilitate compliance when adjustments are 
made to the dollar threshold. For example, if an issuer has disclosed a 
$1.50 minimum finance charge in its application and solicitation table 
at the time the threshold is increased to $2.00, the issuer could 
continue to use forms with the minimum finance charge disclosed, even 
though the issuer would no longer be required to do so.
    In response to the May 2008 Proposal, industry commenters generally 
supported this aspect of the proposal. One industry commenter suggested 
a

[[Page 5290]]

$5.00 threshold, because with the proposed $1.00 threshold, when 
operational costs are considered, for most banks it will be simpler to 
disclose any and all minimum or fixed finance charges. Another industry 
commenter suggested eliminating the minimum or fixed finance charge 
disclosure altogether, and adding a disclosure for cards that charge a 
monthly fee in lieu of the APR. In addition, one industry commenter 
suggested that the Board eliminate the minimum or fixed finance charge 
disclosure and monitor if issuers change their minimum or fixed finance 
charge calculations as a result. Consumer group commenters generally 
opposed the proposal because issuers would no longer be required to 
disclose an important cost to consumers (especially subprime consumers, 
where the fee might be significant in relation to the small initial 
available credit on subprime cards).
    The minimum interest charge was also tested in the Board's 
qualitative consumer testing. In the two rounds of consumer testing 
conducted by the Board after the May 2008 Proposal, participants were 
asked to compare disclosure tables for two credit card accounts. In one 
of the disclosure tables, a small minimum interest charge was 
disclosed. In the other disclosure table, no minimum interest charge 
was disclosed. Participants were specifically asked whether the minimum 
interest charge would influence which card they would choose. Of the 
participants who understood what a minimum interest charge was, almost 
all said that the minimum interest charge would not play a significant 
role in their decision whether or not to apply for the card that 
disclosed the minimum interest charge because of the small amount of 
the fee.
    The final rule retains the $1.00 threshold, as proposed, in Sec.  
226.5a(b)(3) with several modifications. Pursuant to the Board's 
authority under TILA Section 127(c)(5), the final rule retains the 
$1.00 threshold for minimum interest charges because the Board believes 
that when the minimum interest charge is a de minimis amount (i.e., 
$1.00 or less, as adjusted for inflation), disclosure of the minimum 
interest charge is not information that consumers will use to shop for 
a card. 15 U.S.C. 1637(c)(5). The final rule limits the $1.00 threshold 
to apply only to minimum interest charges, which are charges in lieu of 
interest in those months where a consumer would otherwise incur an 
interest charge that is less than the minimum charge. Fixed finance 
charges must be disclosed regardless of whether they are equal to or 
less than $1.00. For example, for credit card products described above 
where no APR is charged, but each month a fixed charge is imposed based 
on the outstanding balance (e.g., $6 charge per $1,000 balance), this 
fixed charge must be disclosed regardless of whether the charge is 
equal to or less than $1.00. The Board is limiting the $1.00 threshold 
to minimum interest charges because the Board believes that minimum 
interest charges are imposed infrequently, and most likely are not 
imposed month after month on an account, unlike fixed finance charges.
    In addition, in a technical edit, the final rule is amended to 
specify that the $1.00 amount would be adjusted periodically by the 
Board to reflect changes in the Consumer Price Index. The final rule 
specifies that the Board shall calculate each year a price level 
adjusted minimum interest charge using the Consumer Price Index in 
effect on the June 1 of that year. When the cumulative change in the 
adjusted minimum value derived from applying the annual Consumer Price 
level to the current minimum interest charge threshold has risen by a 
whole dollar, the minimum interest charge will be increased by $1.00. 
Comments 5a(b)(3)-1 and -2 are also adopted with technical 
modifications.
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. In the June 2007 Proposal, the 
Board proposed to amend Sec.  226.5a(b)(4) to explicitly exclude from 
the table fees charged for transactions in a foreign currency or that 
take place in a foreign country. In an effort to streamline the 
contents of the table, the Board proposed to highlight only those fees 
that may be important for a significant number of consumers. In 
consumer testing for the Board prior to the June 2007 Proposal, 
participants did not mention foreign transaction fees as important fees 
they use to shop. In addition, there are few consumers who may pay 
these fees with any frequency. Thus, in the June 2007 Proposal, the 
Board proposed to except foreign transaction fees from disclosure of 
transaction fees in an application or solicitation, but to include such 
fees in the proposed account-opening summary table to ensure that 
interested consumers can learn of the fees before using the card. See 
proposed Sec.  226.6(b)(4).
    In response to the June 2007 Proposal, some consumer group 
commenters recommended that the Board mandate disclosure of foreign 
transaction fees in the table required under Sec.  226.5a. They 
questioned the utility of the Board requiring foreign transaction fees 
in the account-opening table required under Sec.  226.6, but 
prohibiting those fees to be disclosed in the table under Sec.  226.5a. 
They believed that consumers as well as the industry would be better 
served by eliminating the few differences between the disclosures 
required at the two stages. In addition, one industry commenter 
recommended that the table required under Sec.  226.5a include foreign 
transaction fees. This commenter believed that the foreign transaction 
fee is relevant to any consumer who travels in other countries, and the 
ability to choose a credit card based on the presence of the fee is 
important. In addition, the commenter noted that the large amount of 
press attention that the issue has received suggests that the presence 
or absence of the fee is now of interest to a significant number of 
consumers.
    In the May 2008 Proposal, the Board proposed to require that 
foreign transaction fees imposed by the card issuer must be disclosed 
in the table required under Sec.  226.5a. Specifically, the Board 
proposed to withdraw proposed Sec.  226.5a(b)(4)(ii), which would have 
precluded a card issuer from disclosing a foreign transaction fee in 
the table required by Sec.  226.5a. In addition, the Board proposed to 
add comment 5a(b)(4)-2 to indicate that foreign transaction fees 
charged by the card issuer are considered transaction charges for the 
use of a card for purchases, and thus must be disclosed in the table 
required under Sec.  226.5a.
    In the May 2008 Proposal, the Board noted its concern about the 
inconsistency in requiring foreign transaction fees in the account-
opening table required by Sec.  226.6, but prohibiting that fee in the 
table required by Sec.  226.5a. In the June 2007 Proposal, the Board 
proposed that issuers may substitute the account-opening table for the 
table required by Sec.  226.5a. See proposed comment 5a-2. Under the 
June 2007 Proposal, circumstances could have arisen where one issuer 
substitutes the account-opening table for the table required under 
Sec.  226.5a (and thus is required to disclose the foreign transaction 
fee) but another issuer provides the table required under Sec.  226.5a 
(and thus is prohibited from disclosing the foreign transaction fee). 
If a consumer was comparing the disclosures for these two offers, it 
may appear to the consumer that the issuer providing the account-
opening table charges a foreign transaction fee and the issuer 
providing the table required under Sec.  226.5a does not, even though

[[Page 5291]]

the second issuer may charge the same or a higher foreign transaction 
fee than the first issuer. Thus, to promote uniformity, the Board 
proposed in May 2008 to require issuers to disclose the foreign 
transaction fee in both the account-opening table required by Sec.  
226.6 and the table required by Sec.  226.5a. See proposed comment 
5a(b)(4)-2. The Board also proposed that foreign transaction fees would 
be disclosed in the table required by Sec.  226.5a similar to how those 
fees are disclosed in the proposed account-opening tables published in 
the June 2007 Proposal. See proposed Model Forms and Samples G-17(A), 
(B) and (C).
    In response to the May 2008 Proposal, most consumer group and 
industry commenters supported the Board's proposal to require issuers 
to disclose foreign transaction fees in the table required by Sec.  
226.5a. Nonetheless, some industry commenters opposed the proposal 
because they believed that consumers would not shop on these fees. One 
industry commenter indicated that disclosing the foreign transaction 
fee in the table only in connection with purchases may be misleading to 
consumers as some issuers also charge this fee on cash advances in 
foreign currencies or in foreign countries. This commenter noted that 
in the June 2007 Proposal, the Board identified this fee in proposed 
Sec.  226.5a(b)(4)(ii) as ``a fee imposed by the issuer for 
transactions made in a foreign currency or that take place in a foreign 
country.'' This commenter encouraged the Board to adopt similar 
``transaction'' language in the final rule for Sec.  226.5a(b)(4).
    Comment 5a(b)(4)-2 is adopted as proposed in the May 2008 Proposal 
with several modifications. As discussed above, the final rule requires 
issuers to disclose foreign transaction fees in the table required by 
Sec.  226.5a, to be consistent with the requirement to disclose that 
fee in the account-opening table required by Sec.  226.6. In addition, 
foreign transaction fees could be relevant to consumers who travel in 
other countries or conduct transactions in foreign currencies, and the 
ability to choose a credit card based on the presence of the fee may be 
important to those consumers.
    The Board notes that Sec.  226.5a(b)(4) requires issuers to 
disclose any transaction charge imposed by the card issuer for the use 
of the card for purchases. Thus, comment 5a(b)(4)-2 clarifies that a 
transaction charge imposed by the card issuer for the use of the card 
for purchases includes any fee imposed by the issuer for purchases in a 
foreign currency or that take place outside the United States or with a 
foreign merchant. As noted by one commenter on the May 2008 Proposal, 
some issuers also charge a foreign transaction fee on cash advances in 
foreign currencies or in foreign countries. Issuers that charge a 
foreign transaction fee on cash advances in foreign currencies or in 
foreign countries are required to disclose that fee under Sec.  
226.5a(b)(8), which requires the issuer to disclose in the table any 
fee imposed for an extension of credit in the form of cash or its 
equivalent. Comment 5a(b)(8)-2 is added to clarify that cash advance 
fees include any charge imposed by the card issuer for cash advances in 
a foreign currency or that take place in a foreign country. In 
addition, both comments 5a(b)(4)-2 and 5a(b)(8)-2 clarify that if an 
issuer charges the same foreign transaction fee for purchases and cash 
advances in a foreign currency or in a foreign country, the issuer may 
disclose this foreign transaction fee as shown in Samples G-10(B) and 
G-10(C). Otherwise, the issuer will need to revise the foreign 
transaction fee language shown in Samples G-10(B) and G-10(C) to 
disclose clearly and conspicuously the amount of the foreign 
transaction fee that applies to purchases and the amount of the foreign 
transaction fee that applies to cash advances. Moreover, both comments 
5a(b)(4)-2 and 5a(b)(8)-2 include a cross reference to comment 4(a)-4 
for guidance on when a foreign transaction fee is considered charged by 
the card issuer.
5a(b)(5) Grace Period
    Currently, Sec.  226.5a(b)(5), which implements TILA Section 
127(c)(A)(iii)(I), requires that card issuers disclose in the Sec.  
226.5a table the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. Section 226.5a(a)(2)(iii), which implements TILA Section 
122(c)(2)(C), requires credit card applications and solicitations under 
Sec.  226.5a to 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. 15 U.S.C. 1632(c)(2)(C). 
In the June 2007 Proposal, the Board proposed 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, such as the account-opening table.
    In response to the June 2007 Proposal, one industry commenter 
recommended that the Board no longer mandate the use of the term 
``grace period'' in the table. Although TILA specifically requires use 
of the term ``grace period'' in the Sec.  226.5a table, this commenter 
urged the Board to use its exception authority to choose a term that is 
more understandable to consumers. This commenter pointed out that its 
research as well as that conducted by the Board and the GAO had 
demonstrated that the term is confusing as a descriptor of the 
interest-free period between the purchase and the due date for 
customers who pay their balances in full. This commenter suggested that 
the Board revise the disclosure of the grace period in the table to use 
the heading ``interest-free period'' instead of ``grace period.''
    In the May 2008 Proposal, the Board proposed to use its exemption 
authority to delete the requirement to use the term ``grace period'' in 
the table required by Sec.  226.5a. 15 U.S.C. 1604(a) and (f) and 
1637(c)(5). As the Board discussed in the June 2007 Proposal, consumer 
testing conducted for the Board prior to the June 2007 Proposal 
indicated that some participants misunderstood the term ``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 in its Report on Credit Card Rates and Fees found similar 
misunderstandings by consumers in its consumer testing. See page 50 of 
GAO Report. Furthermore, many participants in the GAO testing 
incorrectly indicated that the grace period was the period of time 
promotional interest rates applied. Nonetheless, in consumer testing 
conducted for the Board prior to the June 2007 Proposal, the Board 
found that participants tended to understand the term ``grace period'' 
more clearly when additional context was added to the language of the 
grace period disclosure, 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 proposed to retain the term ``grace period.''
    As discussed above, in response to the June 2007 Proposal, one 
commenter performed its own testing with consumers on the grace period 
disclosure proposed by the Board. This commenter found that the term 
``grace period'' was still confusing to the participants in its 
testing, even with the additional context given in the grace period 
disclosure proposed by the Board. The commenter found that consumers 
understood the term ``interest-free period'' to more accurately 
describe the interest-free period between the purchase and the due date

[[Page 5292]]

for customers who pay their balances in full.
    In consumer testing conducted by the Board prior to the June 2007 
Proposal, the Board tested the phrase ``interest-free period.'' The 
Board found that some consumers believed the phase ``interest-free 
period'' referred to the period of time that a zero percent 
introductory rate would be in effect, instead of the grace period. 
Subsequently, in consumer testing conducted by the Board in March 2008, 
the Board tested disclosure tables for a credit card solicitation that 
used the phrase ``How to Avoid Paying Interest on Purchases'' as the 
heading for the row containing the information on the grace period. 
Participants in this testing generally seemed to understand this phrase 
to describe the grace period. In addition, in the March 2008 consumer 
testing, the Board also tested the phrase ``Paying Interest'' in the 
context of a disclosure relating to a check that accesses a credit card 
account, where a grace period was not offered on this access check. 
Specifically, the phrase ``Paying Interest'' was used as the heading 
for the row containing information that no grace period was offered on 
the access check. Participants seemed to understand this phrase to mean 
that no grace period was being offered on the use of the access check. 
Thus, in the May 2008 Proposal the Board proposed to revise proposed 
Sec.  226.5a(b)(5) to require that issuers use the phrase ``How to 
Avoid Paying Interest on Purchases,'' or a substantially similar 
phrase, as the heading for the row describing the grace period. If no 
grace period on purchases is offered, when an issuer is disclosing this 
fact in the table, the issuer would have been required to use the 
phrase ``Paying Interest,'' or a substantially similar phrase, as the 
heading for the row describing that no grace period is offered.
    Comments on this aspect of the May 2008 Proposal were mixed. Some 
consumer group and industry commenters supported the new headings. Some 
of these commenters suggested that the new headings be mandated, that 
is, the Board should not allow ``substantially similar'' phrases to be 
used. Other industry and consumer group commenters suggested that the 
Board retain the use of the term ``grace period'' because they claimed 
that consumers generally understand the ``grace period'' phrase. In 
addition, other industry commenters suggested that the Board mandate 
one row heading (regardless of whether there is a grace period or not) 
and that heading should be ``interest-free period.'' These commenters 
believed that the phrase ``interest-free period'' would help consumers 
better understand the ``grace period'' concept generally and would 
reinforce for consumers that they pay interest from the date of the 
transaction for transactions other than purchases.
    In one of the rounds of consumer testing conducted by the Board 
after the May 2008 Proposal, the following three headings were tested 
for describing the ``grace period'' concept: ``How to Avoid Paying 
Interest on Purchases,'' ``Grace Period'' and ``Interest-free Period.'' 
Participants in this round of testing were asked which of the three 
headings most clearly communicates the information contained in that 
row of the table. Most of the participants selected the heading ``How 
to Avoid Paying Interest on Purchases.'' A few of the participants 
selected the heading ``Interest-Free Period.'' None of the participants 
selected ``Grace Period'' as the best heading. A few participants 
commented that the term ``grace period'' was misleading because some 
people might think of a ``grace period'' as a period of time after the 
due date that a consumer could pay without being considered late. In 
addition, the Board believes that the heading ``How to Avoid Paying 
Interest on Purchases'' communicates in plain language the concept of 
the ``grace period,'' without requiring consumers to understand a 
specific phrase like ``grace period'' or ``interest-free period'' to 
represent that concept.
    In addition, in the consumer testing conducted after the May 2008 
Proposal, the Board continued to test the phrase ``Paying Interest'' as 
a disclosure heading in the context of a check that accesses a credit 
card account, where no grace period was offered on this access check. 
When asked whether there was any way to avoid paying interest on 
transactions made with the access check, most participants in these 
rounds of testing understood the ``Paying Interest'' phrase to mean 
that no grace period was being offered on the use of the access check. 
Thus, the final rule in Sec.  226.5a(b)(5) adopts the new headings as 
proposed in May 2008, pursuant to the Board's authority in TILA Section 
105(a) to provide exceptions necessary or proper to effectuate the 
purposes of TILA. 15 U.S.C. 1604(a).
    Although the heading of the row will change depending on whether or 
not a grace period for all purchases is offered on the account, the 
Board does not believe that different headings will significantly 
undercut a consumer's ability to compare terms of credit card accounts. 
Most issuers offer a grace period on all purchases; thus, most issuers 
will use the term ``How to Avoid Paying Interest on Purchases.'' 
Nonetheless, in those cases where a consumer is reviewing the tables 
for two credit card offers--one which has a row with the heading ``How 
to Avoid Paying Interest on Purchases'' and one with a row ``Paying 
Interest''--the Board believes that consumers will recognize that the 
information in those two rows relate to the same concept of when 
consumers will pay interest on the account.
    As discussed above, some commenters suggested that the new headings 
be mandated to promote uniformity of the table, that is, the Board 
should not allow ``substantially similar'' phrases to be used. The 
Board agrees that consistent headings are important to enable consumers 
to better compare grace periods for different offers. Section 
226.5a(b)(5) specifies that in disclosing a grace period that applies 
to all types of purchases in the table, the phrase ``How to Avoid 
Paying Interest on Purchases'' must be used as the heading for the row 
describing the grace period. If a grace period is not offered on all 
types of purchases or is not offered on any purchases, in describing 
this fact in the table, the phrase ``Paying Interest'' must be used as 
the heading for the row describing this fact.
    As discussed above, Sec.  226.5a(b)(5) currently requires that card 
issuers disclose in the Sec.  226.5a table the date by which or the 
period within which any credit extended for purchases may be repaid 
without incurring a finance charge. 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).''
    In the June 2007 Proposal, the Board proposed to amend Sec.  
226.5a(b)(5) to require card issuers to disclose briefly any conditions 
on the applicability of the grace period. The Board also proposed to 
amend comment 5a(b)(5)-1 to provide guidance for how issuers may meet 
the requirements in proposed Sec.  226.5a(b)(5). Specifically, proposed 
comment 5a(b)(5)-1 would have provided that 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 
requirements to disclose conditions on the applicability of the grace 
period by providing the

[[Page 5293]]

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.''
    In response to the June 2007 Proposal, several commenters suggested 
that the Board revise the model language provided in proposed comment 
5a(b)(5)-1 to describe the grace period. One commenter suggested the 
following language: ``Your due date is [at least] 25 days after your 
bill is totaled each month. If you don't pay your bill in full by your 
due date, you will be charged interest on the remaining balance.'' 
Other commenters also recommended that the Board revise the disclosure 
of the grace period to make clearer that the consumer must pay the 
total balance in full each month by the due date to avoid paying 
interest on purchases. In addition, some consumer groups commented that 
if the issuer does not provide a grace period, the Board should mandate 
specific language that draws the consumer's attention to this fact.
    Two industry commenters to the June 2007 Proposal noted that the 
``grace period'' description in proposed sample forms was conditioned 
on ``if you pay your entire balance in full each month.'' One commenter 
suggested deleting the phrase as unnecessary; another asked the Board 
to provide flexibility in the description for creditors that offer a 
grace period on purchases if the purchase (not the entire) balance is 
paid in full.
    In the March 2008 consumer testing, the Board tested the following 
language to describe a grace period: ``Your due date is [at least] ---- 
days after the close of each billing cycle. We will not charge you 
interest on purchases if you pay your entire balance (excluding 
promotional balances) by the due date each month.'' Participants that 
read this language appeared to understand it correctly. That is, they 
understood that they could avoid paying interest on purchases is they 
paid their bill by the due date each month. Thus, in May 2008, the 
Board proposed to amend comment 5a(b)(5)-1 to provide this language as 
guidance to issuers on how to disclose a grace period. The Board noted 
that currently issuers typically require consumers to pay their entire 
balance in full each month to qualify for a grace period on purchases. 
However, in May 2008, the Board and other federal banking agencies 
proposed to prohibit most issuers from requiring consumers to pay off 
promotional balances in order to receive any grace period offered on 
non-promotional purchases. See 73 FR 28904, May 19, 2008. Thus, 
consistent with this proposed prohibition, the language in proposed 
comment 5a(b)(5)-1 would have indicated that the entire balance 
(excluding promotional balances) must be paid each month to avoid 
interest charges on purchases.
    Also, in the March 2008 consumer testing, the Board tested language 
to describe that no grace period was being offered. Specifically, in 
the context of testing a disclosure related to an access check for 
which a grace period was not offered, the Board tested the following 
language: ``We will begin charging interest on these check transactions 
on the transaction date.'' Most participants that read this language 
understood they could not avoid paying interest on this check 
transaction, and therefore, that no grace period was being offered on 
this check transaction. Thus, in May 2008, the Board proposed to add 
comment 5a(b)(5)-2 to provide guidance on how to disclose the fact that 
no grace period on purchases is offered on the account. Specifically, 
proposed comment 5a(b)(5)-2 would have provided that issuers may use 
the following language to describe that no grace period on purchases is 
offered, as applicable: ``We will begin charging interest on purchases 
on the transaction date.''
    In response to the May 2008 Proposal, several industry commenters 
urged the Board to provide flexibility for card issuers to amend the 
``grace period'' language to allow for a more accurate description of 
the grace period as may be appropriate or necessary. For example, these 
commenters indicated that this flexibility is needed since promotional 
balances may be described with more particularity (or using different 
terminology) on billing statements and elsewhere, and also since there 
may be circumstances in which the grace period could be conditioned on 
additional factors, aside from payment of a balance in full. In 
addition, several industry commenters noted that if the interagency 
proposal to prohibit most issuers from treating a payment as late 
unless consumers have been provided a reasonable amount of time to make 
that payment is adopted, issuers may have two due dates each month--one 
for the grace period end date and one for when payments will be 
considered late. Issuers would need flexibility to amend the grace 
period language to reference clearly the grace period end date. Also, 
several consumer group commenters suggested that the Board not adopt 
the proposed model language when a grace period is not offered on 
purchases, namely ``We will begin charging interest on purchases on the 
transaction date.'' These commenters suggested instead that the Board 
mandate the following language: ``No grace period.''
    In consumer testing conducted by the Board after the May 2008 
Proposal, the Board tested the following language describing the grace 
period: ``Your due date is [at least] ---- days after the close of each 
billing cycle. We will not charge you interest on purchases if you pay 
your entire outstanding balance (excluding promotional balances) by the 
due date each month.'' When asked whether there was any way not to pay 
interest on purchase, most participants noticed the language describing 
the grace period and appeared generally to understand that they could 
avoid paying interest on purchases by paying their balance in full each 
month. Nonetheless, most participants did not understand the phrase 
``(excluding promotional balances).'' In the context of testing a 
disclosure related to an access check for which a grace period was not 
offered, the Board tested the following language: ``We will begin 
charging interest on these check transactions on the transaction 
date.'' When asked where there was any way to avoid paying interest on 
these check transactions, most participants saw the above language and 
understood that there was no grace period for these check transactions.
    Based on this testing, the Board adopts in comment 5a(b)(5)-1 the 
model language proposed in May 2008 for describing a grace period that 
is offered on all types of purchases, with one modification. 
Specifically, the phrase ``(excluding promotional balances)'' is 
deleted from the model language. Thus, the model language is revised to 
read: ``Your due date is [at least] ---- days after the close of each 
billing cycle. We will not charge you interest on purchases if you pay 
your entire balance by the due date each month.'' As discussed in 
supplemental information to final rules issued by the Board and other 
federal banking agencies published elsewhere in today's Federal 
Register, the Board and the other federal banking agencies have 
withdrawn the proposal that would have prohibited most issuers from 
requiring consumers to pay off promotional balances in order to receive 
any grace period offered on non-promotional purchases. Thus, the phrase 
``(excluding promotional balances)'' is deleted as unnecessary. In 
addition, other technical edits have been made to comment 5a(b)(5)-1.
    The final rule adopts in comment 5a(b)(5)-2 the following model 
language proposed in May 2008 to describe that no grace period on any 
purchases is

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offered, as applicable: ``We will begin charging interest on purchases 
on the transaction date.'' Comment 5a(b)(5)-3 is added to clarify that 
if an issuer provides a grace period on some types of purchases but no 
grace period on others, the issuer, as appropriate, may combine and 
revise the model language in comments 5a(b)(5)-1 and -2 to describe to 
which types of purchases a grace period applies and to which types of 
purchases no grace period is offered.
    The Board's language in 5a(b)(5)-1 for describing a grace period on 
all purchases, and in 5a(b)(5)-2 for describing that no grace period 
exists on any purchases is not mandatory. This model language is meant 
as a safe harbor for issuers. Credit card issuers may amend this 
language as necessary or appropriate to describe accurately the grace 
period (or lack of grace period) offered on purchases on the account.
5a(b)(6) Balance Computation Method
    TILA Section 127(c)(1)(A)(iv) requires the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance for purchases 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, but 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, however, 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 the 
June 2007 Proposal, the Board proposed to retain a brief reference to 
the balance computation method, but move the disclosure from the table 
to directly below the table. See proposed Sec.  226.5a(a)(2)(iii).
    Commenters generally supported the proposal. Many consumers urged 
the Board to ban the use of a computation method commonly called ``two-
cycle'' as unfair. A federal banking agency urged the Board to require 
``cautionary disclosures'' where technical explanations were 
insufficient, such as a for a description of two-cycle billing. Two 
commenters suggested expanding the list of commonly-used methods in 
Sec.  226.5a(g) to include the daily balance method. One industry 
commenter suggested eliminating the requirement to provide the name of 
the balance computation method, and requiring a toll-free telephone 
number or an optional reference to the creditor's Web site instead.
    Currently, the Board in Sec.  226.5a(g) 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. In the June 2007 Proposal, 
the Board proposed to retain these four balance computation methods.
    In May 2008, the Board and other federal banking agencies proposed 
to prohibit most issuers from using a balance computation method 
commonly referred to as the ``two-cycle'' balance method. See 73 FR 
28904, May 19, 2008. Nonetheless, in the May 2008 Regulation Z 
Proposal, the Board did not propose deleting the two-cycle average 
daily balance method from the list in Sec.  226.5(g) because the 
prohibition would not have applied to all issuers, such as state-
chartered credit unions that would not have been subject to the 
National Credit Union Administration's proposed rules.
    In response to the May 2008 Proposal, several consumer groups 
suggested that the Board consider requiring issuers that use the two-
cycle method to disclose that ``this method is the most expensive 
balance computation method and is prohibited for most credit card 
issuers,'' assuming that the banking agencies' proposed rules 
prohibiting most issuers from using the ``two cycle'' method goes 
forward. In addition, these consumer groups continued to advocate use 
of an ``Energy Star'' approach in describing the balance calculation 
methods, where each balance computation method would be rated on how 
expensive it is, and that rating would be disclosed.
    The Board is adopting the requirement to disclose the name of the 
balance computation method used by the creditor beneath the table, as 
proposed. In consumer testing conducted for the Board prior to the June 
2007 Proposal, virtually no participants understood the two balance 
computation methods used by most 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 prior to the June 2007 Proposal, 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.
    In consumer testing conducted for the Board in March 2008, a 
version of the table was used which attempted to explain in more detail 
the ``average daily balance method'' and the ``two-cycle average daily 
balance method'' and the situation in which the two-cycle method 
results in higher interest charges--namely, in those months where a 
consumer paid his or her entire outstanding balance in full in one 
billing cycle but then does not pay the entire balance in full the 
following cycle. While participants that saw the table understood that 
under two-cycle billing, interest would be charged on balances during 
both the current and previous billing cycles, most participants did not 
understand that they would only be charged interest in the previous 
billing cycle if they had paid the outstanding balance in full for the 
previous cycle but not for the current cycle. Thus, most participants 
did not understand that two-cycle billing would not lead to higher 
interest charges than the ``average daily balance method'' if a 
consumer never paid in full.
    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, 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 require 
issuers 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 and may distract from more 
important information contained in the table. Thus, the final rule 
retains a brief reference to the balance computation method, but moves 
the disclosure from the table to directly below the table. See Sec.  
226.5a(a)(2)(iii).
    The final rule continues to require that issuers disclose the name 
of the balance computation method beneath the table because this 
disclosure is required by TILA Section 127(c)(1)(A)(iv). Consumers and 
others will have access to information about the balance calculation 
method used on the credit card account if they find it useful. Under 
final rules issued by the Board and other federal banking agencies 
published elsewhere in today's

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Federal Register, most credit card issuers are prohibited from using 
the ``two cycle'' balance computation method. Nonetheless, this final 
rule retains the ``two-cycle'' disclosure because not all issuers are 
covered by the final rules published elsewhere in today's Federal 
Register which preclude use of the two-cycle balance computation 
method.
    The Board is not requiring issuers that are permitted to and choose 
to use the two-cycle method to disclose that ``this method is the most 
expensive balance computation method and is prohibited for most credit 
card issuers.'' As discussed above, a statement that the two-cycle 
method is the most expensive balance computation method would be 
accurate only for those consumers who sometimes pay their bill in full 
and sometime do not. For consumers that never pay their bill in full, 
or always pay their bill in full, the interest paid under the two-cycle 
method is the same as paid under the one-cycle average daily balance 
method. For the same reasons, the Board is not requiring an ``Energy 
Star'' approach in describing the balance calculation methods, which 
would require each balance computation method to be rated on how 
expensive it is, and require that rating to be disclosed. Whether one 
balance computation method is more expensive than another would depend 
on how a consumer uses his or her account.
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 Sec.  226.4. For example, a charge for a cash advance at 
an ATM would be disclosed under Sec.  226.5a(b)(8) unless a similar 
charge is imposed for ATM transactions not involving an extension of 
credit. In the June 2007 Proposal, the Board proposed to provide that 
all transaction fees on credit cards would be considered finance 
charges. Thus, the Board proposed to delete the current guidance 
discussed in comment 5a(b)(8)-1 as obsolete. As discussed in the 
section-by-section analysis to Sec.  226.4, the final rule adopts the 
proposal that all transaction fees imposed by a card issuer on a 
cardholder are considered finance charges. Thus, the Board also deletes 
current comment 5a(b)(8)-1 as proposed.
    A new comment 5a(b)(8)-1 is added to refer issuers to Samples G-
10(B) and G-10(C) for guidance on how to disclose clearly and 
conspicuously the cash advance fee. In addition, as discussed in the 
section-by-section analysis to Sec.  226.5a(b)(4), new comment 
5a(b)(8)-2 is added to clarify that cash advance fees includes any 
charge imposed by the card issuer for cash advances in a foreign 
currency or that take place outside the United States or with a foreign 
merchant. In addition, comment 5a(b)(8)-2 clarifies that if an issuer 
charges the same foreign transaction fee for purchases and cash 
advances in a foreign currency or that take place outside the United 
States or with a foreign merchant, the issuer may disclose this foreign 
transaction fee as shown in Samples G-10(B) and (C). Otherwise, the 
issuer will need to revise the foreign transaction fee shown in Samples 
G-10(B) and (C) to disclose clearly and conspicuously the amount of the 
foreign transaction fee that applies to purchases and the amount of the 
foreign transaction fee that applies to cash advances. Moreover, 
comment 5a(b)(8)-2 provides a cross reference to comment 4(a)-4 for 
guidance on when a foreign transaction fee is considered charged by the 
card issuer.
    In addition, consistent with the account-opening disclosures 
required in Sec.  226.6, comment 5a(b)(8)-3 is added to clarify that 
any charge 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 is not a cash advance fee that must be disclosed in 
the table pursuant to Sec.  226.5a(b)(8).
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. In the June 2007 Proposal, 
the Board proposed 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 final rule adopts the Board's proposal to require 
card issuers to disclose in the table the reasons that a penalty rate 
may be imposed. See Sec.  226.5a(b)(1)(iv). The final rule also 
requires card issuers to disclose the returned-payment fee, pursuant to 
the Board's authority under TILA Section 127(c)(5), so that consumers 
are told both consequences of returned payments. 15 U.S.C. 1637(c)(5). 
In addition, returned-payment fees are similar to late-payment fees in 
that returned-payment fees also can relate to a consumer not paying on 
time; if the only payment made by a consumer during a given billing 
cycle is returned, the return of the payment also could result in the 
consumer being deemed to have paid late. Late-payment fees are 
disclosed in the table and the Board believes that consumers also 
should be aware of returned-payment fees when shopping for a credit 
card. See section-by-section analysis to Sec.  226.5a(a)(2).
Cross References 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 prior to the June 2007 Proposal, 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, in the June 2007 
Proposal, the Board proposed 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 imposed (such as a late payment, going over the 
credit limit, or a returned payment), the issuer in disclosing the fee 
also must disclose that the penalty rate may apply, and must provide a 
cross reference to the penalty rate. Proposed Samples G-10(B) and G-
10(C) would have provided guidance on how to provide these disclosures.
    In response to the June 2007 Proposal, several industry commenters 
suggested that the cross reference be eliminated, as unnecessary and 
leading to ``information overload.'' In addition, one commenter 
suggested that the cross reference not be required if one late payment 
cannot cause the APR to increase. Alternatively, this commenter 
suggested that the conditions be disclosed with the cross reference, 
for example, ``If two consecutive payments are late, your APRs may also 
be increased; see Penalty APR section above.''
    In quantitative consumer testing conducted for the Board after the 
May 2008 Proposal, the Board investigated whether the presence of a 
cross reference from a penalty fee, specifically the over-the-limit 
fee, to the penalty APR improved consumers' awareness of the fact that 
a penalty rate could be applied to their accounts if they went over the 
credit limit. The results of the testing indicate that there was no 
statistically significant improvement in consumers' awareness that 
going over the limit could trigger penalty pricing when a cross 
reference was included. Because the testing suggests that cross-
references from penalty fees to the

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penalty rate disclosure does not improve consumer understanding of the 
circumstances in which penalty pricing can be applied to their 
accounts, and due to concerns about ``information overload,'' proposed 
Sec.  226.5a(b)(13) and comment 5a(b)(13)-1 have been withdrawn from 
the final rule. Thus, the final rule does not require cross-references 
from penalty fees to penalty rates in the Sec.  226.5a table.
5a(b)(13) 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 obtains 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 with 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 proposed new Sec.  
226.5a(b)(14) in the June 2007 Proposal to require that the issuer 
disclose any fee for this coverage in the table. In addition, proposed 
Sec.  226.5a(b)(14) would have required 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) would have 
provided guidance on how to provide the fee information and the cross 
reference in the table. The final rule adopts new Sec.  226.5a(b)(13) 
(renumbered from Sec.  226.5a(b)(14)) as proposed. 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)(14) 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 where 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, in the June 2007 
Proposal, the Board proposed to add Sec.  226.5a(b)(16) to inform 
consumers about the impact of these fees on their initial available 
credit. Specifically, proposed Sec.  226.5a(b)(16) would have provided 
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 would have been required to 
consider only 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 would not have been required to 
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 would have been 
required to disclose two figures--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.
    In addition, the Board proposed 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 and charged to the account when 
the account is opened, such as one-time issuance and set-up fees. For 
example, in calculating the available credit, issuers would have been 
required to 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) would have 
provided guidance to issuers on how to provide this disclosure. (See 
proposed comment 5a(b)(16)-2).
    As described above, a card issuer would have been required to 
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. A card issuer would not have been required to consider other 
kinds of fees, such as late fees or over-the-limit fees when evaluating 
whether the 25 percent threshold test is met. The Board solicited 
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.
    In response to the June 2007 Proposal, several commenters suggested 
start-up fees should be banned in some instances. Several consumer 
groups and one member of Congress suggested that start-up fees that 
equal 25 percent or more of the available credit line be banned. 
Another consumer group suggested that start-up fees exceeding 5 percent 
of the available credit line be banned. In addition, several consumer 
groups suggested that the Board should prohibit security deposits from 
being charged to the account as an unfair practice.
    Assuming the Board did not ban start-up fees, several consumer 
groups suggested that the threshold for the available credit disclosure 
be lowered to 5 percent instead of 25 percent. In contrast, several 
industry commenters suggested that the threshold be lowered to 10 
percent or 15 percent. In addition, while some commenters supported the 
Board's proposal to consider only required start-up fees (and not 
optional

[[Page 5297]]

fees) in deciding whether the 25 percent threshold is met, some 
consumer groups suggested that the threshold test be based on required 
and optional fees. Several consumer groups also recommended that the 
language of the available credit disclosure be shortened and a 
percentage be disclosed, as follows: ``AVAILABLE CREDIT: The fees 
charged when you open this account will be $25 (or $40 with an 
additional card), which is 10% (or 16% with an additional card) of the 
minimum credit limit of $250. If you receive a $250 credit limit, you 
will have $225 in available credit (or $210 with an additional card).'' 
These consumer groups also suggested that the available credit 
disclosure be required in advertisements as well, especially in the 
solicitation letter for direct mail and Internet applications and 
solicitations.
    In May 2008, the Board and other federal banking agencies proposed 
to address concerns regarding subprime credit cards by prohibiting 
institutions from financing security deposits and fees for credit 
availability (such as account-opening fees or membership fees) if those 
charges would exceed 50 percent of the credit limit during the first 
twelve months and from collecting at account opening fees that are in 
excess of 25 percent of the credit limit in effect on the consumer's 
account when opened. See 73 FR 28904, May 19, 2008. In the 
supplementary information to the May 2008 Regulation Z Proposal, the 
Board indicated that if such an approach is adopted as proposed, 
appropriate revisions would be made to ensure consistency among the 
regulatory requirements and to facilitate compliance when the Board 
adopted revisions to the Regulation Z rules for open-end (not home-
secured) credit.
    In response to the May 2008 Regulation Z Proposal, several 
commenters again suggested that the threshold for the available credit 
disclosure be reduced to 5 percent or 10 percent. Another consumer 
group commenter suggested that the Board always require the available 
credit disclosure if there are start-up fees on the account, including 
annual fees. In addition, several consumer group commenters reiterated 
their comments on the June 2007 Proposal that the threshold test for 
when the available credit disclosure must be given should be based on 
required and optional fees.
    Under final rules issued by the Board and other federal banking 
agencies published elsewhere in today's Federal Register, most credit 
card issuers are precluded from financing security deposits and fees 
for credit availability if those charges would exceed 50 percent of the 
credit limit during the first six months and from collecting at account 
opening, fees that are in excess of 25 percent of the credit line in 
effect on the consumer's account when opened. Notwithstanding these 
substantive provisions, the Board believes that for subprime cards, a 
disclosure of available credit is needed in the table to inform 
consumers about the impact of start-up fees on the initial available 
credit.
    The final rule adopts Sec.  226.5a(b)(16) with several 
modifications, and renumbers the provision as Sec.  226.5a(b)(14). 
Specifically, the final rule amends the proposal to provide that fees 
or security deposits that are not charged to the account are not 
subject to the disclosure requirements in Sec.  226.5a(b)(14). In 
addition, comment 5a(b)(14)-1 (proposed as comment 5a(b)(16)-1) is 
revised from the proposal to clarify that in calculating the amount of 
the available credit including optional fees, if optional fees could be 
charged multiple times, the issuer shall assume that the optional fee 
is only imposed once. For example, if an issuer charges a fee for each 
additional card issued on the account, the issuer in calculating the 
amount of the available credit including optional fees must assume that 
the cardholder requests only one additional card. Also, comment 
5a(b)(14)-1 is revised to specify that in disclosing the available 
credit, an issuer must round down the available credit amount to the 
nearest whole dollar.
    The final rule also differs from the proposal in that it contains a 
15 percent threshold for when the credit availability disclosure must 
be given, namely, when required fees for issuance or availability of 
credit, or a security deposit, that will be charged against the card 
when the account is opened equal 15 percent or more of the minimum 
credit limit applicable to the card. The Board lowered the threshold to 
15 percent to address commenters' concerns that a lower threshold would 
better inform consumers about offers of credit where large portions of 
the available credit on a new account are taken up by fees before the 
consumer has the opportunity to use the account. The Board has not 
lowered the threshold to 5 percent or 10 percent as suggested by some 
other commenters. The Board believes that a 15 percent threshold will 
ensure that consumers will receive the disclosure in connection with 
subprime credit card products, but that the disclosure will generally 
not be required in connection with a prime credit card account, for 
which credit limits are higher and less fees are charged when the 
account is opened. The Board believes that the disclosure is most 
useful to consumers when a substantial portion of the minimum credit 
line is not available because required start-up fees (or a required 
security deposit) are charged to the account. The available credit 
disclosure may not be as meaningful to consumers, when those consumers 
are receiving 90 to 95 percent of the minimum credit line in available 
credit at account opening.
    In addition, the Board retained in the final rule that the 
available credit disclosure must be given if required start-up fees (or 
a required security deposit) charged against the account at account-
opening equal 15 percent or more of the minimum credit line. Optional 
start-up fees are not considered when determining whether the 15 
percent threshold is met. Nonetheless, if the 15 percent threshold is 
met in connection with the required fees or security deposit, the 
issuer must disclose two figures--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 (assuming that each optional fee is only charged 
once). The Board believes that it is appropriate not to consider 
optional fees when determining whether the 15 percent threshold is 
initially met because consumers are not required to incur these fees to 
obtain the credit card account. Consistent with the proposal, the final 
rule also requires an issuer to consider only fees for the issuance or 
availability of credit when determining whether the 15 percent 
threshold is met; other types of fees such as late-payment fees or 
over-the-limit fees are not required to be considered.
    Moreover, the final rule does not adopt the language for the 
available credit disclosure suggested by several consumer groups. The 
Board believes that including percentages in the disclosure, as 
suggested by those consumer groups, would be confusing to consumers. 
The final rule also does not require that issuers provide the available 
credit disclosure in the solicitation letter for direct mail and 
Internet applications and solicitations, as suggested by several 
consumer group commenters. In consumer testing conducted by the Board, 
participants generally noticed and understood the available credit 
disclosure in the table required by Sec.  226.5a. Thus, the Board does 
not believe that repeating that disclosure in the solicitation letter 
for direct mail and Internet applications and solicitations is needed. 
Sample

[[Page 5298]]

G-10(C) sets forth an example of how the available credit disclosure 
may be made.
5a(b)(15) Web Site Reference
    In June 2007, the Board proposed 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.\17\ The Board recognized 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 
understanding about how credit cards work generally, with some 
participants showing a firm understanding of terms that relate to 
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 APR is--as well as terms that typically apply 
to credit card accounts. Through the Web site, the Board may continue 
to expand the explanation of other credit card terms, such as grace 
periods, that may be difficult to explain concisely in the disclosures 
given with applications and solicitations.
---------------------------------------------------------------------------

    \17\ The materials can be found at http://www.federalreserve.gov/pubs/shop/default.htm.
---------------------------------------------------------------------------

    In response to the June 2007 Proposal, several industry commenters 
questioned whether consumers would use the Web site resource, and 
suggested that the Board either not require the Web site disclosure or 
place the disclosure outside of the table to avoid ``information 
overload.'' Consumer groups generally supported placing the Web site 
disclosure in the table, and requested that the Board provide an 
alternative information source for those consumers who lack Internet 
access, such as a toll-free telephone number at which consumers can 
obtain a free copy of similar information.
    The final rule adopts Sec.  226.5a(b)(15) (proposed as Sec.  
226.5a(b)(17)). 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 final rule requires a 
reference to a Board Web site to be included in the table because this 
is a cost-effective way to provide consumers with additional 
information on credit cards. The Board is not requiring creditors to 
also disclose a toll-free telephone number at which consumers can 
obtain a free copy of similar information from the Board. The Board 
anticipates that consumers are not likely to use a toll-free telephone 
number to request educational materials in these instances because they 
will not want to delay applying for a credit card until the materials 
are delivered. Thus, such a requirement would not significantly benefit 
consumers on the whole.
Payment Allocation and Other Suggested Disclosures Under Sec.  
226.5a(b)
    Payment allocation. Currently, many credit card issuers allocate 
payments in excess of the minimum payment 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. 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.
    In the consumer testing conducted for the Board prior to the June 
2007 Proposal, many participants did not understand how payments would 
be allocated and 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 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. In the supplementary information 
accompanying the June 2007 Proposal, the Board indicated its plans to 
conduct further testing of the disclosure to determine whether the 
disclosure could be improved to more effectively communicate to 
consumers how payment allocation can affect their interest charges.
    In the June 2007 Proposal, the Board proposed to add Sec.  
226.5a(b)(15) to require card issuers to explain payment allocation to 
consumers. Specifically, the Board proposed that issuers explain how 
payment allocation would affect consumers, if an initial discounted 
rate were offered on balance transfers or cash advances but not 
purchases. The Board proposed that issuers must disclose to consumers 
(1) that the initial discounted 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.
    In response to the June 2007 Proposal, several commenters 
recommended the Board test a simplified payment allocation disclosure 
that covers cases other than low rate balance transfers offered with a 
credit card. In consumer testing conducted for the Board in March 2008, 
the Board tested the following payment allocation disclosure: 
``Payments may be applied to balances with lower APRs first. If you 
have balances at higher APRs, you may pay more in interest because 
these balances cannot be paid off until all lower-APR balances are paid 
in full

[[Page 5299]]

(including balance transfers you make at the introductory rate).'' Some 
participants understood from prior experience that issuers typically 
will apply payments to lower APR balances first and the fact that this 
method causes them to incur higher interest charges. For those 
participants that did not know about payment allocation methods from 
prior experience, the disclosure tested was not effective in explaining 
payment allocation to them.
    In May 2008, the Board and other federal banking agencies proposed 
substantive provisions on how issuers may allocate payments. 73 FR 
28904, May 19, 2008. Specifically, under that proposal, when different 
annual percentage rates apply to different balances, most issuers would 
have been required to allocate amounts paid in excess of the minimum 
payment using one of three specified methods or a method that is no 
less beneficial to consumers. Furthermore, when an account has a 
discounted promotional rate balance or a balance on which interest is 
deferred, most issuers would have been required to give consumers the 
full benefit of that discounted rate or deferred interest plan by 
allocating amounts in excess of the minimum payment first to balances 
on which the rate is not discounted or interest is not deferred 
(except, in the case of a deferred interest plan, for the last two 
billing cycles during which interest is deferred). Most issuers also 
would have been prohibited from denying consumers a grace period on 
non-promotional purchases (if one is offered) solely because they have 
not paid off a balance at a promotional rate or a balance on which 
interest is deferred.
    In the supplementary information to the May 2008 Regulation Z 
Proposal, the Board indicated it would withdraw the proposal to require 
a card issuer to explain payment allocation to consumers in the table, 
if the substantive provisions on payment allocation proposed by the 
Board and other federal banking agencies in May 2008 were adopted.
    In response to the May 2008 Regulation Z Proposal, several consumer 
group commenters suggested that the Board retain a payment allocation 
disclosure, even if the substantive provisions on payment allocation 
were adopted. Specifically, these commenters suggested that the Board 
require issuers to disclose which of the three proposed payment 
allocation methods they will use when there is no promotional rate on 
the account. Also, these commenters indicated that issuers should be 
required to disclose how they apply the minimum payment. These 
commenters suggested that the payment allocation disclosures could 
appear outside the table required by Sec.  226.5a. Furthermore, these 
commenters suggested that some consumers might understand these 
disclosures and use them. In addition, these commenters indicated that 
disclosure of the payment allocation method would allow consumer groups 
to know which method an issuer is using and the consumer groups could 
rate the methods, to help consumers understand which card is better for 
the consumer.
    In consumer testing conducted for the Board after May 2008, 
different versions of disclosures explaining payment allocation were 
tested, including language adapted from current credit card 
disclosures. Before participants were shown any disclosures explaining 
payment allocation, they were asked a series of questions designed to 
determine whether they had prior knowledge of payment allocation 
methods. This portion of the testing consisted of showing a 
hypothetical example to participants and asking them, based on their 
prior experience, (i) how they believed the card issuer would allocate 
the payment and (ii) how the participant would want the payment 
allocated. Participants were then shown language explaining how a 
hypothetical card issuer would allocate payments. Each disclosure that 
was used in testing indicated that the issuer would apply payments to 
balances with lower APRs before balances with higher APRs. Consumers 
were then shown the same hypothetical example and asked the same series 
of questions. More information about the specific disclosures tested 
and the results of the testing are available in the December 2008 Macro 
Report on Quantitative Testing.
    Most participants who answered both questions correctly before 
being shown the disclosure, suggesting that they had prior knowledge of 
payment allocation, answered the questions correctly after reviewing 
the disclosure. Some of these participants, however, gave incorrect 
responses to questions that they had answered correctly before 
reviewing the disclosures, suggesting that the disclosure was 
detrimental to these participants' understanding of payment allocation 
practices. Only a small percentage of consumers who did not understand 
payment allocation prior to reviewing the disclosure, gave the correct 
responses after reviewing the disclosure. None of the versions of the 
disclosure that were tested performed significantly better than any of 
the others.
    The final rule does not require a disclosure regarding payment 
allocation in the table. As described above, the consumer testing 
conducted on behalf of the Board suggests that disclosures of payment 
allocation practices have only a minor positive impact on consumer 
comprehension. In addition, the Board and other federal banking 
agencies are substantively addressing payment allocation practices in 
rules published elsewhere in today's Federal Register. Specifically, 
the Board and other federal banking agencies are requiring issuers to 
allocate amounts paid in excess of the minimum payment using one of two 
specified methods. These substantive rules regarding payment allocation 
would permit issuers to use payment allocation methods that may be more 
complicated to disclose than the relatively simple example used in 
consumer testing, i.e., application of payments to balances with lower 
APRs before balances with higher APRs. Consequently, the Board does not 
believe that disclosure requirements would be helpful as a supplement 
to the substantive rules. Finally, even if consumers were able to 
understand payment allocation disclosures, it is unclear whether they 
would be able to evaluate whether one payment allocation method is 
better than another at the time they are shopping for a credit card 
because which payment allocation method is the most beneficial to a 
given consumer would depend on how that consumer uses the account.
    Additional disclosures. In response to the June 2007 Proposal, 
several commenters suggested that the Board require in the table 
information about the minimum payment formula, credit limit, any 
security interest, reasons terms on the account may change, and all 
fees imposed on the account.
    1. Minimum payment formula. In response to the June 2007 Proposal, 
several consumer groups urged the Board to require issuers to disclose 
in the table the minimum payment formula. They believed that this would 
allow consumers to understand what portion of principal balance 
repayment is being included in the minimum payment. Several industry 
commenters supported the Board's proposal not to require the minimum 
payment formula in the table. The final rule does not require the 
minimum payment formula in the table. 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 and

[[Page 5300]]

would be hard to describe concisely in the table.
    2. Credit limit. Card issuers often state a credit limit in a cover 
letter sent with an application or solicitation. Frequently, this 
credit limit is not disclosed 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 and other 
factors such as income, which is evaluated after the consumer submits 
the application or solicitation. As explained in the supplementary 
information to the June 2007 Proposal, the Board did not propose 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 
consumer submits the application or solicitation. In addition, in 
consumer testing conducted for the Board prior to the June 2007 
Proposal, 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.
    In response to the June 2007 Proposal, several consumer group 
commenters suggested that the Board require issuers to disclose the 
credit limit in the table required by Sec.  226.5a. 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. One 
industry commenter also suggested that the Board require issuers to 
disclose in the table the range of credit limits that are being 
offered. This commenter pointed out that currently credit card issuers 
generally have a range of credit limits in mind when marketing a card, 
and while the range is often disclosed in the marketing materials, the 
maximum and minimum credit lines are not necessarily found in the same 
place in the marketing materials or disclosed with the same prominence.
    In May 2008, the Board and other federal banking agencies proposed 
that financial institutions that make ``firm offers of credit'' as 
defined in the FCRA and that advertise multiple APRs or ``up to'' 
credit limits would be required to disclose in the solicitation the 
factors that determine whether a consumer will qualify for the lowest 
APR and highest credit limit advertised. See 73 FR 28904, May 19, 2008. 
As discussed elsewhere in today's Federal Register, the Board and other 
federal banking agencies have not adopted a requirement that creditors 
disclose in the solicitation the factors that determine whether a 
consumer will qualify for the lowest APR and highest credit limit 
advertised.
    Similarly, the Board has not included in the final rule a 
requirement that issuers disclose the credit limit in either the table 
required by Sec.  226.5a or the solicitation. The Board's consumer 
testing indicates that consumers generally understand from prior 
experience that their credit limits will depend on their credit 
histories. Thus, the final rule does not require a disclosure of the 
credit limit in the Sec.  226.5a table or the solicitation.
    3. Security interest. In response to the June 2007 Proposal, 
several consumer group commenters 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 final rule does not require issuers to disclose in the table 
any required security interest. Credit card-issuing merchants may 
include in their account agreements a security interest in the goods 
that are purchased with the card. Any such security interest must be 
disclosed at account-opening pursuant to Sec.  226.6(b)(5), as 
discussed below. 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 final rule does not 
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 is likely to be sufficiently highlighted in the 
materials accompanying the application or solicitation, and does 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, particularly when the security deposit may significantly 
decrease consumers' available credit when the account is opened. Thus, 
as described above, the final rule provides 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 15 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. Reasons terms may change. In response to the June 2007 Proposal, 
several commenters suggested that the Board should require in the table 
a disclosure of the reasons issuers may change terms on the account. 
Typically, a credit card issuer will reserve the right to change terms 
on the account at any time for any reason. These commenters believed 
that a disclosure of the issuer's ability to change terms for any 
reason at any time would alert consumers to the practice at the outset 
of the relationship and could promote competition among issuers 
regarding use of the practice.
    The Board is not requiring in the table a disclosure of the reasons 
issuers may change terms on the account. In consumer testing conducted 
by the Board in March 2008, participants were asked to compare two 
credit card offers where the offers contained different account terms, 
such as APRs and fees. In addition, one of these offers included a 
disclosure in the table that the card issuer could change APRs ``at any 
time for any reason,'' while the other offer did not include this 
disclosure. While about half of the participants indicated they 
considered it a positive factor that one of the offers did not include 
a disclosure that APRs could change at any time for any reason, this 
fact did not

[[Page 5301]]

ultimately impact which offer they chose.
    Thus, it does not appear consumers would shop for a credit card 
based on this disclosure, and allowing this disclosure in the table may 
distract from more important information in the table, and contribute 
to ``information overload.'' Nonetheless, the Board believes that it is 
important for consumers to be properly informed when terms on their 
accounts are changing, and the final rule contains provisions relating 
to change-in-terms notices and penalty rate notices that are designed 
to achieve this goal. See section-by-section analysis to Sec.  226.9(c) 
and (g). In addition, the Board and other federal banking agencies have 
issued final rules published elsewhere in today's Federal Register that 
generally prohibit the application of increased rates to existing 
balances. The Board believes that the substantive protection provided 
by these rules mitigates the impact of many rate increases, and 
decreases the need for an up-front disclosure of the issuer's 
reservation of the right to change terms.
    5. Fees. In response to the June 2007 Proposal, several consumer 
groups suggested that in addition to the fees that the Board has 
proposed to be included in the table, the Board should require that any 
fee that a creditor charges to more than 5 percent of its cardholders 
be disclosed in the table. In addition, one member of Congress 
suggested that issuers be required to disclose in the table fees to pay 
by phone or on the Internet.
    As described above, under the final rule, issuers will be required 
to disclose certain transaction fees and penalty fees, such as cash 
advance fees, balance transfer fees, late-payment fees, and over-the-
limit fees, in the table because these fees are frequently paid by 
consumers, and consumers in testing and comment letters have indicated 
these fees are important for shopping purposes. The Board is not 
requiring issuers to disclose other fees in the table, such as fees to 
pay by phone or on the Internet, 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 prior to the June 2007 
Proposal, participants tended to mention cash advance fees, balance 
transfer fees, late-payment fees, and over-the-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 
most 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. In addition, the Board is not imposing a 
requirement that issuers disclose in the table any fee that the issuer 
charges to more than 5 percent of the cardholders for the card. This 
would undercut the uniformity of the table. For example, although most 
issuers may charge a certain fee, such as a fee to pay by phone, 
requiring issuers to disclose a fee if the issuer charges it to more 
than 5 percent of the cardholders for the card, could mean that some 
issuers would disclose the fee to pay by phone and some would not, even 
though most issuers charge this fee. 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.
    In addition, in response to the June 2007 Proposal, one federal 
banking agency suggested that the Board include a disclosure in the 
table when an issuer may impose an over-the-limit or other penalty fee 
based on circumstances that result solely from the imposition of other 
fees or finance charges, or if the contract permits it to impose 
penalty fees in consecutive cycles based on a single failure by the 
consumer to abide by the terms of the account. The Board is not 
requiring this disclosure in the table. The Board believes that 
consumers are not likely to consider this information in shopping for a 
credit card. Requiring this disclosure in the table may distract from 
important information in the table, and contribute to ``information 
overload.''
5a(c) Direct Mail and Electronic Applications
5a(c)(1) General
    Electronic applications and solicitations. As discussed above, the 
Bankruptcy Act amended 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. In the June 2007 Proposal, the Board 
proposed 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 final rule adopts new Sec.  226.5a(c)(1) as 
proposed.
    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 June 2007 Proposal, the 
Board proposed to revise Sec.  226.5a(c) to implement the ``updated 
regularly'' standard in the Bankruptcy Act with regard to the accuracy 
of variable rates. As proposed, a new Sec.  226.5a(c)(2) would have 
been added to address the accuracy of variable rates in direct mail and 
electronic applications and solicitations. This new section would have 
required 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. As proposed, 
Sec.  226.5a(c)(2) consisted of two subsections.
    Section 226.5a(c)(2)(i) would have provided that Sec.  226.5a 
disclosures mailed to a consumer must be accurate as of the time the 
disclosures are mailed. This section also would have provided that an 
accurate variable APR is one that is in effect within 60 days before 
mailing. Section 226.5a(c)(2)(ii) would have provided 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. 
As proposed, this section would have provided that a variable APR is 
accurate if it is in effect within 30 days before it is sent, or viewed 
by the public. Many of the provisions included in proposed Sec.  
226.5a(c)(2) were incorporated from current Sec.  226.5a(b)(1). To 
eliminate redundancy, the Board proposed to revise Sec.  226.5a(b)(1) 
by deleting Sec.  226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1.
    In response to the June 2007 Proposal, one commenter suggested that 
all variable APR accuracy standards should be simplified to allow for 
disclosures to be modified every 60 days. This commenter suggested that 
issuers should be able to follow a 60-day standard for accuracy for APR 
disclosures no matter how they are delivered to ease the burden of 
compliance. This commenter also indicated that issuers often mail a 
solicitation for a credit card to a consumer and post the same offer on 
a Web site or e-mail it to the consumer. The disclosures for the same 
offer could be different, if the rate mailed is 60 days old and the 
offer on the Web site is 30

[[Page 5302]]

days old. This commenter also indicated that having to create changes 
to the direct mail documents for offers delivered electronically is 
inefficient and costly. On the other hand, one consumer group commenter 
suggested that all electronic disclosures should be accurate as of the 
date when given, including variable rate APRs.
    The Board adds Sec.  226.5a(c)(2) and deletes Sec.  
226.5a(b)(1)(ii), (b)(1)(iii), and comment 5a(c)-1 as proposed. 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, because 
consumers generally 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, the Board 
understands that issuers typically change other terms infrequently, 
perhaps once or twice a year.
5a(d) Telephone Applications and Solicitations
5a(d)(1) Oral Disclosure
    Section 226.5a(d) specifies rules for providing cost disclosures in 
oral applications and solicitations initiated by a card issuer. 
Pursuant to TILA Section 127(c)(2), 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 consumer uses the card, provided that the card issuer provides the 
disclosures later in a written form. 15 U.S.C. 1637(c)(2).
    Consumer-initiated calls. In response to the June 2007 Proposal, 
several consumer group commenters suggested that the requirements to 
provide oral disclosures in Sec.  226.5a(d)(1) should not be limited to 
applications and solicitations initiated by the card issuer. Instead, 
the Board should require oral disclosures for all calls resulting in an 
application or solicitation for a credit card--even if the consumer 
rather than the issuer initiates the telephone call. Consistent with 
the statutory requirement in TILA Section 127(c)(2), the final rule in 
Sec.  226.5a(d)(1) continues to limit the requirement to provide oral 
disclosure to situations where oral applications and solicitations are 
initiated by a card issuer. 15 U.S.C. 1637(c)(2).
    Written applications. In response to the June 2007 Proposal, 
several consumer group commenters suggested that the Board require that 
all applications be made in writing. They indicated that while an 
issuer could offer the credit card over the phone, the consumer should 
be required to sign an application to ensure that he or she actually 
applied for the card and not a thief or errant household member. The 
final rule does not require all applications for credit cards to be 
made in writing. Allowing oral applications and solicitations is 
consistent with the statutory provision in TILA Section 127(c)(2). 15 
U.S.C. 1637(c)(2).
    Available credit disclosure. Currently, under Sec.  226.5a(d)(1), 
if the issuer provides the disclosures orally, the issuer must provide 
information required to be disclosed under Sec.  226.5a(b)(1) through 
(b)(7). This includes information about (1) APRs; (2) fees for issuance 
or availability of credit; (3) minimum or fixed finance charges; (4) 
transaction charges for purchases; (5) grace period on purchases; (6) 
balance computation method; and (7) as applicable, a statement that 
charges incurred by use of the charge card are due when the periodic 
statement is received.
    In the June 2007 Proposal, the Board did not propose to revise 
Sec.  226.5a(d)(1). In response to the June 2007 Proposal, some 
consumer group commenters urged the Board to revise Sec.  226.5a(d)(1) 
to require issuers that are marketing credit cards by telephone to 
disclose certain additional information to consumers at the time of the 
phone call, such as the cash advance fee, the late-payment fee, the 
over-the-limit fee, the balance transfer fee, information about penalty 
rates, any fees for required insurance, and the disclosure about 
available credit in proposed Sec.  226.5a(b)(16).
    In the May 2008 Proposal, the Board proposed to amend Sec.  
226.5a(d)(1) to require that if an issuer provides the oral 
disclosures, the issuer must also disclose orally, if applicable, the 
information about available credit in proposed Sec.  226.5a(b)(16) 
pursuant to the Board's authority under TILA Section 127(c)(5) to add 
or modify Sec.  226.5a disclosures as necessary to carry out the 
purposes of TILA. 15 U.S.C. 1637(c)(5). In response to the May 2008 
Proposal, commenters generally supported this aspect of the proposal.
    The final rule amends Sec.  226.5a(d)(1), as proposed. Currently, 
issuers that provide the oral disclosures must inform consumers about 
the fees for issuance and availability of credit that are applicable to 
the card. The Board believes that the information about available 
credit would complement this disclosure, by disclosing to consumers the 
impact of these fees on the available credit.
    Other oral disclosures. In response to the June 2007 Proposal, 
several consumer groups suggested that issuers should be required to 
provide all of the disclosures required by proposed Sec.  226.5a(b)(1) 
through (b)(17) orally with respect to an oral application or 
solicitation, including cash advance fees, late-payment fees, over-the-
limit fees, balance transfer fees, and fees for required insurance. In 
the supplementary information to the May 2008 Proposal, the Board did 
not propose to require issuers to provide orally a disclosure of the 
fees described above. The Board was concerned that requiring this 
information in oral conversations about credit cards would lead to 
``information overload'' for consumers. In response to the May 2008 
Proposal, consumer groups still believed that consumers should receive 
this information when making the decision whether to apply for a card. 
They further suggested that the solution to ``information overload'' 
was to require a written application to be made whenever there is a 
telephone credit card application or solicitation. As explained above, 
the final rule does not require applications for credit cards to be 
made in writing. Allowing oral applications and solicitations is 
consistent with the statutory provision in TILA Section 127(c)(2). 15 
U.S.C. 1637(c)(2).
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 orally during 
the conversation in which the application or solicitation is 
communicated to the consumer. Alternatively, an issuer is not required 
to give the oral disclosures if the card

[[Page 5303]]

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 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. In the June 2007 
Proposal, the Board proposed 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.
    Account is not approved. In response to the June 2007 Proposal, one 
commenter suggested that the Board clarify that the written alternative 
disclosures would only be necessary if the application for the account 
is approved. The Board notes that current comment 5a(d)-1 indicates 
that the oral and alternative written disclosure requirements do not 
apply in 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. This comment is retained in the final rule.
    Substitution of account-opening table for table required by Sec.  
226.5a. In response to the June 2007 Proposal, one commenter suggested 
that the Board clarify that the account-opening table may substitute 
for the written alternative disclosures set forth in Sec.  
226.5a(d)(2). In the June 2007 Proposal, comment 5a-2 provided, in 
part, that issuers in complying with Sec.  226.5a(d)(2) may substitute 
the account-opening table 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. See proposed Sec.  
226.6(b)(4). Because the written alternative disclosures are not 
provided with the application or solicitation, the Board recognizes 
that proposed comment 5a-2 might have led to confusion about whether 
the account-opening table described in Sec.  226.6(b)(1) may be 
substituted for the written alternative disclosures. In the final rule, 
the Board has revised comment 5a-2 to delete the reference to the 
alternative written disclosures in Sec.  226.5a(d). Instead, the Board 
adds new comment 5a(d)-3 to indicate that issuers may substitute the 
account-opening table described in Sec.  226.6(b)(1) in lieu of the 
alternative written disclosures described in Sec.  226.5a(d)(2).
    Mailing of written alternative disclosures. In response to the June 
2007 Proposal, several consumer group commenters suggested that the 
Board require issuers to provide the written alternative disclosures in 
the mailing that delivers the card, and should impose requirements that 
will ensure that the disclosures are prominent. Otherwise, issuers may 
make the written alternative disclosures in separate mailings, in an 
obscure part of the cover letter with the card, or in other ways that 
are designed not to attract consumers' attention. The final rule does 
not contain this provision. The Board expects that issuers will 
substitute the account-opening table described in Sec.  226.6(b)(1) in 
lieu of the written alternative disclosures described in Sec.  
226.5a(d)(2). Card issuers typically mail account-opening disclosures 
with the card.
    Right to reject account. As described above, 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 consumer uses the card, provided that the card issuer provides the 
disclosures later in a written form. 15 U.S.C. 1637(c)(2). In the final 
rule, Sec.  226.5a(d)(2) is revised to be consistent with the right to 
reject the account given in Sec.  226.5(b)(1)(iv) with respect to 
account-opening disclosures. As discussed in the section-by-section 
analysis to Sec.  226.5(b)(1)(iv), the final rule amends Sec.  
226.5(b)(1)(iv) to provide that creditors may collect or obtain the 
consumer's promise to pay a membership fee before the account-opening 
disclosures are provided, if the consumer can reject the plan after 
receiving the disclosures. In addition, as discussed in the section-by-
section analysis to Sec.  226.6(b)(2)(xiii), the final rule also 
requires creditors to disclose in the account-opening table described 
in Sec.  226.6(b)(1) the right to reject described in Sec.  
226.5(b)(1)(iv) if required fees for the availability or issuance of 
credit, or a security deposit, equal 15 percent or more of the actual 
credit limit offered on the account at account opening. See Sec.  
226.6(b)(2)(xiii).
    The Board expects that issuers will provide the account-opening 
table described in Sec.  226.6(b)(1) in lieu of the alternative written 
disclosures described in Sec.  226.5a(d)(2). The final rule revises 
comment 5a(d)-2 to specify that the right to reject the plan referenced 
in Sec.  226.5a(d)(2) with respect to the alternative written 
disclosures is the same as the right to reject the plan described in 
Sec.  226.5(b)(1)(iv) with respect to account-opening disclosures. An 
issuer may substitute the account-opening summary table described in 
Sec.  226.6(b)(1) in lieu of the written alternative disclosures 
specified in Sec.  226.5a(d)(2)(ii). In that case, the disclosure about 
the right to reject specified in Sec.  226.5a(d)(2)(ii)(B) must appear 
in the table, if the issuer is required to do so pursuant to Sec.  
226.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.  
226.5a(d)(2)(ii)(B) may appear either in or outside the table 
containing the required credit disclosures.
5a(d)(3) Accuracy
    As proposed in June 2007 Proposal, Sec.  226.5a(d)(3) would have 
provided 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 was proposed to be moved to Sec.  226.5a(d)(3) under 
the June 2007 Proposal, except that the option of estimating a variable 
APR would have been eliminated as the least meaningful of the three 
options. Proposed Sec.  226.5a(d)(3) also would have specified 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 proposed to amend Sec.  226.5a(d)(3) to specify that oral 
disclosures under Sec.  226.5a(d)(1) 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, the proposal would have specified that terms 
other than variable APRs must be accurate as of the time they are 
mailed or delivered.
    In response to the June 2007 Proposal, one commenter indicated that 
the accuracy standard for oral disclosures could potentially require an 
issuer to update rates on a daily basis. This commenter believed that 
this proposed rule would create unnecessary burden

[[Page 5304]]

on creditors and would provide little benefit to consumers since the 
rates do not generally vary by much from one day to the next. The Board 
understands that issuers typically adjust variable rates for most 
credit card products on a monthly basis, so as a practical matter, 
issuers will only need to update the oral disclosures on a monthly 
basis in order to meet the requirement that oral disclosures be 
accurate when given. Section 226.5a(d)(3) is adopted as proposed.
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 
applications in 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. In the June 2007 Proposal, the Board proposed to require 
that certain account-opening information (such as information about key 
rates and fees) must be given in the form of a table. Therefore, the 
Board also proposed that card issuers give this same information in a 
tabular form in take-one applications and solicitations. Specifically, 
the Board proposed to delete Sec.  226.5a(e)(2) and comments 5a(e)(2)-1 
and -2 as obsolete. Under the proposal, card issuers that provide cost 
disclosures in take-one applications and solicitations would have been 
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. As discussed in the section-by-section 
analysis to Sec.  226.6(b)(1), the final rule requires creditors to 
provide certain account-opening information in the form of a table. 
Accordingly, the Board deletes current Sec.  226.5a(e)(2) and current 
comments 5a(e)(2)-1 and -2 as proposed, pursuant to the Board's 
authority under TILA Section 127(c)(5). 15 U.S.C. 1637(c)(5). Current 
Sec.  226.5a(e)(3) and comment 5a(e)(3)-1 are renumbered accordingly.
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 
on the application or solicitation, Sec.  226.5a(b)(1)(ii) currently 
requires that any variable APR disclosed must be accurate within 30 
days before printing. In the June 2007 Proposal, the Board proposed to 
move this provision to Sec.  226.5a(e)(4). In addition, proposed Sec.  
226.5a(e)(4) also would have specified that other disclosures must be 
accurate as of the date of printing. The final rule adopts Sec.  
226.5a(e)(4) and accompanying commentary as proposed.
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, in the June 2007 Proposal, the Board proposed to delete 
these provisions and 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 also requested comment on whether these provisions should be 
retained in the regulation. Under the June 2007 Proposal, a commentary 
provision referencing the statutory provision would have been added to 
Sec.  226.5(d), which addresses disclosure requirements for multiple 
creditors. See section-by-section analysis to Sec.  226.5(d). The final 
rule deletes current Sec.  226.5a(f), accompanying commentary, and 
Model Clause G-12 as proposed.
    In-person applications and solicitations. In the June 2007 
Proposal, the Board proposed a new Sec.  226.5a(f) and accompanying 
commentary to address in-person applications and solicitations 
initiated by the card issuer. For 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.
    For in-person solicitations, a card issuer makes an in-person offer 
to a consumer 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.
    In the June 2007 Proposal, the Board proposed to cover in-person 
applications and solicitations under Sec.  226.5a, pursuant to the 
Board's authority under TILA Section 105(a) to make adjustments that 
are necessary to effectuate the purposes of TILA. 15 U.S.C. 1604(a). In 
the June 2007 Proposal, existing comment 5a(a)(3)-2 (which would be 
moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would have been 
revised to be consistent with Sec.  226.5a(f). No comments were 
received on these proposed changes.
    Thus, the Board adopts these changes as proposed pursuant to its 
TILA Section 105(a) authority. 15 U.S.C. 1604(a). Requiring in-person 
applications and solicitations to include credit terms under Sec.  
226.5a would help serve TILA's purpose to provide meaningful disclosure 
of credit terms so that a consumer 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

[[Page 5305]]

must be accurate either 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) and (e)(1). These two alternatives provide 
issuers flexibility, while also providing consumers with the 
information they need to make informed credit decisions.
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 for purchases 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. In the June 2007 and May 
2008 Proposals, the Board proposed to retain these four balance 
computation methods.
    In response to the June 2007 Proposal, several industry commenters 
suggested that the Board add the ``daily balance method'' to the list 
of balance computation methods listed in the regulation. These 
commenters indicated that the ``daily balance method'' is one of the 
most common balance computation methods used by card issuers. 
Currently, comment 5a(g)-1 provides that 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. The final rule revises Sec.  226.5a(g) to include 
daily balance method as one of the balance computation methods named in 
the regulation. As a result, card issuers may disclose ``daily balance 
method'' as the name of the balance computation method used as part of 
the disclosures required by Sec.  226.5a, and are not required to 
provide a description of the balance computation method. The Board 
deletes current comment 5a(g)-1, which provides that 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. See also Sec.  226.6(b)(2)(vi) and 
Sec.  226.7(b)(5), which allow creditors using balance calculation 
methods identified in Sec.  226.5a(g) to provide abbreviated 
disclosures at account opening and on periodic statements.
    In addition, in response to the May 2008 Proposal, several industry 
commenters requested that if the proposal by the Board and other 
federal banking agencies to prohibit certain issuers from using the 
two-cycle balance computation method was adopted, the Board should 
include a cross reference in Sec.  226.5a(g) indicating that some 
issuers are not allowed to use the two-cycle balance computation method 
described in Sec.  226.5a(g). Under rules issued by the Board and other 
federal banking agencies published elsewhere in today's Federal 
Register, most credit card issuers are prohibited from using the two-
cycle balance computation method described in Sec.  226.5a(g). Comment 
5a(g)-1 is amended to specify that some issuers may be prohibited from 
using the two-cycle balance computation method described in Sec.  
226.5a(g)(2)(i) and (ii) and to cross reference the rules issued by the 
federal banking agencies, as described above.

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 to part 226. For a discussion 
about account-opening disclosure rules and format requirements, see the 
section-by-section analysis to Sec.  226.6(a) for HELOCs subject to 
Sec.  226.5b, and Sec.  226.6(b) for open-end (not home-secured) plans.
6(a) Rules Affecting Home-Equity Plans
    Account-opening disclosure and format requirements for HELOCs 
subject to Sec.  226.5b were unaffected by the June 2007 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 Sec.  226.6(a), as discussed in this section-
by-section analysis to Sec.  226.6(a). (See redesignation table below.)
    Commenters supported the proposed organizational changes to ease 
compliance. All disclosure requirements applying exclusively to HELOCs 
subject to Sec.  226.5b are set forth in Sec.  226.6(a), as proposed. 
Rules relating to the disclosure of finance charges currently in Sec.  
226.6(a)(1) through (a)(4) are moved to Sec.  226.6(a)(1)(i) through 
(a)(1)(iv); those rules and accompanying official staff interpretations 
are substantively unchanged. Rules relating to the disclosure of other 
charges are moved from current Sec.  226.6(b) to Sec.  226.6(a)(2), and 
specific HELOC-related disclosure requirements are moved from current 
Sec.  226.6(e) to Sec.  226.6(a)(3). Rules of general applicability to 
open-end credit plans relating to security interests and billing error 
disclosure requirements are moved without substantive change from 
current Sec.  226.6(c) and (d) (proposed as Sec.  226.6(c)(1) and 
(c)(2) in the June 2007 Proposal) to Sec.  226.6(a)(4) and (a)(5), to 
ease compliance.
    Several technical revisions to commentary provisions described in 
the June 2007 Proposal are adopted for clarity and in some cases for 
consistency with corresponding comments to Sec.  226.6(b)(4), which 
addresses rate disclosures for open-end (not home-secured) plans; these 
revisions are not intended to be substantive. See, for example, 
comments 6(a)(1)(ii)-1 and 6(b)(4)(i)(B)-1, which address disclosing 
ranges of balances. For the reasons set forth in the section-by-section 
analysis to Sec.  226.6(b)(3), the Board updates references to ``free-
ride period'' as ``grace period'' in the regulation and commentary to 
Sec.  226.6(a), without any intended substantive change.
    Also, commentary provisions that currently apply to open-end plans 
generally but are inapplicable to HELOCs are not included in the 
commentary provisions related to Sec.  226.6(a), as proposed. For 
example, guidance in current 6(a)(2)-2 regarding a creditor's general 
reservation of the right to change terms is not included in comment 
6(a)(1)(ii)-2, because Sec.  226.5b(f)(1) prohibits ``rate-
reservation'' clauses for HELOCs.
    Model forms and clauses. Revisions to current forms and a new form 
that creditors offering HELOCs may use are adopted as proposed. In 
response to comments received on the June 2007 Proposal, the Board 
proposed in May 2008 to add a new paragraph to Appendix G-1 (Balance 
Computation

[[Page 5306]]

Methods Model Clauses) to part 226 to describe the daily balance 
computation method. A new Appendix G-1(A) to part 226 was also proposed 
for creditors offering open-end (not home-secured) plans. See section-
by-section analysis to Sec.  226.6(b)(4)(i)(D).
    For the reasons set forth in the May 2008 Proposal, the Board is 
adopting the revisions to Appendix G-1 to part 226, retitled as Balance 
Computation Methods Model Clauses (Home-equity Plans) to ease 
compliance, as proposed. Comment App. G-1 is revised to clarify that a 
creditor offering HELOCs may use the model clauses in Appendix G-1 or 
G-1(A), at the creditor's option.
    In addition, for the reasons discussed in the section-by-section 
analysis to Sec. Sec.  226.12 and 226.13, model language has been added 
to Model Clause G-2 (Liability for Unauthorized Use Model Clause), 
Model Form G-3 (Long-form Billing-error Rights Model Form Home-equity 
Plans) and Model Form G-4 (Alternative Billing-error Rights Model Form 
Home-equity Plans) regarding consumers' use of electronic communication 
relating to unauthorized transactions or billing disputes. Like with 
Model Clauses G-1 and G-1(A), the Board is adding new forms G-3(A) and 
G-4(A) for creditors offering open-end (not home-secured) plans, which 
a creditor offering HELOCs may use, at the creditor's option. See 
comment app. G-3.
6(b) Rules Affecting Open-end (not Home-secured) Plans
    All account-opening disclosure requirements applying to open-end 
(not home-secured) plans are set forth in Sec.  226.6(b). The Board is 
adopting two significant revisions to account-opening disclosures for 
open-end (not home-secured) plans, which are set forth in Sec.  
226.6(b), as proposed. The revisions (1) require a tabular summary of 
key terms to be provided before an account is opened (see Sec.  
226.6(b)(1) and (b)(2)), and (2) reform how and when cost disclosures 
must be made (see Sec.  226.6(b)(3) for content, Sec.  226.5(b) and 
Sec.  226.9(c) for timing).
    In response to comments received on the June 2007 Proposal, Sec.  
226.6(b) has been reorganized in the final rule for clarity. Rules 
relating to the account-opening tabular summary are set forth in Sec.  
226.6(b)(1) and (b)(2) and mirror, to the extent applicable, the 
organization and text of disclosure requirements for the tabular 
summary required to accompany credit or charge card applications or 
solicitations in Sec.  226.5a. General disclosure requirements about 
costs imposed as part of the plan are set forth in Sec.  226.6(b)(3), 
and additional requirements for disclosing rates are at Sec.  
226.6(b)(4). Rules about disclosures for optional credit insurance or 
debt cancellation or suspension coverage are set forth at Sec.  
226.6(b)(5). Rules of general applicability to open-end credit plans 
relating to security interests and billing error disclosure 
requirements, also are moved to Sec.  226.6(b)(5) without substantive 
change from current Sec.  226.6(c) and (d) (proposed as Sec.  
226.6(c)(1) and (c)(2) in the June 2007 Proposal), to ease compliance.
6(b)(1) Format for Open-end (not Home-secured) Plans
    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. The 
June 2007 Proposal would have introduced format requirements for 
account-opening disclosures for open-end (not home-secured) plans at 
Sec.  226.6(b)(4), based on proposed format and content requirements 
for the tabular disclosures provided with direct mail applications for 
credit and charge cards under Sec.  226.5a. Proposed forms under G-17 
in Appendix G would have illustrated the account-opening tables. The 
proposal sought 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. TILA disclosures that 
are typically lengthy or complex and less often utilized in determining 
how to use an account, such as how variable rates are determined, could 
continue to be integrated with the account agreement terms but could 
not be placed in the table. Uniformity in the presentation of key 
information promotes consumers' ability to compare account terms.
    Commenters generally supported format rules that focus on 
presenting essential information in a simplified way. Consumer groups 
supported the use of a tabular format similar to the summary table 
required under Sec.  226.5a, to ease consumers' ability to find 
important information in a uniform format, and as a means for consumers 
to compare terms that are offered with terms they actually receive. A 
state consumer protection body urged the Board to develop a glossary 
and, along with some consumer groups, to mandate use of uniform terms 
so that creditors use the same term to identify fees.
    Industry commenters voiced a number of concerns about the account-
opening summary table. Some suggested the purposes of TILA disclosures 
are different at application and account-opening, and a table at 
account-opening is redundant since consumers have already made their 
credit decisions. Some suggested that other techniques to summarize 
information, such as an index or table of contents, should be 
permitted. In particular, industry commenters asked for additional 
flexibility to disclose risk-based APRs outside the summary table, such 
as in a welcome letter or documents accompanying the account agreement, 
or on a sales receipt when an open-end plan is established at a retail 
store in connection with the purchase of goods or services. Others 
believed the information was too simple and could be misleading to 
consumers and in any event would quickly become outdated. To combat 
out-of-date disclosures, one creditor suggested requiring a ``real 
time'' version of account terms on-line, with a paper copy available 
upon request.
    For the reasons stated in this section-by-section analysis to Sec.  
226.6, the Board is adopting the formatting requirements generally as 
proposed, with revisions noted below. In response to commenters' 
suggestions, the regulatory text (moved from proposed Sec.  226.6(b)(4) 
to Sec.  226.6(b)(1) and (b)(2)) more closely tracks the regulatory 
text in Sec.  226.5a, to ease compliance.
    The Board's revisions to rules affecting open-end (not home-
secured) plans contain a limited number of specific words or phrases 
that creditors are required to use. The Board, however, has not adopted 
a glossary of terms nor mandated use of terms as defined in such a 
glossary, to provide flexibility to creditors. Although the Board is 
supportive of creditors that provide real-time account agreements on 
their Web sites, the Board believes requiring all creditors to do so 
would be overly burdensome at this time, and has not adopted such a 
requirement.
    Open-end (not home-secured) plans not involving a credit card. The 
June 2007 Proposal would have applied the tabular summary requirement 
to all open-end credit 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.
    In response to the June 2007 Proposal, some industry commenters 
asked the Board to limit any new disclosure rules to credit card 
accounts. They acknowledged that credit card accounts typically have 
complex terms, and a tabular summary is an effective way to present key 
disclosures. In contrast, these commenters noted that other

[[Page 5307]]

open-end (not home-secured) products such as personal lines of credit 
or overdraft plans have very few of the cost terms required to be 
disclosed. Alternatively, if the Board continued to apply the new 
requirements to open-end plans other than HELOCs, commenters asked that 
the Board consider publishing model forms to ease compliance.
    The Board believes that the benefits to consumers from receiving a 
concise and uniform summary of rates and important fees for these other 
types of open-end plans outweigh the costs, such as developing the new 
disclosures and revising them as needed. In the May 2008 Proposal, the 
Board proposed Sample Form 17(D), which would have illustrated 
disclosures for an open-end (not home-secured) plan not involving a 
credit card, to address commenters' requests for guidance.
    Some consumer groups supported the requirement for a summary table 
for open-end (not home-secured) plans that are not credit card 
accounts. They believe the summary table will help consumers understand 
the terms of their credit agreements. An industry commenter also 
supported a model form for creditors' use but suggested adding 
additional terms to the form such as a fee for returned payment, or 
variable-rate disclosures. One industry commenter strongly objected to 
the requirement for a summary table. This commenter believes creditors 
will incur substantial costs to comply with the requirement and the 
commenter was not convinced that a tabular format is the only way 
creditors may provide accurate and meaningful disclosures.
    For the reasons set forth above, the final rule, pursuant to the 
Board's TILA Section 105(a) authority, applies the tabular summary 
requirement to all open-end credit products, except HELOCs, as 
proposed. Sample Form 17(D) is adopted, with some revisions. The name 
of the balance calculation method and billing error summary were 
inadvertently omitted in the May 2008 Proposal below the table in the 
proposed sample form, and they properly appear in the final form. The 
Board notes that Sec.  226.6(b)(2) requires creditors to disclose in 
the account-opening table the items in that section, to the extent 
applicable. Thus, for example, if a creditor offered an overdraft 
protection line of credit with a variable rate, the creditor must 
provide the applicable variable-rate disclosures, even though such 
disclosures do not appear in Sample Form 17(D).
    Comparison to summary table provided with credit card applications. 
The summary tables proposed in June 2007 to accompany credit and charge 
card applications and solicitations and to be provided at account 
opening were similar but not identical. Under the June 2007 Proposal, 
at the card issuer's option, a card issuer providing a table that 
satisfies the requirements of Sec.  226.6 could satisfy the 
requirements of Sec.  226.5a by providing the account-opening table.
    In response to the June 2007 Proposal, some commenters urged the 
Board to require identical disclosure requirements under Sec.  226.6 
and Sec.  226.5a. Others supported greater flexibility. As discussed 
below, the disclosure requirements for the two summary tables remain 
very similar but are not identical in all respects. The final rule 
includes comment 6(b)(1)-1, adopted substantially as proposed as 
comment 6(b)(4)-1, which provides guidance on how the summary table for 
Sec.  226.5a differs from the table for Sec.  226.6. For clarity, rules 
under Sec.  226.5a that do not apply to account-opening disclosures are 
specifically noted.
6(b)(1)(iii) Fees that Vary by State
    For disclosures required to be provided with credit card 
applications and solicitations, if the amount of a fee such as a late-
payment fee or returned-payment fee varies by state, card issuers 
currently may disclose a range of fees and a statement that the amount 
of the fee varies by state. See Sec.  226.5a(a)(4). In the June 2007 
Proposal, the Board noted that a goal of the proposed account-opening 
summary table is to provide to a consumer specific key information 
about the terms of the account and that permitting creditors to 
disclose a range of fees seems not to meet that standard. Thus, the 
proposal would have required creditors to disclose the amount of the 
fee applicable to the consumer. The Board solicited comment on whether 
there are any operational issues presented by the proposal.
    One commenter discussed operational issues for creditors that are 
licensed to do business under state law and must vary late-payment 
fees, for example, according to state law. Although the letter focused 
on late-payment fee disclosures on the periodic statement, one 
alternative suggested to stating fees applicable to the consumer's 
account was to permit such creditors to refer to a disclosure where 
fees arranged by applicable states would be identified.
    Upon further consideration of the issues related to disclosing fees 
in the account-opening table fees that vary by state, the Board is 
adopting a rule that requires creditors to disclose specific fees 
applicable to the consumer's account in the account-opening table, with 
a limited exception. In general, a creditor must disclose the fee 
applicable to the consumer's account; listing all fees for multiple 
states in the account-opening summary table is not permissible. The 
Board is concerned that such an approach would detract from the purpose 
of the table: To provide key information in a simplified way.
    Currently, creditors licensed to do business under state laws 
commonly disclose at account opening as part of the account agreement 
or disclosure statement a matrix of fees applicable to residents of 
various states. Creditors that provide account-opening disclosures by 
mail can more easily generate account-opening summaries with rates and 
specific fees that apply to the consumer. However, for creditors with 
retail stores in a number of states, it is not practicable to require 
fee-specific disclosures to be provided when an open-end (not home-
secured) plan is established in person in connection with the purchase 
of goods or services. If the Board were to impose such a requirement, 
retail stores may need to keep on hand copies of disclosures for all 
states, because consumers from one state can, and commonly do, shop and 
obtain credit cards at retail locations in other states. In addition, a 
retail store creditor would need to rely on its employees to determine 
at the point of sale which state's disclosures should be provided to 
each consumer who opens an open-end (not home-secured) plan.
    Thus, the final rule provides in Sec.  226.6(b)(1)(iii) that 
creditors imposing fees such as late-payment fees or returned-payment 
fees that vary by state and providing the disclosures required by Sec.  
226.6(b) in person at the time the open-end (not home-secured) plan is 
established in connection with financing the purchase of goods or 
services may, at the creditor's option, disclose in the account-opening 
table either (1) the specific fee applicable to the consumer's account, 
or (2) the range of the fees, if the disclosure includes a statement 
that the amount of the fee varies by state and refers the consumer to 
the account agreement or other disclosure provided with the account-
opening summary table where the amount of the fee applicable to the 
consumer's account is disclosed, for example in a list of fees for all 
states. Currently, creditors that establish open-end plans at point of 
sale provide account-opening disclosures at point of sale before the 
first transaction, and commonly provide an additional set of account-
opening disclosures when, for example, a credit card is sent to the

[[Page 5308]]

consumer. The Board believes that this practice would continue and that 
the account-opening disclosures provided later, for example with the 
credit card, would contain the specific rates and fees applicable to 
the consumer's account, as the creditor must provide for consumers who 
open accounts other than at the point of sale.
6(b)(2) Required Disclosures for Account-opening Table for Open-end 
(not Home-secured) Plans
    Fees. Under the June 2007 Proposal, fees to be highlighted in the 
account-opening summary were identified in Sec.  226.6(b)(4)(iii). The 
proposed list of fees and categories of fees was intended to be 
exclusive. The Board noted that it considered these fees, among the 
charges that TILA covers, to be the most important fees, at least in 
the current marketplace, for consumers to know about before they start 
to use an account. The fees identified in proposed Sec.  
226.6(b)(4)(iii) included charges that a consumer could incur and which 
a creditor likely would not otherwise be able to disclose in advance of 
the consumer engaging in the behavior that triggers the cost, such as 
fees triggered by a consumer's use of a cash advance check or by a 
consumer's late payment. Transaction fees imposed for transactions in a 
foreign currency or that take place in a foreign country also would 
have been among the fees to be disclosed at account opening.
    Industry commenters generally supported the proposal. Some consumer 
groups believe it would be a mistake to adopt a static list of fees to 
be disclosed in the account-opening table. They stated the credit card 
market is dynamic, and a static list would encourage creditors to 
establish new fees that would not be disclosed as prominently as those 
in the table. These commenters suggested the Board also require 
creditors to disclose in the account-opening table any fee that a 
creditor charges to more than 5 percent of its cardholders.
    The Board is adopting in Sec.  226.6(b)(2) the list of fees 
proposed in Sec.  226.4(b)(4)(iii) as the exclusive list of fees and 
categories of fees that must be disclosed in the table, although Sec.  
226.6(b)(2) has been reorganized to more closely track the requirements 
of Sec.  226.5a. Accordingly, the fees required to be disclosed in the 
table are those identified in Sec.  226.6(b)(2)(ii) through (b)(2)(iv) 
and (b)(2)(vii) through (b)(2)(xii); that is, fees for issuance or 
availability of credit, minimum or fixed finance charges, transaction 
fees, cash advance fees, late-payment fees, over-the-limit fees, 
balance transfer fees, returned-payment fees, and fees for required 
insurance, debt cancellation or debt suspension coverage.
    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, fees not required to be 
disclosed in the summary table under the final rule 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 
(b)(1), charges required to be highlighted in the account-opening table 
must be provided in a written and retainable form before the first 
transaction and before being increased or newly introduced. Creditors 
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 consumers 
must be informed of all fees imposed as part of the plan before the 
cost is incurred, not all fees need to be included in the account-
opening table provided at account opening.
    Payment allocation. Section 226.6(b)(4)(vi) of the June 2007 
Proposal would have required creditors to disclose in the account-
opening tabular summary, if applicable, the information regarding how 
payments will be allocated if the consumer transfers balances at a low 
rate and then makes purchases on the account. The payment allocation 
disclosure requirements proposed for the account-opening table mirrored 
the proposed requirements in proposed Sec.  226.5a(b)(15) to be 
provided in the table given at application or solicitation.
    In May 2008, the Board and other federal banking agencies proposed 
limitations on how creditors may allocate payments on outstanding 
credit card balances. See 73 FR 28904, May 19, 2008. The Board 
indicated in the May 2008 Regulation Z Proposal that if the proposed 
limitations were adopted, the Board contemplated withdrawing proposed 
Sec.  226.6(b)(4)(vi). For the reasons discussed in the section-by-
section analysis to Sec.  226.5a(b), the Board is withdrawing proposed 
Sec.  226.6(b)(4)(vi).
6(b)(2)(i) Annual Percentage Rate
    Section 226.6(b)(2)(i) (proposed at Sec.  226.6(b)(4)(ii)) sets 
forth disclosure requirements for rates that would apply to accounts. 
Except as noted below, the disclosure requirements for APRs in the 
account-opening table are adopted for the same reasons underlying, and 
consistent with, the disclosure requirements adopted for APRs in the 
table provided with credit card applications and solicitations. See 
section-by-section analysis to Sec.  226.5a(b)(1).
    Periodic rates and index and margin values are not 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 comments 5a(b)(1)-2 and -8. The 
index and margin must be provided in the credit agreement or other 
account-opening disclosures pursuant to Sec.  226.6(b)(4). Creditors 
also must continue to disclose periodic rates, as a cost imposed as 
part of the plan, before the consumer agrees to pay or becomes 
obligated to pay for the charge, and these disclosures could be 
provided in the credit agreement or other disclosure, 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 at least in part on a later determination of the 
consumer's creditworthiness. At account opening, creditors must 
disclose the specific APRs that will apply to the account as proposed, 
with a limited exception.
    Similar to the discussion in the section-by-section analysis to 
Sec.  226.6(b)(1)(iii), the APR that some creditors may charge vary by 
state. In general, a creditor must disclose the APR applicable to the 
consumer's account. Listing all APRs for multiple states in the 
account-opening summary box is not permissible. The Board is concerned 
that such an approach would detract from the purpose of the table: to 
provide key information in a simplified way. However, for creditors 
with retail stores in a number of states, it is not practicable to 
require APR-specific disclosures to be provided when an open-end (not 
home-secured) plan is established in person in connection with the 
purchase of goods or services. Thus, the Board provides in Sec.  
226.6(b)(2)(i)(E) that creditors

[[Page 5309]]

imposing APRs that vary by state and providing the disclosures required 
by Sec.  226.6(b) in person at the time the open-end (not home-secured) 
plan is established in connection with financing the purchase of goods 
or services may, at the creditor's option, disclose in the account-
opening table either (1) the specific APR applicable to the consumer's 
account, or (2) the range of the APRs, if the disclosure includes a 
statement that the APR varies by state and refers the consumer to the 
account agreement or other disclosure provided with the account-opening 
summary table where the APR applicable to the consumer's account is 
disclosed, for example in a list of APRs for all states. Currently, 
creditors that establish open-end plans at point of sale provide 
account-opening disclosures at point of sale before the first 
transaction, and commonly provide an additional set of disclosures 
when, for example, a credit card is sent to the consumer. The Board 
believes that this practice would continue and that the account-opening 
summary provided with the additional set of disclosures would contain 
the APRs applicable to the consumer's account, as the creditor must 
provide for consumers who open accounts other than at point of sale.
    This limited exception does not extend to rates that vary due to 
creditors' pricing policies. Creditors that offer risk-based APRs 
commonly offer one or two rates, or perhaps three or four, as opposed 
to retail creditors that may offer a dozen or more rates, based on 
varying state laws. The multiplicity of rates and the training required 
for retail sales staff to identify correctly which state law governs 
the potential account holder increases these creditors' risk of 
inadvertent noncompliance. Creditors that choose to offer risk-based 
pricing, however, are better able to manage their potential risk of 
noncompliance. The exception is intended to have a limited scope 
because the Board believes consumers benefit by knowing, at account-
opening, the actual rates that will apply to their accounts.
    Discounted and premium initial rates. Currently, a discounted 
initial rate may, but is not required to, be disclosed in the table 
accompanying a credit or charge card application or solicitation. Card 
issuers that choose to include such a rate must also disclose the time 
period during which the discounted initial rate will remain in effect. 
See Sec.  226.5a(b)(1)(ii). Creditors, however, must disclose these 
terms in account-opening disclosures. The June 2007 Proposal would have 
required any initial temporary rate, the circumstances under which that 
rate expires, and the rate that will apply after the temporary rate 
expires to be disclosed in the account-opening table. See proposed 
Sec.  226.6(b)(4)(ii)(B).
    The final rule regarding the disclosure of temporary initial rates 
differs from the proposal in several ways, two of which are technical. 
As discussed above, the text of the disclosure requirements has been 
revised to more closely track the regulatory text under Sec.  226.5a. 
Therefore, Sec.  226.6(b)(2)(i)(B) and (b)(2)(i)(C), which set forth 
disclosure requirements for discounted initial rates and premium 
initial rates, replace proposed text in Sec.  226.6(b)(4)(ii)(B) 
regarding initial temporary rates and are consistent with Sec.  
226.5a(b)(1)(ii) and (b)(1)(iii). For consistency, discounted initial 
rates are referred to as ``introductory'' rates as that term in defined 
in Sec.  226.16(g)(2)(ii).
    Under Sec.  226.6(b)(2)(i)(B) and consistent with Sec.  226.5a, 
creditors that offer a temporary discounted initial rate must disclose 
in the account-opening table the rate that otherwise would apply after 
the temporary rate expires. Also, to be consistent with Sec.  226.5a, 
creditors under the final rule may, but generally are not required to 
(except as discussed below), disclose discounted initial rates in the 
account-opening table. Creditors that choose to include such a rate 
must also disclose the time period during which the discounted initial 
rate will remain in effect. Under Sec.  226.6(b)(2)(i)(D)(2), if a 
creditor discloses discounted initial rates in the account-opening 
table, the creditor must also disclose directly beneath the table the 
circumstances under which the discounted initial rate may be revoked 
and the rate that will apply after revocation.
    As discussed in the section-by-section analysis to Sec.  
226.5a(b)(1), Sec.  226.6(b)(2)(i) of the final rule has been revised 
to provide that issuers subject to the final rules issued by the Board 
and other federal banking agencies published elsewhere in today's 
Federal Register must disclose any introductory rate applicable to the 
account in the table. This requirement is intended to promote 
consistency with those final rules, which require issuers to state at 
account opening the annual percentage rates that will apply to each 
category of transactions on a consumer credit card account. Thus, Sec.  
226.6(b)(2)(i)(F) has been added to the final rule to clarify that an 
issuer subject to 12 CFR 227.24 or similar law must disclose in the 
account-opening table any introductory rate that will apply to a 
consumer's account. A conforming change has been made to Sec.  
226.6(b)(2)(i)(B).
    Similarly, and for the same reasons stated above, Sec.  
226.6(b)(2)(i)(F) also requires that card issuers subject to the final 
rules issued by the Board and other federal banking agencies published 
elsewhere in today's Federal Register disclose in the table any rate 
that will apply after a premium initial rate expires. Section 
226.6(b)(2)(i)(C) also has been revised for consistency.
    If a creditor that is not subject to 12 CFR 227.24 or similar law 
does not disclose a discounted initial rate (and thus also does not 
disclose the reasons the rate may be revoked and the rate that will 
apply after revocation) in the account-opening table, the creditor must 
provide these disclosures at any time before the consumer agrees to pay 
or becomes obligated to pay for a charge based on the rate, pursuant to 
the disclosure timing requirements of Sec.  226.5(b)(1)(ii). Creditors 
may provide disclosures of these charges in writing but creditors are 
not required to do so; only those charges identified in Sec.  
226.6(b)(2) that must appear in the account-opening table must be 
provided in writing. The Board expects, however, that for contract law 
or other reasons, most creditors as a practical matter will disclose 
the discounted initial rate in writing at account-opening. See section-
by-section analysis to Sec.  226.5(a)(1) above.
    The Board believes aligning the disclosure requirements for the 
account-opening summary table with the requirements for the application 
summary table will ease compliance without lessening consumer 
protections. Many creditors will continue to disclose discounted 
initial rates, including issuers subject to the final rules issued by 
the Board and other federal banking agencies published elsewhere in 
today's Federal Register, and how an initial rate could be revoked in 
the account-opening table or in writing as part of the account-opening 
disclosures.
6(b)(2)(iii) Fixed Finance Charge; Minimum Interest Charge
    TILA Section 127(a)(3), which is currently implemented in Sec.  
226.6(a)(4), requires creditors to disclose in account-opening 
disclosures the amount of the finance charge, including any minimum or 
fixed amount imposed as a finance charge. 15 U.S.C. 1637(a)(3). In the 
June 2007 Proposal, the Board would have required creditors to disclose 
in account-opening disclosures the amount of any finance charges in 
Sec.  226.6(b)(1)(i)(A), and further required creditors to disclose any 
minimum finance charge in the account-opening table in Sec.  
226.6(b)(4)(iii)(D). In May 2008, the Board proposed to require

[[Page 5310]]

card issuers to disclose in the table provided with applications or 
solicitations minimum or fixed finance charges in excess of $1.00 that 
could be imposed during a billing cycle and a brief description of the 
charge under the heading ``minimum interest charge'' or ``minimum 
charge,'' as discussed in the section-by-section analysis to Appendix 
G, for the reasons discussed in the section-by-section analysis to 
proposed Sec.  226.5a(b)(3). At the card issuer's option, the card 
issuer could disclose in the table any minimum or fixed finance charge 
below the threshold. The Board proposed the same disclosure 
requirements to apply to the account-opening table for the same 
reasons.
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.5a(b)(3), Sec.  226.6(b)(2)(iii) is revised and new comment 
6(b)(2)(iii)-1 is added, consistent with Sec.  226.5a(b)(3). As noted 
in the section-by-section analysis to Sec.  226.5a(b)(3), under the 
June 2007 Proposal, card issuers may substitute the account-opening 
table for the table required by Sec.  226.5a. Conforming the fixed 
finance charge and minimum interest charge disclosure requirement for 
the two tables promotes consistency and uniformity. Because minimum 
interest charges of $1.00 or less would no longer be required to be 
disclosed in the account-opening table, these charges could be 
disclosed at any time before the consumer agrees to pay or becomes 
obligated to pay for the charge, pursuant to the disclosure timing 
requirements of Sec.  226.5(b)(1)(ii). Creditors may provide 
disclosures of these charges in writing but are not required to do so. 
See section-by-section analysis to Sec.  226.5(a)(1) above. The Board 
believes creditors will continue to disclose minimum interest charges 
of $1.00 or less in writing at account opening, to meet the timing 
requirement to disclose the fee before the consumer becomes obligated 
for the charge. In addition, creditors that choose to charge more than 
$1.00 would be required to include the cost in the account-opening 
table. Thus, the Board is adopting Sec.  226.6(b)(2)(iii) (proposed in 
May 2008 as Sec.  226.6(b)(4)(iii)(D)) with technical changes described 
in the section-by-section analysis to Sec.  226.5a(b)(3).
6(b)(2)(v) Grace Period
    Under TILA, creditors providing disclosures with applications and 
solicitations must discuss grace periods on purchases; at account 
opening, creditors must explain grace periods more generally. 15 U.S.C. 
1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Section 226.6(b)(4)(iv) in 
the June 2007 Proposal would have required creditors to 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.
    In May 2008, as discussed in the section-by-section analysis to 
Sec.  226.5(a)(2) and to Sec.  226.5a(b)(5), the Board proposed to 
revise provisions relating to the description of grace periods. Under 
the proposal, Sec.  226.6(b)(4)(iv) would have been revised and comment 
6(b)(4)(iv)-1 added, consistent with the proposed revisions to Sec.  
226.5a(b)(5) and commentary. The heading ``How to Avoid Paying Interest 
[on a particular feature]'' would have been used where a grace period 
exists for that feature. The heading ``Paying Interest'' would have 
been used if there is no grace period on any feature of the account. A 
reference to required use of the phrase ``grace period'' in comment 
6(b)(4)-3 of the June 2007 Proposal was proposed to be withdrawn.
    Comments received on the proposed text of headings and the results 
of consumer testing are discussed in the section-by-section analysis to 
Sec.  226.5a(b)(5). For the reasons stated in the section-by-section 
analysis to and consistent with Sec.  226.5a(b)(5), the final rule 
(moved to Sec.  226.6(b)(2)(v)) requires the heading ``How to Avoid 
Paying Interest'' to be used for the row that describes a grace period, 
and the heading ``Paying Interest'' to be used for the row that 
describes no grace period.
    The final rule differs from the proposal in that the heading 
``Paying Interest'' must be used for the heading in the account-opening 
table if any one feature on the account does not have a grace period. 
Comments 6(b)(2)(v)-1 through -3 provide language creditors may use to 
describe features that have grace periods and features that do not, and 
guidance on complying with Sec.  226.6(b)(2)(v) when some features on 
an account have a grace period but others do not. See Samples G-17(B) 
and G-17(C).
    As stated above under TILA, card issuers must disclose any grace 
period for purchases, which most credit cards currently offer, in the 
table provided on or with credit card applications or solicitations, 
and creditors must disclose at account opening whether or not grace 
periods exist for all features of an account. Cash advance and balance 
transfer features on credit card accounts typically do not offer grace 
periods. Under the final rule, the row heading describing grace periods 
in the account-opening table will likely be uniform among creditors, 
``Paying Interest.'' The Board recognizes that this row heading may not 
be consistent with the row heading describing grace periods for 
purchases in the table provided on or with credit card applications and 
solicitations. However, the Board does not believe that different 
headings will significantly undercut a consumer's ability to compare 
the terms of a credit card account to the terms that were offered in 
the solicitation. Currently most issuers offer a grace period on all 
purchase balances; thus, most issuers will use the term ``How to Avoid 
Paying Interest on Purchases'' in the table provided on or with credit 
card applications and solicitations. Nonetheless, when a consumer is 
reviewing the application and account-opening tables for a credit card 
account--the former having a row with the heading ``How to Avoid Paying 
Interest on Purchases'' and the latter having a row ``Paying Interest'' 
because no grace period is offered on balance transfers and cash 
advances--the Board believes that consumers will recognize that the 
information in those two rows relate to the same concept of when 
consumers will pay interest on the account.
6(b)(2)(vi) 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). In June 2007, the Board proposed Sec.  
226.6(b)(4)(ix), which would have required that the name of the balance 
computation method used by the creditor be disclosed beneath the table, 
along with a statement that an explanation of the method is provided in 
the account agreement or disclosure statement. To determine the name of 
the balance computation method to be disclosed, the June 2007 Proposal 
would have required creditors to refer to Sec.  226.5a(g) for a list of 
commonly-used methods; if the method used was not among those 
identified, creditors would be required to provide a brief explanation 
in place of the name.
    Commenters generally supported the proposal. See section-by-section 
analysis to Sec.  226.5a(b)(6) regarding the comments received on 
proposed disclosures of the name of balance computation method below 
the summary table provided on or with credit card applications or 
solicitations. Consistent with the reasons discussed in the section-by-
section analysis to Sec.  226.5a(b)(6), the Board adopts Sec.  
226.6(b)(2)(vi) (proposed as Sec.  226.6(b)(4)(ix)) to require that the 
name of the balance computation method used by a creditor be disclosed

[[Page 5311]]

beneath the table, along with a statement that an explanation of the 
method is provided in the account agreement or disclosure statement. 
Unlike Sec.  226.5a(b)(6), creditors are required in Sec.  
226.6(b)(2)(vi) to disclose the balance computation method used for 
each feature on the account. Samples G-17(B) and G-17(C) provide 
guidance on how to disclose the balance computation method where the 
same method is used for all features on the account.
6(b)(2)(viii) Late-Payment Fee
    Under the June 2007 Proposal, creditors were required to disclose 
penalty fees such as late-payment fees in the account-opening summary 
table. If the APR may increase due to a late payment, the proposal 
required creditors to disclose that fact. Cross references were 
proposed to aid consumer understanding. See proposed Sec.  
226.6(b)(4)(iii)(C).
    In response to the proposal, one federal banking agency suggested 
that in addition to the amount of the fee, the Board should consider 
additional cautionary disclosures to aid in consumer understanding, 
such as that late fees imposed on an account may cause the consumer to 
exceed the credit limit on the account. To keep the table manageable in 
size, the Board is not adopting a requirement to include cautionary 
information about the consequences of paying late beyond the 
requirement to provide information about penalty rates.
Cross References to Penalty Rate
    For the reasons stated in the supplementary information regarding 
proposed Sec.  226.5a(b)(13), the Board has withdrawn a requirement in 
proposed Sec.  226.6(b)(4)(iii)(C) which provided that if a creditor 
may impose a penalty rate for one or more of the circumstances for 
which a late-payment fee, over-the-limit fee, or returned-payment fee 
is charged, the creditor must disclose the fact that the penalty rate 
also may apply and a cross reference to the penalty rate.
6(b)(2)(xii) Required Insurance, Debt Cancellation or Debt Suspension 
Coverage
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.5a(b)(13), as permitted by applicable law, creditors that 
require credit insurance, or debt cancellation or debt suspension 
coverage, as part of the plan are 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 Sec.  226.6(b)(2)(xii).
6(b)(2)(xiii) Available Credit
    The Board proposed in June 2007 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 have applied to creditors that require fees for 
the availability or issuance of credit, or a security deposit, that in 
the aggregate equal 25 percent or more of the minimum credit limit 
offered on the account. If that threshold is met, a creditor would have 
been required to 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. The account-opening disclosures regarding 
available credit also would have been required for credit and charge 
card applications or solicitations. See proposed Sec.  226.5a(b)(16). 
The requirement in proposed Sec.  226.6(b)(4)(vii) would have applied 
to all open-end (not home-secured) credit for which the threshold is 
met, unlike Sec.  226.5a(b)(14) (proposed as Sec.  226.5a(b)(16)), 
which only applies to card issuers.
    Commenters generally supported the proposal, which is generally 
adopted as proposed with several revisions noted below. See section-by-
section analysis to Sec.  226.5a(b)(14) regarding comments received on 
the proposed disclosure of available credit in the summary table 
provided on or with credit card applications or solicitations. 
Consistent with Sec.  226.5a(b)(14), Sec.  226.6(b)(2)(xiii) of the 
final rule (proposed as Sec.  226.6(b)(4)(vii)) reduces the threshold 
for determining whether the available credit disclosure must be given 
to 15 percent or more of the minimum credit limit offered on the 
account.
    Notice of right to reject plan. In May 2008, the Board proposed an 
additional disclosure to inform consumers about their right to reject a 
plan when set-up fees have been charged before the consumer receives 
account-opening disclosures. See section-by-section analysis to Sec.  
226.5(b)(1)(iv). Creditors would have been required to provide 
consumers with notice about the right to reject the plan in such 
circumstances. The Board intended to target the disclosure requirement 
to creditors offering subprime credit card accounts. Comment 
6(b)(4)(vii)-1 also was proposed to provide creditors with model 
language to comply with the disclosure requirement.
    Both industry and consumer group commenters that addressed the 
provision generally supported the proposed notice. See section-by-
section analysis to Sec.  226.5(b)(1)(iv) for a discussion of comments 
received regarding the circumstances under which a consumer could 
reject a plan. Regarding the notice itself, one industry commenter 
suggested adding to the notice information about how the consumer could 
contact the creditor to reject the plan. One commenter suggested 
expanding the disclosure requirement to the table provided with credit 
and charge card applications and solicitations; another suggested 
requiring the notice on the first billing statement.
    The final rule adopts the requirement to provide a notice 
disclosure in the account-opening table to inform consumers about their 
right to reject a plan until the consumer has used the account or made 
a payment on the account after receiving a billing statement, when set-
up fees have been charged before the consumer receives account-opening 
disclosures. The final rule provides model language creditors may use 
to comply with the disclosure requirement, as proposed. The final rule 
does not include a requirement that the creditor provide information 
about how to contact the creditor to reject the plan; the Board 
believes such a requirement would add to the length of the disclosure 
and is readily available to consumers in other account-opening 
materials. The Board also declines to require the notice on or with an 
application or solicitation or on the first billing statement; the 
Board believes the most effective time for the notice to be given is 
after the consumer has chosen to apply for the card account and before 
the consumer has used or had the opportunity to use the card.
    Actual credit limit. The available credit disclosure proposed in 
June 2007 would have been triggered if start-up fees, or a security 
deposit financed by the creditor, in the aggregate equal 25 percent or 
more of the minimum credit limit offered on the account, consistent 
with the proposed disclosure in the summary table required on or with 
credit or charge card applications or solicitations. Some consumer 
groups urged the Board to base the disclosure on the actual credit 
limit received, rather than the minimum credit limit on the account. As 
discussed in the section-by-section analysis to Sec.  226.5a(b)(14), 
final rules issued by the Board and other federal banking agencies 
published elsewhere in today's Federal Register address card issuers' 
ability to finance certain fee amounts.

[[Page 5312]]

    The final rule, consistent with the proposal, bases the threshold 
for whether the available disclosure is required to be given on the 
minimum credit limit offered on the plan. Specifically, the final rule 
requires that the available credit disclosure be given in the account-
opening table if the creditor requires fees for the availability or 
issuance of credit, or a security deposit, that in the aggregate equal 
15 percent or more of the minimum credit limit offered on the plan. The 
Board believes that it is important that a consumer receive consistent 
disclosures in the table provided with an application or solicitation 
and in the account-opening table, regardless of the actual credit limit 
for which the consumer is approved. For example, if a creditor offers 
an open-end plan with a minimum credit limit of $300 and imposes start-
up fees of $45, that creditor would be required to include the 
available credit disclosure in the table provided with applications and 
solicitations. If a consumer applies for that account and receives an 
initial credit limit of $400, the $45 in start-up fees would be less 
than 15% of the consumer's line. However, the Board believes that the 
consumer still should receive the available credit disclosure at 
account-opening so that the consumer is better able to compare the 
terms of the account he or she received with the terms of the offer.
    Although, as discussed above, a creditor must determine whether the 
15 percent threshold is met with reference to the minimum credit limit 
offered on the plan, the final rule requires creditors to base the 
available credit disclosure for the account-opening summary table, if 
required, on the actual credit limit received. The Board believes a 
disclosure of available credit based on the actual credit limit 
provides consumers with accurate information that is helpful in 
understanding the available credit remaining. Creditors typically state 
the credit limit for the account with account-opening materials, and 
permitting creditors to disclose in the table the minimum credit limit 
offered on the account--likely a different dollar amount than the 
actual credit limit--could result in confusion. The Board understands 
that creditors offering accounts that would be subject to the available 
credit disclosure typically establish a limited number of credit limits 
on such accounts. Therefore, for creditors that use pre-printed forms, 
the requirement should not be overly burdensome.
6(b)(2)(xiv) Web Site Reference
    For the reasons stated under Sec.  226.5a(b)(15), the Board adopts 
Sec.  226.6(b)(2)(xiv) (proposed at Sec.  226.6(b)(4)(viii)), which 
requires card issuers to provide a reference to the Board's Web site 
for additional information about shopping for and using credit card 
accounts.
6(b)(2)(xv) 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). This 
information is important, but lengthy. The Board proposed Sec.  
226.6(b)(4)(x) in June 2007 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. Under 
the proposal, the statement, along with the name of the balance 
computation method, would have been required to be located directly 
below the table. The Board received no comments on the billing error 
rights reference and is adopting the requirement as proposed.
6(b)(3) Disclosure of Charges Imposed as Part of Open-End (Not Home-
Secured) Plans
    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)). 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 current 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 creditors 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.
    The June 2007 Proposal would have created 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). 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.
    Under the June 2007 Proposal, charges to be disclosed also would 
have included 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, or the timing 
or method of billing or payment. Proposed commentary provided 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).
    Three examples of types of charges that are not imposed as part of 
the plan were listed in proposed Sec.  226.6(b)(1)(ii). These examples 
would have included 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. Proposed comment 6(b)(1)(ii)-1 
provided examples of fees for packages of services that would have been 
considered to be imposed as part of the plan and fees for packages of 
services that would not. This comment is substantively identical to 
current comment 6(b)-1.v.
    Commenters generally supported deemphasizing the distinction 
between finance charges and other charges. One trade association urged 
the Board to identify costs as ``interest'' or ``fees,'' the labels 
proposed to describe costs on

[[Page 5313]]

periodic statements, rather than ``costs imposed as part of the plan,'' 
to ease compliance and consumer understanding.
    Some industry commenters urged the Board to provide a specific and 
finite list of fees that must be disclosed, to avoid litigation risk. 
They stated the proposed categories of charges considered to be part of 
the plan were not sufficiently precise. They asked for additional 
guidance on what fees might be captured as fees for failure to use the 
card as agreed (except amounts payable for collection activity after 
default), or that affect the consumer's access to the plan, for 
example. One industry trade association asked the Board to clarify that 
creditors would be deemed to be in compliance with the regulation if 
the creditor disclosed a fee that was later deemed to be not a part of 
the plan.
    The Board is adopting the requirement to disclose costs imposed as 
part of the plan as proposed, but renumbered for organizational 
clarity. General rules are set forth in Sec.  226.6(b)(3)(i), charges 
imposed as part of the plan are identified in Sec.  226.6(b)(3)(ii), 
and charges imposed that are not part of the plan are identified in 
Sec.  226.6(b)(3)(iii). The final rule continues to use the term 
``charges.'' Although the Board's consumer testing indicates that 
consumers' understanding of costs incurred during a statement period 
improves when labeled as ``fees'' or ``interest'' on periodic 
statements, the Board believes the general term ``charges,'' which 
encompasses interest and fees, is an efficient description of the 
requirement, and eases compliance by not requiring creditors to recite 
``fees and interest'' wherever the term ``charges'' otherwise would 
appear.
    As the Board acknowledged in the June 2007 Proposal, the disclosure 
requirements do not completely eliminate ambiguity about what are TILA 
charges. The commentary provides examples to ease compliance. To 
further mitigate ambiguity the rule provides a complete list in new 
Sec.  226.6(b)(2) of which charges and categories of charges must be 
disclosed in writing at account opening (or before they are increased 
or newly introduced). See Sec. Sec.  226.5(b)(1) and 226.9(c)(2) for 
timing rules. Any fees aside from those fees or categories of fees 
identified in Sec.  226.6(b)(2) are not required to be disclosed in 
writing at account opening. However, if they are not disclosed in 
writing at account opening, other charges imposed as part of an open-
end (not home-secured) plan must be disclosed in writing or orally at a 
time and in a manner that a consumer would be likely to notice them 
before the consumer agrees to or becomes obligated to pay the charge. 
This approach is intended in part to reduce creditor burden. For 
example when a consumer orders a service by telephone, creditors 
presumably disclose fees related to that service at that time for 
business reasons and to comply with other state and federal laws.
    Moreover, compared to the approach reflected in the current 
regulation, the 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. Comment 6(b)(3)(ii)-3 is added to 
provide that if a creditor is unsure whether a particular charge is a 
cost imposed as part of the plan, the creditor may, at its option, 
consider such charges as a cost imposed as part of the plan for Truth 
in Lending purposes. In addition, this approach will help ensure that 
consumers receive the information they need when it would be most 
helpful to them.
    Comment 6(b)(3)(ii)-2 has been revised from the June 2007 Proposal. 
The comment, as proposed in June 2007 as comment 6(b)(1)(i)-2, included 
a fee to receive paper statements as an example of a fee that affects 
the plan. This example is not included in the final rule. Creditors are 
required to provide periodic statements in writing in connection with 
open-end plans, and the Board did not intend with the inclusion of this 
example to express a view on the permissibility of charging consumers a 
fee to receive paper statements.
    Section 226.6(b)(3) applies 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 are 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 currently 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 has 
generally referred to this period as a ``free-ride period.'' To use 
consistent terminology to describe the concept, the Board is updating 
references to ``free-ride period'' as ``grace period'' in the 
regulation and commentary, without any intended substantive change, as 
proposed. Comment 6(b)(3)-2 is revised to provide that although the 
creditor need not use any particular descriptive phrase or term to 
describe a grace period, the descriptive phrase or term must be 
sufficiently similar to the disclosures provided pursuant to Sec. Sec.  
226.5a and 226.6(b)(2) to satisfy a creditor's duty to provide 
consistent terminology under Sec.  226.5(a)(2).
6(b)(4) Disclosure of Rates for Open-End (Not Home-Secured) Plans
    Rules for disclosing rates that affect the amount of interest that 
will be imposed are consolidated in Sec.  226.6(b)(4) (proposed at 
Sec.  226.6(b)(2)). (See redesignation table below.) Headings have been 
added for clarity.
6(b)(4)(i)
    Currently, creditors must disclose finance charges attributable to 
periodic rates. These costs are typically interest charges but may 
include other costs such as premiums for required credit insurance. For 
clarity, the text of Sec.  226.6(b)(4)(i) uses the term ``interest'' 
rather than ``finance charge'' and is adopted as proposed.
6(b)(4)(i)(D) Balance Computation Method
    Section Sec.  226.6(b)(4)(i) sets forth rules relating to the 
disclosure of rates. Section Sec.  226.6(b)(4)(i)(D) (currently Sec.  
226.6(a)(3) and proposed in June 2007 as Sec.  226.6(b)(2)(i)(D)) 
requires creditors to explain the method used to determine the balance 
to which rates apply. 15 U.S.C. 1637(a)(2).
    The June 2007 Proposal would have required creditors to continue to 
explain the balance computation methods in the account-opening 
agreement or other disclosure statement. The name of the balance 
computation method and a reference to where the explanation can be 
found would have been required along with the account-opening summary 
table. Commenters generally supported the Board's approach, and the 
Board is adopting the requirement to provide an explanation of balance 
computation methods in the account agreement or other disclosure 
statement, as proposed. See also the section-by-section analysis to 
Sec.  226.6(b)(2)(vi).
    Model clauses. Model clauses that explain commonly used balance 
computation methods, such as the average daily balance method, are at 
Appendix G-1 to part 226. In the June 2007 Proposal, the Board 
requested comment on whether model clauses for methods such as 
``adjusted balance'' and ``previous balance'' should be deleted as 
obsolete, and more broadly, whether

[[Page 5314]]

Model Clauses G-1 should be eliminated entirely because creditors no 
longer use the model clauses.
    One trade association asked that all model clauses be retained. In 
response to other comments received on the June 2007 Proposal, the 
Board proposed in May 2008 to add a new model clause to Model Clauses 
G-1 for the ``daily balance'' method. In addition, the Board proposed 
new Model Clauses G-1(A) for open-end (not home-secured) plans. The 
clauses in G-1(A) differ from the clauses in G-1 by referring to 
``interest charges'' rather than ``finance charges'' to explain balance 
computation methods. Commenters did not specifically address this 
aspect of the May 2008 Proposal.
    Based on the comments received on both proposals, the Board is 
adopting Model Clauses G-1(A). See section-by-section analysis to Sec.  
226.6(a) regarding Model Clauses G-1.
    Current comment 6(a)(3)-2 clarifies that creditors may, but need 
not, explain how payments and other credits are allocated to 
outstanding balances as part of explaining a balance computation 
method. Two examples are deleted from the comment (renumbered in this 
final rule as 6(b)(4)(i)(D)-2), to avoid any unintended confusion or 
conflict with rules limiting how creditors may allocate payments on 
outstanding credit balances, published elsewhere in today's Federal 
Register.
6(b)(4)(ii) Variable-Rate Accounts
    New Sec.  226.6(b)(4)(ii) sets 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 is moved from 
the commentary to the regulation and revised, as proposed. 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). In June 2007, the Board 
proposed an accuracy standard for variable rates disclosed at account 
opening; the rate disclosed would have been accurate if it was in 
effect as of a specified date within 30 days before the disclosures are 
provided. Creditors' option to provide an estimated rate as the rate in 
effect for a variable-rate account would have been eliminated under the 
proposal. Current comment 6(a)(2)-10, which addresses discounted 
variable-rate plans, was proposed as comment 6(b)(2)(ii)-5, with 
technical revisions but no substantive changes.
    The June 2007 Proposal also would have required 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).
    The Board is adopting the rules for variable-rate disclosures 
provided at account-opening, as proposed. As to accuracy requirements, 
the Board believes 30 days provides sufficient flexibility to creditors 
and reasonably current information to consumers. 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.
    Comment 6(b)(4)(ii)-5 (proposed as 6(b)(2)(ii)-5) is adopted, with 
revisions consistent with the rule adopted under Sec.  
226.6(b)(2)(i)(B), which permits but does not require creditors, except 
those subject to 12 CFR Sec.  227.24 or similar law, to disclose 
temporary initial rates in the account-opening summary table. However, 
creditors must comply with the general requirement to disclose charges 
imposed as part of the plan before the charge is imposed. The Board 
believes creditors not subject to 12 CFR Sec.  227.24 or similar law 
will continue to disclose initial rates as part of the account 
agreement for contract and other reasons.
    Pursuant to its TILA Section 105(a) authority, the Board is also 
adopting in Sec.  226.6(b)(4)(ii)(B) the requirement to disclose any 
applicable margin when describing how a variable rate is determined. 
The Board believes creditors already 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 apply. Thus, the Board does not expect the revision will 
add burden.
6(b)(4)(iii) Rate Changes Not Due to Index or Formula
    The June 2007 Proposal would have consolidated 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. See proposed Sec.  
226.6(b)(2)(iii). In addition to requiring creditors to identify the 
circumstances under which a rate may change (such as the end of an 
introductory period or a late payment), the June 2007 Proposal would 
have required creditors to disclose how existing balances would be 
affected by the new rate. The change was 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, proposed 
comment 6(b)(2)(iii)-2 would require creditors to disclose the 
increase; the highest margin can be stated if more than one might 
apply.
    Comment 6(b)(4)(iii)-1 (proposed as comment 6(b)(2)(iii)-1) is 
adopted with revisions consistent with the rule adopted under Sec.  
226.6(b)(2)(i)(B), which permits but does not require creditors to 
disclose temporary initial rates in the account-opening summary table, 
except as provided in Sec.  226.6(b)(2)(i)(F). The effect of making the 
disclosure permissive is that creditors may disclose initial rates at 
any time before those rates are applied. However, the Board believes 
creditors will continue to disclose initial rates as part of the 
account agreement for contract and other reasons and to comply with the 
general requirement to disclose charges imposed as part of the plan 
before the charge is imposed.
    Balances to which rates apply. The June 2007 Proposal would have 
required creditors to inform consumers whether any new rate would apply 
to balances outstanding at the time of the rate change. In May 2008, 
the Board and other federal banking agencies proposed rules to prohibit 
the application of a penalty rate to outstanding balances, with some 
exceptions. Elsewhere in today's Federal Register, the Board and other 
federal banking agencies are adopting the rule, with some revisions. To 
conform the requirements of Sec.  226.6 to the rules addressing the 
application of a penalty rate to outstanding balances, creditors are 
required under Sec.  226.6(b)(4)(iii)(D) and (b)(4)(iii)(E) to inform 
consumers about the balance to which the new rate will apply and the 
balance to which the current rate at the time of the change will apply. 
Comment 6(b)(4)(iii)-3 is conformed accordingly.
    Credit privileges permanently terminated. Under current rules, 
comment 6(a)(2)-11 provides that creditors need not disclose increased 
rates that may apply if credit privileges are permanently terminated. 
That rule was retained in the June 2007 Proposal, but was moved to 
Sec.  226.6(b)(4)(ii)(C) and comment 6(b)(2)(iii)-2.iii., to be 
consistent with Sec.  226.5a(b)(1)(iv) in the June 2007 Proposal. In 
May 2008, the Board proposed to eliminate that exception; accordingly, 
references to increased rates upon permanently terminated credit 
privileges in paragraph iii. to comment 6(b)(2)(iii)-2 would have been 
removed.
    For the reasons stated in the section-by-section analysis to Sec.  
226.5a(b)(1), the Board is eliminating the exception:

[[Page 5315]]

creditors that increase rates when credit privileges are permanently 
terminated must disclose that increased rate in the account-opening 
table.
6(b)(5) Additional Disclosures for Open-end (not Home-secured) Plans
6(b)(5)(i) Voluntary Credit Insurance; Debt Cancellation or Suspension
    As discussed in the section-by-section analysis to Sec.  226.4, the 
Board is adopting revisions to the requirements to exclude charges for 
voluntary credit insurance or debt cancellation or debt suspension 
coverage from the finance charge. See 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 required 
under Sec.  226.4(d) will be provided at the time the product is 
offered to the consumer.
    In June 2007, the Board proposed Sec.  226.6(b)(3) to require 
creditors to provide the disclosures required under Sec.  226.4(d) to 
exclude voluntary credit insurance or debt cancellation or debt 
suspension coverage from the finance charge. One commenter asked the 
Board to clarify that the disclosures are required to be provided only 
to those consumers that purchase the product and not to all consumers 
to whom the product was made available.
    Section 226.6(b)(5)(i) (proposed as Sec.  226.6(b)(3)) is adopted 
as proposed, with technical revisions for clarity in response to 
commenters' concerns. Comment 6(b)(5)(i)-1 is added to provide that 
creditors comply with Sec.  226.6(b)(5)(i) if they provide disclosures 
required to exclude the cost of voluntary credit insurance or debt 
cancellation or debt suspension coverage from the finance charge in 
accordance with Sec.  226.4(d). For example, if the Sec.  226.4(d) 
disclosures are given at application, creditors need not repeat those 
disclosures when providing other disclosures required to be given at 
account opening.
6(b)(5)(ii) Security Interests
    Regulatory text regarding the disclosure of security interests 
(currently at Sec.  226.6(c) and proposed at Sec.  226.6(c)(1)) is 
retained without change. Comments to Sec.  226.6(b)(5)(ii) (currently 
at Sec.  226.6(c) and proposed as Sec.  226.6(c)(1)) are revised for 
clarity, without any substantive change.
6(b)(5)(iii) 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. In June 2007, 
the Board revised Model Form G-3 to improve its readability, proposed 
as Model Form G-3(A). The proposed revisions were not based on consumer 
testing, although design techniques and changes in terminology were 
used to facilitate improved consumer understanding of TILA's billing 
rights. Under the June 2007 Proposal, creditors offering HELOCs subject 
to Sec.  226.5b could continue to use current Model Form G-3 or G-3(A), 
at the creditor's option.
    Model Form G-3 is retained and Model Form G-3(A) is adopted, with 
some revisions. As discussed in the section-by-section analysis to 
Sec. Sec.  226.12(b) and 226.13(b), the Board clarified that creditors 
may choose to permit a consumer, at the consumer's option, to 
communicate with the creditor electronically when notifying the 
creditor about possible unauthorized transactions or other billing 
disputes. The use of electronic communication in these circumstances 
applies to all open-end credit plans; thus, additional text that 
provides instructions for a consumer, at the consumer's option, to 
communicate with the creditor electronically has been added to Model 
Forms G-3 and G-3(A). In addition, technical changes have also been 
made to Model Form G-3(A) for clarity without intended substantive 
change, in response to comments received.
    Technical revisions. The final rule adopts several technical 
revisions, as proposed in the June 2007 Proposal. The section is 
retitled ``Account-opening disclosures'' from the current title 
``Initial disclosures'' to reflect more accurately the timing of the 
disclosures, as proposed. 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 and 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 other technical revisions, as proposed, comments 6-1 and 6-2 are 
deleted. The substance of comment 6-1, which requires consistent 
terminology, is discussed more generally in Sec.  226.5(a)(2). Comment 
6-2 addresses certain open-end plans involving more than one creditor, 
and is deleted as obsolete. See section-by-section analysis to Sec.  
226.5a(f).
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). 
For a discussion about periodic statement disclosure rules and format 
requirements, see the section-by-section analysis to Sec.  226.7(a) for 
HELOCs subject to Sec.  226.5b, and Sec.  226.7(b) for open-end (not 
home-secured) plans.
7(a) Rules Affecting Home-Equity Plans
    Periodic statement disclosure and format requirements for HELOCs 
subject to Sec.  226.5b were unaffected by the June 2007 Proposal, 
consistent with the Board's plan to review Regulation Z's disclosure 
rules for home-secured credit in a future rulemaking. To facilitate 
compliance, the substantively unrevised requirements applicable only to 
HELOCs are grouped together in Sec.  226.7(a). (See redesignation table 
below.)
    For HELOCs, creditors are required to comply with the disclosure 
requirements under Sec.  226.7(a)(1) through (a)(10). Except for the 
addition of an exception that HELOC creditors may utilize at their 
option (further discussed below), these rules and accompanying 
commentary are substantively unchanged from current Sec.  226.7(a) 
through (k) and the June 2007 Proposal. As 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 
current Sec.  226.7(d) is moved to Sec.  226.7(a)(4) and comment 
7(a)(4)-6, as proposed.
7(a)(4) 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 a year. 15 U.S.C. 1637(b)(5); Sec.  226.14(b). 
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

[[Page 5316]]

during the billing cycle.'' In June 2007, the Board proposed for open-
end (not home-secured) plans a limited exception to TILA Section 
127(b)(5) regarding promotional rates that were offered but not 
actually applied, to effectuate the purposes of TILA to require 
disclosures that are meaningful and to facilitate compliance.
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.7(b)(4)(ii), under the June 2007 Proposal, creditors would 
have been required to disclose promotional rates only if the rate 
actually applied during the billing period. The Board noted 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 did not 
apply to HELOCs covered by Sec.  226.5b, and the Board requested 
comment on whether the class of transactions under the proposed 
exceptions should apply more broadly to include HELOCs subject to Sec.  
226.5b, and if so, why.
    Commenters generally supported the proposal under Sec.  
226.7(b)(4). Although few commenters addressed the issue of whether the 
exception should also apply to HELOCs subject to Sec.  226.5b, these 
commenters favored extending the exception to HELOCs because concerns 
about information overload on consumers and operational burdens on 
creditors apply equally in the context of HELOC disclosures. The Board 
is adopting the exception as it applies to open-end (not home-secured) 
plans as proposed, with minor changes to the description of the time 
period to which the promotional rate applies. For the reasons stated 
above and in the section-by-section analysis to Sec.  226.7(b)(4), the 
Board also extends the exception to HELOCs subject to Sec.  226.5b. 
Section 226.7(a)(4) and comment 7(a)(4)-1 are revised accordingly. 
Extending this exception to HELOCs does not require creditors offering 
HELOCs to revise any forms or procedures. Therefore, no additional 
burden is associated with revising the rules governing HELOC 
disclosures. Comment 7(a)(4)-5, which provides guidance when the 
corresponding APR and effective APR are the same, is revised to be 
consistent with a creditor's option, rather than a requirement, to 
disclose an effective APR, as discussed below.
7(a)(7) Annual Percentage Rate
    The June 2007 Proposal included two alternative approaches to 
address concerns about the effective APR. The section-by-section 
analysis to Sec.  226.7(b) discusses in detail the proposed approaches 
and the reasons for the Board's determination to adopt the proposed 
approach that eliminates the requirement to disclose the effective APR. 
Thus, under this approach, the effective APR is optional for creditors 
offering HELOCs. Section 226.7(a) expressly provides, however, that a 
HELOC creditor must provide disclosures of fee and interest in 
accordance with Sec.  226.7(b)(6) if the creditor chooses not to 
disclose an effective APR. Comment 7(a)(7)-1 is revised to provide that 
creditors stating an annualized rate on periodic statements in addition 
to the corresponding APR required by Sec.  226.7(a)(4) must calculate 
that additional rate in accordance with Sec.  226.14(c), to avoid the 
disclosure of rates that may be calculated in different ways.
    Currently and under the June 2007 Proposal, HELOC creditors 
disclosing the effective APR must label it as ``annual percentage 
rate.'' The final rule adds comment 7(a)(7)-2 to provide HELOC 
creditors with additional guidance in labeling the APR as calculated 
under Sec.  226.14(c) and the periodic rate expressed as an annualized 
rate. HELOC creditors that choose to disclose an effective APR may 
continue to label the figure as ``annual percentage rate,'' and label 
the periodic rate expressed as an annualized rate as the 
``corresponding APR,'' ``nominal APR,'' or a similar term, as is 
currently the practice. Comment 7(a)(7)-2 further provides that it is 
permissible to label the APR calculated under Sec.  226.14(c) as the 
``effective APR'' or a similar term. For those creditors, the periodic 
rate expressed as an annualized rate could be labeled ``annual 
percentage rate,'' consistent with the requirement under Sec.  
226.7(b)(4). If the two rates are different values, creditors must 
label the rates differently to comply with the regulation's standard to 
provide clear disclosures.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
    The June 2007 Proposal contained a number of significant revisions 
to periodic statement disclosures for open-end (not home-secured) 
plans, grouped together in proposed Sec.  226.7(b). The Board proposed 
for comment two alternative approaches to disclose the effective APR: 
The first approach attempted to improve consumer understanding of this 
rate and reduce creditor uncertainty about its computation. The second 
approach eliminated the requirement altogether. In addition, the Board 
proposed to add new paragraphs Sec.  226.7(b)(11) and (b)(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. TILA Section 127(b)(11) and (12); 15 U.S.C. 1637(b)(11) 
and (12).
    Effective annual percentage rate.
    Background on effective APR. 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.'' TILA 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 (the ``corresponding APR''). 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 currently requires that both be stated.
    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

[[Page 5317]]

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.
    As discussed in greater detail in the Board's June 2007 Proposal, 
industry and consumer groups disagree as to whether the effective APR 
conveys meaningful information. Creditors argue that the cost of a 
transaction is rarely, if ever, as high as the effective APR makes it 
appear, and that this tendency of the rate to exaggerate the cost of 
credit makes this APR misleading. Consumer groups contend that the 
information the rate provides about the cost of credit, 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. 
Consumer advocates and industry representatives also disagree as to 
whether the effective APR promotes credit shopping. Industry and 
consumer group representatives find some common ground in their 
observations that consumers do not understand the effective APR well.
    Industry representatives also claim that 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 costs of: (1) Conducting legal analysis of 
Regulation Z to determine whether the fee for the new service is a 
finance charge and must be included in the effective APR; (2) 
reprogramming software if the fee must be included; and (3) responding 
to telephone inquiries from confused customers and accommodating them 
(e.g., with fee waivers or rebates).
    Consumer research conducted for the Board prior to the June 2007 
Proposal. As discussed in the June 2007 Proposal, the Board undertook 
research through a consultant on consumer awareness and understanding 
of the effective APR, and on whether changes to the presentation of the 
disclosure could increase awareness and understanding. The consultant 
used 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, the language and design of the statements were modified 
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 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 of testing prior to the June 2007 
Proposal 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 proposed two alternative approaches. After considering 
the concerns and issues raised by industry and consumer groups about 
the effective APR, as well as the results of the consumer testing, the 
Board proposed in June 2007 two alternative approaches for addressing 
the effective APR. The first approach attempted to improve consumer 
understanding of this rate and reduce creditor uncertainty about its 
computation. The second approach proposed to eliminate the requirement 
to disclose the effective APR.
    1. First alternative proposal. Under the first alternative, the 
Board proposed to impose uniform terminology and formatting on 
disclosure of the effective APR and the fees included in its 
computation. See proposed Sec.  226.7(b)(6)(iv) and (b)(7)(i). This 
proposal was based largely on a form developed through several rounds 
of one-on-one interviews with consumers. The Board also proposed 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.
    Under proposed Sec.  226.7(b)(7)(i) and Sample G-18(B), creditors 
would have disclosed an effective APR for each feature, such as 
purchases and cash advances, in a table with the heading ``Fee-
Inclusive APR.'' Creditors would also have indicated that the Fee-
Inclusive APRs are ``APRs that you paid this period when transactions 
or fixed fees are taken into account as well as interest.'' A composite 
effective APR for two or more features would no longer have been 
permitted, as it is more difficult to explain to consumers. In addition 
to the effective APR(s) for each feature, the table would have 
included, by feature, 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 have required 
creditors to label the specific fees used to calculate the effective 
APR either as ``transaction'' or ``fixed'' fees, depending on whether 
the fee relates to a specific transaction. Such fees would also have 
been 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 have 
disclosed only the corresponding APRs and would not have been required 
to label fees as ``transaction'' or ``fixed'' fees since there would be 
no fees that are finance charges in such cases. These requirements 
would have been illustrated in forms under G-18 in Appendix G to part 
226, and creditors would have been required to use the model form or a 
substantially similar form.
    The proposal also sought to simplify computation of the effective 
APR, both to increase consumer understanding of the disclosure and 
facilitate creditor compliance. Proposed Sec.  226.14(e) would have 
included a specific and exclusive list of finance charges that would be 
included in calculating the effective APR.\18\
---------------------------------------------------------------------------

    \18\ Under the statute, the numerator of the quotient used to 
determine the historical APR is the total finance charge. See TILA 
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 TILA 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 effective APR. See 
Sec.  226.14(c)(2) and (c)(3).

---------------------------------------------------------------------------

[[Page 5318]]

    2. Second alternative proposal. Under the second alternative 
proposal, disclosure of the effective APR would no longer have been 
required. The Board proposed 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 uninformed 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).
    Under the second alternative proposal, disclosure of an effective 
APR would have been optional for creditors offering HELOCs, as 
discussed above in the section-by-section analysis to Sec.  
226.7(a)(7). For creditors offering open-end (not home-secured) plans, 
the regulation would have included no effective APR provision, and 
Sec.  226.7(b)(7) would have been reserved.
    Comments on the proposal. Many industry commenters supported the 
Board's second alternative proposal to eliminate the requirement to 
disclose the effective APR. Commenters supporting this alternative 
generally echoed the reasons given by the Board for this alternative in 
the June 2007 Proposal. For example, they contended that the effective 
APR cannot be used for shopping purposes because it is backward-looking 
and only purports to represent the cost of credit for a particular 
cycle; the effective APR confuses and misleads consumers; and the 
effective APR requirement imposes compliance costs and risks on 
creditors (for example, cost of legal analysis to determine whether new 
fees must be included in the effective APR, litigation risk, and costs 
of responding to inquiries from confused consumers).
    Another argument commenters made in support of eliminating the 
effective APR was that the disclosure would be unnecessary, in light of 
the Board's proposal for disclosure of interest and fees totaled by 
period and year to date (see the section-by-section analysis to Sec.  
226.7(b)(6)). Some commenters also indicated that retaining the 
effective APR, in combination with the proposal to include all 
transaction fees in the finance charge, might result in a creditor 
violating restrictions on interest rates. Some commenters contended 
that the Board's proposal to rename the effective APR the ``Fee-
Inclusive APR'' would not solve the problems of consumer 
misunderstanding and might in fact exacerbate such problems, although 
one industry commenter stated that if the Board decided to retain the 
effective APR requirement (which this commenter did not favor), the 
term ``Fee-Inclusive APR'' might represent an improvement.
    Industry commenters also expressed concern about the Board's 
proposal to specify precisely the fees that are to be included in the 
effective APR calculation (in proposed Sec.  226.14(e), as discussed 
above). One commenter said that if the effective APR requirement were 
to be retained, the Board would need to better clarify in Sec.  
226.14(e) which fees must be included. Another commenter stated that 
the proposed approach would not solve the problem of creditor 
uncertainty about which fees are to be included in the effective APR, 
because new types of fees will arise and create further uncertainty.
    Other commenters, including consumer groups and government 
agencies, supported the Board's first alternative proposal to retain 
the effective APR requirement. Commenters supporting this alternative 
believe that consumers need the effective APR in order to be able to 
properly evaluate and compare costs of card programs; commenters also 
contended that if the effective APR were eliminated, creditors could 
impose additional fees that would escape effective disclosure. Many of 
these commenters urged not only that the effective APR requirement 
should be retained, but in addition that all fees, or at least more 
fees than under the current regulation (for example, late-payment fees 
and over-the-limit fees) should be included in its calculation.
    Some commenters noted that even if the effective APR were retained, 
if the proposed approach (in proposed Sec.  226.14(e)) of specifying 
the fees to be included in the effective APR were followed, creditors 
could introduce new fees that might qualify as finance charges, but 
might not be included in the effective APR. One commenter supporting 
retention suggested that the Board try further consumer testing of an 
improved disclosure format for the effective APR, but that if the 
testing showed that consumers still did not understand the effective 
APR, then it should be eliminated.
    Consumer group commenters also expressed concern about the proposal 
to require disclosure of separate effective APRs for each feature on a 
credit card account. Commenters stated that such an approach would 
understate the true cost of credit, and would ``dilute'' the effect of 
multiple fees, because the fees would be shared among several different 
APRs. One creditor commenter also expressed concern about this 
proposal, stating that it would increase programming costs.
    Additional consumer research. In March 2008, and again after the 
May 2008 Proposal, the Board conducted further consumer research using 
one-on-one interviews in the same manner as in the consumer research 
prior to the June 2007 Proposal, discussed above. Three rounds of 
testing were conducted. A majority of participants in all rounds did 
not offer a correct explanation of the effective APR; instead, they 
offered a variety of incorrect explanations, including that the 
effective APR represented: the interest rate paid on fee amounts; the 
interest rate if the consumer paid late (the penalty rate); the APR 
after the introductory period ends; or the year-to-date interest 
charges expressed as a percentage. Two different labels were used for 
the effective APR in the statements shown to participants: the ``Fee-
Inclusive APR'' and the ``APR including Interest and Fees''. The label 
that was used did not have a noticeable effect on participant 
comprehension.
    In addition, in September 2008 the Board conducted additional 
consumer research using quantitative methods for the purpose of 
validating the qualitative research (one-on-one interviews) conducted 
previously. The quantitative consumer research involved surveys of 
1,022 consumers at shopping malls in seven locations around the 
country. Two research questions were investigated; the first was 
designed to determine what percentage of consumers understand the 
significance of the effective APR. The interviewer pointed out the 
effective APR disclosure for a month in which a cash advance occurred, 
triggering a transaction fee and thus making the effective APR higher 
than the nominal APR (interest rate). The interviewer then asked what 
the effective APR would be in the next month, in which the cash advance 
balance was not paid off but no new cash advances occurred. A very 
small percentage of respondents gave the correct answer (that the 
effective APR would be the same as the nominal APR). Some consumers 
stated that the effective APR would be the same in the

[[Page 5319]]

next month as in the current month, others indicated that they did not 
know, and the remainder gave other incorrect answers.
    The second research question was designed to determine whether the 
disclosure of the effective APR adversely affects consumers' ability to 
correctly identify the current nominal APR on cash advances. Some 
consumers were shown a periodic statement disclosing an effective APR, 
while other consumers were shown a statement without an effective APR 
disclosure. Consumers were then asked to identify the nominal APR on 
cash advances. A greater percentage of consumers who were shown a 
statement without an effective APR than of those shown a statement with 
an effective APR correctly identified the rate on cash advances. This 
finding was statistically significant, as discussed in the December 
2008 Macro Report on Quantitative Testing. Some of the consumers who 
did not correctly identify the rate on cash advances instead identified 
the effective APR as that rate.
    The quantitative consumer research conducted by the Board validated 
the results of the qualitative testing conducted both before and after 
the June 2007 proposal; it indicates that most consumers do not 
understand the effective APR, and that for some consumers the effective 
APR is confusing and detracts from the effectiveness of other 
disclosures.
    Final rule. After considering the comments on the proposed 
alternatives and the results of the consumer testing, the Board has 
determined that it is appropriate to eliminate the requirement to 
disclose an effective APR. The Board takes this action pursuant to its 
exception and exemption authorities under TILA Section 105.
    Section 105(f) directs the Board to make an exemption 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, has concluded that it has satisfied the criteria for 
the exemption determination. Consumer testing conducted prior to the 
June 2007 Proposal, in March 2008, and after the May 2008 Proposal 
indicates that consumers find the current disclosure of an APR that 
combines rates and fees to be confusing. The June 2007 Proposal would 
have required disclosure of the nominal interest rate and fees in a 
manner that is more readily understandable and comparable across 
institutions. The Board believes that this approach can better inform 
consumers and further the goals of consumer protection and the informed 
use of credit for all types of open-end credit.
    The Board also considered whether there were potentially competing 
considerations that would suggest retention of the requirement to 
disclose an effective APR. First, the Board considered the extent to 
which ``sticker shock'' from the effective APR benefits consumers, even 
if the disclosure does not enable consumers to meaningfully compare 
costs from month to month or for different products. A second 
consideration is whether the effective APR may be 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 eliminating the requirement to disclose the effective APR 
outweigh these considerations.
    The consumer testing conducted for the Board supports this 
determination. With the exception of one round of testing conducted 
prior to the June 2007 Proposal, the overall results of the testing 
demonstrated that most consumers do not correctly understand the 
effective APR. Some consumers in the testing offered no explanation of 
the difference between the corresponding and effective APR, and others 
appeared to have an incorrect understanding. The results were similar 
in the consumer testing conducted in March 2008 and in the qualitative 
and quantitative testing conducted after the May 2008 proposal; in all 
rounds of the testing, a majority of participants did not offer a 
correct explanation of the effective APR.
    Even if some consumers have some understanding of the effective 
APR, the Board believes sound reasons support eliminating the 
requirement for its disclosure. Disclosure of the effective APR on 
periodic statements does not significantly assist consumers in credit 
shopping, because the effective APR disclosed on a statement on one 
credit card account cannot be compared to the nominal APR disclosed on 
a solicitation or application for another credit card account. In 
addition, even within the same account, the effective APR for a given 
cycle is unlikely to accurately indicate the cost of credit in a future 
cycle, because if any of several factors (such as the timing of 
transactions and payments and the amount carried over from the prior 
cycle) is different in the future cycle, the effective APR will be 
different even if the amounts of the transaction and the fee are the 
same in both cycles. As to contentions that the effective APR for a 
particular billing cycle provides the consumer a rough indication that 
the cost of repeating transactions triggering transaction fees is high 
in some sense, the Board believes the requirements adopted in the final 
rule to disclose interest and fee totals for the cycle and year-to-date 
will serve the same purpose. In addition, the interest and fee total 
disclosure requirements should address concerns that elimination of the 
effective APR would remove disincentives for creditors to introduce new 
fees.
    The Board is adopting its second alternative proposal under which 
disclosure of an effective APR is not required. Under the second 
alternative proposal, Sec.  226.7(b)(7) would have been reserved. In 
the final rule, proposed Sec.  226.7(b)(14) (change-in-terms and 
increased penalty rate summary) is renumbered as Sec.  226.7(b)(7). In 
addition, Sample G-18(B), as proposed in June 2007 as part of the first 
alternative proposal, is not adopted.
    Format requirements for periodic statements. TILA and Regulation Z 
currently contain few formatting requirements for periodic statement 
disclosures. The Board proposed several proximity requirements in June 
2007, based on consumer testing that showed targeted proximity 
requirements on periodic statements tended to improve the effectiveness 
of disclosures for consumers. Under the June 2007 Proposal, interest 
and fees imposed as part of the plan during the statement period would 
have been disclosed in a simpler manner and in a consistent location. 
Transactions would have been grouped by type, and fee and interest 
charge totals would have been required to be located with the 
transactions. If an advance notice of changed rates or terms is 
provided on or with a periodic statement, the June 2007 Proposal would 
have required a summary of the change beginning on the front of the 
first page of the periodic statement. The proposal would have linked by

[[Page 5320]]

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 have been linked by proximity with the new 
warning required by the Bankruptcy Act about the effects of making only 
minimum payments on the account. Grouping these disclosures together 
was intended to enhance consumers' informed use of credit.
    Model clauses were proposed to illustrate the revisions, to 
facilitate compliance. The Board published for the first time proposed 
forms illustrating front sides of a periodic statement, as a compliance 
aid. The Board published 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. Proposed Forms G-18(G) and G-18(H) would have contained 
some additional disclosures that are not required by Regulation Z. The 
forms also would have presented information in some additional formats 
that are not required by Regulation Z.
    Some consumer groups applauded the Board's prescriptive approach 
for periodic statement disclosures, to give effect to the Board's 
findings about presenting information in a manner that makes it easier 
for consumers to understand. A federal banking agency noted that 
standardized periodic statement disclosures may reduce consumer 
confusion that may result from variations among creditors.
    Most industry commenters strongly opposed the Board's approach as 
being overly prescriptive and costly to implement. They strongly urged 
the Board to permit additional flexibility, or simply to retain the 
current requirement to provide ``clear and conspicuous'' disclosures. 
For example, these commenters asked the Board to eliminate any 
requirement that dictated the order or proximity of disclosures, along 
with any requirement that creditors' disclosures be substantially 
similar to model forms or samples. Although the Board's testing 
suggested certain formatting may be helpful to consumers, many 
commenters believe other formats might be as helpful. They stated that 
not all consumers place the same value on a certain piece of 
information, and creditors should be free to tailor periodic statements 
to the needs of their customers. Further, although participants in the 
Board's consumer testing may have indicated they preferred one format 
over another, commenters believe consumers are not confused by other 
formats, and the cost to reformat paper-based and electronic statements 
is not justified by the possible benefits. For example, commenters said 
the proposed requirements will require lengthier periodic statements, 
which is an additional ongoing expense independent of the significant 
one-time cost to redesign statements.
    The final rule retains many of the formatting changes the Board 
proposed. In response to further consumer testing results and comments, 
however, the Board is providing flexibility to creditors where the 
changes proposed by the Board have not demonstrated consumer benefit 
sufficient to justify the expense to creditors of reformatting the 
periodic statement. For example, while the Board is adopting the 
proposal to group interest and fees, the Board is not adopting the 
requirement to group transactions (including credits) by transaction 
type. See the section-by-section analysis to Sec.  226.7(b)(2), (b)(3), 
and (b)(6) below. Furthermore, if an advance notice of a change in 
rates or terms is provided on or with a periodic statement, the final 
rule requires that a summary of the change appear on the front of the 
periodic statement, but unlike the proposal, the summary is not 
required to begin on the front of the first page of the statement. See 
the section-by-section analysis to Sec.  226.7(b)(7). Moreover, 
proximity requirements for certain information in the periodic 
statement have been retained, but the information does not need to be 
presented substantially similar to the Board's model forms. See the 
section-by-section analysis to Sec.  226.7(b)(13).
    Deferred interest 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. The substance of 
comment 7-3, revised to conform to other proposed revisions in Sec.  
226.7(b), was proposed in June 2007 as comment 7(b)-1, which applies to 
open-end (not home-secured) plans. The comment permits, but does not 
require, creditors to disclose during the promotional period 
information about accruing interest, balances, interest rates, and the 
date in a future cycle when the balance must be paid in full to avoid 
interest.
    Some industry commenters asked the Board to provide additional 
guidance about how and where this optional information may be disclosed 
if the Board adopts proposed formatting requirements for periodic 
statements. Some consumer commenters urged the Board to require 
creditors to disclose on each periodic statement the date when any 
promotional offer ends.
    Comment 7(b)-1 is adopted as proposed, with technical revisions for 
clarity without any intended substantive change. For example, the 
transactions described in the comment are now referred to as ``deferred 
interest'' rather than ``deferred-payment.'' The comment also has been 
revised to note that it does not apply to card issuers that are subject 
to 12 CFR 227.24 or similar law which does not permit the assessment of 
deferred interest.
    The Board believes the formatting requirements for periodic 
statements do not interfere with creditors' ability to provide 
information about deferred interest transactions or other promotions. 
Comment 7(b)-1, retained as proposed, clarifies that creditors are 
permitted, but not required, to disclose on each periodic statement the 
date in a future cycle when the balance on the deferred interest 
transaction must be paid in full to avoid interest charges. Similarly, 
subject to the requirement to provide clear and conspicuous 
disclosures, creditors may, but are not required to, disclose when 
promotional offers end. The final rule does not require creditors to 
disclose on each periodic statement the date when any promotional offer 
ends. The Board believes that many creditors currently provide such 
information prior to the end of the promotional period.
7(b)(2) Identification of Transactions
    Under the June 2007 Proposal, Sec.  226.7(b)(2) would have required 
creditors to identify transactions in accordance with rules set forth 
in Sec.  226.8. This provision implements TILA Section 127(b)(2), 
currently at Sec.  226.7(b). The section-by-section analysis to Sec.  
226.8 discusses the Board's proposal to revise and significantly 
simplify the rules for identifying transactions, which the Board adopts 
as proposed.
    Under the June 2007 Proposal, the Board introduced a format 
requirement to group transactions by type, such as purchases and cash 
advances, based on consumer testing conducted for the Board. In 
consumer testing conducted prior to the June 2007 Proposal, 
participants in the Board's consumer testing found such groupings 
helpful. Moreover, participants 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. 
Proposed Sample G-18(A) would have illustrated the proposal.
    Most industry commenters opposed the proposed requirement to group

[[Page 5321]]

transactions by type. Overall, commenters opposing this aspect of the 
proposal believe the cost to implement the change exceeds the benefit 
consumers might receive. Some commenters reported that their customers 
or consumer focus groups preferred chronological listings. Similarly, 
some commenters believe consumer understanding is enhanced by a 
chronological listing that permits fees related to a transaction, such 
as foreign transaction fees, to appear immediately below the 
transaction. Other commenters were concerned that under the proposal, 
creditors would no longer be able to disclose transactions grouped by 
authorized user, or by other sub-accounts such as for promotions.
    In quantitative consumer testing conducted in the fall of 2008, the 
Board tested consumers' ability to identify specific transactions and 
fees on periodic statements that grouped transactions by transaction 
type versus those that listed transactions in chronological order. 
After they were shown either a grouped periodic statement or a 
chronological periodic statement, consumer testing participants were 
asked to identify the dollar amount of the first cash advance in the 
statement period. In order to test the effect of grouping fees, 
participants also were asked to identify the number of fees charged 
during the statement period. While testing evidence showed that the 
grouped periodic statement performed better among participants with 
respect to both questions, the improved performance of the grouped 
periodic statement was more significant with regard to consumers' 
ability to identify fees.
    Based on these testing results and comments the Board received on 
the proposal to require transactions to be grouped by transaction type 
on periodic statements, the final rule requires creditors to group fees 
and interest together into a separate category but permits flexibility 
in how transactions may be listed. The Board believes that it is 
especially important for consumers to be able to identify fees and 
interest in order to assess the overall cost of credit. As further 
discussed below in the section-by-section analysis to Sec.  
226.7(b)(6), because testing evidence suggests that consumers can more 
easily find fees when they are grouped together under a separate 
heading rather than when they are combined with a consumer's 
transactions in a chronological list, the Board is adopting the 
proposal that would require the grouping of fees and interest on the 
statement.
    With respect to grouping of transactions, such as purchases and 
cash advances, the Board believes that the modest improvement in 
consumers' ability to identify specific transactions in a grouped 
periodic statement may not justify the high cost to many creditors of 
reformatting periodic statements and coding transactions in order to 
group transactions by type. Furthermore, providing flexibility in how 
transactions may be presented would allow creditors to disclose 
transactions grouped by authorized user or by other sub-accounts, which 
consumers may find useful. In addition, in consumer testing conducted 
for the Board prior to the fall of 2008, most consumers indicated that 
they already review the transactions on their periodic statements. The 
Board expects that consumers will continue to review their 
transactions, and that consumers generally are aware of the 
transactions in which they have engaged during the billing period.
    Accordingly, the Board has withdrawn the requirement to group 
transactions by type in proposed Sec.  226.7(b)(2). Comment 7(b)(2)-1 
has been revised from the proposal to permit, but not require, 
creditors to group transactions by type. Therefore, creditors may list 
transactions chronologically, group transactions by type, or organize 
transactions in any other way that would be clear and conspicuous to 
consumers. However, consistent with Sec.  226.7(b)(6), all fees and 
interest must be grouped together under a separate heading and may not 
be interspersed with transactions.
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 did not propose substantive changes to 
the disclosure requirements for credits in June 2007. However, 
consistent with the format requirements proposed in Sec.  226.7(b)(2), 
the June 2007 Proposal would have required credits and payments to be 
grouped together. Proposed Sample G-18(A) would have illustrated the 
proposal.
    Few commenters directly addressed issues related to disclosing 
credits on periodic statements, although many industry commenters 
opposed format requirements to group transactions (thus, credits) by 
type rather than in a chronological listing. In response to a request 
for guidance on the issue, comment 7(b)(3)-1 is modified from the 
proposal to clarify that credits may be distinguished from transactions 
in any way that is clear and conspicuous, for example, by use of debit 
and credit columns or by use of plus signs and/or minus signs.
    As discussed in the section-by-section analysis to Sec.  
226.7(b)(2) above, the Board is not requiring creditors to group 
transactions by type. For the reasons discussed in that section and in 
the section-by-section analysis to Sec.  226.7(b)(6) below, the Board 
is only requiring creditors to group fees and interest into a separate 
category, while credits, like transactions, may be presented in any 
manner that is clear and conspicuous to consumers.
    Combined deposit account and credit account statements. Currently, 
comment 7(c)-2 permits creditors to commingle credits related to 
extensions of credit and credits related to non-credit accounts, such 
as for a deposit account. In June 2007, the Board solicited comment on 
the need for alternatives to the proposed format requirements to 
segregate transactions and credits, 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.
    As discussed above in the section-by-section analysis to Sec.  
226.7(b)(2) above, the Board is not requiring creditors to segregate 
transactions and credits. Therefore, formatting alternatives for 
combined deposit account and credit account statements are no longer 
necessary. Comment 7(b)(3)-3, as renumbered in the June 2007 Proposal, 
is revised for clarity and is adopted as proposed.
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 a year. 15 U.S.C. 
1637(b)(5); Sec.  226.14(b). In the June 2007 Proposal, the Board 
proposed to eliminate, for open-end (not home-secured) plans, the 
requirement to disclose periodic rates on periodic statements.
    Most industry commenters supported the proposal, believing that 
periodic rates are not important to consumers. Some consumer groups 
opposed eliminating the periodic rate as a disclosure requirement, 
stating that it is easier for consumers to check the calculation of 
their interest charges when the rate appears on the statement. One 
industry commenter asked the Board to clarify that the rule would not 
prohibit creditors from providing, at their option, the periodic rate 
close to the APR and balance to which the rates relate.

[[Page 5322]]

    The final rule eliminates the requirement to disclose periodic 
rates on periodic statements, as proposed, pursuant to the Board's 
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 uninformed 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 considered each of these factors carefully, and based on 
that review and the comments received, determined that the exemption is 
appropriate. In consumer testing conducted for the Board prior to the 
June 2007 Proposal, consumers indicated they do not use periodic rates 
to verify interest charges. Consistent with the Board's June 2007 
Proposal not to allow periodic rates to be disclosed in the tabular 
summary on or with credit card applications and disclosures, requiring 
periodic rates to be disclosed on periodic statements may detract from 
more important information on the statement, and contribute to 
information overload. Eliminating periodic rates from the periodic 
statement 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 notes that under the final rule, creditors may continue 
to disclose the periodic rate, so long as the additional information is 
presented in a way that is consistent with creditors' duty to provide 
required disclosures clearly and conspicuously. See comment app. G-10.
    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.'' The June 2007 
Proposal would have required creditors offering open-end (not home-
secured) plans to label the APR disclosed under proposed Sec.  
226.7(b)(4) as ``annual percentage rate.'' The proposal was intended to 
promote uniformity and to distinguish between this ``interest only'' 
APR and the effective APR that includes interest and fees, as proposed 
to be enhanced under one alternative in the June 2007 Proposal.
    Commenters generally supported the proposal, and the labeling 
requirement is adopted as proposed. Forms G-18(F) and G-18(G) 
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 
cash advance 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 June 2007 
Proposal included 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 Sec.  226.7(b)(4)(ii) of the June 2007 Proposal, creditors 
would have been required to disclose promotional rates only if the rate 
actually applied during the billing period. 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 clarified 
that creditors are not required to disclose the 1.99 percent 
promotional APR unless the consumer used the check during the statement 
period. In the June 2007 Proposal, the Board noted its belief 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 did not 
apply to HELOCs covered by Sec.  226.5b.
    Industry and consumer group commenters generally supported the 
proposal that requires promotional rates to be disclosed only if the 
rate actually applied during the billing period. Some consumer groups 
urged the Board to go further and prohibit creditors from disclosing a 
promotional rate that has not actually been applied, to avoid possible 
consumer confusion over a multiplicity of rates. For the reasons stated 
in the June 2007 Proposal and discussed above, the Board is adopting 
Sec.  226.7(b)(4)(ii) as proposed, with minor changes to the 
description of the rate and time period, consistent with Sec.  
226.16(g). See also section-by-section analysis to Sec.  226.7(a)(4), 
which discusses extending the exception to HELOCs subject to Sec.  
226.5b.
    Combining interest and other charges. Currently, creditors must 
disclose finance charges attributable to periodic rates. These costs 
are typically interest charges 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 below, consumer testing for the Board 
conducted prior to the June 2007 Proposal indicated that participants 
appeared to understand credit costs in terms of ``interest'' and 
``fees,'' and the June 2007 Proposal would have required 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 in the dollar cost disclosed. Thus, in the 
June 2007 Proposal guidance permitting periodic rates attributable to 
interest and other finance charges to be combined would have been 
eliminated for open-end (not home-secured) plans.

[[Page 5323]]

    Few comments were received on this aspect of the proposal. Some 
consumer groups strongly opposed the proposal if the Board determined 
to eliminate the effective APR, as proposed under one alternative in 
the June 2007 Proposal. They believe that because the required credit 
insurance premium is calculated as a percentage of the outstanding 
balance, creditors could understate the percentage consumers must pay 
for carrying a balance, which would conceal the true cost of credit.
    The final rule provides that creditors offering open-end (not home-
secured) plans that impose finance charges attributable to periodic 
rates (other than interest) must disclose the amount in dollars, as a 
fee, as proposed. See section-by-section analysis to Sec.  226.7(b)(6) 
below. Many fees associated with credit card accounts or other open-end 
plans are a percentage of the transaction or balance, such as balance 
transfer or cash advance fees. The Board believes that disclosing fees 
such as for credit insurance premiums as a separate dollar amount 
rather than as part of a percentage provides consistency and, based on 
the Board's consumer testing, may be more helpful to many consumers.
    In addition, a new comment 7(b)(4)-4 (proposed in June 2007 as 
comment 7(b)(4)-7) is added to provide guidance to creditors when a fee 
is imposed, remains unpaid, and interest accrues on the unpaid balance. 
The comment, adopted as proposed, 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, as 
proposed.
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); and Model Clauses G-1. 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 June 2007 Proposal did not change how 
creditors are required to disclose the amount of the balance on which 
finance charges are computed. Proposed comment 7(b)(5)-4 would have 
permitted 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 
proposed to retain the rule permitting creditors to disclose an average 
daily balance but would have eliminated the requirement to provide the 
explanation. Consumer testing conducted for the Board prior to the June 
2007 Proposal suggested 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. Thus, 
the final rule adopts comment 7(b)(5)-4, as proposed, which permits 
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.
    The June 2007 Proposal would have required creditors to refer to 
the balance as ``balances subject to interest rate,'' to complement 
proposed revisions intended to further consumers' understanding of 
interest charges, as distinguished from fees. The final rule adopts the 
required description as proposed. See section-by-section analysis to 
Sec.  226.7(b)(6). Forms G-18(F) and 18(G) (proposed as Forms G-18(G) 
and G-18(H)) illustrate this format requirement.
    Explanation of balance computation method. The June 2007 Proposal 
would have contained an alternative to providing an explanation of how 
the balance was determined. Under proposed Sec.  226.7(b)(5), a 
creditor that uses a balance computation method identified in Sec.  
226.5a(g) would have two options. The creditor could: (1) Provide an 
explanation, as the rule currently requires, or (2) identify the name 
of the balance computation method and provide a toll-free telephone 
number where consumers may obtain more information from the creditor 
about how the balance is computed and resulting interest charges are 
determined. If the creditor uses a balance computation method that is 
not identified in Sec.  226.5a(g), the creditor would have been 
required to provide a brief explanation of the method. The Board's 
proposal was 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 
conducted prior to the June 2007 Proposal indicated that consumers call 
the creditor for assistance when they attempt without success to 
calculate balances and verify interest charges.
    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 important information in a simplified way, and in a manner 
consistent with how consumers obtain further balance computation 
information.
    Some consumer groups urged the Board to continue to require 
creditors to disclose the balance computation method on the periodic 
statement. They believe that the information is important for consumers 
that check creditors' interest calculations. Consumers, a federal 
banking agency and a member of Congress were among those who suggested 
banning a computation method commonly called ``two-cycle.'' As an 
alternative, the agency suggested requiring a cautionary disclosure on 
the periodic statement about the two-cycle balance computation method 
for those creditors that use the method.
    Industry commenters generally favored the proposal, although one 
commenter would eliminate identifying the name of the balance 
computation method. Some commenters urged the Board to add ``daily 
balance'' method to Sec.  226.5a(g), to enable creditors that use that 
balance computation method to take advantage of the alternative 
disclosure.
    Some consumer groups further urged the Board to require creditors, 
when responding to a consumer who has called the creditor's toll-free 
number established pursuant to the proposed rules, to offer to mail 
consumers a

[[Page 5324]]

document that provides a complete set of rules for calculating the 
balances and applying the periodic rate, and to post this information 
on creditors' Web sites. An industry commenter asked the Board to 
permit a creditor, in lieu of a reference to a toll-free telephone 
number, to reference the Board's Web site address that will be provided 
with the application and account-opening summary tables, or the 
creditor's Web site address, because a Web site can better provide 
accurate, clear, and consistent information about balance computation 
methods. The Board is adopting Sec.  226.7(b)(5), as proposed for the 
reasons stated above. See also Sec.  226.5a(g), which is revised to 
include the daily balance method as a common balance computation 
method. The Board is not requiring creditors also to refer to the 
creditor's Web site for an explanation of the balance computation 
method, or to mail written explanations upon consumers' request, to 
ease compliance. Consumers who do not understand the written or Web-
based explanation will likely call the creditor in any event. However, 
a creditor could choose to disclose a reference to its Web site or 
provide a written explanation to consumers, at the creditor's option. 
Current comment 7(e)-6, which refers creditors to guidance in comment 
6(a)(3)-1 about disclosing balance computation methods is deleted as 
unnecessary, as proposed. Elsewhere in today's Federal Register, the 
Board is adopting a rule that prohibits the two-cycle balance 
computation method as unfair for consumer credit card accounts. 
Therefore any cautionary disclosure is largely unnecessary.
7(b)(6) Charges Imposed
    As discussed in the section-by-section analysis to Sec.  226.6, the 
Board proposed in June 2007 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 were intended to simplify how creditors identify the dollar 
amount of charges imposed during the statement period.
    Consumer testing conducted for the Board prior to the June 2007 
Proposal indicated that most participants reviewing mock periodic 
statements could not correctly explain the term ``finance charge.'' The 
revisions proposed in June 2007 were intended to conform labels of 
charges more closely to common understanding, ``interest'' and 
``fees.'' Format requirements were intended to help ensure that 
consumers notice charges imposed during the statement period.
    Two alternatives were proposed: One addressed interest and fees in 
the context of an effective APR disclosure, the second assumed no 
effective APR is required to be disclosed.
    Charges imposed as part of the plan. Proposed Sec.  226.7(b)(6) 
would have required 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)(3) (proposed as Sec.  226.6(b)(1)). Guidance on which 
charges are deemed to be imposed as part of the plan is in Sec.  
226.6(b)(3) and accompanying commentary. Although coverage of charges 
was 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 stated its understanding 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 did not expect the proposed change to affect 
significantly the disclosure of charges on the periodic statement.
    Interest charges and fees. For creditors complying with the new 
cost disclosure requirements proposed in June 2007, the current 
requirement in Sec.  226.7(f) to label finance charges as such would 
have been eliminated. See current Sec.  226.7(f). Testing of this term 
with consumers conducted prior to the June 2007 Proposal found that it 
did not help them to understand charges. Instead, charges imposed as 
part of an open-end (not home-secured) plan would have been disclosed 
under the labels of ``interest charges'' or ``fees.'' Consumer testing 
also supplied evidence that consumers may generally understand interest 
as the cost of borrowing money over time and view other costs--
regardless of their characterization under TILA and Regulation Z--as 
fees (other than interest). The Board's June 2007 Proposal was 
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, Sec.  
226.7(b)(6)(ii) of the June 2007 Proposal would have required creditors 
to itemize finance charges attributable to interest, by type of 
transaction, labeled as such, and would have required creditors 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 separately disclose the dollar interest costs associated 
with cash advance and purchase balances. Based on consumer testing 
conducted prior to the June 2007 Proposal, the Board stated its belief 
that 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 enables 
consumers to better understand the cost for using each type of 
transaction, and uniformity among periodic statements allows consumers 
to compare one account with other open-end plans the consumer may have.
    Because the Board believes that consumers benefit when interest 
charges are itemized by transaction type, which many creditors do 
currently, the Board is adopting Sec.  226.6(b)(6)(ii) as generally 
proposed, with one clarification that all interest charges be grouped 
together. As a result, all interest charges on an account, whether they 
are attributable to different authorized users or sub-accounts, must be 
disclosed together.
    Under the June 2007 Proposal, finance charges attributable to 
periodic rates other than interest charges, such as required credit 
insurance premiums, would have been required to be identified as fees 
and would not have been permitted to be combined with interest costs. 
See proposed comment 7(b)(4)-3. The Board did not receive comment on 
this provision, and the comment is adopted as proposed.
    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,'' proposed Sec.  226.7(b)(6)(iii) required that other costs be 
identified consistent with the feature or type, and itemized. The

[[Page 5325]]

proposal differed from current requirements in the following respect: 
Fees were required to be grouped together and a total of all fees for 
the statement period were required. Currently, creditors typically 
include fees among other transactions identified under Sec.  226.7(b). 
In consumer testing conducted prior to the June 2007 Proposal, 
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 interspersed among the 
transactions without a total. (Proposed Sec.  226.7(b)(6)(iii) also 
would have required that certain fees included in the computation of 
the effective APR pursuant to Sec.  226.14 must be labeled either as 
``transaction fees'' or ``fixed fees,'' under one proposed approach. 
This proposed requirement is discussed in further detail in the general 
discussion on the effective APR in the section-by-section analysis to 
Sec.  226.7(b).)
    To highlight the overall cost of the credit account to consumers, 
under the June 2007 Proposal, creditors would have been required to 
disclose the total amount of interest charges and fees for the 
statement period and calendar year to date. Comment 7(b)(6)-3 would 
have provided guidance on how creditors may disclose the year-to-date 
totals at the end of a calendar year. This aspect of the proposal was 
based on consumer testing that indicated that participants noticed 
year-to-date cost figures and would find the numbers helpful in making 
future financial decisions. The proposal was intended to provide 
consumers with information about the cumulative cost of their credit 
plans over a significant period of time. This requirement is discussed 
further below.
    Format requirements. In consumer testing conducted for the Board 
prior to the June 2007 Proposal, consumers consistently reviewed 
transactions identified on their periodic statements and noticed fees 
and interest charges, itemized and totaled, when they were grouped 
together with the transactions on the statement. 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 June 2007 Proposal did not affect creditors' 
flexibility to provide this information in such summaries. See Proposed 
Forms G-18(G) and G-18(H), which would have illustrated, but not 
required, such summaries. However, the Board stated in the June 2007 
Proposal its belief that 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 proposed 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 to part 226. Proposed Sec.  
226.7(b)(6)(iii) would have required non-interest fees to be itemized 
and grouped together, and a total of fees to be disclosed for the 
statement period and calendar year to date. Interest charges would have 
been required to be itemized by type of transaction, grouped together, 
and a total of interest charges disclosed for the statement period and 
year to date. Proposed Sample G-18(A) in Appendix G to part 226 would 
have illustrated the proposal.
    Labeling costs imposed as part of the plan as fees or interest. 
Commenters generally supported the Board's approach to label costs as 
either ``fees'' or ``interest charge'' rather than ``finance charge'' 
as aligning more closely with consumers' understanding.
    For the reasons stated above, the requirement in Sec.  226.7(b)(6) 
to label costs imposed as part of the plan as either fees or interest 
charge is adopted as proposed. Because the Board is adopting the 
alternative to eliminate the requirement to disclose an effective APR, 
the proposed requirement to label fees as ``transaction'' or ``fixed'' 
fees as a part of the proposed alternative to improve consumers' 
understanding of the effective APR is not included in the final rule.
    Grouping fees together, identified by feature or type, and 
itemized. Some consumer groups supported the proposal to group fees 
together, and to identify and itemize them by feature or type. They 
believe that segregating and highlighting fees is likely to make 
consumers more aware of fees, and in turn, to assist consumers in 
avoiding them.
    Most industry commenters opposed this aspect of the proposal, as 
overly prescriptive. As discussed in the section-by-section analysis to 
Sec.  226.7(b)(2) regarding the requirement to group transactions 
together, many commenters believe the proposal would hinder rather than 
help consumer understanding if transaction-related fees are disclosed 
in a separate location from the transaction itself. They assert that 
consumers prefer a chronological listing of debits and credits to the 
account, and even if consumers prefer groupings, chronological listings 
are not confusing and consumer preference does not justify the cost to 
the industry to redesign periodic statements.
    Other industry commenters stated that currently they separately 
display account activity in a variety of ways, such as by user, 
feature, or promotion. They believe consumers find these distinctions 
to be helpful in managing their accounts, and urged the Board to allow 
creditors to continue to display information in this manner.
    As discussed in the section-by-section analysis to Sec.  
226.7(b)(2) above, in the fall of 2008, the Board tested consumers' 
ability to identify specific transactions and fees on periodic 
statements where transactions were grouped by transaction type and on 
periodic statements that listed transactions in chronological order. 
Testing evidence showed that the grouped periodic statement performed 
better among participants with respect to identifying specific 
transactions and fees, though the improved performance of the grouped 
periodic statement was more significant with regard to the 
identification of fees.
    Moreover, consumers' ability to match a transaction fee to the 
transaction giving rise to the fee was also tested. Among participants 
who correctly identified the transaction to which they were asked to 
find the corresponding fee, a larger percentage of consumers who saw a 
statement on which account activity was arranged chronologically were 
able to match the fee to the transaction than when the statement was 
grouped. However, out of the participants who were able to identify the 
transaction to which they were asked to find the corresponding fee, the 
percentage of participants able to find the corresponding fee was very 
high for both types of listings.
    The Board believes that the ability to identify all fees is 
important for consumers to assess their cost of credit. As discussed 
above, since the vast majority of consumers do not appear to comprehend 
the effective APR, the Board believes highlighting fees and interest 
for consumers will more effectively inform consumers of their costs of 
credit. Because consumer testing results indicate that grouping fees 
together helped consumers find them more easily, the Board is adopting 
the proposal under Sec.  226.7(b)(6)(iii) to require creditors to group 
fees together. All fees assessed on the account must be grouped 
together under one heading even if fees may be attributable to 
different users of the account or to different sub-accounts.

[[Page 5326]]

    Cost totals for the statement period and year to date. Consumer 
group commenters supported the proposal to disclose cost totals for the 
statement period, as well as a year-to-date total. One commenter urged 
the Board to disclose total fees and interest charged for the cycle, 
regardless of the Board's decision regarding the effective APR. The 
commenter also stated that year-to-date totals in dollars provide 
consumers with the overall cost of the credit on an annualized basis.
    In general, industry commenters opposed the requirement for year-
to-date totals as unnecessary and costly to implement. Some trade 
associations urged the Board to discuss with data processors potential 
costs to implement the year-to-date totals, and to provide sufficient 
implementation time if the requirement is adopted. Suggested 
alternatives to the proposal included providing the information on the 
first or last statement of the year, at the end of the year to 
consumers who request it, or to provide access to year-to-date 
information on-line.
    The Board believes that providing consumers with the total of 
interest and fee costs, expressed in dollars, for the statement period 
and year to date is a significant enhancement to consumers' ability to 
understand the overall cost of credit for the account, and has adopted 
the requirement as proposed. The Board's testing indicates consumers 
notice and understand credit costs expressed in dollars. Aggregated 
cost information enables consumers to evaluate how the use of an 
account may impact the amount of interest and fees charged over the 
year and thus promotes the informed use of credit. Discussions with 
processors indicated that programming costs to capture year-to-date 
information are not material.
    Comment 7(b)(6)-3 has been added to provide additional flexibility 
to creditors in providing year-to-date totals, in response to a 
commenter's request. Under the revised comment, creditors sending 
monthly statements may comply with the requirement to provide a year-to 
date total using a January 1 through December 31 time period, or the 
period representing 12 monthly cycles beginning in November and ending 
in December of the following year or beginning in December and ending 
in January of the following year. This guidance also applies when 
creditors send quarterly statements.
    Some commenters asked the Board to provide guidance on creditors' 
duty to reflect refunded fees or interest in year-to-date totals. 
Comment 7(b)(6)-5 has been added to reflect that creditors may, but are 
not required to, reflect the adjustment in the year-to-date totals, 
nor, if an adjustment is made, to provide an explanation about the 
reason for the adjustment, to ease compliance. Such adjustments should 
not affect the total fees or interest charges imposed for the current 
statement period.
7(b)(7) Change-in-terms and Increased Penalty Rate Summary for Open-end 
(not Home-secured) Plans
    A major goal of the Board's review of Regulation Z's open-end 
credit rules is to address consumers' surprise at increased rates (and/
or fees). In the June 2007 Proposal, the Board sought to address the 
issue in Sec.  226.9(c)(2) and (g) to give more time before new rates 
and changes to significant costs become effective. The Board and other 
federal banking agencies further proposed in May 2008, subject to 
certain exceptions, a prohibition on increasing the APR applicable to 
balances outstanding at the end of the fourteenth day after a notice 
disclosing the change in the APR is provided to the consumer.
    As part of the June 2007 Proposal, the Board also proposed new 
Sec.  226.7(b)(14), which would have required a summary of key changes 
to precede transactions when a change-in-terms notice or a notice of a 
rate increase due to delinquency or default or as a penalty is provided 
on or with a periodic statement. Samples G-20 and G-21 in Appendix G to 
part 226 illustrated 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 (g)(3). Proposed Sample Forms G-18(G) and G-
18(H) would have illustrated the placement of these notices on a 
periodic statement. The summary would have been required to be 
displayed in a table, in no less than 10-point font. See Sec.  
226.9(c)(2)(iii)(B) and (g)(3)(ii), Sec.  226.5(a)(3). The proposed 
format rule was 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-terms notice. In 
consumer testing conducted prior to the June 2007 Proposal, consumers 
who participated in testing conducted for the Board consistently set 
aside change-in-terms notices in inserts that accompanied periodic 
statements. Research conducted for the Board indicated that consumers 
do look at the front side of periodic statements and do look at 
transactions.
    Consumer groups supported the proposed format requirements, as 
being more readable and pertinent than current change-in-term notices 
provided with periodic statements. Industry commenters opposed the 
proposal for a number of reasons. Many commenters stated that creditors 
use pre-printed forms and have limited space to place non-recurring 
messages on the front of the statement. These commenters asserted that 
the proposed requirement to place a change-in-term notice or a penalty 
rate increase notice preceding the transactions would be costly to 
implement. Some commenters asked the Board to permit creditors to refer 
consumers to an insert where the change-in-term or penalty increase 
could be described, if the requirement for a summary table was adopted. 
Others asked for more flexibility, such as by requiring the disclosures 
to precede transactions, without a further requirement to provide 
disclosures in a form substantially similar to proposed Forms G-18(G) 
and G-18(H), and Samples G-20 and G-21. One commenter urged the Board 
to require that the summary table be printed in a font size that is 
consistent with TILA's general ``clear and conspicuous'' standard, 
rather than require a 10-point font. Others noted that proposed Forms 
G-18(G) and G-18(H) were designed in a portrait format, with the 
summary table directly above the transactions, and asked that the Board 
clarify whether creditors could provide the table in a landscape 
format, with the summary table to the right or left of the 
transactions. One commenter asked the Board to provide guidance in the 
event both a change-in-terms notice and a penalty rate increase notice 
are included in a periodic statement. One commenter suggested the 
effect of the proposal will be to drive creditors to use separate 
mailings, to reduce redesign costs.
    As discussed in more detail in the section-by-section analysis to 
Sec.  226.9(c) and 226.9(g), the final rule requires that a creditor 
include on the front of the periodic statement a tabular summary of 
changes to certain key terms, when a change-in-terms notice or notice 
of the imposition of a penalty rate is included with the periodic 
statement. However, consistent with the results of the consumer testing 
conducted on behalf of the Board, this tabular summary is not required 
to appear on the front of the first page of the statement prior to the 
list of transactions, but rather may appear anywhere on the front of 
the periodic statement. Conforming changes have been made to Sec.  
226.7(b)(7) in the final rule. The summary table on the model forms 
continues to be disclosed on the front of the first page of the 
periodic statement; however, this is not required under the final rule. 
See Forms

[[Page 5327]]

G-18(F) and G-18(G) (proposed as Forms G-18(G) and G-18(H)). In a 
technical change, proposed Sec.  226.7(b)(14) has been renumbered as 
Sec.  226.7(b)(7) in the final rule.
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. In many cases, an inquiry or 
question can be resolved in a phone conversation, without requiring the 
consumer and creditor to engage in a formal error resolution procedure.
    In June 2007, the Board proposed to update comment 7(k)-2, 
renumbered as comment 7(b)(9)-2, to address notification by e-mail or 
via a Web site. The proposed comment would have provided 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 via a 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. See also 
comment 13(b)-2, which addresses circumstances under which electronic 
notices are deemed to satisfy the written billing error requirement. 
Commenters generally supported the proposal. Some consumer groups urged 
the Board to discourage creditors' policies not to accept electronic 
delivery of dispute notices, and that if a creditor accepts electronic 
dispute notices, the creditor should be required to accept these 
electronic submissions as preserving billing rights. The final rule 
adopts comment 7(b)(9)-2, as proposed. The rule provides consumers with 
flexibility to attempt to resolve inquiries or questions about billing 
statements informally, while advising them that if the matter is not 
resolved in a telephone call or via e-mail, the consumer must submit a 
written inquiry to preserve billing error rights.
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 the June 
2007 Proposal to implement TILA amendments in the Bankruptcy Act 
regarding late payments and the effect of making minimum payments, the 
Board proposed to require creditors to group together, as applicable, 
disclosures of related information about due dates and payment amounts, 
including the new balance. The comments received on these proposed 
formatting requirements are discussed in the section-by-section 
analysis to Sec.  226.7(b)(11) and (b)(13) below.
    Some consumer commenters urged the Board to require credit card 
issuers to disclose the amount required to pay off the account in full 
(the ``payoff balance'') on each periodic statement and pursuant to a 
consumer's request by telephone or through the issuer's Web site. The 
Board's final rule does not contain such a requirement. At the time the 
payoff balance would be disclosed, the issuer may not be aware of some 
transactions that are still being processed and that have not yet been 
posted to the account. In addition, finance charges can continue to 
accrue after the payoff balance is disclosed. If a consumer relies on 
the disclosure to submit a payment for that amount, the account still 
may not be paid off in full.
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 June 2007 
Proposal would have implemented those requirements in Sec.  
226.7(b)(11) by requiring creditors to disclose the payment due date on 
the front side of the first page of the periodic statement and, closely 
proximate to the due date, any cut-off time if the time is before 5 
p.m. Further, the amount of any late-payment fee and any penalty APR 
that could be triggered by a late payment would have been required to 
be in close proximity to the due date.
    Home-equity plans. The Board stated in the June 2007 Proposal its 
intent 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 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 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 proposed in June 2007 that the late payment disclosure 
requirements contained in the Bankruptcy Act and to be implemented in 
new Sec.  226.7(b)(11) would not apply to charge card issuers because 
the new requirement is not specifically enumerated to apply to charge 
card issuers. The Board noted that for some charge card issuers, 
payments are not considered ``late'' for purposes of imposing a fee 
until a consumer fails to make payments in two consecutive billing 
cycles. 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; if consumers routinely avoided paying a 
charge card balance by the due date, it could cause issuers to change 
their practice with respect to charge cards.
    One industry commenter that offers a charge card account with a 
revolving feature supported the proposal. The commenter further asked 
the Board to clarify how card issuers with such products may comply 
with the late payment disclosure requirement.
    Creditors are required to provide the disclosures set forth in 
Sec.  226.7 as applicable. Section Sec.  226.7(b)(11)(ii) has been 
revised to make clear the exemption is for periodic statements provided 
solely for charge card accounts; periodic statements provided for 
accounts with charge card and revolving features must comply with the 
late fee disclosure provision as to the revolving feature. Comment app. 
G-9 has been added to provide that creditors offering card accounts 
with a charge card feature and a revolving feature may revise the late 
payment (and minimum payment) disclosure to make clear the feature to 
which the disclosures apply. For creditors subject to Sec.  
226.7(b)(11), the late payment disclosure is not required to be made on 
a statement where no payment is due (and no late payment could be 
triggered), because the disclosure would not apply.
    Payment due date. Under the June 2007 Proposal, creditors must 
disclose the due date for a payment if a late-payment fee or penalty 
rate could be

[[Page 5328]]

imposed under the credit agreement, as discussed in more detail as 
follows. This rule is adopted, as proposed.
    Courtesy periods. In the June 2007 Proposal, the Board interpreted 
the due date to be a date that is required by the legal obligation. 
This would not 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. Proposed 
comment 7(b)(11)-1 would have provided that creditors need not disclose 
informal ``courtesy periods'' not part of the legal obligation.
    Commenters generally supported this aspect of the proposal, which 
is adopted as proposed.
    Laws affecting assessment of late fees. Under the Bankruptcy Act, 
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 was 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. 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.
    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 appeared cumbersome and overly complicated. For 
those reasons, under the June 2007 Proposal, creditors would have been 
required to disclose the due date under the terms of the legal 
obligation, and not a later date, such as when creditors are required 
by state or other law to delay imposing a late-payment fee for a 
specified period 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 were 
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.
    Commenters supported the Board's interpretation, and for the 
reasons stated above, the proposal is adopted. In response to a request 
for guidance, the substance of the above discussion regarding the due 
date disclosure when state or other laws affect the assessment of a 
late-payment fee is added in a new comment 7(b)(11)-2.
    Cut-off time for making payments. As discussed in the section-by-
section analysis to Sec.  226.10(b) to the June 2007 Proposal, 
creditors would have been required to 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 proposal would have required creditors 
to state the earliest time without specifying the method to which it 
applies, to avoid information overload. Cut-off hours of 5 p.m. or 
later could continue to be disclosed under the existing rule (including 
on the reverse side of periodic statements).
    Comments were divided on the proposed cut-off hour disclosure for 
periodic statements. Industry representatives that have a cut-off hour 
earlier than 5 p.m. for an infrequently used payment means expressed 
concern about consumer confusion if the more commonly used payment 
method is later than 5 p.m. Consumer groups urged the Board also to 
adopt a ``postmark'' date on which consumers could rely to demonstrate 
their payment was mailed sufficiently in advance for the payment to be 
timely received, or to eliminate cut-off hours altogether. Both 
consumer groups and industry representatives asked the Board to clarify 
by which time zone the cut-off hour should be measured.
    As discussed in the section-by-section analysis to Sec.  226.10(b) 
to the May 2008 Proposal, the Board proposed that to comply with the 
requirement in Sec.  226.10 to provide reasonable payment instructions, 
a creditor's cut-off hour for receiving payments by mail can be no 
earlier than 5 p.m. in the location where the creditor has designated 
the payment to be sent. The Board requested comment on whether there 
would continue to be a need for creditors to disclose cut-off hours 
before 5 p.m. for payments made by telephone or electronically.
    Consumer groups suggested the Board should require a cut-off hour 
no earlier than 5 p.m. for all methods of payment. They stated that 
different cut-off hours are confusing for consumers. Moreover, they 
argue that consumers have no control over the time electronic payments 
are posted. They suggested having a uniform cut-off hour would not 
require creditors to process and post payments on the same day or to 
change processing systems; such a rule would merely prohibit the 
creditor from imposing a late fee.
    Industry commenters generally opposed a requirement to disclose any 
cut-off hour for receiving payments made other than by mail closely 
proximate to each reference of the due date. They stated that such a 
disclosure is unnecessary because creditors disclose cut-off times with 
other payment channels, such as the telephone or Internet. If a cut-off 
hour were to be required on the front side of periodic statements, one 
trade association suggested permitting a reference to cut-off hours on 
the back of the statement, to avoid cluttering the statement with 
information that, in their view, would not be helpful to many consumers 
in any event. Others suggested moving the timing and location of cut-
off hour disclosures to account-opening, below the account-opening box, 
or disclosing the cut-off time for each payment channel on the periodic 
statement. One service provider suggested as an alternative to a cut-
off hour disclosure, a substantive rule requiring a one-day period 
following the due date before the payment could be considered late.
    In the two rounds of testing following the May 2008 Proposal, the 
Board conducted additional testing on cut-off hour disclosures for 
receiving payments other than by mail. Consumers were shown mock 
periodic statements which disclosed near the due date a 2 p.m. cut-off 
time for electronic payments and a reference to the back of the 
statement for cut-off times for other payment methods. The disclosure 
on the back of the statement stated that mailed payments must be 
received by 5 p.m. on the due date. When asked what time a mailed 
payment would be due, about two-thirds of the participants incorrectly 
named 2 p.m., the cut-off hour identified for electronic payments. 
Although the mock statement referred the reader to the back of the 
statement for more information about cut-off hours, only one 
participant in each round was able to locate the

[[Page 5329]]

information. Most other participants understood that cut-off hours may 
differ for various payment channels, but they were unable to locate 
more specific information on the statement.
    Based on the comments received and on the Board's consumer testing, 
the Board is not adopting an additional requirement to disclose any 
cut-off hour for receiving payments made other than by mail closely 
proximate to each reference of the due date. Testing showed that 
abbreviated disclosures were not effective. The Board believes that 
fully explaining each cut-off hour is too cumbersome for the front of 
the first side of the periodic statement. Creditors currently disclose 
relevant cut-off hours when consumers use the Internet or telephone to 
make a payment, and the Board expects creditors will continue to do so. 
See section-by-section analysis to Sec.  226.10 regarding substantive 
rules regarding cut-off hours, generally.
    Fee or rate triggered by multiple events. Some industry commenters 
asked for guidance on complying with the late payment disclosure if a 
late fee or penalty rate is triggered after multiple events, such as 
two late payments in six months. Comment 7(b)(11)-3 has been added to 
provide that in such cases, the creditor may, but is not required to, 
disclose the late payment and penalty rate disclosure each month. The 
disclosures must be included on any periodic statement for which a late 
payment could trigger the late payment fee or penalty rate, such as 
after the consumer made one late payment in this example.
    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 June 2007 Proposal would have required that the amount of 
the late-payment fee 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 have required the creditor to disclose the highest 
fee in the range.
    In addition, the Board proposed to require creditors to disclose 
any increased rate that may apply if consumers' payments are received 
after the due date. The proposal was intended to address the Board's 
concern about a potential increase in APRs as a consequence of paying 
late. 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 proposal would have required the creditor to 
disclose the highest rate that could apply, to avoid information 
overload. The June 2007 Proposal would have required creditors to 
disclose the increased APR closely proximate to the fee and due date to 
fulfill Congress's intent to warn consumers about the effects of paying 
late. See proposed Sec.  226.7(b)(13).
    Some consumer groups and a member of Congress generally supported 
the Board's proposal to require creditors to disclose any penalty rate, 
as well as a late payment fee, that could be imposed if a consumer 
makes an untimely payment. One trade association and a number of 
industry commenters noted that under the proposal, consumers are warned 
about the consequences of paying late on or with the application or 
solicitation for a credit or charge card and at account-opening, and 
thus repeating disclosures each month was unnecessary. As an 
alternative, the trade association suggested requiring an annual 
reminder about triggers for penalty pricing or a preprinted statement 
on the back of the periodic statement. Some industry commenters opposed 
the proposal as overly burdensome.
    The Board continues to believe that the late-payment warning should 
include a disclosure of any penalty rate that may apply if the consumer 
makes a late payment. For some consumers, the increase in rate 
associated with a late payment may be more costly than the imposition 
of a fee. Disclosing only the fee to these consumers would not inform 
them of one of the primary costs of making late payment. Accordingly, 
the Board believes that disclosure of both the penalty rate and fee 
should be required. For the reasons stated above, the proposal is 
adopted.
    Scope of penalties disclosed. Some consumer groups urged the Board 
also to require disclosure of the earliest date after which a creditor 
could impose ``any negative consequence,'' as a catch-all to address 
new fees and terms that are not specifically addressed in the proposal. 
The Board is concerned that a requirement to disclose the amount of 
``any other negative consequence'' is overly broad and unclear and 
would increase creditors' risk of litigation and thus is not included 
in the final rule.
    Many consumers, consumer groups, and others also urged the Board to 
ban ``excessive'' late fees and penalty rates. Elsewhere in today's 
Federal Register, the Board is adopting a rule that prohibits 
institutions from increasing the APR on outstanding balances, with some 
exceptions. The Board is also adopting a rule that requires 
institutions to provide consumers with a reasonable amount of time to 
make their payments, which should help consumers avoid late fees and 
penalty rates resulting from late payment. No action is taken under 
this rulemaking that affects the amount of fees or rates creditors may 
impose.
    Range of fees and rates. An industry commenter asked for more 
flexibility in disclosing late-payment fees and penalty rates that 
could be imposed under the account terms but could vary, for example, 
based on the outstanding balance. In other cases, the creditor may have 
the contractual right to impose a specified penalty rate but may choose 
to impose a lower rate based on the consumer's overall behavior. The 
commenter suggested permitting creditors to disclose the range of fees 
or rates, or ``up to'' the maximum late-payment fee or rate that may be 
imposed on the account. In the commenter's view, this approach would 
provide more accurate disclosures and provide consumers with a better 
understanding of the possible outcome of a late payment. Modified from 
the proposal, Sec.  226.7(b)(11)(i)(B) provides that if a range of 
late-payment fees or penalty rates could be imposed on the account, 
creditors may disclose the highest late-payment fee and rate and at 
creditors' option, an indication (such as using the phrase ``up to'') 
that lower fees or rates may be imposed. Comment 7(b)(11)-4 has been 
added to illustrate the requirement. The final rule also permits 
creditors to disclose a range of fees or rates. This approach 
recognizes the space constraints on periodic statements about which 
industry commenters express concern, but gives creditors more 
flexibility in disclosing possible late-payment fees and penalty rates.
    Some creditors are subject to state law limitations on the amount 
of late-payment fees or interest rates that may be assessed. Currently, 
where disclosures are required but the amount is determined by state 
law, such creditors typically disclose a matrix disclosing which rates 
and fees are applicable to residents of various states. Under the June 
2007 Proposal, creditors would have been required to disclose the late-
payment fee applicable to the consumer's account. To ease burden, one 
commenter urged the Board to permit these creditors to disclose the 
highest late-payment fee (or penalty rate) that could apply in any 
state. The Board is mindful of compliance costs associated with 
customizing the disclosure to reflect disclosure requirements of 
various states; however, the Board believes the purposes of TILA

[[Page 5330]]

would not be served if a consumer received a late-payment fee 
disclosure for an amount that exceeded, perhaps substantially, the 
amount the consumer could be assessed under the terms of the legal 
obligation of the account. For that reason, Sec.  226.7(b)(11)(i)(B) 
provides that ranges or the highest fee must be those applicable to the 
consumer's account. Accordingly, a creditor may state a range only if 
all fee amounts in that range would be permitted to be imposed on the 
consumer's account under applicable state law, for example if the state 
law permits a range of late fees that vary depending on the outstanding 
account balance.
    Penalty rate in effect. Industry commenters asked the Board to 
clarify the penalty rate disclosure requirements when a consumer's 
untimely payment has already triggered the penalty APR. Comment 
7(b)(11)-5 is added to provide that if the highest penalty rate has 
previously been triggered on an account, the creditor may, but is not 
required to, delete as part of the late payment disclosure the amount 
of the penalty rate and the warning that the rate may be imposed for an 
untimely payment, as not applicable. Alternatively, the creditor may, 
but is not required to, modify the language to indicate that the 
penalty rate has been increased due to previous late payments, if 
applicable.
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. 1637(b)(11). This disclosure 
must include: (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 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 his or her 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.\19\ The Federal Trade Commission (FTC) must 
maintain a toll-free telephone number for creditors that are subject to 
the FTC's authority to enforce TILA and Regulation Z as to the card 
issuer. 15 U.S.C. 1637(b)(11)(A)-(C).\20\
---------------------------------------------------------------------------

    \19\ The Board expects to activate its toll-free telephone 
number for use by small depository institutions by April 1, 2009, 
even though institutions are not required to include a telephone 
number on periodic statements issued before the rule's mandatory 
compliance date. The Board will subsequently issue a press release 
announcing the toll-free number and its activation date.
    \20\ The FTC also expects to activate its toll-free telephone 
number for use by entities under its jurisdiction by April 1, 2009, 
even though these entities are not required to include a telephone 
number on periodic statements issued before the rule's mandatory 
compliance date. The FTC also expects to subsequently issue a press 
release announcing the toll-free number and the exact date on which 
it will be activated.
---------------------------------------------------------------------------

    The Bankruptcy Act provides that creditors, the Board and the FTC 
may use a toll-free telephone number that connects consumers to an 
automated device through which they can obtain repayment information by 
providing information using a touch-tone telephone or similar device. 
The Bankruptcy Act also provides that consumers who are unable to use 
the automated device must have the opportunity to speak with 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 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, this supplementary information 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 
disclosure requirements 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 June 2007 Proposal, the Board proposed to exempt open-end 
credit plans other than credit card accounts from the minimum payment 
disclosure requirements. This would have exempted, for example, HELOCs 
(including open-end reverse mortgages), overdraft lines of credit and 
other general purpose personal lines of credit. In response to the June 
2007 Proposal, industry commenters generally supported exempting open-
end credit plans other than credit card accounts from the minimum 
payment disclosure requirements. Several consumer group commenters 
urged the Board to require the minimum payment disclosures for HELOCs, 
as well as credit card accounts.
    The final rule limits the minimum payment disclosures to credit 
card accounts, as proposed pursuant to the Board's authority under TILA 
Section 105(a) to make adjustments that are necessary to effectuate the 
purposes of TILA. 15 U.S.C. 1604(a). The Congressional debate on the 
minimum payment disclosures indicates that 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. 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'

[[Page 5331]]

understanding of what their financial situation is.

Remarks of Senator Grassley (2005), Congressional Record (daily 
edition), vol. 151, March 1, p. S 1856.

    With respect to HELOCs, 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 additional 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, appears not to be justified by the limited benefit to 
consumers. Thus, the final rule exempts HELOCs from the minimum payment 
disclosure requirements as not necessary to effectuate the purposes of 
TILA, using the Board's TILA Section 105(a) authority.
    As proposed, the final rule also exempts 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.)\21\ 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 using 
its TILA Section 105(a) authority to exempt overdraft lines of credit 
and other general purpose credit lines from the minimum payment 
disclosure requirements, because in this context the Board believes the 
minimum payment disclosures are not necessary to effectuate the 
purposes of TILA.
---------------------------------------------------------------------------

    \21\ 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).
---------------------------------------------------------------------------

7(b)(12)(i) General Disclosure Requirements
    In response to the June 2007 Proposal, several commenters suggested 
revisions to the structure of the regulatory text in Sec.  226.7(b)(12) 
to make the regulatory text in this section easier to read and 
understand. In the final rule, Sec.  226.7(b)(12) is restructured to 
accomplish these goals. The final rule in Sec.  226.7(b)(12)(i) 
clarifies that issuers can choose one of three ways to comply with the 
minimum payment disclosure requirements: (1) Provide on the periodic 
statement a warning about making only minimum payments, a hypothetical 
example, and a toll-free telephone number where consumers may obtain 
generic repayment estimates as described in Appendix M1 to part 226; 
(2) provide on the periodic statement a warning about making only 
minimum payments, and a toll-free telephone number where consumers may 
obtain actual repayment disclosures as described in Appendix M2 to part 
226; or (3) provide on the periodic statement the actual repayment 
disclosure as described in Appendix M2 to part 226.
7(b)(12)(ii) Generic Repayment Example and Establishment of a Toll-Free 
Telephone Number
    The final rule in Sec.  226.7(b)(12)(ii) sets forth requirements 
that credit card issuers must follow if they choose to comply with the 
minimum payment disclosure provisions by providing on the periodic 
statement a warning about making only minimum payments, a hypothetical 
example, and a toll-free telephone number where consumers may obtain 
generic repayment estimates. 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 $1000 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 TILA 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. In the June 2007 Proposal, the Board 
proposed to modify 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 
proposed 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 have disclosed 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 the modification of the 
examples will further TILA's purpose to assure a meaningful disclosure 
of credit terms. 15 U.S.C. 1601(a). The final rule adopts the examples 
as proposed. 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.
    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. In June 2007, the 
Board proposed to eliminate the specific minimum payment formulas from 
the

[[Page 5332]]

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).
    In response to the June 2007 Proposal, several consumer group 
commenters suggested that the Board include in the example the 
statutory reference to the ``typical'' minimum payment formula (either 
2 percent or 5 percent as described above), because without this 
reference, the example implies that minimum payment formulas do not 
vary from creditor to creditor.
    Like the proposal, the final rule does not include in the examples 
a reference to the minimum payment formula used to calculate the 
repayment period given in the examples. The Board believes that 
including the entire minimum payment formula, including the floor 
amount, in the disclosure could make the example too complicated. Also, 
the Board did not revise the disclosures to indicate that the repayment 
period in the $1,000 balance was calculated based on a $20 payment, and 
the repayment period in the $300 balance was calculated based on a $15 
payment. The Board believes that revising the statutory requirement in 
this way would change 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 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 final rule requires the hypothetical examples without specifying 
the minimum payment formulas used to calculate repayment periods in the 
examples. The Board believes that the modification of the examples will 
further TILA's purpose to assure a meaningful disclosure of credit 
terms. 15 U.S.C. 1601(a).
    In response to the June 2007 Proposal, one industry commenter 
suggested that if an issuer already includes on the first page of the 
periodic statement a toll-free customer service telephone number, the 
Board should permit the issuer to reference that telephone number 
within the minimum payment disclosure, rather than having to repeat 
that number again in the minimum payment disclosure. The final rule 
requires issuers to state the toll-free telephone number in the minimum 
payment disclosure itself, even if the same toll-free telephone number 
is listed in other places on the first page of the periodic statement. 
The Board believes that listing the toll-free telephone number in the 
minimum payment disclosure itself makes the disclosure easier for 
consumers to use.
    The final regulatory language for the examples is set forth in new 
Sec.  226.7(b)(12)(ii). As proposed in June 2007, in addition to the 
revisions mentioned above, the final rule also adopts 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. Furthermore, the language has been revised 
to reflect comments from the Board's consultation with the other 
federal banking agencies, the NCUA, and the FTC, pursuant to Section 
1309 of the Bankruptcy Act, as discussed immediately below.
    Clear and conspicuous disclosure of examples. The Bankruptcy Act 
requires the Board, in consultation with the other federal banking 
agencies, the NCUA, and the FTC, to provide guidance on clear and 
conspicuous disclosure of the examples the Board is requiring under 
Sec.  226.7(b)(12)(ii)(A)(1), (b)(12)(ii)(A)(2), and (b)(12)(ii)(B) to 
ensure that they are reasonably understandable and designed to call 
attention to the nature and significance of the information in the 
notice. 15 U.S.C. 1637 note (Regulations). In the June 2007 Proposal, 
the Board set forth exact wording for creditors to use for the examples 
based on language provided in the Bankruptcy Act, as discussed 
immediately above. The Board also proposed that the headings for the 
notice be in bold text and that the notice be placed closely proximate 
to the minimum payment due on the periodic statement, as discussed 
below in the supplementary information to Sec.  226.7(b)(13).
    The other federal banking agencies, the NCUA, and the FTC generally 
agreed with the Board's approach. These agencies, however, suggested 
that the heading be changed from ``Notice about Minimum Payments'' to 
``Minimum Payment Warning,'' consistent with the heading provided in 
the Bankruptcy Act. The agencies the Board consulted were concerned 
that without the term ``warning'' in the heading, the Board's proposed 
heading would not sufficiently call attention to the nature and 
significance of the information contained in the notice. The Board 
agrees with the agencies, and the final rule adopts the ``Minimum 
Payment Warning'' heading.
    One of the agencies the Board consulted also suggested that the 
wording in the examples be modified to refer to the example balance 
amount a second time in order to clarify to which balance the time 
period to repay refers. Thus, in the example under Sec.  
226.7(b)(12)(ii)(A)(1), the agency suggested that the phrase ``of 
$1,000'' be added to the end of the sentence in the notice that states, 
``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.'' The agency suggested similar amendments 
to the examples under Sec.  226.7(b)(12)(ii)(A)(2) and (b)(12)(ii)(B). 
The Board believes that including a second reference to the example 
balance in the notice would be redundant and would unnecessarily extend 
the length of the notice. Therefore, the Board declines to amend the 
notice to add the second reference.
    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 June 2007 Proposal, the Board proposed not to 
adjust the APR used in the hypothetical examples. The final rule adopts 
this approach. 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

[[Page 5333]]

telephone number provided as part of the minimum payment disclosure.
    Small depository institutions. Under the Bankruptcy Act, the Board 
is 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 FTC must 
maintain a toll-free telephone number for creditors that are subject to 
the FTC's authority to enforce TILA and Regulation Z as to the card 
issuer. 15 U.S.C. 1637(b)(11)(F). Like the proposal, the final rule 
defines ``small depository institution issuers'' as card issuers that 
are depository institutions (as defined by section 3 of the Federal 
Deposit Insurance Act), including federal credit unions or state-
chartered credit unions (as defined in section 101 of the Federal 
Credit Union Act), with total assets not exceeding $250 million. The 
final rule clarifies the determination whether an institution's assets 
exceed $250 million should be made as of December 31, 2009. 15 U.S.C. 
1637(b)(11)(F)(ii). Generally, small depository institution issuers may 
disclose the Board's toll-free telephone number on their periodic 
statements. Nonetheless, some card issuers may fall within the 
definition of ``small depository institution issuers'' and be subject 
to the FTC's enforcement authority, such as small state-chartered 
credit unions. New comment 7(b)(12)(ii)(A)(3)-1 clarifies that those 
card issuers must disclose the FTC's toll-free telephone number on 
their periodic statements.
    Web site address. In response to the June 2007 Proposal, one 
industry commenter suggested that the Board provide the option to 
include in the minimum payment disclosure a Web site address (in 
addition to the toll-free telephone number) where consumers may obtain 
the generic repayment estimates or actual repayment disclosures, as 
applicable. New comment 7(b)(12)-4 is added to allow issuers at their 
option to include a reference to a Web site address (in addition to the 
toll-free telephone number) where its customers may obtain generic 
repayment estimates or actual repayment disclosures as applicable, so 
long as the information provided on the Web site complies with Sec.  
226.7(b)(12), and Appendix M1 or M2 to part 226, as applicable. The Web 
site link disclosed must take consumers directly to the Web page where 
generic repayment estimates or actual repayment disclosures may be 
obtained. The Board believes that some consumers may find it more 
convenient to obtain the repayment estimate through a Web site rather 
than calling a toll-free telephone number.
    New Sec.  226.7(b)(12)(ii)(A)(3) sets forth the disclosure that 
small depository institution issuers must provide on their periodic 
statements if the issuers use the Board's toll-free telephone number. 
New Sec.  226.7(b)(12)(ii)(B) sets forth the disclosure that card 
issuers subject to the FTC's enforcement authority must provide on 
their periodic statements. These disclosure statements include two 
toll-free telephone numbers: one that is accessible to hearing-impaired 
consumers and one that is accessible to other consumers. In addition, 
the disclosures include a reference to the Board's Web site, or the 
FTC's Web site as appropriate, where generic repayment estimates may be 
obtained.
    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 Bankruptcy Act also provides that creditors, the Board and the 
FTC may use a toll-free telephone number that connects consumers 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 speak with 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.
    In the June 2007 Proposal, the Board proposed 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, proposed comment 7(b)(12)(iv)-3 would have provided 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 to part 226, as applicable.
    The final rule moves these provisions to Sec.  226.7(b)(12)(ii) and 
comments 7(b)(12)-1, 2 and 5, with several revisions. In addition, 
comment 7(b)(12)-3 is added to clarify that an issuer may provide as 
part of the minimum payment disclosure a toll-free telephone number 
that is designed to handle customer service calls generally, so long as 
the option to select to receive the generic repayment estimate or 
actual repayment disclosure, as applicable, through that toll-free 
telephone number is prominently disclosed to the consumer. For 
automated systems, the option to select to receive the generic 
repayment estimate or actual repayment disclosure is prominently 
disclosed if it is listed as one of the options in the first menu of 
options given to the consumer, such as ``Press or say `3' if you would 
like an estimate of how long it will take you to repay your balance if 
you make only the minimum payment each month.'' If the automated system 
permits callers to select the language in which the call is conducted 
and in which information is provided, the Board has amended comment 
7(b)(12)-3 to state that the menu to select the language may precede 
the menu with the option to receive the repayment disclosure.
    In addition, proposed comment 7(b)(12)(iv)-3 dealing with 
advertisements and marketing information has been moved to comment 
7(b)(12)-5. This comment is revised to specify 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 (except for providing 
the name of the issuer) to the consumer prior to providing the 
repayment information required or permitted by Appendix M1 or M2 to 
part 226, as applicable. Furthermore, new comment 7(b)(12)-5 clarifies 
that educational materials that do not solicit business are not 
considered advertisements or marketing materials for purposes of Sec.  
226.7(b)(12). Also, comment 7(b)(12)-5 contains examples of how the 
prohibition on providing advertisements and marketing information 
applies in two contexts. In particular, comment 7(b)(12)-5 provides an 
example where the issuer is using a toll-free telephone number that is 
designed to handle customer service calls generally and the option to 
select to receive the generic repayment estimate or actual repayment 
disclosure is given as one of the options in the first

[[Page 5334]]

menu of options given to the consumer. Comment 7(b)(12)-5 clarifies in 
that context that once the consumer selects the option to receive the 
generic repayment estimate or the actual repayment disclosure, the 
issuer may not provide advertisements or marketing materials to the 
consumer (except for providing the name of the issuer) prior to 
providing the information required or permitted by Appendix M1 or M2 to 
part 226, as applicable. In addition, if an issuer discloses a link to 
a Web site as part of the minimum payment disclosure on the periodic 
statement, the issuer may not provide advertisements or marketing 
materials (except for providing the name of the issuer) on the Web page 
accessed by the link, including pop-up marketing materials or banner 
marketing materials, prior to providing the information required or 
permitted by Appendix M1 or M2 to part 226, as applicable.
    In response to the June 2007 Proposal, several consumer groups 
suggested that the Board prohibit issuers from providing advertisements 
or marketing materials even after the repayment information has been 
given, if the issuer is providing generic repayment estimates through 
the toll-free telephone number. Nonetheless, if the issuer is providing 
actual repayment disclosures through the toll-free telephone number, 
these commenters suggested that the Board allow the issuer to provide 
advertisements or marketing materials after the repayment information 
is given, to encourage creditors to provide actual repayment 
disclosures instead of generic repayment estimates. The final rule does 
not adopt this approach. The Board believes that allowing 
advertisements or marketing materials after the repayment information 
is given is appropriate regardless of whether the repayment information 
provided are generic repayment estimates or actual repayment 
disclosures, because consumers could end the telephone call (or exit 
the Web page) if they were not interested in listening to or reviewing 
the advertisements or marketing materials given.
7(b)(12)(iii) Actual Repayment Disclosure Through Toll-free Telephone 
Number
    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, along with 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). In the June 
2007 Proposal, the Board proposed to implement this statutory provision 
in new Sec.  226.7(b)(12)(ii)(A). The final rule moves this provision 
to Sec.  226.7(b)(12)(iii), with one revision described below.
    Wording of disclosure on periodic statement. Under the Bankruptcy 
Act, if a creditor chooses to provide the actual repayment disclosure 
through the toll-free telephone number, the statute provides specific 
language that issuers must disclose on the periodic statement. In 
particular, this statutory language reads: ``Making only the minimum 
payment will increase the interest you pay and the time it takes to 
repay your balance. For more information, call this toll-free number: 
----------.'' In the June 2007 Proposal, the Board proposed that 
issuers use this statutory disclosure language. See proposed Sec.  
226.7(b)(12)(ii)(A). In response to the June 2007 Proposal, several 
consumer groups suggested that the Board revise the disclosure language 
to communicate more clearly to consumers the type of information that 
consumers will receive through the toll-free telephone number. The 
final rule in Sec.  226.7(b)(12)(iii) revises the disclosure language 
to read: ``For an estimate of how long it will take to repay your 
balance making only minimum payments, call this toll-free telephone 
number: ----------.'' The Board adopts this change to the disclosure 
language 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). The Board believes that this change will further TILA's 
purpose of assuring a meaningful disclosure of credit terms. 15 U.S.C. 
1601(a).
7(b)(12)(iv) Actual Repayment Disclosure on the Periodic Statement
    In the June 2007 Proposal, the Board proposed to provide that if 
card issuers provide the actual repayment disclosure on the periodic 
statement, they need not disclose the warning, the hypothetical example 
or 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). In the 
supplementary information to the June 2007 Proposal, the Board strongly 
encouraged card issuers to provide the actual repayment disclosure on 
periodic statements, and solicited comments on whether the Board could 
take other steps to provide incentives to card issuers to use this 
approach.
    In response to the June 2007 Proposal, several consumer group 
commenters suggested that the Board should require issuers to disclose 
the actual repayment disclosure on the periodic statement in all cases. 
Industry commenters generally supported the option to provide the 
actual repayment disclosure on the periodic statement.
    As proposed in June 2007, the final rule in new Sec.  
226.7(b)(12)(iv) provides that an issuer may comply with the minimum 
payment requirements by providing the actual repayment disclosure on 
the periodic statement. Consistent with the statutory requirements, the 
Board is not requiring that issuers provide the actual repayment 
disclosure on the periodic statement.
    The Board is adopting 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 
card issuer instead provides the actual repayment disclosure on the 
periodic statement.
    The Board adopts 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,

[[Page 5335]]

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 this exemption for card 
issuers that provide the actual repayment disclosure on the periodic 
statement.
    As discussed in the supplementary information to the June 2007 
Proposal, the Board believes that certain cardholders would find the 
actual repayment disclosures more helpful than the generic repayment 
estimates, as suggested by a recent study conducted by the GAO on 
minimum payments. 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.\22\ 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 expressed a preference for the 
customized disclosures preferred them because 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.
---------------------------------------------------------------------------

    \22\ 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. Thus, the final rule has the potential to 
better inform consumers and further the goals of consumer protection 
and the informed use of credit for credit card accounts.
7(b)(12)(v) Exemptions
    As explained above, the final rule requires the minimum payment 
disclosures only for credit card accounts. See 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 as discussed above, the final rule exempts 
these products even if they can be accessed by a credit card device as 
discussed in the June 2007 Proposal, pursuant to the Board's authority 
under TILA Section 105(a) to make adjustments that are necessary to 
effectuate the purposes of TILA. 15 U.S.C. 1604(a). Specifically, new 
Sec.  226.7(b)(12)(v) would exempt the following types of credit card 
accounts: (1) HELOCs that are subject to Sec.  226.5b, even if the 
HELOC is accessible by credit cards; (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 new Sec.  
226.7(b)(12)(v)(A)-(C). The final rule also exempts 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 new Sec.  
226.7(b)(12)(v)(D).
    Exemption for credit card accounts with a fixed repayment period. 
In the June 2007 Proposal, the Board proposed 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).
    In response to the June 2007 Proposal, several consumer group 
commenters urged the Board not to provide an exemption for credit with 
a defined fixed repayment period. These commenters believed that the 
Board should develop a special warning for these types of loans, 
indicating that paying more than the required minimum payment will 
result in paying off the loan earlier than the date of final payment 
and will save the consumer interest charges. Industry commenters 
generally supported the exemption for credit card accounts with a 
specific repayment period.
    The final rule in Sec.  226.7(b)(12)(v)(E) adopts the exemption for 
credit card accounts with a specific repayment period as proposed, with 
several technical edits, pursuant to the Board's authority under TILA 
Section 105(a) to make adjustments that are necessary to effectuate the 
purposes of TILA. 15 U.S.C. 1604(a). The minimum payment disclosure 
does not appear to provide additional information to consumers that 
they do not already have in their account agreements. In addition, as 
discussed below, this exemption will typically be used with respect to 
accounts that have 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. In these cases, consumers will likely be 
aware of the fixed period of time to repay because it has been 
specifically negotiated with the card issuer.
    In order for this proposed exemption to apply, a fixed repayment 
period must be specified in the account agreement. As discussed above, 
this exemption would be applicable to, for example, accounts that have 
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 comment 7(b)(12)(v)-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

[[Page 5336]]

retail credit cards have several credit features associated with the 
account. One of the features may be a general revolving feature, where 
the required 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 required 
minimum payments for that feature will pay off the purchase within a 
fixed period of time, such as one year. Comment 7(b)(12)(v)-1 makes 
clear that the exemption relating to a fixed repayment period for the 
entire account does not apply to the above situation, because the 
retail card account as a whole does not have a fixed repayment period, 
although the exemption under Sec.  226.7(b)(12)(v)(F) might apply as 
discussed below.
    Exemption where balance has fixed repayment period. In the June 
2007 Proposal, the Board proposed 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 
that balance will amortize the outstanding balance within the fixed 
repayment period. See proposed Sec.  226.7(b)(12)(iii)(G). This 
exemption was 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. On the other hand, this exemption 
would not have applied in those cases where all or part of the 
consumer's balance for a particular billing cycle is held in a general 
revolving feature, where the required minimum payment for this feature 
does not pay off the balance in a specific period of time set forth in 
the account agreement. The final rule in Sec.  226.7(b)(12)(v)(F) 
adopts this exemption as proposed, with one technical edit, pursuant to 
the Board's authority under TILA Section 105(a) to make adjustments 
that are necessary to effectuate the purposes of TILA. 15 U.S.C. 
1604(a). See also comment 7(b)(12)(v)-2. The minimum payment 
disclosures would not appear to provide additional information to 
consumers in this context because consumers would be able to determine 
from their account agreements how long it would take to repay the 
balance. In addition, these fixed repayment features are often promoted 
in advertisements by retail card issuers, so consumers will typically 
be aware of the fixed repayment period when using these features.
    Exemption where cardholders have paid their accounts in full for 
two consecutive billing cycles. In the June 2007 Proposal, the Board 
proposed to provide that card issuers are not required to include the 
minimum payment disclosure in the periodic statement for a particular 
billing cycle if a consumer has paid the entire balance in full in that 
billing cycle and the previous billing cycle. See proposed Sec.  
226.7(b)(12)(iii)(F).
    In response to the June 2007 Proposal, several consumer groups 
suggested that the Board not adopt this exemption and not provide any 
exemption based on consumers' payment habits. Several industry 
commenters suggested that the Board broaden this exemption. Some 
industry commenters suggested that issuers should only be required to 
comply with minimum payment disclosure requirements for a particular 
billing cycle if the consumer has made minimum payments for the past 
three consecutive billing cycles. Other industry commenters suggested 
that issuers should only by required to comply with the minimum payment 
disclosure requirements for a particular billing cycle if the consumer 
has made at least three minimum payments in the past 12 months. Another 
industry commenter suggested that there should be an exemption for any 
consumer who has paid his or her account in full during the past 12 
months, or has promotional balances that equal 50 percent or more of 
his or her total account balance.
    The final rule adopts in Sec.  226.7(b)(12)(v)(G) the exemption as 
proposed, with one technical edit, pursuant to the Board's authority 
under TILA Section 105(a) to make adjustments that are necessary to 
effectuate the purposes of TILA. 15 U.S.C. 1604(a). The final rule 
exempts card issuers from the requirement to provide the minimum 
payment disclosures in the periodic statement for a particular billing 
cycle immediately following two consecutive billing cycles in which the 
consumer paid the entire balance in full, had a zero balance or had a 
credit balance. The Board believes this approach strikes an appropriate 
balance between benefits to consumers of 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 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 useful to the consumer. In 
addition, creditors typically 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 already currently capture 
payment history for consumers for two consecutive months (or cycles).
    The Board notes that card issuers are not required to use this 
exemption. A card issuer 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, the 
Board encourages issuers to follow the disclosures rules set forth in 
Sec.  226.7(b)(12), the accompanying commentary, and Appendices M1-M3 
to part 226 (as appropriate) for those cardholders.
    Exemption where minimum payment would pay off the entire balance 
for a particular billing cycle. In response to the June 2007 Proposal, 
several commenters requested that the Board add an exemption where 
issuers would not be required to comply with the minimum payment 
disclosure requirements for a particular billing cycle where paying the 
minimum payment due for that billing cycle will pay the outstanding 
balance on the account for that billing cycle. For example, if the 
entire outstanding balance on an account for a particular billing cycle 
is $20 and the minimum payment is $20, an issuer would not need to 
comply with the minimum payment disclosure requirements for that 
particular billing cycle. The final rule contains this exemption in new 
Sec.  226.7(b)(12)(v)(H), pursuant to the Board's authority under TILA 
Section 105(a) to make adjustments that are necessary to effectuate the 
purposes of TILA. 15 U.S.C. 1604(a).
    Other exemptions. In response to the June 2007 Proposal, several 
commenters suggested other exemptions to the minimum payment 
requirements, as discussed below. For the reasons discussed below, the 
final rule does not include these exemptions.

[[Page 5337]]

    1. Exemption for discontinued credit card products. In response to 
the June 2007 Proposal, one industry commenter asked the Board to 
provide an exemption for discontinued products for which no new 
accounts are being opened, and for which existing accounts are closed 
to new transactions. The commenter indicated 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 does not believe that this exception is 
warranted. Issuers will need to make changes to their periodic 
statement systems as a result of changes to other periodic statement 
requirements in this final rule and issuers could make changes to the 
periodic statement system to incorporate the minimum payment disclosure 
on the periodic statement at the same time they make other changes 
required by the final rule.
    2. Exemption for credit card accounts purchased within the last 18 
months. In response to the June 2007 Proposal, several commenters urged 
the Board to provide an exemption for accounts purchased by a credit 
card issuer. With respect to these purchased accounts, one commenter 
urged the Board to exempt issuers from providing the minimum payment 
disclosures during a transitional period (up to 18 months) while the 
purchasing issuer converts the new accounts to its statement system. In 
this situation, the commenters indicated that the purchase of credit 
card accounts is often followed by a change-in-terms notice, which may 
include a change in the minimum payment formula. If this occurs, 
disclosing one estimated repayment period immediately after the account 
is purchased and then disclosing a different repayment period for the 
same balance after the change in terms becomes effective would be 
confusing to many consumers. The Board does not believe that such an 
exemption is warranted. A consumer may be alerted that his or her 
minimum payment has changed, either through reading the change-in-terms 
notice, or seeing different minimum payment amounts disclosed on his or 
her periodic statement. Thus, consumers may be aware that their minimum 
payment has changed, and as a result, may not be confused about 
receiving a different repayment period for the same or similar balance.
    3. Promotional plans. One industry commenter suggested that the 
Board exempt any account where there is a balance in a promotional 
credit plan, such as a deferred interest plan, until expiration of the 
promotional plan. Another industry commenter suggested that the Board 
not require an issuer to provide the minimum payment disclosures to any 
consumer that has promotional balances that equal 50 percent or more of 
his or her total account balance. The final rule does not include these 
exemptions for promotional plans. Not all consumers will necessarily 
pay off the promotional balances by the end of the promotional periods. 
Thus, the Board believes that some consumers that have taken advantage 
of promotional plans may still find the minimum payment disclosures 
useful.
    4. General purpose lines of credit. One commenter suggested that 
the final rule include an exemption for general purpose lines of 
credit. This commenter indicated that general purpose lines can be 
accessed by check or credit union share draft, by personal request at a 
branch, or via telephone or Internet. The Board notes that Sec.  
226.7(b)(12)(i) makes clear that the minimum payment disclosure 
requirements only apply to credit card accounts. Thus, to the extent 
that a general purpose line of credit is not accessed by a credit card, 
it is not subject to the requirements in Sec.  226.7(b)(12).
7(b)(13) Format Requirements
    Under the June 2007 Proposal, creditors would have been required to 
group together disclosures regarding 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), the potential costs for paying late (late-payment 
fee, and penalty APR if triggered by a late payment), and the potential 
costs for making only minimum payments. Proposed Samples G-18(E) and G-
18(F) in Appendix G to part 226 would have illustrated the proposed 
requirements. The proposed format requirements were intended to fulfill 
Congress's intent to have the new late payment and minimum payment 
disclosures enhance consumer understanding of the consequences of 
paying late or making only minimum payments, and were based on consumer 
testing conducted for the Board that indicated improved understanding 
when related information is grouped together.
    Consumer group commenters, a member of Congress and one trade 
association supported the format requirements, as being helpful to 
consumers.
    Industry commenters generally opposed the requirements as being 
overly prescriptive. They urged the Board to permit additional 
flexibility, or instead to retain the current requirement to provide 
``clear and conspicuous'' disclosures. They asked the Board to require 
a ``closely proximate'' standard that would allow additional 
flexibility in how creditors design their statements, and to eliminate 
any requirement that creditors' disclosures be substantially similar to 
model forms or samples. They stated that there is no evidence that 
under the current ``clear and conspicuous'' standard consumers are 
unable to locate or understand the due date, balances, and minimum 
payment amount.
    Some industry commenters opposed the requirement to place the late 
payment disclosures on the front of the first page. Some commenters 
asserted that locating that disclosure on the top of the first page 
places a disproportionate emphasis on the disclosure.
    The Board tested the formatting of information regarding payments 
in two rounds of consumer testing conducted after May 2008. 
Participants were presented with two different versions of the periodic 
statement, in which the information was grouped, but the formatting was 
varied. These changes had no noticeable impact on how easily 
participants could locate the warning regarding the potential costs for 
paying late and the potential costs for making only minimum payments.
    The Board also tested different formats for the grouped information 
in the quantitative testing conducted in September and October 2008. 
Participants were shown versions of the periodic statement in which the 
information was grouped, but formatted in three different ways. In 
order to assess whether formatting had an impact on consumers' ability 
to locate these disclosures, the Board's testing consultant focused on 
whether the format in which payment information was provided impacted 
consumer awareness of the late payment warning. Participants were asked 
whether there was any information on the statement about what would 
happen if they made a late payment. Participants who noticed the late 
payment warning were then asked a series of questions about what would 
happen if they made a late payment. Consistent with the prior rounds of 
consumer testing, the results of the quantitative testing demonstrated 
that the formatting of the grouped payment information does not have a 
statistically significant impact on consumers' ability to locate or 
understand the late payment warning.
    Because the Board's consumer testing demonstrated that formatting 
of the information about payments does not have an impact on consumer 
awareness

[[Page 5338]]

of these disclosures if the information is grouped together, Sec.  
226.7(b)(13) as adopted does not require that disclosures regarding 
when a payment is due, how much is owed, the potential costs for paying 
late, and the potential costs for making only minimum payments be 
``substantially similar'' to Sample G-18(D) or G-18(E) (proposed as 
Samples G-18(E) and G-18(F)). The final rule does require, however, 
that these terms be grouped together, in close proximity, consistent 
with the proposal. For the reasons discussed in the supplementary 
information to Sec.  226.7(b)(11), the final rule does not require a 
disclosure of the cut-off time on the front of the periodic statement, 
and the reference to a cut-off time disclosure that was included in 
proposed Sec.  226.7(b)(13) has been deleted.
    In response to a request for guidance, comment app. G-10 is added 
to clarify that although the payment disclosures appear in the upper 
right-hand corner of Forms G-18(F) and G-18(G) (proposed as Forms G-
18(G) and G-18(H)), the disclosures may be located elsewhere, as long 
as they appear on the front side of the first page.
    Combined deposit account and credit account statements. Some 
financial institutions provide information about deposit account and 
open-end credit account activity on one periodic statement. Industry 
commenters asked for guidance on how to comply with format requirements 
requiring disclosures to appear on the ``front of the first page'' for 
these combined statements. Comment 7(b)(13)-1 is added to clarify that 
for purposes of providing disclosures on the front of the first page of 
the periodic statement pursuant to Sec.  226.7(b)(13), the first page 
of such a combined statement shall be deemed to be the page on which 
credit transactions first appear. For example, assume a combined 
statement where credit transactions begin on the third page and deposit 
account information appears on pages one and two. For purposes of 
providing disclosures on the front of the first page of the periodic 
statement under Regulation Z, this comment clarifies that page three is 
deemed to be the first page of the periodic statement.
    Technical revisions. A number of technical revisions are made for 
clarity, as proposed. For the reasons set forth in the section-by-
section analysis to Sec.  226.6(b)(2)(v), the Board is updating 
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, is deleted as obsolete and unnecessary.

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 
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).
    ``Descriptive billing'' statements. In June 2007, the Board 
proposed revisions to 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 proposed revisions reflect current business practices and consumer 
experience, and were 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. 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 June 2007 Proposal would have permitted all creditors 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 would have remained unchanged under the 
proposal.
    Commenters addressing this aspect of the June 2007 Proposal 
generally supported the proposed revisions. For the reasons stated 
below, the final rule provides additional flexibility to creditors that 
use descriptive billing to identify transactions on periodic 
statements.
    The Board's revisions are 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. Thus, 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. 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 
card issuer obtains the necessary clarification. Maintaining rules that 
require more standardization and detail would be costly, and likely 
without significant corresponding consumer benefit. Thus, the revisions 
are intended to provide flexibility for card issuers without reducing 
consumer protection.

[[Page 5339]]

    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 names such as ``XYZ Sweater.'' 
This item-by-item description, while not required under current or 
revised rules, remains permissible.
    To implement the approach described above, Sec.  226.8 is revised, 
as proposed, as follows. Section 226.8(a)(1) sets forth the rule 
providing flexibility in identifying sales transactions, as discussed 
above as well as the content of footnote 19. Section 226.8(a)(2) 
contains 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) is added to set 
forth rules now contained in footnote 16; 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, is deleted as unnecessary. The title of the 
section is revised for clarity.
    The commentary to Sec.  226.8 is reorganized and consolidated but 
is not substantively changed, as proposed. Comments 8-1, 8(a)(1)-1, and 
8(a)(2)-4 are 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, are deleted as 
unnecessary. Revised Sec.  226.8(a)(1)(ii) and comments 8(a)-3 and 
8(a)-7, which provide guidance for identifying mail or telephone 
transactions, are updated to refer to Internet transactions.
    Examples of sale credit. Proposed comment 8(a)-1 republished an 
existing example of sales credit--a funds transfer service (such as a 
telegram) from an intermediary-- and proposed a new example--expedited 
payment service from a creditor. One commenter addressed the proposed 
comment, suggesting that the entire comment be deleted. The commenter 
asserted creditors should have the flexibility to post a funds transfer 
service as a cash advance but that the comment forces creditors to post 
the transaction as a purchase, and, similarly, creditors should have 
discretion in how to post fees for creditors' services.
    The requirements of Sec.  226.8 are limited to how creditors must 
identify transactions on periodic statements and do not impact how 
creditors may otherwise characterize transactions, such as for purposes 
of pricing. The Board believes a consumer's purchase of a funds 
transfer service from a third party is properly characterized as sales 
credit for purposes of identifying transactions on a card issuer's 
periodic statement. Consumers are likely to recognize the name of the 
funds transfer merchant, as would be the typical case where the card 
issuer and funds transfer merchant are not the same or related. Thus, 
the example is retained although a more current illustration (wire 
transfer) replaces the existing illustration (telegram).
    Additional guidance is added to comment 8(a)-1 regarding 
permissible identification of creditors' services that are purchased by 
the consumer and are ``costs imposed as part of the plan,'' in response 
to the commenter's concerns. The comment provides that for the purchase 
of such services (for example, a fee to expedite a payment), card 
issuers and creditors comply with the requirements for identifying 
transactions under Sec.  226.8 by disclosing the fees in accordance 
with the requirements of Sec.  226.7(b)(6)(iii). The example of 
voluntary credit insurance premiums as ``sale credit'' is deleted, 
because such premiums are costs imposed as part of the plan under Sec.  
226.6(b)(3)(ii)(F). To ease compliance, the comment further provides 
that for purchases of services that are not costs imposed as part of 
the plan, card issuers and creditors may, at their option, identify 
transactions under this section or in accordance with the requirements 
of Sec.  226.7(b)(6)(iii). This flexibility is intended to avoid 
technical compliance violations.
    Aggregating small dollar purchases. One commenter urged the Board 
to permit card issuers to aggregate, for billing purposes, small dollar 
purchases at the same merchant. Aggregating such purchases, in the view 
of the commenter, could enhance consumers' ability to track small 
dollar spending at particular merchants in a more meaningful way.
    The Board believes further study is desirable to consider the 
potential ramifications of permitting card issuers to aggregate small 
dollar transactions on periodic statements. Furthermore, consistent 
rules should be considered under Regulation E (Electronic Fund 
Transfer). 12 CFR part 205. Thus, the final revisions do not include 
rules permitting aggregation of small dollar purchases.
    Receipts accompany statements. Rules for identifying transactions 
where receipts accompany the periodic statement were not affected by 
the June 2007 Proposal, and are retained. Comments 8-4 and 8(a)(2)-3, 
which provide guidance when copies of credit or sales slips accompany 
the statement, are deleted, as proposed. 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.

Section 226.9 Subsequent Disclosure Requirements

    Section 226.9 currently sets forth a number of disclosure 
requirements that apply after an account is opened, including a 
requirement to provide billing rights 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.
9(a) Furnishing Statement of Billing Rights
    Section 226.9(a) requires 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. See 15 U.S.C. 
1637(a)(7). Alternatively, creditors may provide a shorter billing 
rights statement on each periodic statement. Regulation Z contains 
model forms creditors may use to satisfy the notice requirements under 
Sec.  226.9(a). See Model Forms G-3 and G-4.
    The June 2007 Proposal would have revised both the regulation and 
commentary under Sec.  226.9(a) to conform to other changes elsewhere 
in the proposal, but otherwise would have left the provision unchanged 
substantively. In addition, the Board proposed new Model Forms G-3(A) 
(long form billing rights notice) and G-4(A) (short form alternative 
billing rights notice) in the June 2007 Proposal to improve the 
readability of the current notices. For HELOCs subject to the 
requirements of Sec.  226.5b, the June 2007 Proposal would have given 
creditors the option of using the current Model Forms G-3 and G-4, or 
the revised forms.
    One industry commenter opposed the proposed changes in Model Forms 
G-3(A) and G-4(A), largely due to the increased compliance burden from 
having separate forms for HELOCs and for other open-end plans. This 
commenter further noted that the Board did not conduct consumer 
research on the readability of the proposed notices. Another industry 
commenter opposed

[[Page 5340]]

the revised language in Model Forms G-3(A) and G-4(A) regarding the 
merchant claims and defenses under Sec.  226.12(c), stating that mere 
dissatisfaction with the good or service would not be enough to trigger 
the consumer's rights. Consumer groups generally supported the revised 
forms, but urged the Board to add additional language in the short form 
billing rights notice (Model Form G-4(A)) to note that a consumer need 
not pay any interest if the error is resolved in the consumer's favor, 
consistent with language in the long-form notice (Model Form G-3(A)). 
Consumer groups also suggested that the Board add optional language in 
the event a creditor allows a cardholder to provide billing error 
notices electronically.
    The final rule retains Model Forms G-3(A) and G-4(A), largely as 
proposed. To address concerns about potential compliance burdens from 
using multiple forms, the final rule permits creditors to use Model 
Forms G-3(A) and G-4(A) in all cases to comply with their disclosure 
obligations for all open-end products. Thus, 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 revised forms, or continue to use Model Forms G-3 and G-4. In 
addition, while the new model forms were not tested with individual 
consumers, the forms were reviewed by the Board's testing consultant 
which enabled the Board to draw upon the consultant's experience, both 
from the insights obtained through the testing of other notices in 
connection with this rulemaking, as well as from working with plain 
language disclosures in other contexts.
    To address consumer group concerns, language has been added to 
Model Form G-4(A) (the short form alternative billing rights notice for 
open-end (not home-secured) plans) to inform the consumer that he or 
she need not pay any interest if the error is resolved in the 
consumer's favor, consistent with identical language used in the long 
form (Model Form G-3(A)). In addition, each of the model forms has been 
revised to include optional language a creditor may use if it permits a 
cardholder to provide billing error notices electronically. As 
discussed below in the section-by-section analysis to Sec.  226.13, if 
a creditor indicates that it will accept notices submitted 
electronically, it must treat notices received in such manner as 
preserving billing error rights. See Sec.  226.13(b); comment 13(b)-2, 
discussed below. Lastly, both Model Forms G-3(A) and G-4(A) have been 
revised in the final rule to clarify that for merchant claims (see 
Sec.  226.12(c)), the consumer must first attempt in good faith to 
correct the problem with the merchant before asserting the claim with 
the issuer.
9(b) Disclosures for Supplemental Credit Access Devices and Additional 
Features
    Section 226.9(b) currently 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 June 2007, the Board proposed to retain the current rules set 
forth in Sec. Sec.  226.9(b)(1) and (b)(2) for all credit devices and 
credit features except checks that access a credit card account. With 
respect to checks that access a credit card account, the Board proposed 
to create a new Sec.  226.9(b)(3) that would require certain 
information to be disclosed each time 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.
    The June 2007 Proposal would have required the following key terms 
to 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 APR; (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. The disclosures would have been required to be accurate as 
of the time the disclosures are given. The June 2007 Proposal provided 
that a variable APR is accurate if it was in effect within 30 days of 
when the disclosures are given. Proposed Sec.  226.9(b)(3) would have 
required that these key terms be disclosed in a tabular format 
substantially similar to Sample G-19 in Appendix G to part 226. The 
Board solicited comment on the operational burden associated with 
customizing the checks to disclose the actual APR, 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 the burden on creditors.
    In the May 2008 Proposal, the Board proposed to add to the summary 
table in Sec.  226.9(b)(3) another disclosure that would have required 
additional information regarding the expiration date of any offer of a 
discounted initial rate. The additional disclosure was set forth in 
proposed Sec.  226.9(b)(3)(i)(C), pursuant to the Board's authority 
under TILA Section 105(a). 15 U.S.C. 1604(a). Specifically, the 
disclosure would have been required to include any date by which the 
consumer must use the checks in order to receive the discounted initial 
rate. Furthermore, if the creditor will honor the checks if they are 
used after the disclosed date but will apply to the advance a rate 
other than the discounted rate, proposed Sec.  226.9(b)(3)(i)(C) would 
have required the creditor to disclose that fact and the type of rate 
that will apply under those circumstances. The Board also proposed to 
revise proposed Sec.  226.9(b)(3)(i)(E) (proposed in June 2007 as Sec.  
226.9(b)(3)(i)(D)) regarding disclosure of any grace period applicable 
to the checks and to add a new comment 9(b)(3)(i)(E)-1 which set forth 
language that creditors could have used to describe in the tabular 
disclosure any grace period (or lack of a grace period) offered on 
check transactions.
    APRs. The Board received several comments on the proposal to 
require disclosure of the actual APR or APRs applicable to the checks. 
Several industry commenters noted that there would be operational 
burdens associated with disclosing the actual rate applicable to the 
checks that access a credit card account. These commenters encouraged 
the Board to consider alternatives, such as providing a reference to 
the type of rate that will apply or providing a toll-free number that 
consumers can use to get customized information. One issuer noted that 
all cardholders do not receive

[[Page 5341]]

the same rate and/or fees even if they receive checks at the same time 
and stated that convenience check printing would have to be done in 
batches, raising the production costs. Another issuer noted that it has 
only one rate that applies to all features (purchases, cash advances, 
and balance transfers) under a given pricing plan, so its cardholders 
were unlikely to be confused about the rate that will apply after the 
expiration of a promotional rate. That commenter stated that 
redisclosing the rate applicable to the account on the page containing 
the checks would require customization by pricing plan. One issuer 
commented that the burden of customizing checks would fall 
disproportionately on smaller issuers because they would not be able to 
obtain efficiencies of scale if customization was required. Finally, 
one commenter also stated that, in addition to being operationally 
burdensome, the disclosure of the actual ``go-to'' rate could be 
confusing for consumers, because it may be inaccurate by the time any 
promotional offer expires.
    Consumer groups, a trade association for community banks, and a 
credit union trade association supported the disclosure of the actual 
rate applicable to the checks. These commenters stated that it is 
important that consumers be aware of the costs associated with using 
checks that access a credit card account and that consumers should not 
have to use a toll-free number to receive the information. One 
commenter pointed out that the testing conducted on behalf of the Board 
indicated that consumers generally did not notice or pay attention to a 
cross reference contained in the convenience check disclosure.
    The final rule requires that the tabular disclosure accompanying 
checks that access a credit card account include a disclosure of the 
actual rate or rates applicable to the checks, consistent with the June 
2007 Proposal. The Board believes that disclosing the actual rate that 
will apply to checks once any promotional rate expires is a crucial 
piece of information necessary to assist consumers in deciding whether, 
and in what manner, to use the checks. While the actual post-
promotional rate disclosed at the time the checks are sent to a 
consumer may be inaccurate by the time the promotional offer expires, 
due, for example, to fluctuations in the index used to determine a 
variable rate, the Board notes that this is not materially different 
from the situation where a post-promotional rate is disclosed in the 
disclosures provided to a consumer with an application or solicitation 
under Sec.  226.5a or with the account-opening disclosures given 
pursuant to Sec.  226.6. In either case, the exact post-promotional 
rate may differ from the rate disclosed by the time it becomes 
applicable to the consumer's account; however, the Board believes that 
disclosure of the actual post-promotional rate in effect at the time 
that the checks are sent to the consumer is an important piece of 
information for the consumer to use in making an informed decision 
about whether to use the checks.
    The requirement to disclose the actual rate applicable to the 
checks also is consistent with the policy considerations underlying 
TILA Section 127(c)(6)(A), as added by Section 1303(a) of the 
Bankruptcy Act. 15 U.S.C. 1637(c)(6)(A). As discussed in the 
supplementary information to Sec.  226.16(g), TILA Section 127(c)(6)(A) 
requires in connection with credit card direct mail applications and 
solicitations or accompanying promotional materials that a creditor 
disclose the time period in which the introductory period will end and 
the APR that will apply after the end of the introductory period. The 
requirements in TILA Section 127(c)(6)(A) do not apply to checks that 
access a credit card account because such checks are generally provided 
in connection with an existing account, not in connection with an 
application or solicitation for a new credit card account. However, the 
Board believes, consistent with the intent of TILA Section 
127(c)(6)(A), that requiring creditors to disclose with access checks 
the actual rate that will apply upon expiration of any promotional rate 
will ensure that consumers to whom an initial discounted rate is being 
promoted also receive, with the materials promoting the initial 
discounted rate, a disclosure of the actual rate that will apply after 
that promotional rate expires.
    Testing conducted on behalf of the Board also suggests that a 
disclosure of the actual rate, rather than a toll-free telephone 
number, will help to enhance consumer understanding of the rate that 
will apply when the promotional rate expires. Consumer testing 
conducted after the June 2007 Proposal supports the notion that 
consumers tend to look for a rate rather than a narrative disclosure 
when identifying the APR applicable to the checks. In March 2008, the 
form of access check disclosures tested contained a disclosure of the 
actual APR that would apply upon expiration of the promotional rate. 
All of the participants who noticed the disclosures \23\ in the March 
2008 interviews successfully identified the rate that would apply after 
the promotional rate expired. In July and August 2008, however, 
participants were presented with disclosures on the front of the page 
containing the checks that did not disclose the actual APR, but rather 
stated the type of rate that would apply (the cash advance rate) and a 
toll-free number that the consumer could call to learn the current APR. 
Almost all of the participants in the July and August 2008 testing were 
able to identify either the type of rate that would apply or the toll-
free number. However, several consumers in the July and August 2008 
testing who looked for a rate rather than a narrative disclosure 
mistakenly identified the fee for use of the checks, which was 
presented as a numerical rate, as the rate that would apply after 
expiration of the promotional rate. In addition, several participants 
who were presented with forms that did not provide an actual rate 
commented that this information could be obtained only by calling the 
creditor.
---------------------------------------------------------------------------

    \23\ As discussed below, in the March 2008 testing, some 
consumers did not notice the disclosures that accompanied the checks 
that access a credit card account when they were included on an 
insert with the periodic statement and not on the front of the page 
containing the checks.
---------------------------------------------------------------------------

    Finally, the Board also has reduced the operational burden 
associated with printing the disclosure of the actual rate applicable 
to the checks by adopting a 60-day accuracy requirement for the 
disclosure of a variable rate rather than the 30-day accuracy 
requirement that was proposed in June 2007. The June 2007 Proposal 
would have provided in Sec.  226.9(b)(3)(ii) that a variable APR 
disclosed pursuant to Sec.  226.9(b)(3)(i) is accurate if it was in 
effect within 30 days of when the disclosures are given. Several 
commenters stated that mailed convenience checks should be subject to 
the same 60-day accuracy requirement that applies to other mailed 
offers as contemplated in Sec.  226.5a(c)(2)(i) for direct mail 
applications and solicitations. The commenters stated that card issuers 
may have trouble complying with the 30-day requirement, because the APR 
applicable to transactions in a given billing cycle sometimes is not 
determined until the end of a billing cycle, for example, if an issuer 
defines its index as of the last day of the cycle. Consequently, for 
those issuers, if the checks are printed several days before the checks 
are mailed, the APR obtained from the issuer's system may not be one in 
effect within 30 days of the mail date for some subset of that issuer's 
customers. The final rule in Sec.  226.9(b)(3)(ii) incorporates the 60-
day accuracy provisions requested by these commenters. The Board 
believes that it

[[Page 5342]]

is appropriate to have the same timing provision for convenience checks 
as for direct mail credit card applications and solicitations, and that 
a 60-day period will effectively balance consumer benefit against the 
burden on issuers.
    One commenter noted that the proposed wording in Sec.  
226.9(b)(3)(ii) that refers to when the account-opening disclosures 
``are given'' creates confusion in the context of mailed disclosures, 
because it is unclear when a mailed disclosure is ``given'' even though 
it may be known when it is mailed. Sections 226.9(b)(3)(i) and (ii) of 
the final rule refer to when the account-opening disclosures ``are 
mailed or delivered.'' The Board believes that this will provide useful 
clarification to issuers, and is consistent with the existing provision 
for other supplemental credit access devices, which is retained in the 
final rule as Sec.  226.9(b)(1) and (b)(2).
    Location and format. Many industry commenters on the June 2007 
Proposal urged the Board to provide flexibility regarding the required 
location of the tabular disclosure for checks that access a credit card 
account. Several commenters asked the Board to relax the location 
requirement for the Sec.  226.9(b)(3) disclosures. One commenter stated 
that a creditor should be permitted to provide the table on the first 
page of a multiple-page advertising offer, even if the checks are 
printed on the second page. Another commenter stated that creditors 
should be permitted to provide a cross reference to the disclosures 
when the checks are included with a periodic statement. Finally, 
another commenter asked that the location requirements be relaxed for 
single checks inserted as standalone inserts in mailings. Several 
commenters opposed prescriptive location requirements more generally 
and advocated that the Board adopt only a clear and conspicuous 
standard, as opposed to the more specific standard proposed, for 
location of the tabular disclosures.
    Proposed Sec.  226.9(b)(3) stated that the disclosures were 
required on the front of the page containing the checks. Consumer 
testing conducted on behalf of the Board prior to the issuance of the 
June 2007 Proposal showed that consumers were more aware of the 
information included in the tabular disclosure when it was located on 
the front of the page containing the checks rather than on the back. In 
addition, approximately half of the participants in a round of testing 
conducted in March 2008 failed to notice the tabular disclosure when it 
was included as an insert with the periodic statement rather than on 
the page containing the checks. With several clarifications discussed 
below for multiple-page check offers, the final rule retains the 
location requirement as proposed because testing has shown that 
consumers are more likely to notice and pay attention to the 
disclosures when they are located on the front of the page containing 
the checks.
    Several commenters asked the Board to clarify how the location 
requirement would apply in situations where checks are printed on 
multiple pages rather than a single page. For example, one commenter 
asked the Board to clarify that redundant disclosures are not required 
when the offer contains checks on multiple pages. A second commenter 
asked the Board to provide flexibility for checks printed in a mini-
book or accordion-fold multi-panel booklet containing checks. New 
comment 9(b)(3)(i)-1 is adopted to clarify that for an offer with 
checks on multiple pages, the tabular disclosure need only be provided 
on the front of the first page containing checks. Similarly, for a 
mini-book or accordion-fold multi-panel booklet, comment 9(b)(3)(i)-1 
clarifies that the tabular disclosures need only be provided on the 
front of the mini-book or accordion-fold booklet. The proposed 
requirement that disclosures be provided on the front of the page 
containing the checks was intended to draw a consumer's attention to 
the disclosures. The Board believes that the clarifications for 
multiple-page offers and mini-books included in the commentary will 
achieve the goal of attracting consumer attention while mitigating 
burden on creditors that would be associated with providing the 
disclosures on each page containing checks.
    One commenter requested clarification that the tabular disclosure 
could be printed on the solicitation letter if the checks were on the 
same page as the letter, separated only by perforations. Comment 
9(b)(3)(i)-1 provides the requested clarification.
    Another commenter stated that a creditor should be permitted to 
disclose the required terms within the same table with respect to 
multiple APRs applying to different checks within the same offer. Such 
a situation would arise, for example, where a consumer receives a 
single offer that gives the consumer a choice between checks with a 
higher APR for a longer promotional period or a lower APR for a shorter 
promotional period. The Board believes that Sec.  226.9(b)(3) as 
proposed would have permitted a single tabular disclosure of multiple 
APRs applicable to checks within the same offer, provided that the 
disclosure is provided on the front of the page containing the checks; 
therefore, such a single disclosure as described by the commenter also 
is permitted by the final rule. The Board believes that no additional 
clarification is necessary in the regulation or the commentary.
    Use-by date. As discussed above, the May 2008 Proposal included a 
new Sec.  226.9(b)(3)(i)(C), which would have required additional 
disclosures regarding the date by which the consumer must use the 
checks in order to receive any discounted initial rate offered on the 
checks. This requirement is adopted as proposed, renumbered as Sec.  
226.9(b)(3)(i)(A)(3) in the final rule, as discussed below. Both 
industry and consumer commenters generally supported this proposal, and 
several large issuers indicated that they already provide a disclosure 
of a date by which access checks must be used. In addition, consumer 
testing conducted on behalf of the Board suggests that consumers who 
see the disclosure tend to understand the use-by date, while consumers 
who do not see the disclosure are unaware that there may be a use-by 
date. More than half of the participants in consumer testing conducted 
after the May 2008 Proposal noticed the use-by date disclosure and 
understood from the disclosure that if they used the check after the 
``use-by'' date the introductory rate would not apply. Most 
participants that did not see the use-by date disclosure assumed that 
no use-by date existed, and they could use the check, and obtain the 
discounted initial rate, until the end of the promotional period. The 
results of this testing suggest that consumers are not generally aware 
from their own experience that the offer of a promotional rate for 
access checks might be subject to a use-by date.
    One industry commenter stated that its checks often are offered 
through a seasonal program, and that checks are pre-printed with a 
disclosure that the checks are ``good for only 90 days'' rather than 
with a disclosure of a date certain by which the checks must be used to 
qualify for a promotional rate. The commenter indicated that the 
proposed changes could increase the costs associated with check 
printing. New Sec.  226.9(b)(3)(i)(A)(3), consistent with the proposal, 
requires however that the creditor disclose the date on which the offer 
of the discounted initial rate expires. A consumer may have no way of 
knowing on exactly what date the checks were mailed and the Board 
believes, therefore, that a general statement such as ``good for only 
90 days'' is not sufficient to inform a consumer of when the 
promotional rate

[[Page 5343]]

offer expires. A creditor would still be free to specify a number of 
days for which the promotional rate will be in effect (e.g., 90 days 
from the date of use) rather than a particular calendar date on which 
the promotional rate will end.
    Grace period disclosure. In the May 2008 Proposal, the Board 
proposed to revise proposed Sec.  226.9(b)(3)(i)(E) (proposed in June 
2007 as Sec.  226.9(b)(3)(i)(D)) and to add a new comment 
9(b)(3)(i)(E)-1 which set forth language that creditors could have used 
to describe in the tabular disclosure any grace period (or lack of 
grace period) offered on check transactions, consistent with the grace 
period disclosures proposed under Sec.  226.5a. For the reasons 
discussed in the supplementary information to Sec.  226.5a(b)(5), Sec.  
226.9(b)(3)(i)(D) and comment 9(b)(3)(i)(D)-1 (proposed as Sec.  
226.9(b)(3)(i)(E) and comment 9(b)(3)(i)(E)-1) are adopted as proposed. 
New comment app. G-11 is added to provide guidance on the headings that 
must be used when describing in the tabular disclosure a grace period 
(or lack of a grace period) offered on check transactions that access a 
credit card account.
    Terminology. In June 2007, the Board proposed in new Sec.  
226.9(b)(3)(i)(A) to require creditors to use the term ``introductory'' 
or ``intro'' in immediate proximity to the listing of any discounted 
initial rate in the access check disclosures. The May 2008 Proposal 
would have deleted this requirement, consistent with changes to 
terminology in proposed Sec.  226.16(e)(2), and would have revised 
Sample G-19 accordingly. Consistent with the May 2008 Proposal, the 
final rule does not require creditors to use the term ``introductory'' 
or ``intro'' in access check disclosures, and Sample G-19 is adopted as 
proposed. See Sec.  226.16(g)(2) and (g)(3) (proposed as Sec.  
226.16(e)(2) and (e)(3)).
    Additional disclosures. One commenter asked that the Board include 
an additional disclosure in the table describing the payment allocation 
applicable to the checks. As noted in the supplementary information to 
the proposal published in May 2008 and in the supplementary information 
to the final rule issued by the Board and other federal banking 
agencies published elsewhere in today's Federal Register, the Board and 
other agencies originally sought to address payment allocation issues 
by developing disclosures explaining payment allocation and the impact 
of payment allocation on accounts with multiple balances at different 
APRs. However, despite extensive consumer testing conducted for the 
Board, a significant percentage of consumers still did not comprehend 
how payment allocation can affect the amount of interest assessed. As a 
result, the Board and other agencies are addressing payment allocation 
through a substantive rule, and no disclosure regarding payment 
allocation has been added to the tabular disclosure provided with 
checks that access a credit card account.
    One consumer group commenter suggested that the Board require 
creditors to disclose on each check that accesses a credit card account 
the following statement: ``The use of this check will trigger immediate 
interest and fees.'' The final rule does not require this disclosure on 
the checks. The Board believes that the final rule already addresses 
fees and the possible lack of a grace period by means of the 
disclosures under Sec.  226.9(b)(3)(i)(C) and (b)(3)(i)(D). In consumer 
testing conducted for the Board, most consumers saw these disclosures 
presented on the front of the page containing the checks and understood 
them.
    A federal banking agency stated that the Board should require a 
disclosure with checks that access a credit card account that certain 
substantive protections that apply to credit cards do not apply to the 
checks. The final rule does not require such a disclosure. As discussed 
above with regard to Sec.  226.2(a)(15), the Board believes that 
existing provisions under state UCC law governing checks, coupled with 
the billing error provisions under Sec.  226.13, provide consumers with 
sufficient protections from the unauthorized use of access checks. 
Thus, the Board has declined to extend TILA's protections for credit 
cards to such checks. Similarly, the Board believes that a disclosure 
that certain substantive protections applicable to credit cards do not 
apply to the checks is not necessary and may contribute to 
``information overload.''
    Exceptions. Some commenters asked the Board to require the tabular 
disclosure only if the checks were not specifically requested by the 
customer. These commenters indicated that customers may, and do, 
request checks, and that these checks may be supplied through third-
party check printers that do not have access to the information 
required to be included in the new Sec.  226.9(b)(3) tabular 
disclosure. The final rule, as proposed, requires that the tabular 
disclosure accompany the checks that access a credit card account, even 
if those checks were specifically requested by the consumer. The Board 
believes that consumer requests for access checks are uncommon for most 
credit card accounts. The Board believes that regardless of whether a 
consumer requests the checks that access a credit card account, the 
consumer should receive disclosures of the costs of using the checks, 
to better enable the consumer to make an informed decision regarding 
usage of the checks. Furthermore, it is the Board's understanding that 
any third-party processor must already receive from the issuer some 
personalized information, such as the consumer's name and address or a 
special routing number to link the checks to the consumer's account, 
that is used in the preparation and printing of the checks. The Board 
anticipates that creditors can build on their existing processes for 
providing personalized information to a third party processor in order 
to comply with the requirement to disclose account-specific information 
about rates and fees with the checks.
    Other industry commenters requested exceptions to the disclosure 
requirements when checks are sent within a certain period of time after 
full disclosures are provided, such as full disclosures sent upon 
automatic card renewal, or when checks accompanied by the required 
disclosures were sent previously within a given time frame. The Board 
has not included either of these exceptions in the final rule. The 
Board believes that the tabular disclosures accompanying the checks are 
important to enable consumers to make informed decisions regarding 
check usage. For example, a consumer may receive a set of checks in the 
mail and may discard them because, at that time, he or she has no 
intention of using the checks. If that consumer receives a second set 
of checks, even a short time later, the consumer should receive a 
disclosure of the terms applicable to the second set of checks, which 
he or she may have interest in using, without having to retain and 
refer back to the disclosure accompanying the first set of checks. The 
Board believes that consumers generally will benefit from receiving the 
required disclosures each time they receive checks that access a credit 
card account, but has retained, for consistency with existing language 
in Sec.  226.9(b)(1), an exception for checks provided during the first 
30 days after the account-opening disclosures are mailed or delivered 
to that consumer.
    In the June 2007 Proposal, the Board sought 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 received no comments advocating that the new

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Sec.  226.9(b)(3) disclosures be required for products other than 
checks that access a credit card account. Accordingly, the final rule 
is limited to access checks.
    Technical amendments. The Board also made several technical 
revisions to Sec.  226.9(b) in the final rule. First, Sec.  226.9(b)(3) 
has been reorganized for clarity without substantive change. Second, 
Sec.  226.9(b)(3)(i)(A) has been amended to clarify that the term 
``promotional rate'' has the meaning set forth in Sec.  
226.16(g)(2)(i). Finally, the Board also proposed in the June 2007 
Proposal several technical revisions to improve the clarity of Sec.  
226.9(b) and the associated commentary. The Board received no comments 
on these technical revisions, and they are included in the final rule.
9(c) Change in Terms
    The June 2007 Proposal included several revisions to the regulation 
and commentary designed to improve consumers' awareness about changes 
in their account terms or increased rates due to delinquency or default 
or as a penalty. The proposed revisions generally would have applied 
when a creditor changes terms that must be disclosed in the account-
opening summary table under proposed Sec.  226.6(b)(4), or increases a 
rate due to delinquency or default or as a penalty. First, the Board 
proposed to give consumers earlier notice of a change in terms, or for 
increased rates due to delinquency or default or as a penalty. Second, 
the Board proposed 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. Third, the Board proposed 
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.
    Timing. Currently, Sec.  226.9(c)(1) provides that whenever any 
term required to be disclosed under Sec.  226.6 is changed or the 
required minimum payment is increased, a written notice must be mailed 
or delivered to the consumer at least 15 days before that change 
becomes effective. Proposed Sec.  226.9(c)(2)(i) would have extended 
the notice period from 15 days to 45 days.
    In response to the June 2007 Proposal, individual consumers and 
consumer group commenters were generally supportive of the extension of 
the notice period for a change in terms to 45 days. These commenters 
agreed with the Board's observation that an extended notice period 
would give consumers the opportunity to transfer or pay off their 
balances, in order to potentially avoid or mitigate the cost associated 
with the change in terms. Some consumer and consumer group commenters 
urged the Board to consider extending the notice period even further, 
to as many as 90 or 180 days.
    A federal banking agency that commented on the June 2007 Proposal 
supported the proposed 45-day change-in-terms notice period. This 
commenter suggested, however, that the notice requirement should be 
supplemented with a consumer right to opt out of certain changes, 
including changes that are made unilaterally by the creditor or changes 
in the consumer's rate under a universal default clause.
    A number of industry commenters indicated that 45 days is too long 
and would not provide financial institutions with the ability to 
respond promptly to changes in market conditions. Some commenters 
suggested that the increased period of advanced notice would undermine 
the effectiveness of risk-based pricing and would lead to higher 
pricing at the outset to hedge for the risk associated with more risky 
borrowers. Some industry commenters stated that a 45-day advance notice 
requirement would, in practice, result in many consumers receiving 60 
to 90 days advance notice, particularly when a change-in-terms notice 
is included with a periodic statement that is sent out on a monthly 
cycle. Some industry commenters stated that the notice period should 
remain at 15 days, while others advocated a 30-day or one billing cycle 
notice period. These commenters indicated that 15 or 30 days is ample 
time for consumers to act to transfer or pay off balances in advance of 
the effective date of any changed term. Finally, some commenters stated 
that a 45-day requirement might create an incentive for issuers to send 
change-in-terms notices separately from the periodic statement, which 
these commenters believe consumers are less likely to read.
    Consistent with the proposal, the final rule requires 45 days' 
advance notice for changes to terms required to be disclosed pursuant 
to Sec.  226.9(c)(2)(i). The Board believes that the shorter notice 
periods suggested by some commenters, such as 30 days or one billing 
cycle, would not provide consumers with sufficient time to shop for and 
possibly obtain alternative financing. The 45-day advance notice 
requirement refers to when the change-in-terms notice must be sent, but 
as discussed in the June 2007 Proposal it may take several days for the 
consumer to receive the notice. As a result, the Board believes that 
the 45-day advance notice requirement will give consumers, in most 
cases, at least one calendar month after receiving a change-in-terms 
notice to seek alternative financing or otherwise to mitigate the 
impact of an unexpected change in terms.
    As discussed above, some commenters raised concerns about whether 
creditors would be able to respond promptly to changes in market 
conditions in light of the proposed 45-day notice period. 
Notwithstanding the 45-day advance notice requirement, the Board 
believes that creditors still have the ability to respond appropriately 
to changes in market conditions. First, a creditor may choose to offer 
products with variable rates, which vary with the market in accordance 
with a designated index. If the annual percentage rate applicable to a 
consumer's account changes due to fluctuations in an index value as set 
forth in the consumer's credit agreement, such changes can take effect 
immediately without any notice required under Sec.  226.9(c)(2). If a 
creditor chooses to offer a product with a rate that does not vary in 
accordance with an index, that creditor will be required to wait 30 
days longer than the current rule requiring 15 days' notice before 
imposing a new, increased rate to a consumer's account.
    The Board has declined to adopt a longer period, such as 90 or 180 
days, as suggested by some commenters. The Board believes that such an 
extended advance notice period would inappropriately restrict 
creditors' ability to respond to market or other conditions and is not 
necessary for consumers to have a reasonable opportunity to seek 
alternative financing. The intent of extending the advance notice 
period to 45 days is for consumers to have time to avoid costly 
surprises; the Board believes that a consumer having at least one 
calendar month to seek alternate financing appropriately balances 
burden on creditors against benefit to consumers. In addition, the 
Board notes that final rules issued by the Board and other federal 
banking agencies published elsewhere in today's Federal Register 
provide additional substantive protections for consumers regarding rate 
increases.
    The Board is aware that operational issues associated with 
including change-in-terms notices with periodic statements may lead to 
certain consumers receiving more than 45 days' notice. As noted above, 
some industry commenters specifically indicated that a 45 day notice 
requirement could in practice result in consumers receiving 60 or 90 
days' notice, if the notice is included with the periodic statement. 
While the Board encourages creditors to

[[Page 5345]]

include change-in-terms notices with periodic statements, Sec.  
226.9(c) also permits change-in-terms notices to be sent in a separate 
mailing. A creditor that does not wish to wait a longer period before 
changing terms on a consumer's account could send the change-in-terms 
notice separately from the statement to avoid delays in changes in 
terms in excess of the 45 day period.
    As discussed in the supplementary information to Sec.  226.9(g), 
the Board has adopted examples in comment 9(g)-1 to illustrate the 
interaction between the requirements of the final rules issued by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register and the subsequent disclosure requirements under 
Regulation Z. Some of those examples also provide guidance to an issuer 
providing a notice pursuant to Sec.  226.9(c)(2)(i); the Board also has 
adopted a new comment 9(c)(2)(i)-6 which cross references those 
examples.
    As discussed in the June 2007 Proposal, the 45-day notice period 
was only proposed for those changes in terms that affect charges 
required to be disclosed as a part of the account-opening table under 
proposed Sec.  226.6(b)(4) or for increases in the required minimum 
periodic payment. A different disclosure requirement would have applied 
when a creditor increases any component of a charge, or introduces a 
new charge, that is imposed as part of the plan under proposed Sec.  
226.6(b)(1) but is not required to be disclosed as part of the account-
opening summary table under proposed Sec.  226.6(b)(4). Under those 
circumstances, the proposal would have required the creditor to 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.
    Consumer groups expressed concern that allowing any oral notice may 
provide insufficient information or time for a consumer's consideration 
and that even written notice with no advance disclosure would be 
insufficient. The comments also suggested that the proposed disclosure 
regime, which limits the 45-day advance written notice of a change in 
terms to a specific, finite list of terms, presents the possibility 
that card issuers could generate new fees or terms not in the list that 
will not be subject to the advance notice requirement.
    Consistent with the proposal, and as discussed in the supplementary 
information for Sec.  226.5, the final rule permits notice of the 
amount of a charge that is not required to be disclosed under Sec.  
226.6(b)(1) and (b)(2) (proposed as Sec.  226.6(b)(4)) to be given 
orally or in writing at a relevant time before the consumer agrees to 
or becomes obligated to pay the charge, at a time and in a manner that 
a consumer would be likely to notice the disclosure of the charge. As 
discussed above, the Board intends to continue monitoring credit card 
products for the introduction of new types of fees and costs on those 
accounts. If new costs are introduced that the Board believes are fees 
of which consumers should be aware when the account is opened, the 
Board would likely add such fees to the specified costs in Sec.  
226.6(b)(2). The Board notes that a change-in-terms notice would be 
required, however, in connection with a change in any fee of a type 
that must be disclosed in the account-opening table.
    Changes in type of applicable rate. The final rule includes new 
comments 9(c)(2)(iv)-3 and 9(c)(2)(iv)-4 to clarify that if a creditor 
changes a rate applicable to a consumer's account from a non-variable 
rate to a variable rate, or from a variable rate to a non-variable 
rate, a change-in-terms notice is required under Sec.  226.9(c), even 
if the current rate at the time of the change is higher than the new 
rate at the time of the change. The Board believes that this 
clarification is appropriate to clarify the relationship between 
comments 9(c)(2)(iii)(A)-3 and 9(c)(2)(iii)(A)-4 and Sec.  
226.9(c)(2)(iv), which were proposed in June 2007 and have been adopted 
in the final rule. Comments 9(c)(2)(iii)(A)-3 and 9(c)(2)(iii)(A)-4 set 
forth guidance as to how a creditor should disclose a change from one 
type of rate to another type of rate. Section 226.9(c)(2)(iv) states, 
in part, consistent with the current rule, that a notice is not 
required when a change involves the reduction of any component of a 
finance or other charge. The Board recognizes that changing from one 
type of rate (e.g., variable or non-variable) to another type of rate 
might result in a temporary reduction in a finance charge. For example, 
a creditor might change the rate from a variable rate that is currently 
16.99% to a non-variable rate of 15%. However, over time as the value 
of the index used to determine the variable rate fluctuates, the new 
rate may in some cases ultimately be higher than the value of the rate 
that applied prior to the change. In the example above, this could 
occur if the value of the index used to compute the variable rate 
effective before the change decreases by two percentage points, so that 
the variable rate that would have been calculated using the formula 
effective before the change in terms is 14.99%.
    The Board notes that an issuer that is subject to final rules 
issued by the Board and other federal banking agencies published 
elsewhere in today's Federal Register may only change rates as 
permitted pursuant to those rules. For example, those rules limit, in 
some circumstances, a card issuer's ability to change a rate applicable 
to a consumer's credit card account from a non-variable rate to a 
variable rate.
    Changes in late-payment fees and over-the-limit fees. Creditors 
currently are not required to provide notice of changes to late-payment 
fees and over-the-limit fees, pursuant to current Sec.  226.9(c)(2). 
The June 2007 Proposal would have required 45 days' advance notice for 
changes involving late-payment fees or over-the-limit fees, other than 
a reduction in the amount of the charges, which is consistent with the 
inclusion of late-payment fees and over-the-limit fees in the tabular 
disclosure provided at account-opening under proposed Sec.  226.6(b)(4) 
for open-end (not home-secured) plans. The proposed amendment would 
have required that 45 days' advance notice be given only when a card 
issuer changes the amount of a late-payment fee or over-the-limit fee 
that it can impose, not when such a fee is actually applied to a 
consumer's account.
    Several commenters asked the Board to reduce or eliminate the 
advance notice requirement for prospective changes to fees, such as 
late-payment fees or over-the-limit fees, and for other changes in 
terms that do not affect an existing balance (such as a change in 
interest rates that will apply only prospectively to new transactions). 
These commenters indicated that transaction-based fees, which are based 
on account usage, and the assessment of additional interest charges or 
fees based on changes in terms that do not affect an existing balance, 
are in the control of the consumer and should not be afforded a lengthy 
prior notice period. Notwithstanding these comments, the final rule 
requires 45 days' advance notice of a change in terms, even if that 
change is a prospective change to fees, or otherwise does not affect an 
existing balance. The Board believes that a consumer still may want to 
seek an alternative form of financing in anticipation of a change in 
terms, even if that change only affects fees or does not affect 
existing balances. Accordingly, the final rule is designed to give a 
consumer enough notice so that the consumer has the opportunity to 
avoid incurring additional interest

[[Page 5346]]

charges or fees as a result of that change in terms. For example, an 
increase in the annual fee applicable to a consumer's account does not 
affect existing balances; however, a consumer may wish to transfer his 
or her balance to a different card in order to avoid incurring an 
increased annual fee on his or her account.
    Changes initially disclosed. The final rule contains several 
revisions to comment 9(c)(2)-1, which was modeled after current comment 
9(c)-1 and was included in the June 2007 Proposal. The comment sets 
forth guidance on when change-in-terms notices are not required if a 
change has been initially disclosed. Proposed comment 9(c)(2)-1, 
consistent with current comment 9(c)-1, included examples of terms 
deemed to be initially disclosed. Among these examples were 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. The final rule 
deletes these two examples from the comment.
    The Board believes that an increase in rate due to the termination 
of a consumer's employment with a particular company or due to the 
consumer's account balance falling below a certain level is a type of 
rate increase as a penalty that must be disclosed in advance under 
Sec.  226.9(g), even if the circumstances under which the change may 
occur are set forth in the account agreement. Accordingly, the Board 
believes that retaining these examples in comment 9(c)(2)-1 could be 
inconsistent with the rules for penalty rate increases set forth in 
Sec.  226.9(g). A creditor may, by contract, designate many types of 
consumer behavior, or changes in a consumer's circumstances, as events 
upon the occurrence of which the consumer's rate may increase as a 
penalty. Some of these events, such as the termination of an employment 
contract, may not be typically considered events of delinquency or 
default; nonetheless, in each case the creditor reserves the 
contractual right to increase the rate applicable to the consumer's 
account, and that rate increase is triggered by certain actions by, or 
changes in the circumstances of, the consumer. The Board believes that 
the changes to comment 9(c)(2)-1 are consistent with the requirements 
of Sec.  226.9(g) As a result, and for the reasons stated in the 
section-by-section analysis to Sec.  226.9(g) below, the final rule 
provides that a consumer must receive advance notice prior to the 
imposition of such rate increases so that a consumer may seek 
alternative financing or otherwise respond to the change.
    In addition, as noted below in the section-by-section analysis to 
Sec.  226.9(g), one commenter on the proposal asked for clarification 
regarding the difference between a consumer's ``default or 
delinquency'' and a ``penalty.'' The Board believes that the revisions 
to proposed comment 9(c)(2)-1 will help to eliminate ambiguity as to 
when a rate is increased as a ``penalty.''
    Format and content. Section 226.9 currently contains no 
restrictions or requirements for how change-in-terms notices are 
presented or formatted. For open-end (not home-secured) plans, the 
Board's June 2007 Proposal would have required that creditors provide a 
summary table of a limited 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. Creditors would have been required to utilize the same 
headings as in the account-opening tables in proposed model forms 
contained in Appendix G to part 226. If the change-in-terms notice were 
included with a periodic statement, the summary table would have been 
required to appear on the front of the first page of the periodic 
statement, preceding the list of transactions for the period. Based on 
consumer testing conducted for the Board prior to the June 2007 
Proposal, 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.
    The June 2007 Proposal would have required that creditors provide 
specific information in the change-in-terms notice, namely (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 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 currently 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. The June 2007 Proposal specified that this information must be 
placed directly above the summary of key changes described above. The 
minimum font size requirements in proposed comment 5(a)(1)-3 also would 
have applied to any tabular disclosure required to be given pursuant to 
proposed Sec.  226.9(c)(2)(iii)(B).
    In May 2008, the Board proposed to add an additional disclosure 
requirement to the summary table described above. For consistency with 
the substantive restrictions regarding the application of increased 
APRs to preexisting balances proposed by the Board and other federal 
banking agencies in May 2008, the Board would have required the change-
in-terms notice to disclose the balances to which the increased rate 
will be applied. If the rate increase will not apply to all balances, 
the creditor would have been required to identify the balances to which 
the current rate will continue to apply.
    In response to the June 2007 Proposal, consumers and consumer 
groups suggested a number of new formatting requirements, as well as 
additional content for the summary box. For example, some consumers 
requested that changes in terms be specifically highlighted, such as by 
printing the original contract term in black and the new term in red. 
Other consumers requested that change-in-terms notices always include a 
complete, updated account agreement. Some comments focused on the mode 
of delivery of the notice, with one commenter requesting that change-
in-terms notices always be mailed as a first-class letter and others 
urging that notices of changes in terms should be delivered both by 
regular mail and electronic mail. The Board has not incorporated any of 
these formatting suggestions as requirements in the final rule. The 
Board believes that some of these suggestions, such as sending a 
complete, updated account agreement with each change in terms or 
highlighting the changed term in a different color than the original 
text, would impose operational burdens and/or significant costs on 
creditors that would not be outweighed by a benefit to consumers. 
Consumer testing conducted on behalf of the Board has indicated that 
including a summary table either on the first page of the periodic 
statement or the first page of the change-in-terms notice (if the 
notice is sent separately from the statement) is an effective way to 
enhance consumer attention regarding, and comprehension of, change-in-
terms notices, which is the

[[Page 5347]]

approach proposed by the Board and adopted in the final rule.
    Several consumers who commented on the June 2007 Proposal said that 
the change-in-terms notice should state the reasons for the change in 
terms and should state what, if anything, the consumer can do to 
reverse the increase to the penalty rate and have the standard rate 
reinstated. For several reasons, the final rule does not include a 
requirement that a change in terms notice state the reasons for the 
change. In some circumstances, the reasons may have nothing to do with 
consumer behavior, and there may be no mechanism for the consumer to 
reverse the increase. For example, if a creditor raises interest rates 
generally due to a change in market conditions, such action is 
independent of the consumer's behavior on the account and the consumer 
can only mitigate the cost of the increase by reducing use of the card, 
transferring a balance, or paying off the balance. Under these 
circumstances, the Board believes the burden for issuers to customize 
the notice to refer to the reason for the increase may exceed the 
potential benefit of such a disclosure to consumers. In addition, if 
the increase in rate is due to the imposition of a penalty rate, the 
consumer will receive a disclosure indicating that the penalty rate has 
been triggered, and the circumstances, if any, under which the 
delinquency or default rate or penalty rate will cease to apply to the 
consumer's account, as discussed below with regard to Sec.  226.9(g).
    Consumer group commenters on the May 2008 Proposal stated that a 
change-in-terms notice given in connection with a rate increase should 
be required to state the current rate so that consumers will have an 
indication of the magnitude of the change in terms. The final rule does 
not require a creditor to disclose the current rate. The main purpose 
of the change-in-terms notice is to inform consumers of the new rates 
that will apply to their accounts. If several rates are being changed 
and are being disclosed in a single change-in-terms notice, the Board 
is concerned that disclosure of each of the current rates in the 
change-in-terms notice could contribute to information overload.
    Finally, several consumer commenters urged that issuers be required 
to disclose the effect or magnitude of a change in terms in dollar 
terms. The Board has not included this disclosure in the final rule, 
because it would be difficult and likely misleading to try to estimate 
in advance how a changed term will affect the cost of credit for any 
individual consumer. For some types of changes in terms, such as a 
change in a transaction fee or penalty fee, whether or not the fee will 
be assessed with respect to a particular consumer's account depends to 
some extent on that consumer's behavior on the account. For example, if 
the change in terms being disclosed is an increase in the late fee, it 
will never be assessed if a consumer does not make a late payment. 
However, for a consumer who makes multiple late payments, the fee could 
be assessed multiple times. Therefore, it is difficult to predict in 
advance the dollar cost of the change for any given consumer. 
Similarly, the dollar cost of an increased interest rate depends on the 
extent to which the consumer engages in transactions to which that 
increased interest rate applies, as well as whether the consumer is 
able to take advantage of a grace period and avoid interest on those 
transactions.
    In response to the June 2007 Proposal, many industry commenters 
asked for more flexibility in the formatting requirements for the 
summary table regarding a change in terms. Some commenters stated that 
an issuer should be able to include a clear and conspicuous change-in-
terms notice on or with a periodic statement without a requirement to 
summarize it in a box on the front of the statement. Other commenters 
asked the Board to allow issuers to include with the periodic statement 
a separate change-in-terms notice as a statement stuffer or insert, 
rather than including the tabular disclosure on the front of the first 
page of the statement. These commenters stated that the requirement to 
include a tabular disclosure on the front of the first page of a 
periodic statement would substantially increase the cost of providing 
change-in-terms notices. Other commenters stated that if the final rule 
contained an alert on the front of the statement, it should at most be 
a simplified cross reference stating that the statement includes 
important information regarding a change in terms and referring the 
consumer to the end of the statement. One commenter asked that the 
strict front-of-the-first page location requirement be replaced by a 
more general requirement that the change-in-terms disclosure appear 
before the transaction details. Finally, one credit union asked that 
the Board permit institutions to provide the tabular disclosure of 
changed terms on a newsletter mailed with the periodic statement.
    One credit union trade association that commented on the May 2008 
Proposal stated that it supported the tabular requirement for 
disclosure of changes in terms. This commenter noted that while the 
requirement would impose a burden on credit unions, a consumer's need 
for clarity outweighs this inconvenience or expense.
    The final rule requires that the tabular summary appear on the 
front of the periodic statement, consistent with the proposal. Consumer 
testing conducted on behalf of the Board suggests that consumers tend 
to set aside change-in-terms notices when they are presented as a 
separate pamphlet inserted in the periodic statement. In addition, 
testing prior to the June 2007 Proposal also revealed that consumers 
are more likely to correctly identify the changes to their account if 
the changes in terms are summarized in a tabular format. Quantitative 
consumer testing conducted in the fall of 2008 demonstrated that 
disclosing a change in terms in a tabular summary on the statement led 
to a small improvement in the percentage of consumers who were able to 
correctly identify the new rate that would apply to the account 
following the change, versus a disclosure on the statement indicating 
that changes were being made to the account and referring to a separate 
change-in-terms insert. The Board believes that as consumers become 
more familiar with the new format for the change-in-terms summary, 
which was new to all testing participants, they may become better able 
to recognize and understand the information presented. It is the 
Board's understanding, which was supported by observations in consumer 
testing prior to the June 2007 Proposal, that consumers are familiar 
with the tabular formatting for the disclosures given with applications 
and solicitations under Sec.  226.5a and that they find this consistent 
formatting to be useful. Presentation of key information regarding 
changes in terms in a tabular format also is consistent with the 
Board's approach to disclosure of terms applicable to open-end (not 
home-secured) accounts, where important information is provided to 
consumers throughout the life of an account in a consistent tabular 
format.
    The Board also believes that as consumers become more familiar 
generally with all new disclosures and formatting changes to the 
periodic statement required by the final rule, consumers will become 
better able to distinguish between information presented in a change-
in-terms summary table and other terms regularly disclosed on each 
statement. The Board's consumer testing in the fall of 2008 indicated 
that when a change-in-terms summary disclosing a change in an APR is 
included on the periodic

[[Page 5348]]

statement, it can contribute to ``information overload'' and, for some 
consumers, may make it more difficult to locate other APRs set forth on 
the periodic statement. However, the Board believes that this finding 
likely reflected the fact that consumers were unaccustomed to the 
periodic statement form that they saw during the testing, which may 
have been formatted differently and included different content than the 
periodic statements that testing participants currently receive. The 
Board believes that as consumers become more familiar with all new 
Regulation Z disclosures on their periodic statements, they will become 
less likely to mistake any new APR set forth in a change-in-terms 
summary for another rate applicable to their account.
    The Board recognizes that there will be operational costs 
associated with printing the change-in-terms summary on the front of 
the periodic statement, but believes that the location requirements are 
warranted to facilitate consumer attention to, and understanding of, 
the disclosures. As discussed above, under the final rule the minimum 
font size requirements of 10-point font set forth in comment 5(a)(1)-3 
also apply to any tabular disclosure given under Sec.  
226.9(c)(2)(iii)(B).
    The Board has not, however, adopted the requirement that a change-
in-terms summary appear on the first page of the periodic statement. 
Quantitative consumer testing conducted for the Board in the fall of 
2008 indicated that consumers were as likely to notice a change-in-
terms summary or reference if it was presented on the second page of 
the statement as they were to notice it on the first page. Given that 
many industry commenters noted that there would be substantial cost and 
burden associated with reformatting the statement to include the 
summary on the first page, and consumer testing did not show that 
locating the notice on the first page of the statement improved its 
noticeability, the Board believes that such a formatting requirement is 
not warranted.
    One industry commenter on the June 2007 Proposal asked for 
clarification whether it would be permissible to move the table 
disclosing the changes in terms to the top right corner of the periodic 
statement instead of the center, as it is presented in Model Form G-
18(F) (proposed as Form G-18(G)). The Board believes that this would 
have been permissible pursuant to the proposed rules, and that it also 
is permissible under the final rule, particularly given that creditors 
are not required to include the change-in-terms summary on the first 
page of the statement. Form G-18(F) as adopted in the final rule 
presents the change-in-terms summary on the front of the first page of 
the periodic statement prior to the transactions list, consistent with 
the proposal. However, there is no requirement that a creditor's 
periodic statement must be ``substantially similar'' to Form G-18(F), 
and provided that the periodic statement complies with other applicable 
formatting requirements, relocating the change-in-terms tabular 
disclosure to other locations on the front of the statement would be 
permissible.
    One industry commenter on the June 2007 Proposal stated that the 
change-in-terms formatting requirements would force creditors to send 
statements to consumers even if there is a zero balance, when terms are 
changed on their accounts. The final rule, like the June 2007 Proposal, 
does not require a creditor to send a change-in-terms notice with the 
periodic statement. Therefore, for a consumer with a zero or a positive 
balance, it is permissible to send a standalone change-in-terms notice 
that meets the requirements of Sec.  226.9(c)(2)(iii)(B)(3) rather than 
a periodic statement including a change-in-terms notice.
    For creditors that choose to send change-in-terms notices 
separately from the periodic statement, consistent with the proposal 
the final rule requires that the change-in-terms summary appear on the 
front of the first page of the notice. The Board believes that locating 
the summary on the first page of such a standalone notice does not 
impose the same level of burden and cost as would formatting changes to 
the periodic statement. The results of the Board's quantitative 
consumer testing do not directly bear on the formatting of separate 
notices, but the Board believes based on testing conducted prior to the 
June 2007 Proposal that including the tabular summary on the first page 
of a standalone notice is important to improve consumer understanding 
of, and attention to, the disclosure. Participants indicated in focus 
groups and interviews conducted for the Board prior to June 2007 that 
they often do not carefully read change-in-terms notices that they 
receive from their bank in the mail, in part because the text is dense 
prose and they have difficulty identifying the information in the 
document that they consider important. The Board believes that 
including a tabular summary of key changes on the first page of a 
standalone notice may make consumers more likely to read the notice and 
to understand what terms are being changed.
    Several industry commenters remarked that change-in-terms notices 
required pursuant to Sec.  226.9(c) would be confusing to consumers in 
light of the complexity of the interaction between the requirements of 
Sec.  226.9(c) and additional substantive requirements regarding rate 
increases proposed by the Board and other federal banking agencies in 
May 2008. See 73 FR 28904, May 19, 2008. One industry commenter 
specifically stated that proposed Sec.  226.9(c)(2)(iii)(A)(7), which 
would require a change-in-terms notice to disclose the balances to 
which any increased rate will be applied, is a material change to the 
45 day change-in-terms notice proposed in the June 2007 Proposal, and 
would result in a notice that is confusing to consumers. One commenter 
stated that the rule forces the use of disclosures that provide 
specific dates within billing cycles to describe when current or 
increased APRs apply and which account transactions and balances are 
affected and that it would be simpler and more understandable if 
transactions and balances affected by a change in rates applied for the 
entire billing cycle or billing statement in which they appear, rather 
than in reference to a specific date.
    The Board acknowledges that the substantive restrictions on rate 
increases set forth in final rules adopted by the Board and other 
federal banking agencies published elsewhere in this Federal Register 
introduce additional complexity into disclosure of changes in terms, 
because rate increases may apply only to certain balances on a 
consumer's account and not to others. In two rounds of consumer testing 
conducted for the Board after the May 2008 Proposal, participants were 
shown change-in-terms notices that disclosed an impending change to the 
interest rate on purchases applicable to the account. These notices 
formatted the information in two different ways, but both forms 
disclosed the effective date of the change and disclosed that the rate 
applicable to outstanding balances as of a specified date earlier than 
the effective date would remain at the current rate. The notices also 
indicated that, if the penalty APR was currently being applied to the 
account, the change would not go into effect at the present time.
    In the first of these two rounds, about half of participants 
understood that the new rate on purchases would apply only to 
transactions made after the specified date shown. In addition, about 
half of participants also understood that if the penalty rate was 
already applicable to the account, the new rate

[[Page 5349]]

on purchases would not immediately apply. However, none of the 
participants could correctly identify the date when the changes would 
begin to apply.
    Based on the results of this consumer testing, changes were made to 
the form which were tested in a subsequent round of testing. These 
formatting changes generally improved consumer understanding of the 
impending changes. In this second round, all but one participant 
understood that the new APR on purchases would only apply to 
transactions made after the date specified, and that the current APR 
would continue to apply to transactions made before that date. In 
addition, all but one participant also understood that if the penalty 
rate was in effect, the new APR on purchases would not immediately 
apply. Consumers still had the most difficulty identifying the 
effective date of the changes. Approximately half of participants 
correctly identified the effective date of the changes, while the other 
participants mistakenly thought that the changes would apply as of the 
earliest date disclosed in the notice, which was the cut-off date for 
determining which transactions would be impacted by the changes 
disclosed.
    Form G-18(F) (proposed as Form G-18(G)) and Sample G-20 have 
accordingly been revised to reflect the formatting changes introduced 
in this second round of testing, because they improved consumer 
comprehension of the notice.
    The Board also proposed in May 2008 a clarification to comment 
9(c)(2)(ii)-1 (which applies to changes in fees not required to be 
disclosed in the summary table) to clarify that electronic notice may 
be provided without regard to the notice and consent requirements of 
the E-Sign Act when a consumer requests a service in electronic form 
(for example, requests the service on-line via the creditor's Web 
site). The Board received no comments addressing the changes to comment 
9(c)(2)(ii)-1, which are adopted as proposed.
    Reduction in credit limit. The June 2007 Proposal included a new 
Sec.  226.9(c)(2)(v), for open-end (not home-secured) plans, providing 
that if a creditor decreases the credit limit on an account, advance 
notice of the decrease would be required to 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 would have been required to be provided in writing or 
orally at least 45 days prior to imposing an over-the-limit fee or 
penalty rate and to state that the credit limit on the account has been 
or will be decreased. The June 2007 Proposal stated that this 
requirement would apply only when the over-the-limit fee or penalty 
rate is imposed solely as a result of a reduction in the credit limit; 
if the over-the-limit fee or penalty rate would have been charged 
notwithstanding the reduction in a credit limit, no advance notice 
would have been required. Under the June 2007 Proposal, the reduction 
in the credit limit could have taken effect immediately, but 45 days' 
notice would have been required before an over-the-limit fee or penalty 
rate could be applied based solely on exceeding the newly decreased 
credit limit.
    The final rule adopts Sec.  226.9(c)(2)(v) as proposed. One 
industry commenter on the June 2007 Proposal asked the Board to clarify 
whether an adverse action letter under Regulation B would constitute 
sufficient notice to the consumer, or whether the reduced credit limit 
appearing on the periodic statement would be sufficient notice. The new 
Sec.  226.9(c)(2)(v) does not contain any format requirements for the 
notice informing the consumer that his or her credit limit has or will 
be decreased. Any written or oral notification that contains the 
content specified in Sec.  226.9(c)(2)(v) would be permissible. A 
creditor could combine a notice required pursuant to Sec.  
226.9(c)(2)(v) with an adverse action notice under Regulation B 
provided that the requirements of both rules are met. Simply showing a 
reduced credit limit on the periodic statement, however, without a 
statement that the credit limit has been or will be decreased, would 
not meet the requirements of Sec.  226.9(c)(2)(v).
    The same commenter asked the Board to consider permitting written 
notice on one statement and permitting the imposition of over-the-limit 
fees after the next account cycle. The final rule, consistent with the 
proposal, continues to require 45 days advance notice. The Board 
believes that 45 days is the appropriate length of time, for the same 
reasons discussed above in connection with change-in-terms notices more 
generally. Sending the notice 45 days in advance gives a consumer, in 
most cases, at least one month to bring his or her balance under the 
new, reduced credit limit, either by paying down the balance or by 
transferring all or a portion of it to another card.
    In addition, as discussed in the supplementary information to Sec.  
226.9(g)(4)(ii), the Board is adopting additional guidance to clarify 
how to comply with Sec.  226.9(g) when a creditor also is providing a 
notice pursuant to Sec.  226.9(c)(2)(v).
    Rules affecting home-equity plans. The final rule retains in Sec.  
226.9(c)(1), without intended substantive change, the current 
provisions regarding the circumstances, timing, and content of change-
in-terms notices for HELOCs. These provisions will be reviewed when the 
Board reviews the provisions of Regulation Z addressing open-end (home-
secured) credit.
    The Board proposed in June 2007 to make several deletions in 
proposed Sec.  226.9(c)(1) and the related commentary with respect to 
HELOCs in order to promote consistency between Sec.  226.9(c)(1) and 
the substantive restrictions imposed by Sec.  226.5b. The Board 
solicited comment on whether there were 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. The Board received no comment on the proposed deletions 
or on any additional references that should be deleted; accordingly, 
the changes to Sec.  226.9(c)(1) are adopted as proposed.
    Substantive restrictions on changes in terms. Several consumer and 
consumer group commenters urged the Board to adopt substantive 
restrictions on changes in terms in connection with credit card 
accounts in addition to the disclosure-related requirements described 
above. For example, some commenters stated that credit agreements 
should remain in force, without any changed terms, for the life of the 
credit account, until the expiration of the card, or for a fixed period 
such as 24 months. Other comments suggested that the Board should ban 
``any time, any reason'' repricing or universal default clauses. 
Finally, other commenters advocated the creation of a federal opt-out 
right for certain increases in interest rates applicable to a 
consumer's account. The Board has not included any such substantive 
restrictions in Sec.  226.9(c) or (g) of the final rule. With regard to 
changes in terms, Regulation Z and TILA primarily address how and when 
those changes should be disclosed to consumers. The final rule issued 
by the Board and federal banking agencies and published elsewhere in 
today's Federal Register addresses substantive restrictions on certain 
types of changes in credit card terms.
    Technical correction. One commenter noted that a cross reference in 
Sec.  226.9(c)(2)(iii)(B)(2) referred to the wrong paragraph. That 
technical error has been corrected in the final rule.

[[Page 5350]]

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 and solicitations 
(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 on 
the account. However, there is an alternative delayed notice procedure 
where the fee can be assessed provided the fee is reversed if the 
consumer is given notice and chooses to terminate the account.
    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 on the front of the statement a reference to 
those disclosures. See Sec.  226.9(e)(3). In June 2007, the Board 
proposed a model clause that creditors could, but would not have been 
required to, use to comply with the delayed notice method. See comment 
9(e)(3)-1. The final rule adopts this model clause as proposed.
    The Board also proposed in June 2007 comment 9(e)-4, which 
addresses accuracy standards for disclosing rates on variable rate 
plans. The comment provides that 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 or may use the 
rate as of a specified date within the last 30 days before the 
disclosure is provided. The final rule adopts this comment as proposed, 
for the same reasons and consistent with the accuracy standard for 
account-opening disclosures. See section-by-section analysis to Sec.  
226.6(b)(4)(ii)(G). Other minor changes to Sec.  226.9(e), with no 
intended substantive change, are adopted as proposed. For example, 
footnote 20a, dealing with format, is deleted as unnecessary, while 
comment 9(e)-2, which generally repeats the substance of footnote 20a, 
is retained.
    Comment 9(e)(3)-1 contains guidance that if a single disclosure is 
used to comply with both Sec. Sec.  226.9(e) and 226.7, the periodic 
statement must comply with the rules in Sec. Sec.  226.5a and 226.7. 
One example listed in the comment is the current requirement to use the 
words ``grace period.'' That guidance is revised in the final rule to 
conform to the Board's new terminology requirements with respect to any 
grace period (or lack of grace period) in connection with disclosures 
required under Sec.  226.5a.
9(f) Change in Credit Card Account Insurance Provider
    Section 226.9(f) requires card issuers to provide notices if the 
issuer changes the provider of insurance (such as credit life 
insurance) for a credit card account. The June 2007 Proposal did not 
include any changes to Sec.  226.9(f). A commenter suggested that the 
Board provide, by amending either the regulation or the commentary to 
Sec.  226.9(f), that a conversion of credit insurance coverage to debt 
cancellation coverage or debt suspension coverage may be treated the 
same as a change from one credit insurance provider to another. The 
result would be that the card issuer would not be required to comply 
with Sec.  226.4(d)(3) (in particular, the requirement that the 
consumer sign or initial an affirmative written request for the debt 
cancellation or debt suspension coverage), provided the issuer notified 
the consumer of the conversion following the procedures set forth in 
Sec.  226.9(f). The commenter stated that credit insurance and debt 
cancellation coverage are essentially functionally equivalent from the 
consumer's perspective, and that if an affirmative written request from 
the consumer were required, many consumers might unintentionally lose 
coverage because they might neglect to sign and return the request 
form.
    The final rule does not include any amendments to Sec.  226.9(f) 
(other than minor technical changes to correct grammatical errors). The 
Board believes that the current rule provides better consumer 
protection than would be afforded under the approach suggested by the 
commenter, in that consumers are given an opportunity to decide whether 
they wish to have credit insurance converted to debt cancellation or 
debt suspension coverage, rather than having the conversion occur 
automatically unless the consumer takes affirmative action to reject 
it. In addition, under the new provision in Sec.  226.4(d)(4) 
permitting telephone sales of credit insurance and debt cancellation or 
debt suspension coverage, creditors would not have to obtain an 
affirmative written request from the consumer for debt cancellation or 
suspension coverage to replace credit insurance, but could instead 
obtain an affirmative oral request by telephone. (See the section-by-
section analysis to Sec.  226.4(d)(4) for a discussion of the telephone 
sales rule with respect to credit insurance and debt cancellation or 
debt suspension coverage.)
9(g) Increase in Rates Due to Delinquency or Default or Penalty Pricing
    In the June 2007 Proposal, the Board proposed that disclosures be 
provided prior to the imposition of penalty pricing on a consumer's 
account balances. With respect to open-end (not home-secured) plans, 
the Board proposed a new 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.
    In the supplementary information to its June 2007 Proposal, the 
Board expressed concern that the imposition of penalty pricing may come 
as a costly surprise to consumers who are not aware of, or do not 
understand, what behavior constitutes a ``default'' under their 
agreement. One way in which the June 2007 Proposal addressed penalty 
pricing was through improved disclosures regarding the conditions under 
which penalty pricing may be imposed. The Board proposed, 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.'' In addition, in light of the fact 
that rates may be increased for relatively minor contractual breaches, 
such as a payment late by one day, the Board also proposed to require 
advance notice of such rate increases, which consumers otherwise may 
not expect. The Board proposed that the notice be provided at least 45 
days before the increase takes effect.
    In response to the June 2007 Proposal, some credit card issuers 
advocated a shorter notice period, such as 30 or 15

[[Page 5351]]

days. These commenters noted that, unlike other changes in terms, an 
increase in a consumer's rate to the penalty rate is driven by the 
consumer's failure to meet the account terms. In addition, the comments 
noted that a consumer will have received prior notice in the account-
opening disclosures that such a rate increase could occur. Another 
commenter stated that the notice period prior to the imposition of a 
penalty rate should vary from 15 to 45 days depending on the length of 
grace period offered by the issuer. Commenters also stated that 45 
days' advance notice might confuse consumers, because it would come so 
far in advance that consumers will not be able to relate their behavior 
to the increase in rate, when that increase eventually takes effect.
    Industry commenters, however, opposed more generally any additional 
prior notice before imposition of a penalty rate, when the penalty APR 
has already been disclosed to the consumer at account-opening and 
constitutes part of the consumer's account terms. These commenters 
indicated that consumers will not forget about the penalty APR and the 
circumstances under which the penalty rate might be imposed, because 
they will be reminded of it each month by the new late payment warning 
required to be included on the periodic statement pursuant to Sec.  
226.7(b)(11). In addition, these comments noted that the penalty APR 
will be disclosed in the revised application and solicitation table and 
new account-opening table more clearly than it is currently. Other 
comments indicated that the proposed advance notice was effectively a 
price control that goes beyond TILA's main purpose of assuring 
meaningful disclosure of credit terms.
    Some commenters suggested that a requirement to give advance notice 
before raising a consumer's rate to the penalty rate would cause 
issuers to change their pricing practices in ways that might be 
detrimental to consumers. First, the commenters indicated that 
creditors will have an incentive to remove penalty APRs from 
advertising, account-opening disclosures, and billing statement 
disclosures, because they will in effect be required to treat the 
imposition of penalty pricing as a change in terms anyway. Second, 
commenters indicated that if creditors are prevented from promptly 
imposing penalty pricing, they may be forced to consider other means to 
price for risk such as setting a higher penalty APR, reducing credit 
limits, charging higher fees, closing accounts, imposing tighter 
underwriting standards, or raising non-penalty APRs for lower-risk 
customers to compensate for the delay in changing rates for higher-risk 
customers.
    Some commenters distinguished between ``on us'' defaults, where the 
consumer's act of default under the contract pertains directly to the 
account being repriced (e.g., a late payment on the credit card for 
which the interest rate is being increased) and ``off us'' defaults, 
where the consumer's act of default pertains to an account with a 
different creditor. These commenters noted that consumers will be well 
aware of the circumstances that may cause an account to be repriced 
based on ``on us'' behaviors, because, as discussed above, those 
triggers will be disclosed in the application and solicitation 
disclosures, the account-opening disclosures, and in the case of late 
payments as a trigger, on the periodic statement itself. The comments 
indicated that consumers may have different expectations between ``on 
us'' and ``off us'' repricing, with the latter having more potential 
for surprise and a sense of perceived unfairness. Industry commenters 
differed as to whether an act of default pertaining to a different 
account held by the same issuer constituted an ``on us'' or ``off us'' 
default.
    Several commenters suggested that the Board introduce a disclosure 
on each periodic statement reminding the consumer of the circumstances 
in which penalty pricing may be applied, rather than requiring 45 days' 
advance notice of a rate increase. One issuer suggested an exception 
for issuers with penalty APRs and triggers that meet five conditions, 
namely: (1) Triggers are limited to actions on the specific credit card 
account; (2) triggers are within the consumer's knowledge and control; 
(3) triggers are specifically disclosed in the application and 
solicitation and account-opening disclosure tables; (4) triggers are 
clearly and conspicuously disclosed on each periodic statement; and (5) 
the penalty APR is specifically disclosed, along with the index and 
margin used to calculate the penalty APR. This issuer stated that this 
exception will avoid costly surprise to consumers arising from the 
imposition of penalty APRs by encouraging issuers to use sharply-
defined, ``on us'' penalty rate triggers. The commenter also indicated 
that the monthly disclosure would be more effective in enhancing 
awareness of penalty APRs and their triggers than the proposed after-
the-fact penalty APR notice.
    Consumers and consumer groups were supportive of the proposal's 
requirement to give 45 days' advance notice of the imposition of a 
penalty rate, noting that the proposal represented a substantial 
improvement over the current rule. Some, however, urged the Board to 
increase the notice period to 60 days or 90 days. The Board also 
received comments from individual consumers, consumer groups, another 
federal banking agency, and a member of Congress stating that notice 
alone was not sufficient to protect consumers from the expense caused 
by rate increases.
    The final rule adopts Sec.  226.9(g)(1) generally as proposed, 
although as discussed below the Board has created several exceptions to 
the notice requirement in Sec.  226.9(g) to address concerns raised by 
commenters and to clarify the relationship between Sec.  226.9(g) and 
final rules adopted by the Board and other federal banking agencies 
published elsewhere in today's Federal Register.
    The final rule generally requires creditors to provide 45 days' 
advance notice before rate increases due to the consumer's delinquency 
or default or as a penalty, as proposed. Notwithstanding the fact that 
final rules adopted by the Board and other federal banking agencies 
published elsewhere in today's Federal Register will prohibit, in most 
cases, the application of penalty rates to existing balances, the Board 
believes that allowing creditors to apply the penalty rate, even if 
only to new transactions, immediately upon the consumer triggering the 
rate would nonetheless lead to undue surprise and insufficient time for 
the consumer to consider alternative options regarding use of the card.
    The final rule elsewhere enhances the disclosure of the 
circumstances under which the penalty rate may apply in the 
solicitation and application table as well as at account opening. Such 
improved up-front disclosure of the circumstances in which penalty 
pricing may be imposed on a consumer's account may enable some 
consumers to avoid engaging in certain behavior that would give rise to 
penalty pricing. However, the Board believes generally that consumers 
will be the most likely to notice and be motivated to act if they 
receive a specific notice alerting them of an imminent rate increase, 
rather than a general disclosure stating the circumstances when a rate 
might increase.
    In focus groups conducted for the Board prior to the June 2007 
Proposal, consumers were asked to identify the terms that they looked 
for when shopping for a credit card or at account-opening. The terms 
most often identified by consumers were the interest rate on purchases, 
interest rate on balance transfers, credit limit, fees, and incentives 
or rewards such as frequent flier miles or cash back.

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Consumers did not frequently mention the penalty rate or penalty rate 
triggers. It is possible that some consumers do not find this 
information relevant when shopping for or opening an account because 
they do not anticipate that they will trigger penalty pricing. Because 
many consumers are looking for terms other than the penalty rate and 
penalty triggers, they may not recall this information later, after 
they have begun using the account, and may be surprised when penalty 
pricing is subsequently imposed.
    For similar reasons, the Board also believes that a notice 
appearing on each monthly statement informing a consumer of the ``on 
us'' behaviors that can trigger a penalty rate would not be as 
effective as a more specific notice provided after a rate increase has 
been triggered but before it has been imposed. Consumers already will 
receive a notice under new Sec.  226.7(b)(11) on the periodic statement 
generally informing them that they may be subject to a late fee and/or 
penalty rate if they make a late payment. This will alert consumers 
generally that making a late payment may have adverse consequences, but 
that Board does not believe that a general notice about the 
circumstances in which penalty pricing may be applied is as effective 
as a more specific notice that a penalty rate is in fact about to be 
imposed.
    In addition, the Board believes that the notice required by Sec.  
226.9(g) is the most effective time to inform consumers of the 
circumstances under which penalty rates can be applied to their 
existing balances consistent with final rules adopted by the Board and 
other federal banking agencies published elsewhere in today's Federal 
Register. Pursuant to those rules, under limited circumstances a 
penalty rate can be applied to all of a consumer's balances, 
specifically if the consumer fails to make a required minimum periodic 
payment within 30 days after the due date for the payment.
    As discussed elsewhere in the section-by-section analysis to Sec.  
226.5a, due to concerns about ``information overload,'' the final rule 
does not require a creditor to distinguish, in the disclosures given 
with an application or solicitation or at account-opening, between 
those penalty rate triggers that apply to existing balances and more 
general contractual penalty triggers that may apply only to new 
balances. While the Board anticipates that creditors will disclose in 
the account agreement for contractual reasons the distinction between 
triggers applicable to existing balances and new balances, those 
disclosures will not be highlighted in a tabular format. The notice 
given under Sec.  226.9(g) will, therefore, be for many consumers, the 
best opportunity for disclosure that penalty pricing may apply only to 
new balances and that, if the consumer pays late once by more than 30 
days, the penalty rate may be applied to all of his or her balances.
    Disclosure content and format. With respect to open-end (not home-
secured) plans, under the Board's June 2007 Proposal, which was amended 
by the May 2008 Proposal for consistency with proposal by the Board and 
other federal banking agencies published in May 2008 (See 73 FR 28904, 
May 19, 2008), if a creditor is increasing the rate due to delinquency 
or default or as a penalty, the creditor would have been required to 
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 
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, including, if applicable, the 
balances that would be affected if a consumer fails to make a required 
minimum periodic payment within 30 days from the due date for that 
payment; and (5) if applicable, a description of any balances to which 
the current rate will continue to apply as of the effective date of the 
rate increase, unless a consumer fails to make a required minimum 
periodic payment within 30 days from the due date for that payment.
    If the notice regarding increases in rates due to delinquency, 
default or penalty pricing were included on or with a periodic 
statement, the June 2007 Proposal would have required the notice to be 
in a tabular format. Under the proposal, the notice also would have 
been required to appear on the front of the first page of the periodic 
statement, directly above the list of transactions for the period. If 
the notice were not included on or with a periodic statement, the 
information described above would have been required to be disclosed on 
the front of the first page of the notice. As discussed above, the 
minimum font size requirements of 10-point font set forth in proposed 
comment 5(a)(1)-3 also would have applied to any tabular disclosure 
given under Sec.  226.9(g)(3).
    One consumer group commenter on the May 2008 Proposal supported the 
requirements in proposed Sec.  226.9(g)(3)(i)(D) and (g)(3)(i)(E), 
which were added for consistency with the proposal by the Board and 
other federal banking agencies published in May 2008 (see 73 FR 28904, 
May 19, 2008), to disclose the balances to which a delinquency or 
default rate or penalty rate would be applied and to describe, if 
applicable, any balances to which the current rate would continue to 
apply as of the effective date of the rate increase (unless the 
consumer's account becomes more than 30 days late). This commenter 
believes that disclosure does not alter the unfairness of applying 
penalty, delinquency, or default rates to existing balances, but that 
the additional information would be useful to consumers.
    Commenters on the content and formatting of penalty rate notices 
generally raised the same or similar issues as commenters on the 
content and formatting of change-in-terms notices required under Sec.  
226.9(c). See section-by-section analysis to Sec.  226.9(c) for a 
discussion of these comments. For the reasons described in the section-
by-section analysis to Sec.  226.9(c), the content and formatting 
requirements for notices of penalty rate increases in Sec.  226.9(g)(3) 
are adopted generally as proposed, except that if the notice is 
included with a periodic statement, the summary table is required to 
appear on the front of the periodic statement, but is not required to 
appear on the first page. In addition, a technical change has been made 
to Sec.  226.9(g)(3)(i)(D) to delete a substantively duplicative 
requirement included in both proposed Sec.  226.9(g)(3)(i)(D) and (E).
    The final rule also contains a technical amendment to clarify that 
a notice given under Sec.  226.9(g)(1) may be combined with a notice 
given pursuant to new Sec.  226.9(g)(4)(ii), described below.
    Form G-18(G) (proposed as Form G-18(H)) and Sample G-21 have been 
revised to reflect formatting changes designed to make these notices 
more understandable to consumers. Similar to the testing conducted for 
change-in-terms notices described above in the section-by-section 
analysis to Sec.  226.9(c), the Board also conducted two rounds of 
consumer testing of notices of penalty rate increases. Consumers 
generally understood the key dates disclosed in these notices. 
Specifically, of participants who saw statements that indicated that 
the penalty rate would be applied to the account, all participants in 
both rounds of testing understood

[[Page 5353]]

that the penalty rate would only apply to transactions made after the 
specified date shown. All participants also understood that if they 
became 30 days late on their account the penalty rate would apply to 
earlier transactions as well.
    Sample G-21 also has been revised to conform with substantive 
restrictions on rate increases applicable to promotional rate balances 
included in final rules issued by the Board and other federal banking 
agencies published elsewhere in today's Federal Register. As proposed 
in May 2008, Sample G-21 would have contained a disclosure indicating 
that the consumer's promotional rate balances would be subject to the 
standard rate on the effective date of the penalty rate increase. The 
final rules published elsewhere in today's Federal Register regarding 
the applicability of rate increases to outstanding balances prohibit a 
creditor from repricing a consumer's outstanding balances from a 
promotional rate to a higher rate, unless the consumer's account is 
more than 30 days late. Accordingly, the disclosure regarding loss of a 
promotional rate has been deleted from final Sample G-21. The dates 
used in the example in Sample G-21 also have been amended for 
consistency with the definition of ``outstanding balance'' in the final 
rules published elsewhere in today's Federal Register. In addition, a 
technical correction also has been made to final Sample G-21 to clarify 
that a consumer must make a payment that is more than 30 days late in 
order for the penalty rate to apply to outstanding balances; as 
proposed, Sample G-21 referred to a payment that is 30 days late. These 
changes to Sample G-21 also are reflected in final Model Form G-18(G).
    Examples. In order to facilitate compliance with the advance notice 
requirements set forth in Sec.  226.9(g), the Board's May 2008 Proposal 
included a new comment 9(g)-1.ii that set forth several illustrations 
of how the advance notice requirement would have applied in light of 
the substantive rules regarding rate increases proposed by the Board 
and other federal banking agencies published in May 2008 (See 73 FR 
28904, May 19, 2008). Several industry commenters remarked on these 
illustrations, particularly on proposed comment 9(g)-1.ii.D. Proposed 
comment 9(g)-1.ii.D indicated that an issuer would be required, in some 
circumstances, to give a second advance notice, after the consumer's 
account became more than 30 days late, 45 days prior to imposing a 
penalty rate to outstanding balances as permitted under the Board's and 
agencies' proposed substantive rule. Many of these industry commenters 
stated that the creditor should not be required to provide an 
additional 45 days' notice to the consumer if: (i) A creditor has 
already provided 45 days' advance notice regarding the imposition of a 
penalty rate that applies only to new balances; and (ii) that notice 
states that such rate will apply to outstanding balances if the 
consumer becomes more than 30 days delinquent while the increased rate 
is in effect. Other commenters stated that an additional 45 days' 
notice should not be required if the consumer has already received 
within the last 12 months a notice regarding the consequences of making 
a payment more than 30 days late. One commenter indicated that if the 
Board retains the requirement to send a second notice in these 
circumstances, proposed comment 9(g)-1, in particular, 9(g)-1.ii.D 
should be revised to clarify that if a second trigger event occurs 
after the initial penalty rate notice is provided, the creditor should 
not be required to wait until the consumer is more than 30 days 
delinquent to provide the second penalty APR notice.
    The Board has adopted a set of revised examples in comment 9(g)-1 
that have been modified to conform with the final rules adopted by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register. These examples, among other things, clarify that a 
creditor is not required to provide a consumer with a second notice 
when the creditor has already sent a notice pursuant to Sec.  226.9(g) 
and during the period between when that notice is sent and the 
effective date of the change, the consumer pays more than 30 days late. 
A second notice would, however, be required if the consumer were to pay 
more than 30 days late, if such a subsequent default by the consumer 
occurred after the effective date of the first notice sent by the 
creditor pursuant to Sec.  226.9(g). The Board believes that a second 
notice is appropriate in these circumstances because the subsequent 
late payment or payments may occur months or years after the first 
notice pursuant to Sec.  226.9(g) has been sent. At such a later date, 
the consumer may not recall the events that will cause the penalty rate 
to be applied to his or her existing balances; because such repricing 
may come as a surprise to the consumer, the Board believes that the 
consumer should receive advance notice in order to have an opportunity 
to seek alternative financing or to pay off his or her balances.
    In addition to amending the examples, the Board also has clarified 
in new Sec.  226.9(g)(4)(iii), discussed below, that a creditor need 
not send a second notice pursuant to Sec.  226.9(g) prior to increasing 
the rate applicable to outstanding balances, in the limited 
circumstances where the creditor has already sent a notice disclosing a 
rate increase applicable to new transactions and during the period 
between when that notice is sent and the effective date of the change, 
if the consumer pays more than 30 days late. This exception is 
consistent with the examples described above.
    Multiple triggers for penalty rate. In response to the June 2007 
Proposal, several industry commenters requested a limited exception to 
the 45-day notice requirement for increases to penalty or default rates 
that are clearly disclosed in the account-opening disclosures and that 
involve behavior by the consumer that must occur in two or more billing 
cycles before the default rate is triggered. Under these circumstances, 
these commenters suggested that issuers should be permitted to provide 
the required notice after the first of the multiple triggering events 
has occurred, rather than waiting until the final trigger event. For 
example, if a creditor were to impose penalty pricing but only upon two 
late payments, the comments suggest that the creditor should be 
permitted to send the notice upon the consumer's first late payment. 
The creditor would then be free to impose the penalty rate immediately 
upon the consumer's second late payment, provided that 45 days has 
elapsed since the notice was provided. The commenters suggest that, 
under these circumstances, the consumer will have 45 days of advance 
notice to avoid the second triggering event.
    Some commenters also suggested that creditors should be permitted 
to include on each periodic statement after the first triggering event 
a notice informing the consumer of the circumstances under which 
penalty pricing will be imposed. If the consumer engages in the 
behavior disclosed on the periodic statement, these creditors suggested 
that a creditor should be permitted to impose penalty pricing 
immediately, without additional advance notice given to the consumer.
    For penalty pricing with multiple triggering events, the final rule 
continues to require 45 days' notice after the occurrence of the final 
triggering event. The Board believes that a notice of an impending rate 
increase may have the most utility to a consumer immediately prior to 
when the rate is increased. Depending on the particular triggers used 
by a creditor, the period of time between the first triggering event 
and the final triggering event could be

[[Page 5354]]

quite long, and a consumer may have forgotten about the notice he or 
she received many months earlier. For example, if a creditor imposed 
penalty pricing based on the consumer exceeding his or her credit limit 
twice in a twelve-month period, a consumer might exceed the credit 
limit in January, and pursuant to the exception requested by 
commenters, would receive a notice of the possible imposition of 
penalty pricing shortly thereafter. If the consumer subsequently 
exceeded the credit limit again in December, that consumer's account 
could immediately be subject to penalty pricing with no additional 
advance notice given specifically informing that the consumer that he 
or she has, in fact, triggered the penalty rate. The Board believes 
that many consumers may not retain or recall the specific details set 
forth on a notice delivered in January, when penalty pricing is 
eventually imposed in December, particularly because different 
creditors' practices can vary. In addition, a notice given in January 
could in many cases state only that the consumer's account may be 
repriced upon the occurrence of subsequent events. The Board believes 
that a notice that states clearly that the interest rate applicable to 
a consumer's account is in fact being increased is important in order 
to avoid costly surprise in these circumstances.
    The Board also believes that a notice included on each periodic 
statement after the first triggering event informing the consumer of 
the circumstances under which penalty pricing will be imposed would not 
be as effective as a notice informing the consumer of a specific 
impending rate increase. An institution may choose to provide a 
statement on each periodic informing the consumer of the circumstances 
under which penalty pricing will be imposed, but the institution still 
would be required to provide a notice prior to actually imposing the 
penalty rate pursuant to Sec.  226.9(g).
    Promotional rate increased as a penalty. In response to both the 
June 2007 and May 2008 Proposals, a number of industry commenters 
advocated an exception to the 45-day advance notice requirement when 
the rate is being changed from a promotional rate to a higher rate, 
such as a standard rate, as a penalty triggered by an event such as a 
late payment. These commenters suggested that a standard rate is not a 
true penalty rate and that consumers are aware that a promotional rate 
is temporary in nature. The comment letters also questioned whether 
creditors would continue to make promotional rates available if they 
were required to give notice 45 days in advance of repricing a 
consumer's account. Commenters also noted that the proposed rules 
regarding rate increases issued by the Board and other federal banking 
agencies in May 2008 contained an exception for repricing from a 
promotional rate to a standard rate. See 73 FR 28904, May 19, 2008.
    The final rule does not contain an exception to the 45-day advance 
notice requirement for repricing from a promotional rate to any higher 
rate upon an event of default by the consumer. The Board believes that 
the rationales discussed above for the 45-day advance notice apply 
equally when a consumer's account is repriced from a promotional rate 
to a higher rate, prior to the end of the term for which the 
promotional rate was offered. The loss of a promotional rate before the 
end of a promotional period can be a costly surprise to the consumer, 
and in some cases even more costly than other types of interest rate 
increases. A consumer may have an expectation that a zero percent or 
other promotional rate will apply to transactions made for a certain 
fixed period, for example one year, and may purchase large ticket items 
or transfer a significant balance to that account during the period in 
reliance on the promotional rate. Under these circumstances, the Board 
believes that the consumer should have the opportunity to seek 
alternative sources of financing before the account is repriced to the 
higher rate. This outcome is consistent with final rules issued by the 
Board and other federal banking agencies and published elsewhere in 
this Federal Register, which do not contain an exception for repricing 
from a promotional rate to a standard rate prior to the expiration of 
the promotional period.
    There is no obligation to provide a notice under Sec.  226.9(g) if 
the increase from a promotional rate to the standard rate occurs at the 
end of the term for which the promotional rate was offered, not based 
on any event of default by the consumer. One industry commenter asked 
for guidance as to what a creditor must do under Sec.  226.9(g) when 
the promotional rate is set to expire in less than 45 days and the 
consumer triggers penalty pricing. Under those circumstances, the Board 
anticipates that a creditor would not send a notice under Sec.  
226.9(g), but rather would let the promotional rate expire under its 
original terms. At the end of the promotional period, the rate would 
revert to the standard rate and no notice need be given to the consumer 
because a rate increase from the promotional rate to the standard rate 
upon the expiration of the period set forth in the original agreement 
would not constitute a change in terms or penalty repricing.
    Raise in rate due to violation of terms of a workout plan. Industry 
commenters on the June 2007 Proposal also requested an exception for 
the situation where a rate is increased due to a violation of the terms 
of a special collection plan or workout plan. Some creditors may offer 
payment relief or a temporary reduction in a consumer's interest rate 
for a consumer who is having difficulty making payments, with the 
understanding that the consumer will return to standard contract terms 
if he or she does not make timely payments. For example, a consumer 
might be having difficulty making payments on an account to which a 
penalty rate of 30 percent applies. Under the terms of a workout 
arrangement, a creditor might reduce the rate to 20 percent, provided 
that if the consumer fails to make timely minimum payments, the 30 
percent rate will be reimposed. One commenter noted that workout 
arrangements are generally offered to consumers who are so delinquent 
on their accounts that other or better financing options may not be 
available to them. Commenters also noted that the availability of 
workout programs was likely to be limited or reduced if a creditor were 
required to give 45 days' advance notice prior to reinstating a 
consumer's pre-existing contract terms if that consumer fails to abide 
by the terms of the workout arrangement.
    The final rule contains a new Sec.  226.9(g)(4)(i), which generally 
provides that a creditor is not required to give advance notice 
pursuant to Sec.  226.9(g)(1) if a rate applicable to a consumer's 
account is increased as a result of the consumer's default, 
delinquency, or as a penalty, in each case for failure to comply with 
the terms of a workout arrangement between the creditor and the 
consumer. The exception is only applicable if the new rate being 
applied to the category of transactions does not exceed the rate that 
applied to that category of transactions prior to commencement of the 
workout arrangement, or is a variable rate determined by the same 
formula (index and margin) that applied to the category of transactions 
prior to commencement of the workout arrangement. The Board believes 
that workout arrangements provide a clear benefit to consumers who are 
otherwise having difficulty making payments and that the rule should 
not limit the continued availability of such arrangements. A consumer 
who is otherwise in default on his or her

[[Page 5355]]

account and is offered a reduced interest rate for a period of time in 
order to facilitate the making of payments, and who has recently been 
in contact with his or her creditor regarding the terms of the workout 
arrangement, generally should not be surprised by the revocation of the 
reduced rate if he or she defaults under that workout arrangement.
    Decrease in credit limit. The final rule contains a new exception 
in Sec.  226.9(g)(4)(ii) that clarifies the relationship between the 
notice requirements in Sec. Sec.  226.9(c)(2)(v) and 226.9(g)(1)(ii) 
when the creditor decreases a consumer's credit limit and under the 
terms of the credit agreement a penalty rate may be imposed for 
extensions of credit that exceed that newly decreased limit.
    As discussed above, Sec.  226.9(c)(2)(v) requires that a creditor 
give advance notice of a decrease in a consumer's credit limit in 
writing or orally at least 45 days before an over-the-limit fee or 
penalty rate can be imposed solely as a result of the consumer 
exceeding the newly decreased credit limit. The purpose of this 
provision is to give the consumer an opportunity to reduce outstanding 
balances to below the newly-decreased credit limit before penalty fees 
or rates can be imposed. In addition, Sec.  226.9(g)(1)(ii) requires a 
creditor to give 45 days' advance written notice prior to increasing a 
rate as a penalty for one or more events specified in the account 
agreement, including for obtaining an extension of credit that exceeds 
the credit limit.
    Without clarification, the Board is concerned that Sec.  
226.9(c)(2)(v) and (g)(1)(ii) could be read together to require 90 
days' notice prior to imposing a penalty rate for a consumer exceeding 
a newly-decreased credit limit (i.e., that the 45-day cure period 
contemplated in Sec.  226.9(c)(2)(v) would need to elapse before a 
consumer could be deemed to have triggered a penalty rate, only after 
which point the notice under Sec.  226.9(g)(1)(ii) could be given). It 
was not the Board's intent for Sec.  226.9(c)(2)(v) to extend the 
notice period prior to imposing a penalty rate for a consumer's having 
exceeded the credit limit to 90 days, but rather only to ensure that a 
consumer had a reasonable opportunity to avoid penalties for exceeding 
a newly decreased credit limit.
    In order to clarify the relationship between Sec.  226.9(c)(2)(v) 
and (g)(1)(ii), the final rule contains new Sec.  226.9(g)(4)(ii), 
which permits a creditor to send, at the time that the creditor 
decreases the consumer's credit limit, a single notice (in writing) 
that would satisfy both the requirements of Sec. Sec.  226.9(c)(2)(v) 
and (g)(1). The combined notice would be required to be sent at least 
45 days in advance of imposing the penalty rate and would be required 
to contain the content set forth in Sec.  226.9(c)(2)(v), as well as 
additional content that generally tracks the requirements in Sec.  
226.9(g)(3)(i). The content of the notice would differ from the 
requirements in Sec.  226.9(g)(3)(i) in order to accurately reflect the 
fact that a consumer may avoid imposition of the penalty rate by 
reducing his or her balance below the newly decreased credit limit by 
the date specified in the notice.
    Consistent with the intent of Sec.  226.9(c)(2)(v), new Sec.  
226.9(g)(4)(ii) provides that a creditor is not permitted to impose the 
penalty rate if the consumer's balance does not exceed the newly 
decreased credit limit on the date set forth in the notice for the 
imposition of the penalty rate (which date must be at least 45 days 
from when the notice is sent). However, if the consumer's balance does 
exceed the credit limit on the date specified in the notice, the 
creditor would be permitted to impose the penalty rate on that date, 
with no additional advance notice required. For example, assume that a 
creditor decreased the credit limit applicable to a consumer's account 
and sent a notice pursuant to Sec.  226.9(g)(4)(ii) on January 1, 
stating among other things that the penalty rate would apply if the 
consumer's balance exceeded the new credit limit as of February 16. If 
the consumer's balance exceeded the credit limit on February 16, the 
creditor could impose the penalty rate on that date. However, a 
creditor could not apply the penalty rate if the consumer's balance did 
not exceed the new credit limit on February 16, even if the consumer's 
balance had exceeded the new credit limit on several dates between 
January 1 and February 15. If the consumer's balance did not exceed the 
new credit limit on February 16 but the consumer conducted a 
transaction on February 17 that caused the balance to exceed the new 
credit limit, the general rule in Sec.  226.9(g)(1)(ii) would apply and 
the creditor would be required to give an additional 45 days' notice 
prior to imposition of the penalty rate (but under these circumstances 
the consumer would have no ability to cure the over-the-limit balance 
in order to avoid penalty pricing).
    New Sec.  226.9(g)(4)(ii)(C) sets forth the formatting requirements 
for notices given pursuant to Sec.  226.9(g)(4)(ii), which conform with 
the formatting requirements for notices provided under Sec.  
226.9(g)(1).
    Certain rate increases applicable to outstanding balances. The 
final rule contains a new exception in Sec.  226.9(g)(4)(iii) intended 
to clarify the relationship between the notice requirements under Sec.  
226.9(g) and rules regarding the application of rate increases to 
outstanding balances issued by the Board and other federal banking 
agencies published elsewhere in today's Federal Register. Under the 
exception, a creditor is not required, under certain conditions, to 
provide an additional notice pursuant to paragraph Sec.  226.9(g) prior 
to increasing the rate applicable to an outstanding balance, if the 
creditor previously provided a notice under Sec.  226.9(g) disclosing 
that the rate applicable to new transactions was going to be increased. 
The exception only applies if, after the Sec.  226.9(g) notice 
disclosing the rate increase for new transactions is provided but prior 
to the effective date of the rate increase or rate increases disclosed 
in the notice pursuant, the consumer pays more than 30 days late. Under 
those circumstances, a creditor may increase the rate applicable to 
both new and outstanding balances on the effective date set forth in 
the notice that was previously provided to the consumer.
    This exception is meant to conform the requirements of the rule to 
the examples set forth in comment 9(g)-1, which clarify the interaction 
between the notice requirements of Sec.  226.9(g) and rules regarding 
the application of rate increases to outstanding balances issued by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register. The Board believes that a limited exception to the 
notice requirements of Sec.  226.9(g) is appropriate in these 
circumstances because the consumer will have received a notice 
disclosing the rate increase applicable to new transactions, which also 
will disclose the circumstances under which the rate increase will 
apply to outstanding balances if the consumer fails to make timely 
payments prior to the effective date of the change.
    Terminology. One commenter commented that the use of the terms 
``delinquency or default rate,'' and ``penalty rate'' is confusing and 
not necessarily consistent with industry usage. The commenter asked for 
clarification regarding the meaning of ``delinquency or default rate'' 
versus ``penalty rate.'' The Board included both terms in the proposed 
rules, and has retained both terms in the final rule, in order to 
capture any situation in which a consumer's rate is increased in 
response to a violation or breach by the consumer of any term set forth 
in the

[[Page 5356]]

contract. The term ``delinquency or default rate'' has historically 
appeared in Regulation Z, and the Board has added ``penalty rate'' in 
recognition that there may be contractual provisions that permit an 
increase in the rate applicable to a consumer's account for behavior 
that falls short of being a delinquency or default.

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 current comments 10(b)-1 and -2. Pursuant to Sec.  
226.10(b) and current 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.
10(b) Specific Requirements for Payments
    Reasonable requirements for cut-off times. In the June 2007 
Proposal, the Board sought to address concerns that cut-off times may 
effectively result in a due date that is one day earlier in practice 
than the due date disclosed. The Board did not propose in June 2007 to 
require a minimum cut-off time. Rather, the Board proposed a 
disclosure-based approach, which would have created a 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 in close proximity to 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. 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 have required that 
creditors disclose only the earliest cut-off time, if earlier than 5 
p.m. on the due date.
    Although some consumer commenters on the June 2007 Proposal 
supported the proposed cut-off time disclosure, other consumers and 
consumer groups thought that the proposed disclosure would provide only 
a minimal benefit to consumers. These commenters recommended that the 
Board consider other approaches to more effectively address cut-off 
times. Consumer groups recommended that the Board adopt a postmark 
rule, under which the timeliness of a consumer's payment would be 
evaluated based on the date on which the payment was postmarked. Some 
consumers commented that cut-off times are unfair and should be 
abolished, while other consumers suggested that the Board establish 
minimum cut-off times.
    Industry commenters expressed concern that the proposed disclosure 
would be confusing to consumers. They noted that many creditors vary 
their cut-off times by payment channel and that disclosure of only the 
earliest cut-off hour would be inaccurate and misleading. They 
suggested that, if the Board were to adopt this requirement, a creditor 
should be permitted to identify to which payment method the cut-off 
time relates, disclose the cut-off hours for all payment channels, or 
disclose the cut-off hour for the payment method used by the consumer, 
if known. Industry commenters also asked that the Board relax the 
location requirement for the cut-off time disclosure on the periodic 
statement.
    Both consumer groups and industry commenters urged the Board to 
clarify which time zone should be considered when determining if the 
cut-off time is prior to 5 p.m.
    In light of comments received on the June 2007 Proposal, the Board 
proposed in May 2008 to address cut-off times for mailed payments by 
providing guidance as to the types of requirements that would be 
reasonable for creditors to impose for payments received by mail. In 
part, the Board proposed to move guidance currently contained in the 
commentary to the regulation. Current comment 10(b)-1 provides examples 
of specific payment requirements creditors may impose and current 
comment 10(b)-2 states that payment requirements must be reasonable, in 
particular that it should not be difficult for most consumers to make 
conforming payments. The Board proposed in May 2008 to move the 
substance of comments 10(b)-1 and 10(b)-2 to Sec.  226.10(b)(1) and 
(b)(2) of the regulation. Under the May 2008 Proposal, Sec.  
226.10(b)(1) would have stated the general rule, namely that a creditor 
may specify reasonable requirements that enable most consumers to make 
conforming payments. The Board would have expanded upon the example in 
comment 10(b)-1.i.B as proposed in June 2007 in new proposed Sec.  
226.10(b)(2)(ii), which would have stated that it would not be 
reasonable for a creditor to set a cut-off time for payments by mail 
that is earlier than 5:00 p.m. at the location specified by the 
creditor for receipt of such payments.
    The language in current comment 10(b)-2 stating that it should not 
be difficult for most consumers to make conforming payments would not 
have been included in the regulatory text under the May 2008 Proposal. 
As noted in the May 2008 Proposal, the Board believes that this 
language is in substance duplicative of the requirement that any 
payment requirements be reasonable and enable most consumers to make 
conforming payments.
    The Board did not propose a postmark rule as suggested by consumer 
group commenters on the June 2007 Proposal. In part, this is because 
the Board and other federal banking agencies proposed in May 2008 a 
rule that would have required a creditor to provide consumers with a 
reasonable time to make payments. As discussed in the May 2008 
Proposal, the Board also believes that it would be difficult for 
consumers to retain proof of when their payments were postmarked, in 
order to challenge the prompt crediting of payments under such a rule. 
In addition, a mailed payment may not have a legible postmark date when 
it reaches the creditor or creditor's service provider. Finally, the 
Board believes there would be significant operational costs and burdens 
associated with capturing and recording the postmark dates for 
payments.
    Consumer groups, one state treasurer, one federal banking agency, 
several industry commenters and several industry trade associations 
supported the proposal that it would not be reasonable to set a cut-off 
time for payments received by mail prior to 5 p.m. on the due date at 
the location specified by the creditor for the receipt of mailed 
payments. Several consumer groups, credit unions, and two members of 
Congress suggested that the Board expand the proposed rule to apply to 
all forms of payment, including payments made by telephone and on-line. 
Several consumer groups urged that the rule should be dependent on the 
local time of the consumer's billing address, not the local time of the 
issuer's payment facility. Several consumer groups suggested that the 
Board establish a

[[Page 5357]]

uniform rule establishing a cut-off time of either 5 p.m. or the close 
of business, if it is later than 5 p.m. One of these commenters noted 
that a uniform, minimum 5 p.m. cut-off time would not require creditors 
to process and post the payments on the same day, or to change their 
systems, but would only require that creditors not treat payments 
received before 5 p.m. as late.
    One industry commenter that supported the 5 p.m. rule stated that 
it should only apply to mailed payments. This commenter stated that a 
consumer who makes payments on-line, by telephone, or at a bank branch 
controls and is aware of the exact time a payment is made. An industry 
trade association noted that its support of the 5 p.m. cut-off time was 
conditioned on the understanding that there would be no requirement for 
creditors to process payments within certain time frames. This 
commenter indicated its understanding that the May 2008 Proposal would 
only prohibit assessing a late fee, or otherwise considering the 
payment late, if it is received on or before the due date, and would 
not dictate when the payment actually needed to be processed.
    The majority of industry commenters opposed the proposed rule that 
would have provided that cut-off times prior to 5 p.m. for mailed 
payments are not reasonable. Many of these commenters raised 
operational issues with the proposed rule. One industry trade 
association stated that banks need sufficient time after retrieving 
mail to update accounts and produce accurate periodic statements. This 
commenter indicated that remittance processing requires time to confirm 
transactions and detect and remedy errors. This commenter noted that if 
a bank is unable to complete any necessary updates prior to generation 
of the consumer's statement, the payment may be subsequently revised 
and backdated, but the payment will not be reflected in the statement 
sent to the consumer, which would make the statement inaccurate. Other 
industry commenters noted that they use a lockbox to process payments. 
These commenters indicated that currently their lockbox personnel 
cannot open, process, and credit payments on the date received unless 
they are received by a time certain that may be in the morning, or at 
the latest, midday.
    Several industry commenters stated that the proposed 5 p.m. cut-off 
time rule in effect would impose a requirement for all open-end 
creditors to adopt a 5 p.m. post office run or to do a ``last mail 
call'' at 4:59 p.m. One commenter noted that 5 p.m. is rush hour, which 
could lead to significant delays in delivering the payments in 
metropolitan areas. Several industry commenters further noted that some 
post offices may officially close prior to 5 p.m. but continue to 
process mail and insert mail into mail boxes.
    One trade association for credit unions noted that some smaller 
credit unions may only be open several days a week and may have limited 
business hours, for example, a faith-based credit union chartered to 
serve the members of a church congregation that is only open on Sundays 
or weekends for several hours. This commenter indicated that for such a 
creditor, it should be reasonable to impose a cut-off time that is 
consistent with that particular institution's closing time.
    One large bank and one industry trade association suggested that a 
deadline of 2 p.m. for mailed payments should be considered reasonable, 
due to operational and logistical challenges that make a 5 p.m. cut-off 
time too early. Several industry commenters noted that Regulation CC 
(Availability of Funds and Collections of Checks) permits earlier cut-
offs for access to deposits of 2 p.m. or later, or 12 p.m. or later if 
the deposit is received at an ATM. 12 CFR 229.19(a)(5)(ii) Several 
other industry commenters stated that the Board had not articulated its 
reasons for selecting a 5 p.m. cut-off time, and that there is no 
evidence that consumers expect a 5 p.m. deadline.
    Other industry commenters stated that it is consistent with 
consumer expectations that a customer needs to provide the bank with a 
reasonable time to process a transaction. These commenters noted that 
it is especially important that open-end creditors have a reasonable 
time to process payments received by mail in light of the fact that 
such creditors are required to credit a borrower's account as of the 
day the payment is received, even if the creditor does not receive 
funds after depositing the check for one or more days.
    Finally, two industry commenters expressed concern about the 
proposal's classification of cut-off times prior to 5 p.m. as 
``unreasonable.'' These commenters indicated that the characterization 
of certain cut-off times as ``unreasonable'' might give rise to 
litigation risk for creditors that used earlier cut-off times prior to 
this rule that were permissible under the Regulation Z requirements at 
that time.
    In light of comments received, the Board is adopting in the final 
rule a modified version of proposed Sec.  226.10(b)(2)(ii), which 
describes a 5 p.m. cut-off time for mailed payments as an example of a 
reasonable requirement for payments, but does not state that earlier 
cut-off times would be unreasonable in all circumstances. The Board 
believes that the establishment of a safe harbor for a 5 p.m. cut-off 
time for mailed payments, rather than declaring earlier cut-off times 
to be per se unreasonable, should help to alleviate commenters' 
concerns about litigation risk while helping to ensure that consumers 
receive a reasonable period of time to pay on the due date. The Board 
intends for this rule to apply only prospectively, and believes that 
providing a safe harbor rather than defining certain cut-off times as 
unreasonable reinforces the fact that the rule does not apply to past 
practices.
    The Board notes that if a creditor adopts a 5 p.m. cut-off time for 
payments received by mail, neither the current rule nor the revised 
rule would mandate that the creditor pick up its mail at 5 p.m. on the 
payment due date. Section 10(a) addresses only the date as of which a 
creditor is required to credit a payment to a consumer's account, but 
does not impose any requirements as to when the creditor actually must 
process or post the payment. It would be permissible under the final 
rule for a creditor that has a 5 p.m. cut-off time on the due date for 
payments by mail to, for example, backdate and credit payments received 
in its first pick-up of the following morning as of the due date, 
assuming that its previous pick-up was not made at or after 5 p.m. on 
the due date. The Board understands that backdating of payments is 
relatively common and that some servicers have platforms that provide 
for automated backdating. A creditor that prefers not to backdate its 
payments for operational reasons could, however, arrange for a 5 p.m. 
mail pick-up.
    The final rule adopts the 5 p.m. safe harbor only for mailed 
payments and does not address other payment channels. Payments made by 
other methods, such as electronic payments or payments by telephone, 
are however subject to the general rule that requirements for payments 
must be reasonable. The Board will continue to monitor cut-off times 
for non-mailed payments in the future in order to determine whether a 
safe harbor or similar guidance for such payments is necessary. The 
Board believes that a safe harbor for payments by mail is important 
because it is the payment mechanism over which consumers have the least 
direct control. A consumer is more aware of, and better able to 
control, the time at which he or she makes an electronic, telephone, or 
in-person payment, but is not able to

[[Page 5358]]

control or monitor the exact time at which mail is received by a 
creditor.
    The safe harbor, consistent with the proposal, refers to the time 
zone of the location specified by the creditor for the receipt of 
payments. The Board believes that this clarification is necessary to 
provide creditors with certainty regarding compliance with the safe 
harbor, and that a rule requiring a creditor to process payments 
differently based on the time zone at the consumer's billing address 
could impose significant operational burdens on creditors. The safe 
harbor also refers to 5 p.m., consistent with the proposal. The Board 
believes that many consumers expect that payments received by the 
creditor by 5 p.m., which corresponds to the end of a standard business 
day, will be credited on that day. This also is consistent with the 
results of consumer testing conducted prior to the June 2007 Proposal, 
which showed that most consumers assume payment is due by midnight or 
by the close of business on the due date.
    Under the June 2007 Proposal, Sec.  226.10(b) contained a cross 
reference to Sec.  226.7(b)(11), regarding the disclosure of cut-off 
hours on periodic statements. In the May 2008 Proposal, the Board 
solicited comment on whether disclosure of cut-off hours near the due 
date for payment methods other than mail (e.g., telephone or Internet) 
should be retained. As discussed in the section-by-section analysis to 
Sec.  226.7(b)(11), the final rule does not adopt the formatting 
requirements for disclosing the cut-off time on the periodic statement 
that were proposed in the June 2007 Proposal. A creditor must, however, 
continue to specify on or with the periodic statement any applicable 
cut-off times pursuant to Sec.  226.10(b)(3) (formerly Sec.  
226.10(b)), as renumbered in the final rule.
    Receipt of electronic payments made through a creditor's Web site. 
The Board also proposed in the June 2007 Proposal 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. The proposed comment would have referred 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, the 
Board's proposed comment 10(a)-2 would have referred 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 
have been the following business day. For example, a consumer may go 
on-line on a Sunday evening and instruct that a payment be made; 
however, the creditor might not transmit the request for the debit to 
the 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 have been deemed to be Monday, not Sunday. 
Proposed comment 10(b)-1.i.B would have clarified 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. As discussed in the June 2007 Proposal, the 
Board's proposed clarification of comment 10(a)-2 is limited to 
electronic payments made through the creditor's own Web site, over 
which the creditor has control.
    Two industry commenters supported the proposed changes to comments 
10(a)-2 and 10(b)-1.i.B regarding electronic payments made via the 
creditor's Web site. One of these commenters noted that the proposed 
changes were consistent with consumer expectations, and stated that it 
was appropriate that the changes were limited to electronic payments 
made at the creditor's own Web site, over which the creditor has 
control, rather than being expanded to include all types of electronic 
payments. Several individual consumers also commented that electronic 
payments should be credited on the day on which they are authorized. 
Comment 10(a)-2 is adopted as proposed. The clarification to comment 
10(b)-1.i.B proposed in June 2007 has been adopted in Sec.  
226.10(b)(2)(ii).
    Promotion of payment via the creditor's Web site. In the June 2007 
Proposal, the Board proposed to update the commentary to clarify that 
if a creditor promotes electronic payments via its Web site, then 
payments made through the creditor's Web site would 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. As discussed in the June 2007 
Proposal, the Board believes 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. For these reasons, the Board also 
proposed in June 2007 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), such a payment is considered a 
conforming payment for purposes of Sec.  226.10(b).
    One industry commenter noted that there could be operational issues 
associated with treating payments made via the creditor's Web site as 
conforming, because most banks use third-party processors to process 
their electronic payments. This commenter stated that an issuer may not 
be in control of its processing system and may not be able to credit 
its payments on the same day they are authorized. This commenter 
further stated that a creditor may have one Web site that offers 
several different means of making payments, for example a portal solely 
for making credit card payments as well as a portal for making bill 
payments through a third-party bill payment processor, and that 
payments could be sent either way by the consumer. This commenter noted 
that there may be additional delay in processing the payment depending 
on which electronic payment mechanism the consumer uses.
    The Board believes that consumer expectation is that a payment made 
via the creditor's Web site is a conforming payment, and that a 
creditor that promotes and accepts payment via its Web site should 
treat such payment as conforming. As noted above, individual consumers 
who commented on the June 2007 Proposal stated that electronic payments 
should receive same-day crediting. The Board notes that creditors may 
use third-party processors not just for electronic payments, but also 
for mailed payments that are treated as conforming. Thus, the use of a 
third-party processor may give rise to delays in processing payments 
regardless of the payment mechanism used. The Board notes that a 
creditor need not post a payment made via its Web site on the same day 
for which the consumer authorized payment, but need only credit the 
payment as of that date. Comment 10(b)-2 is adopted as proposed.

[[Page 5359]]

10(d) Crediting of Payments When Creditor Does Not Receive or Accept 
Payments on Due Date
    Holiday and weekend due dates. The Board's June 2007 Proposal did 
not address the practice of setting due dates on dates on which a 
creditor does not accept payments, such as weekends or holidays. A 
weekend or holiday due date might occur, for example, if a creditor 
sets its payment due date on the same day (the 25th, for example) of 
each month. While in most months the 25th would fall on a business day, 
in other months the 25th might be a weekend day or holiday, due to 
fluctuations in the calendar. The Board received a number of comments 
in response to the June 2007 Proposal from consumer groups, individual 
consumers, and a member of Congress criticizing weekend or holiday due 
dates. The comment letters expressed concern that a consumer whose due 
date falls on a date on which the creditor does not accept payments 
must pay one or several days early in order to avoid the imposition of 
fees or other penalties that are associated with a late payment. 
Comment letters from consumers indicated that, for many consumers, 
weekend and holiday due dates are a common occurrence. Some of these 
commenters suggested that the Board mandate an automatic grace period 
until the next business day for any such weekend or holiday due dates. 
Other commenters recommended that the Board prohibit weekend or holiday 
due dates.
    In response to these comments, the Board proposed in May 2008 a new 
Sec.  226.10(d) that would have required a creditor to treat a payment 
received by mail the next business day as timely, if the due date for 
the payment is a day on which the creditor does not receive or accept 
payment by mail, such as a day on which the U.S. Postal Service does 
not deliver mail. Thus, if a due date falls on a Sunday on which a 
creditor does not receive or accept payment by mail, the payment could 
not have been subjected to late payment fees or increases in the 
interest rate applicable to the account due to late payment if the 
payment were received by mail on the next day that the creditor does 
receive or accept payment by mail. The Board proposed this rule using 
its authority to regulate the prompt posting of payments under TILA 
Section 164, which states that ``[p]ayments received from an obligor 
under an open end consumer credit plan by the creditor shall be posted 
promptly to the obligor's account as specified in regulations of the 
Board.'' 15 U.S.C. 1666c.
    The proposed rule in Sec.  226.10(d) was limited to payments made 
by mail. The Board noted its particular concern about payments by mail 
because the consumer's time to pay, as a practical matter, is the most 
limited for those payments, since a consumer paying by mail must 
account for the time that it takes the payment to reach the creditor. 
The Board solicited comment in the May 2008 Proposal as to whether this 
rule also should address payments made by other means, such as 
telephone payments or payments made via the Internet.
    Consumer groups, several industry commenters, one industry trade 
group, a state treasurer, several credit union trade associations, and 
several state consumer protection agencies supported the Board's 
proposed rule regarding weekend or holiday due dates. Several industry 
commenters indicated that they were already in compliance with the 
proposed rule. Consumer groups stated that the proposed rule should be 
expanded to all forms of payment, including payments made 
electronically, by personal delivery, and by telephone.
    Several other industry trade groups and industry commenters 
objected to the proposed rule regarding weekend or holiday due dates, 
stating that it would impose operational challenges and costs for 
banks, including additional systems processing. These commenters 
questioned the necessity of the proposed rule, in light of the proposal 
by the Board and other federal banking agencies in May 2008, which 
would have prohibited institutions from treating a payment as late for 
any purpose unless the consumer has been provided a reasonable amount 
of time to make payment. See 73 FR 28904, May 19, 2008. One industry 
commenter supported prohibiting creditors from charging a late payment 
fee if the due date falls on a weekend or holiday and the payment is 
received on the next business day, but indicated that creditors should 
not be required to backdate interest associated with the payment. One 
industry commenter that opposed the proposal stated that the Board 
should require a creditor to disclose in the account-opening table the 
dates that are considered business days for purposes of payments.
    Several commenters commented on the example offered by the Board, 
``for example if the U.S. Postal Service does not deliver mail on that 
date,'' to describe a day on which the creditor does not receive or 
accept payments by mail. One industry commenter indicated that it 
accepts and receives mail from the U.S. Postal Service every hour, 365 
days a year, and indicated that the example may be misleading in light 
of its actual practices. Another industry commenter commented more 
generally that issuers who receive and process mail on Sundays and 
holidays should be permitted to rely on payment due dates that fall on 
those days.
    The final rule adopts Sec.  226.10(d) as proposed, with one minor 
clarification discussed below. The Board believes that it is important 
for consumers to have adequate time to make payment on their accounts, 
and that it is reasonable for consumers to expect that their mailed 
payments actually can be received and processed on the due date. 
Consumers should not be required to account for the fact that the due 
date for a mailed payment in practice is in effect one day earlier than 
the due date disclosed due to a weekend or holiday. While the rule may 
impose operational burden on some issuers, the Board believes that this 
burden is outweighed by the benefit to consumers of having their 
payments posted in accordance with their expectations that payments 
need not be delivered prior to the due date in order to be timely. The 
Board also notes that several industry commenters indicated that they 
were already in compliance with the rule and that it would impose no 
additional operational burden on those institutions.
    The example in proposed Sec.  226.10(d) regarding a date on which 
the U.S. Postal Service does not deliver mail has been moved to a new 
comment 10(d)-1, to emphasize that it is an example only. A creditor 
that accepts and receives mail on weekends and holidays may rely on 
payment due dates that fall on those days.
    The final rule adopts the rule regarding weekend or holiday due 
dates only for mailed payments and does not address other payment 
mechanisms. The Board will continue to monitor due dates for non-mailed 
payments in the future in order to determine whether a similar rule for 
such payments is necessary.
    One commenter stated that Sec.  226.10(d) should refer to dates on 
which a creditor does not ``receive or process'' payments rather than 
dates on which a creditor does not ``receive or accept'' payments. The 
creditor stated that receipt or acceptance, absent actual processing, 
could create the appearance of prompt crediting of payments where there 
is none. The final rule does not adopt this change. The rules in Sec.  
226.10 do not address when a creditor must process payments, only the 
date as of which a creditor must credit the payment to a consumer's 
account.

[[Page 5360]]

Crediting a payment to a consumer's account as of the date of receipt 
does not require that the creditor actually process the payment on that 
date; a creditor that does not process and post the payment on the date 
of receipt could comply with Sec.  226.10(a) by backdating the payment 
and computing all charges applicable to the consumer's account 
accordingly.
    The Board believes that its final rule under Regulation Z regarding 
weekend or holiday due dates will complement the final rule issued by 
the Board and other federal banking agencies published elsewhere in 
today's Federal Register to require banks to provide a consumer with a 
reasonable amount of time to make payments.

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 refunding any remaining credit 
balance within seven business days after receiving a written request 
from the consumer or making a good faith effort to refund any credit 
balance that remains in the consumer's account for more than six 
months. 15 U.S.C. 1666d. Although the substance of these provisions 
remains unchanged, the final rule implements a number of amendments 
proposed in June 2007.
    In June 2007, the Board proposed moving the provisions in Sec.  
226.11 regarding credit balances to a new paragraph (a) and renumbering 
the commentary accordingly. The Board also proposed adding a new 
paragraph (b) implementing the prohibition in Section 1306 of the 
Bankruptcy Act on terminating accounts under certain circumstances 
(further discussed below). See TILA Section 127(h); 15 U.S.C. 1637(h). 
Furthermore, the Board proposed amending the section title to reflect 
the new subject matter. Finally, the Board proposed revising the 
commentary to provide that a creditor may comply with Sec.  226.11(a) 
by refunding any credit balance upon receipt of a consumer's oral or 
electronic request. See proposed comment 11(a)-1.
    In response to proposed comment 11(a)-1, some consumer groups 
requested that creditors be required to inform consumers that, unlike 
compliance with a written refund request under Sec.  226.11(a)(2), 
compliance with an oral or electronic refund request is not mandatory. 
The Board believes that this disclosure is not necessary. A creditor 
that requires requests for refund of a credit balance to be in writing 
is unlikely to accept an oral or electronic request for such a refund 
of a credit balance and then refuse to comply without notifying the 
consumer that a written request is required. Furthermore, Sec.  
226.11(a)(3) requires creditors to refund credit balances in excess of 
$1 after six months even if no request is made.
    The Board is amending the credit balance provisions in Sec.  226.11 
as proposed in June 2007, with minor technical and clarifying 
revisions.
11(b) Account Termination
    TILA Section 127(h), added by the Bankruptcy Act, prohibits 
creditors that offer open-end consumer credit plans from terminating an 
account prior to its expiration date solely because the consumer has 
not incurred finance charges on the account. 15 U.S.C. 1637(h). A 
creditor is not, however, prohibited from terminating an account for 
inactivity in three or more consecutive months.
    In June 2007, the Board proposed to implement TILA Section 127(h) 
in the new Sec.  226.11(b). The general prohibition in TILA Section 
127(h) was stated in proposed Sec.  226.11(b)(1). The proposed 
commentary to Sec.  226.11(b)(1) would have clarified that the 
underlying credit agreement, not the credit card, determines if there 
is a stated expiration (maturity) date. Thus, creditors offering 
accounts without a stated expiration date would not be permitted to 
terminate those accounts solely because the consumer uses the account 
and does not incur a finance charge. See proposed comment 11(b)(1)-1.
    Proposed Sec.  226.11(b)(2) provided that, consistent with TILA 
Section 127(h), the prohibition in proposed Sec.  226.11(b)(1) would 
not have prevented creditors from terminating an account that is 
inactive for three consecutive months. Under proposed Sec.  
226.11(b)(2), an account would have been inactive if there had been no 
extension of credit (such as by purchase, cash advance, or balance 
transfer) and if the account had no outstanding balance.
    One comment on proposed comment 11(b)(1)-1 requested that the 
phrase ``uses the account'' be removed because it does not appear in 
TILA Section 127(h) or proposed Sec.  226.11(b). The June 2007 Proposal 
included this phrase because, under proposed Sec.  226.11(b)(2), a 
creditor would be permitted to terminate an account for inactivity. To 
clarify this point, the Board has revised comment 226.11(b)(1)-1 to 
reference Sec.  226.11(b)(2) explicitly. Otherwise, Sec.  226.11(b) is 
adopted as proposed in June 2007, with minor technical and clarifying 
revisions.

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.
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. While 
the June 2007 Proposal did not propose changes to the current renewal 
and substitution rules, the May 2008 Proposal set forth certain 
limitations on a card issuer's ability to issue a new card as a 
substitute for an accepted card for card accounts that have been 
inactive for a significant period of time. Specifically, a card issuer 
would not have been permitted to substitute a new card for a previously 
accepted card if the merchant base would be changed (for example, from 
a card that is honored by a single merchant to a general purpose card) 
and if the account has been inactive for a 24-month period preceding 
the issuance of the substitute card. See proposed comment 12(a)(2)-2.v.
    Consumer groups supported the proposal but urged the Board to 
expand the scope of the proposed revision, to prohibit any replacement 
of a retail card by a general-purpose credit card if the substitution 
was not specifically requested by the consumer. In contrast, the 
majority of industry commenters commenting on the issue stated that the 
proposed revision would inappropriately restrict an issuer's ability to 
upgrade cards for consumers who want a product that provides greater 
merchant acceptance than their existing retail card. These commenters 
also generally believed that any potential concerns about cardholder 
security or identity theft are already adequately addressed through 
market practices designed to prevent fraud (such as card activation 
requirements) and other regulatory requirements (for example, change-
in-terms notice requirements under Regulation Z and identity theft 
``Red Flag'' requirements

[[Page 5361]]

under the FCRA). See e.g. 12 CFR part 222. One industry commenter urged 
the Board to consider adding exceptions where the general-purpose 
credit card carries similar branding as the retail card (for example, 
where ``Department store X retail card'' is replaced with ``Department 
store X general-purpose card''), or where the retailer goes out of 
business.
    Industry commenters also urged the Board to extend the time period 
for inactivity from 24 to 36 months after which a general purpose 
credit card could no longer be substituted for a retail card on an 
unsolicited basis. These industry commenters stated that private label 
credit cards, particularly those used to make major purchases, tend to 
have long life-cycles and sporadic usage patterns. One industry 
commenter also noted that 36 months aligned with current card 
expiration and renewal time frames. Consumer groups in contrast 
believed that 24 months was excessive, because a consumer may no longer 
remember having the particular retail card, or may have moved during 
that time period. Instead, consumer groups urged the Board to adopt a 
time frame of 180 days. Alternatively, consumer groups suggested that 
the Board could permit substitutions only if the creditor has sent a 
periodic statement within the prior three-month period.
    The final rule adopts the revisions to comment 12(a)(2)-2.v, as 
proposed. While some consumers may benefit from receiving a card that 
could be used at a wider number of merchants compared to their current 
retail card, other consumers may have only signed up for the retail 
card to receive a benefit unique to that retailer or group of 
retailers, such as an initial purchase discount, and may not want a 
card with greater merchant acceptance. Although consumers in some cases 
can elect not to activate the substitute card and to destroy the 
unwanted device, others may have moved in the interim period, leading 
to potential card fraud and identity theft concerns as the cards will 
be sent to an invalid address. Some consumers may not remember having 
opened the retail card account in the first place, leading to possible 
consumer confusion when the new card arrives in the mail.
    Accordingly, the Board believes that the revised comment as 
adopted, including the 24-month period, strikes a reasonable balance 
between the potential benefits to consumers of using an accepted card 
at a wider number of merchants and consumer concerns arising from an 
unsolicited card being sent for an account that has been inactive for a 
significant period of time, particularly when the card is issued by a 
creditor with whom the consumer may have no prior relationship. The 
final comment also deletes as unnecessary the reference to situations 
where ``the consumer has not obtained credit with the existing merchant 
base within 24 months prior to the issuance of the new card'' because, 
as noted by one commenter, this concept is already incorporated into 
the definition of ``inactive account'' in the comment.
    In light of the revised comment's narrow scope, the Board also 
believes it is unnecessary to add any exceptions to the provision as 
adopted. The final rule does not affect creditors' ability to send a 
general-purpose card to replace a retail card that has been inactive 
for more than 24 months if the consumer specifically requests or 
applies for the general-purpose card.
12(b) Liability of Cardholder for Unauthorized Use
    TILA and Regulation Z provide protections to consumers against 
losses due to unauthorized transactions on an open-end plan. See TILA 
Section 133(a); 15 U.S.C. 1643, Sec.  226.12(b); TILA Section 
161(b)(1); 15 U.S.C. 1666(b)(1), Sec.  226.13(a)(1). Significantly, 
under Sec.  226.12(b), a cardholder's liability for an unauthorized use 
of a credit card is limited 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 June 2007 and May 2008 Proposals set forth a number of 
revisions that would have clarified the scope of Sec.  226.12(b) and 
updated the regulation to address current business practices. In 
addition, the Board proposed to move the guidance that is currently set 
forth in footnotes to the regulation or commentary, as appropriate.
    Scope. As proposed in the June 2007 Proposal, the definition of 
``unauthorized use'' currently found in footnote 22 is moved to the 
regulation. See Sec.  226.12(b)(1)(i). This 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. In 
the June 2007 Proposal, the Board proposed two new commentary 
provisions, comments 12(b)(1)(ii)-3 and -4, to parallel existing 
commentary provisions under Regulation E (Electronic Fund Transfers) 
regarding unauthorized electronic fund transfers.
    Comment 12(b)(1)(ii)-3, as proposed, would have clarified 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 the creditor (in 
writing, orally, or otherwise) 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. Two industry commenters, one 
card issuer and one trade association, supported the proposed comment, 
stating that it provided helpful guidance on an issue that frequently 
arises in disputes between card issuers and cardholders. Consumer 
groups, however, asserted that the scope of the proposed comment should 
be limited to misuse by persons that a cardholder has added as an 
authorized user on the account.
    The Board adopts the comment as proposed. The Board believes that 
limiting the comment to authorized users would be too narrow as it 
would potentially allow cardholders to avoid liability for certain 
transactions simply because the cardholder did not undertake the 
procedural steps necessary to add an authorized user. In addition, as 
noted by one commenter in support of the proposed comment, the 
cardholder is in the best position to control the persons to whom they 
have provided a card for use. Lastly, the Board believes that to the 
extent feasible, it is appropriate to have consistent rules under 
Regulation Z and Regulation E, particularly where the underlying 
statutory requirements are similar.
    The June 2007 Proposal also would have added comment 12(b)(1)(ii)-4 
to provide that unauthorized use includes circumstances where a person 
has obtained a credit card, or otherwise has initiated a credit card 
transaction, through robbery or fraud (for example, if the person holds 
the consumer at gunpoint and forces the consumer to initiate a 
transaction). See also comments 205.2(m)-3 and -4 of the Official Staff 
Commentary to Regulation E. Because ``unauthorized use'' under 
Regulation Z includes the use of a credit card by a person other than 
the cardholder who does not have ``actual,

[[Page 5362]]

implied, or apparent authority,'' \24\ some commenters agreed with the 
Board's observation in the supplementary information to the June 2007 
Proposal that cases of robbery or fraud were likely to be adequately 
addressed under the existing regulation. Nonetheless, these commenters 
welcomed the additional guidance as it provided certainty to the issue. 
Consumer groups expressed concern that the proposed comment was too 
narrow and could leave consumers vulnerable to liability for 
unauthorized use in other similar circumstances, such as theft, 
burglary and identity theft. Consequently, these groups urged the Board 
to expand the scope of the proposed comment to cover additional 
circumstances. The Board adopts comment 12(b)(1)(ii)-4 generally as 
proposed, with a minor revision to clarify that unauthorized use is not 
limited to instances of robbery or fraud.
---------------------------------------------------------------------------

    \24\ By contrast, ``unauthorized electronic fund transfer'' 
under Regulation E is defined as an electronic fund transfer from a 
consumer's account initiated by a person other than a consumer 
``without actual authority'' to initiate the transfer and from which 
the consumer receives no benefit, but excludes a transfer initiated 
by a person who was furnished the access device by the consumer. See 
12 CFR 205.2(m).
---------------------------------------------------------------------------

    As discussed previously under Sec.  226.2(a)(15), the term ``credit 
card'' does not include a check that accesses a credit card account. 
Thus, in June 2007, the Board proposed to add comment 12(b)-4 to 
provide that the liability limits established in Sec.  226.12(b) do not 
apply to unauthorized transactions involving the use of these checks. 
Consumer groups in response asserted that even if the Board declined to 
expand the definition of ``credit card'' to include access checks, it 
should not necessarily follow that any unauthorized transactions 
involving the use of these checks should be exempt from the protections 
afforded by Sec.  226.12(b). In particular, consumer groups observed 
that this outcome would lead to the anomalous result that the 
consumer's use of the credit card number alone would receive the 
protections of Sec.  226.12(b), but the consumer's use of an access 
check would not, even though in both cases, the transaction is 
ultimately charged to the consumer's credit card account.
    The Board adopts comment 12(b)-4 as proposed, and thus does not 
extend application of Sec.  226.12(b) to access checks in light of the 
statutory language in TILA Section 133 requiring that the unauthorized 
use involve the use of a credit card. Nonetheless, as noted in the June 
2007 Proposal, the consumer may still assert the billing error 
protections under Sec.  226.13 with respect to any unauthorized 
transaction using an access check. Comment 12(b)-4 in the final rule 
contains this clarification as proposed.
    Some industry commenters urged the Board to adopt a time period 
within which consumers must make claims for unauthorized transactions 
made through use of a credit card. The Board declines to adopt such a 
time period. As noted in the June 2007 Proposal, 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. See 15 U.S.C. 1643.
    Conditions for imposing liability. Before a card issuer may impose 
any liability for an unauthorized use of a credit card, Sec.  226.12(b) 
requires, among other things, that the card issuer first provide a 
means to identify the cardholder on the account or the authorized user 
of the card, such as a signature, photograph, or fingerprint on the 
card. As proposed in the June 2007 Proposal, comment 12(b)(2)(iii)-1 
would have updated the examples of the means that a card issuer may 
provide for identifying the cardholder on the account or the authorized 
user of the card to include additional biometric means of 
identification. See Sec.  226.12(b)(2). No commenters opposed this 
proposed comment, and it is adopted as proposed.
    In addition, the June 2007 Proposal would have revised comment 
12(b)(2)(iii)-3 to clarify that a card issuer may not impose liability 
for an unauthorized use 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. For example, 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. Other 
information on the card that may be provided is the card expiration 
date. While the provision of such information may suggest that the 
person providing the number is in possession of the card, it does not 
enable the issuer to determine that the person providing the number is 
in fact the cardholder or the authorized user. Consumer groups 
supported this proposal, and no commenter opposed the proposed 
revision. Accordingly, comment 12(b)(2)(iii)-3 is adopted as proposed.
    As noted above, a creditor must provide adequate notice of the 
consumer's maximum liability before it may impose liability for an 
unauthorized use of a credit card. In the June 2007 Proposal, the Board 
proposed Model Clause G-2(A), which can be used to explain the 
consumer's liability for unauthorized use. No commenters addressed the 
proposed model clause. The final rule revises the language of Model 
Clause G-2(A) to incorporate optional language that an issuer may 
provide in the event it allows a consumer to provide notice of the 
unauthorized use electronically. For HELOCs subject to Sec.  226.5b, at 
the creditor's option, the creditor may use either Model Clause G-2 or 
G-2(A).
    Reasonable investigation. Comment 12(b)-3 provides that a card 
issuer may not automatically deny an unauthorized use claim based 
solely on the consumer's failure or refusal to comply with a particular 
request. In the May 2008 Proposal, the Board proposed to amend the 
comment to specifically provide that the issuer may not require the 
cardholder to submit an affidavit or to file a police report as a 
condition of investigating an unauthorized use claim. The proposed 
addition reflected the Board's concerns that such card issuer requests 
could cause a chilling effect on a cardholder's ability to assert his 
or her right to avoid liability for an unauthorized transaction. The 
proposed addition also would have codified in the commentary guidance 
that had previously only been stated in the supplementary information 
accompanying prior Board rulemakings. See 59 FR 64351, 64352, December 
14, 1994; 60 FR 16771, 16774, April 3, 1995.
    While a few industry commenters supported the proposal, most 
industry commenters asserted that card issuer requirements for 
affidavits or police reports served a useful purpose in deterring false 
or fraudulent assertions of unauthorized use. In addition, industry 
commenters also noted that such documentation may be necessary to help 
validate and appropriately resolve a dispute, as well as to convince 
local authorities to prosecute the person responsible for the 
unauthorized transaction. At a minimum, industry commenters asked the 
Board to permit card issuers to require cardholders to provide a signed 
statement regarding the unauthorized use.
    Consumer groups strongly supported the proposed provision, stating 
that paperwork requirements and notary fees could deter consumers from 
filing legitimate unauthorized use claims. In addition, consumer groups 
noted that

[[Page 5363]]

some consumers continue to have difficulty obtaining police reports in 
connection with identity theft claims, making it impossible to comply 
with creditor requirements for police reports. In such cases, consumer 
groups asserted that a creditor should not be permitted to impose 
liability on a victim of fraud or identity theft because of the 
police's reluctance to take the report.
    The final rule adopts the comment, generally as proposed. As stated 
in prior rulemakings and in the May 2008 Proposal, the Board is 
concerned that certain card issuer requests could cause a chilling 
effect on a cardholder's ability to assert his or her right to avoid 
liability for an unauthorized transaction. However, the Board 
recognizes that in some cases, a card issuer may need to provide some 
form of certification indicating that the cardholder's claim is 
legitimate, for example, to obtain documentation from a merchant 
relevant to the claim or to pursue chargeback rights. Accordingly, the 
Board is revising the final comment to clarify that a card issuer may 
require the cardholder to provide a signed statement supporting the 
asserted claim, provided that the act of providing the signed statement 
would not subject the cardholder to potential criminal penalty. For 
example, the card issuer may include a signature line on the billing 
error rights form that the cardholder may send in to provide notice of 
the claim, so long as the signature is not accompanied by a statement 
that the cardholder is providing the notice under penalty of perjury 
(or the equivalent). See comment 12(b)-3.vi. The Board further notes 
that notwithstanding the prohibition on requiring an affidavit or the 
filing of a police report as a condition of investigating a claim of 
unauthorized use, if the cardholder otherwise does not provide 
sufficient information to allow a card issuer to investigate the 
matter, the card issuer may reasonably terminate the investigation as a 
result of the lack of information.
    Business use of credit cards. Section 226.12(b)(5) generally 
provides that a card issuer and a business may agree to liability for 
unauthorized use beyond the limits established by the regulation if 10 
or more credit cards are issued for use by the employees of that 
business. Liability on an individual cardholder, however, may only be 
imposed subject to the $50 limitation established by TILA and the 
regulation. The Board did not propose guidance on this issue in either 
the June 2007 or the May 2008 Proposal.
    One commenter in response to the June 2007 Proposal urged the Board 
to clarify the meaning of the term ``employee'' to include temporary 
employees, independent contractors, and any other individuals permitted 
by an organization to participate in its corporate card program, in 
addition to traditional employees. The final rule leaves Sec.  
226.12(b)(5) unchanged. The Board notes that to the extent such persons 
meet the definition of ``employee'' under state law, they could be 
permissibly included in determining whether an organization meets the 
10 or more employee threshold for imposing additional liability.
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 
Regulation Z, 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. The right is further limited to disputes exceeding 
$50 for purchases made in the consumer's home state or within 100 miles 
of the cardholder's address. See 15 U.S.C. 1666i.\25\ In the June 2007 
Proposal, the Board proposed to update the regulation to address 
current business practices and move guidance currently in the footnotes 
to the regulation or commentary as appropriate.
---------------------------------------------------------------------------

    \25\ Certain merchandise disputes, such as the non-delivery of 
goods, may also be separately 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. In the June 2007 Proposal, the Board proposed to 
update the examples in comment 12(c)(1)-1 of circumstances that are 
covered by Sec.  226.12(c) to include Internet transactions charged to 
the credit card account. No commenters opposed this revision, which is 
adopted as proposed.
    Comment 12(c)(1)-1 also provides examples of circumstances for 
which the protections under Sec.  226.12(c) do not apply. In the June 
2007 Proposal, the Board proposed to delete the reference to ``paper-
based debit cards'' in comment 12(c)(1)-1.iv. However, the final rule 
retains this example of a type of transaction excluded from Sec.  
226.12(c) to address circumstances in which a debit card transaction is 
submitted by paper-based means, such as when a merchant takes an 
imprint of a debit card and submits the sales slip in paper to obtain 
payment.
    Currently, footnote 24 and comment 12(c)(1)-1 provide that 
purchases effected by a debit card when used to draw upon an overdraft 
credit line are exempt from coverage under Sec.  226.12(c). In the June 
2007 Proposal, the Board proposed to move the substance of footnote 24 
to comment 12(c)-3 and to make a technical revision to comment 
12(c)(1)-1. Consumer groups opposed the substance of these provisions, 
asserting that any debit card transaction that accesses some form of 
credit should be accorded the protections under Regulation Z, whether 
the debit card transaction accesses a traditional overdraft line of 
credit covered by Regulation Z or an overdraft service covered instead 
by Regulation DD (Truth in Savings). In their view, the protections 
under Regulation Z are stronger than those provided under Regulation E 
(Electronic Funds Transfer), which generally governs rights and 
responsibilities for debit card transactions. See 12 CFR parts 230 and 
205. The Board continues to believe that given potential operational 
difficulties in applying the merchant claims and defense provisions 
under Sec.  226.12(c) to what are predominantly electronic fund 
transfers covered by Regulation E and the Electronic Fund Transfer Act, 
an exemption for such transactions from Regulation Z coverage remains 
appropriate. See 46 FR 20848, 20865 (Apr. 7, 1981). Accordingly, the 
language previously contained in footnote 24 is moved to comments 
12(c)-3 and 12(c)(1)-1, as proposed.
    As stated above, a disputed transaction must meet certain 
requirements before the consumer may assert a claim or defense under 
Sec.  226.12(c), including that the cardholder first make a good faith 
attempt to seek resolution with the person honoring the credit card, 
and that the transaction has 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); TILA Section 170. The 
Board proposed in June 2007 to redesignate these conditions to Sec.  
226.12(c)(3)(i)(A) and (c)(3)(i)(B). No comments were received on the 
proposed change, and it is adopted as proposed. Section 
226.12(c)(3)(ii), which sets forth the provision previously contained 
in footnote 26 regarding the applicability of some of the conditions, 
is also adopted as proposed in the June 2007 Proposal.

[[Page 5364]]

    Because many telephone and Internet transactions may involve 
merchants that are based far from a cardholder's residence, consumer 
groups urged the Board to amend the regulation to explicitly provide 
that telephone and Internet transactions are deemed to have been made 
in the consumer's home state for purposes of the 100-mile geographic 
limitation. The Board believes, however, that the location where a 
telephone or Internet transaction takes place remains a matter best 
left to state law. Moreover, the Board is not aware of widespread 
incidences in which a merchant claim asserted under Sec.  226.12(c) has 
been denied due to the merchant's location. 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 physically located more than 
100 miles from the cardholder's address.
    Guidance regarding how to calculate the amount of the claim or 
defense that may be asserted by the cardholder under Sec.  226.12(c), 
formerly found in footnote 25, is moved to the commentary in comment 
12(c)-4 as proposed in the June 2007 Proposal.
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).''
    In the June 2007 Proposal, the Board requested comment on whether 
additional guidance was needed and, if so, the specific issues the 
guidance should address. Several consumer groups commented that any 
guidance should explicitly require strong measures to manifest a 
consumer's consent to grant a security interest, specifically a 
separate written document that must be independently signed by the 
consumer and that references a specific account. These commenters also 
suggested that issuers should be required to show that they are not 
routinely taking security interests in deposit accounts as the 
functional equivalent of an offset, for example, by either falling 
under a numerical threshold (only a small percentage of accounts have a 
security interest) or by establishing a special program for accounts 
with a security interest.
    The Board is not aware of evidence that would suggest that 
creditors are routinely taking security interests in deposit accounts 
as the functional equivalent of offsets, and therefore believes that it 
is unnecessary to require measures such as numerical thresholds or 
special programs. However, comment 12(d)(2)-1 is amended to state that 
indicia of the consumer's intent to grant a security interest in a 
deposit account include at least one of the procedures listed in the 
comment (i.e., separate signature or initials to authorize the security 
interest, placement of the security agreement on a separate page, and 
reference to a specific amount of funds or to a specific account 
number), or a procedure that is substantially similar in evidencing the 
consumer's intent. As stated in the June 2007 Proposal, questions have 
been raised with the Board whether creditors must follow all of the 
procedures specified in the comment; while the Board believes it is 
unnecessary to require creditors to use all of these procedures to 
ensure the consumer's awareness of and intent to create a security 
interest, it is reasonable to expect creditors to follow at least one 
of them.
    No other changes to Sec.  226.12(d) and associated commentary were 
proposed, and no other comments were received. Therefore, other than 
the change to comment 12(d)(2)-1 discussed above, Sec.  226.12(d) and 
the associated commentary remain unchanged in the final rule.
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 did not propose any changes 
to these provisions or the associated commentary, and no comments were 
received on them. These provisions and the associated commentary remain 
unchanged in the final rule.

Section 226.13 Billing Error Resolution

    TILA Section 161, as implemented in Sec.  226.13 of the regulation, 
sets forth error resolution procedures for billing errors, and requires 
a consumer to provide written notice of an 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 extension of credit that is made in 
connection with an open-end account.
13(a) Definition of Billing Error
    Section 226.13(a) defines a ``billing error'' for purposes of the 
error resolution procedures. Under Sec.  226.13(a)(3), the term 
``billing error'' includes disputes about property or services that are 
not delivered to the consumer as agreed. See Sec.  226.13(a)(3). As 
originally proposed in June 2007, comment 13(a)(3)-2 would have 
provided that a consumer may assert a billing error under Sec.  
226.13(a)(3) with respect to property or services obtained through any 
extension of credit made in connection with a consumer's use of a 
third-party payment service.
    In some cases, a consumer might pay for merchandise purchased 
through an Internet site using an Internet payment service, with the 
funds being provided through an extension of credit from the consumer's 
credit card or other open-end account. For example, the consumer may 
purchase an item from an Internet auction site and use the payment 
service to fund the transaction, designating the consumer's credit card 
account as the funding source. As in the case of purchases made using a 
check that accesses a consumer's credit card

[[Page 5365]]

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 access checks, the June 2007 Proposal 
would have provided that the billing error provisions would similarly 
apply when a consumer makes a purchase using a third-party payment 
intermediary funded using the same credit card account.
    Consumer groups strongly supported the Board's proposal, stating 
that it would help to resolve a number of problems involving 
transactions processed by third-party intermediary payment services in 
which goods are not received. Industry commenters largely opposed the 
proposed comment, however, urging the Board to treat extensions of 
credit involving third-party payment intermediaries similarly to 
transactions in which a consumer uses an access check or credit card to 
obtain a cash advance, and then uses that cash to pay for a good or 
service. Under such circumstances, a consumer would be able to assert a 
billing error if the wrong amount was funded, but not if the good 
purchased with the funds was not delivered as agreed.
    Industry commenters also stated that the proposed comment 
inappropriately puts the burden of investigating billing errors 
involving third-party payment services on the card issuer, rather than 
on the third-party payment intermediary itself, even though the 
intermediary will have more direct access to information about the 
transaction. Industry commenters were particularly concerned about the 
lack of privity between the card issuer and the end merchant because in 
many cases the merchant in a third-party intermediary arrangement will 
not have agreed to meet the requirements of participating in the credit 
card network. Thus, a card issuer would be unable to contact the 
merchant or to charge back a transaction in the event the consumer 
asserts a billing error, thereby exposing the issuer to considerably 
more risk for the transaction. In this regard, some industry commenters 
drew a contrast between the use of third-party payment services and the 
use of access checks, noting that creditors are able to control for 
risks for access check transactions by either pricing those 
transactions differently or by restricting the checks that may be 
issued to the cardholder.
    Industry commenters also raised a number of operational 
considerations. For example, commenters stated that some consumers may 
use their credit cards to fund their third-party intermediary accounts, 
but then not use those funds for some time. In those circumstances, 
issuers would be unable to trace a disputed transaction back to the 
purchased good or service because the issuer would not receive any 
information about that subsequent transaction. Consequently, while they 
opposed the proposed comment in principle, a few industry commenters 
suggested that the proposed comment might be workable only if it were 
limited to circumstances in which the credit card account is used 
specifically for a particular purchase that can be identified (for 
example, where funds from the card are used contemporaneously, the 
amount of the purchase and ``funding'' are the same, and they can be 
traced and tracked). Another industry commenter asked for guidance on 
how the proposed comment would apply where the purchase of a good or 
service results from the commingling of funds, only a portion of which 
can be attributed to an extension of credit from a credit card account.
    The Board continues to believe that it is appropriate to apply the 
billing error provisions to transactions made through a third-party 
intermediary using a credit card account \26\ just as they would apply 
to purchases made with checks that access the same credit card account. 
However, in light of certain operational issues raised by commenters, 
the final rule limits the applicability of comment 13(a)(3)-2 to 
extensions of credit that (1) are obtained at the time the consumer 
purchases the good or service through the third-party payment 
intermediary; and (2) match the amount of the purchase transaction for 
the good or service including any ancillary taxes and fees (such as 
shipping and handling costs and/or taxes).
---------------------------------------------------------------------------

    \26\ Although the billing error provisions apply to extensions 
of credit made through open-end credit plans more generally, the 
Board is not aware of any circumstances in which a transaction made 
to fund a third-party intermediary transaction is initiated with any 
open-end credit plan other than a credit card.
---------------------------------------------------------------------------

    From the consumer's perspective, there is likely to be little 
difference between his or her use of a credit card to make a payment 
directly to the merchant on a merchant's Internet Web site or to make a 
payment to the merchant through a third-party intermediary. Indeed, in 
some cases, the merchant may not otherwise accept credit cards, making 
the use of the third-party intermediary service the consumer's most 
viable option of paying for the good or service. In other cases, the 
consumer may not want to provide his or her credit card number or other 
information to the merchant for security reasons. Nonetheless, the 
consumer may reasonably expect that transactions made using his or her 
credit card account would be afforded the billing error protections 
just as if the consumer used an access check to purchase the good or 
service. To the extent that such transactions may pose additional risk 
to the creditor due to the lack of privity between the creditor and the 
merchant, nothing in the rule would prohibit the creditor from pricing 
the transaction differently, just as access check transactions are 
often priced differently from other purchases made using a credit card.
    As noted above, comment 13(a)(3)-2 is limited to extensions of 
credit that are obtained in connection with the consumer's purchase of 
a good or service using the third-party payment intermediary and where 
the purchase amount of the transaction including any ancillary taxes 
and fees (such as shipping and handling costs and/or taxes) matches the 
amount of the extension of credit. In those circumstances, the Board 
understands that credit card network rules generally require that 
specific information about the extension of credit, including the name 
of the merchant from whom the consumer has purchased the good or 
service and the purchase amount, be passed through to the creditor, 
which would allow the creditor to identify the particular purchase. The 
final rule does not extend billing error rights to extensions of credit 
that are made to fund an account held by a third-party payment 
intermediary if the consumer does not contemporaneously use those funds 
to purchase a good or service at that time. For example, a consumer may 
use his or her credit card to fund the consumer's account held at a 
third-party payment intermediary for $100, but then some time later 
purchase a good or service using some or all of the $100 in funds in 
that account. Under those circumstances, the creditor would not have 
any information about subsequent transactions made using the funds from 
the $100 extension of credit to enable the creditor to investigate the 
claim. The Board considers the $100 extension of credit in that 
scenario to be equivalent to a cash advance, which would allow the 
consumer to assert a billing error if the wrong amount is funded, but 
any problems with the delivery of that good or service would not be 
considered a billing error for purposes of Sec.  226.13(a)(3).
    The revised comment also does not cover extensions of credit that 
are made to fund only a portion of the purchase amount, where the 
consumer may use

[[Page 5366]]

another source of funds to fund the remaining amount. For example, the 
consumer may make a $50 purchase using a third-party payment 
intermediary service, but have $20 in his or her account held by the 
payment intermediary. The consumer may in this case use a credit card 
account to cover the remaining $30 of the purchase. In this ``split 
tender'' example where the purchase is funded by a commingling of 
multiple payment sources, including a credit card account, the Board 
believes that the operational challenges in resolving any disputes 
arising from the purchased good or service, including how to credit the 
purchase amount back to the consumer, outweigh any resulting benefits 
to the consumer in treating any disputes regarding the delivery of the 
good purchased as a billing error under Sec.  225.13(a)(3).
    The Board's adoption of a final rule providing consumers error 
resolution rights when they use their credit card account in connection 
with third-party payment intermediary services in some circumstances 
does not preclude a future possible change to the regulation extending 
these rights to additional circumstances in which purchases made 
through a third-party payment intermediary service are funded in whole 
or in part using a credit card account. The Board intends to continue 
to study this issue, and other issues related to third-party payment 
intermediaries more generally, and may consider in the future whether 
additional protections under Regulation Z and other consumer financial 
services regulations are necessary with respect to consumer usage of 
these services.
    The June 2007 Proposal also proposed a new comment 13(a)(3)-3 to 
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. One industry commenter urged the Board 
to reconsider the proposed comment, stating that in many cases, such as 
in the event of non-delivery, a dispute might be more efficiently 
resolved if the consumer contacted the merchant first before asserting 
a billing error claim with the creditor. Consumer groups supported the 
proposed comment. In adopting the comment as proposed, the Board notes 
that 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 resolve a disagreement or 
problem with the person honoring the credit card, the billing error 
provisions under TILA do not require the consumer to first notify and 
attempt to resolve the dispute with the person honoring the credit card 
before asserting a billing error directly with the creditor. See 15 
U.S.C. 1666i.
13(b) Billing Error Notice
    To assert a billing error, 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. See Sec.  226.13(b). The June 2007 Proposal would have revised 
comment 13(b)-1 to incorporate guidance currently in footnote 28 
stating that a creditor need not comply with the requirements of Sec.  
226.13(c) through (g) if the consumer voluntarily withdraws the billing 
error notice. In addition, the June 2007 Proposal would have added new 
comment 13(b)-2 to incorporate 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. Proposed comment 13(b)-2 further would have provided 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 its billing rights 
statement that it will accept notices submitted electronically, 
including how the consumer can submit billing error notices in this 
manner.
    No commenters opposed the proposed revisions to the commentary 
under Sec.  226.13(b), and these comments are adopted as proposed. In 
addition, the Board is revising Model Forms G-2, G-2(A), G-3, G-3(A), 
G-4 and G-4(A) to add optional language creditors can use if they elect 
to accept billing error notices (or notices of loss or theft of credit 
cards) electronically.
13(c) Time for Resolution; General Procedures
    Section 226.13(c) generally requires a creditor to mail or deliver 
written acknowledgement 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. To ensure that creditors complete 
their investigations in the time period set forth under TILA, in June 
2007 the Board proposed to add new comment 13(c)(2)-2 which would have 
provided that a creditor must complete its investigation and 
conclusively determine whether an error occurred within the error 
resolution timeframes. Once this period has expired, the proposed 
comment further provided that 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.
    In response to the June 2007 Proposal, consumer groups urged the 
Board to adopt the comment to prevent unwelcome consumer surprise when 
a creditor reverses an error finding months later. Industry commenters 
in contrast asserted that the proposed comment unreasonably prevented 
creditors from considering evidence that is presented after the error 
timeframes. Industry commenters noted, moreover, that disputes today 
are much more numerous and complex to investigate and resolve, thus 
supporting the case for a longer, rather than shorter, timeframe. In 
this regard, industry commenters urged the Board, at a minimum, to 
provide exceptions for instances of consumer fraud or bad faith in 
asserting a billing error.
    Industry commenters also stated that the proposed comment would 
effectively nullify the statutory forfeiture penalty provision under 
TILA Section 161(e) which, they stated, caps the amount that may be 
forfeited by a creditor for failure to comply with the billing error 
provisions at $50. 15 U.S.C. 1666(e). In their view, TILA Section 
161(e) reflects the intent of Congress to balance the need for timely 
investigations against potential unjust enrichment to consumers. Thus, 
commenters stated that if a creditor receives information about a 
disputed transaction after the two-billing-cycle investigation period 
which indicates that an error did not occur as alleged, TILA Section 
161(e) would permit the creditor to reverse the credit, minus the 
statutory $50 penalty.
    Comment 13(c)(2)-2 as adopted states that the creditor must comply 
with the error resolution procedures and complete its error 
investigation within the time period under Sec.  226.13(c)(2). For 
example, if the creditor determines that an error did not occur as 
asserted after the error resolution time frame has expired, it 
generally may not reverse funds that were previously credited to the 
consumer's account. Similarly, if a creditor fails to comply with a 
billing error requirement, such as mailing or delivering a written 
explanation stating why an error did not occur as asserted, within the 
billing error period, the creditor generally must credit the consumer's 
account in the amount of

[[Page 5367]]

the disputed error as well as related finance or other charges, as 
applicable. Like the proposal, the final comment does not reflect the 
statutory forfeiture provision in TILA Sec.  161(c).
    The purpose of the billing error resolution time frame set forth in 
TILA Section 161 is to enable consumers to have their error claims 
investigated and resolved promptly. In short, TILA Section 161, as 
implemented by Sec.  226.13, is intended to bring finality to the 
billing error resolution process, and avoid the potential of undue 
surprise for consumers caused by the reversal of previously credited 
funds when a creditor fails to complete their investigation in a timely 
manner. Thus, the Board does not interpret the statutory forfeiture 
penalty under TILA Section 161(e) as being intended to override Section 
161's overall protections. In this regard, the Board notes that TILA's 
administrative and civil liability provisions in TILA Sections 108 and 
130, respectively, support this reading of Section 161. That is, if a 
creditor does not comply with the substantive requirements of TILA 
Section 161 and complete their investigation in the established 
timeframe (i.e., two complete billing cycles), the creditor also may be 
subject to administrative or civil penalties. These provisions serve to 
facilitate finality in the billing error process by ensuring that the 
investigation is closed within the time period set forth in the 
statute.
    The final comment is also revised to clarify that creditors have 
two complete billing cycles to investigate after receiving a consumer's 
notice of a billing error. Thus, if a creditor receives a billing error 
notice mid-cycle, it would have the remainder of that cycle plus the 
next two full billing cycles to resolve the error. See comment 
13(c)(2)-1. Comment 13(e)-3, which cross references comment 13(c)(2)-2, 
is also adopted as proposed in the June 2007 Proposal.
13(d) Rules Pending Resolution
    Once a consumer asserts a billing error, 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.
    Currently, Sec.  226.13(d) prohibits a card issuer from deducting 
through an automated payment plan, any part of the disputed amount or 
related charges from a cardholder's deposit account if the deposit 
account is also held by the card issuer, provided that the cardholder 
has provided a billing error notice at least three business days before 
the scheduled payment date. To reflect current payment processing 
practices, the Board proposed in June 2007 to extend the prohibition to 
all automatic deductions from any consumer deposit account where the 
deduction is pursuant to the consumer's enrollment in a card issuer's 
automatic payment plan. See proposed Sec.  226.13(d)(1) and comment 
13(d)(1)-4. The intent of the proposal was to ensure that a cardholder 
whose payments are automatically debited (via the card issuer's 
automatic payment service) from a deposit account maintained at a 
different financial institution would have the same protections 
afforded to a cardholder whose deposit account is maintained by the 
card issuer. 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 deposit account for any part of 
the amount in dispute, provided that the card issuer has received 
sufficient notice.
    In response to the June 2007 Proposal, some industry commenters 
stated that the proposal reflected a reasonable balance. Other industry 
commenters stated that the proposal introduced operational challenges 
which could result in significant inconvenience for the customer and 
the creditor. For example, once a dispute related to a transaction is 
received, a creditor would have to recalculate the required payment 
amount to exclude the disputed charges and cause the next automatic 
debit of the customer's deposit account to include only that 
recalculated payment amount. Industry commenters stated that the 
process of analyzing the dispute and communicating this information to 
the area which manages payments could delay the receipt of the payment 
to the detriment of the consumer. Consumer groups supported the 
proposal, stating that the change would ensure that all consumers who 
use automatic payment plans offered by their card issuer to pay their 
credit card bills have a meaningful ability to invoke their billing 
error rights.
    The revisions to Sec.  226.13(d)(1) are adopted, as proposed. 
Although a few industry commenters raised certain operational issues, 
these concerns would also appear to apply to automatic debits from 
accounts held by the card issuer itself. Accordingly, the Board is not 
persuaded there is a need to distinguish automatic payment plans that 
debit a cardholder's deposit account held at the card issuer from plans 
that debit a cardholder's deposit account held at a different financial 
institution. Cardholders should not have different billing error rights 
as a consequence of enrolling in an automated payment plan offered by 
the card issuer based on where their deposit accounts are held. Section 
226.13(d)(1) as revised applies whether the card issuer operates the 
automatic payment plan itself or outsources the service to a third-
party service provider, but would not apply where the cardholder has 
enrolled in a third-party bill payment service that is not offered by 
the card issuer. Thus, for example, the revised rule does not apply 
where the consumer uses his or her deposit account-holding 
institution's bill-payment service to pay his or her credit card bill 
(unless the deposit account-holding institution has also issued the 
credit card). Comment 13(d)(1)-4 is also revised to reflect the adopted 
change as proposed.
    Section 226.13(d)(3) is adopted as proposed in the June 2007 
Proposal to incorporate 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. In 
addition, the Board is retaining portions of comment 13-1, which it had 
proposed to delete, to retain the reference to the statutory forfeiture 
penalty under TILA Section 161(e) in the event a creditor fails to 
comply with any of the billing error requirements under Sec.  226.13. 
Accordingly, comment 13-2, which was proposed to be redesignated as 
comment 13-1, is retained in place in the commentary. No comments were 
received on these provisions.
13(f) Procedures if Different Billing Error or not Billing Error 
Occurred
    Section 226.13(f) sets forth procedures for resolving billing error 
claims if the creditor determines that no error or a different error 
occurred. A creditor must first conduct a reasonable investigation 
before a creditor may deny a 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.

[[Page 5368]]

1666(a)(3)(B)(ii). Footnote 31 currently provides that to resolve 
allegations of nondelivery of property or services, creditors must 
determine whether property or services were actually delivered, mailed, 
or sent as agreed. To resolve allegations of incorrect information on a 
periodic statement due to an incorrect report, creditors must determine 
that the information was correct.
    The June 2007 Proposal proposed to delete footnote 31 as 
unnecessary in light of the general creditor obligation under Sec.  
226.13(f) to conduct a reasonable investigation. Consumer advocates, 
however, urged the Board to retain the substance of the footnote, 
noting that it requires issuers to take concrete steps for resolving 
claims of non-delivery such as obtaining delivery records or contacting 
merchants. Without this guidance, advocates expressed concern that 
issuers would conduct more perfunctory investigations, which, in their 
view, has been the case with respect to some creditors applying the 
same ``reasonable investigation'' standard in investigations into 
allegations of errors on credit reports under the FCRA. 15 U.S.C. 1681 
et seq.
    In light of these concerns, the Board proposed in May 2008 to add 
comment 13(f)-3 which would have contained the substance of footnote 
31. The proposed comment also would have included guidance on 
conducting a reasonable investigation of a claim of an unauthorized 
transaction to harmonize the standards under both Sec.  226.12(b) and 
Sec.  226.13(a)(1). Specifically, the Board proposed to include 
applicable guidance currently provided for unauthorized transaction 
claims under Sec.  226.12(b) in proposed comment 13(f)-3. See comment 
12(b)-3. The proposed comment also would have paralleled proposed 
guidance under comment 12(b)-3 to provide that a creditor may not 
automatically deny a claim based solely on the consumer's failure or 
refusal to comply with a particular request, including a requirement 
that the consumer submit an affidavit or file a police report. Lastly, 
the proposed comment included illustrations on the procedures that may 
be followed in investigating different types of alleged billing errors.
    Both industry and consumer group commenters generally supported the 
proposed comment. Consumer groups stated that retaining the text of 
footnote 31 in the proposed comment would help to ensure that creditors 
conduct substantive investigations of billing disputes, and urged the 
Board to provide guidance for all types of billing error disputes, 
including specified steps that a creditor should take to conduct a 
reasonable investigation. One trade association urged the Board to 
revise the commentary language requiring creditors to confirm that 
services or property were actually delivered when there is a claim of 
non-performance because the merchant, and not the creditor, is in the 
best place to make this determination. This commenter also urged the 
Board to provide additional guidance to outline the parameters of what 
constitutes a ``reasonable investigation'' to avoid potential disputes 
between issuers, consumers, and examiners.
    Industry commenters opposing the proposed comment primarily raised 
the same concerns they had previously raised with respect to the 
proposed commentary revisions to Sec.  226.12(b) which explicitly 
stated that a card issuer could not require a consumer to provide an 
affidavit or file a police report as a condition of investigating a 
claim of unauthorized use.
    The final rule adopts comment 13(f)-3 generally as proposed, with 
revisions to conform to the parallel comment adopted under Sec.  
226.12(b) with respect to unauthorized use, which would prohibit a card 
issuer from requiring an affidavit or the filing of a police report. 
See comment 12(b)-3, discussed above. The Board believes that 
incorporating all of the prior guidance pertaining to the investigation 
of billing errors in a single place would facilitate compliance for 
creditors. In addition, as stated in the supplementary information 
accompanying the May 2008 Proposal, adoption of the guidance currently 
set forth under Sec.  226.12(b) with respect to unauthorized 
transactions under Sec.  226.13 would harmonize the standards under the 
two provisions. However, because what might constitute a ``reasonable 
investigation'' is necessarily a case-by-case determination, the Board 
declines to prescribe a specific series of steps or measures that a 
creditor must undertake in investigating a particular 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. In the June 2007 Proposal, the 
Board proposed guidance to clarify the length of 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. Specifically, the Board proposed 
to revise comment 13(g)(2)-1 to provide that before a creditor may 
collect any amounts owed related to a disputed charge that is 
determined to be proper, the creditor must provide the consumer a 
period of time equivalent to any grace period disclosed under proposed 
Sec. Sec.  226.6 or 226.7, as applicable, to pay the disputed amount as 
well as related finance or other charges (assuming that the consumer 
was entitled to a grace period at the time the consumer asserted the 
alleged error). As explained in the supplementary information to the 
June 2007 Proposal, this interpretation was 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) as if the consumer had not disputed the transaction 
in the first place. No comments were received on the proposed change, 
and comment 13(g)(2)-1 is adopted as proposed.
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 provides 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.  226.13(d) and (g)). In the June 
2007 Proposal, the Board proposed to revise the examples in comment 
13(i)-2 of incidental credit that is governed solely by the error 
resolution procedures in Regulation E to specifically refer 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.
    No industry commenters addressed this provision. However, consumer 
groups asserted that the Board should reconsider its prior 
determination not to cover overdraft loan products under Regulation Z 
and remove the example entirely. The Board has determined that it 
remains appropriate to exclude overdraft services under Regulation Z,

[[Page 5369]]

and instead address concerns about this product under Regulations DD 
and E. Consistent with this determination, the Board is adopting 
comment 13(i)-2 generally as proposed, with a minor revision to amend 
the example to refer to overdraft services, instead of overdraft 
protection plans.
    In the June 2007 Proposal, the Board also solicited comment as to 
whether it should include any additional examples of incidental credit 
that should be addressed under the error resolution procedures of 
Regulation E, rather than those of Regulation Z. See comment 13(i)-2. 
Consumer groups opposed the addition of new examples, asserting that 
Regulation E provides less protection than Regulation Z with respect to 
error resolution. No other commenters provided any additional examples, 
and the provision is unchanged.
    Technical revisions. In addition to moving the substance of 
footnotes 27 and 31 as discussed above, the Board is also adopting 
technical revisions which move the substance of footnotes 28-30 in the 
current rule to the regulation or commentary, as appropriate. (See 
redesignation table below.) References to ``free-ride period'' in the 
regulation and commentary are replaced with ``grace period,'' without 
any intended substantive change, for the reasons set forth in the 
section-by-section analysis to Sec.  226.6(b)(3).

Section 226.14 Determination of Annual Percentage Rate

    As discussed in the section-by-section analysis to Sec.  226.7 
above, Regulation Z currently 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, the June 2007 Proposal contained two alternative approaches 
regarding the computation and disclosure of the effective APR. Under 
the first alternative, the Board proposed to retain the requirement 
that the effective APR be disclosed on periodic statements, with 
modifications to the rules for computing and disclosing the effective 
APR to reflect an approach tested with consumers. See proposed 
Sec. Sec.  226.7(b)(7) and 226.14(d). For home-equity plans subject to 
Sec.  226.5b, the Board proposed to allow a creditor to comply with the 
current rules applicable to the effective APR; thus, creditors offering 
home-equity plans would not be required to make changes in their 
periodic statement systems for such plans at this time. See proposed 
Sec. Sec.  226.7(a)(7) and 226.14(c). Alternatively, the Board proposed 
that at the creditor's option, it could instead calculate and disclose 
an effective APR for its home-equity plans under any revised rules 
adopted for disclosure of the effective APR for open-end (not home-
secured) credit.
    The second alternative proposed by the Board was to eliminate the 
requirement to disclose the effective APR on the periodic statement. 
Under the second alternative, for a home-equity plan subject to Sec.  
226.5b, the Board proposed that a creditor would have the option to 
disclose the effective APR according to current rules or not to 
disclose an effective APR. The Board's proposed alternative versions of 
Sec.  226.14 reflected these two proposed alternatives.
    Under either alternative, the Board did not propose to revise 
substantively the current provisions in Sec.  226.14(a) (dealing with 
APR tolerances) and (b) (guidance on calculating the APR for certain 
disclosures other than the periodic statement), but minor technical 
changes were proposed to reflect changes in terminology and to 
eliminate footnotes, moving their substance into the text of the 
regulation. No comments were received on these changes, and they are 
adopted in the final rule as proposed.
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.7, the Board is eliminating the requirement to disclose the 
effective APR on periodic statements. Consistent with the proposal, for 
a home-equity plan subject to Sec.  226.5b, a creditor has the option 
to disclose an effective APR (according to the current rules in 
Regulation Z for computing and disclosing the effective APR, set forth 
in Sec.  226.14(c)), or not to disclose an effective APR. The option to 
continue to disclose the effective APR allows creditors offering home-
equity plans to avoid making changes in their periodic statement 
systems at this time. As discussed earlier, the Board is undertaking a 
review of home-secured credit, including HELOCs; the rules for 
computing and disclosing the APR for HELOCs could be the subject of 
comment during the review of rules affecting HELOCs.
    As stated in the June 2007 Proposal, no guidance is given for 
disclosing the effective APR on open-end (not home-secured) plans, 
since the requirement to provide the effective APR on such plans is 
eliminated. Proposed Sec. Sec.  226.14(d) and (e), which would have set 
forth the revised rules for calculating an effective APR for open-end 
(not home-secured) credit, are withdrawn. Section 226.14(d) is retained 
in its current form, rather than being redesignated as Sec.  
226.14(c)(5) as proposed. Minor technical changes are made to Sec.  
226.14(c) and the accompanying commentary as proposed, including 
redesignation of comments to assist users in locating comments relevant 
to the applicable regulatory provisions.

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 statutory 
provisions apply 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. The Board proposed 
several changes to the advertising rules in Sec.  226.16 in the June 
2007 Proposal. Changes were proposed in order to ensure meaningful 
disclosure of advertised credit terms, alleviate compliance burden for 
certain advertisements, and implement provisions of the Bankruptcy Act. 
The Board's proposals related to trigger term disclosures generally and 
additional disclosures for minimum monthly payment advertising, 
introductory rates, alternative disclosures for television and radio 
advertisements, and guidance on use of the word ``fixed'' in connection 
with an APR. Based in part on comments to the June 2007 Proposal, the 
Board proposed additional changes to the advertising rules in the May 
2008 Proposal related to promotional rates (referred to as introductory 
rates in the June 2007 Proposal) and deferred interest offers.
    Deferred interest offers. Many creditors offer deferred interest 
plans where consumers may avoid paying interest on purchases if the 
outstanding balance is paid in full by the end of the deferred interest 
period. If the outstanding balance is not paid in full when the 
deferred interest period ends, these deferred interest plans often 
require the consumer to pay interest that has accrued during the 
deferred interest period. Moreover, these plans typically also require 
the consumer to pay interest accrued from the date of purchase if the 
consumer defaults on the credit agreement. Some deferred interest plans 
define default under the card agreement to include failure to make a 
minimum payment during the

[[Page 5370]]

deferred interest period while other plans do not. Advertisements often 
prominently disclose the possibility of financing the purchase of goods 
or services at no interest.
    In May 2008, the Board proposed to use its authority under TILA 
Section 143(3) to add a new Sec.  226.16(h) to address the Board's 
concern that the disclosures currently required under Regulation Z may 
not adequately inform consumers of the terms of deferred interest 
offers. 15 U.S.C. 1663(3). Specifically, the Board proposed to require 
that the deferred interest period be disclosed in immediate proximity 
to each statement regarding interest or payments during the deferred 
interest period. The Board also proposed that certain information about 
the terms of the deferred interest offer be disclosed in close 
proximity to the first statement regarding interest or payments during 
the deferred interest period.
    The final rules adopted by the Board and other federal banking 
agencies published elsewhere in today's Federal Register do not permit 
issuers subject to those rules to establish deferred interest plans in 
which creditors can retroactively charge interest on prior 
transactions. Accordingly, the Board is withdrawing proposed Sec.  
226.16(h).
    Clear and conspicuous standard. In June 2007, the Board proposed to 
implement Section 1309 of the Bankruptcy Act, which requires the Board 
to provide guidance on the meaning of ``clear and conspicuous'' as it 
applies to certain disclosures required by Section 1303(a) of the 
Bankruptcy Act. Under Section 1303(a) of the Bankruptcy Act, when an 
introductory rate is stated in a direct mail application or 
solicitation for credit cards or accompanying promotional materials, 
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 proposed in the June 2007 Proposal 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. The Board also proposed in 
comment 16-2 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.
    As discussed more fully below in the section-by-section analysis to 
Sec.  226.16(g), the Board amended proposed comment 16-2 in the May 
2008 Proposal to apply the standard to ``promotional rates.'' 
Furthermore, in the May 2008 Proposal, the Board proposed additional 
requirements for deferred interest offers. As part of these 
requirements, the Board proposed to apply the same clear and 
conspicuous standard for certain disclosures related to deferred 
interest offers as the Board proposed to require for promotional rate 
advertisements.
    The Board received a few comments on the June 2007 proposed comment 
16-2. In addition, the Board consulted with the other federal banking 
agencies, the NCUA, and the FTC, consistent with Section 1309 of the 
Bankruptcy Act. Consumer group commenters and one of the federal 
banking agencies the Board consulted suggested that the safe harbor for 
complying with the ``equally prominent'' requirement be amended to 
require terms to have the same ``highlighting.'' The consumer group 
commenters further suggested that the equal prominence safe harbor be a 
requirement that applied to all advertising terms and not just 
promotional rate information. Presumably, the commenters believed that 
the equal prominence standard should be applied to all requirements in 
Sec.  226.16 where a term triggers some additional disclosures; that 
is, the additional disclosures would be required to be equally 
prominent to the term that triggered such disclosures.
    The Board is adopting proposed comment 16-2, renumbered as comment 
16-2.ii., as proposed in May 2008, except references to provisions 
related to deferred interest offers have been deleted due to the 
Board's decision to withdraw the advertising disclosure requirements 
related to deferred interest plans. As discussed in the June 2007 
Proposal, the Board believes that requiring equal prominence for 
certain information calls attention to the nature and significance of 
such information by ensuring that the information is at least as 
significant as the terms to which it relates. In the June 2007 
Proposal, the Board noted that an equally prominent standard currently 
applies to advertisements for HELOCs under Sec.  226.16(d)(2) with 
respect to certain information related to an initial APR. Consequently, 
the Board believes this is the appropriate standard for information 
related to promotional rates and deferred interest offers as well. In 
terms of the safe harbor, the Board believes that type size provides a 
bright line standard to determine whether terms are equally prominent. 
To require similar ``highlighting'' would be an ambiguous standard. 
Furthermore, requiring the text of the terms to be identical may be 
overly prescriptive and may not provide sufficient flexibility to 
advertisers. For example, if an advertiser presented a promotional rate 
in 16-point font in green text and disclosed a promotional period in 
16-point font in blue text closely proximate to the rate, the terms 
would not be identical, but the promotional period may be equally 
prominent to the promotional rate.
    Furthermore, comment 16-2.ii. (proposed as comment 16-2 in the May 
2008 Proposal) clarifies that the equally prominent standard will apply 
only to written and electronic advertisements. As discussed in more 
detail in the section-by-section analysis to Sec.  226.16(g)(1) below, 
the Board is expanding the types of advertisements to which the 
requirements of Sec.  226.16(g) would apply to include non-written, 
non-electronic advertisements, such as telephone marketing, radio and 
television advertisements. However, because equal prominence is a 
difficult standard to measure outside the context of written and 
electronic advertisements, the Board believes that the guidance on 
clear and conspicuous disclosures, as set forth in comment 16-2.ii. 
(proposed as comment 16-2 in the May 2008 Proposal), should apply 
solely to written and electronic advertisements. Disclosures required 
under Sec.  226.16(g)(4) for non-written, non-electronic 
advertisements, while not required to meet the clear and conspicuous 
standard in comment 16-2.ii. (proposed as comment 16-2 in the May 2008 
Proposal), are required to meet the general clear and conspicuous 
standard as set forth in comment 16-1.
    Other Technical Changes. Comment 16-2, as adopted in the July 2008 
Final HOEPA Rule, has been renumbered as comment 16-2.i. Moreover, 
technical changes proposed to comment 16-1 are adopted as proposed in 
the May 2008 Proposal. Comments 16-3 through 16-7, as adopted in the 
July 2008 Final HOEPA Rule, remain unchanged. 73 FR 44522, 44605, July 
30, 2008.
16(b) Advertisement of Terms That Require Additional Disclosures
    Under Sec.  226.16(b), certain terms stated in an advertisement 
require additional disclosures. In the June 2007 Proposal, the Board 
proposed to move the substance currently in Sec.  226.16(b) to Sec.  
226.16(b)(1), with some amendments, and proposed a new requirement for 
additional disclosures when a minimum

[[Page 5371]]

monthly payment is stated in an advertisement.
Paragraph 16(b)(1)
    Negative terms as triggering terms. Triggering terms are specific 
terms that, if disclosed in an advertisement, ``trigger'' the 
disclosure under Sec.  226.16(b) (which is renumbered as Sec.  
226.16(b)(1) in the final rule for organizational purposes) of (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. The 
June 2007 Proposal would have made triggering terms consistent for all 
open-end credit advertisements by expanding Sec.  226.16(b) to include 
terms stated negatively (for example, ``no interest'') for 
advertisements of open-end (not home-secured) plans. Under TILA Section 
147(a) (15 U.S.C. 1665b(a)), triggering terms for advertisements of 
HELOCs include both positive and negative terms while under current 
comment 16(b)-2, triggering terms for advertisements of open-end (not 
home-secured) plans only include terms that are expressed as a positive 
number.
    The Board received few comments on the proposal. Consumer groups 
supported the Board's proposal. One industry commenter opposed the 
proposal stating that advertisements of ``no annual fee'' should not 
trigger additional disclosures. As discussed in the June 2007 Proposal, 
the Board believes that including negative terms as triggering terms 
for open-end (not home-secured) plans is necessary in order to provide 
consumers with a more accurate picture of possible costs that may apply 
to plans that advertise negative terms, such as ``no interest'' or ``no 
annual fee.'' In addition, the requirement ensures similar treatment of 
advertisements of all open-end plans. For these reasons and pursuant to 
its authority under TILA Section 143(3), the Board adopts proposed 
comment 16(b)-1 as proposed, and renumbers the comment as comment 
16(b)(1)-1. As proposed, current comment 16(b)-7 is consolidated in the 
new comment for organizational purposes and for clarity, without 
substantive change.
    Membership fees. Membership and participation fees that could be 
imposed are among the additional information that must be disclosed if 
a creditor states a triggering term in an advertisement. For 
consistency, new comment 16(b)(1)-6 is added to provide that for open-
end (not home-secured) plans, ``membership fee'' shall have the same 
meaning as in Sec.  226.5a(b)(2).
    Other changes to Sec.  226.16(b)(1). In the June 2007 Proposal, the 
Board proposed certain technical amendments to Sec.  226.16(b) and 
associated commentary. These changes are adopted largely as proposed in 
the June 2007 Proposal. Specifically, Sec.  226.16(b) (renumbered as 
Sec.  226.16(b)(1)) is revised to reflect the new cost disclosure rules 
for open-end (not home-secured) plans while preserving existing cost 
disclosure rules for HELOCs. Footnote 36d (stating that disclosures 
given in accordance with Sec.  226.5a do not constitute advertising 
terms) is 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. Guidance in 
current comments 16(b)-1 and 16(b)-8 has been moved to Sec.  
226.16(b)(1), with some revisions. Current comment 16(b)-6 is 
eliminated as duplicative of the requirements under Sec.  226.16(g), as 
discussed below.
Paragraph 16(b)(2)
    The Board proposed in June 2007 to require additional disclosures 
for advertisements that state a minimum monthly payment for an open-end 
credit plan that would be established to finance the purchase of goods 
or services. Under the Board's proposal, if a minimum 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 assuming only minimum 
payments are made.
    Consumer group and consumer commenters, a state regulatory 
association commenter, and a member of Congress were supportive of the 
proposal. Several industry commenters opposed the Board's proposal 
regarding minimum payment advertising and suggested that the Board not 
adopt the provision. Industry commenters indicated that the disclosure 
is inherently speculative because determining how long it would take a 
consumer to pay off the balance and the total dollar amount of payments 
would depend on a particular consumer's other purchases and use of the 
account in general as well as other external factors that may affect 
the account. To illustrate their point, some industry commenters gave 
examples of promotional programs in which a minimum payment amount 
advertised relates to a promotional rate that is in effect for a 
certain period of time (e.g., ``$49 for 2 years''). If paying the 
minimum payment amount advertised does not fully amortize the purchase 
price over the period of time in which the promotional rate is in 
effect, the balance is then transferred to the general account and 
combined with other non-promotional balances. Depending on other 
promotional and non-promotional balances the consumer may have on the 
account, calculating the total of payments and time period to repay 
could prove difficult. Another commenter noted that any APR changes 
could affect the balance and hence alter the total of payments and time 
period to repay.
    Other industry commenters offered suggestions to address these 
concerns with minimum payment advertising. One industry commenter 
suggested that a table be disclosed with sample payments and repayment 
periods. That commenter also suggested an alternative of providing a 
telephone number for consumers to call to obtain that information. A 
few other industry commenters suggested that the Board specify a set of 
assumptions that advertisers may make in providing the disclosure. One 
of these industry commenters also suggested that the Board provide 
model language to include in the advertisement to disclose these 
assumptions to consumers.
    As the Board stated in the June 2007 Proposal, the Board believes 
that for advertisements stating a minimum monthly payment, requiring 
the advertisement to disclose 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 will provide consumers with a 
clearer picture of the costs of financing the purchase of a good or 
service than if only the minimum monthly payment amount is advertised. 
While the Board acknowledges that a disclosure of the total of payments 
and time period to repay the purchase cannot be calculated with 
certainty without knowing how a particular consumer may use the account 
in the future or what other changes may affect the account, the Board 
believes the additional information would be helpful to consumers. Even 
if the disclosure may not reflect the actual total costs and time 
period to repay for a particular consumer, the disclosure provides 
useful information to the consumer in evaluating the offer. This will 
help ensure that consumers are not surprised later by the amount of 
time it may take to pay the debt and how much the credit could cost 
them over that time period by only making the payments advertised.
    Therefore, the Board is adopting Sec.  226.16(b)(2) as proposed 
with minor modifications, as discussed below. In response to industry 
concerns, the Board is also adopting comment

[[Page 5372]]

16(b)(2)-1 to provide a list of assumptions advertisers may make in 
providing these disclosures. Advertisers may assume that: (i) Payments 
are made timely so as not to be considered late by the creditor; (ii) 
payments are made each period, and no debt cancellation or suspension 
agreement, or skip payment feature applies to the account; (iii) no 
interest rate changes will affect the account; (iv) no other balances 
are currently carried or will be carried on the account; (v) no taxes 
or ancillary charges are or will be added to the obligation; (vi) goods 
or services are delivered on a single date; and (vii) the consumer is 
not currently and will not become delinquent on the account. The Board, 
however, declines to adopt model language concerning these assumptions. 
The Board believes advertisers should have flexibility to determine if, 
and how, they may want to convey these assumptions to consumers. In 
addition, advertisers may make further assumptions in making the 
disclosures required by Sec.  226.16(b)(2) beyond those specified in 
comment 16(b)(2)-1. If the Board were to provide model language, such 
assumptions may not be sufficiently captured by that language.
    Industry commenters also pointed out that the minimum monthly 
payment advertised may not always be the same as the minimum payment 
amount on a consumer's billing statement. Furthermore, a consumer group 
commenter stated that the word ``minimum'' should be deleted so that 
any time a payment amount is advertised, the disclosure should be 
provided. In response to these concerns, the Board is replacing the 
term ``minimum monthly payment'' with ``periodic payment amount.'' 
Therefore, an advertisement that states any periodic payment amount 
(e.g., $45 per month, $20 per week) would be required to provide the 
disclosures in Sec.  226.16(b)(2). Furthermore, using the term 
``periodic payment amount'' instead of ``minimum monthly payment'' 
disassociates the term from the concept of ``minimum payment,'' and 
makes clear that the amount advertised need not be the same amount as 
the minimum payment on a consumer's billing statement to trigger the 
disclosures.
    Several industry commenters also suggested that advertisements of 
``no payment'' for a specified period of time should be excluded from 
the requirements of Sec.  226.16(b)(2). The Board agrees, assuming 
there is no other periodic payment amount advertised. Because 
advertisers would not know the periodic payment amount a consumer would 
pay after the ``no payment'' period passes (and are not otherwise 
suggesting a specific periodic payment amount by advertising one), they 
would be unable to determine the total of payments and time period to 
repay the obligation. To address this concern, the final rule adds 
comment 16(b)(2)-2 to provide that a periodic payment amount must be a 
positive number to trigger the disclosure requirements under Sec.  
226.16(b)(2).
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic 
Advertisements
    Technical amendments to Sec.  226.16(c) and comments 16(c)(1)-1 and 
16(c)(1)-2 were previously adopted in the November 2007 Final 
Electronic Disclosure Rule, and are republished as a part of this final 
rule. 72 FR 63462, Nov. 9, 2007; 72 FR 71058, Dec. 14, 2007.
16(d) Additional Requirements for Home-equity Plans
    Revisions to the advertising rules under Sec.  226.16(d) were 
adopted in the July 2008 Final HOEPA Rule, and are republished as a 
part of this final rule. 73 FR 44522, 44599, July 30, 2008. Technical 
amendments to comments 16(d)-1 and 16(d)-8 to conform citations and 
other descriptions to revisions being adopted today have been made, 
without intended substantive change.
16(e) Alternative Disclosures--Television or Radio Advertisements
    For radio and television advertisements, the June 2007 Proposal 
would have allowed alternative disclosures to those required by Sec.  
226.16(b) if a triggering term is stated in the advertisement. Radio 
and television advertisements would still have been required to 
disclose any APR applicable to the plan; however, instead of requiring 
creditors also to describe minimum or fixed payments, and annual or 
membership fees, an advertisement would have been able to provide a 
toll-free telephone number that the consumer may call to receive more 
information.
    Industry commenters were supportive of this proposal. Consumer 
groups opposed the proposal arguing that consumers tend to miss cross 
references and that creditors may use the toll-free number to engage in 
``hard-sell'' marketing tactics. As the Board discussed in the June 
2007 Proposal, given the space and time constraints on radio and 
television advertisements, disclosing information such as minimum or 
fixed payments may go unnoticed by consumers or be difficult for them 
to retain and would therefore not provide a meaningful benefit to 
consumers. In the Board's view, given the nature of television and 
radio media, an alternative means of disclosure may be more effective 
in many cases than requiring all the information currently required to 
be included in the advertisement. As noted in the June 2007 Proposal, 
this approach is consistent with the approach taken in the advertising 
rules for Regulation M. See 12 CFR Sec.  213.7(f). Furthermore, a 
consumer who is interested in the credit product advertised in a radio 
or television advertisement would likely call for information 
regardless of whether additional required disclosures (minimum or fixed 
payments, and annual or membership fees) appear or are stated in the 
advertisement. Therefore ``hard sell'' marketing tactics could arguably 
be present whether or not the alternative disclosures are used and may 
be addressed in some cases by the FTC Telemarketing Sales Rule. 16 CFR 
part 310.
    A similar rule to the one proposed by the Board in the June 2007 
Proposal to provide alternative disclosures for television and radio 
advertisements was adopted in the July 2008 Final HOEPA Rule for home-
equity plans as Sec.  226.16(e). 73 FR 44522, July 30, 2008. Therefore, 
the Board amends Sec.  226.16(e), as adopted under the July 2008 HOEPA 
Rule, to apply to all other open-end plans. Comments 16(e)-1 and 16(e)-
2, as adopted in the July 2008 Final HOEPA Rule, have remained 
unchanged.
16(f) Misleading Terms
    In order to avoid consumer confusion and the uninformed use of 
credit, the Board proposed Sec.  226.16(g) in June 2007 to restrict use 
of the term ``fixed'' in advertisements to instances where the rate 
will not change for any reason. 15 U.S.C. 1601(a), 1604(a). Under the 
proposal, advertisements would have been prohibited from using the term 
``fixed'' or any similar term to describe an APR unless that rate will 
remain in effect unconditionally until the expiration of any advertised 
time period. If no time period was advertised, then the term ``fixed'' 
or any similar term would not have been able to be used unless the rate 
would remain in effect unconditionally until the plan is closed.
    Consumer and consumer group commenters overwhelmingly supported the 
Board's proposal. Industry commenters that addressed the issue opposed 
the Board's proposal stating that using the word ``fixed'' when a rate

[[Page 5373]]

could change is not misleading if all the conditions of the APR are 
clearly disclosed.
    The Board has found through consumer testing conducted prior to the 
June 2007 Proposal that consumers generally believe a ``fixed'' rate 
does not change, such as with ``fixed-rate'' mortgage loans. Numerous 
consumer commenters have also supported this finding. In the consumer 
testing conducted for the Board prior to the June 2007 Proposal, a 
significant number of participants 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. Therefore, although 
creditors often use the term ``fixed'' to describe an APR that is not 
tied to an index, consumers do not understand the term in this manner. 
For these reasons, the Board adopts the provision as proposed; however, 
for organizational purposes, the provision is adopted as Sec.  
226.16(f).
    One retail industry commenter requested that the restriction on the 
term ``fixed'' under Sec.  226.16(f) not apply to oral disclosures. The 
commenter indicated that in a retail environment, a sales associate 
could, in response to a consumer inquiry about whether a rate is 
variable, respond that a rate is ``fixed,'' despite the retailer's 
efforts to train the sales associate not to use the word. The Board 
declines to provide an exception for oral disclosures to the 
restriction on the use of the term ``fixed.'' The Board notes, however, 
that in the situation described by the retail industry commenter above, 
the sales associate's conversation with the consumer is likely not 
considered an ``advertisement'' subject to the provisions of Sec.  
226.16. Under existing comment 2(a)(2)-1.ii.A., the term 
``advertisement'' does not include ``direct personal contacts, * * * or 
oral or written communication relating to the negotiation of a specific 
transaction.''
16(g) Promotional Rates
    In the June 2007 Proposal, the Board proposed to implement TILA 
Sections 127(c)(6) and 127(c)(7), as added by Sections 1303(a) and 
1304(a) of the Bankruptcy Act, respectively, in Sec.  226.16(e) (which 
the Board is moving to Sec.  226.16(g) in the final rule for 
organizational purposes). TILA Section 127(c)(6) requires that if a 
credit card issuer states an introductory rate in a direct mail credit 
card application, solicitation, or any of the 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). In addition, TILA Section 
127(c)(6) requires credit card issuers to 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) further 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 
proposed in the June 2007 Proposal to expand the types of disclosures 
to which these rules would apply. Among other things, the Board 
proposed to extend these requirements for the presentation of 
introductory rates to other written or electronic advertisements for 
open-end credit plans that may not accompany an application or 
solicitation (other than advertisements of home-equity plans subject to 
Sec.  226.5b, which were addressed in the Board's July 2008 Final HOEPA 
Rule; see Sec.  226.16(d)(6)).
    In response to concerns from industry commenters that the Board's 
proposed use of the term ``introductory rate'' and required use of the 
word ``introductory'' or ``intro'' was overly broad in some cases, the 
Board proposed in the May 2008 Proposal to revise Sec.  226.16(e)(2) to 
define ``promotional'' and ``introductory'' rates separately. 
Conforming revisions to Sec.  226.16(e)(4) and to commentary provisions 
to Sec.  226.16(e) were also proposed in the May 2008 Proposal. The 
Board adopts proposed Sec.  226.16(e), with revisions discussed below, 
and renumbers this paragraph as Sec.  226.16(g) for organizational 
purposes.
16(g)(1) Scope
    The Bankruptcy Act amendments regarding ``introductory'' rates 
apply to direct mail credit card applications and solicitations, and 
accompanying promotional materials. 15 U.S.C. 1637(c)(6). The Board 
proposed to expand these requirements to applications or solicitations 
to open a credit card account, and all accompanying promotional 
materials, that are publicly available (``take-ones''). 15 U.S.C. 
1601(a); 15 U.S.C. 1604(a); 15 U.S.C. 1637(c)(3)(A). In the June 2007 
Proposal, the Board proposed to expand the requirements to electronic 
applications even though the Bankruptcy Act amendments applied these 
requirements only to electronic solicitations. 15 U.S.C. 1637(c)(7). 
Pursuant to its authority under TILA Section 143, the Board also 
proposed in the June 2007 Proposal to extend some of the introductory 
rate requirements in Section 1303 of the Bankruptcy Act to other 
written advertisements for open-end credit plans that may not accompany 
an application or solicitation, other than advertisements of home-
equity plans subject to Sec.  226.5b, in order to promote the informed 
use of credit. Therefore, the Board proposed that the requirements 
under Sec.  226.16(g) (proposed as Sec.  226.16(e)) apply to all 
written or electronic advertisements.
    The Board received few comments on expanding the scope of the rules 
regarding promotional rates in the manner proposed in the June 2007 
Proposal, and the comments received supported the proposal. As 
discussed in the June 2007 Proposal, the Board believes consumers will 
benefit from these enhanced disclosures and advertisers will benefit 
from the consistent application of promotional rate requirements for 
all written and electronic open-end advertisements.
    In the May 2008 Proposal, the Board solicited comment on whether 
all or any of the information required under Sec.  226.16(g) (proposed 
as Sec.  226.16(e)) to be provided with the disclosure of a promotional 
rate would be helpful in a non-written, non-electronic context, such as 
telephone marketing, or radio or television advertisements. The 
guidance originally proposed in June 2007 on complying with Sec.  
226.16(g) (proposed as Sec.  226.16(e)) had addressed written and 
electronic advertisements.
    Consumer group commenters urged the Board to apply the requirements 
under Sec.  226.16(g) (proposed as Sec.  226.16(e)) to non-written, 
non-electronic advertisements. Many industry commenters opposed 
expanding the requirements to non-written, non-electronic 
advertisements citing the space and time constraints of such media and 
concern that there would be information overload. Nevertheless, several 
industry commenters suggested that if the Board did decide to expand 
the requirements to non-written, non-electronic advertisements, the 
Board should provide flexibility in how the required disclosures may be 
made. Some industry commenters recommended that the alternative method 
of disclosure available to television and radio advertisements for 
disclosing triggered terms under Sec.  226.16(b)(1), as would be 
permitted under Sec.  226.16(e), should be

[[Page 5374]]

available for promotional rate disclosures.
    Current comment 16(b)-6, which the Board had proposed to delete in 
the June 2007 Proposal as duplicative of the requirements under Sec.  
226.16(g) (proposed as Sec.  226.16(e)), requires advertisements that 
state a ``discounted variable rate'' to include ``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 requirement applies to all advertisements, regardless of 
media. Because current comment 16(b)-6 imposes requirements similar, 
though not identical, to those required in Sec.  226.16(g) (proposed as 
Sec.  226.16(e)) to non-written, non-electronic advertisements, the 
Board believes that the requirements of Sec.  226.16(g) (proposed as 
Sec.  226.16(e)) should also apply to such advertisements. Therefore, 
Sec.  226.16(g)(1) has been amended to apply to any advertisement, and 
current comment 16(b)-6 has been deleted as proposed. However, as 
further discussed in the section-by-section analysis to comment 16-2.ii 
above and Sec.  226.16(g)(4) below, the Board is providing flexibility 
in how the required information may be presented in a non-written, non-
electronic context.
    Finally, one industry commenter noted that the term ``consumer 
credit card account,'' as used in Sec.  226.16(g), is not defined. The 
commenter suggested that the Board either define ``consumer credit card 
account'' specifically to exclude home equity lines of credit subject 
to Sec.  226.5b or replace the term with the phrase ``open-end plan not 
subject to Sec.  226.5b.'' To address this concern, the Board is 
clarifying in Sec.  226.16(g)(1) that the requirements of Sec.  
226.16(g) apply to any ``open-end (not home-secured) plan,'' as 
proposed in June 2007. A similar change has been made to the definition 
of ``promotional rate'' in Sec.  226.16(g)(2). As discussed in the June 
2007 Proposal, the Board did not intend to cover advertisements of 
open-end, home-secured plans subject to Sec.  226.5b, but did intend to 
cover advertisements of all open-end plans that are not home-secured 
under these requirements.
16(g)(2) Definitions
    In the June 2007 Proposal, the Board proposed to define the term 
``introductory rate'' as 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. 
In addition, the Board defined an ``introductory period'' as ``the 
maximum time period for which the introductory rate may be 
applicable.'' In response to the June 2007 Proposal, several industry 
commenters were critical of the use of these terms as applied to 
special rates offered to consumers with an existing account. Commenters 
noted that the phrase ``introductory rate'' commonly refers to 
promotional rates offered in connection with the opening of a new 
account only. Commenters also noted the use of the term ``advertised'' 
in the definition of ``introductory rate'' might imply that the APR in 
effect after the introductory period would have to be ``advertised'' 
before the requirements under Sec.  226.16(e)(3) and (e)(4) in the June 
2007 Proposal would apply.
    Since the Board's June 2007 proposed definition for ``introductory 
rate'' would have encompassed special rates that may be offered to 
consumers with existing accounts, the Board proposed in May 2008 to 
refer to these rates more broadly as ``promotional rates.'' The May 
2008 Proposal would have defined the term ``promotional rates'' to 
include any APR applicable to one or more balances or transactions on a 
consumer credit card account for a specified period of time that is 
lower than the APR that will be in effect at the end of that period. In 
addition, consistent with definitions proposed by the Board and other 
federal banking agencies in May 2008, the proposed definition under 
Sec.  226.16(g) (proposed as Sec.  226.16(e)) also would have included 
any rate of interest applicable to one or more transactions on a 
consumer credit card account that is lower than the APR that applies to 
other transactions of the same type. This definition was meant to 
capture ``life of balance'' offers where a special rate is offered on a 
particular balance for as long as any portion of that balance exists. 
Proposed comment 16(e)-2) would have provided an illustrative example 
of a ``life of balance'' offer similar to a comment proposed by the 
Board and other federal banking agencies in May 2008. 73 FR 28904, May 
19, 2008.
    Furthermore, the definition proposed in May 2008 would have removed 
the term ``advertised'' from the definition, as commenters asserted 
this would imply that the APR in effect after the introductory period 
had to have been ``advertised'' before the requirements under Sec.  
226.16(g)(3) and (g)(4) (proposed as Sec.  226.16(e)(3) and (e)(4)) 
would have applied. This was not the Board's intention. The use of the 
term ``advertised'' in the June 2007 proposed definition was intended 
to refer to the advertising requirements regarding variable rates and 
the accuracy requirements for such rates. The May 2008 Proposal would 
have addressed these requirements in a new comment 16(e)-1.
    Comment 16(e)-1, as proposed in May 2008, provided that if a 
variable rate will apply at the end of the promotional period, the 
post-promotional rate is the rate that would have applied at the time 
the promotional rate was advertised if the promotional rate had not 
been offered. In direct mail credit card applications and solicitations 
(and accompanying promotional materials), this rate is one that 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)). For variable-rate disclosures provided by 
electronic communication, this rate is one that was in effect within 30 
days before mailing the disclosures to a consumer's electronic mail 
address, or within the last 30 days of making it available at another 
location such as a card issuer's Web site, as required under proposed 
Sec.  226.5a(c)(2)(ii) (and currently under Sec.  226.5a(b)(1)(iii)).
    The Board also proposed a new definition for ``introductory rate'' 
to conform more closely to how the term is most commonly used. Section 
226.16(e)(2)(ii) in the May 2008 Proposal defined ``introductory rate'' 
as a promotional rate that is offered in connection with the opening of 
an account. As a result of the proposal, only ``introductory rates'' 
(and not other promotional rates) would have been subject to the 
requirement in Sec.  226.16(e)(3) to state the term ``introductory'' in 
immediate proximity to the rate.
    Commenters were generally supportive of providing separate 
definitions for ``promotional'' rates as distinguished from 
``introductory'' rates. Several industry commenters, however, suggested 
that the Board's definition for ``promotional rate'' may be overbroad 
and cause certain rates that are not traditionally categorized as 
``promotional rates'' to be considered ``promotional rates.'' These 
commenters provided similar comments to rules proposed by the Board and 
other federal banking agencies in May 2008, in which a similar 
definition was proposed for ``promotional rate.'' Some of these 
commenters also suggested specific language changes to the Board's 
proposed definition.
    Based on these comments, the Board is adopting the definition of 
``introductory rate'' as proposed in the May 2008 Proposal, renumbered 
as Sec.  226.16(g)(2)(ii), and amending the definition of ``promotional 
rate,'' which

[[Page 5375]]

has been renumbered as Sec.  226.16(g)(2)(i). Specifically, the Board 
is inserting in the definition of ``promotional rate'' the phrase ``on 
such balances or transactions,'' to address commenters' concerns about 
the breadth of the definition by clarifying to which balances and 
transactions the rate that will be in effect after the end of the 
promotional period applies. In addition, the Board is replacing the 
phrase ``consumer credit card account'' in the definition with ``open-
end (not home-secured) plan'' to be consistent with the scope of the 
requirements as set forth in Sec.  226.16(g)(1) and as discussed in the 
supplementary information to Sec.  226.16(g)(1). The Board is also 
adopting comment 16(e)-1, as proposed, renumbered as comment 16(g)-2.
    In addition, the Board is deleting the provision in the definition 
of ``promotional rate'' that was meant to capture life-of-balance 
offers, as well as proposed comment 16(e)-2 from the May 2008 Proposal, 
which would have provided an illustrative example of a life-of-balance 
offer. The Board had included the provision in the May 2008 Proposal in 
order to be consistent with the definition of ``promotional rate'' in 
rules proposed by the Board and other federal banking agencies in May 
2008. Since the advertising disclosure requirements the Board had 
proposed relating to promotional rates would generally not apply for 
life-of-balance offers, the Board had proposed in May 2008 to exempt 
life-of-balance offers from many of these requirements. See proposed 
Sec.  226.16(e)(2)(i)(B) and (e)(4) in the May 2008 Proposal. As a 
result, the only requirement under the advertising rules for 
promotional rates to which life-of-balance offers were subject under 
the proposal was the requirement to state the term ``introductory'' 
within immediate proximity of the rate. The Board believes this 
requirement would not be especially helpful to consumers for offers 
where the rate would not change for the life of the balance except on 
default. Since the minimal benefit to consumers does not seem to 
warrant the burden on advertisers of distinguishing what types of 
offers fit the definition, the Board has decided instead to eliminate 
life-of-balance offers from the definition of ``promotional rate'' for 
ease of compliance.
    Moreover, the Board believes that further amendments suggested by 
commenters to the definition of ``promotional rate'' are unnecessary. 
In particular, some industry commenters recommended adding the concept 
of a ``standard'' rate in the definition. The Board believes that 
inserting this concept in the definition may generate further confusion 
instead of providing clarity since there may not be consensus on what 
would be considered a ``standard'' rate among all issuers. Furthermore, 
with respect to some of the examples commenters provided to illustrate 
why they thought the May 2008 proposed definition was overbroad, the 
definition of ``promotional rate'' as proposed would likely not cover 
these examples. For example, one industry commenter stated that a 
standard rate could be considered a ``promotional rate'' when the rate 
that will be ``in effect'' is a penalty rate. Pursuant to the 
definition of ``promotional rate,'' that standard rate would have to be 
in effect for a specified period of time before the penalty rate 
applies in order to be considered a ``promotional rate.'' Typically, 
penalty rates are applied upon the occurrence of a specific event or 
action by the consumer rather than the passage of a specified time 
period. As a result, this type of standard rate would not have been 
considered a ``promotional rate'' under the proposal, and similarly is 
not a ``promotional rate'' under the final rule.
    The Board also proposed to define ``promotional period'' in Sec.  
226.16(e)(2)(iii) in the May 2008 Proposal. The definition proposed in 
May 2008 was similar to one previously proposed for ``introductory 
period'' in the June 2007 Proposal, consistent with the definition in 
TILA Section 127(c)(6)(D)(ii). No comments were received on this 
definition, and Sec.  226.16(e)(2)(iii) is adopted as proposed and 
renumbered as Sec.  226.16(g)(2)(iii).
16(g)(3) Stating the Term ``Introductory''
    The Board proposed in the June 2007 Proposal to implement TILA 
Section 127(c)(6)(A), as added by section 1303(a) of the Bankruptcy 
Act, in Sec.  226.16(e)(3) (which the Board moves to Sec.  226.16(g)(3) 
for organizational purposes). TILA Section 127(c)(6)(A) requires the 
term ``introductory'' to 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).
    Requirement. As discussed above, industry commenters expressed 
concern about requiring use of the word ``introductory'' to describe 
special rates offered to consumers with an existing account. However, 
with the revised definition of ``introductory rate'' under Sec.  
226.16(g)(2) (proposed as Sec.  226.16(e)(2)), as discussed above, only 
promotional rates offered in connection with the opening of an account 
would be covered under Sec.  226.16(g)(3), which the Board believes 
addresses commenters' concerns.
    Some industry commenters also requested that the Board clarify that 
the term ``introductory'' be used only in relation to rates that are 
available exclusively to new customers. These commenters believe that 
advertisements that state a rate that is offered to both new and 
existing customers should not be required to be labeled as 
``introductory.'' Alternatively, one industry commenter suggested that 
the Board allow advertisers to choose whether to label a rate as 
``introductory'' or ``promotional'' if an advertisement applies to both 
new and existing accounts. The Board notes that there is no requirement 
to use the term ``promotional'' with respect to a promotional rate 
stated in an advertisement. The Board believes that there are several 
terms that may be used to convey the concept of a promotional rate to 
existing customers, and flexibility should be provided to advertisers. 
Consistent with the requirements of TILA Section 127(c)(6)(A), however, 
the Board believes that as long as the rate offered in an advertisement 
could be considered an ``introductory rate,'' the term ``introductory'' 
must be used. Therefore, the Board declines to amend Sec.  226.16(g)(3) 
(proposed as Sec.  226.16(e)(3)) to apply only to rates advertised 
exclusively to new customers or to permit advertisers to choose whether 
to label a rate as ``introductory'' if an advertisement applies to both 
new and existing accounts.
    Abbreviation. The Board proposed in the June 2007 Proposal to allow 
advertisers to use the word ``intro'' as an alternative to the 
requirement to use the term ``introductory.'' Commenters supported the 
Board's proposal, and the final rule adopts Sec.  226.16(g)(3) 
(proposed as Sec.  226.16(e)(3)) as proposed consistent with the 
Board's authority under TILA Section 105(a) to facilitate compliance 
with TILA, with minor technical amendments.
    Immediate proximity. In the June 2007 Proposal, the Board proposed 
to provide a safe harbor for creditors that place the word 
``introductory'' or ``intro'' within the same phrase as each listing of 
the introductory rate. One consumer group commenter suggested that the 
word ``introductory'' be adjacent to or immediately before or after the 
introductory rate. However, as discussed in the June 2007 Proposal, the 
Board believes that interpreting ``immediate proximity'' to mean 
adjacent to the rate may be too

[[Page 5376]]

restrictive and would effectively ban phrases such as ``introductory 
balance transfer rate X percent.'' Therefore, the guidance in comment 
16(g)-2 (proposed as comment 16(e)-2 in the June 2007 Proposal and 
comment 16(e)-3 in the May 2008 Proposal) is adopted as proposed, with 
minor technical amendments.
16(g)(4) Stating the Promotional Period and Post-Promotional Rate
    The Board proposed Sec.  226.16(e)(4) in the June 2007 Proposal to 
implement TILA Section 127(c)(6)(A), as added by Section 1303(a) of the 
Bankruptcy Act. TILA Section 127(c)(6)(A) 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 (excluding disclosures in the 
application and solicitation table). 15 U.S.C. 1637(c)(6)(A).
    Prominent location closely proximate. In the June 2007 Proposal, 
the Board proposed that placing the time period in which the 
promotional period will end and the APR that will apply after the end 
of the promotional period in the same paragraph as the first listing of 
the promotional rate would be deemed to be in a ``prominent location 
closely proximate'' to the listing. As discussed in the June 2007 
Proposal, the Board proposed a safe harbor in interpreting ``prominent 
location closely proximate.'' In addition, the Board proposed that 
placing this information in footnotes would not be a prominent location 
closely proximate to the listing.
    The Board received few comments on this proposal. Consumer groups 
strongly opposed the Board's safe harbor. Instead, the commenters 
suggested that if the Board used a safe harbor approach, the safe 
harbor should be either ``side-by-side with or immediately under or 
above the rate.'' One industry commenter suggested that it would be 
sufficient to disclose the promotional period and the post-promotional 
rate in the text of the offer.
    As the Board reasoned in the June 2007 Proposal, Congress's use of 
the term ``closely proximate'' may be distinguished from its use of the 
term ``immediate proximity.'' Therefore, 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(g)-2 (proposed as comment 16(e)-2 
in the June 2007 Proposal and comment 16(e)-3 in the May 2008 Proposal) 
discussed above. In the Board's view, ``side-by-side with or 
immediately under or above the rate'' is little different from the 
guidance the Board has in place for ``immediate proximity.'' Requiring 
terms to be in the same paragraph, on the other hand, gives advertisers 
flexibility but ensures that the terms are fairly close to the 
promotional rate. The Board believes that concerns that paragraphs will 
be so long as to bury the information may be misplaced. Above all, 
advertisements are intended to capture consumers' interest in the 
advertised product or service, and long, dense paragraphs are often 
eschewed in the advertising context. As a result, the Board adopts the 
safe harbor in comment 16(g)-3 (proposed as comment 16(e)-3 in the June 
2007 Proposal and comment 16(e)-4 in the May 2008 Proposal), as 
proposed, with minor technical amendments.
    First listing. In the June 2007 Proposal, the Board provided 
guidance on determining which listing of a promotional rate should be 
considered the ``first listing'' other than the rate provided in the 
table required on or with credit card applications or solicitations. 
The Board proposed in June 2007 that for a multi-page mailing or 
application or solicitation package, the first listing is the most 
prominent listing on the front of the first page of the ``principal 
promotional document'' in the package. 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. This 
definition is consistent with the FTC's definition of the term in its 
regulations related to the FCRA. 16 CFR Sec.  642.2(b). If the 
introductory rate does not appear in the principal promotional document 
but appears in another document in the package or there is no principal 
promotional document, then the requirements would have applied to each 
separate document that lists the promotional rate. In determining which 
listing is the ``most prominent,'' the Board proposed a safe harbor for 
the listing with the largest type size.
    The Board received few comments on the proposal. Consumer group 
commenters supported the Board's proposal but suggested that the 
requirements should apply to each document in a mailing regardless of 
whether or not the promotional rate appears on the principal 
promotional document. As the Board noted in the June 2007 Proposal, the 
Board's consumer testing efforts suggest that consumers are most likely 
to read the principal promotional document. The Board believes that 
applying the requirement to each document in a mailing/package would be 
overly burdensome and unnecessary if the consumer will already have 
seen the promotional rate in the principal promotional document. As 
provided in the comment, however, if the promotional rate does not 
appear in the principal promotional document or there is no principal 
promotional document, the requirements apply to the first listing of 
the promotional rate in each document in the package containing the 
promotional rate as it is not clear which document the consumer will 
read first in such circumstances.
    One industry commenter also suggested that there may be times when 
a promotional rate is not listed on the front of the first page of a 
document. In those cases, the Board believes that the first listing 
should be the most prominent listing in the subsequent pages of the 
document. Therefore, the Board adopts comment 16(g)-4 (previously 
proposed as comment 16(e)-4 in the June 2007 Proposal and comment 
16(e)-5 in the May 2008 Proposal), largely as proposed with 
modifications to account for instances when a promotional rate may not 
appear on the front of the first page of a principal promotional 
document or other document. Technical changes are also made to clarify 
that the comment applies solely to written or electronic 
advertisements.
    Post-promotional rate. In the June 2007 Proposal, the Board 
proposed that a range of rates may be listed as the rate that will 
apply after the promotional period if the specific rate for which the 
consumer will qualify will depend on later determinations of a 
consumer's creditworthiness. This approach is consistent with the 
guidance the Board proposed for listing the APR in the table required 
for credit card applications and solicitations under Sec.  
226.5a(b)(1)(v). In addition, the Board solicited comment on whether 
advertisers alternatively should be able to 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), the Board asked whether card issuers should be permitted to 
provide only the highest rate (up to 17.99 percent).
    Most of the comments the Board received regarding the 
permissibility of disclosing a range of rates were focused on the 
proposed rule under Sec.  226.5a(b)(1)(v) rather than the

[[Page 5377]]

corresponding proposed provision under the advertising rules. As 
discussed in the section-by-section analysis to Sec.  226.5a(b)(1)(v), 
the Board declines to allow creditors to list only the highest rate 
that may apply instead of a range of rates for all applicable rates 
other than the penalty rate. For the reasons set forth in the 
supplementary information to Sec.  226.5a(b)(1)(v), the Board also 
declines to allow advertisers to list only the highest rate that may 
apply instead of a range of rates, and comment 16(g)-5 (proposed as 
comment 16(e)-5 in the June 2007 Proposal and 16(e)-6 in the May 2008 
Proposal) is adopted as proposed. In addition, the Board received one 
industry comment suggesting that when a range is given, the 
advertisement must state that the rates are based on creditworthiness 
as required for applications and solicitations under Sec.  
226.5a(b)(1)(v). The final rule does not adopt this suggestion as the 
Board believes that consumers will see this statement in an application 
or solicitation, so it is not necessary to include it in an 
advertisement.
    Life-of-balance offers. In May 2008, the Board proposed to exempt 
life-of-balance promotional offers from the requirement to state when 
the promotional rate will end and the APR that will apply thereafter. 
See proposed Sec.  226.16(e)(2)(i)(B) and (e)(4). The Board recognized 
that requiring disclosure of when the promotional rate will end and the 
post-promotional rate that will apply after the end of the promotional 
period would not be appropriate for these types of offers since the 
rate in effect for such offers lasts as long as the balance is in 
existence. Since the final rule excludes life-of-balance offers from 
the definition of ``promotional rate,'' as discussed in the 
supplementary information to Sec.  226.16(g)(2) above, the exception is 
no longer necessary, and Sec.  226.16(g)(4) (proposed as Sec.  
226.16(e)(4) in the May 2008 Proposal) has been revised, as 
appropriate.
    Non-written, non-electronic advertisements. As discussed above in 
the section-by-section analysis to Sec.  226.16(g)(1), the Board is 
expanding the requirements of Sec.  226.16(g) (proposed as Sec.  
226.16(e)) to non-written, non-electronic advertisements. The Board, 
however, recognizes that for non-written, non-electronic 
advertisements, such as telephone marketing, radio and television 
advertisements, there are unique challenges in presenting information 
to consumers because of the space and time constraints of such media. 
Therefore, the final rule amends Sec.  226.16(g)(4) to provide 
flexibility in how the required information may be presented in non-
written, non-electronic advertisements. Specifically, for non-written, 
non-electronic advertisements, Sec.  226.16(g)(4) does not impose any 
specific proximity or formatting requirements other than the general 
requirement that information be clear and conspicuous, as contemplated 
under comment 16-1.
16(g)(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). In the June 2007 Proposal, the Board 
set forth this provision in proposed Sec.  226.16(e)(5). Furthermore, 
the Board proposed also to exclude banner advertisements and pop-up 
advertisements that are linked to an electronic application or 
solicitation.
    Consumer group commenters disagreed with the Board's proposal to 
extend the exception to banner advertisements and pop-up advertisements 
that are linked to an electronic application or solicitation. As 
discussed in the June 2007 Proposal, the Board extended the exception 
because of the similarity of these approaches to envelopes or other 
enclosures in the direct mail context. One industry commenter agreed 
with the Board's proposal to exclude banner advertisements and pop-up 
advertisements that are linked to an electronic application or 
solicitation, but also suggested that the Board provide flexibility for 
other marketing channels where an initial summary advertisement is used 
to alert customers to an offer or prompt further inquiry about the 
details of an offer, such as transportation and terminal posters, 
roadside and merchant billboards or signs, and take-one application 
display stands. The Board declines to extend the exception in the 
manner suggested. Unlike envelopes and banner advertisements and pop-up 
advertisements that are linked to an electronic application or 
solicitation, these other approaches are stand-alone in nature and are 
not connected to an advertising piece that contains detailed 
information on the promotional rate. As a result, the Board adopts 
Sec.  226.16(g)(5) (proposed as Sec.  226.16(e)(5)) as proposed.

Appendix E--Rules for Card Issuers That Bill on a Transaction-by-
Transaction Basis

    Appendix E to part 226 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 to part 
226 were added to the regulation, they were intended to address card 
programs offered by automobile rental companies.
    Appendix E to part 226 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 under Appendix E to part 226 card issuers do not 
issue periodic statements of account activity, Appendix E to part 226 
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).
    In the June 2007 Proposal, the Board proposed to revise Appendix E 
to part 226 by inserting material explaining what is meant by ``related 
persons.'' In addition, technical changes were proposed, including 
numbering the paragraphs within the Appendix and changing cross 
references to conform to the renumbering of other provisions of 
Regulation Z.
    The Board solicited comment on whether Appendix E to part 226 
should be revised to specify that the disclosures required under Sec.  
226.5a apply to card programs covered by the Appendix, as well as on 
whether any other provisions of Regulation Z not currently specified in 
Appendix E to part 226 as applicable to transaction-by-transaction card 
issuers should be specified as being applicable. Comment was also 
requested on whether any provisions currently specified as being 
applicable should be deleted.
    No comments were received on Appendix E to part 226. Therefore, the 
proposed changes are adopted in the final rule (with further technical

[[Page 5378]]

changes, such as to conform cross references to other sections).

Appendix F--Optional Annual Percentage Rate Computations for Creditors 
Offering Open-End Plans Subject to the Requirements of Sec.  226.5b

    Appendix F to part 226 provides guidance regarding the computation 
of the effective APR in 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. In the June 2007 Proposal, the 
Board did not propose changes to Appendix F to part 226 except to move 
the substance of footnote 1 to Appendix F to the text of the Appendix. 
In addition, a cross reference to proposed comment 14(d)(3)-3 would 
have been added to the staff commentary to Appendix F to part 226. The 
guidance in Appendix F to part 226 would have continued to apply to 
either proposed Sec.  226.14(c)(3) (covering HELOCs) or proposed Sec.  
226.14(d)(3) (covering open-end (not home-secured) credit). As 
discussed above, since the Board has eliminated the requirement to 
disclose the effective APR, proposed Sec.  226.14(d)(3) is not being 
adopted, and compliance with Sec.  226.14(c)(3) is optional for HELOC 
creditors, under the final rule. The guidance in Appendix F to part 226 
therefore applies to HELOC creditors that choose to calculate and 
disclose an effective APR under Sec.  226.14(c)(3). The Appendix is 
retitled to reflect more accurately its scope.
    No comments were received on Appendix F to part 226. The changes to 
Appendix F to part 226 are adopted as proposed, except the cross 
references in the Appendix F commentary are revised to conform to the 
final changes to Sec.  226.14.

Appendix G--Open-End Model Forms and Clauses; Appendix H--Closed-End 
Model Forms and Clauses

    Appendices G and H to part 226 set forth model forms, model clauses 
and sample forms that creditors may use to comply with the requirements 
of Regulation Z. Appendix G to part 226 contains model forms, model 
clauses and sample forms applicable to open-end plans. Appendix H to 
part 226 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 proposed in June 2007 and 
May 2008 to add or revise several model and sample forms to Appendix G 
to part 226. 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(a)(5) and (b)(7), 
226.6(b)(1), (b)(2) and (b)(5), 226.7(b), 226.9(a), 226.9(b), 226.9(c), 
226.9(g), and 226.12(b). In addition, the Board proposed to add a new 
model clause and sample form relating to debt suspension coverage in 
Appendix H to part 226. These forms are discussed above in the section-
by-section analysis to Sec.  226.4(d)(3).
    In Appendix G to part 226, all the existing forms applicable to 
HELOCs have been retained without revision, with three exceptions, 
discussed below. These changes are permissive and do not require HELOC 
creditors to revise any existing form. The Board anticipates 
considering revisions to HELOC forms when it reviews the home-equity 
disclosure requirements in Regulation Z.
    The Board revises or adds commentary to the model and sample forms 
in Appendix G to part 226, as discussed below. Furthermore, as 
discussed in the general discussion on the effective APR in the 
section-by-section analysis to Sec.  226.7(b), the Board is not 
adopting proposed Sample G-18(B). Therefore, several forms and samples 
sequentially following proposed Sample G-18(B) have been renumbered 
accordingly.
    Permissible changes to the model and sample forms. The commentary 
to Appendices G and H to part 226 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 
has adopted 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 
revising certain model forms to improve their readability. See G-2(A), 
G-3(A) and G-4(A). Thus, the Board amends comment app. G and H-1, as 
proposed in June 2007, to indicate that formatting changes may not be 
made to certain model and sample forms in Appendix G to part 226.
    In a technical revision, the Board deletes comment app. G and H-
1.vii. as obsolete, as proposed in June 2007. 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.'' Current comment 
app. G and H-1.viii. has been renumbered as comment app. G and H-1.vii.
    Model clauses for balance computation methods. Currently and under 
the June 2007 Proposal, creditors are required to explain the method 
used to determine the balance to which rates are applied. See current 
Sec.  226.6(a) and proposed Sec.  226.6(a)(1)(iii) and (b)(2)(i)(D). 
Model Clauses that explain commonly used methods, such as the average 
daily balance method, are at Appendix G-1 to part 226.
    The Model Clauses at Appendix G-1 to part 226 were republished 
without change in the June 2007 Proposal. The Board requested comment 
on whether model clauses for methods such as the ``previous balance'' 
or ``adjusted balance'' method should be eliminated because they are no 
longer used. Few commenters addressed the issue. Those that did 
recommended retaining the existing clauses, and two commenters asked 
the Board to add a model clause explaining the daily balance method.
    In May 2008, the Board proposed to add a new paragraph (f) to 
describe a daily balance method in Appendix G-1 to part 226. In 
addition, a new Appendix G-1(A) to part 226 was proposed for open-end 
(not home-secured) plans. The clauses in Appendix G-1(A) to part 226 
refer to ``interest charges'' rather than ``finance charges'' to 
explain balance computation methods. The consumer testing conducted for 
the Board prior to the June 2007 Proposal indicated that consumers 
generally had a better understanding of ``interest charge'' than 
``finance charge,'' which is reflected in the Board's use of 
``interest'' (rather than ``finance charge'') in account-opening 
samples and to describe costs other than fees on periodic statement 
samples and forms under the June 2007 Proposal. See proposed Samples G-
17(B) and G-17(C), Sample G-18(A), and Forms G-18(G) and G-18(H). 
Comment app. G-1 was proposed to be revised in May 2008 to clarify that 
for HELOCs subject to Sec.  226.5b, creditors may properly use the 
model clauses in either Appendix G-1 or G-1(A). The Board is adopting a 
new paragraph (f) to describe a daily balance method in Model Clauses 
G-1, a new Model Clauses G-1(A), and accompanying commentary, as 
proposed in May 2008.
    Model clauses for notice of liability for unauthorized use and 
billing-error

[[Page 5379]]

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. In June 2007, the Board proposed to revise Model Clause G-
2 to improve its readability, proposed as Model Clause G-2(A) for open-
end (not home-secured) plans. In addition, Appendix G currently 
includes 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 proposed to revise Model Forms G-3 and 
G-4 to improve readability, proposed as Model Form G-3(A) and G-4(A) 
for open-end (not home-secured) plans. The Board adopts Model Clause G-
2(A) and Model Forms G-3(A) and G-4(A), as proposed, with revisions 
noted below. 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 G-2(A), 3(A) and 4(A). See comments 
app. G-2 and -3.
    As stated above, Model Clause G-2 and Model Forms G-3 and G-4 are 
adopted without revision, except for optional language creditors may 
use when instructing consumers on how to contact the creditor by 
electronic communication, such as via the Internet. The same 
instructions are contained in Model Clause G-2(A) and Model Forms G-
3(A) and G-4(A). Technical changes have also been made for clarity 
without intended substantive change, in response to comments received. 
See section-by-section analysis to Sec.  226.9(a).
    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. The June 2007 Proposal would have 
substantially revised Model Form G-10(A) and Sample G-10(B) to reflect 
the proposed changes to Sec.  226.5a, as discussed in the section-by-
section analysis to Sec.  226.5a. In addition, Sample G-10(C) would 
have been added to provide another example of how certain disclosures 
required by Sec.  226.5a may be given. Current Model Form G-10(C) 
illustrating the tabular format disclosures for charge card 
applications and solicitations would have been moved to G-10(D) and 
revised. The Board proposed 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 June 2007 Proposal would have added a model form 
and two sample forms to illustrate, in the tabular format, the 
disclosures required under Sec.  226.6(b)(2) for account-opening 
disclosures. See proposed Model G-17(A) and Samples G-17(B) and G-
17(C). In the May 2008 Proposal, the Board proposed to add Sample G-
17(D) to illustrate, in the tabular format, the disclosures required 
for account-opening disclosures for open-end plans such as a line of 
credit or an overdraft plan.
    In the June 2007 Proposal, the Board also proposed 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 proposed 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. In addition, the Board 
proposed 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 proposed 
Sec. Sec.  226.5a(a)(2)(iv) and 226.6(b)(4)(i)(C) in the June 2007 
Proposal.
    In response to the June 2007 Proposal, several industry commenters 
requested that the Board continue to allow the horizontal format (where 
headings are at the top of the page) to allow issuers flexibility in 
how to design the format of the table. The final rule requires 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 continues to believe that horizontal formats 
would be difficult for consumers to read, given the information that is 
required to be disclosed in the table.
    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). In the June 2007 Proposal, the Board proposed 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 were 
proposed for Model Form G-17(A), the model form for the account-opening 
table. In the consumer testing conducted for the Board prior to the 
June 2007 Proposal, many participants did not understand the term 
``finance charge'' in this context. The term ``interest'' was more 
familiar to many participants. Under the June 2007 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 
would have been required to disclose this charge under the heading 
``Minimum Interest Charge.'' The final rule adopts this guidance as 
proposed. Under the final rules, other minimum and fixed finance 
charges are required to be disclosed under the heading ``Minimum 
Charge.''
    Also, under the June 2007 Proposal, Model Forms G-10(A), G-10(D) 
and G-17(A) would have contained 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 proposed to provide guidance on when a 
creditor would have been required to 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 would have been required to 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 would have been required to use the heading ``Set-up 
and Maintenance Fees''

[[Page 5380]]

to disclose fees for issuance or availability of credit, including the 
annual fee. The final rule adopts this guidance as proposed, although 
the reference to the account-opening disclosure requirement has been 
renumbered as Sec.  226.6(b)(2)(ii).
    In the June 2007 Proposal, the Board also proposed to 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. (The guidance also would 
apply to Sample Form G-17(D), proposed in May 2008 for open-end (not 
home-secured) plans not accessed by credit cards.) For example, the 
proposed commentary indicated that Samples G-10(B), G-10(C), G-17(B) 
and G-17(C) were 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 Arial 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.
    The proposed guidance stated that 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 encouraged issuers to consider these techniques when 
disclosing information in the table, to ensure that the information is 
presented in a readable format.
    In response to the June 2007 Proposal, several industry commenters 
suggested that the Board explicitly state that the table is not 
required to be presented on a particular size of paper, such as an 8\1/
2\ x 14 inch legal-size paper. In addition, one industry commenter 
suggested that the Board explicitly allow the table to appear on more 
than one page as long as the information appears consecutively without 
any other information interspersed and if it takes more than one page, 
that there is a reference to where the remainder of the table can be 
found.
    In quantitative consumer testing conducted for the Board in the 
fall of 2008, some participants were shown forms of the table required 
pursuant to Sec.  226.5a on which all required content was presented on 
one side of a single page; other participants were shown a form in 
which the table appeared on two pages, specifically where a portion of 
the row for penalty fees was disclosed on a second page. The testing 
showed that participants were less able to locate a fee when it was 
disclosed on the second page than when it was disclosed on the first 
page. Based on this testing result, the Board considered whether to 
require creditors to disclose the table on 8\1/2\ x 14 inch paper if 
the table would not fit in its entirety on one side of a sheet of 8\1/
2\ x 11 inch paper. However, the Board is not requiring use of 8\1/2\ x 
14 inch paper. The Board recognizes that even if the use of 8\1/2\ x 14 
inch paper were mandatory for tables that will not fit on one side of 
one sheet of 8\1/2\ by 11 inch paper, it would still not guarantee that 
the table would always fit on one side of one sheet of paper. However, 
the Board encourages creditors, when possible, to present all 
information in the table on one side of one sheet of paper.
    Comment app. G-5.v has been revised to expressly state that if the 
disclosures required under Sec. Sec.  226.5a and 226.6 are not provided 
on a single side of a sheet of paper, the creditor must include a 
reference or references, such as ``SEE BACK OF PAGE for more important 
information about your account.'' to indicate that the table continues 
onto an additional page or pages. The comment further states that a 
creditor that splits the table onto two or more pages must disclose the 
table on consecutive pages and may not include any intervening 
information between portions of the table.
    In addition, in response to the June 2007 Proposal, several 
industry commenters suggested that the Board allow issuers to disclose 
the APRs for purchases, cash advances and balance transfers in the same 
row in the table, if the issuer charges the same APR for each of these 
types of transactions. Under the proposed rule, issuers would be 
required to disclose the APR for purchases, cash advances, and balance 
transfers in three separate rows, even if the APRs for all three of 
these types of transactions were the same.
    In quantitative testing conducted for the Board after May 2008, the 
effectiveness of combining rows where the APR for two types of 
transactions are the same was tested. Some participants were shown 
tables in which the APRs for cash advances and balance transfers were 
shown in separate rows. Other participants were shown tables in which 
the APR for both cash advances and balance transfers, which was the 
same, was disclosed in one row. In each case, participants were then 
asked to identify the APR for balance transfers. The testing results 
suggest that there was no statistically significant difference in the 
ability of participants to identify the APR for balance transfers 
whether there were separate rows for the APRs for cash advances and 
balance transfers or one row reflecting the APR for both cash advances 
and balance transfers. Based on these results, the Board is providing 
flexibility by permitting issuers to disclose the APRs for purchases, 
cash advances, and/or balance transfers in the same row in the table, 
if the issuer charges the same APR for such transactions. The Board has 
amended final comment app. G-5.ii accordingly.
    Also, in response to the June 2007 Proposal, several commenters had 
suggestions on how transaction and penalty fees should be disclosed in 
the table. One commenter urged the Board to allow issuers to disclose 
fees of the same amount on the same row, without a carriage return 
after each fee. (Proposed Sample Forms G-10(B) and (C) showed the fees 
listed separately on their own lines.) In addition, proposed Sample 
Forms G-10(B) and (C) and Sample Forms G-17(B) and (C) (and Sample Form 
G-17(D) proposed in May 2008) use the headings ``Transaction Fees'' and 
``Penalty Fees.'' One commenter urged the Board to delete these 
headings as unnecessary.
    As discussed above, based on testing conducted for the Board after 
May 2008, the Board is permitting issuers to disclose the APRs for 
purchases, cash

[[Page 5381]]

advances, and/or balance transfers in the same row in the table if the 
issuer charges the same APR for such transactions. The effect of 
combining fee rows was also tested in quantitative testing conducted in 
fall 2008. Some participants were shown tables in which two penalty 
fees, the returned payment fee and the over-the-limit fee, were 
disclosed in separate rows. Other participants were shown tables in 
which these two fees were combined in a single row. The testing 
indicated that combining rows did not make it more difficult for 
consumers to locate fees. For the same reasons, the Board is also 
amending final comment app. G-5.ii to permit issuers to disclose fees 
of the same amount on the same row, if the fees are in the same 
category of fees (e.g., if both fees are transaction fees or both fees 
are penalty fees). Therefore, transaction fees of the same amount may 
be combined in the same row. Similarly, penalty fees of the same amount 
may be combined in the same row. The Board is, however, preserving 
separate headings for ``Transaction Fees'' and ``Penalty Fees'' as the 
Board believes it is important to distinguish these separate categories 
for consumers. Thus, if the amount of a transaction fee is the same as 
the amount of a penalty fee, the fees must still be disclosed 
separately under separate headings.
    The final Sample Forms G-10(B) and (C) and Sample Forms G-17(B)-(D) 
continue to use the headings ``Transaction Fees'' and ``Penalty Fees.'' 
The Board believes that these headings are useful to consumers in 
understanding the types of fees that may be charged on the account. In 
addition, to describe a grace period (or the lack of a grace period), 
as applicable, the heading ``How to Avoid Paying Interest for 
Purchases'' or ``Paying Interest'' must be used for Sample Forms G-
10(B) and (C). The headings ``How to Avoid Paying Interest'' or 
``Paying Interest'' must be used for Sample Forms G-17(B)-(D). See 
Sec. Sec.  226.5a(b)(5) and 226.6(b)(2)(v).
    In response to the June 2007 Proposal, one industry commenter 
suggested that the Board explicitly state that the use of color, 
shading and similar graphic techniques are permitted with respect to 
the table. Comment app. G-5.vii adds guidance to clarify that the use 
of color, shading and similar graphic techniques are permitted with 
respect to the table, so long as the table remains substantially 
similar to the model and sample forms in Appendix G to part 226.
    In addition, one commenter noted that the proposed model and sample 
forms in Appendix G-10 to part 226 segregated the fee disclosures from 
the interest rate and interest charge disclosures using two separate 
tables. This commenter suggested that the Board clarify that using 
separate tables for the fee disclosures and the interest and interest 
charges disclosure is required. The Board believes that in order for a 
table to be substantially similar to the applicable table in Appendix G 
to part 226, a table for credit card application and solicitation 
disclosures and account-opening disclosures must contain separate 
tables for the fee disclosures and the interest and interest charge 
disclosures, and therefore, additional clarification is not needed.
    Model and sample forms for periodic statements. In June 2007, the 
Board proposed to add several model forms for periodic statement 
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). 
Comment app. G-8 is added, as proposed, 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)-(E) to comply with the requirements in Sec.  226.7(b).
    New comment app. G-9 is added in response to requests for guidance 
relating to the late payment and minimum payment disclosures. Samples 
G-18(D) and G-18(E) (proposed as Samples G-18(E) and G-18(F)) 
illustrate how creditors may comply with proximity requirements for 
payment information. The comment clarifies that creditors offering card 
accounts with a charge card feature and a revolving feature may change 
the disclosure to make clear the feature to which the disclosures 
apply.
    New comment app. G-10 is added to the final rule in response to 
commenters' requests, to provide guidance on creditors' use of Sample 
Forms G-18(F) and G-18(G) (proposed as Forms G-18(G) and G-18(H)). The 
comment clarifies that creditors are not required to print periodic 
statements on an 8 x 14 inch sheet of paper, although the samples were 
designed to be printed on that size paper. The comment clarifies that 
although the payment information disclosures appear in the upper right-
hand corner on Sample Forms G-18(F) and G-18(G), the disclosures may be 
located elsewhere, as long as they appear on the front of the first 
page of the periodic statement.
    The comment also clarifies that the sample forms are published as a 
compliance aid, and that some information and some formats are not 
required by the regulation. For example, certain information such as 
the summary of account activity is not a required disclosure, although 
some information presented in the summary is required (e.g., the 
previous balance and new balance). The comment also provides that 
subject to the general requirement to provide disclosures in a clear 
and conspicuous manner, additional information may appear on the 
periodic statement.
    Model and sample form relating to debt suspension coverage. As 
discussed above in the section-by-section analysis for Sec.  
226.4(d)(3), the Board proposed in June 2007 to add a disclosure for 
debt suspension programs, 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. 
Model Clauses and Samples were proposed at Appendix G-16(A) and G-16(B) 
(for open-end credit) and Appendix H-17(A) and H-17(B) (for closed-end 
credit) to part 226. One commenter noted that the model language in 
Model Clause H-17(A) and Sample H-17(B) regarding cost of coverage is 
more appropriate for open-end credit. Model Clause H-17(A) and Sample 
H-17(B) have been revised in the final rule to include language that is 
appropriate for closed-end credit.

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. 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. In the June 
2007 Proposal, the Board proposed that instead of issuing a table,

[[Page 5382]]

it would issue guidance in Appendix M1 to part 226 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 final rule 
adopts this approach. The Board expects that this guidance will 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). In the June 2007 Proposal, the Board proposed new 
Appendix M2 to part 226 to provide guidance to issuers on how to 
calculate the actual repayment disclosure.
    Calculating generic repayment estimates. Proposed Appendix M1 would 
have provided guidance on how to calculate the generic repayment 
estimates. Under the June 2007 Proposal, the Board would have allowed 
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 also would have used 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 have allowed issuers and the 
FTC to prompt the consumer to input this information so that the 
generic repayment estimate could be calculated. The final rule adopts 
this ``consumer input'' system approach. Although issuers may have the 
ability to program their systems to obtain consumers' account 
information from their account management systems, the Board is not 
requiring issuers to do so. Allowing issuers to use a ``consumer 
input'' system in calculating the generic repayment estimate preserves 
the distinction contemplated in the statute between estimates based on 
the Board table and actual repayment disclosures.
    In proposed Appendix M1 to part 226, the Board set 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 
proposed to set forth assumptions about these terms that issuers and 
the FTC must use.
    1. Minimum payment formula. In the June 2007 Proposal, the Board 
proposed to require a credit card issuer to use the minimum payment 
formula that applies to most of the issuer's accounts. The Board 
proposed different rules for general purpose credit cards and retail 
credit cards in selecting the ``most common'' minimum payment formula. 
The Board proposed 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 would have been defined as credit cards that are not retail 
credit cards.
    Under the June 2007 Proposal, when calculating the generic 
repayment estimate for general purpose credit cards, a card issuer 
would have been required to use the minimum payment formula that 
applies to most of its general purpose consumer credit card accounts. 
The issuer would have been required to use this ``most common'' formula 
to calculate the generic repayment estimate for all of its general 
purpose consumer credit card accounts, regardless of whether this 
formula applies to a particular account. Proposed Appendix M1 to part 
226 would have contained additional guidance to issuers of general 
purpose credit cards in complying with the ``most common'' formula 
approach.
    In addition, under the June 2007 Proposal, when calculating the 
generic repayment estimate for retail credit cards, a credit card 
issuer would have been required to use the minimum payment formula that 
most commonly applies to its retail consumer credit card accounts. If 
an issuer offers credit card accounts on behalf of more than one 
retailer, credit card issuers would have been required to 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 issues separate cards for Retailer A and Retailer B, which are 
under common ownership or control, the proposal would have required 
Issuer A to determine the most common formula separately for each 
retailer (A and B). Under the proposal, the issuer would have been 
required to 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 to part 226 would 
have provided additional guidance to issuers of retail credit cards on 
how to comply with the ``most common'' formula approach. The Board 
solicited comment on whether Issuer A in the example above should be 
permitted to determine a single ``most common'' formula for all 
retailers under common ownership or control, and if so, what the 
standard of affiliation should be.
    In response to the June 2007 Proposal, several consumer group 
commenters suggested that the Board should require credit card issuers 
to use the minimum payment formula(s) that applies specifically to a 
consumer's account to calculate the generic repayment estimate, instead 
of allowing issuer to use the ``most common'' minimum payment formula 
that applies to the issuer's accounts. They suggested that issuers 
could be required to disclose a code on the periodic statement that 
represents the minimum payment formula(s) used, and the consumer could 
be asked to enter that code when requesting the generic repayment 
estimate. In addition, some industry commenters suggested that the 
Board not require issuers to use the ``most common'' minimum payment 
formula, but instead allow issuers to use the same minimum payment 
assumptions as used by the Board for its toll-free telephone number. In 
the June 2007 Proposal, the Board indicated that it would use the 
following minimum payment formula to calculate the generic repayment 
estimates for its toll-free telephone number: 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 that must be 
disclosed on periodic statements. See Sec.  226.7(b)(12).
    The final rule adopts the ``most common'' approach as proposed, 
with several revisions. The Board believes that the ``most common'' 
approach properly balances the benefit to consumers of more accurate 
estimates with the burden to creditors of calculating the generic 
repayment estimate. It appears that, at least for general purpose 
credit cards, issuers

[[Page 5383]]

typically use the same or similar minimum payment formula(s) 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. 
Accordingly, the ``most common'' minimum payment formula approach would 
provide more accurate estimates to consumers than allowing all issuers 
to use the 2 percent or $20 minimum payment formula described above.
    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 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 actual minimum payment formulas applicable to a 
consumer's account.
    Nonetheless, the Board is not requiring credit card issuers to use 
the actual minimum payment formula(s) that apply to a consumer's 
account to calculate the generic repayment estimate. The Board does not 
believe that the potential benefit of more accurate estimates outweighs 
the burden to issuers in identifying a code for each unique minimum 
payment formula that might apply to a consumer's account and disclosing 
that code on the periodic statement. While the ``code'' approach may 
provide more accurate estimates in cases where there is only one 
minimum payment that applies to the account, it is not clear that use 
of this code would lead to more accurate generic repayment estimates 
when multiple minimum payment formulas apply to an account. As 
described below, in those cases, the issuer would still need to assume 
that the minimum payment formula applicable to the general revolving 
feature that applies to new transactions would apply to the entire 
balance on the account, regardless of whether this formula applies to a 
particular balance on that account. In addition, consumers may be 
unfamiliar with a new code on their periodic statements and explaining 
the purpose of the code would lead to a longer and more complex minimum 
payment disclosure on periodic statements.
    In addition, in response to the June 2007 Proposal, several 
industry commenters requested clarification on calculating the generic 
repayment estimate where there are multiple features on the account and 
a different minimum payment formula applies to each feature. The final 
rule amends Appendix M1 to part 226 to clarify that if more than one 
minimum payment formula applies to an account, when calculating the 
generic repayment estimate, the issuer must use the ``most common'' 
minimum payment formula applicable to the general revolving feature 
that applies to new transactions and apply it to the entire balance on 
the account, regardless of whether this formula applies to a particular 
balance on that account. For example, assume for all of its accounts, a 
creditor uses one minimum payment formula to calculate the minimum 
payment amount for balances existing before January 1, 2008, and uses a 
different minimum payment formula to calculate the minimum payment 
amount for balances incurred on or after January 1, 2008. To calculate 
the minimum payment amount, this creditor must use the minimum payment 
formula applicable to balances incurred on or after January 1, 2008, 
and apply that formula to the entire outstanding balance even if the 
account has not been used for transactions on or after January 1, 2008.
    Also, in response to the June 2007 Proposal, one industry commenter 
suggested that the Board allow a retailer to use the most common 
formula for all of its retail cards, instead of evaluating each program 
separately. Although this commenter indicated that terms of retail 
accounts do not differ more than the terms of general purpose credit 
cards, the Board understands that with respect to some ``private 
label'' programs where a card issuer offers credit cards on behalf of 
more than one retailer, the minimum payment formula(s) applicable to 
the credit card accounts can vary substantially depending on the 
retailer on whose behalf the cards are issued. Thus, the final rule 
retains the proposed requirement that 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 (or affiliated 
group of retailers) separately and determine the minimum formula that 
is most common to each retailer.
    In the June 2007 Proposal, the Board proposed that a card issuer 
must re-evaluate which minimum payment formula is most common every 12 
months. The final rule clarifies that at the issuer's option, the 
issuer may re-evaluate which minimum payment formula is most common 
more often than every 12 months.
    The final rule also clarifies that in choosing which formula is the 
``most common,'' an issuer may ignore differences among the formulas 
related to whether past due amounts or over-the-limit amounts are 
included in the formula for calculating the minimum payment. As 
described below, the final rule allows issuers to assume that the 
consumer's account is not past due and the account balance is not over 
the credit limit. The final rule also clarifies that a creditor may, 
when considering all of its consumer purpose credit card accounts for 
purposes of identifying the ``most common'' minimum payment formula, 
use a statistical sample of its consumer credit card accounts developed 
and validated using accepted statistical principles and methodology.
    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. In the June 2007 Proposal, the Board proposed 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 that is required to be disclosed on 
periodic statements. The final rule adopts this approach. The Board is 
using 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 final rule states that the FTC must 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, as proposed in the June 2007 Proposal.
    2. Annual percentage rates. In the June 2007 Proposal, the Board 
proposed to require that the generic repayment estimate be calculated 
using a single APR, even for accounts that have multiple APRs. In 
selecting the single APR to be used in calculating the generic 
repayment estimates, the Board proposed to require credit card issuers 
and the FTC to use the highest APR on which the consumer has an 
outstanding balance. As proposed, an issuer and the

[[Page 5384]]

FTC would have been allowed to 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 have followed the same 
approach in calculating the generic repayment estimates for its toll-
free telephone number.
    In response to the June 2007 Proposal, one industry commenter 
suggested that instead of issuers providing a worst case scenario 
estimate by using the highest APR on which a consumer has an 
outstanding balance, issuers should be allowed to provide two generic 
repayment estimates to the consumer, one estimate based on the purchase 
APR and another estimate based on the cash advance APR. This commenter 
believed that the two estimates would allow the consumer to determine 
which estimate best fits the composition of his or her account balance.
    The final rule adopts the approach to require credit card issuers 
and the FTC to use the highest APR on which the consumer has an 
outstanding balance, as proposed. 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 believes that the complexity and effort 
required to accommodate multiple APRs using a ``consumer-input'' system 
would be unduly burdensome for consumers. 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. 
The Board believes that disclosing two estimates--one based on the 
purchase APR and one based on the cash advance APR--would be confusing 
to consumers.
    3. Outstanding balance. Because consumers' outstanding account 
balances appear on their monthly statements, consumers can provide that 
amount when requesting an estimate of the repayment period. In the June 
2007 Proposal, the Board proposed 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 would have been allowed to 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 have followed the same approach in calculating the generic 
repayment estimates for its toll-free telephone number. The final rule 
adopts this approach with one revision. Appendix M1 allows issuers to 
round the outstanding balance to the nearest whole dollar to calculate 
the generic repayment estimate or to prompt the consumer to enter the 
balance rounded to the nearest whole dollar.
    Other terms. In the June 2007 Proposal, the Board proposed 
assumptions about other terms that issuers and the FTC must use to 
calculate the generic repayment estimates. The final rule adopts this 
approach, except that issuers, at their option, are permitted to use 
the actual terms on the consumer's account instead of using the 
assumptions.
    1. Balance computation method. In the June 2007 Proposal, the Board 
proposed to use the average daily balance method for purposes of 
calculating the generic repayment estimate. The average daily balance 
method is 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. As a result, the Board 
proposed to assume that all months are the same length--i.e., 30.41667 
days. In addition, in the absence of data on when consumers typically 
make their payments each month, the Board proposed to assume that 
payments are credited on the last day of the month.
    In response to the June 2007 Proposal, several consumer group 
commenters suggested that issuers not be allowed to use the average 
daily balance method, if the issuer uses a less favorable method such 
as two-cycle average daily balance. The final rule retains the rule 
that issuers may assume that the average daily balance calculation 
method applies, regardless of whether it matches consumers' actual 
account terms. As discussed below, because the Board is assuming that 
no grace period exists and the consumer will be ``revolving'' or 
carrying a balance each month, there is no difference between the 
interest charges calculated, and thus, the repayment period calculated, 
if the average daily balance method is used compared to the two-cycle 
average daily balance method. The Board also notes that in final rules 
issued by the Board and other federal banking agencies published 
elsewhere in today's Federal Register, most credit card issuers could 
not use the two-cycle average daily balance method.
    In addition, one commenter suggested in response to the June 2007 
Proposal that the Board permit issuers to use uniform months of 30 days 
rather than require the use of 30.41667 days. This commenter indicated 
that some systems do not easily recognize fractions of days. The final 
rule amends Appendix M1 to specify that an issuer or the FTC may assume 
a monthly or daily periodic rate applies to the account. If a daily 
periodic rate is used, the issuer or the FTC may either assume (1) a 
year is 365 days long, and all months are 30.41667 days long, or (2) a 
year is 360 days long, and all months are 30 days long. Both sets of 
assumptions about the length of the year and months would yield the 
same repayment estimates.
    2. Grace period. In the June 2007 Proposal, the Board proposed to 
assume that no grace period exists. The final rule adopts this 
approach, as proposed. 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 final rule 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. In the June 2007 Proposal, the Board proposed to

[[Page 5385]]

make these same assumptions with respect to the calculation of the 
generic repayment estimates. The final rule adopts this approach, as 
proposed. These assumptions are necessary to have a finite solution to 
the repayment period calculation. Without these assumptions, the 
repayment period could be infinite.
    4. Minimum payments are made each month. In response to the June 
2007 Proposal, one commenter suggested that the Board clarify how debt 
cancellation, debt suspension and skip payment features should be 
handled. In those cases, a consumer may not be required to make a 
minimum payment on the account in a particular month. The final rule 
amends Appendix M1 to part 226 to provide that issuers or the FTC may 
assume that minimum payments are made each month and any debt 
cancellation or suspension agreements or skip payment features do not 
apply to a consumer's account.
    5. APR will not change. In response to the June 2007 Proposal, one 
commenter suggested that issuers be able to assume that the APR on the 
account will not change. The final rule amends Appendix M1 to part 226 
to provide that issuers or the FTC may assume that the APR on the 
account will not change, through either the operation of a variable 
rate or the change to a rate. For example, if a penalty APR currently 
applies to a consumer's account, an issuer or the FTC may assume that 
the penalty APR will apply to the consumer's account indefinitely, even 
if the consumer may potentially return to a non-penalty APR in the 
future under the account agreement.
    6. Account not past due and the account balance does not exceed the 
credit limit. The final rule allows issuers or the FTC to assume that 
the consumer's account is not past due and the account balance is not 
over the credit limit.
    7. Rounding assumed payments, current balance and interest charges 
to the nearest cent. The final rule allows issuers or the FTC, when 
calculating the generic repayment estimate, to round to the nearest 
cent the assumed payments, current balance and interest charges for 
each month, as shown in Appendix M3 to part 226.
    Other technical edits have been made to the assumptions to conform 
them to the assumptions used in Appendix M2 to part 226 to calculate 
the actual repayment disclosure.
    Tolerances. In response to the June 2007 Proposal, several 
commenters were concerned about liability for alleged incorrect 
estimates. Some commenters were concerned about state unfair or 
deceptive practices laws, under which an issuer might be sued for 
providing the generic repayment estimate or the actual repayment 
disclosure, if the actual time to repay a specific debt was different 
from the generic repayment estimate or actual repayment disclosure 
provided pursuant to TILA. Other issuers asked the Board to provide an 
express tolerance for error of at least two months (prior to rounding) 
in all of the proposed calculations. This commenter indicated that this 
error tolerance is needed because a variation as small as a penny can 
change amortization calculations and repayment period disclosures 
materially, when estimates are rounded to the nearest year. Take, for 
example, a minimum payment formula of the greater of 2 percent or $20 
and two separate amortization calculations that, at the end of 28 
months, arrived at remaining balances of $20 and $20.01 respectively. 
The $20 remaining balance would be paid off in the 29th month, 
resulting in the disclosure of a 2-year repayment period due to the 
Board's rounding rule. The $20.01 remaining balance would be paid off 
in the 30th month, resulting in the disclosure of a 3-year repayment 
period due to the Board's rounding rule. The final rule amends Appendix 
M1 to part 226 to provide that a generic repayment estimate shall be 
considered accurate if it is not more than 2 months above or below the 
generic repayment estimate determined in accordance with the guidance 
in Appendix M1 to part 226, prior to rounding. Thus, in the example 
above, an issuer or the FTC would be in compliance with the guidance in 
Appendix M1 to part 226 by disclosing 3 years, instead of 2 years, 
because the issuer's or FTC's estimate is within the 2 months' 
tolerance, prior to rounding. In addition, the final rule also provides 
that even if an issuer's or FTC's estimate is more than 2 months above 
or below the generic repayment estimate calculated using the guidance 
in this Appendix, so long as the issuer or FTC discloses the correct 
number of years to the consumer based on the rounding rule set forth in 
paragraph (b)(1)(i), the issuer or the FTC would be in compliance with 
the guidance in Appendix M1 to part 226. For example, assume the 
generic repayment estimate calculated using the guidance in Appendix M1 
to part 226 is 32 months (2 years, 8 months), and the generic repayment 
estimate calculated by the issuer or the FTC is 38 months (3 years, 2 
months). Under the rounding rule set forth in paragraph (b)(1)(i), both 
of these estimates would be rounded and disclosed to the consumer as 3 
years. Thus, if the issuer or the FTC disclosed 3 years to the 
consumer, the issuer or the FTC would be in compliance with the 
guidance in Appendix M1 to part 226 even through the generic repayment 
estimate calculated by the issuer or the FTC is outside the 2 months' 
tolerance amount.
    The Board also recognizes that both the generic repayment estimates 
and the actual repayment disclosures, as calculated in Appendices M1 
and M2 to part 226 respectively, are estimates. The Board would expect 
that issuers would not be liable under federal or state unfair or 
deceptive practices laws for providing inaccurate or misleading 
information, when issuers provide to consumers the generic repayment 
estimates or actual repayment disclosures calculated according to 
guidance provided in Appendices M1 and M2 to part 226 respectively, as 
required by TILA.
    Disclosing the generic repayment estimates to consumers. In the 
June 2007 Proposal, the Board proposed in Appendix M1 to part 226 to 
provide guidance regarding how the generic repayment estimate must be 
disclosed to consumers. As proposed, credit card issuers and the FTC 
would have been required to provide certain specified 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 proposed to follow the same approach in 
disclosing the generic repayment estimates through its toll-free 
telephone number.
    1. Required disclosures. Under the June 2007 Proposal, credit card 
issuers and the FTC would have been 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 make 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 final rule adopts this approach, as proposed, with two 
revisions. The final rule amends Appendix M1 to provide

[[Page 5386]]

that at the issuer's or FTC's option, the issuer or the FTC may also 
disclose as part of the required disclosures a description of the 
minimum payment formula(s) or the minimum payment amounts used to 
calculate the generic repayment estimate, including a disclosure of the 
dollar amount of the minimum payment calculated for the first month. In 
addition, at an issuer's or FTC's option, the issuer or FTC also may 
disclose as part of the required disclosures the total amount of 
interest that a consumer would pay if the consumer makes minimum 
payments for the length of time disclosed in the generic repayment 
estimate.
    Under the June 2007 Proposal, Appendix M1 to part 226 would have 
provided that 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 would have been 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. In response to the June 2007 Proposal, 
one commenter suggested that the Board always require that the generic 
repayment estimate be disclosed in years, even for repayment periods 
that are less than 2 years. This commenter indicated that the different 
rules for disclosing the generic repayment estimate depending on 
whether the estimate is less than 2 years or not would add 
unnecessarily to regulatory burden and cause confusion. The final rule 
retains the rule to disclose the generic repayment estimate in months 
if the estimate is less than 2 years, and in years if the estimate is 2 
years or more. The Board believes that this approach provides more 
useful information to consumers, and does not impose significant 
regulatory burden on issuers.
    In the June 2007 Proposal, the Board proposed a model clause in 
Appendix M1 that credit card issuers and the FTC would be allowed to 
use to comply with the above disclosure requirements. The final rule 
adopts this model clause, with several stylistic changes. This model 
clause includes a brief statement identifying the repayment period as 
an estimate rather than including 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 final rule 
allows 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 will follow the same approach in 
disclosing the generic repayment estimates through its toll-free 
telephone number.
    2. Zero or negative amortization. Zero or negative amortization can 
occur if the required minimum payment is the same as or 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 zero or negative amortization. But 
some creditors may use a minimum payment formula that allows zero or 
negative amortization (such as by requiring a payment of 2 percent of 
the outstanding balance, regardless of the finance charges or fees 
incurred). If zero or negative amortization occurs when calculating the 
repayment estimate, the Board proposed in June 2007 to require issuers 
and the FTC 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. The final rule adopts 
this approach as proposed with several technical modifications. The 
Board will follow the same approach in disclosing through its toll-free 
telephone number that zero or negative amortization is occurring.
    If issuers use a minimum payment formula that allows for zero or 
negative amortization, the Board believes that consumers should be told 
that zero or 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 zero or 
negative amortization is occurring, when in fact, if the estimate was 
based on the consumer's actual account terms, zero or negative 
amortization would not occur. The Board strongly encourages issuers to 
use the actual repayment disclosure provided in Appendix M2 to part 226 
in these instances to avoid giving inaccurate information to consumers.
    In the June 2007 Proposal, Appendix M1 to part 226 would have 
contained model language that issuers and the FTC may use to disclose 
to consumers that zero or negative amortization is occurring. In 
response to the June 2007 Proposal, several consumer group commenters 
suggested that the Board require issuers to use the model language to 
describe that zero or negative amortization is occurring. The final 
rule retains this language (with stylistic changes) as a model clause 
that issuers may use. Because the model language provides a safe harbor 
from liability, the Board expects that most issuers will use this model 
language to describe that zero or negative amortization is occurring.
    3. Permitted disclosures. The June 2007 Proposal provided that 
credit card issuers and the FTC would be allowed to 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 or years, allowing the consumer to select the payoff period; 
(5) a reference to Web sites that contain minimum payment calculators; 
and (6) the total amount of interest that a consumer may pay if he or 
she makes minimum payments for the length of time disclosed in the 
generic repayment estimate. As proposed, the Board would have followed 
the same approach in disclosing permitted information through its toll-
free telephone number.
    The final rule retains these permissible disclosures, with two 
revisions. As discussed above, the final rule permits issuers to 
provide as part of the required disclosures the total amount of 
interest that a consumer may pay if he or she makes minimum payments 
for the length of time disclosed in the generic repayment estimate. In 
addition, the final rule adds to the list of permissible disclosures 
that issuers may disclose the total amount of interest that a consumer 
would pay under optional repayment periods permitted to be disclosed--
such as how much interest the consumer would pay if he or she paid a 
fixed payment amount each month.
    In response to the June 2007 Proposal, one commenter suggested that 
the Board issue model forms explaining the assumptions used in 
calculating the

[[Page 5387]]

generic repayment estimate. The final rule does not include model forms 
explaining the assumptions used in calculating the generic repayment 
estimates. The assumptions are not required disclosures, so the Board 
does not believe that model forms are needed.

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 June 2007 Proposal, the Board proposed to 
provide in Appendix M2 to part 226 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. In the June 2007 
Proposal, the Board proposed 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 proposed to 
allow issuers to make certain assumption about these terms. The final 
rule retains this approach, as proposed.
    1. Minimum payment formulas. When calculating actual repayment 
disclosures, the Board proposed that credit card issuers generally must 
use the minimum payment formula(s) that apply to a cardholder's 
account. In response to the June 2007 Proposal, several industry 
commenters requested clarification on calculating and providing the 
actual repayment disclosure where there are multiple features on the 
account and a different minimum payment formula applies to each 
feature. The final rule amends Appendix M2 to provide that in 
calculating the actual repayment disclosure, if more than one minimum 
payment formula applies to an account, the issuer must apply each 
minimum payment formula to the portion of the balance to which the 
formula applies. In providing the actual repayment disclosure, an 
issuer may either disclose the longest repayment period calculated, or 
the repayment period calculated for each minimum payment formula. For 
example, assume that an issuer uses one minimum payment formula to 
calculate the minimum payment amount for a general revolving feature, 
and another minimum payment formula to calculate the minimum payment 
amount for special purchases, such as a ``club plan purchase.'' Also, 
assume that based on a consumer's balances in these features, the 
repayment period calculated pursuant to Appendix M2 for the general 
revolving feature is 5 years, while the repayment period calculated for 
the special purchase feature is 3 years. This issuer may either 
disclose 5 years as the repayment period for the entire balance to the 
consumer, or disclose 5 years as the repayment period for the balance 
in the general revolving feature and 3 years as the repayment period 
for the balance in the special purchase feature.
    In addition, in the June 2007 Proposal, the Board proposed to allow 
issuers to disregard promotional terms that may be applicable to a 
consumer's account when calculating the actual repayment disclosure. 
The term ``promotional terms'' was defined in the proposal as ``terms 
of a cardholder's account that will expire in a fixed period of time, 
as set forth by the card issuer.'' The Board noted that allowing 
issuers to disregard promotional terms on accounts where the 
promotional terms apply only for a limited amount of time eases 
compliance burden on issuers, without a significant impact on the 
accuracy of the repayment estimates for consumers.
    In response to the June 2007 Proposal, one industry commenter 
requested that the Board expand this definition of ``promotional 
terms'' to include any offer that involves a special payment 
arrangement or an APR that is below the contractual payment or APR. 
They noted that the proposed definition of ``promotional terms'' would 
not cover ``life of balance'' promotions, where an APR is offered on a 
balance (e.g., balance transfers at account opening) that is lower than 
the rate that would otherwise apply to those types of balances and that 
lower APR will apply to that balance until the balance is paid in full. 
The final rule retains the definition of ``promotional terms'' as 
proposed. The Board believes that issuers should not be allowed to 
disregard ``life of balance'' promotions, because that rate will not 
expire after a limited amount of time, but will apply until the balance 
is paid in full.
    2. Annual percentage rates. Generally, when calculating actual 
repayment disclosures, the June 2007 Proposal would have required 
credit card issuers to 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 reasons discussed above, the Board proposed to 
allow issuers to disregard promotional APRs that may apply to a 
consumer's account. Specifically, if any promotional terms related to 
APRs apply to a cardholder's account, such as introductory rates or 
deferred interest plans, credit card issuers would have been allowed to 
assume the promotional terms do not apply, and to use the APRs that 
would apply without regard to the promotional terms. The final rule 
adopts this approach, as proposed.
    3. Outstanding balance. When calculating the actual repayment 
disclosures, the Board proposed 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 have been required to take 
into account any transactions consumers may have made since the last 
billing cycle. The final rule adopts this approach. 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. The final rule revises Appendix M2 to part 226 to 
allow issuers to round the outstanding balance to the nearest whole 
dollar to calculate the actual repayment disclosure.
    4. Other terms. As discussed above, the Board proposed in the June 
2007 Proposal that issuers calculate the actual repayment disclosures 
for a consumer based on the minimum payment formulas(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 proposed to allow issuers to make certain 
assumptions about these terms. For example, the Board would have 
allowed 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 proposed to allow 
issuers to assume that payments are allocated to lower APR balances 
before higher APR balances when multiple APRs apply to an account.
    The final rule retains this approach, as proposed, with several 
revisions. As described above with respect to generic repayment 
estimates, the final rule adds several assumptions related to minimum 
payments being made each month, APRs not changing on the account, the 
length of each month, and the account not being past due or account 
balances not exceeding the

[[Page 5388]]

credit limit. The Board would still allow issuers to assume that 
payments are allocated to lower APR balances before higher APR balances 
when multiple APRs apply to an account. Under final rules issued by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register, most issuers are permitted to allocated minimum 
payment amounts as they choose; however, most issuers would be 
restricted in how they may allocate payments above the minimum payment 
amount. The Board assumes that issuers are likely to allocate the 
minimum payment amount to lower APR balances before higher APR 
balances, and issuers may assume that is the case in making the 
repayment estimate.
    Consistent with the guidance in Appendix M1 to part 226 for generic 
repayment estimates, the final rule also would amend Appendix M2 to 
part 226 to provide that an actual repayment disclosure shall be 
considered accurate if it is not more than 2 months above or below the 
actual repayment disclosure determined in accordance with the guidance 
in Appendix M2 to part 226, prior to rounding.
    Disclosing the actual repayment disclosures to consumers through 
the toll-free telephone number or on the periodic statement. In the 
June 2007 Proposal, the Board proposed in Appendix M2 to part 226 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 proposed similar rules with respect to disclosing the actual 
repayment disclosures as were proposed with respect to the generic 
repayment estimate. Specifically, the Board proposed 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 to part 226. No 
comments were received on this aspect of the proposal. The final rule 
adopts this approach, as proposed.

Appendix M3--Sample Calculations of Generic Repayment Estimates and 
Actual Repayment Disclosures

    In the June 2007 Proposal, the Board proposed Appendix M3 to part 
226 to provide sample calculations for the generic repayment estimate 
and the actual repayment disclosures discussed in Appendices M1 and M2 
to part 226. The final rule adopts these sample calculations with 
several technical modifications.
Conforming Citations and Descriptions
    The final rule includes a number of technical changes to various 
commentary provisions that were not the subject of the Board's review 
of open-end (not home-secured) plans. These changes conform citations 
and other descriptions to revisions being adopted today, without 
intended substantive changes, as identified below.
    Subpart B. Comments 5b(a)(1)-1; 5b(f)(3)(vi)-4.
    Subpart D. Comment 26(a)-1; Comment 27-1; Comment 28(a)-6; Comment 
30-8.
    In Sec.  226.30, footnote 50 and accompanying comment 30-13, 
providing for a transitional compliance rule that has now expired, are 
deleted as obsolete rather than retained with a conformed citation.

VII. Mandatory Compliance Date

    Under TILA Section 105(d), regulatory amendments that require 
disclosures that differ from the previous requirements are to have an 
effective date of that October 1 which follows by at least six months 
the date of promulgation. 15 U.S.C. 1604(d). However, the Board may, at 
its discretion, lengthen the implementation period for creditors to 
adjust their forms to accommodate new requirements, or shorten the 
period where the Board finds that such action is necessary to prevent 
unfair or deceptive disclosure practices.
    In the June 2007 Proposal, the Board requested comment on an 
appropriate implementation period that would provide creditors 
sufficient time to implement any revisions that may be adopted. In 
response to the June 2007 and May 2008 Proposals, industry commenters 
representing creditors, card issuers, and service providers, suggested 
implementation periods ranging from at least 12 months to at least 24 
months. These commenters stated that the size and complexity of the 
Board's June 2007 and May 2008 Regulation Z Proposals if adopted, 
present a significant implementation task. They noted that creditors 
and service providers affected by the final rule must analyze all 
aspects of the rule, develop compliance programs, and revise written 
policies and procedures. They also identified the need to make systems 
changes to design new forms and to develop, test and implement new 
software programs, which may require coordination among third-party 
data processors and creditors' compliance or technical staff. One 
commenter reported that a vendor reported it would need almost a year 
to implement changes after the client delivered the business 
requirements to the vendor. Industry commenters also noted that 
employees' tasks to implement the new rules would be in addition to 
employees' ongoing duties to provide day-to-day service to customers. 
Thus, in industry commenters' views, a significant period of time is 
necessary to implement the required changes in an orderly manner.
    A few commenters suggested staggered mandatory compliance dates. 
For example, one commenter suggested an 18-month implementation period 
for application and solicitation disclosures, account-opening 
disclosures and agreements, and billing error notices; with a 24-month 
period for periodic statement disclosures, including change-in-terms 
notices that are provided with statements. Most others requested a 
single implementation date.
    Many industry commenters stated that they contemplated implementing 
the final rule in stages, and asked the Board to provide a safe harbor 
for compliance with the regulation's requirement to use consistent 
terminology if some disclosures are modified earlier than others. For 
example, a creditor may revise some disclosures to use the term 
``interest charges'' as required by the final rule while other 
disclosures that comply with existing rules continue to use the term 
``finance charges'' because they have not yet been revised.
    Commenters representing credit unions, while opposing the Board's 
June 2007 Proposal to amend the definition of open-end credit, 
requested that the Board delay the mandatory compliance date for rules 
affecting the definition of open-end credit until the Board completes 
its review of rules affecting closed-end disclosures, so systems would 
be revised only once.
    The Board adopts a mandatory compliance date of July 1, 2010. The 
mandatory compliance date for this final rule is consistent with the 
mandatory compliance date for the final rules addressing credit card 
practices adopted by the Board and other federal banking agencies 
published elsewhere in today's Federal Register. This date affords 
creditors and others affected by this final rule approximately 18 
months to implement the required changes. In adopting this mandatory 
compliance date, the Board is cognizant that due to the breadth of 
changes required a significant period of time is needed to implement 
both this final rule and the other final rules adopted by the Board and 
other federal banking agencies. In

[[Page 5389]]

addition, the Board believes that a single implementation date provides 
greater flexibility to creditors and others affected by the final rules 
to determine the most efficient way to implement the required changes, 
rather than adopting staggered compliance dates that determine the 
stages in which the changes must be instituted.
    Prospective application of new rules. The final rule is prospective 
in application. The following paragraphs set forth additional guidance 
and examples as to how a creditor must comply with the final rule on 
the effective date.
    Tabular summaries that accompany applications or solicitations. 
Credit and charge card applications provided or made available to 
consumers on or after July 1, 2010 must comply with the final rule, 
including format and terminology requirements. For example, if a 
direct-mail application or solicitation is mailed to a consumer on June 
30, 2010, it is not required to comply with the new requirements, even 
if the consumer does not receive it until July 7, 2010. If a direct-
mail application or solicitation is mailed to consumers on or after 
July 1, 2010, however, it must comply with the final rule. If a card 
issuer makes an application or solicitation available to the general 
public, such as ``take-one'' applications, any new applications or 
solicitations issued by the creditor on or after July 1, 2010 must 
comply with the new rule. However, if a card issuer issues an 
application or solicitation by making it available to the public prior 
to July 1, 2010, for example by restocking an in-store display of 
``take-one'' applications on June 15, 2010, those applications need not 
comply with the new rule, even if a consumer may pick up one of the 
applications from the display after July 1, 2010. Any ``take-one'' 
applications that the card issuer uses to restock the display on or 
after July 1, 2010, however, must comply with the final rule.
    Account-opening disclosures. Account-opening disclosures furnished 
on or after July 1, 2010 must comply with the final rule, including 
format and terminology requirements. The relevant date for purposes of 
this requirement is the date on which the disclosures are furnished, 
not when the consumer applies for the account. For example, if a 
consumer applies for an account on June 30, 2010, but the account-
opening disclosures are not mailed until July 2, 2010, those 
disclosures must comply with the final rule. In addition, if the 
disclosures are furnished by mail, the relevant date is the day on 
which the disclosures were sent, not the date on which the consumer 
receives the disclosures. Thus, if a creditor mails the account-opening 
disclosures on June 30, 2010, even if the consumer receives those 
disclosures on July 7, 2010, the disclosures are not required to comply 
with the final rule.
    Periodic statements. Periodic statements mailed or delivered on or 
after July 1, 2010 must comply with the final rule. For example, if a 
creditor mails a periodic statement to the consumer on June 30, 2010, 
that statement is not required to comply with the final rule, even if 
the consumer does not receive the statement until July 7, 2010.
    For periodic statements mailed on or after July 1, 2010, fees and 
interest charges must be disclosed for the statement period and year-
to-date. For the year-to-date figure, creditors comply with the final 
rule by aggregating fees and interest charges beginning with the first 
periodic statement mailed on or after July 1, 2010. The first statement 
mailed on or after July 1, 2010 need not disclose aggregated fees and 
interest charges from prior cycles in the year. At the creditor's 
option, however, the year-to-date figure may reflect amounts computed 
in accordance with comment 7(b)(6)-3 for prior cycles in the year.
    The Board recognizes that a creditor may wish to comply with 
certain provisions of the final rule for periodic statements that are 
mailed prior to July 1, 2010. A creditor may phase in disclosures 
required on the periodic statement under the final rule that are not 
currently required prior to July 1, 2010. A creditor also may generally 
omit from the periodic statement any disclosures that are not required 
under the final rule prior to July 1, 2010. However, a creditor must 
continue to disclose an effective APR unless and until that creditor 
provides disclosures of fees and interest that comply with Sec.  
226.7(b)(6) of the final rule. Similarly, as provided in Sec.  
226.7(a), in connection with a HELOC, a creditor must continue to 
disclose an effective APR unless and until that creditor provides fee 
and interest disclosures under Sec.  226.7(b)(6).
    Checks that access a credit card account. A creditor must comply 
with the disclosure requirements of Sec.  226.9(b)(3) of the final rule 
for checks that access a credit account that are provided on or after 
July 1, 2010. Thus, for example, if a creditor mails access checks to a 
consumer on June 30, 2010, these checks are not required to comply with 
new Sec.  226.9(b)(3), even if the consumer receives them on July 7, 
2010.
    Change-in-terms notices and notices of application of a penalty 
rate. A creditor must provide change-in-terms notices or penalty rate 
notices in accordance with the requirements of Sec.  226.9(c) or (g) of 
the final rule, as applicable, for any changes in terms or increases in 
rates that will first take effect on or after July 1, 2010. For 
example, if a card issuer increases the interest rate applicable to 
purchases (other than due to the consumer's default or delinquency or 
as a penalty) effective as of June 30, 2010, the card issuer may comply 
with current Sec.  226.9(c)(1) and mail or deliver a change-in-terms 
notice to the consumer 15 days in advance, on or before June 15, 2010. 
If, however, a card issuer increases the interest rate applicable to 
purchases (other than due to the consumer's default or delinquency or 
as a penalty) effective as of July 1, 2010, the creditor must comply 
with Sec.  226.9(c)(2) of the final rule and mail or deliver notice of 
the change at least 45 days in advance, on or before May 17, 2010. 
Similarly, if a creditor increases the interest rate applicable to a 
consumer's account to a penalty APR and the change is effective prior 
to June 30, 2010, the creditor is not required to comply with Sec.  
226.9(g) of the final rule. If, however, a creditor increases the 
interest rate applicable to a consumer's account to a penalty APR, with 
the new rate becoming effective on July 1, 2010, the creditor must 
comply with Sec.  226.9(g) of the final rule and provide 45 days' 
advance notice of the change, on or before May 17, 2010. A creditor 
must comply with Sec.  226.9(g) of the final rule for any increase to a 
penalty APR taking effect on or after July 1, 2010, even if the event 
triggering that change occurs prior to July 1, 2010.
    In addition, a card issuer increasing an interest rate on or after 
July 1, 2010 may do so only to the extent permitted by final rules 
issued by the Board and other federal banking agencies addressing 
credit card practices published elsewhere in today's Federal Register.
    Advertising rules. Advertisements occurring on or after July 1, 
2010, such as an advertisement broadcast on the radio or published in a 
newspaper on July 1, 2010 or later, must comply with the new final 
rule, including rules regarding the use of the word ``fixed.'' 
Similarly, an advertisement mailed on or after July 1, 2010 must comply 
with the final rule. Thus, an advertisement mailed on June 30, 2010 is 
not required to comply with the final rule even if that advertisement 
is received by the consumer on July 7, 2010.
    Additional rules. The final rule contains additional new rules, 
such as revisions to certain definitions, that differ from current 
interpretations and are prospective. For example, creditors

[[Page 5390]]

may rely on current interpretations on the definition of ``finance 
charge'' in Sec.  226.4 regarding the treatment of fees for cash 
advances obtained from automatic teller machines (ATMs) until July 1, 
2010. On or after that date, however, such fees must be treated as a 
finance charge. For example, for account-opening disclosures provided 
on or after July 1, 2010, a creditor will need to disclose fees to 
obtain cash advances at ATMs in accordance with the requirements Sec.  
226.6 of the final rule for disclosing finance charges. In addition, a 
HELOC creditor that chooses to continue to disclose an effective APR on 
the periodic statement will need to treat fees for obtaining cash 
advances at ATMs as finance charges for purposes of computing the 
effective APR on or after July 1, 2010. Similarly, foreign transaction 
fees must be treated as a finance charge on or after July 1, 2010.
    Definition of open-end credit. As discussed in the section-by-
section analysis to Sec.  226.2(a)(20), all creditors must provide 
closed-end or open-end disclosures, as appropriate in light of revised 
Sec.  226.2(a)(20) and the associated commentary, as of the mandatory 
compliance date of this final rule.
    Implementation in stages. As noted above, commenters indicated 
creditors will likely implement the final rule in stages. As a result, 
some disclosures may contain existing terminology required currently 
under Regulation Z while other disclosures may contain new terminology 
required in this final rule. For example, the final rule requires 
creditors to use the term ``penalty rate'' when referring to a rate 
that can be increased due to a consumer's delinquency or default or as 
a penalty. In addition, creditors are required under the final rule to 
use a phrase other than the term ``grace period'' in describing whether 
a grace period is offered for purchases or other transactions. The 
final rule also requires in some circumstances that a creditor use a 
term other than ``finance charge,'' such as ``interest charge.'' As 
discussed in the section-by-section analysis to Sec.  226.5(a)(2), 
during the implementation period, terminology need not be consistent 
across all disclosures. For example, if a creditor uses terminology 
required by the final rule in the disclosures given with applications 
or solicitations, that creditor may continue to use existing 
terminology in the disclosures it provides at account-opening or on 
periodic statements until July 1, 2010. Similarly, a creditor may use 
one of the new terms or phrases required by the final rule in a certain 
disclosure but is not required to use other terminology required by the 
final rule in that disclosure prior to the mandatory compliance date. 
For example, the creditor may use new terminology to describe the grace 
period, consistent with the final rule, in the disclosures it provides 
at account-opening, but may continue to use other terminology currently 
permitted under the rules to describe a penalty rate in the same 
account-opening disclosure. By the mandatory compliance date of this 
rule, however, all disclosures must have consistent terminology.

VIII. Final 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 a final regulatory 
flexibility analysis for the proposed amendments to Regulation Z. The 
RFA requires an agency either to provide a final regulatory flexibility 
analysis with a final rule or certify that the final rule will not have 
a significant economic impact on a substantial number of small 
entities. An entity is considered ``small'' if it has $175 million or 
less in assets for banks and other depository institutions.\27\
---------------------------------------------------------------------------

    \27\ U.S. Small Business Administration, Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

    The Board stated in the June 2007 and May 2008 Proposals its belief 
that the proposals would have a significant economic impact on a 
substantial number of small entities. Based on comments received, the 
Board's own analysis, and for the reasons stated below, the Board 
believes that the final rule will have a significant economic impact on 
a substantial number of small entities.
    1. Statement of need for, and objectives of, the final 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 this final rule is to improve the 
effectiveness of the disclosures that creditors provide to consumers at 
application and throughout the life of an open-end account through 
amendments to Regulation Z. Accordingly, the final rule changes 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) subsequent notices such as 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 final rule:
     A high-level summary of the major changes adopted in this 
final rule is in II. Summary of Major Changes, and a more detailed 
discussion is in V. Discussion of Major 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 change, as well as the rulemaking authority for certain changes 
mandated by the Bankruptcy Act, are discussed in VI.

Section-by-Section Analysis.

    2. Summary of issues raised by comments in response to the initial 
regulatory flexibility analysis. In accordance with section 3(a) of the 
RFA, 5 U.S.C 603(a), the Board published in each of the June 2007 and 
May 2008 Proposals an initial regulatory flexibility analysis (IRFA) in 
connection with the proposals, and acknowledged that the projected 
reporting, recordkeeping, and other compliance requirements of the 
proposed rule would have a significant economic impact on a substantial 
number of small entities. In addition, the Board recognized that the 
precise compliance costs would be difficult to ascertain because they 
would depend on a number of unknown factors, including, among other 
things, the specifications of the current systems used by small 
entities to prepare and provide disclosures and/or advertisements and 
to administer and maintain accounts, the complexity of the terms of 
credit products that they offer, and the range of such product 
offerings. The Board sought information and comment on any costs, 
compliance requirements, or changes in operating procedures arising 
from the application of the proposed rules to small entities. The Board 
recognizes that businesses often pass compliance costs on to consumers 
and that a less costly rule could benefit both small business and 
consumers.
    The Board reviewed comments submitted by various entities in order 
to ascertain the economic impact of the proposals on small entities. 
Many industry commenters expressed general concern about the compliance 
burden of the proposed amendments on all creditors offering open-end 
(not home-secured) plans, including small entities. They expressed 
concerns that the proposals, if adopted, would be costly to implement, 
would not provide sufficient flexibility, and could result in

[[Page 5391]]

creditors offering fewer products, or less credit or higher-priced 
credit to consumers. Many of the issues raised by commenters do not 
apply uniquely to small entities and are addressed in VI. Section-by-
Section Analysis regarding specific provisions. Comments that expressed 
specific concerns about the effect of the proposals on small entities 
are discussed below.
    Commenters representing credit unions and credit union trade 
associations specifically addressed the Board's request for comment on 
the number of small entities that might be affected. As discussed in 
VI. Section-by-Section Analysis, many credit union commenters focused 
their commenters on proposed changes to the definition of open-end 
credit in Sec.  226.2(a)(20). One commenter contended that the proposal 
would negatively and adversely affect the viability of small credit 
unions. This commenter cited data for year-end 2001 to 2006 from the 
National Credit Union Administration that the number of federally-
insured credit unions decreased from 9,688 to 8,326, and stated that 
anecdotal evidence suggests that regulatory burden and compliance costs 
contribute significantly to the decision to merge or cease operations. 
This commenter urged the Board to withdraw all aspects of the June 2007 
Proposal not mandated by the Bankruptcy Act. Another commenter that 
provides insurance and related financial services to credit unions 
reported that based on internal records, over 1900 credit unions with 
assets under $50 million and that offer multifeatured plans would incur 
an average cost of $100,000 per credit union to switch to closed-end 
disclosures if clarifications in the June 2007 Proposal related to the 
definition of open-end credit were adopted as proposed. The commenter 
noted that those conversion costs were in addition to costs associated 
with conforming the credit unions open-end disclosures to the final 
rule.
    One industry trade group also specifically addressed the costs to 
small entities of requiring the changes in the periodic statement 
disclosures for open-end (not home-secured) credit that is not a credit 
card, such as an overdraft line of credit. According to the trade 
group, the costs and complications of amending the periodic statements 
for non-credit card open-end products would discourage small and 
midsize banks from offering these products. Another bank commenter 
noted that the costs associated with the periodic statement changes 
would be substantial and therefore more difficult for smaller 
institutions to absorb.
    3. Description of small entities affected by the final rule. The 
final rule affects all creditors that offer open-end (not home-secured) 
credit plans. In addition, the final rule affects persons advertising 
open-end (not home-secured) credit, whether or not they are creditors. 
The Board acknowledged in its IRFA the total number of small entities 
likely to be affected by the proposal is 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).\28\ Based on June 30, 2008 call report 
data, there are approximately 709 banks, 3,397 insured credit unions, 
and 27 thrift institutions with credit card assets (or 
securitizations), and total assets of $175 million or less. 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.\29\ 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 final rule.
---------------------------------------------------------------------------

    \28\ 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.'' Sec.  226.1(c)(1).
    \29\ 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.
---------------------------------------------------------------------------

    4. Reporting, recordkeeping and compliance requirements. The 
compliance requirements of this final rule are described above in VI. 
Section-by-Section Analysis.
    The effect of the revisions to Regulation Z on small entities is 
unknown. Small entities are required to, among other things, conform 
their open-end credit disclosures, including those in credit card 
applications or solicitations, account opening materials, periodic 
statements, change-in-terms notices, and advertisements to the revised 
rules. The Board has sought to reduce the burden on small entities, 
where possible, by adopting model forms that can be used to ease 
compliance with the final rules. Small entities also are required to 
update their systems to comply with new rules regarding reasonable cut-
off times for payments and weekend or holiday payment due dates.
    In the May 2008 Proposal, the Board noted that 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. The Board requested information and comment on the effects 
of the proposed rules on small entities and received few comments 
regarding the cost impact on small entities specifically. These 
comments are discussed above in the ``Summary of issues raised by 
comments in response to the initial regulatory flexibility analysis'' 
section.
    5. Steps taken to minimize the economic impact on small entities. 
As previously noted, the June 2007 and May 2008 Proposals implement the 
Board's mandate to prescribe regulations that carry out the purposes of 
TILA. In addition, portions of the June 2007 Proposal 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 in this final 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 above 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 of open-end credit 
products.
    The steps the Board has taken to minimize the economic impact and 
compliance burden on small entities, including the factual, policy, and 
legal reasons for selecting the alternatives adopted and why each one 
of the other

[[Page 5392]]

significant alternatives was not accepted, are described above in VI. 
Section-by-Section Analysis. The final rule's modifications from the 
proposed rule that minimize economic impact on small entities are 
summarized below.
    In response to the results of consumer testing, the Board's final 
rule provides a number of modifications designed to increase 
flexibility and thus reduce costs to creditors. Under the final rule, 
for the summary tables accompanying applications or solicitations and 
the summary tables provided at account opening, creditors will be 
permitted to combine rows for different transaction types when the APR 
for each transaction type is the same. In addition, the final rule 
removes the requirement that creditors provide certain cross references 
in the summary tables. Both these changes allow for shorter 
disclosures, which in turn, could reduce the amount of paper creditors 
must use and the mailing costs of the disclosures.
    The final rule also provides flexibility in the periodic statement 
disclosure by removing the requirement that the grouping of certain 
payment information on periodic statements be substantially similar to 
the model forms provided by the Board. This change provides flexibility 
to creditors to determine how to fit certain new periodic statement 
disclosure requirements under the final rule within the format of 
creditors' current forms instead of requiring creditors to potentially 
redesign their forms to be substantially similar to the Board's model 
forms. In addition, under the final rule, creditors are no longer 
required to provide the effective APR on the periodic statement.
    The Board has also amended the rule on setting reasonable cut-off 
hours for mailed payments to be received on the due date and be 
considered timely. The May 2008 Proposal stated that it would not be 
reasonable for a creditor to set a cut-off time for payments by mail 
that is earlier than 5 p.m. In response to industry commenters, 
including a comment from a small credit union with limited hours of 
operation, the Board has relaxed this standard and amended the final 
rule to describe a 5 p.m. cut-off time for mailed payment as an example 
of a reasonable requirement for payments while not stating that earlier 
cut-off times would be unreasonable in all circumstances.
    Furthermore, as proposed in June 2007 and consistent with the 
Bankruptcy Act, small depository institutions with assets of $250 
million or less are not required to maintain their own toll-free 
telephone number to provide the minimum repayment estimates required 
under Sec.  226.7(b)(12) for a period of two years after the effective 
date of the rule. The Board must establish and maintain a toll-free 
telephone number for use by customers of these institutions.
    Also, the Board is providing an implementation period that responds 
to commenters' concerns about the time needed to comply with the final 
rule. The Board believes the effective date will decrease costs for 
small entities by providing them with sufficient time to come into 
compliance with the final rule's requirements. The implementation date 
is discussed above in VII. Mandatory Compliance Date.
    The Board believes that these changes minimize the significant 
economic impact on small entities while still meeting the stated 
objectives of TILA.
    6. Other federal rules. With the following exception, the Board 
believes no Federal rules duplicate, overlap, or conflict with this 
final rule. In the June 2007 Proposal, the Board noted in the section-
by-section analysis to Sec.  226.13(i) 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. This can occur when a financial 
institution extends credit incident to electronic fund transfers 
subject to 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. Current Sec.  226.13(i), which has not been amended 
in the final rule, resolves this conflict by stating 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)).
    In the May 2008 Regulation Z Proposal, the Board also requested 
comment regarding any duplication, overlap, or conflict between the 
proposed revisions to Regulation Z in this May 2008 Proposal and the 
proposal to address certain credit card practices issued by the Board, 
as well as other federal banking agencies, in May 2008. 73 FR 28904, 
May 19, 2008. Several commenters raised potential conflicts between the 
two proposals. As discussed above in VI. Section-by-Section Analysis 
and in the supplementary information to the final rule adopted by the 
Board and other federal banking agencies published elsewhere in today's 
Federal Register, the Board has addressed these comments and believes 
the final rule avoids any conflict, duplication, or overlap with the 
final rule adopted by the Board and other federal banking agencies 
published elsewhere in today's Federal Register.

IX. 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 
final 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 final 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. Since 
the Federal Reserve does not collect any information, no issue of 
confidentiality normally arises. However, in the event the Board were 
to retain records during the course of an examination, the information 
may be protected from disclosure under the exemptions set forth in 
(b)(4), (6), and (8) of the Freedom of Information Act (5 U.S.C. 
522(b)).
    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

[[Page 5393]]

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, state member banks and 
other creditors supervised by the Federal Reserve 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 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 entities subject to 
Regulation Z. 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.
    As mentioned in III. The Board's Review of Open-end Credit Rules 
above, two notices of proposed rulemaking were published in the Federal 
Register: the June 2007 Proposal, 72 FR 32948 (June 14, 2007) and the 
May 2008 Proposal, 73 FR 28866 (May 19, 2008). The comment period for 
these notices expired October 12, 2007 and July 18, 2008, respectively. 
No comments specifically addressing the burden estimates in those two 
proposals were received. However, since publication of the May 2008 
Proposal, the one-time increase and continuing total annual burden 
hours have been revised. The revisions include: (1) Incorporating 
provisions of Regulation Z requirements affecting mortgage lending, 
published in the Federal Register on July 30, 2008 (73 FR 44522) and 
(2) updating the total number of Federal Reserve-regulated institutions 
that are deemed to be respondents for the purposes of the PRA from 
1,172 to 1,138.
    Based on these adjustments to the estimates published in the May 
2008 Proposal, the final rule will impose a one-time increase in the 
total annual burden by 74,640 hours. The final rule, on a continuing 
basis, will impose an increase in the total annual burden by 35,120 
hours due to the adjustments discussed above, as well as (1) revisions 
to the rules governing change-in-terms notices in this final rule, 
which would increase the frequency with which such notices are required 
and (2) inclusion of the disclosure requirement to cosigners under 12 
CFR 227.14(b) (Regulation AA). The title of the Regulation Z 
information collection will be updated to account for these sections of 
Regulation AA. In total the final rule will increase the annual burden 
by 109,760 hours from 578,847 to 688,607 hours. This burden increase 
will be imposed on all Federal Reserve-regulated institutions that are 
deemed to be respondents for purposes of the PRA.
    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 estimation 
methodology. 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 11,671,017 hours. In total the final rule will impose 
an increase to the estimated annual burden for all institutions subject 
to Regulation Z of 1,926,373 hours to 13,597,390 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 from 12,324,037 to 13,230,534 hours. The estimates above 
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 17,200) 
potentially are affected by this collection of information, and thus 
are respondents for purposes of the PRA.
    The Board has a continuing interest in the public's opinion of our 
collections of information. At any time, comments regarding the burden 
estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to: 
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets, NW., Washington, DC 20551; and to the Office of Management and 
Budget, Paperwork Reduction Project (7100-0199), Washington, DC 20503.

X. Redesignation Table

    The Board has adopted organizational revisions that are designed to 
make the regulation easier to use. The following table indicates the 
redesignations.

------------------------------------------------------------------------
             Current                           Redesignation
------------------------------------------------------------------------
Comment I-4.....................  Comment I-3
Comment I-5.....................  Comment I-4
Footnote 3......................  Sec.   226.2(a)(17)(v)
Comment 2(a)(20)-6..............  Comment 2(a)(20)-7
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)
Sec.   226.4(d)(3)(i)...........  Sec.   226.4(d)(3)
Sec.   226.4(d)(3)(i)(A)........  Sec.   226.4(d)(3)(i)
Sec.   226.4(d)(3)(i)(B)........  Sec.   226.4(d)(3)(ii)
Sec.   226.4(d)(3)(i)(C)........  Sec.   226.4(d)(3)(iv)
Sec.   226.4(d)(3)(ii)..........  Comment 4(d)(3)-3
Comment 4(a)-4..................  Comment 4(a)-4.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)

[[Page 5394]]

 
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(b)(1)..............  Sec.   226.5(b)(1)(i)
Footnote 10.....................  Sec.   226.5(b)(2)(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
Comment 5(b)(1)-1...............  Sec.   226.5(b)(1)(iv); Comments
                                   5(b)(1)(i)-1, 5(b)(1)(iv)-2, and
                                   5(b)(1)(iv)-4
Comment 5(b)(1)-2...............  Comment 5(b)(1)(i)-2
Comment 5(b)(1)-3...............  Comment 5(b)(1)(i)-3
Comment 5(b)(1)-4...............  Comment 5(b)(1)(i)-4
Comment 5(b)(1)-5...............  Comment 5(b)(1)(i)-5
Comment 5(b)(2)(ii)-2...........  Comment 5(b)(1)(iii)-1
Comment 5(b)(2)(ii)-3...........  Comment 5(b)(1)(iii)-2
Sec.   226.5a(a)(2)(i)            Sec.   226.5a(a)(2)(vi)
 (prominent 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  Sec.   226.5a(2)(i); Sec.
 5a(c)-1.                          226.5a(e)(4)
Sec.   226.5a(b)(1)(iii)........  Sec.   226.5a(2)(ii)
Sec.   226.5a...................  Sec.   226.5a(1)
Sec.   226.5a(d)(2).............  Sec.   226.5a(d)(2)(i) and (ii)
Sec.   226.5a(d)(2)(i)..........  Sec.   226.5a(d)(2)(ii)(A)
Sec.   226.5a(d)(2)(ii).........  Sec.   226.5a(d)(2)(ii)(B)
Sec.   226.5a(e)(3).............  Sec.   226.5a(e)(2)
Sec.   226.5a(e)(4).............  Sec.   226.5a(e)(3)
Comment 5a(a)(2)-1..............  Comment 5a(a)-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 5a(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).................  Sec.   226.6(a)(1); Sec.   226.6(b)(3)
                                   and (4)
Footnote 11.....................  Sec.   226.6(a)(1)(ii); Sec.
                                   226.6(b)(4)(i)(B)
Footnote 12.....................  Sec.   226.6(a)(1)(ii); Sec.
                                   226.6(b)(4)(ii)
Footnote 13.....................  Comments 6(a)(1)(iv)-1 and 6(b)(3)-3
Sec.   226.6(b).................  Sec.   226.6(a)(2); Sec.   226.6(b)(3)
Sec.   226.6(c).................  Sec.   226.6(a)(4); Sec.
                                   226.6(b)(5)(ii)
Sec.   226.6(d).................  Sec.   226.6(a)(5); Sec.
                                   226.6(b)(5)(iii)
Sec.   226.6(e).................  Sec.   226.6(a)(3)
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)
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)(3)-1
Comment 6(a)(1)-2...............  Comments 6(a)(1)(i)-2 and 6(b)(3)-2
Comment 6(a)(2)-1...............  Comments 6(a)(1)(ii)-1 and
                                   6(b)(4)(i)(B)-1
Comment 6(a)(2)-2...............  Comments 6(a)(1)(ii)-2 and 6(b)(4)(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)(4)(ii)-
                                   2
Comment 6(a)(2)-7...............  Comments 6(a)(1)(ii)-7 and 6(b)(4)(ii)-
                                   3
Comment 6(a)(2)-8...............  Comments 6(a)(1)(ii)-8 and 6(b)(4)(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)(4)(ii)-5

[[Page 5395]]

 
Comment 6(a)(2)-11..............  Comment 6(a)(1)(ii)-11
Comment 6(a)(3)-1...............  Comments 6(a)(1)(iii)-1 and
                                   6(b)(4)(i)(D)-1
Comment 6(a)(3)-2...............  Comments 6(a)(1)(iii)-2 and
                                   6(b)(4)(i)(D)-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..................  Comments 6(a)(4)-1 and 6(b)(5)(ii)-1
Comment 6(c)-2..................  Comments 6(a)(4)-2 and 6(b)(5)(ii)-2
Comment 6(c)-3..................  Comments 6(a)(4)-3 and 6(b)(5)(ii)-3
Comment 6(c)-4..................  Comments 6(a)(4)-4 and 6(b)(5)(ii)-4
Comment 6(c)-5..................  Comments 6(a)(4)-5 and 6(b)(5)(ii)-5
Comment 6(d)....................  Comments 6(a)(5)-1 and 6(b)(5)(iii)-1
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(b)(6)
Sec.   226.7(g).................  Sec.   226.7(a)(7)
Sec.   226.7(h).................  Sec.   226.7(a)(6)(ii); Sec.
                                   226.7(b)(6)
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..................  Comment 7(a)(4)-5
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
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
Comment 7(g)-2..................  Comments 7(a)(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

[[Page 5396]]

 
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
Footnote 16.....................  Sec.   226.8(c)(1)
Footnote 17.....................  Sec.   226.8(c)(2)
Footnote 19.....................  Sec.   226.8(a)(1)(ii)
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.i. and ii.
Comment 8(a)(2)-2...............  Comment 8(a)-6.iii.
Comment 8(a)(2)-5...............  Comment 8(a)-3.iv.
Comment 8(a)(3)-1...............  Comment 8(a)-7
Comment 8(a)(3)-2...............  Comment 8(a)-8.i.
Comment 8(a)(3)-3...............  Comment 8(a)-8.ii.
Comment 8(a)(3)-4...............  Comment 8(a)-3.iv.
Comment 8(b)-1..................  Comment 8(b)-3
Comment 8(b)-3..................  Comment 8(b)-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..................  Comments 9(c)(1)-2 and 9(c)(2)-2
Comment 9(c)-3..................  Comments 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.   226.10(b)................  Sec.   226.10(b)(3)
Comment 10(b)-1 (specific         Sec.   226.10(b)(2)
 requirements).
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(b)(1)-1..............  Comment 12(b)(1)(ii)-1
Comment 12(b)(1)-2..............  Comment 12(b)(1)(ii)-2
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
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)
Footnote 31.....................  Comment 13(f)-3
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)
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

[[Page 5397]]

 
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
Sec.   226.16(b)................  Sec.   226.16(b)(1)
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(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(g)(4)
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
------------------------------------------------------------------------

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, Reporting 
and recordkeeping requirements, Truth in Lending.

0
For the reasons set forth in the preamble, the Board amends Regulation 
Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

0
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).

Subpart A--General

0
2. Section 226.1 is revised to read as follows:


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: the credit is offered or extended to consumers; the 
offering or extension of credit is done regularly;\1\ the credit is 
subject to a finance charge or is payable by a written agreement in 
more than four installments; and the credit is primarily for personal, 
family, or household purposes.
---------------------------------------------------------------------------

    \1\ [Reserved]
---------------------------------------------------------------------------

    (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 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: the 
authority, purpose, coverage, and organization of the regulation; the 
definitions of basic terms; the transactions that are exempt from 
coverage; and the method of determining the finance charge.
    (2) Subpart B contains the rules for open-end credit. It requires 
that account-opening 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. 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.
    (3) Subpart C relates to closed-end credit. It contains rules on 
disclosures, treatment of credit balances, annual percentages rate 
calculations, rescission requirements, and advertising.
    (4) Subpart D contains rules on oral disclosures, disclosures in 
languages other than English, record retention, effect on state laws, 
state exemptions, and rate limitations.
    (5) Subpart E contains special rules for certain 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 mortgage transactions 
that are subject to Sec.  226.32. Section 226.35 prohibits specific 
acts and practices in connection with higher-priced mortgage loans, as 
defined in Sec.  226.35(a). Section 226.36 prohibits specific acts and 
practices in connection with credit secured by a consumer's principal 
dwelling.

[[Page 5398]]

    (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.

0
3. Section 226.2 is revised 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\
---------------------------------------------------------------------------

    \2\ [Reserved]
---------------------------------------------------------------------------

    (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 of 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. Sec.  226.15 
and 226.23, and for purposes of Sec. Sec.  226.19(a)(1)(ii) and 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 of 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. Sec.  226.15 and 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 a 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, 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:
    (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
---------------------------------------------------------------------------

    \3\ [Reserved]
---------------------------------------------------------------------------

    (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.
    (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 of this part, 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 of this part (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 Sec.  226.6(a)(1) 
and (b)(3)(i) and Sec.  226.7(a)(4) through (7) and (b)(4) through (6) 
and the right of rescission set forth in Sec.  226.15) and subpart C of 
this part, 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.
    (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 a 
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.
    (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

[[Page 5399]]

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 word 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 contract.
    (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.

0
4. Section 226.3 is revised to read as follows:


Sec.  226.3  Exempt transactions.

    This regulation does not apply to the following: \4\
---------------------------------------------------------------------------

    \4\ [Reserved]
---------------------------------------------------------------------------

    (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, 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.).
    (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, a tax-sheltered annuity 
under section 403(b) of the Internal Revenue Code, or an eligible 
governmental deferred compensation plan under section 457(b) of the 
Internal Revenue Code (26 U.S.C. 401(a); 26 U.S.C. 403(b); 26 U.S.C. 
457(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.).

0
5. Section 226.4 is revised 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.

[[Page 5400]]

    (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) Charges or premiums paid for debt cancellation or debt 
suspension coverage written in connection with a credit transaction, 
whether or not the 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 and debt suspension 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 in writing. If the term of insurance is less than the term of 
the transaction, the term of insurance also shall 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.
    (iii) The consumer signs or initials an affirmative written request 
for the insurance after receiving the disclosures specified in this 
paragraph, except as provided in paragraph (d)(4) of this section. Any 
consumer in the transaction may sign or initial the request.
    (2) Property insurance premiums. Premiums for insurance against 
loss of or damage to property, or against liability arising out of the 
ownership or use of property, including single interest insurance if 
the insurer waives all right of subrogation against the consumer,\5\ 
may be excluded from the finance charge if the following conditions are 
met:
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    \5\ [Reserved]
---------------------------------------------------------------------------

    (i) The insurance coverage may be obtained from a person of the 
consumer's choice,\6\ and this fact is disclosed. (A creditor may 
reserve the right to refuse to accept, for reasonable cause, an insurer 
offered by the consumer.)
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    \6\ [Reserved]
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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 or debt suspension fees. Charges or 
premiums paid for debt cancellation coverage 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 may be excluded from the 
finance charge, whether or not the coverage is insurance, if the 
following conditions are met:
    (i) The debt cancellation or debt suspension agreement or coverage 
is not required by the creditor, and this fact is disclosed in writing;
    (ii) The fee or premium for the initial term of coverage is 
disclosed in writing. 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;

[[Page 5401]]

    (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.
    (iv) The consumer signs or initials an affirmative written request 
for coverage after receiving the disclosures specified in this 
paragraph, except as provided in paragraph (d)(4) of this section. Any 
consumer in the transaction may sign or initial the request.
    (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 evidence that the consumer, after being provided the 
disclosures orally, 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.
    (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.

Subpart B--Open-End Credit

0
6. Section 226.5 is revised to read as follows:


Sec.  226.5  General disclosure requirements.

    (a) Form of disclosures. (1) General. (i) The creditor shall make 
the disclosures required by this subpart clearly and conspicuously.
    (ii) The creditor shall make the disclosures required by this 
subpart in writing,\7\ in a form that the consumer may keep,\8\ except 
that:
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    \7\ [Reserved]
    \8\ [Reserved]
---------------------------------------------------------------------------

    (A) The following disclosures need not be written: Disclosures 
under Sec.  226.6(b)(3) of charges that are imposed as part of an open-
end (not home-secured) plan that are not required to be disclosed under 
Sec.  226.6(b)(2) and related disclosures under Sec.  
226.9(c)(2)(ii)(B) of charges; disclosures under Sec.  226.9(c)(2)(v); 
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 that need not be written under paragraph (a)(1)(ii)(A) of 
this section; disclosures for credit and charge card applications and 
solicitations under Sec.  226.5a; home-equity disclosures under Sec.  
226.5b(d); the 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.
    (2) Terminology. (i) Terminology used in providing the disclosures 
required by this subpart shall be consistent.
    (ii) For home-equity plans subject to Sec.  226.5b, 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 periodic statement disclosures under 
Sec.  226.7(a)(4) and for advertisements under Sec.  226.16.
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    \9\ [Reserved]
---------------------------------------------------------------------------

    (iii) If disclosures are required to be presented in a tabular 
format pursuant to paragraph (a)(3) of this section, the term penalty 
APR shall be used, as applicable. The term penalty APR need not be used 
in reference to the annual percentage rate that applies with the loss 
of a promotional rate, assuming the annual percentage rate that applies 
is not greater than the annual percentage rate that would have applied 
at the end of the promotional period; or if the annual percentage rate 
that applies with the loss of a promotional rate is a variable rate, 
the annual percentage rate is calculated using the same index and 
margin as would have been used to calculate the annual percentage rate 
that would have applied at the end of the promotional period. 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.
    (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)(1).
    (iv) Certain disclosures provided on periodic statements must be 
grouped together in accordance with the requirements of Sec.  
226.7(b)(6) and (b)(13).
    (v) 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).
    (vi) 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).
    (vii) Certain disclosures provided when a rate is increased due to 
delinquency, default or as a penalty must be provided in a tabular 
format in

[[Page 5402]]

accordance with the requirements of Sec.  226.9(g)(3)(ii).
    (b) Time of disclosures. (1) Account-opening disclosures. (i) 
General rule. The creditor shall furnish account-opening disclosures 
required by Sec.  226.6 before the first transaction is made under the 
plan.
    (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)(2) may be disclosed after account opening but before the 
consumer agrees to pay or becomes obligated to pay for the charge, 
provided they are disclosed at a time and in a manner that a consumer 
would be likely to notice them. 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 or third-party creditor;
    (B) The merchant or third-party creditor 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 the merchant or third-party creditor has provided 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) General. In general, a creditor may not 
collect any fee before account-opening disclosures are provided. A 
creditor may collect, or obtain the consumer's agreement to pay, 
membership fees, including application fees excludable from the finance 
charge under Sec.  226.4(c)(1), before providing account-opening 
disclosures if, after receiving the disclosures, the consumer may 
reject the plan and have no obligation to pay these fees (including 
application fees) or any other fee or charge. A membership fee for 
purposes of this paragraph has the same meaning as a fee for the 
issuance or availability of credit described in Sec.  226.5a(b)(2). 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 that fee or any other fee 
or charge.
    (B) Home-equity plans. Creditors offering home-equity plans subject 
to the requirements of Sec.  226.5b are not subject to the requirements 
of paragraph (b)(1)(iv)(A) of this section.
    (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. However, if a consumer rejects 
the plan after receiving account-opening disclosures, the consumer must 
have no obligation to pay such an application fee, or if the fee was 
paid, it must be refunded. See Sec.  226.5(b)(1)(iv).
    (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, 
if delinquency collection proceedings have been instituted, if the 
creditor has charged off the account in accordance with loan-loss 
provisions and will not charge any additional fees or interest on the 
account, 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 Sec.  226.7(a)(8) or (b)(8), as applicable, 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\ [Reserved]
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    (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.
    (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. Sec.  226.6 and 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).

0
7. Section 226.5a is revised 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. 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.
    (2) Form of disclosures; tabular format. (i) The disclosures in 
paragraphs (b)(1) through (5) (except for (b)(1)(iv)(B)) and (b)(7) 
through (15) of this section made pursuant to paragraph (c), (d)(2), 
(e)(1) or (f) of this section generally shall be in the form of a table 
with headings, content, and format substantially similar to any of the 
applicable tables found in G-10 in Appendix G to this part.
    (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.

[[Page 5403]]

    (iii) Disclosures required by paragraphs (b)(1)(iv)(B) and (b)(6) 
of this section must be placed directly beneath the table.
    (iv) When a tabular format is required, any annual percentage rate 
required to be disclosed pursuant to paragraph (b)(1) of this section, 
any introductory rate permitted to be disclosed pursuant to paragraph 
(b)(1)(ii) or required to be disclosed under paragraph (b)(1)(vii) of 
this section, any rate that will apply after a premium initial rate 
expires permitted to be disclosed under paragraph (b)(1)(iii) or 
required to be disclosed under paragraph (b)(1)(vii), and any fee or 
percentage amounts required to be disclosed pursuant to paragraphs 
(b)(2), (b)(4), (b)(8) through (b)(13) of this section must be 
disclosed in bold text. However, bold text shall not be used for: Any 
maximum limits on fee amounts disclosed in the table that do not relate 
to fees that vary by state; the amount of any periodic fee disclosed 
pursuant to paragraph (b)(2) of this section that is not an annualized 
amount; and other annual percentage rates or fee amounts disclosed in 
the table.
    (v) For an application or a solicitation that is accessed by the 
consumer in electronic form, the disclosures required under this 
section may 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.
    (3) 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.
    (4) Fees that vary by state. Card issuers that impose fees referred 
to in paragraphs (b)(8) through (12) of this section that vary by state 
may, at the issuer's option, disclose in the table the specific fee 
applicable to the consumer's account, or the range of the fees, if the 
disclosure includes a statement that the amount of the fee varies by 
state and refers the consumer to a disclosure provided with the table 
where the amount of the fee applicable to the consumer's account is 
disclosed. A card issuer may not list fees for multiple states in the 
table.
    (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;
    (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.
    (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), (e)(1) or (f) 
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 (12), and (15) 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 16-point type, except for the following: Oral disclosures of the 
annual percentage rate for purchases; or a penalty rate that may apply 
upon the occurrence of one or more specific events.
    (i) Variable rate information. If a rate disclosed under paragraph 
(b)(1) of this section is a variable rate, the card issuer 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 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. A disclosure of any applicable limitations on 
rate increases or decreases shall not be included in the table.
    (ii) Discounted initial rate. If the initial rate is an 
introductory rate, as that term is defined in Sec.  226.16(g)(2)(ii), 
the card issuer must disclose the rate that would otherwise apply to 
the account pursuant to paragraph (b)(1) of this section. 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. Except as provided in paragraph (b)(1)(vii) of this 
section, the issuer is not required to, but may disclose in the table 
the introductory rate along with the rate that would otherwise apply to 
the account if the card issuer also discloses the time period during 
which the introductory rate will remain in effect, and uses the term 
``introductory'' or ``intro'' in immediate proximity to the 
introductory 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, 
the card issuer must disclose the premium initial rate pursuant to 
paragraph (b)(1) of this section. Except as provided in paragraph 
(b)(1)(vii) of this section, the issuer is not required to, but 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. Consistent 
with paragraph (b)(1) of this section, the premium initial rate for 
purchases must be in at least 16-point type. If the issuer also 
discloses in the table the rate that will apply after the premium 
initial rate for purchases expires, that rate also must be in at least 
16-point type.
    (iv) Penalty rates. (A) In general. Except as provided in paragraph 
(b)(1)(iv)(B), 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, the card issuer must 
disclose pursuant to paragraph (b)(1) of this section the increased 
rate that may 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.
    (B) Introductory rates. If the issuer discloses an introductory 
rate, as that term is defined in Sec.  226.16(g)(2)(ii), in the table 
or in any written or electronic

[[Page 5404]]

promotional materials accompanying applications or solicitations 
subject to paragraph (c) or (e) of this section, the issuer must 
briefly disclose directly beneath the table the circumstances, if any, 
under which the introductory rate may be revoked, and the type of rate 
that will apply after the introductory rate is revoked.
    (v) Rates that depend on consumer's creditworthiness. If a rate 
cannot be determined at the time disclosures are given because the rate 
depends, at least in part, 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, and other factors if applicable. If the 
rate that depends, at least in part, on a later determination of the 
consumer's creditworthiness is a penalty rate, as described in 
paragraph (b)(1)(iv) of this section, the card issuer at its option may 
disclose the highest rate that could apply, instead of disclosing the 
specific rates or the range of rates that could apply.
    (vi) APRs that vary by state. Issuers imposing annual percentage 
rates that vary by state may, at the issuer's option, disclose in the 
table the specific annual percentage rate applicable to the consumer's 
account, or the range of the annual percentage rates, if the disclosure 
includes a statement that the annual percentage rate varies by state 
and refers the consumer to a disclosure provided with the table where 
the annual percentage rate applicable to the consumer's account is 
disclosed. A card issuer may not list annual percentage rates for 
multiple states in the table.
    (vii) Issuers subject to 12 CFR 227.24 or similar law. 
Notwithstanding paragraphs (b)(1)(ii) and (b)(1)(iii) of this section, 
issuers that are subject to 12 CFR Sec.  227.24 or similar law must 
disclose in the table any introductory rate applicable to the account, 
consistent with the requirements of paragraph (b)(1)(ii) of this 
section, and any rate applicable upon the expiration of a premium 
initial rate, consistent with the requirements of paragraph (b)(1)(iii) 
of this section.
    (2) Fees for issuance or availability. (i) Any annual or other 
periodic 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; 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.
    (3) Fixed finance charge; minimum interest charge. Any fixed 
finance charge and a brief description of the charge. Any minimum 
interest charge if it exceeds $1.00 that could be imposed during a 
billing cycle, and a brief description of the charge. The $1.00 
threshold amount shall be adjusted periodically by the Board to reflect 
changes in the Consumer Price Index. The Board shall calculate each 
year a price level adjusted minimum interest charge using the Consumer 
Price Index in effect on the June 1 of that year. When the cumulative 
change in the adjusted minimum value derived from applying the annual 
Consumer Price level to the current minimum interest charge threshold 
has risen by a whole dollar, the minimum interest charge will be 
increased by $1.00. The issuer may, at its option, disclose in the 
table minimum interest charges below this threshold.
    (4) Transaction charges. Any transaction charge imposed by the card 
issuer for the use of the card for purchases.
    (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 due to a periodic interest rate and any conditions on the 
availability of the grace period. 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 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. In disclosing in the 
tabular format a grace period that applies to all types of purchases, 
the phrase ``How to Avoid Paying Interest on Purchases'' shall be used 
as the heading for the row describing the grace period. If a grace 
period is not offered on all types of purchases, in disclosing this 
fact in the tabular format, the phrase ``Paying Interest'' shall be 
used as the heading for the row describing this fact.
    (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. 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.
    (12) Returned-payment fee. Any fee imposed by the card issuer for a 
returned payment.
    (13) 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, 
as applicable.
    (14) 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 and charged to the account when the account is opened is 15 
percent or more of the minimum credit limit for 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 15 
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 15 percent threshold test is met, the issuer 
in providing the disclosure must disclose the amount of available 
credit calculated by excluding those optional fees, and the available 
credit including those optional fees. This paragraph does not apply 
with respect to fees or security deposits that are not debited to the 
account.
    (15) Web site reference. 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.

[[Page 5405]]

    (c) Direct mail and electronic applications and solicitations. (1) 
General. 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 to consumers in electronic 
form.
    (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 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.
    (d) Telephone applications and solicitations. (1) Oral disclosure. 
The card issuer shall disclose orally the information in paragraphs 
(b)(1) through (7) and (b)(14) 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:
    (i)(A) Does not impose a fee described in paragraph (b)(2) of this 
section; or
    (B) Imposes such a fee but provides the consumer with a right to 
reject the plan consistent with Sec.  226.5(b)(1)(iv); and
    (ii) 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:
    (A) The applicable information in paragraph (b) of this section; 
and
    (B) As applicable, the fact that the consumer has the right to 
reject the plan and not be obligated to pay fees described in paragraph 
(b)(2) or any other fees or charges until the consumer has used the 
account or made a payment on the account after receiving a billing 
statement.
    (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).
    (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 (e)(1) or (e)(2) 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) 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.
    (3) 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.
    (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.
    (f) In-person applications and solicitations. 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.
    (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.
    (5) Daily balance. For each day in the billing cycle, this balance 
is figured by taking the beginning balance each day,

[[Page 5406]]

adding any new purchases, and subtracting any payment and credits.

0
8. Section 226.6 is revised to read as follows:


Sec.  226.6   Account-opening disclosures.

    (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. A creditor shall disclose the 
items in this section, to the extent applicable:
    (1) Finance charge. The circumstances under which a finance charge 
will be imposed and an explanation of how it will be determined, as 
follows.
    (i) 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.
    (ii) 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\ 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 effect(s) of an increase. 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. A creditor is not required to adjust the range of balances 
disclosure to reflect the balance below which only a minimum charge 
applies.
---------------------------------------------------------------------------

    \11\ [Reserved]
    \12\ [Reserved]
---------------------------------------------------------------------------

    (iii) An explanation of the method used to determine the balance on 
which the finance charge may be computed.
    (iv) 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\ [Reserved]
---------------------------------------------------------------------------

    (2) 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.
    (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.  
226.5b(d)(6) and (d)(12)(ii).
    (vii) The variable-rate disclosures described in Sec.  
226.5b(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(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.
    (4) 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.
    (5) 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 Model Form G-3 or, at the creditor's option G-3(A), in 
Appendix G to this part.
    (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.
    (1) Form of disclosures; tabular format for open-end (not home-
secured) plans. Creditors must provide the account-opening disclosures 
specified in paragraph (b)(2)(i) through (b)(2)(v) (except for 
(b)(2)(i)(D)(2)) and (b)(2)(vii) through (b)(2)(xiv) of this section) 
in the form of a table with the headings, content, and format 
substantially similar to any of the applicable tables in G-17 in 
Appendix G to this part.
    (i) Highlighting. In the table, any annual percentage rate required 
to be disclosed pursuant to paragraph (b)(2)(i) of this section; any 
introductory rate permitted to be disclosed pursuant to paragraph 
(b)(2)(i)(B) or required to be disclosed under paragraph (b)(2)(i)(F) 
of this section, any rate that will apply after a premium initial rate 
expires permitted to be disclosed pursuant to paragraph (b)(2)(i)(C) or 
required to be disclosed pursuant to paragraph (b)(2)(i)(F), and any 
fee or percentage amounts required to be disclosed pursuant to 
paragraphs (b)(2)(ii), (b)(2)(iv), (b)(2)(vii) through (b)(2)(xii) of 
this section must be disclosed in bold text. However, bold text shall 
not be used for: Any maximum limits on fee amounts disclosed in the 
table that do not relate to fees that vary by state; the amount of any 
periodic fee disclosed pursuant to paragraph (b)(2) of this section 
that is not an annualized amount; and other annual percentage rates or 
fee amounts disclosed in the table.
    (ii) Location. Only the information required or permitted by 
paragraphs (b)(2)(i) through (b)(2)(v) (except for (b)(2)(i)(D)(2)) and 
(b)(2)(vii) through (b)(2)(xiv) of this section) shall be in the table. 
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(vi) and 
(b)(2)(xv) of this section shall be placed directly below the table. 
Disclosures required by paragraphs (b)(3) through (b)(5) of this 
section that are not otherwise required to be in the table and other 
information may be presented with the account agreement or account-
opening disclosure statement, provided such information appears outside 
the required table.
    (iii) Fees that vary by state. Creditors that impose fees referred 
to in paragraphs (b)(2)(vii) through (b)(2)(xi) of this section that 
vary by state and that provide the disclosures required by paragraph 
(b) of this section in person at the time the open-end (not home-
secured) plan is established in connection with financing the purchase 
of goods or services may, at the creditor's option, disclose in the 
account-opening table the specific fee applicable to the consumer's 
account, or the range of the fees, if the disclosure includes a 
statement that the amount of the fee varies by state and refers the 
consumer to the account agreement or other disclosure provided with the 
account-opening table where the amount of the fee applicable to the 
consumer's account is disclosed. A creditor may not list fees for 
multiple states in the account-opening summary table.
    (iv) 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.
    (2) Required disclosures for account-opening table for open-end 
(not home-

[[Page 5407]]

secured) plans. A creditor shall disclose the items in this section, to 
the extent applicable:
    (i) 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 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)(2)(i) 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. A disclosure of any applicable limitations on rate increases 
or decreases shall not be included in the table.
    (B) Discounted initial rates. If the initial rate is an 
introductory rate, as that term is defined in Sec.  226.16(g)(2)(ii), 
the creditor must disclose the rate that would otherwise apply to the 
account pursuant to paragraph (b)(2)(i) of this section. Where the rate 
is not tied to an index or formula, the creditor 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 of 
paragraph (b)(4)(ii)(G) of this section. Except as provided in 
paragraph (b)(2)(i)(F) of this section, the creditor is not required 
to, but may disclose in the table the introductory rate along with the 
rate that would otherwise apply to the account if the creditor also 
discloses the time period during which the introductory rate will 
remain in effect, and uses the term ``introductory'' or ``intro'' in 
immediate proximity to the introductory rate.
    (C) Premium initial rate. If the initial rate is temporary and is 
higher than the rate that will apply after the temporary rate expires, 
the creditor must disclose the premium initial rate pursuant to 
paragraph (b)(2)(i) of this section. Except as provided in paragraph 
(b)(2)(i)(F) of this section, the creditor is not required to, but 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. Consistent 
with paragraph (b)(2)(i) of this section, the premium initial rate for 
purchases must be in at least 16-point type. If the creditor also 
discloses in the table the rate that will apply after the premium 
initial rate for purchases expires, that rate also must be in at least 
16-point type.
    (D) Penalty rates. (1) In general. Except as provided in paragraph 
(b)(2)(i)(D)(2) of this section, 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, 
the creditor must disclose pursuant to paragraph (b)(2)(i) of this 
section the increased rate that may 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 
more than one penalty rate may apply, the creditor at its option may 
disclose the highest rate that could apply, instead of disclosing the 
specific rates or the range of rates that could apply.
    (2) Introductory rates. If the creditor discloses in the table an 
introductory rate, as that term is defined in Sec.  226.16(g)(2)(ii), 
creditors must briefly disclose directly beneath the table the 
circumstances under which the introductory rate may be revoked, and the 
rate that will apply after the introductory rate is revoked.
    (E) Point of sale where APRs vary by state. Creditors imposing 
annual percentage rates that vary by state and providing the 
disclosures required by paragraph (b) of this section in person at the 
time the open-end (not home-secured) plan is established in connection 
with financing the purchase of goods or services may, at the creditor's 
option, disclose pursuant to paragraph (b)(2)(i) of this section in the 
account-opening table the specific annual percentage rate applicable to 
the consumer's account, or the range of the annual percentage rates, if 
the disclosure includes a statement that the annual percentage rate 
varies by state and refers the consumer to the account agreement or 
other disclosure provided with the account-opening table where the 
annual percentage rate applicable to the consumer's account is 
disclosed. A creditor may not list annual percentage rates for multiple 
states in the account-opening table.
    (F) Creditors subject to 12 CFR 227.24 or similar law. 
Notwithstanding paragraphs (b)(2)(i)(B) and (b)(2)(i)(C) of this 
section, issuers that are subject to 12 CFR 227.24 or similar law must 
disclose in the table any introductory rate that would apply to the 
account, consistent with the requirements of paragraph (b)(2)(i)(B) of 
this section, and any rate that would apply upon the expiration of a 
premium initial rate, consistent with the requirements of paragraph 
(b)(2)(i)(C) of this section.
    (ii) Fees for issuance or availability. (A) 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; how frequently it will be imposed; and the annualized 
amount of the fee.
    (B) Any non-periodic fee that relates to opening the plan. A 
creditor must disclose that the fee is a one-time fee.
    (iii) Fixed finance charge; minimum interest charge. Any fixed 
finance charge and a brief description of the charge. Any minimum 
interest charge if it exceeds $1.00 that could be imposed during a 
billing cycle, and a brief description of the charge. The $1.00 
threshold amount shall be adjusted periodically by the Board to reflect 
changes in the Consumer Price Index. The Board shall calculate each 
year a price level adjusted minimum interest charge using the Consumer 
Price Index in effect on the June 1 of that year. When the cumulative 
change in the adjusted minimum value derived from applying the annual 
Consumer Price level to the current minimum interest charge threshold 
has risen by a whole dollar, the minimum interest charge will be 
increased by $1.00. The creditor may, at its option, disclose in the 
table minimum interest charges below this threshold.
    (iv) Transaction charges. Any transaction charge imposed by the 
creditor for use of the open-end plan for purchases.
    (v) Grace period. The date by which or the period within which any 
credit extended may be repaid without incurring a finance charge due to 
a periodic interest rate and any conditions on the availability of the 
grace period. If no grace period is provided, that fact must be 
disclosed. If the length of the grace period varies, the creditor may 
disclose the range of days, the minimum number of days, or the average 
number of the days in the grace period, if the disclosure is identified 
as a range, minimum, or average. In disclosing in the tabular format a 
grace period that applies to all features on the account, the phrase 
``How to Avoid Paying Interest'' shall be used as the heading for the 
row describing the grace period.

[[Page 5408]]

If a grace period is not offered on all features of the account, in 
disclosing this fact in the tabular format, the phrase ``Paying 
Interest'' shall be used as the heading for the row describing this 
fact.
    (vi) Balance computation method. The name of the balance 
computation method listed in Sec.  226.5a(g) that is used to determine 
the balance on which the finance charge is computed for each feature, 
or an explanation of the method used if it is not listed, along with a 
statement that an explanation of the method(s) required by paragraph 
(b)(4)(i)(D) of this section is provided with the account-opening 
disclosures. In determining which balance computation method to 
disclose, the creditor shall assume that credit extended will not be 
repaid within any grace period, if any.
    (vii) Cash advance fee. Any fee imposed for an extension of credit 
in the form of cash or its equivalent.
    (viii) Late payment fee. Any fee imposed for a late payment.
    (ix) Over-the-limit fee. Any fee imposed for exceeding a credit 
limit.
    (x) Balance transfer fee. Any fee imposed to transfer an 
outstanding balance.
    (xi) Returned-payment fee. Any fee imposed by the creditor for a 
returned payment.
    (xii) Required insurance, debt cancellation or debt suspension 
coverage. (A) 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
    (B) A cross reference to any additional information provided about 
the insurance or coverage, as applicable.
    (xiii) Available credit. If a creditor requires fees for the 
issuance or availability of credit described in paragraph (b)(2)(ii) 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 and charged to the account when the account is opened is 15 
percent or more of the minimum credit limit for the plan, a creditor 
must disclose the available credit remaining after these fees or 
security deposit are debited to the account. The determination whether 
the 15 percent threshold is met must be based on the minimum credit 
limit for the plan. However, the disclosure provided under this 
paragraph must be based on the actual initial credit limit provided on 
the account. In determining whether the 15 percent threshold test is 
met, the creditor 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 15 percent threshold test is met, the creditor in 
providing the disclosure must disclose the amount of available credit 
calculated by excluding those optional fees, and the available credit 
including those optional fees. The creditor shall also disclose that 
the consumer has the right to reject the plan and not be obligated to 
pay those fees or any other fee or charges until the consumer has used 
the account or made a payment on the account after receiving a periodic 
statement. This paragraph does not apply with respect to fees or 
security deposits that are not debited to the account.
    (xiv) 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 cards.
    (xv) Billing error rights reference. A statement that information 
about consumers' right to dispute transactions is included in the 
account-opening disclosures.
    (3) Disclosure of charges imposed as part of open-end (not home-
secured) plans. A creditor shall disclose, to the extent applicable:
    (i) For charges imposed as part of an open-end (not home-secured) 
plan, the circumstances under which the charge may be imposed, 
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.
    (ii) 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.
    (iii) Charges that are not imposed as part of the plan include:
    (A) 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.
    (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.
    (4) Disclosure of rates for open-end (not home-secured) plans. A 
creditor shall disclose, to the extent applicable:
    (i) For each periodic rate that may be used to calculate interest:
    (A) Rates. The rate, expressed as a periodic rate and a 
corresponding annual percentage rate.
    (B) Range of balances. 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) Type of transaction. The type of transaction to which the rate 
applies, if different rates apply to different types of transactions.
    (D) Balance computation method. An explanation of the method used 
to determine the balance to which the rate is applied.
    (ii) Variable-rate accounts. For interest rate changes that are 
tied to increases in an index or formula (variable-rate accounts) 
specifically set forth in the account agreement:
    (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.

[[Page 5409]]

    (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) Rate changes not due to index or formula. 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)(4)(i)(A) of this section.
    (B) How long the initial rate will remain in effect and 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) The balances to which the new rate will apply.
    (E) The balances to which the current rate at the time of the 
change will apply.
    (5) Additional disclosures for open-end (not home-secured) plans. A 
creditor shall disclose, to the extent applicable:
    (i) Voluntary credit insurance, debt cancellation or debt 
suspension. The disclosures in Sec.  226.4(d)(1)(i) and (d)(1)(ii) and 
(d)(3)(i) through (d)(3)(iii) if the creditor offers optional credit 
insurance or debt cancellation or debt suspension coverage that is 
identified in Sec.  226.4(b)(7) or (b)(10).
    (ii) 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.
    (iii) 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 Model Form G-3(A) in Appendix G to this part.
    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:
    (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 not to provide a disclosure under paragraph (a)(7) of this 
section must comply with paragraph (b)(6) of this section.
    (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.
    (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 accounting does not result in any finance or 
other charge.
    (4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii) 
of this section, 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\ 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. If different periodic 
rates apply to different types of transactions, the types of 
transactions to which the periodic rates apply shall also be disclosed. 
For variable-rate plans, the fact that the periodic rate(s) may vary.
---------------------------------------------------------------------------

    \14\ [Reserved]
    \15\ [Reserved]
---------------------------------------------------------------------------

    (ii) Exception. An annual percentage rate that differs from the 
rate that would otherwise apply and is offered only for a promotional 
period 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. 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.
    (6) Amount of finance charge 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. 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.
    (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.
    (7) Annual percentage rate. 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(c) using the term annual 
percentage rate.
    (8) Grace period. The date by which or the time period within which 
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.
    (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.
    (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.
    (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

[[Page 5410]]

disclosed. For variable-rate plans, the fact that the annual percentage 
rate may vary.
    (ii) Exception. A promotional rate, as that term is defined in 
Sec.  226.16(g)(2)(i) is required to be disclosed only 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 interest 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)(3), grouped together, in 
proximity to transactions identified under paragraph (b)(2) of this 
section, substantially similar to Sample G-18(A) in Appendix G to this 
part.
    (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 of finance charges attributable to periodic 
interest rates, using the term Total Interest, 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 to this part.
    (iii) Fees. Charges imposed as part of the plan other than charges 
attributable to periodic interest rates must be grouped together under 
the heading Fees, identified consistent with the feature or type, and 
itemized, and a total of charges, using the term Fees, 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.
    (7) Change-in-terms and increased penalty rate summary for open-end 
(not home-secured) plans. Creditors that provide a change-in-terms 
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). See Forms G-18(F) and 
G-18(G) in Appendix G to this part.
    (8) Grace period. The date by which or the time period within which 
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 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) The amount of the late-payment fee and any increased periodic 
rate(s) (expressed as an annual percentage rate(s)) that may be imposed 
on the account as a result of a late payment. If a range of late-
payment fees may be assessed, the creditor may state the range of fees, 
or the highest fee and at the creditor's option with the highest fee an 
indication that the fee imposed could be lower. If the rate may be 
increased for more than one feature or balance, the creditor may state 
the range of rates or the highest rate that could apply and at the 
creditor's option an indication that the rate imposed could be lower.
    (ii) Exception. The requirements of paragraph (b)(11) of this 
section do not apply to periodic statements provided solely for charge 
card accounts.
    (12) Minimum payment. (i) General disclosure requirements. Except 
as provided in paragraph (b)(12)(v) of this section, a card issuer, at 
its option, shall comply with any of paragraphs (b)(12)(ii), 
(b)(12)(iii) or (b)(12)(iv) of this section.
    (ii) Generic repayment example and establishment of a toll-free 
telephone number. A card issuer that chooses this option to comply with 
the requirements of paragraph (b)(12) of this section must comply with 
paragraph (b)(12)(ii)(A) or (b)(12)(ii)(B) as applicable.
    (A) Credit card issuers not regulated by the FTC. This paragraph 
applies to card issuers that are not subject to the Federal Trade 
Commission's authority to enforce the act and this regulation as to the 
card issuer.
    (1) General rule. Except as provided in paragraph (b)(12)(ii)(A)(2) 
or (b)(12)(ii)(A)(3) of this section, the card issuer must provide the 
following statement with a bold heading on each periodic statement, in 
accordance with the format requirements of paragraph (b)(13) of this 
section: ``Minimum Payment Warning: 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].'' The card 
issuer may, at its option, substitute an example that uses an annual 
percentage rate that is greater than 17 percent. 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 to this part, and disclose this toll-free telephone 
number as part of the statement above. In responding to a request for a 
generic repayment estimate, as described in Appendix M1 to this part, 
through the toll-free telephone number, the card issuer may not provide 
any repayment information other than the repayment information required 
or permitted by Appendix M1 to this part.
    (2) Alternative disclosure where minimum payment exceeds 4%. If the 
required minimum periodic payment exceeds 4% of the balance upon which 
finance charges accrue, the card issuer may comply with this paragraph 
in lieu of paragraph (b)(12)(ii)(A)(1) of this section. Such card 
issuer may provide the following statement with a bold heading on each 
periodic statement, in accordance with the format requirements of 
paragraph (b)(13) of this section: ``Minimum Payment Warning: 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

[[Page 5411]]

estimate of the time it would take to repay your actual balance making 
only minimum payments, call: [toll-free telephone number].'' The card 
issuer may, at its option, substitute an example that uses an annual 
percentage rate that is greater than 17 percent. The card 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 to this part, and disclose this toll-free telephone 
number as part of the statement above. In responding to a request for a 
generic repayment estimate, as described in Appendix M1 to this part, 
through the toll-free telephone number, the card issuer may not provide 
any repayment information other than the repayment information required 
or permitted by Appendix M1 to this part.
    (3) Small depository institution issuers. After June 30, 2012 a 
small depository institution issuer is required to establish and 
maintain a toll-free telephone number for the purpose of providing its 
customers with generic repayment estimates, as described in Appendix M1 
to this part. Before June 30, 2012, small depository institution 
issuers, when making a disclosure under paragraph (b)(12)(ii)(A)(1) or 
(2) of this section, may provide the toll-free telephone numbers and 
the Web site operated by or on behalf of the Federal Reserve Board. A 
small depository institution issuer must use the following language to 
disclose the Federal Reserve Board's toll-free telephone numbers: ``For 
an estimate of the time it would take to repay your actual balance 
making only minimum payments, call the Federal Reserve Board at this 
toll-free telephone number: 1-888-445-4801 or visit the Board's Web 
site at http://www.federalreserve.gov/creditcardcalculator. (TTY toll-
free telephone number: 1-888-319-4802.)'' 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 chartered credit unions (as defined in section 
101 of the Federal Credit Union Act), with total assets not exceeding 
$250 million, as of December 31, 2009.
    (B) FTC-regulated credit card issuers. This paragraph applies to 
card issuers that are subject to the Federal Trade Commission's 
authority under the Truth in Lending Act to enforce the act and this 
regulation as to a card issuer. The card issuer must disclose the 
following statement with a bold heading on each periodic statement, in 
accordance with the format requirements of paragraph (b)(13) of this 
section: ``Minimum Payment Warning: 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: [toll-free telephone number established by the 
FTC] or visit the FTC's Web site at [Web site established by the FTC]. 
(TTY toll-free telephone number: [TTY toll-free telephone number 
established by the FTC].)'' The card issuer may, at its option, 
substitute an example that uses an annual percentage rate that is 
greater than 17 percent. The card issuer must disclose the toll-free 
telephone numbers and Web site established by or on behalf of the 
Federal Trade Commission.
    (iii) Actual repayment disclosure through a toll-free telephone 
number. A card issuer that chooses this option for complying with the 
requirements of paragraph (b)(12) of this section must disclose the 
following statement with a bold heading on each periodic statement in 
accordance with the format requirements of paragraph (b)(13) of this 
section: ``Minimum Payment Warning: 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 an estimate of how long it will 
take you to repay your balance making only minimum payments, call this 
toll-free telephone number:----.'' The card 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 to this part, and disclose this toll-free telephone number as part 
of the statement above. In responding to a request for an actual 
repayment disclosure, as described in Appendix M2 to this part, through 
the toll-free telephone number, the card issuer may not provide any 
repayment information other than the repayment information required or 
permitted by Appendix M2 to this part.
    (iv) Actual repayment disclosure on the periodic statement. A card 
issuer that chooses this option for complying with the requirements of 
paragraph (b)(12) of this section must provide on each periodic 
statement, in accordance with the format requirements of paragraph 
(b)(13) of this section, a disclosure of the actual repayment 
information as described in Appendix M2 to this part, in a form 
substantially similar to Sample G-18(C) in Appendix G to this part.
    (v) 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 the entire outstanding balance is subject 
to a fixed repayment period specified in the account agreement and the 
required minimum payments applicable to that balance will amortize the 
outstanding balance within the fixed repayment period;
    (G) A billing cycle immediately following two consecutive billing 
cycles in which the consumer paid the entire balance in full, had a 
zero outstanding balance or had a credit balance; and
    (H) A billing cycle where paying the minimum payment due for that 
billing cycle will pay the entire outstanding balance on the account 
for that billing cycle.
    (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 amount of the late-payment 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, late-payment fee and annual percentage rate, ending balance, 
minimum payment due, and minimum payment disclosure shall be grouped 
together. Samples G-18(D) or G-18(E) in Appendix G to this part set 
forth examples of how these terms may be grouped.

0
10. Section 226.8 is revised to read as follows:


Sec.  226.8  Identifying transactions on periodic statements.

    The creditor shall identify credit transactions on or with the 
first periodic

[[Page 5412]]

statement that reflects the transaction by furnishing the following 
information, as applicable.\16\
---------------------------------------------------------------------------

    \16\ [Reserved]
---------------------------------------------------------------------------

    (a) Sale credit. (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
---------------------------------------------------------------------------

    \17\ [Reserved]
    \18\ [Reserved]
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    \19\ [Reserved]
---------------------------------------------------------------------------

    (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.
    (b) Nonsale credit. For each credit transaction not involving the 
sale of property or services, the creditor must disclose 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.
---------------------------------------------------------------------------

    \20\ [Reserved]
---------------------------------------------------------------------------

    (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)(26), 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.

0
11. Section 226.9 is revised 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 Sec.  226.6(a)(5) and (b)(5)(iii) 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 Model 
Form G-4 or Model Form G-4(A) in Appendix G to this part, as 
applicable. Creditors offering home-equity plans subject to the 
requirements of Sec.  226.5b may use either Model Form, at their 
option.
    (b) Disclosures for supplemental credit access devices and 
additional features. (1) If a creditor, within 30 days after mailing or 
delivering the account-opening disclosures under Sec.  226.6(a)(1) or 
(b)(3)(ii)(A), as applicable, adds a credit feature to the consumer's 
account or mails or delivers to the consumer a credit access device, 
including but not limited to checks that access a credit card account, 
for which the finance charge terms are the same as those previously 
disclosed, no additional disclosures are necessary. Except as provided 
in paragraph (b)(3) of this section, after 30 days, if the creditor 
adds a credit feature or furnishes a credit access 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) Except as provided in paragraph (b)(3) of this section, 
whenever a credit feature is added or a credit access 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)(1) or (b)(3)(ii)(A), as applicable, that are applicable 
to the added feature or device shall be given before the consumer uses 
the feature or device for the first time.
    (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) are mailed or delivered, or are 
provided within 30 days of the account-opening disclosures and the 
finance charge terms for the checks differ from the finance charge 
terms previously disclosed, 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 to this part:
    (A) If a promotional rate, as that term is defined in Sec.  
226.16(g)(2)(i) applies to the checks:
    (1) The promotional rate and the time period during which the 
promotional rate will remain in effect;
    (2) The type of rate that will apply (such as whether the purchase 
or cash advance rate applies) after the promotional rate expires, and 
the annual percentage rate that will apply after the promotional rate 
expires. For 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; and
    (3) The date, if any, by which the consumer must use the checks in 
order to qualify for the promotional rate. If the creditor will honor 
checks used after such date but will apply an annual percentage rate 
other than the promotional rate, the creditor must disclose this fact 
and the type of annual percentage rate that will apply if the consumer 
uses the checks after such date.
    (B) If no promotional rate applies to the checks:
    (1) The type of rate that will apply to the checks and the 
applicable annual percentage rate. For a variable-rate account, a 
creditor must disclose an annual percentage rate based on the 
applicable index or formula in

[[Page 5413]]

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)(2)(iv), (b)(2)(vii), or (b)(2)(x); 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. When disclosing whether there 
is a grace period, the phrase ``How to Avoid Paying Interest on Check 
Transactions'' shall be used as the row heading when a grace period 
applies to credit extended by the use of the checks. When disclosing 
the fact that no grace period exists for credit extended by use of the 
checks, the phrase ``Paying Interest'' shall be used as the row 
heading.
    (ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this 
section must be accurate as of the time the disclosures are mailed or 
delivered. A variable annual percentage rate is accurate if it was in 
effect within 60 days of when the disclosures are mailed or delivered.
    (c) Change in terms. (1) Rules affecting home-equity plans. (i) 
Written notice required. For home-equity plans subject to the 
requirements of Sec.  226.5b, whenever any term required to be 
disclosed under Sec.  226.6(a) 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; the notice 
shall be given, however, before the effective date of the change.
    (ii) Notice not required. For home-equity plans subject to the 
requirements of Sec.  226.5b, a creditor is not required to provide 
notice under this section when the change involves a reduction of any 
component of a finance or other charge or when the change results from 
an agreement involving a court proceeding.
    (iii) Notice to restrict credit. For home-equity plans subject to 
the requirements of Sec.  226.5b, if the creditor prohibits additional 
extensions of credit or reduces the credit limit pursuant to Sec.  
226.5b(f)(3)(i) or (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.
    (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.  226.6(b)(3), (b)(4) or 
(b)(5) 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 (g) of this 
section instead of paragraph (c)(2) of this section.
    (ii) Charges not covered by Sec.  226.6(b)(1) and (b)(2). 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)(3) that is not required 
to be disclosed under Sec.  226.6(b)(1) and (b)(2), a creditor may 
either, at its option:
    (A) Comply with the requirements of paragraph (c)(2)(i) of this 
section; or
    (B) Provide notice of the amount of the charge before the consumer 
agrees to or becomes obligated to pay the charge, at a time and in a 
manner that a consumer would be likely to notice the disclosure of 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 to Sec.  226.6(b)(1) and (b)(2), 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 required by Sec.  
226.6(b)(1) and (b)(2);
    (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;
    (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; and
    (7) If the change in terms being disclosed is an increase in an 
annual percentage rate, the balances to which the increased rate will 
be applied. If applicable, a statement identifying the balances to 
which the current rate will continue to apply as of the effective date 
of the change in terms.
    (B) Format requirements. (1) Tabular format. The summary of changes 
described in paragraph (c)(2)(iii)(A)(1) 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 to this part. 
The table must disclose the changed term and information relevant to 
the change, if that relevant information is required by Sec.  
226.6(b)(1) and (b)(2). The new terms shall be described in the same 
level of detail as required when disclosing the terms under Sec.  
226.6(b)(2).
    (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 front of any 
page of the statement. The summary of changes described in paragraph 
(c)(1)(iii)(A)(1) of this section must immediately follow the 
information described in paragraph (c)(2)(iii)(A)(2) through 
(c)(2)(iii)(A)(7) of this section, and be substantially similar to the 
format shown in Sample G-20 in Appendix G to this part.
    (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

[[Page 5414]]

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 (c)(1)(iii)(A)(7) of this section, 
substantially similar to the format shown in Sample G-20 in Appendix G 
to this part.
    (iv) Notice not required. For open-end plans (other than home 
equity plans 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.
    (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. Sec.  226.5a, 226.6 and 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 (b)(7) 
that would apply if the account were renewed; 20a and
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    \20a\ [Reserved]
---------------------------------------------------------------------------

    (ii) How and when the cardholder may terminate credit availability 
under the account to avoid paying the renewal fee.
    (2) Delayed notice. Alternatively, 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:
    (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 to the cardholder written notice 
of the change not less than 30 days before the change in provider 
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. 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.
    (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, except 
as provided in paragraph (g)(4) of this section, 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.

[[Page 5415]]

    (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 delinquency or default rate or penalty 
rate, as applicable, has been triggered;
    (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;
    (D) A statement indicating to which balances the delinquency or 
default rate or penalty rate will be applied; and
    (E) If applicable, a description of any balances to which the 
current rate will continue to apply as of the effective date of the 
rate increase, unless a consumer fails to make a minimum periodic 
payment within 30 days from the due date for that payment.
    (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 any page of the 
periodic statement, 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) or (g)(4)(ii) of this section.
    (4) Exceptions. (i) Workout arrangements. A creditor is not 
required to provide a notice pursuant to paragraph (g)(1) of this 
section if a rate applicable to a category of transactions is increased 
as a result of the consumer's default, delinquency or as a penalty, in 
each case for failure to comply with the terms of a workout arrangement 
between the creditor and the consumer, provided that:
    (A) The rate following any such increase does not exceed the rate 
that applied to the category of transactions prior to commencement of 
the workout arrangement; or
    (B) If the rate that applied to a category of transactions prior to 
the commencement of the workout arrangement was a variable rate, the 
rate following any such increase is a variable rate determined by the 
same formula (index and margin) that applied to the category of 
transactions prior to commencement of the workout arrangement.
    (ii) Decrease in credit limit. A creditor is not required to 
provide, prior to increasing the rate for obtaining an extension of 
credit that exceeds the credit limit, a notice pursuant to paragraph 
(g)(1) of this section, provided that:
    (A) The creditor provides at least 45 days in advance of imposing 
the penalty rate a notice, in writing, that includes:
    (1) A statement that the credit limit on the account has been or 
will be decreased.
    (2) A statement indicating the date on which the penalty rate will 
apply, if the outstanding balance exceeds the credit limit as of that 
date;
    (3) A statement that the penalty rate will not be imposed on the 
date specified in paragraph (g)(4)(ii)(A)(2) of this section, if the 
outstanding balance does not exceed the credit limit as of that date;
    (4) The circumstances under which the penalty rate, if applied, 
will cease to apply to the account, or that the penalty rate, if 
applied, will remain in effect for a potentially indefinite time 
period;
    (5) A statement indicating to which balances the penalty rate may 
be applied; and
    (6) If applicable, a description of any balances to which the 
current rate will continue to apply as of the effective date of the 
rate increase, unless the consumer fails to make a minimum periodic 
payment within 30 days from the due date for that payment; and
    (B) The creditor does not increase the rate applicable to the 
consumer's account to the penalty rate if the outstanding balance does 
not exceed the credit limit on the date set forth in the notice and 
described in paragraph 9(g)(4)(ii)(A)(2) of this section.
    (C)(1) If a notice provided pursuant to paragraph (g)(4)(ii)(A) of 
this section is included on or with a periodic statement, the 
information described in paragraph (g)(4)(ii)(A) of this section must 
be in the form of a table and provided on the front of any page of the 
periodic statement; or
    (2) If a notice required by paragraph (g)(4)(ii)(A) of this section 
is not included on or with a periodic statement, the information 
described in paragraph (g)(4)(ii)(A) of this section must be disclosed 
on the front of the first page of the notice. Only information related 
to the reduction in credit limit may be included with the notice, 
except that this notice may be combined with a notice described in 
paragraph (c)(2)(iii)(A) or (g)(1) of this section.
    (iii) Certain rate increases applicable to outstanding balances. A 
creditor is not required to provide a notice pursuant to paragraph 
(g)(1) of this section prior to increasing the rate applicable to an 
outstanding balance as defined in 12 CFR Sec.  227.24(a)(2), if:
    (A) The creditor previously provided a notice pursuant to paragraph 
(g)(1) of this section containing the content specified in paragraph 
(g)(3) of this section;
    (B) After that notice is provided but prior to the effective date 
of the rate increase or rate increases disclosed in the notice pursuant 
to paragraph (g)(3)(i)(B) of this section, the consumer fails to make a 
required minimum periodic payment within 30 days from the due date for 
that payment; and
    (C) The rate increase applicable to outstanding balances takes 
effect on the effective date set forth in the notice.

0
12. Section 226.10 is revised 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. (1) General rule. A 
creditor may specify reasonable requirements for payments that enable 
most consumers to make conforming payments.
    (2) Examples of reasonable requirements for payments. Reasonable 
requirements for making payment may include:
    (i) Requiring that payments be accompanied by the account number or 
payment stub;
    (ii) Setting reasonable cut-off times for payments to be received 
by mail, by electronic means, by telephone, and in person. For example, 
it would be reasonable for a creditor to set a cut-off time for 
payments by mail of 5 p.m. on the payment due date at the location 
specified by the creditor for the receipt of such payments;
    (iii) Specifying that only checks or money orders should be sent by 
mail;
    (iv) Specifying that payment is to be made in U.S. dollars; or
    (v) Specifying one particular address for receiving payments, such 
as a post office box.

[[Page 5416]]

    (3) Nonconforming 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.
    (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.
    (d) Crediting of payments when creditor does not receive or accept 
payments on due date. If the due date for payments is a day on which 
the creditor does not receive or accept payments by mail, the creditor 
may not treat a payment received by mail the next business day as late 
for any purpose.

0
13. Section 226.11 is revised to read as follows:


Sec.  226.11  Treatment of credit balances; account termination.

    (a) Credit balances. 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--
    (1) Credit the amount of the credit balance to the consumer's 
account;
    (2) Refund any part of the remaining credit balance within seven 
business days from receipt of a written request from the consumer;
    (3) 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.
    (b) Account termination. (1) A creditor 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 or more 
consecutive months. An account is inactive for purposes of this 
paragraph if no credit has been extended (such as by purchase, cash 
advance or balance transfer) and if the account has no outstanding 
balance.

0
14. Section 226.12 is revised 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\ [Reserved]
---------------------------------------------------------------------------

    (b) Liability of cardholder for unauthorized use. (1)(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) 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\ [Reserved]
---------------------------------------------------------------------------

    (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\ [Reserved]
---------------------------------------------------------------------------

    (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\ [Reserved]
    \25\ [Reserved]
---------------------------------------------------------------------------

    (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. (i) General. The rights stated in paragraphs 
(c)(1) and (c)(2) of this section apply only if:
    (A) The cardholder has made a good faith attempt to resolve the 
dispute with the person honoring the credit card; and
    (B) 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

[[Page 5417]]

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\ [Reserved]
---------------------------------------------------------------------------

    (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.
    (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 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 7 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 3 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.

0
15. Section 226.13 is revised to read as follows:


Sec.  226.13  Billing error resolution.\27\
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    \27\ [Reserved]
---------------------------------------------------------------------------

    (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.  226.7(a)(2) or (b)(2), as applicable, 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:
---------------------------------------------------------------------------

    \28\ [Reserved]
    \29\ [Reserved]
---------------------------------------------------------------------------

    (1) Is received by a creditor at the address disclosed under Sec.  
226.7(a)(9) or (b)(9), as applicable, 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:

[[Page 5418]]

    (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 has enrolled in an automatic payment 
plan offered by the card issuer and 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.
---------------------------------------------------------------------------

    \30\ [Reserved]
---------------------------------------------------------------------------

    (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 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.
    (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 
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.
    (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.
    (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:
---------------------------------------------------------------------------

    \31\ [Reserved]
---------------------------------------------------------------------------

    (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.  226.6(a)(1) 
or (b)(3), as applicable, and Sec.  226.7(a)(8) or (b)(8), as 
applicable, 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.  
226.6(a)(1) or (b)(3), as applicable, and Sec.  226.7(a)(8) or (b)(8), 
as applicable 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.

0
16. Section 226.14 is revised 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\th of 1 
percentage point above or below the annual percentage rate determined 
in accordance with this section.\31a\ An error in disclosure of the 
annual percentage rate or finance charge shall not, in itself, be 
considered a violation of this regulation if:
---------------------------------------------------------------------------

    \31a\ [Reserved]
---------------------------------------------------------------------------

    (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.
    (b) Annual percentage rate--in general. 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, 226.7(a)(4) or (b)(4), 226.9, 226.15, 226.16, and 226.26 shall 
be computed by multiplying each periodic rate by the number of periods 
in a year.
    (c) Optional effective annual percentage rate for periodic 
statements for creditors offering open-end plans

[[Page 5419]]

subject to the requirements of Sec.  226.5b. A creditor offering an 
open-end plan subject to the requirements of Sec.  226.5b need not 
disclose an effective annual percentage rate. Such 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:
    (1) Solely periodic rates imposed. 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) Minimum or fixed charge, but not transaction charge, imposed. 
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\ 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.
---------------------------------------------------------------------------

    \32\ [Reserved]
    \33\ [Reserved]
---------------------------------------------------------------------------

    (3) Transaction charge imposed. 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\ 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 to this part 
regarding determination of the denominator of the fraction under this 
paragraph.
---------------------------------------------------------------------------

    \34\ [Reserved]
    \35\ [Reserved]
---------------------------------------------------------------------------

    (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 (c)(3) of this section.
    (d) Calculations where daily periodic rate applied. If the 
provisions of paragraph (c)(1)(ii) or (c)(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:
    (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
    (2) By dividing the total finance charge by the sum of the daily 
balances and multiplying the quotient by 365.

0
17. Section 226.16 is revised 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. (1) 
Any term required to be disclosed under Sec.  226.6(b)(3) 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.  226.6(a)(1) or 
(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. If any of the terms that 
trigger additional disclosures under this paragraph is set forth in an 
advertisement, the advertisement shall also clearly and conspicuously 
set forth the following: \36d\
---------------------------------------------------------------------------

    \36d\ [Reserved]
---------------------------------------------------------------------------

    (i) Any minimum, fixed, transaction, activity or similar charge 
that is a finance charge under Sec.  226.4 that could be imposed.
    (ii) 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.
    (iii) Any membership or participation fee that could be imposed.
    (2) If an advertisement for credit to finance the purchase of goods 
or services specified in the advertisement states a periodic payment 
amount, the advertisement shall also state the total of payments and 
the time period to repay the obligation, assuming that the consumer 
pays only the periodic payment amount advertised. The disclosure of the 
total of payments and the time period to repay the obligation must be 
equally prominent to the statement of the periodic payment amount.
    (c) Catalogs or other multiple-page advertisements; electronic 
advertisements. (1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on 
an Internet Web site), 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 electronic 
advertisement (such as an advertisement appearing on an Internet Web 
site) 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.
    (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 Sec.  226.6(a)(1) or (a)(2) or 
the payment terms of the plan are set forth,

[[Page 5420]]

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 with equal prominence and in close 
proximity to the initial rate:
    (i) The period of time such initial rate will be in effect; and
    (ii) 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 of 
any minimum periodic payment and a balloon payment may result if only 
the minimum periodic payments are made, even if such a payment is 
uncertain or unlikely, the advertisement also shall state with equal 
prominence and in close proximity to the minimum periodic payment 
statement that a balloon payment may result, if applicable.\36e\ 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 is required to repay the entire outstanding balance at 
such time. If a balloon payment will occur when the consumer makes only 
the minimum payments required under the plan, an advertisement for such 
a program which contains any statement of any minimum periodic payment 
shall also state with equal prominence and in close proximity to the 
minimum periodic payment statement:
---------------------------------------------------------------------------

    \36e\ [Reserved]
---------------------------------------------------------------------------

    (i) That a balloon payment will result; and
    (ii) The amount and timing of the balloon payment that will result 
if the consumer makes only the minimum payments for the maximum period 
of time that the consumer is permitted to make such payments.
    (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. If an advertisement 
distributed in paper form or through the Internet (rather than by radio 
or television) is for a home-equity plan secured by the consumer's 
principal dwelling, and the advertisement states that the advertised 
extension of credit may exceed the fair market value of the dwelling, 
the advertisement shall clearly and conspicuously state that:
    (i) 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; and
    (ii) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.
    (5) Misleading terms. An advertisement may not refer to a home-
equity plan as ``free money'' or contain a similarly misleading term.
    (6) Promotional rates and payments. (i) Definitions. The following 
definitions apply for purposes of paragraph (d)(6) of this section:
    (A) Promotional rate. The term ``promotional rate'' means, in a 
variable-rate plan, any annual percentage rate that is not based on the 
index and margin that will be used to make rate adjustments under the 
plan, if that rate is less than a reasonably current annual percentage 
rate that would be in effect under the index and margin that will be 
used to make rate adjustments under the plan.
    (B) Promotional payment. The term ``promotional payment'' means:
    (1) For a variable-rate plan, any minimum payment applicable for a 
promotional period that:
    (i) Is not derived by applying the index and margin to the 
outstanding balance when such index and margin will be used to 
determine other minimum payments under the plan; and
    (ii) Is less than other minimum payments under the plan derived by 
applying a reasonably current index and margin that will be used to 
determine the amount of such payments, given an assumed balance.
    (2) For a plan other than a variable-rate plan, any minimum payment 
applicable for a promotional period if that payment is less than other 
payments required under the plan given an assumed balance.
    (C) Promotional period. A ``promotional period'' means a period of 
time, less than the full term of the loan, that the promotional rate or 
promotional payment may be applicable.
    (ii) Stating the promotional period and post-promotional rate or 
payments. If any annual percentage rate that may be applied to a plan 
is a promotional rate, or if any payment applicable to a plan is a 
promotional payment, the following must be disclosed in any 
advertisement, other than television or radio advertisements, in a 
clear and conspicuous manner with equal prominence and in close 
proximity to each listing of the promotional rate or payment:
    (A) The period of time during which the promotional rate or 
promotional payment will apply;
    (B) In the case of a promotional rate, any annual percentage rate 
that will apply under the plan. If such rate is variable, the annual 
percentage rate must be disclosed in accordance with the accuracy 
standards in Sec. Sec.  226.5b or 226.16(b)(1)(ii) as applicable; and
    (C) In the case of a promotional payment, the amounts and time 
periods of any payments that will apply under the plan. In variable-
rate transactions, payments that will be determined based on 
application of an index and margin shall be disclosed based on a 
reasonably current index and margin.
    (iii) Envelope excluded. The requirements in paragraph (d)(6)(ii) 
of this section do not apply to an envelope 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.
    (e) Alternative disclosures--television or radio advertisements. An 
advertisement made through television or radio stating any of the terms 
requiring additional disclosures under paragraphs (b)(1) or (d)(1) of 
this section may alternatively comply with paragraphs (b)(1) or (d)(1) 
of this section by stating the information required by paragraphs 
(b)(1)(ii) or (d)(1)(ii) of this section, as applicable, and listing a 
toll-free telephone number, or any telephone number that allows a 
consumer to reverse the phone charges when calling for information, 
along with a reference that such number may be used by consumers to 
obtain the additional cost information.
    (f) 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.
    (g) Promotional Rates. (1) Scope. The requirements of this 
paragraph (g) apply to any advertisement of an open-end (not home-
secured) plan, including promotional materials accompanying

[[Page 5421]]

applications or solicitations subject to Sec.  226.5a(c) or 
accompanying applications or solicitations subject to Sec.  226.5a(e).
    (2) Definitions. (i) Promotional rate means any annual percentage 
rate applicable to one or more balances or transactions on an open-end 
(not home-secured) plan for a specified period of time that is lower 
than the annual percentage rate that will be in effect at the end of 
that period on such balances or transactions.
    (ii) Introductory rate means a promotional rate offered in 
connection with the opening of an account.
    (iii) Promotional period means the maximum time period for which 
the promotional 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 in a written or electronic 
advertisement.
    (4) Stating the promotional period and post-promotional rate. If 
any annual percentage rate that may be applied to the account is a 
promotional rate under paragraph (g)(2)(i) of this section, the 
information in paragraphs (g)(4)(i) and (g)(4)(ii) of this section must 
be stated in a clear and conspicuous manner in the advertisement. If 
the rate is stated in a written or electronic advertisement, the 
information in paragraphs (g)(4)(i) and (g)(4)(ii) of this section must 
also be stated in a prominent location closely proximate to the first 
listing of the promotional rate.
    (i) When the promotional rate will end; and
    (ii) The annual percentage rate that will apply after the end of 
the promotional 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(d)(3), 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 at least in part 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 (g)(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.

0
18. Section 226.30 is revised to read as follows:


Sec.  226.30  Limitation on rates.

    A creditor shall include in any consumer credit contract secured by 
a dwelling and subject to the act and this regulation the maximum 
interest rate that may be imposed during the term of the obligation 
\50\ when:
---------------------------------------------------------------------------

    \50\ [Reserved]
---------------------------------------------------------------------------

    (a) In the case of closed-end credit, the annual percentage rate 
may increase after consummation, or
    (b) In the case of open-end credit, the annual percentage rate may 
increase during the plan.

0
19. Appendix E to part 226 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 the card issuer and the seller are the same or related 
persons; no finance charge is imposed; 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 no cumulative account is maintained which reflects the 
transactions by each consumer during a period of time, such as a 
month. 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.
    1. Section 226.6(a)(5) or Sec.  226.6(b)(5)(iii).
    2. Section 226.6(a)(2) or Sec.  226.6(b)(3)(ii)(B), as 
applicable. The disclosure required by Sec.  226.6(a)(2) or Sec.  
226.6(b)(3)(ii)(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. A tabular format 
is not required.
    3. Section 226.6(a)(4) or Sec.  226.6(b)(5)(ii).
    4. Section 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. Creditors may 
comply by placing the required disclosures on the invoice or 
statement sent to the consumer for each transaction.
    5. Section 226.9(a). Creditors may comply by mailing or 
delivering the statement required by Sec.  226.6(a)(5) or Sec.  
226.6(b)(5)(iii) (see Appendix G-3 and G-3(A) to this part) to each 
consumer receiving a transaction invoice during a one-month period 
chosen by the card issuer or by sending either the statement 
prescribed by Sec.  226.6(a)(5) or Sec.  226.6(b)(5)(iii), or an 
alternative billing error rights statement substantially similar to 
that in Appendix G-4 and G-4(A) to this part, with each invoice sent 
to a consumer.
    6. Section 226.9(c). A tabular format is not required.
    7. Section 226.10.
    8. Section 226.11(a). 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.
    9. Section 226.12 including Sec.  226.12(c) and (d), as 
applicable. Section 226.12(e) is inapplicable.
    10. 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.
    11. Section 226.15, as applicable.

0
20. Appendix F to Part 226 is revised to read as follows:

Appendix F to Part 226--Optional Annual Percentage Rate Computations 
for Creditors Offering Open-End Plans Subject to the Requirements of 
Sec.  226.5b

    In determining the denominator of the fraction under Sec.  
226.14(c)(3), no amount will be used more than once when adding the 
sum of the balances \1\ subject to periodic rates to the sum of the 
amounts subject to specific transaction charges. (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.'') In every case, the full amount 
of transactions subject to specific transaction charges shall be 
included in the denominator. Other balances or parts of balances 
shall be included according to the manner of determining the balance 
subject to a periodic rate, as illustrated in the following examples 
of accounts on monthly billing cycles:
---------------------------------------------------------------------------

    \1\ [Reserved]
---------------------------------------------------------------------------

    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

[[Page 5422]]

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.

0
21. Appendix G to Part 226 is amended by:
0
A. Revising the table of contents at the beginning of the Appendix;
0
B. Revising Forms G-1, G-2, G-3, G-4, G-10(A), G-10(B), G-10(C), G-11, 
and G-13(A) and (B);
0
C. Adding new Forms G-1(A), G-2(A), G-3(A), G-4(A), G-10(D) and (E), G-
16(A) and (B), G-17(A) through (D), G-18(A) through (G), G-19, G-20, 
and G-21 in numerical order; and
0
D. Removing and reserving Form G-12.

Appendix G to Part 226--Open-End Model Forms and Clauses

G-1 Balance Computation Methods Model Clauses (Home-equity Plans) 
(Sec. Sec.  226.6 and 226.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than 
Home-equity Plans) (Sec. Sec.  226.6 and 226.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans) 
(Sec.  226.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than 
Home-equity Plans) (Sec.  226.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans) 
(Sec. Sec.  226.6 and 226.9)
G-3(A) Long-Form Billing-Error Rights Model Form (Plans Other Than 
Home-equity Plans) (Sec. Sec.  226.6 and 226.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans) 
(Sec.  226.9)
G-4(A) Alternative Billing-Error Rights Model Form (Plans Other Than 
Home-equity Plans) (Sec.  226.9)
G-5 Rescission Model Form (When Opening an Account) (Sec.  226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec.  226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.  
226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.  
226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.  
226.15)
G-10(A) Applications and Solicitations Model 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 Sample (Credit Cards) (Sec.  
226.5a(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards) 
(Sec.  226.5a(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.  
226.5a(b))
G-11 Applications and Solicitations Made Available to General Public 
Model Clauses (Sec.  226.5a(e))
G-12 Reserved
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
G-16(A) Debt Suspension Model Clause (Sec.  226.4(d)(3))
G-16(B) Debt Suspension Sample (Sec.  226.4(d)(3))
G-17(A) Account-opening Model Form (Sec.  226.6(b)(2))
G-17(B) Account-opening Sample (Sec.  226.6(b)(2))
G-17(C) Account-opening Sample (Sec.  226.6(b)(2))
G-17(D) Account-opening Sample (Sec.  226.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec.  226.7(b))
G-18(B) Late Payment Fee Sample (Sec.  226.7(b))
G-18(C) Actual Repayment Period Sample Disclosure on Periodic 
Statement (Sec.  226.7(b))
G-18(D) New Balance, Due Date, Late Payment and Minimum Payment 
Sample (Credit cards) (Sec.  226.7(b))
G-18(E) New Balance, Due Date, and Late Payment Sample (Open-end 
Plans (Non-credit-card Accounts)) (Sec.  226.7(b))
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-19 Checks Accessing a Credit Card Account Sample (Sec.  
226.9(b)(3))
G-20 Change-in-Terms Sample (Sec.  226.9(c)(2))
G-21 Penalty Rate Increase Sample (Sec.  226.9(g)(3))
G-1--Balance Computation Methods Model Clauses (Home-equity Plans)

    (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

[[Page 5423]]

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).
    (f) Daily balance method (including current transactions)
    We figure [a portion of] the finance charge on your account by 
applying the periodic rate to the ``daily balance'' of your account 
for each day in the billing cycle. To get the ``daily balance'' we 
take the beginning balance of your account each day, add any new 
[purchases/advances/fees], and subtract [any unpaid finance charges 
and] any payments or credits. This gives us the daily balance.

G-1(A)--Balance Computation Methods Model Clauses (Plans Other Than 
Home-equity Plans)

    (a) Adjusted balance method
    We figure the interest 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 interest 
or other finance charges and] any payments and credits received 
during the present billing cycle.
    (b) Previous balance method
    We figure the interest charge on your account by applying the 
periodic rate to the amount you owe at the beginning of each billing 
cycle. We do not subtract any payments or credits received during 
the billing cycle.
    (c) Average daily balance method (excluding current 
transactions)
    We figure the interest charge on your account by applying the 
periodic rate to the ``average daily balance'' of your account. To 
get the ``average daily balance'' we take the beginning balance of 
your account each day and subtract [any unpaid interest or other 
finance charges and] any payments or credits. We do not add in any 
new [purchases/advances/fees]. 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 the interest charge on your account by applying the 
periodic rate to the ``average daily balance'' of your account. To 
get the ``average daily balance'' we take the beginning balance of 
your account each day, add any new [purchases/advances/fees], and 
subtract [any unpaid interest or other finance charges and] any 
payments or credits. 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 the interest charge on your account by applying the 
periodic rate to the amount you owe at the end of each billing cycle 
(including new [purchases/advances/fees] and deducting payments and 
credits made during the billing cycle).
    (f) Daily balance method (including current transactions)
    We figure the interest charge on your account by applying the 
periodic rate to the ``daily balance'' of your account for each day 
in the billing cycle. To get the ``daily balance'' we take the 
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid interest or other finance 
charges and] any payments or credits. This gives us the daily 
balance.

G-2-Liability for Unauthorized Use Model Clause (Home-equity Plans)

    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. [You may also contact 
us on the Web: [Creditor Web or e-mail address]] In any case, your 
liability will not exceed [insert $50 or any lesser amount under 
agreement with the cardholder].

G-2(A)-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 may also contact us on the Web: [Creditor Web or e-mail 
address]]
    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].

G-3-Long-Form Billing-Error Rights Model Form (Home-equity Plans)

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 may 
also contact us on the Web: [Creditor Web or e-mail address]] 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 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.

G-3(A)--Long-Form Billing-Error Rights Model Form (Plans Other Than 
Home-equity Plans)

[[Page 5424]]

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]

[You may also contact us on the Web: [Creditor Web or e-mail 
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 [or 
electronically]. 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 on that amount.
     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 are dissatisfied with the goods or services that you have 
purchased with your 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 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 not yet have fully paid for the purchase.

If all of the criteria above are met and you are still dissatisfied 
with the purchase, contact us in writing [or electronically] at:
    [Creditor Name]
    [Creditor Address]
    [Creditor Web or e-mail 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.

G-4--Alternative Billing-Error Rights Model Form (Home-equity Plans)
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. [You 
may also contact us on the Web: [Creditor Web or e-mail address]] 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.)

G-4(A)--Alternative Billing-Error Rights Model Form (Plans Other 
Than Home-equity Plans)

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]
    [You may also contact us on the Web: [Creditor Web or e-mail 
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 [or 
electronically]. 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 on that amount.
     The charge in question may remain on your statement, 
and we may continue to charge you interest on that amount. But, if 
we determine that we made a mistake, you will not have to pay the 
amount in question or any interest or other fees related to 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 are dissatisfied with the goods or services that you have 
purchased with your 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 purchase.

[[Page 5425]]

    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 not yet have fully paid for the purchase.

If all of the criteria above are met and you are still dissatisfied 
with the purchase, contact us in writing [or electronically] at:
    [Creditor Name]
    [Creditor Address]
    [Creditor Web 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.
* * * * *
BILLING CODE 6210-01-P

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BILLING CODE 6210-01-C
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) 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 [Reserved]
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.]
    [ ] 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.

[[Page 5430]]

[(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.
* * * * *
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--------
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--------
BILLING CODE 6210-01-P

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G-18(B) 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%.
G-18(C) Actual Repayment Period Sample Disclosure on Periodic 
Statement

(a) When Zero or Negative Amortization Does Not Occur

    Minimum Payment Warning: If you make only the minimum payment on 
time each month and no other amounts are added to the balance, we 
estimate that it will take you approximately 13 months to pay off 
the balance shown on this statement.

(b) When Zero or Negative Amortization Occurs

    Minimum Payment Warning: You will never pay off the outstanding 
balance shown on this statement if you only pay the minimum payment.

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BILLING CODE 6210-01-C

0
22. Appendix H to part 226 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
    H-17(A) Debt Suspension Model Clause
    H-17(B) Debt Suspension Sample
* * * * *
    H-17(A) Debt Suspension Model Clause
    Please enroll me in the optional [insert name of program], and 
bill my account the fee of [insert charge for the initial term of 
coverage]. 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----------
    H-17(B) Debt Suspension Sample
    Please enroll me in the optional [name of program], and bill my 
account the fee of $200.00. 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----------

0
23. New Appendix M1, Appendix M2, and Appendix M3 to part 226 are added 
to read as follows:

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. (1) When calculating the 
generic repayment estimate for general purpose credit cards, a card 
issuer must use the minimum payment formula that applies to most of 
its general purpose consumer 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

[[Page 5442]]

common, card issuers must choose a day in the last six months, 
consider all general purpose consumer credit card accounts held by 
the issuer on that day, and determine which formula applies to the 
most accounts. In considering all general purpose credit card 
accounts, a creditor may use a statistical sample of its general 
purpose consumer credit card accounts developed and validated using 
accepted statistical principles and methodology. In choosing which 
formula is the ``most common,'' the issuer may ignore differences 
among the formulas related to whether past due amounts or over-the-
credit-limit amounts are included in the formula for calculating the 
minimum payment.
    (2) If more than one minimum payment formula applies to an 
account, the card issuer must use the formula applicable to the 
general-revolving feature that applies to new transactions to 
determine which formula is most common. In addition, if more than 
one minimum payment formula applies to an account, when calculating 
the generic repayment estimate, the issuer must use the ``most 
common'' minimum payment formula applicable to the general revolving 
feature identified above and apply it to the entire balance on the 
account as described in paragraph (a)(4) of this Appendix, 
regardless of whether this formula applies to a particular balance 
on that account. For example, assume for all of its accounts, an 
issuer uses one minimum payment formula to calculate the minimum 
payment amount for balances existing before January 1, 2009, and 
uses a different minimum payment formula to calculate the minimum 
payment amount for balances incurred on or after January 1, 2009. To 
calculate the minimum payment amount, this creditor must use the 
minimum payment formula applicable to balances incurred on or after 
January 1, 2009, and apply that formula to the entire outstanding 
balance.
    (3) Card issuers must re-evaluate which minimum payment formula 
is most common at least 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 and each subsequent year, the issuer must again 
choose a day between January 5 and July 4 to determine the minimum 
payment formula that is most common, but the day that is chosen need 
not be the same day chosen the previous year. At the issuer's 
option, the issuer may re-evaluate which minimum payment formula is 
most common more often than every 12 months. In the example above, 
if the issuer changed the minimum formula that applies to most of 
its credit card accounts on October 1 of a particular year, the 
issuer could change the minimum payment formula used to calculate 
the generic repayment estimates on October 1. For the following and 
each subsequent year, the issuer may either continue to evaluate 
which minimum payment formula is the most common during the January 
5 to July 4 timeframe, or may switch to choosing any day in the six 
months prior to October 1 of a particular year to evaluate which 
minimum payment formula is most common.
    (B) Retail credit cards. (1) 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 
consumer 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 consumer credit card accounts for 
each retailer held by the issuer on that day, and determine which 
formula applies to the most accounts for that retailer. In 
considering all retail purpose credit card accounts, a creditor may 
use a statistical sample of its retail purpose consumer credit card 
accounts developed and validated using accepted statistical 
principles and methodology in determining which formula is the 
``most common,'' the issuer may ignore differences among the 
formulas related to whether past due amounts or over-the-credit-
limit amounts are included in the formula for calculating the 
minimum payment.
    (2) If more than one minimum payment formula applies to an 
account, the card issuer must use the formula applicable to the 
general revolving feature that applies to new transactions to 
determine which formula is most common for each retailer. In 
addition, if more than one minimum payment formula applies to an 
account, when calculating the generic repayment estimate, the issuer 
must use the ``most common'' minimum payment formula applicable to 
the general revolving feature identified above for each retailer and 
apply it to the entire balance on the account as described in 
paragraph (a)(4) of this Appendix, regardless of whether this 
formula applies to a particular balance on that account. For 
example, assume for all of its accounts, a creditor uses the 
following minimum payment formulas: A minimum payment formula 
applicable to a general revolving feature that applies to balances 
existing before January 1, 2009; a minimum payment formula 
applicable to a general revolving feature that applies to balances 
incurred on or after January 1, 2009; and a minimum payment formula 
applicable to special purchases, such as ``club plan purchases.'' To 
calculate the minimum payment amount, this creditor must use the 
minimum payment formula applicable to the general revolving feature 
that applies to balances incurred on or after January 1, 2009, and 
apply that formula to the entire outstanding balance.
    (3) Card issuers must re-evaluate which minimum payment formula 
is most common for retail credit card accounts with respect to each 
retailer at least 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 
determine 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 determine the minimum payment formula that is most 
common, but the day that is chosen need not be the same day chosen 
the previous year. At the issuer's option, the issuer may re-
evaluate which minimum payment formula is most common more often 
than every 12 months. In the example above, if the issuer changed 
the minimum formula that applies to most of its credit card accounts 
on October 1 of a particular year, the issuer could change the 
minimum payment formula used to calculate the generic repayment 
estimates on October 1. For the following and each subsequent year, 
the issuer may either continue to evaluate which minimum payment 
formula is the most common during the January 5 to July 4 timeframe, 
or may switch to choosing any day in the six months prior to October 
1 of a particular year to evaluate which minimum payment formula is 
most common.
    (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. When calculating the generic repayment 
estimate, credit card issuers and the FTC may round the beginning 
balance as described above to the nearest whole dollar or prompt the 
consumer to enter that balance rounded to the nearest whole dollar.
    (5) Assumptions. When calculating the generic repayment 
estimate, credit card issuers for each of the terms below, may 
either make the following assumption about that term, or use the 
account term that applies to a consumer's account.
    (i) Only minimum monthly payments are made each month. In 
addition, minimum monthly payments are made each month--for example, 
a debt cancellation or suspension agreement, or skip payment feature 
does not apply to the account.
    (ii) No additional extensions of credit are obtained, such as 
new purchases, transactions, fees, charges or other activity. No 
refunds or rebates are given.

[[Page 5443]]

    (iii) The annual percentage rate described in paragraph (a)(3) 
of this Appendix will not change, through either the operation of a 
variable rate or the change to a rate. For example, if a penalty 
annual percentage rate currently applies to a consumer's account, an 
issuer may assume that the penalty annual percentage rate will apply 
to the consumer's account indefinitely, even if the consumer may 
potentially return to a non-penalty annual percentage rate in the 
future under the account agreement.
    (iv) There is no grace period.
    (v) The final payment pays the account in full (i.e., there is 
no residual interest 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 and leap year is ignored. A 
monthly or daily periodic rate may be assumed. If a daily periodic 
rate is assumed, the issuer may either assume a year is 365 days 
long, and all months are 30.41667 days long, or a year is 360 days 
long, and all months are 30 days long.
    (viii) Payments are credited on the last day of the month.
    (ix) The account is not past due and the account balance does 
not exceed the credit limit.
    (x) When calculating the generic repayment estimate, the assumed 
payments, current balance and interest charges for each month may be 
rounded to the nearest cent, as shown in Appendix M3 to this part.
    (6) Tolerance. A generic repayment estimate shall be considered 
accurate if it is not more than 2 months above or below the generic 
repayment estimate determined in accordance with the guidance in 
this Appendix (prior to rounding described in paragraph (b)(1)(i) of 
this Appendix). For example, assume the generic repayment estimate 
calculated using the guidance in this Appendix is 28 months (2 
years, 4 months), and the generic repayment estimate calculated by 
the issuer or the FTC is 30 months (2 years, 6 months). The generic 
repayment estimate should be disclosed as 2 years, due to the 
rounding rule set forth in paragraph (b)(1)(i) of this Appendix. 
Nonetheless, based on the 30 month estimate, the issuer or FTC 
disclosed 3 years, based on that rounding rule. The issuer and the 
FTC would be in compliance with this guidance by disclosing 3 years, 
instead of 2 years, because the issuer's or FTC's estimate is within 
the 2 months' tolerance, prior to rounding. In addition, even if an 
issuer's or FTC's estimate is more than 2 months above or below the 
generic repayment estimate calculated using the guidance in this 
Appendix, so long as the issuer or FTC discloses the correct number 
of years to the consumer based on the rounding rule set forth in 
paragraph (b)(1)(i) of this Appendix, the issuer or the FTC would be 
in compliance with this guidance. For example, assume the generic 
repayment estimate calculated using the guidance in this Appendix is 
32 months (2 years, 8 months), and the generic repayment estimate 
calculated by the issuer or the FTC is 38 months (3 years, 2 
months). Under the rounding rule set forth in paragraph (b)(1)(i) of 
this Appendix, both of these estimates would be rounded and 
disclosed to the consumer as 3 years. Thus, if the issuer or the FTC 
disclosed 3 years to the consumer, the issuer or the FTC would be in 
compliance with this guidance even though the generic repayment 
estimate calculated by the issuer or the FTC is outside the 2 
months' tolerance amount.
    (b) Disclosing the generic repayment estimate to consumers.
    (1) Required disclosures. Except as provided in paragraph (b)(3) 
of this Appendix, 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 annual percentage rate 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.
    (vi) At the issuer's or the FTC's option, a description of the 
minimum payment formula(s) or the minimum payment amounts used to 
calculate the generic repayment estimate, including a disclosure of 
the dollar amount of the minimum payment calculated for the first 
month.
    (vii) At the issuer's or the FTC's option, the total amount of 
interest that a consumer would pay if the consumer makes minimum 
payments for the length of time disclosed in the generic repayment 
estimate.
    (2) Model language. Credit card issuers and the FTC may use the 
following disclosure to meet the requirements set forth in paragraph 
(b)(1) of this Appendix as applicable:
    It will take approximately------[months/years] to pay off a 
balance of $------ with an APR of ------%, if you make only the 
minimum payment on time each month and no other amounts are added to 
the balance. This estimate is based on the information you provided 
and assumptions about your account. The actual time it may take you 
to pay off this balance by only making minimum payments will differ 
based on the terms of your account and future account activity.
    (3) Zero or negative amortization. If zero or negative 
amortization occurs when calculating the generic repayment estimate, 
credit card issuers and the FTC must disclose to the consumer that 
based on the information provided by the consumer and assumptions 
used to calculate the generic repayment estimate, the issuer or FTC 
estimates that consumer will never 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, as applicable: ``Based on the information you provided 
and assumptions that we used to calculate the time to repay your 
balance, we estimate that you will never pay off your credit card 
balance if you only make the minimum payment because your payment is 
less than the interest charged each month.''
    (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 Appendix are given:
    (i) A description of the assumptions used to calculate the 
generic repayment estimate as described in paragraph (a)(5) of this 
Appendix.
    (ii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this Appendix 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 Appendix, 
except they 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 Appendix if the 
consumer made a fixed payment amount each month, allowing the 
consumer to select the amount of the fixed payment. For example, an 
issuer or the FTC could prompt the consumer to enter in a payment 
amount in whole dollars (e.g., $50) and disclose to the consumer how 
long it would take to repay the beginning balance if the consumer 
made that payment each month. In calculating this estimate, card 
issuers and the FTC must use the same terms described in paragraph 
(a) of this Appendix, except they must assume the consumer made a 
fixed payment amount each month.
    (iv) The monthly payment amount that would be required to pay 
off the beginning balance described in paragraph (b)(1)(ii) of this 
Appendix within a specific number of months or years, allowing the 
consumer to select the payoff period. For example, an issuer or the 
FTC could prompt the consumer to enter in the number of years to 
repay the beginning balance, and disclose to the consumer the 
monthly payment amount that the consumer would need to pay each 
month in order to repay the balance in that number of years. In 
calculating the monthly payment amount, card issuers and the FTC 
must use the same terms described in paragraph (a) of this Appendix, 
as appropriate.
    (v) Reference to Web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (vi) The total amount of interest that a consumer may pay under 
repayment options described in paragraphs (b)(4)(ii), (iii) or (iv) 
of this Appendix.

[[Page 5444]]

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 that are related by common ownership or 
control.
    (ii) ``General purpose credit card'' means a credit card other 
than a retail credit card.
    (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 the actual 
repayment disclosure, credit card issuers must use the minimum 
payment formula(s) that apply to a cardholder's account. If more 
than one minimum payment formula applies to an account, the issuer 
must apply each minimum payment formula to the portion of the 
balance to which the formula applies. If any promotional terms 
related to payments apply to a cardholder's account, such as a 
deferred billing plan where minimum payments are not required for 12 
months, credit card issuers may assume no promotional terms apply to 
the account.
    (3) Annual percentage rate. When calculating the actual 
repayment disclosure, 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 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. When calculating the actual 
repayment disclosure, credit card issuers may round the beginning 
balance as described above to the nearest whole dollar.
    (5) Assumptions. When calculating the actual repayment 
disclosure, credit card issuers and the FTC for each of the terms 
below, may either make the following assumption about that term, or 
use the account term that applies to a consumer's account.
    (i) Only minimum monthly payments are made each month. In 
addition, minimum monthly payments are made each month--for example, 
a debt cancellation or suspension agreement, or skip payment feature 
does not apply to the account.
    (ii) No additional extensions of credit are obtained, such as 
new purchases, transactions, fees, charges or other activity. No 
refunds or rebates are given.
    (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. For example, if a 
penalty annual percentage rate currently applies to a consumer's 
account, an issuer may assume that the penalty annual percentage 
rate will apply to the consumer's account indefinitely, even if the 
consumer may potentially return to a non-penalty annual percentage 
rate in the future under the account agreement.
    (iv) There is no grace period.
    (v) The final payment pays the account in full (i.e., there is 
no residual interest 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 and leap year is ignored. A 
monthly or daily periodic rate may be assumed. If a daily periodic 
rate is assumed, the issuer may either assume a year is 365 days 
long, and all months are 30.41667 days long, or a year is 360 days 
long, and all months are 30 days long.
    (viii) Payments are credited on the last day of the month.
    (ix) Payments are allocated to lower annual percentage rate 
balances before higher annual percentage rate balances.
    (x) The account is not past due and the account balance does not 
exceed the credit limit.
    (xi) When calculating the generic repayment estimate, the 
assumed payments, current balance and interest charges for each 
month may be rounded to the nearest cent, as shown in Appendix M3 to 
this part.
    (6) Tolerance. An actual repayment disclosure shall be 
considered accurate if it is not more than 2 months above or below 
the actual repayment disclosure determined in accordance with the 
guidance in this Appendix (prior to rounding described in paragraph 
(b)(1)(i) of this Appendix). For example, assume the actual 
repayment estimate calculated using the guidance in this Appendix is 
28 months (2 years, 4 months), and the actual repayment estimate 
calculated by the issuer is 30 months (2 years, 6 months). The 
actual repayment estimate should be disclosed as 2 years, due to the 
rounding rule set forth in paragraph (b)(1)(i) of this Appendix. 
Nonetheless, based on the 30 month estimate, the issuer disclosed 3 
years, based on that rounding rule. The issuer would be in 
compliance with this guidance by disclosing 3 years, instead of 2 
years, because the issuer's estimate is within the 2 months' 
tolerance, prior to rounding. In addition, even if an issuer's 
estimate is more than 2 months above or below the actual repayment 
estimate calculated using the guidance in this Appendix, so long as 
the issuer discloses the correct number of years to the consumer 
based on the rounding rule set forth in paragraph (b)(1)(i) of this 
Appendix, the issuer would be in compliance with this guidance. For 
example, assume the actual repayment estimate calculated using the 
guidance in this Appendix is 32 months (2 years, 8 months), and the 
actual repayment estimate calculated by the issuer is 38 months (3 
years, 2 months). Under the rounding rule set forth in paragraph 
(b)(1)(i) of this Appendix, both of these estimates would be rounded 
and disclosed to the consumer as 3 years. Thus, if the issuer 
disclosed 3 years to the consumer, the issuer would be in compliance 
with this guidance even though the actual repayment estimate 
calculated by the issuer is outside the 2 months' tolerance amount.
    (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 Appendix, when responding to a request for actual repayment 
disclosures through a toll-free telephone number, credit card 
issuers and the FTC 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. If more than one minimum 
payment formula applies to an account, when calculating the actual 
repayment period, the issuer must apply each minimum payment formula 
to the portion of the balance to which the formula applies. The 
issuer may either disclose the longest repayment period calculated, 
or the repayment period calculated for each minimum payment formula. 
For example, assume that an issuer uses one minimum payment formula 
to calculate the minimum payment amount for a general revolving 
feature, and another minimum payment formula to calculate the 
minimum payment amount for special purchases, such as a ``club plan 
purchase.'' Also, assume that based on a consumer's balances in 
these features and the annual percentage rates that apply to such 
features, that the repayment period calculated pursuant to this 
Appendix for the general revolving feature is 5 years, while the 
repayment period calculated for the special purchase feature is 3 
years. This issuer may either disclose 5 years as the repayment 
period for the entire balance to the consumer, or disclose 5 years 
as the repayment period for the balance in the general revolving 
feature and 3 years as the repayment period for the balance in the 
special purchase feature.
    (ii) The beginning balance on which the actual repayment 
disclosure is calculated.
    (iii) The assumption that only minimum payments are made and no 
other amounts are added to the balance.
    (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.
    (v) At the issuer's option, a description of the minimum payment 
formula(s) or the minimum payment amounts used to calculate the 
actual repayment disclosure, including a disclosure of the dollar 
amount of the minimum payment calculated for the first month.
    (vi) At the issuer's option, the total amount of interest that a 
consumer would pay if the consumer makes minimum payments for the 
length of time disclosed in the actual repayment disclosure.

[[Page 5445]]

    (2) Model language. Credit card issuers may use the following 
disclosure to meet the requirements set forth in paragraph (b)(1) of 
this Appendix:
    Your outstanding balance as of the last billing statement was 
$----. If you make only the minimum payment on time each month and 
no other amounts are added to your balance, we estimate that it 
would take approximately ---- [months/years] to pay off this 
balance. This estimate is based on several assumptions about the 
terms of your account and future account activity.
    (3) Zero or negative amortization. If zero or 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 and on assumptions used 
to calculate the repayment estimate, the issuer estimates that the 
consumer will never 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, as applicable: ``Your 
outstanding balance as of the last billing statement was $----. 
Based on the current terms applicable to your account and on 
assumptions that we used to calculate the time to repay your 
balance, we estimate that you will never pay off your credit card 
balance if you only make the minimum payment because your payment is 
less than the interest charged each month.''
    (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 Appendix are given:
    (i) A description of the assumptions used to calculate the 
actual repayment disclosure as described in paragraph (a)(5) of this 
Appendix.
    (ii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this Appendix 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 Appendix used to 
calculate the actual repayment disclosure, except they 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 Appendix if the 
consumer made a fixed payment amount each month, allowing the 
consumer to select the amount of the fixed payment. For example, an 
issuer could prompt the consumer to enter in a payment amount in 
whole dollars (e.g., $50) and disclose to the consumer how long it 
would take to repay the beginning balance if the consumer made that 
payment each month. In calculating this estimate, card issuers must 
use the same terms described in paragraph (a) of this Appendix to 
calculate the actual repayment disclosure, except they must assume 
the consumer made a fixed payment amount each month.
    (iv) The monthly payment amount that would be required to pay 
off the beginning balance described in paragraph (b)(1)(ii) of this 
Appendix within a specific number of months or years, allowing the 
consumer to select the payoff period. For example, an issuer could 
prompt the consumer to enter in the number of years to repay the 
beginning balance, and disclose to the consumer the monthly payment 
amount that the consumer would need to pay each month in order to 
repay the balance in that number of years. In calculating the 
monthly payment amount, card issuers must use the same terms 
described in paragraph (a) of this Appendix, as appropriate.
    (v) Reference to Web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (vi) The total amount of interest that a consumer may pay under 
repayment options described in paragraph (b)(4)(ii), (iii) or (iv) 
of this Appendix.
    (c) Disclosing the actual repayment disclosures on periodic 
statements.
    (1) Required disclosures. Except as provided in paragraph (c)(3) 
of this Appendix, 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 periodic statement.
    (iii) The assumption that only minimum payments are made and no 
other amounts are added to the balance.
    (iv) At the issuer's option, a description of the minimum 
payment formula(s) or the minimum payment amounts used to calculate 
the generic repayment estimate, including a disclosure of the dollar 
amount of the minimum payment calculated for the first month.
    (v) At the issuer's option, the total amount of interest that a 
consumer would pay if the consumer makes minimum payments for the 
length of time disclosed in the actual repayment disclosure.
    (2) Model form. Credit card issuers may use the disclosure in 
Sample G-18(C) in Appendix G to this part to meet the requirements 
set forth in paragraph (c)(1) of this Appendix.
    (3) Zero or negative amortization. If zero or negative 
amortization occurs when calculating the actual repayment 
disclosure, credit card issuers must disclose to the consumer that 
the issuer estimates that the consumer will never pay off the 
balance by making only the minimum payment. Card issuers may use the 
disclosure in Sample G-18(C) in Appendix G to this part 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) of this Appendix 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 actual repayment 
disclosure.
    (iii) A description of the assumptions used to calculate the 
actual repayment disclosure as described in paragraph (a)(5) of this 
Appendix.
    (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 
Appendix used to calculate the actual repayment disclosure, except 
they must assume the additional amount was paid each 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 paragraph (a) of this Appendix used to 
calculate the actual repayment disclosure, except they 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 shown on the statement within a specific 
number of months or years. Card issuers may choose the specific 
number of months or years used in the calculation. In calculating 
the monthly payment amount, card issuers must use the same terms 
described in paragraph (a) of this Appendix, as appropriate.
    (vii) Reference to Web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (viii) The total amount of interest that a consumer may pay 
under repayment options described in paragraphs (c)(4)(iv), (v) or 
(vi) of this Appendix.
BILLING CODE 6210-01-P

[[Page 5446]]

Appendix M3 to Part 226--Sample Calculations of Generic Repayment 
Estimates and Actual Repayment Disclosures
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BILLING CODE 6210-01-C

[[Page 5450]]


0
24. In Supplement I to Part 226:
0
A. Revise the Introduction.
0
B. Revise subpart A.
0
C. In Subpart B, revise sections 226.5 and 226.5a and sections 226.6 
through 226.14 and section 226.16.
0
D. Under Section 226.5b--Requirements for Home-equity Plans, under 
5b(a) Form of Disclosures, under 5b(a)(1) General, paragraph 1. is 
revised.
0
E. Under Section 226.5b--Requirements for Home-equity Plans, under 
5b(f) Limitations on Home-equity Plans, under Paragraph 5b(f)(3)(vi), 
paragraph 4. is revised.
0
F. Under Section 226.26--Use of Annual Percentage Rate in Oral 
Disclosures, under 26(a) Open-end credit., paragraph 1. is revised.
0
G. Under Section 226.27--Language of Disclosures, paragraph 1. is 
revised.
0
H. Under Section 226.28--Effect on State Laws, under 28(a) Inconsistent 
disclosure requirements., paragraph 6. is revised.
0
I. Under Section 226.30--Limitation on Rates, paragraph 8. is revised 
and paragraph 13. is removed.
0
J. Revise Appendix F and appendices G and H.
0
K. Amend Appendix G by revising paragraphs 1. through 3. and 5. through 
6., republishing paragraph 7., and adding paragraphs 8. through 11.
0
L. 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, 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 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. 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, reference to ``this section'' or 
``this paragraph'' means the section or paragraph in the regulation 
that is the subject of the comment.
    4. 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 I-4. Comments to the appendices may be cited, for example, 
as comment app. A-1.

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. For example, if a U.S. resident has a credit card 
account located in the consumer's state issued by a bank (whether 
U.S. or foreign-based), 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 
account issued by a foreign branch of a U.S. bank, the account is 
not covered by the regulation.
    1(d) Organization.
    Paragraph (1)(d)(5).
    1. Effective dates. The Board's revisions to Regulation Z 
published on July 30, 2008 (the ``final rules''), apply to covered 
loans (including refinance loans and assumptions considered new 
transactions under Sec.  226.20), for which the creditor receives an 
application on or after October 1, 2009, except for the final rules 
on advertising, escrows, and loan servicing. The final rules on 
escrows in Sec.  226.35(b)(3) are effective for covered loans, 
(including refinancings and assumptions in Sec.  226.20) for which 
the creditor receives an application on or after April 1, 2010; but 
for such loans secured by manufactured housing on or after October 
1, 2010. The final rules applicable to servicers in Sec.  226.36(c) 
apply to all covered loans serviced on or after October 1, 2009. The 
final rules on advertising apply to advertisements occurring on or 
after October 1, 2009. For example, a radio ad occurs on the date it 
is first broadcast; a solicitation occurs on the date it is mailed 
to the consumer. The following examples illustrate the application 
of the effective dates for the final rules.
    i. General. A refinancing or assumption as defined in Sec.  
226.20(a) or (b) is a new transaction and is covered by a provision 
of the final rules if the creditor receives an application for the 
transaction on or after that provision's effective date. For 
example, if a creditor receives an application for a refinance loan 
covered by Sec.  226.35(a) on or after October 1, 2009, and the 
refinance loan is consummated on October 15, 2009, the provision 
restricting prepayment penalties in Sec.  226.35(b)(2) applies. 
However, if the transaction were a modification of an existing 
obligation's terms that does not constitute a refinance loan under 
Sec.  226.20(a), the final rules, including for example the 
restriction on prepayment penalties would not apply.
    ii. Escrows. Assume a consumer applies for a refinance loan to 
be secured by a dwelling (that is not a manufactured home) on March 
15, 2010, and the loan is consummated on April 2, 2010, the escrow 
rule in Sec.  226.35(b)(3) does not apply.
    iii. Servicing. Assume that a consumer applies for a new loan on 
August 1, 2009. The loan is consummated on September 1, 2009. The 
servicing rules in Sec.  226.36(c) apply to the servicing of that 
loan as of October 1, 2009.

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. Electronic advertisements, 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 or potential customers as part of 
an organized solicitation of business.
    I. Messages on checking account statements offering auto loans 
at a stated annual percentage rate.
    J. Communications promoting a new open-end plan or closed-end 
transaction.
    ii. The term does not include:
    A. Direct personal contacts, such as follow-up letters, cost 
estimates for individual consumers, or oral or written communication 
relating to the negotiation of a specific transaction.

[[Page 5451]]

    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)(3) [Reserved]
    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 first 
billing cycle on an open-end account (i.e., the time period between 
account opening and the generation of the first periodic statement) 
or to a transitional billing cycle that can occur if 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.)
    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, 
the receipt of disclosures for certain mortgage transactions under 
Sec.  226.19(a)(1)(ii), 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, the receipt of disclosures for certain 
mortgage transactions under Sec.  226.19(a)(1)(ii), or the delivery 
of disclosures for certain high-cost mortgages covered by Sec.  
226.32.
    2(a)(7) Card issuer.
    1. Agent. An agent of a card issuer is considered a card issuer. 
Because agency relationships are traditionally defined by contract 
and by state or other applicable law, the regulation does not define 
agent. Merely providing services relating to the production of 
credit cards or data processing for others, however, does not make 
one the agent of the card issuer. In contrast, a financial 
institution may become the agent of the card issuer if an agreement 
between the institution and the card issuer provides that the 
cardholder may use a line of credit with the financial institution 
to pay obligations incurred by use of the credit card.
    2(a)(8) Cardholder.
    1. General rule. A cardholder is a natural person at whose 
request a card is issued for consumer credit purposes or who is a 
co-obligor or guarantor for such a card issued to another. The 
second category does not include an employee who is a co-obligor or 
guarantor on a card issued to the employer for business purposes, 
nor does it include a person who is merely the authorized user of a 
card issued to another.
    2. Limited application of regulation. For the limited purposes 
of the rules on issuance of credit cards and liability for 
unauthorized use, a cardholder includes any person, including an 
organization, to whom a card is issued for any purpose--including a 
business, agricultural, or commercial purpose.
    3. Issuance. See the commentary to Sec.  226.12(a).
    4. Dual-purpose cards and dual-card systems. Some card issuers 
offer dual-purpose cards that are for business as well as consumer 
purposes. If a card is issued to an individual for consumer 
purposes, the fact that an organization has guaranteed to pay the 
debt does not make it business credit. On the other hand, if a card 
is issued for business purposes, the fact that an individual 
sometimes uses it for consumer purchases does not subject the card 
issuer to the provisions on periodic statements, billing-error 
resolution, and other protections afforded to consumer credit. Some 
card issuers offer dual-card systems--that is, they issue two cards 
to the same individual, one intended for business use, the other for 
consumer or personal use. With such a system, the same person may be 
a cardholder for general purposes when using the card issued for 
consumer use, and a cardholder only for the limited purposes of the 
restrictions on issuance and liability when using the card issued 
for business purposes.
    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. Sec.  
226.15 and 226.23, a consumer includes any natural person whose 
ownership interest in his or her principal dwelling is subject to 
the risk of loss. Thus, if a security interest is taken in A's 
ownership interest in a house and that house is A's principal 
dwelling, A is a consumer for purposes of rescission, even if A is 
not liable, either primarily or secondarily, on the underlying 
consumer credit transaction. An ownership interest does not include, 
for example, leaseholds or inchoate rights, such as dower.
    3. Land trusts. Credit extended to land trusts, as described in 
the commentary to Sec.  226.3(a), is considered to be extended to a 
natural person for purposes of the definition of consumer.
    2(a)(12) Consumer credit.

[[Page 5452]]

    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 
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, 
226.7(b)(11), 226.7(b)(12), 226.9(e), 226.9(f) and 226.28(d), and 
appendices G-10 through G-13. When the term credit card is used in 
those provisions, it refers to credit cards other than charge cards.
    2(a)(16) Credit sale.
    1. Special disclosure. If the seller is a creditor in the 
transaction, the transaction is a credit sale and the special credit 
sale disclosures (that is, the disclosures under Sec.  226.18(j)) 
must be given. This applies even if there is more than one creditor 
in the transaction and the creditor making the disclosures is not 
the seller. (See the commentary to Sec.  226.17(d).)
    2. Sellers who arrange credit. If the seller of the property or 
services involved arranged for financing but is not a creditor as to 
that sale, the transaction is not a credit sale. Thus, if a seller 
assists the consumer in obtaining a direct loan from a financial 
institution and the consumer's note is payable to the financial 
institution, the transaction is a loan and only the financial 
institution is a creditor.
    3. Refinancings. Generally, when a credit sale is refinanced 
within the meaning of Sec.  226.20(a), loan disclosures should be 
made. However, if a new sale of goods or services is also involved, 
the transaction is a credit sale.
    4. Incidental sales. Some lenders sell a product or service--
such as credit, property, or health insurance--as part of a loan 
transaction. Section 226.4 contains the rules on whether the cost of 
credit life, disability or property insurance is part of the finance 
charge. If the insurance is financed, it may be disclosed as a 
separate credit-sale transaction or disclosed as part of the primary 
transaction; if the latter approach is taken, either loan or credit-
sale disclosures may be made. (See the commentary to Sec.  
226.17(c)(1) for further discussion of this point.)
    5. Credit extensions for educational purposes. A credit 
extension for educational purposes in which an educational 
institution is the creditor may be treated as either a credit sale 
or a loan, regardless of whether the 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.

[[Page 5453]]

    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 Sec.  
226.2(a)(17)(v).
    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 Sec.  226.2(a)(17)(v) 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 2006.
    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 2007, it is a creditor for 
purposes of the regulation for the last extension of credit in 2007 
and for all extensions of consumer credit in 2008. On the other 
hand, if a business begins in 2007 and extends consumer credit 20 
times, it is not a creditor for purposes of the regulation in 2007. 
If it extends consumer credit 75 times in 2008, 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 2009.
    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 2007 
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 2007 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 2007 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.
    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. (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

[[Page 5454]]

consumer credit that is extended under a plan and meets all 3 
criteria set forth in the definition.
    2. Existence of a plan. The definition requires that there be a 
plan, which connotes a contractual arrangement between the creditor 
and the consumer. Some creditors offer programs containing a number 
of different credit features. The consumer has a single account with 
the institution that can be accessed repeatedly via a number of sub-
accounts established for the different program features and rate 
structures. Some features of the program might be used repeatedly 
(for example, an overdraft line) while others 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, multifeatured 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, it would be more reasonable for a bank or depository 
institution to contemplate repeated transactions with a customer 
than for a seller of aluminum siding to make the same assumption 
about its customers.
    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, 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 occasionally or routinely 
verify credit information such as the consumer's continued income 
and employment status or information for security purposes 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. A credit card 
account where the plan as a whole replenishes meets the self-
replenishing criterion, notwithstanding the fact that a credit card 
issuer may verify credit information from time to time in connection 
with specific transactions. 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. (See Sec.  226.2(a)(17)(iv) for 
disclosure requirements when a credit card is used to obtain the 
advances.)
    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 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 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. Verifications of collateral value. Creditors that otherwise 
meet the requirements of Sec.  226.2(a)(20) extend open-end credit 
notwithstanding the fact that the creditor must verify collateral 
values to comply with federal, state, or other applicable law or 
verifies the value of collateral in connection with a particular 
advance under the plan.
    7. 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\% 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.

[[Page 5455]]

    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.  
226.4(b)(9) and (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 five 
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 226.20(b)--disclosure requirements for assumptions.
    v. Section 226.23(f)--exemption from the right of rescission.
    2. Lien status. The definition is not limited to first lien 
transactions. For example, a consumer might assume a paid-down first 
mortgage (or borrow part of the purchase price) and borrow the 
balance of the purchase price from a creditor who takes a second 
mortgage. The second mortgage transaction is a residential mortgage 
transaction if the dwelling purchased is the consumer's principal 
residence.
    3. Principal dwelling. A consumer can 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 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) 
(assumability policies). 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

[[Page 5456]]

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

    1. Relationship to Sec.  226.12. The provisions in Sec.  
226.12(a) and (b) governing the issuance of credit cards and the 
limitations on 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.
    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. 
(See comment 3(a)-2, however, with respect to credit cards.)
    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, the provisions of the regulation do not apply, other than as 
provided in Sec. Sec.  226.12(a) and 226.12(b), even if extensions 
of credit for consumer purposes are occasionally 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.
    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 occasional 
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, 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.
    3. 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:
    i. General.
    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.
    ii. Business-purpose examples. 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.
    iii. Consumer-purpose examples. 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.
    4. 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)-5, however, for rules relating to 
owner-occupied rental property.)
    5. 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)-3.
    6. 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.
    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.
    8. 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.
    9. 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.
    10. 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

[[Page 5457]]

institution as trustee. In some instances, the consumer executes a 
personal guaranty of the indebtedness. The note provides that it is 
payable only out of the property specifically described in the trust 
deed and that the trustee has no personal liability on the note. 
Assuming the transactions are for personal, family, or household 
purposes, these transactions are subject to the regulation since in 
substance (if not form) consumer credit is being extended.
    3(b) Credit over $25,000 not secured by real property or a 
dwelling.
    1. Coverage. Since a mobile home can be a dwelling under Sec.  
226.2(a)(19), this exemption does not apply to a credit extension 
secured by a mobile home used or expected to be used as the 
principal dwelling of the consumer, even if the credit exceeds 
$25,000. A loan commitment for closed-end credit in excess of 
$25,000 is exempt even though the amounts actually drawn never 
actually reach $25,000.
    2. Open-end credit. 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 (except as permitted from time to time pursuant to Sec.  
226.2(a)(20)).
    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.
    ii. Extensions of credit not covered. 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 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:
    A. 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.

[[Page 5458]]

    B. A consumer enters into a combined time deposit/credit 
agreement with a financial institution that establishes a time 
deposit account and an open-end line of credit. The line of credit 
may be used to borrow against the funds in the time deposit. The 
agreement provides for an interest rate on any credit extension of, 
for example, 1%. In addition, the agreement states that the creditor 
will pay 0% interest on the amount of the time deposit that 
corresponds to the amount of the credit extension(s). The interest 
that is not paid on the time deposit by the financial institution is 
not a finance charge (and therefore does not affect the annual 
percentage rate computation).
    4. Treatment of 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:
    i. 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.
    ii. Any charge imposed on a credit cardholder for making a 
purchase or obtaining a cash advance outside the United States, with 
a foreign merchant, or in a foreign currency is a finance charge, 
regardless of whether a charge is imposed on debit cardholders for 
such transactions. The following principles apply in determining 
what is a foreign transaction fee and the amount of the fee:
    A. Included are fees imposed when transactions are made in a 
foreign currency and converted to U.S. dollars; fees imposed when 
transactions are made in U.S. dollars outside the U.S.; and fees 
imposed when transactions are made (whether in a foreign currency or 
in U.S. dollars) with a foreign merchant, such as via a merchant's 
Web site. For example, a consumer may use a credit card to make a 
purchase in Bermuda, in U.S. dollars, and the card issuer may impose 
a fee because the transaction took place outside the United States.
    B. Included are fees imposed by the card issuer and fees imposed 
by a third party that performs the conversion, such as a credit card 
network or the card issuer's corporate parent. (For example, in a 
transaction processed through a credit card network, the network may 
impose a 1 percent charge and the card-issuing bank may impose an 
additional 2 percent charge, for a total of a 3 percentage point 
foreign transaction fee being imposed on the consumer.)
    C. Fees imposed by a third party are included only if they are 
directly passed on to the consumer. For example, if a credit card 
network imposes a 1 percent fee on the card issuer, but the card 
issuer absorbs the fee as a cost of doing business (and only passes 
it on to consumers in the general sense that the interest and fees 
are imposed on all its customers to recover its costs), then the fee 
is not a foreign transaction fee and need not be disclosed. In 
another example, if the credit card network imposes a 1 percent fee 
for a foreign transaction on the card issuer, and the card issuer 
imposes this same fee on the consumer who engaged in the foreign 
transaction, then the fee is a foreign transaction fee and a finance 
charge.
    D. A card issuer is not required to disclose a fee imposed by a 
merchant. For example, if the merchant itself performs the currency 
conversion and adds a fee, this fee need not be disclosed by the 
card issuer. Under Sec.  226.9(d), a card issuer is not obligated to 
disclose finance charges imposed by a party honoring a credit card, 
such as a merchant, although the merchant is required to disclose 
such a finance charge if the merchant is subject to the Truth in 
Lending Act and Regulation Z.
    E. The foreign transaction fee is determined by first 
calculating the dollar amount of the transaction by using a currency 
conversion rate outside the card issuer's and third party's control. 
Any amount in excess of that dollar amount is a foreign transaction 
fee. Conversion rates outside the card issuer's and third party's 
control include, for example, a rate selected from the range of 
rates available in the wholesale currency exchange markets, an 
average of the highest and lowest rates available in such markets, 
or a government-mandated or government-managed exchange rate (or a 
rate selected from a range of such rates).
    F. The rate used for a particular transaction need not be the 
same rate that the card issuer (or third party) itself obtains in 
its currency conversion operations. In addition, the rate used for a 
particular transaction need not be the rate in effect on the date of 
the transaction (purchase or cash advance).
    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;
    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 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).

[[Page 5459]]

    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 (b)(8).
    1. Pre-existing insurance policy. The insurance discussed in 
Sec.  226.4(b)(7) and (b)(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. Credit 
insurance sold before or after an open-end (not home-secured) plan 
is opened is considered ``written in connection with a credit 
transaction.'' Insurance 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 considered 
``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 home-equity plan subject to the requirements of Sec.  
226.5b (although credit-sale disclosures may be required for the 
insurance sold after consummation if it is financed).
    3. Substitution of life insurance. The premium for a life 
insurance policy purchased and assigned to satisfy a credit life 
insurance requirement must be included in the finance charge, but 
only to the extent of the cost of the credit life insurance if 
purchased from the creditor or the actual cost of the policy (if 
that is less than the cost of the insurance available from the 
creditor). If the creditor does not offer the required insurance, 
the premium to be included in the finance charge is the cost of a 
policy of insurance of the type, amount, and term required by the 
creditor.
    4. Other insurance. Fees for required insurance not of the types 
described in Sec.  226.4(b)(7) and (b)(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. 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. 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. Pursuant to section 167(b) of the act, 
this provision applies only to transactions involving an open-end 
credit plan or a credit card (whether open-end or closed-end credit 
is extended on the card). The merchant must offer the discount to 
prospective buyers whether or not they are cardholders or members of 
the open-end credit plan. The merchant may, however, make other 
distinctions. For example:
    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. Pursuant to section 171(c) of the act, discounts excluded 
from the finance charge under this paragraph are also excluded 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 plan 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 and debt suspension 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 ``debt cancellation coverage'' includes guaranteed 
automobile protection, or ``GAP,'' agreements, which pay or satisfy 
the remaining debt after property insurance benefits are exhausted. 
Debt suspension coverage provides for suspension of the obligation 
to make one or more payments on the date(s) otherwise required by 
the credit agreement, when a specified event occurs. The term ``debt 
suspension'' does not include loan payment deferral arrangements in 
which the triggering event is the bank's unilateral decision to 
allow a deferral of payment and the borrower's unilateral election 
to do so, such as by skipping or reducing one or more payments 
(``skip payments'').
    2. Coverage written in connection with a transaction. Coverage 
sold after

[[Page 5460]]

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.''
    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 
described in Sec.  226.4(c)(4) do not necessarily have to be formal 
membership fees, nor are they limited to credit card plans. The 
provision applies to any credit plan in which payment of a fee is a 
condition of access to the plan itself, but it does not apply to 
fees imposed separately on individual closed-end transactions. The 
fee may be charged on a monthly, annual, or other periodic basis; a 
one-time, non-recurring fee imposed at the time an account is opened 
is not a fee that is charged on a periodic basis, and may not be 
treated as a participation fee.
    2. Participation fees--exclusions. Minimum monthly charges, 
charges for non-use of a credit card, and other charges based on 
either account activity or the amount of credit available under the 
plan are not excluded from the finance charge by Sec.  226.4(c)(4). 
Thus, for example, a fee that is charged and then refunded to the 
consumer based on the extent to which the consumer uses the credit 
available would be a finance charge. (See the commentary to Sec.  
226.4(b)(2). Also, see comment 14(c)-2 for treatment of certain 
types of fees excluded in determining the annual percentage rate for 
the periodic statement.)
    Paragraph 4(c)(5).
    1. Seller's points. The seller's points mentioned in Sec.  
226.4(c)(5) include any charges imposed by the creditor upon the 
noncreditor 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 and debt suspension 
coverage.
    1. General. Section 226.4(d) permits insurance premiums and 
charges and debt cancellation and debt suspension charges to be 
excluded from the finance charge. The required disclosures must be 
made in writing, except as provided in Sec.  226.4(d)(4). The rules 
on location of insurance and debt cancellation and debt suspension 
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 and debt suspension coverage unless the context 
indicates otherwise.

[[Page 5461]]

    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 or debt suspension 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; debt cancellation or 
suspension coverage. Credit life, accident, health, or loss-of-
income insurance, and debt cancellation and suspension coverage 
described in Sec.  226.4(b)(10), must be voluntary in order for the 
premium or charges to be excluded from the finance charge. Whether 
the insurance or coverage is in fact required or optional is a 
factual question. If the insurance or coverage is required, the 
premiums must be included in the finance charge, whether the 
insurance or coverage is purchased from the creditor or from a third 
party. If the consumer is required to elect one of several options--
such as to purchase credit life insurance, or to assign an existing 
life insurance policy, or to pledge security such as a certificate 
of deposit--and the consumer purchases the credit life insurance 
policy, the premium must be included in the finance charge. (If the 
consumer assigns a preexisting policy or pledges security instead, 
no premium is included in the finance charge. The security interest 
would be disclosed under Sec.  226.6(a)(4), Sec.  226.6(b)(5)(ii), 
or Sec.  226.18(m). See the commentary to Sec.  226.4(b)(7) and 
(b)(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 imposed 
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 or debt 
suspension 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 or debt suspension 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 or debt suspension 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 or debt 
suspension coverage whether or not the coverage is considered 
insurance. Creditors may use the

[[Page 5462]]

model credit insurance disclosures only if the debt cancellation or 
debt suspension coverage constitutes insurance under state law. (See 
Model Clauses and Samples at G-16 and H-17 in Appendix G and 
Appendix H to part 226 for guidance on how to provide the disclosure 
required by Sec.  226.4(d)(3)(iii) for debt suspension products.)
    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.
    4. Disclosures in programs combining debt cancellation and debt 
suspension features. If the consumer's debt can be cancelled under 
certain circumstances, the disclosure may be modified to reflect 
that fact. The disclosure could, for example, state (in addition to 
the language required by Sec.  226.4(d)(3)(iii)) that ``In some 
circumstances, my debt may be cancelled.'' However, the disclosure 
would not be permitted to list the specific events that would result 
in debt cancellation.
    4(d)(4) Telephone purchases.
    1. Affirmative request. A creditor would not satisfy the 
requirement to obtain a consumer's affirmative request if the 
``request'' was a response to a script that uses leading questions 
or negative consent. A question asking whether the consumer wishes 
to enroll in the credit insurance or debt cancellation or suspension 
plan and seeking a yes-or-no response (such as ``Do you want to 
enroll in this optional debt cancellation plan?'') would not be 
considered leading.
    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 (e)(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 (e)(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.
    5(a)(1) General.
    1. Clear and conspicuous standard. The ``clear and conspicuous'' 
standard generally requires that disclosures be in a reasonably 
understandable form. Disclosures for credit card applications and 
solicitations under Sec.  226.5a, highlighted account-opening 
disclosures under Sec.  226.6(b)(1), 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.
    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.
    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)(1), 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)(2)(i).)
    4. Integrated document. The creditor may make both the account-
opening 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, except where otherwise indicated, 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; or
    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
    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.
    Paragraph 5(a)(1)(ii)(A).
    1. Electronic disclosures. Disclosures that need not be provided 
in writing under Sec.  226.5(a)(1)(ii)(A) may be provided in 
writing, orally, or in electronic form. If the consumer requests the 
service in electronic form, such as on the creditor's Web site, the 
specified disclosures may be provided in electronic form without 
regard to the consumer consent or other provisions of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act) (15 
U.S.C. 7001 et seq.).
    Paragraph 5(a)(1)(iii).

[[Page 5463]]

    1. Disclosures not subject to E-Sign Act. See the commentary to 
Sec.  226.5(a)(1)(ii)(A) regarding disclosures (in addition to those 
specified under Sec.  226.5(a)(1)(iii)) that may be provided in 
electronic form without regard to the consumer consent or other 
provisions of the E-Sign Act.
    5(a)(2) Terminology.
    1. When disclosures must be more conspicuous. For home-equity 
plans subject to Sec.  226.5b, 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 Sec.  226.5(a)(2)(ii). 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)(1)(ii), the term annual percentage rate is subject to the 
more conspicuous rule.
    ii. In disclosing the amount of the finance charge, required by 
Sec.  226.7(a)(6)(i), 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)(1)(iii) and 
(a)(1)(iv), they may be equally conspicuous as the disclosures 
required under Sec. Sec.  226.6(a)(1)(ii) and 226.7(a)(7).
    2. Making disclosures more conspicuous. In disclosing the terms 
finance charge and annual percentage rate more conspicuously for 
home-equity plans subject to Sec.  226.5b, 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. 
For home-equity plans subject to Sec.  226.5b, the terms annual 
percentage rate and finance charge need not be more conspicuous than 
figures (including, for example, numbers, percentages, and dollar 
signs).
    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.
    5(b) Time of disclosures.
    5(b)(1) Account-opening disclosures.
    5(b)(1)(i) General rule.
    1. Disclosure before the first transaction. When disclosures 
must be furnished ``before the first transaction,'' account-opening 
disclosures must be delivered before the consumer becomes obligated 
on the plan. Examples include:
    i. Purchases. The consumer makes the first purchase, such as 
when a consumer opens a credit plan and makes purchases 
contemporaneously at a retail store, except when the consumer places 
a telephone call to make the purchase and opens the plan 
contemporaneously (see commentary to Sec.  226.5(b)(1)(iii) below).
    ii. Advances. The consumer receives the first advance. If the 
consumer receives a cash advance check at the same time the account-
opening 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).
    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 account-opening 
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 account-opening disclosures are required. No new 
account-opening 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, account-opening 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 furnish the disclosures required by Sec.  226.6 
so that the consumer has an opportunity, after receiving the 
disclosures, to contact the creditor before the balance is 
transferred and decline the transfer. 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 creditor 
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 creditor and withdraw the 
request. A creditor that permits consumers to withdraw the request 
by telephone has met this timing standard if the creditor does not 
effect the balance transfer until 10 days after the creditor has 
sent account-opening disclosures to the consumer, assuming the 
consumer has not contacted the creditor to withdraw the request. 
Card issuers that are subject to the requirements of Sec.  226.5a 
may establish procedures that comply with both Sec. Sec.  226.5a and 
226.6 in a single disclosure statement.
    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)(2). (Charges imposed as part of an 
open-end (not home-secured plan) that are not specified under Sec.  
226.6(b)(2) may alternatively be disclosed in electronic form; see 
the commentary to Sec.  226.5(a)(1)(ii)(A).) Creditors must provide 
such disclosures at a time and in a manner that a consumer would be 
likely to notice them. 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 
orally to the consumer. Similarly, a creditor providing marketing 
materials in writing to a consumer about a particular service would 
meet the standard if the creditor provided a clear and conspicuous 
written disclosure of the fee for that service in those same 
materials. A creditor that provides written materials to a consumer 
about a particular service but provides a fee disclosure for another 
service not promoted in such materials would not meet the standard. 
For example, if a creditor provided marketing materials promoting 
payment by Internet, but included the fee for a replacement card on 
such materials with no explanation, the creditor would not be 
disclosing the fee at a time and in a manner that the consumer would 
be likely to notice the fee.
    5(b)(1)(iii) Telephone purchases.
    1. Return policies. In order for creditors to provide 
disclosures in accordance with the timing requirements of this 
paragraph, consumers must be permitted to return merchandise 
purchased at the time the plan was established without paying 
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. 
Return policies need not provide a right to return goods if the 
consumer consumes or damages the goods, or for installed appliances 
or fixtures, provided there is a reasonable repair or replacement 
policy to cover defective goods or installations. If the consumer 
chooses to reject the financing plan, creditors comply with the 
requirements of this paragraph by permitting the consumer to pay for 
the goods with another reasonable form of payment acceptable to the 
merchant and keep the goods although the creditor cannot require the 
consumer to do so.
    5(b)(1)(iv) Membership fees.

[[Page 5464]]

    1. Membership fees. See Sec.  226.5a(b)(2) and related 
commentary for guidance on fees for issuance or availability of a 
credit or charge card.
    2. Rejecting the plan. If a consumer has paid or promised to pay 
a membership fee including an application fee excludable from the 
finance charge under Sec.  226.4(c)(1) before receiving account-
opening disclosures, the consumer may, after receiving the 
disclosures, reject the plan and not be obligated for the membership 
fee, application fee, or any other fee or charge. A consumer who has 
received the disclosures and uses the account, or makes a payment on 
the account after receiving a billing statement, is deemed not to 
have rejected the plan.
    3. Using the account. A consumer uses an account by obtaining an 
extension of credit after receiving the account-opening disclosures, 
such as by making a purchase or obtaining an advance. A consumer 
does not ``use'' the account by activating the account. A consumer 
also does not ``use'' the account when the creditor assesses fees on 
the account (such as start-up fees or fees associated with credit 
insurance or debt cancellation or suspension programs agreed to as a 
part of the application and before the consumer receives account-
opening disclosures). For example, the consumer does not ``use'' the 
account when a creditor sends a billing statement with start-up 
fees, there is no other activity on the account, the consumer does 
not pay the fees, and the creditor subsequently assesses a late fee 
or interest on the unpaid fee balances. A consumer also does not 
``use'' the account by paying an application fee excludable from the 
finance charge under Sec.  226.4(c)(1) prior to receiving the 
account-opening disclosures.
    4. Home-equity plans. Creditors offering home-equity plans 
subject to the requirements of Sec.  226.5b are subject to the 
requirements of Sec.  226.5b(h) regarding the collection of fees.
    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 draw privileges. When a consumer's ability to 
draw on an open-end account is terminated without being converted to 
closed-end credit under a written agreement, the creditor must 
continue to provide periodic statements to those consumers entitled 
to receive them under Sec.  226.5(b)(2)(i), for example, when the 
draw period of an open-end credit plan ends and consumers are paying 
off outstanding balances according to the account agreement or under 
the terms of a workout agreement that is not converted to a closed-
end transaction. In addition, creditors must continue to follow all 
of the other open-end credit requirements and procedures in subpart 
B.
    3. Uncollectible accounts. An account is deemed uncollectible 
for purposes of Sec.  226.5(b)(2)(i) when a creditor has ceased 
collection efforts, either directly or through a third party.
    4. 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.
    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. For open-end plans not subject to 12 CFR part 227, subpart 
C; 12 CFR part 535, subpart C; or 12 CFR part 706, subpart C, 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). (For consumer credit card 
accounts subject to 12 CFR part 227, subpart C; 12 CFR part 535, 
subpart C; or 12 CFR part 706, subpart C, see 12 CFR 227.22, 12 CFR 
535.22, or 12 CFR 706.22, as applicable.)
    2. Deferred interest transactions. See comment 7(b)-1.iv.
    Paragraph 5(b)(2)(iii).
    1. Computer malfunction. The exceptions identified in Sec.  
226.5(b)(2)(iii) of this section do not extend to the failure to 
provide a periodic statement because of computer malfunction.
    2. 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 grace period, the statement must 
be made available in accordance with the 14-day rule.
    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, 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.
    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.
    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.
    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

[[Page 5465]]

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 solicitations 
initiated by a card issuer to open a credit or charge card account. 
(See Sec.  226.5a(a)(5)and (e)(2) for exceptions; see Sec.  
226.5a(a)(1) and accompanying commentary for the definition of 
solicitation; see also Sec.  226.2(a)(15) and accompanying 
commentary for the definition of charge card.)
    2. Substitution of account-opening summary table for the 
disclosures required by Sec.  226.5a. In complying with Sec.  
226.5a(c), (e)(1) or (f), a card issuer may provide the account-
opening summary table described in Sec.  226.6(b)(1) 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.
    3. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to Sec.  226.5a 
disclosures.
    5a(a) General rules.
    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.
    5a(a)(2) Form of disclosures; tabular format.
    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. 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.
    ii. Electronic disclosures. If the table is provided 
electronically, the table must be provided in close proximity to the 
application or solicitation. Card issuers have flexibility in 
satisfying this requirement. Methods card issuers could use to 
satisfy the requirement include, but are not limited to, the 
following examples:
    A. The disclosures could automatically appear on the screen when 
the application or reply form appears;
    B. The disclosures could be located on the same Web page as the 
application or reply form (whether or not they appear 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;
    C. 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. The link would take the consumer to the 
disclosures, but the consumer need not be required to scroll 
completely through the disclosures; or
    D. The disclosures could be located on the same Web page as the 
application or reply form without necessarily appearing on the 
initial screen, immediately preceding the button that the consumer 
will click to submit the application or reply.
    Whatever method is used, a card issuer need not confirm that the 
consumer has read the disclosures.
    2. Multiple accounts. 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.
    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 foreign transaction fee is imposed on the 
account, the heading Foreign transaction and disclosure may be 
deleted from the table or the disclosure form may contain the 
heading Foreign transaction and a disclosure showing none. 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. i. 
In general. See Samples G-10(B) and G-10(C) for guidance on 
providing the disclosures described in Sec.  226.5a(a)(2)(iv) 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 in the table.
    ii. Maximum limits on fees. Section 226.5a(a)(2)(iv) provides 
that any maximum limits on fee amounts unrelated to fees that vary 
by state may not be disclosed in bold text. For example, assume an 
issuer will charge a cash advance fee of $5 or 3 percent of the cash 
advance transaction amount, whichever is greater, but the fee will 
not exceed $100. The maximum limit of $100 for the cash advance fee 
must not be highlighted in bold. Nonetheless, assume that the amount 
of the late fee varies by state, and the range of amount of late 
fees disclosed is $15--$25. In this case, the maximum limit of $25 
on the late fee amounts must be highlighted in bold. In both cases, 
the minimum fee amount (e.g. $5 or $15) must be disclosed in bold 
text.
    iii. Periodic fees. Section 226.5a(a)(2)(iv) provides that any 
periodic fee disclosed pursuant to Sec.  226.5a(b)(2) that is not an 
annualized amount must not be disclosed in bold. For example, if an 
issuer imposes a $10 monthly maintenance fee for a card account, 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 
this example, the $10 fee disclosure would not be disclosed in bold, 
but the $120 annualized amount must be disclosed in bold. In 
addition, if an issuer must disclose any annual fee in the table, 
the amount of the annual fee must be disclosed in bold.
    6. Form of disclosures. Whether disclosures must be in 
electronic form depends upon the following:
    i. If a consumer accesses a credit card application or 
solicitation electronically (other than as described under ii. 
below), such as on-line at a home computer, the card issuer must 
provide the disclosures in electronic form (such as with the 
application or solicitation on its Web site) in order to meet the 
requirement to provide disclosures in a timely manner on or with the 
application or solicitation. If the issuer instead mailed paper 
disclosures to the consumer, this requirement would not be met.
    ii. In contrast, if a consumer is physically present in the card 
issuer's office, and accesses a credit card application or 
solicitation electronically, such as via a terminal or kiosk (or if 
the consumer uses a terminal or kiosk located on the premises of an 
affiliate or third party that has arranged with the card issuer to 
provide applications or solicitations to consumers), the issuer may 
provide disclosures in either electronic or paper form, provided the 
issuer complies with the timing and delivery (``on or with'') 
requirements of the regulation.
    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 Appendix G-10 to part 226; but see Sec.  226.5(a)(2) for 
terminology requirements applicable to Sec.  226.5a disclosures.
    5a(a)(4) 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 specific fee 
applicable to the consumer's account, the range may be stated as the 
lowest authorized fee (zero, if there are one or more states where 
no fee applies) to the highest authorized fee.
    5a(a)(5) Exceptions.

[[Page 5466]]

    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).
    5a(b) Required disclosures.
    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 Sec.  226.5a(c), 
(d)(2), (e)(1) and (f). The tabular format does not apply to oral 
disclosures given pursuant to Sec.  226.5a(d)(1). (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.
    5a(b)(1) Annual percentage rate.
    1. 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(b)(4)(ii) for examples of variable-rate 
plans.)
    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 may 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. A card issuer may not 
disclose any applicable limitations on rate increases or decreases 
in the table, such as describing that the rate will not go below a 
certain rate or higher than a certain 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. i. Immediate proximity. If the term 
``introductory'' is in the same phrase as the introductory rate, as 
that term is defined in Sec.  226.16(g)(2)(ii), it will be deemed to 
be in immediate proximity of the listing. For example, an issuer 
that uses the phrase ``introductory balance transfer APR X percent'' 
has used the word ``introductory'' within the same phrase as the 
rate. (See Sample G-10(C) for guidance on how to disclose clearly 
and conspicuously the expiration date of the introductory rate and 
the rate that will apply after the introductory rate expires, if an 
introductory rate is disclosed in the table.)
    ii. Subsequent changes in terms. The fact that an issuer may 
reserve the right to change a rate subsequent to account opening, 
pursuant to the notice requirements of Sec.  226.9(c), does not, by 
itself, make that rate an introductory rate. For example, assume an 
issuer discloses an annual percentage rate for purchases of 12.99% 
but does not specify a time period during which that rate will be in 
effect. Even if that issuer subsequently increases the annual 
percentage rate for purchases to 15.99%, pursuant to a change-in-
terms notice provided under Sec.  226.9(c), the 12.99% is not an 
introductory rate. (However, issuers subject to 12 CFR 227.24 or 
similar law are subject to certain limitations on such rate 
increases.)
    iii. More than one introductory rate. If more than one 
introductory rate may apply to a particular balance in succeeding 
periods, the term ``introductory'' need only be used to describe the 
first introductory rate. For example, if an issuer offers a rate of 
8.99% on purchases for six months, 10.99% on purchases for the 
following six months, and 14.99% on purchases after the first year, 
the term ``introductory'' need only be used to describe the 8.99% 
rate.
    4. Premium initial rates--subsequent changes in terms. The fact 
that an issuer may reserve the right to change a rate subsequent to 
account opening, pursuant to the notice requirements of Sec.  
226.9(c) (as applicable), does not, by itself, make that rate a 
premium initial rate. For example, assume an issuer discloses an 
annual percentage rate for purchases of 18.99% but does not specify 
a time period during which that rate will be in effect. Even if that 
issuer subsequently reduces the annual percentage rate for purchases 
to 15.99%, the 18.99% is not a premium initial rate. If the rate 
decrease is the result of a change from a non-variable rate to a 
variable rate or from a variable rate to a non-variable rate, see 
comments 9(c)(2)(iv)-3 and 9(c)(2)(iv)-4 for guidance on the notice 
requirements under Sec.  226.9(c). (In addition, issuers subject to 
12 CFR 227.24 or similar law may be subject to certain limitations 
on such rate decreases.)
    5. Increased penalty rates. i. In general. For rates that are 
not introductory 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, the 
card issuer must disclose the increased rate that would 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. 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 
because 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.'' 
Similarly, if an issuer may increase a rate that applies to a 
particular balance because the account is more than 30 days late, 
the issuer should describe this circumstance in the table as ``make 
a late payment.'' An issuer may not distinguish between the events 
that may result in an increased rate for existing balances and the 
events that may result in an increased rate for new transactions. 
(See Samples G-10(B) and G-10(C) (in the row labeled ``Penalty APR 
and When it Applies'') 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) (in the row labeled ``Penalty APR and 
When it Applies'') for additional guidance on the level of detail 
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 information 
required by Sec.  226.5a(b)(1)(iv)(A) if the issuer uses the format 
shown in Samples G-10(B) and G-10(C) (in the row labeled ``Penalty 
APR and When it Applies'') to disclose this information.
    ii. Introductory rates--general. An issuer is only required to 
disclose directly beneath the table the circumstances under which an 
introductory rate, as that term is defined in Sec.  
226.16(g)(2)(ii), may be revoked, and the rate that will apply after 
the revocation, if the issuer discloses the introductory rate in the 
table or in any written or electronic promotional materials 
accompanying applications or solicitations subject to Sec.  
226.5a(c) or (e). This information about revocation of an 
introductory rate and the rate that will apply after revocation must 
be provided even if the rate that will apply after the introductory 
rate is revoked is the rate that would have applied at the end of 
the promotional period. In a variable-rate account, the rate that 
would have applied at the end of the promotional period is a rate 
based on the applicable index or formula in accordance with the 
accuracy requirements set forth in Sec.  226.5a(c) or (e). In 
describing the rate that will apply after revocation of the 
introductory rate, if the rate that will apply after revocation of 
the introductory rate is already disclosed in the table, the issuer 
is not required to repeat the rate, but may refer to that rate in a 
clear and conspicuous manner. For example, if the rate that will 
apply after revocation of an introductory rate is the standard rate 
that applies to that type of transaction (such as a purchase or 
balance transfer transaction), and the standard rates are labeled in 
the table as ``standard APRs,'' the issuer may refer to the 
``standard APR'' when describing the rate that will apply after 
revocation of an introductory rate. (See

[[Page 5467]]

Sample G-10(C) in the disclosure labeled ``Loss of Introductory 
APR'' directly beneath the table.) The description of the 
circumstances in which an introductory rate could be revoked should 
be brief. For example, if an issuer may increase an introductory 
rate because the account is more than 30 days late, the issuer 
should describe this circumstance in the table as ``make a late 
payment.'' In addition, if the circumstances in which an 
introductory rate could be revoked are already listed elsewhere in 
the table, the issuer is not required to repeat the circumstances 
again, but may refer to those circumstances in a clear and 
conspicuous manner. For example, if the circumstances in which an 
introductory rate could be revoked are the same as the event or 
events that may trigger a ``penalty rate'' as described in Sec.  
226.5a(b)(1)(iv)(A), the issuer may refer to the actions listed in 
the Penalty APR row, in describing the circumstances in which the 
introductory rate could be revoked. (See Sample G-10(C) in the 
disclosure labeled ``Loss of Introductory APR'' directly beneath the 
table for additional guidance on the level of detail in which to 
describe the circumstances in which an introductory rate could be 
revoked.) A card issuer will be deemed to meet the standard to 
clearly and conspicuously disclose the information required by Sec.  
226.5a(b)(1)(iv)(B) if the issuer uses the format shown in Sample G-
10(C) to disclose this information.
    iii. Introductory rates--issuers subject to 12 CFR 227.24 or 
similar law. Issuers that are disclosing an introductory rate 
subject to 12 CFR 227.24 or similar law are prohibited from 
increasing or revoking the introductory rate before it expires 
unless the consumer fails to make a required minimum periodic 
payment within 30 days after the due date for the payment. In making 
the required disclosure pursuant to Sec.  226.5a(b)(1)(iv)(B), any 
issuers subject to 12 CFR 227.24 or similar law should describe this 
circumstance directly beneath the table as ``make a late payment.''
    6. Rates that depend on consumer's creditworthiness. i. In 
general. 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). The card issuer may not disclose only the lowest, highest 
or median rate that could apply. (See Samples G-10(B) and G-10(C) 
for guidance on how to disclose a range of rates.)
    ii. Penalty rates. If the rate is a penalty rate, as described 
in Sec.  226.5a(b)(1)(iv), the card issuer at its option may 
disclose the highest rate that could apply, instead of disclosing 
the specific rates or the range of rates that could apply. For 
example, if the penalty rate could be up to 28.99 percent, but the 
issuer may impose a penalty rate that is less than that rate 
depending on factors at the time the penalty rate is imposed, the 
issuer may disclose the penalty rate as ``up to'' 28.99 percent. The 
issuer also must include a statement that the penalty rate for which 
the consumer may qualify will depend on the consumer's 
creditworthiness, and other factors if applicable.
    iii. Other factors. Section 226.5a(b)(1)(v) applies even if 
other factors are used in combination with a consumer's 
creditworthiness to determine the rate for which a consumer may 
qualify at account opening. For example, Sec.  226.5a(b)(1)(v) would 
apply if the issuer considers the type of purchase the consumer is 
making at the time the consumer opens the account, in combination 
with the consumer's creditworthiness, to determine the rate for 
which the consumer may qualify at account opening. If other factors 
are considered, the issuer should amend the statement about 
creditworthiness, to indicate that the rate for which the consumer 
may qualify at account opening will depend on the consumer's 
creditworthiness and other factors. Nonetheless, Sec.  
226.5a(b)(1)(v) does not apply if a consumer's creditworthiness is 
not one of the factors that will determine the rate for which the 
consumer may qualify at account opening (for example, if the rate is 
based solely on the type of purchase that the consumer is making at 
the time the consumer opens the account, or is based solely on 
whether the consumer has other banking relationships with the card 
issuer).
    7. Rate based on another rate on the account. In some cases, one 
rate may be based on another rate on the account. For example, 
assume that a penalty rate as described in Sec.  226.5a(b)(1)(iv)(A) 
is determined by adding 5 percentage points to the current purchase 
rate, which is 10 percent. In this example, the card issuer in 
disclosing the penalty rate must disclose 15 percent as the current 
penalty rate. If the purchase rate is a variable rate, then the 
penalty rate also is a variable rate. In that case, the card issuer 
also must disclose the fact that the penalty rate may vary and how 
the rate is determined, such as ``This APR may vary with the market 
based on the Prime Rate.'' In describing the penalty rate, the 
issuer shall not disclose in the table the amount of the margin or 
spread added to the current purchase rate to determine the penalty 
rate, such as describing that the penalty rate is determined by 
adding 5 percentage points to the purchase rate. (See Sec.  
226.5a(b)(1)(i) and comment 5a(b)(1)-2 for further guidance on 
describing a variable rate.)
    8. Rates. The only rates that shall be disclosed in the table 
are annual percentage rates determined under Sec.  226.14(b). 
Periodic rates shall not be disclosed in the table.
    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 shall not be disclosed in 
the table 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) shall not 
be disclosed in the table if the basic account may be opened without 
paying such fees. Issuing a card to each primary cardholder (not 
authorized users) is considered a basic membership privilege and 
fees for additional cards, beyond the first card on the account, 
must be disclosed as a fee for issuance or availability. Thus, a fee 
to obtain an additional card on the account beyond the first card 
(so that each cardholder would have his or her own card) must be 
disclosed in the table as a fee for issuance or availability under 
Sec.  226.5a(b)(2). This fee must be disclosed even if the fee is 
optional; that is, if the fee is charged only if the cardholder 
requests one or more additional cards. (See the available credit 
disclosure in Sec.  226.5a(b)(14).)
    3. One-time fees. Disclosure of non-periodic fees is limited to 
fees related to opening the account, such as one-time membership or 
participation fees, or an application fee that is excludable from 
the finance charge under Sec.  226.4(c)(1). The following are 
examples of fees that shall not be disclosed in the table:
    i. Fees for reissuing a lost or stolen card.
    ii. Statement reproduction fees.
    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 reduced 
fees or waivers will remain in effect.
    5. 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(C) for guidance on how to meet these 
requirements.)
    5a(b)(3) Fixed finance charge; minimum interest 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.
    2. Adjustment of $1.00 threshold amount. Consistent with Sec.  
226.5a(b)(3), the Board will publish adjustments to the $1.00 
threshold amount, as appropriate.
    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, shall not be 
disclosed in the table under this section; the third party would be 
responsible for disclosing the charge under Sec.  226.9(d)(1).
    2. Foreign transaction fees. A transaction charge imposed by the 
card issuer for the use of the card for purchases includes any fee 
imposed by the issuer for purchases in a foreign currency or that 
take place outside the United States or with a foreign merchant. 
(See comment 4(a)-4 for guidance on when a foreign transaction fee 
is considered charged by the card issuer.) If an issuer charges the 
same foreign transaction fee for purchases and cash advances in a 
foreign currency, or that take place outside the United States or 
with a foreign merchant, the issuer may disclose this foreign 
transaction fee as shown in Samples G-10(B) and G-10(C). Otherwise, 
the issuer must revise the

[[Page 5468]]

foreign transaction fee language shown in Samples G-10(B) and G-
10(C) to disclose clearly and conspicuously the amount of the 
foreign transaction fee that applies to purchases and the amount of 
the foreign transaction fee that applies to cash advances.
    5a(b)(5) Grace period.
    1. How grace period disclosure is made. The card issuer must 
state any conditions on the applicability of the grace period. An 
issuer that offers a grace period on all purchases and conditions 
the grace period on the consumer paying his or her outstanding 
balance in full by the due date each billing cycle, or on the 
consumer paying the outstanding balance in full by the due date in 
the previous and/or the current billing cycle(s) will be deemed to 
meet these requirements by providing the following disclosure, as 
applicable: ``Your due date is [at least] ---- days after the close 
of each billing cycle. We will not charge you interest on purchases 
if you pay your entire balance by the due date each month.''
    2. No grace period. The issuer may use the following language to 
describe that no grace period on any purchases is offered, as 
applicable: ``We will begin charging interest on purchases on the 
transaction date.''
    3. Grace period on some purchases. If the issuer provides a 
grace period on some types of purchases but no grace period on 
others, the issuer may combine and revise the language in comments 
5a(b)(5)-1 and -2 as appropriate to describe to which types of 
purchases a grace period applies and to which types of purchases no 
grace period is offered.
    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 disclose below the table only the 
name of the method. 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(b)(4)(i)(D). (See the 
commentary to Sec.  226.5a(g) for guidance on particular methods.)
    2. Determining the method. In determining which balance 
computation method to disclose for purchases, 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. Content. See Samples G-10(B) and G-10(C) for guidance on how 
to disclose clearly and conspicuously the cash advance fee.
    2. Foreign cash advances. Cash advance fees required to be 
disclosed under Sec.  226.5a(b)(8) include any charge imposed by the 
card issuer for cash advances in a foreign currency or that take 
place outside the United States or with a foreign merchant. (See 
comment 4(a)-4 for guidance on when a foreign transaction fee is 
considered charged by the card issuer.) If an issuer charges the 
same foreign transaction fee for purchases and cash advances in a 
foreign currency or that take place outside the United States or 
with a foreign merchant, the issuer may disclose this foreign 
transaction fee as shown in Samples G-10(B) and (C). Otherwise, the 
issuer must revise the foreign transaction fee language shown in 
Samples G-10(B) and (C) to disclose clearly and conspicuously the 
amount of the foreign transaction fee that applies to purchases and 
the amount of the foreign transaction fee that applies to cash 
advances.
    3. ATM fees. An issuer is not required to disclose pursuant to 
Sec.  226.5a(b)(8) any 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.
    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. See 
Samples G-10(B) and G-10(C) for guidance on how to disclose clearly 
and conspicuously the late-payment fee.)
    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. (See Samples G-10(B) and G-10(C) for 
guidance on how to disclose clearly and conspicuously the over-the-
limit fee.)
    5a(b)(13) Required insurance, debt cancellation, or debt 
suspension coverage.
    1. Content. See Sample G-10(B) for guidance on how to comply 
with the requirements in Sec.  226.5a(b)(13).
    5a(b)(14) Available credit.
    1. Calculating available credit. If the 15 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 and charged to the account when the account is 
opened, such as one-time issuance and set-up fees. 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. In calculating the amount of the available credit 
including optional fees, if optional fees could be charged multiple 
times, the issuer shall assume that the optional fee is only imposed 
once. For example, if an issuer charges a fee for each additional 
card issued on the account, the issuer in calculating the amount of 
the available credit including optional fees may assume that the 
cardholder requests only one additional card. In disclosing the 
available credit, the issuer shall round down the available credit 
amount to the nearest whole dollar.
    2. Content. See Sample G-10(C) for guidance on how to provide 
the disclosure required by Sec.  226.5a(b)(14) clearly and 
conspicuously.
    5a(b)(15) Web site reference.
    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 card accounts.
    5a(c) Direct mail and electronic applications and solicitations.
    1. 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 
(e)(1)(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 
(e)(1)(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

[[Page 5469]]

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.
    2. Right to reject the plan. The right to reject the plan 
referenced in this paragraph is the same as the right to reject the 
plan described in Sec.  226.5(b)(1)(iv). If an issuer substitutes 
the account-opening summary table described in Sec.  226.6(b)(1) in 
lieu of the disclosures specified in Sec.  226.5a(d)(2)(ii), the 
disclosure specified in Sec.  226.5a(d)(2)(ii)(B) must appear in the 
table, if the issuer is required to do so pursuant to Sec.  
226.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.  
226.5a(d)(2)(ii)(B) may appear either in or outside the table 
containing the required credit disclosures.
    3. Substituting account-opening table for alternative written 
disclosures. An issuer may substitute the account-opening summary 
table described in Sec.  226.6(b)(1) in lieu of the disclosures 
specified in Sec.  226.5a(d)(2)(ii).
    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. 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.)
    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 (e)(1)(iii) may appear either in or outside the 
table containing the required credit disclosures.
    5a(e)(2) 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)(3) 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) and a consumer calls 
or writes a card issuer to obtain information about changes in the 
disclosures, the issuer need only provide the items of information 
that have changed from those previously disclosed on or with the 
application or solicitation. If a consumer requests information 
about particular items, the card issuer need only provide the 
requested information. If, however, the card issuer has made 
disclosures in accordance with the option in Sec.  226.5a(e)(2) 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 must provide the 
information listed in Sec.  226.5a(e)(1). Information provided in 
writing need not be in a tabular format.
    5a(f) In-person applications and solicitations.
    1. Coverage. i. This paragraph applies if:
    A. An in-person conversation between a card issuer and a 
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.
    5a(g) Balance computation methods defined.
    1. Two-cycle average daily balance methods.
    i. In general. The two-cycle average daily balance methods 
described in Sec.  226.5a(g)(2)(i) and (g)(2)(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.
    ii. Restrictions. Some issuers may be prohibited from using the 
two-cycle average daily balance methods described in Sec.  
226.5a(g)(2)(i) and (ii). See 12 CFR parts 227, 535, and 706.

Section 226.5b Requirements for Home-equity Plans

* * * * *
    5b(a) Form of Disclosure
    5b(a)(1) General
    1. Written disclosures. The disclosures required under this 
section must be clear and conspicuous and in writing, but need not 
be in a form the consumer can keep. (See the commentary to Sec.  
226.6(a)(3) for special rules when disclosures required under Sec.  
226.5b(d) are given in a retainable form.)
* * * * *
    5b(f) Limitations on Home-equity Plans
* * * * *
    Paragraph 5b(f)(3)(vi).
* * * * *
    4. Reinstatement of credit privileges. Creditors are responsible 
for ensuring that credit privileges are restored as soon as 
reasonably possible after the condition that permitted the 
creditor's action ceases to exist. One way a creditor can meet this 
responsibility is to monitor the line on an ongoing basis to 
determine when the condition ceases to exist. The creditor must 
investigate the condition frequently enough to assure itself that 
the condition permitting

[[Page 5470]]

the freeze continues to exist. The frequency with which the creditor 
must investigate to determine whether a condition continues to exist 
depends upon the specific condition permitting the freeze. As an 
alternative to such monitoring, the creditor may shift the duty to 
the consumer to request reinstatement of credit privileges by 
providing a notice in accordance with Sec.  226.9(c)(1)(iii). A 
creditor may require a reinstatement request to be in writing if it 
notifies the consumer of this requirement on the notice provided 
under Sec.  226.9(c)(1)(iii). Once the consumer requests 
reinstatement, the creditor must promptly investigate to determine 
whether the condition allowing the freeze continues to exist. Under 
this alternative, the creditor has a duty to investigate only upon 
the consumer's request.
* * * * *

Section 226.6 Account-opening Disclosures

    6(a) Rules affecting home-equity plans.
    6(a)(1) Finance charge.
    Paragraph 6(a)(1)(i).
    1. When finance charges accrue. Creditors are not required to 
disclose a specific date when finance charges will begin to accrue. 
Creditors may provide a general explanation such as that the 
consumer has 30 days from the closing date to pay the new balance 
before finance charges will accrue on the account.
    2. Grace periods. In disclosing whether or not a grace period 
exists, the creditor need not use ``free period,'' ``free-ride 
period,'' ``grace period'' or any other particular descriptive 
phrase or term. For example, a statement that ``the finance charge 
begins on the date the transaction is posted to your account'' 
adequately discloses that no grace 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 grace period 
exists in the interim.
    Paragraph 6(a)(1)(ii).
    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% monthly periodic rate on purchase balances of $0-$500, and a 
1% monthly periodic rate for balances above $500). In this example, 
the creditor must give a range of balances disclosure for the 
purchase feature.
    2. Variable-rate disclosures--coverage.
    i. Examples. 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 for plans involving rate changes such as 
the following:
    A. Rate changes that are tied to the rate the creditor pays on 
its six-month certificates of deposit.
    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. An open-end credit plan in which the employee receives a 
lower rate contingent upon employment (that is, with the rate to be 
increased upon termination of employment) is not a variable-rate 
plan.
    3. Variable-rate plan--rate(s) in effect. In disclosing the 
rate(s) in effect at the time of the account-opening disclosures (as 
is required by Sec.  226.6(a)(1)(ii)), 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 
account-opening disclosures, the disclosures under Sec.  
226.6(a)(1)(ii) 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 
of rate increases 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 6(a)(1)(ii)-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 account-
opening 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 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 in Sec.  
226.6(a)(1)(ii).
    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 
6(a)(1)(ii)-3.
    11. Increased penalty rates. If the initial rate may increase 
upon the occurrence of one or more specific events, such as a late 
payment or an extension of credit that exceeds the credit limit, the 
creditor must disclose the initial rate and the increased penalty 
rate that may apply. If the penalty rate is based on an index and an 
increased margin, the issuer must disclose the index and the margin. 
The creditor must also disclose the specific event or events that 
may result in the increased rate, such as ``22% APR, if 60 days 
late.'' If the penalty rate cannot be determined at the time 
disclosures are given, the creditor must provide an explanation of 
the specific event or events that may result in the increased rate. 
At the creditor's option, the creditor may disclose the period for 
which the increased rate will remain in effect, such as ``until you 
make three timely payments.'' The creditor need not disclose an 
increased rate that is imposed when credit privileges are 
permanently terminated.
    Paragraph 6(a)(1)(iii).
    1. Explanation of balance computation method. A shorthand phrase 
such as ``previous balance method'' does not suffice in explaining 
the balance computation method. (See Model Clauses G-1 and G-1(A) to 
part 226.)
    2. Allocation of payments. 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.)

[[Page 5471]]

    Paragraph 6(a)(1)(iv).
    1. Finance charges. In addition to disclosing the periodic 
rate(s) under Sec.  226.6(a)(1)(ii), creditors must disclose 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)). 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.
    6(a)(2) Other charges.
    1. General; examples of other charges. Under Sec.  226.6(a)(2), 
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 residential mortgage 
transactions or 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. 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(a)(2)-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.
    6(a)(3) 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), 
(d)(12)(x), (d)(12)(xi), and (d)(12)(xii) need not be provided with 
the disclosures under Sec.  226.6 if the disclosures under Sec.  
226.5b(d) were provided in a form the consumer could keep; and the 
disclosures of the payment example under Sec.  226.5b(d)(5)(iii), 
the maximum-payment example under Sec.  226.5b(d)(12)(x) and the 
historical table under Sec.  226.5b(d)(12)(xi) included a 
representative payment example for the category of payment options 
the consumer has chosen.
    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 (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), (d)(12)(viii), (d)(12)(x), (d)(12)(xi) and 
(d)(12)(xii) must be given to any consumer who chooses one of the 
other two options. If the Sec.  226.5b(d)(5)(iii) and (d)(12) 
disclosures are provided with the second set of disclosures, they 
need not be transaction-specific, but may be based on a 
representative example of the category of payment option chosen.
    4. Disclosures for the repayment period. The creditor must 
provide disclosures about both the draw and repayment phases when 
giving the disclosures under Sec.  226.6. Specifically, the creditor 
must make the disclosures in Sec.  226.6(a)(3), state the 
corresponding annual percentage rate, and provide the variable-rate 
information required in Sec.  226.6(a)(1)(ii) for the repayment 
phase. To the extent the corresponding annual percentage rate, the 
information in Sec.  226.6(a)(1)(ii), 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.
    6(a)(4) Security interests.
    1. General. 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.
    2. Identification of property. Creditors sufficiently identify 
collateral by type 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. 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. 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 account-opening 
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(a)(4)-2.)
    5. Collateral from third party. Security interests taken in 
connection with the plan must be disclosed, whether the collateral 
is owned by the consumer or a third party.
    6(a)(5) Statement of billing rights.
    1. See the commentary to Model Forms G-3, G-3(A), G-4, and G-
4(A).
    6(b) Rules affecting open-end (not home-secured) plans.
    6(b)(1) Form of disclosures; tabular format for open-end (not 
home-secured) plans.
    1. Relation to tabular summary for applications and 
solicitations. See

[[Page 5472]]

commentary to Sec.  226.5a(a), (b), and (c) regarding format and 
content requirements, except for the following:
    i. Creditors must use the accuracy standard for annual 
percentage rates in Sec.  226.6(b)(4)(ii)(G).
    ii. Generally, creditors must disclose the specific rate for 
each feature that applies to the account. If the rates on an open-
end (not home-secured) plan vary by State and the creditor is 
providing the account-opening table in person at the time the plan 
is established in connection with financing the purchase of goods or 
services the creditor may, at its option, disclose in the account-
opening table the rate applicable to the consumer's account, or the 
range of rates, if the disclosure includes a statement that the rate 
varies by State and refers the consumer to the account agreement or 
other disclosure provided with the account-opening table where the 
rate applicable to the consumer's account is disclosed.
    iii. Creditors must explain whether or not a grace period exists 
for all features on the account. The row heading ``Paying Interest'' 
must be used if any one feature on the account does not have a grace 
period.
    iv. Creditors must name the balance computation method used for 
each feature of the account and state that an explanation of the 
balance computation method(s) is provided in the account-opening 
disclosures.
    v. Creditors must state that consumers' billing rights are 
provided in the account-opening disclosures.
    vi. If fees on an open-end (not home-secured) plan vary by State 
and the creditor is providing the account-opening table in person at 
the time the plan is established in connection with financing the 
purchase of goods or services the creditor may, at its option, 
disclose in the account-opening table the specific fee applicable to 
the consumer's account, or the range of fees, if the disclosure 
includes a statement that the amount of the fee varies by State and 
refers the consumer to the account agreement or other disclosure 
provided with the account-opening table where the fee applicable to 
the consumer's account is disclosed.
    vii. Creditors that must disclose the amount of available credit 
must state the initial credit limit provided on the account.
    viii. Creditors must disclose directly beneath the table the 
circumstances under which an introductory rate may be revoked and 
the rate that will apply after the introductory rate is revoked only 
if the introductory rate is disclosed pursuant to Sec.  
226.6(b)(2)(i)(B) in the account-opening table. Creditors subject to 
12 CFR 227.24 or similar law are subject to limitations on the 
circumstances under which an introductory rate may be revoked. (See 
comment 5a(b)(1)-4 for guidance on how a creditor subject to 12 CFR 
227.24 or similar law may disclose the circumstances under which an 
introductory rate may be revoked.)
    ix. The applicable forms providing safe harbors for account-
opening tables are under Appendix G-17 to part 226.
    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)(1) 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 to part 226; but see Sec.  226.5(a)(2) for terminology 
requirements applicable to Sec.  226.6(b).
    6(b)(2) Required disclosures for account-opening table for open-
end (not home-secured) plans.
    6(b)(2)(iii) Fixed finance charge; minimum interest charge.
    1. Example of brief statement. See Samples G-17(B), G-17(C), and 
G-17(D) for guidance on how to provide a brief description of a 
minimum interest charge.
    6(b)(2)(v) Grace period.
    1. Grace period. Creditors must state any conditions on the 
applicability of the grace period. A creditor that offers a grace 
period on all types of transactions for the account and conditions 
the grace period on the consumer paying his or her outstanding 
balance in full by the due date each billing cycle, or on the 
consumer paying the outstanding balance in full by the due date in 
the previous and/or the current billing cycle(s) will be deemed to 
meet these requirements by providing the following disclosure, as 
applicable: ``Your due date is [at least] ----days after the close 
of each billing cycle. We will not charge you interest on your 
account if you pay your entire balance by the due date each month.''
    2. No grace period. Creditors may use the following language to 
describe that no grace period is offered, as applicable: ``We will 
begin charging interest on [applicable transactions] on the 
transaction date.''
    3. Grace period on some features. See Samples G-17(B) and G-
17(C) for guidance on complying with Sec.  226.6(b)(2)(v) when a 
creditor offers a grace period for purchases but no grace period on 
balance transfers and cash advances.
    6(b)(2)(vi) Balance computation method.
    1. Content. See Samples G-17(B) and G-17(C) for guidance on how 
to disclose the balance computation method where the same method is 
used for all features on the account.
    6(b)(2)(xiii) Available credit.
    1. Right to reject the plan. Creditors may use the following 
language to describe consumers' right to reject a plan after 
receiving account-opening disclosures: ``You may still reject this 
plan, provided that you have not yet used the account or paid a fee 
after receiving a billing statement. If you do reject the plan, you 
are not responsible for any fees or charges.''
    6(b)(3) Disclosure of 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. 
However, the descriptive phrase or term must be sufficiently similar 
to the disclosures provided pursuant to Sec. Sec.  226.5a(b)(5) and 
226.6(b)(2)(v) to satisfy a creditor's duty to provide consistent 
terminology under Sec.  226.5(a)(2).
    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.
    Paragraph 6(b)(3)(ii).
    1. Failure to use the plan as agreed. Late-payment fees, over-
the-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.
    iii. Timing or method of billing or payment. Fees to pay by 
telephone or via the Internet.
    3. Threshold test. If the creditor is unsure whether a 
particular charge is a cost imposed as part of the plan, the 
creditor may at its option consider such charges as a cost imposed 
as part of the plan for purposes of the Truth in Lending Act.
    Paragraph 6(b)(3)(iii)(B).
    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.
    6(b)(4) Disclosure of rates for open-end (not home-secured) 
plans.
    Paragraph 6(b)(4)(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)(4)(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

[[Page 5473]]

``previous balance method'' or the name of a balance computation 
method listed in Sec.  226.5a(g). (See Model Clauses G-1(A) in 
Appendix G to part 226. See Sec.  226.6(b)(2)(vi) regarding balance 
computation descriptions in the account-opening summary.)
    2. Allocation of payments. Creditors may, but need not, explain 
how payments and other credits are allocated to outstanding 
balances.
    6(b)(4)(ii) Variable-rate accounts.
    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 certificates of deposit.
    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:
    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 disclose in the account-opening disclosures 
an initial rate that is not calculated using the index or formula 
for later rate adjustments, the 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)(4)(ii).
    6(b)(4)(iii) Rate changes not due to index or formula.
    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 that 
disclose the initial rate in the account-opening disclosure 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 event 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 only 
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.
    3. Effect of rate change on balances. Creditors must disclose 
information to consumers about the balance to which the new rate 
will apply and the balance to which the current rate at the time of 
the change will apply. Creditors that are subject to 12 CFR Sec.  
227.24 or similar law may be subject to certain restrictions on the 
application of increased rates to certain balances.
    6(b)(5) Additional disclosures for open-end (not home-secured) 
plans.
    (6)(b)(5)(i) Voluntary credit insurance, debt cancellation or 
debt suspension.
    1. Timing. Under Sec.  226.4(d), disclosures required to exclude 
the cost of voluntary credit insurance or debt cancellation or debt 
suspension coverage from the finance charge must be provided before 
the consumer agrees to the purchase of the insurance or coverage. 
Creditors comply with Sec.  226.6(b)(5)(i) if they provide those 
disclosures in accordance with Sec.  226.4(d). For example, if the 
disclosures required by Sec.  226.4(d) are provided at application, 
creditors need not repeat those disclosures at account opening.
    6(b)(5)(ii) Security interests.
    1. General. 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.
    2. Identification of property. Creditors sufficiently identify 
collateral by type 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. 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. 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 account-opening 
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(b)(5)(ii)-2.)
    5. Collateral from third party. Security interests taken in 
connection with the plan

[[Page 5474]]

must be disclosed, whether the collateral is owned by the consumer 
or a third party.
    6(b)(5)(iii) Statement of billing rights.
    1. See the commentary to Model Forms G-3(A) and G-4(A).

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 additional guidance for 
multifeatured plans.
    7(a) Rules affecting home-equity plans.
    7(a)(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.
    7(a)(2) Identification of transactions.
    1. Multifeatured plans. In identifying transactions under Sec.  
226.7(a)(2) for multifeatured plans, creditors may, for example, 
choose to arrange transactions by feature (such as disclosing sale 
transactions separately from cash advance transactions) or in some 
other clear manner, such as by arranging the transactions in general 
chronological order.
    2. Automated teller machine (ATM) charges imposed by other 
institutions in shared or interchange systems. A charge imposed on 
the cardholder by an institution other than the card issuer for the 
use of the other institution's ATM in a shared or interchange system 
and included by the terminal-operating institution in the amount of 
the transaction need not be separately disclosed on the periodic 
statement.
    7(a)(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.  226.13(e) and (f).)
    2. Format. A creditor may list credits relating to credit 
extensions (payments, rebates, etc.) together with other types of 
credits (such as deposits to a checking account), as long as the 
entries are identified so as to inform the consumer which type of 
credit each entry represents.
    3. Date. If only one date is disclosed (that is, the crediting 
date as required by the regulation), no further identification of 
that date is necessary. More than one date may be disclosed for a 
single entry, as long as it is clear which date represents the date 
on which credit was given.
    4. Totals. A total of amounts credited during the billing cycle 
is not required.
    7(a)(4) Periodic rates.
    1. Disclosure of periodic rates--whether or not actually 
applied. Except as provided in Sec.  226.7(a)(4)(ii), 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 (because of a variable-rate plan), the rates required 
to be disclosed under Sec.  226.7(a)(4) 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 Sec.  226.7(a)(4) for the periodic statement 
reflecting the May account activity.
    ii. 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 0.1% 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; 0.1% 
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 the 
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 annual percentage rate 
disclosed under Sec.  226.7(a)(7), the creditor need disclose only 
one annual percentage rate, but must use the phrase ``annual 
percentage rate.''
    6. Range of balances. See comment 6(a)(1)(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.
    7(a)(5) Balance on which finance charge computed.
    1. Limitation to periodic rates. Section 226.7(a)(5) 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 7(a)(5)-5.)
    3. Monthly rate on average daily balance. Creditors may apply a 
monthly periodic rate to an average daily balance.
    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 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(a)(5)-
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:

[[Page 5475]]

    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 6(a)(1)(iii).
    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 (Sec.  
226.7(a)(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.'').
    9. Use of one balance computation method explanation when 
multiple balances disclosed. Sometimes the creditor will disclose 
more than one balance to which a periodic rate was applied, even 
though each balance was computed using the same balance computation 
method. For example, if a plan involves purchases and cash advances 
that are subject to different rates, more than one balance must be 
disclosed, even though the same computation method is used for 
determining the balance for each feature. In these cases, one 
explanation of the balance computation method is sufficient. 
Sometimes the creditor separately discloses the portions of the 
balance that are subject to different rates because different 
portions of the balance fall within two or more balance ranges, even 
when a combined balance disclosure would be permitted under comment 
7(a)(5)-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).
    7(a)(6) Amount of finance charge and other charges.
    Paragraph 7(a)(6)(i).
    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 example, if a creditor charges 1.5% per month on the 
first $500 of a balance and 1% per month on amounts over $500, the 
creditor may itemize the two components ($7.50 and $1.00) of the 
$8.50 charge, or may disclose $8.50.
    4. Multifeatured plans. In a multifeatured plan, in disclosing 
the amount of the finance charge attributable to the application of 
periodic rates no total periodic rate disclosure for the entire plan 
need be given.
    5. Finance charges not added to account. A finance charge that 
is not included in the new balance because it is payable to a third 
party (such as required life insurance) must still be shown on the 
periodic statement as a finance charge.
    6. Finance charges other than periodic rates. See comment 
6(a)(1)(iv)-1 for examples.
    7. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since 
the consumer's last payment is directly deducted from each new 
payment, rather than being separately added to each statement and 
therefore reflected as an increase in the obligation. In such a 
plan, no disclosure is required of finance charges that have accrued 
since the last payment.
    8. Start-up fees. Points, loan fees, and similar finance charges 
relating to the opening of the account that are paid prior to the 
issuance of the first periodic statement need not be disclosed on 
the periodic statement. If, however, these charges are financed as 
part of the plan, including charges that are paid out of the first 
advance, the charges must be disclosed as part of the finance charge 
on the first periodic statement. However, they need not be factored 
into the annual percentage rate. (See Sec.  226.14(c)(3).)
    Paragraph 7(a)(6)(ii).
    1. Identification. In identifying any other charges actually 
imposed during the billing cycle, the type is adequately described 
as late charge or membership fee, for example. Similarly, closing 
costs or settlement costs, for example, may be used to describe 
charges imposed in connection with real estate transactions that are 
excluded from the finance charge under Sec.  226.4(c)(7), if the 
same term (such as closing costs) was used in the initial 
disclosures and if the creditor chose to itemize and individually 
disclose the costs included in that term. Even though the taxes and 
filing or notary fees excluded from the finance charge under Sec.  
226.4(e) are not required to be disclosed as other charges under 
Sec.  226.6(a)(2), 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 6(a)(2)-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, 
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 fees of $3 for providing copies related to the 
resolution of a billing error could be listed separately or as $9.
    7(a)(7) Annual percentage rate.
    1. Plans subject to the requirements of Sec.  226.5b. For home-
equity plans subject to the requirements of Sec.  226.5b, creditors 
are not required to disclose an effective annual percentage rate. 
Creditors that state an annualized rate in addition to the 
corresponding annual percentage rate required by Sec.  226.7(a)(4) 
must calculate that rate in accordance with Sec.  226.14(c).
    2. Labels. Creditors that choose to disclose an annual 
percentage rate calculated under Sec.  226.14(c) and label the 
figure as ``annual percentage rate'' must label the periodic rate 
expressed as an annualized rate as the ``corresponding APR,'' 
``nominal APR,'' or a similar phrase as provided in comment 7(a)(4)-
4. Creditors also comply with the label requirement if the rate 
calculated under Sec.  226.14(c) is described as the ``effective 
APR'' or something similar. For those creditors, the periodic rate 
expressed as an annualized rate could be labeled ``annual percentage 
rate,'' consistent with the requirement under Sec.  226.7(b)(4). If 
the two rates represent different values, creditors must label the 
rates differently to meet the clear and conspicuous standard under 
Sec.  226.5(a)(1).
    7(a)(8) Grace period.
    1. Terminology. Although the creditor is required to indicate 
any time period the consumer may have to pay the balance

[[Page 5476]]

outstanding without incurring additional finance charges, no 
specific wording is required, so long as the language used is 
consistent with that used on the account-opening disclosure 
statement. For example, ``To avoid additional finance charges, pay 
the new balance before ----------'' would suffice.
    7(a)(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.
    7(a)(10) Closing date of billing cycle; new balance.
    1. Credit balances. See comment 7(a)(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.
    7(b) Rules affecting open-end (not home-secured) plans.
    1. Deferred interest 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 a deferred interest 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. The following 
guidance does not apply to card issuers that are subject to 12 CFR 
Sec.  227.24 or similar law which does not permit the assessment of 
deferred interest.
    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 
interest feature, if the deferred interest balance is not paid by a 
certain date, March 31 in this example, interest charges applicable 
to the billing cycles between the date of purchase in January and 
March 31 may be imposed. Annual percentage rates that may apply to 
the deferred interest balance ($500 in this example) if the balance 
is not paid in full by March 31 must appear on periodic statements 
for the billing cycles between the date of purchase and March 31. 
However, if the consumer does not pay the deferred interest balance 
by March 31, the creditor is not required to identify, on the 
periodic statement disclosing the interest charge for the deferred 
interest balance, annual percentage rates that have been disclosed 
in previous billing cycles between the date of purchase and March 
31.
    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 interest balance ($500 in this example) 
is not subject to interest for billing cycles between the date of 
purchase and March 31 in this example. Periodic statements sent for 
those billing cycles should not include the deferred interest 
balance in the balance disclosed under Sec.  226.7(b)(5). At the 
creditor's option, this amount may be separately 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 interest balance''). During any 
billing cycle in which an interest charge on the deferred interest 
balance is debited to the account, the balance disclosed under Sec.  
226.7(b)(5) should include the deferred interest 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 interest purchases, the creditor may impose 
interest from the date of purchase if the deferred interest balance 
($500 in this example) is not paid in full by March 31 in this 
example, but otherwise will not impose interest for billing cycles 
between the date of purchase and March 31. Periodic statements for 
billing cycles preceding March 31 in this example should not include 
in the interest charge disclosed under Sec.  226.7(b)(6)(ii) the 
amounts a consumer may owe if the deferred interest balance is not 
paid in full by March 31. 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 separately 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 interest 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, the following are four examples illustrating how a creditor 
may comply with the requirement to disclose the grace period 
applicable to a deferred interest 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 interest period 
(January, February, and March in this example).
    D. If the due date for the deferred interest 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(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.
    7(b)(2) Identification of transactions.
    1. Multifeatured plans. Creditors may, but are not required to, 
arrange transactions by feature (such as disclosing purchase 
transactions separately from cash advance transactions). Pursuant to 
Sec.  226.7(b)(6), however, creditors must group all fees and all 
interest separately from transactions and may not disclose any fees 
or interest charges with 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.
    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.  226.13(e) and (f).) 
Credits may be distinguished from transactions in any way

[[Page 5477]]

that is clear and conspicuous, for example, by use of debit and 
credit columns or by use of plus signs and/or minus signs.
    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.
    3. Totals. A total of amounts credited during the billing cycle 
is not required.
    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 annual 
percentage rate for each, even if the consumer only makes purchases 
on the account during the billing cycle.
    ii. If the annual percentage rate varies (such as when it is 
tied to a particular index), the creditor must disclose each annual 
percentage 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 annual percentage 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 annual percentage 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 
0.1% 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).
    4. 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.
    5. Ranges of balances. See comment 6(b)(4)(i)(B)-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 interest transactions. See comment 7(b)-1.
    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.
    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, comments 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 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), multiplying each of the results 
by the applicable daily periodic rate, and adding these products 
together.
    5. Information to compute balance. In connection with disclosing 
the interest 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 interest 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

[[Page 5478]]

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 interest transactions. See comment 7(b)-1.
    7(b)(6) Charges imposed.
    1. Examples of charges. See commentary to Sec.  226.6(b)(3).
    2. Fees. Costs attributable to periodic rates other than 
interest charges shall be disclosed as a fee. For example, if a 
consumer obtains 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.
    i. Monthly statements. Some creditors send monthly statements 
but the statement periods do not coincide with the calendar month. 
For creditors sending monthly statements, the following comply with 
the requirement to provide calendar year-to-date totals.
    A. A 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, 2011 through January 9, 2012, may disclose the 
year-to-date total for fees imposed from January 10, 2011, through 
January 9, 2012. Alternatively, the creditor could provide a 
statement for the cycle ending January 9, 2012, showing the year-to-
date total for fees imposed January 1, 2011, through December 31, 
2011.
    B. A 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 December and finishing 
with the period that begins during November. For example, if 
statement periods begin on the 10th day of each month, the statement 
covering November 10, 2011 through December 9, 2011, may disclose 
the year-to-date total for fees imposed from December 10, 2010, 
through December 9, 2011.
    ii. Quarterly statements. Creditors issuing quarterly statements 
may apply the guidance set forth for monthly statements to comply 
with the requirement to provide calendar year-to-date totals on 
quarterly statements.
    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.
    5. Adjustments to year-to-date totals. In some cases, a creditor 
may provide a statement for the current period reflecting that fees 
or interest charges imposed during a previous period were waived or 
reversed and credited to the account. Creditors may, but are not 
required to, reflect the adjustment in the year-to-date totals, nor, 
if an adjustment is made, to provide an explanation about the reason 
for the adjustment. Such adjustments should not affect the total 
fees or interest charges imposed for the current statement period.
    7(b)(7) Change-in-terms and increased penalty rate summary for 
open-end (not home-secured) plans.
    1. Location of summary tables. If a change-in-terms notice 
required by Sec.  226.9(c)(2) is provided on or with a periodic 
statement, a tabular summary of key changes must appear on the front 
of the statement. Similarly, if a notice of a rate increase due to 
delinquency or default or as a penalty required by Sec.  226.9(g)(1) 
is provided on or with a periodic statement, information required to 
be provided about the increase, presented in a table, must appear on 
the front of the statement.
    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 interest transactions. See comment 7(b)-1.
    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.
    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.
    7(b)(11) Due date; late payment costs.
    1. Informal periods affecting late payments. Although the terms 
of the 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 or practice 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 Sec.  226.7(b)(11).
    2. Laws affecting assessment of late-payment fees. Some state or 
other laws require that a certain number of days must elapse 
following a due date before a late-payment fee may be imposed. 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. 
Creditors must disclose the due date under the terms of the legal 
obligation (March 10 in this example), 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 specified period following the due 
date (March 21 in this example). Consumers' rights under the state 
law to avoid the imposition of late-payment fees during a specified 
period following a due date are unaffected by the disclosure 
requirement. In this 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.
    3. Fee or rate triggered by multiple events. If a late-payment 
fee or penalty rate is triggered after multiple events, such as two 
late payments in six months, the creditor may, but is not required 
to, disclose the late payment and penalty rate disclosure each 
month. The disclosures must be included on any periodic statement 
for which a late payment could trigger the late-payment fee or 
penalty rate, such as after the consumer made one late payment in 
this example. For example, if a cardholder has already made one late 
payment, the disclosure must be on each statement for the following 
five billing cycles.
    4. Range of late fees or penalty rates. Creditors that impose a 
range of late-payment fees or rates on an open-end (not home-
secured) plan may state the highest fee or rate along with an 
indication lower fees or rates could be imposed. For example, a 
phrase indicating the late-payment fee could be ``up to $29'' 
complies with this requirement.
    5. Penalty rate in effect. If the highest penalty rate has 
previously been triggered on an account, the creditor may, but is 
not required to, delete the amount of the penalty rate and the 
warning that the rate may be imposed for an untimely payment, as not 
applicable. Alternatively, the creditor may, but is not required to, 
modify the language to indicate that the penalty rate has been 
increased due to previous late payments (if applicable).
    7(b)(12) Minimum payment.
    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

[[Page 5479]]

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 to part 226, as applicable, by inputting 
information using a touch-tone telephone or similar device. However, 
consumers whose telephones are not equipped to use such automated 
devices must be provided the opportunity to be connected to an 
individual from whom the information may be obtained.
    3. Toll-free telephone number. An issuer may provide a toll-free 
telephone number that is designed to handle customer service calls 
generally, so long as the option to select to receive the generic 
repayment estimate or actual repayment disclosure, as applicable, 
through that toll-free telephone number is prominently disclosed to 
the consumer. For automated systems, the option to select to receive 
the generic repayment estimate or actual repayment disclosure is 
prominently disclosed to the consumer if it is listed as one of the 
options in the first menu of options given to the consumer, such as 
``Press or say `3' if you would like an estimate of how long it will 
take you to repay your balance if you make only the minimum payment 
each month.'' If the automated system permits callers to select the 
language in which the call is conducted and in which information is 
provided, the menu to select the language may precede the menu with 
the option to receive the generic repayment estimate or actual 
repayment disclosure.
    4. Web site address. When making the minimum payment disclosure 
on the periodic statement pursuant to Sec.  226.7(b)(12)(ii) or 
(b)(12)(iii), an issuer at its option may also include a reference 
to a Web site address (in addition to the toll-free telephone 
number) where its customers may obtain generic repayment estimates 
or actual repayment disclosures, so long as the information provided 
on the Web site complies with Sec.  226.7(b)(12), and Appendix M1 or 
M2 to part 226 as applicable. The Web site link disclosed must take 
consumers directly to the Web page where generic repayment estimates 
or actual repayment disclosures may be obtained.
    5. 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 (except for providing the name 
of the issuer) prior to providing the information required or 
permitted by Appendix M1 or M2 to part 226, as applicable. 
Educational materials that do not solicit business are not 
considered advertisements or marketing materials for this purpose. 
Examples:
    i. Toll-free telephone number. As described in comment 7(b)(12)-
3, an issuer may provide a toll-free telephone number that is 
designed to handle customer service calls generally, so long as the 
option to select to receive the generic repayment estimate or actual 
repayment disclosure, as applicable, through that toll-free 
telephone number is prominently disclosed to the consumer. Once the 
consumer selects the option to receive the generic repayment 
estimate or the actual repayment disclosure, the issuer may not 
provide advertisements or marketing materials to the consumer 
(except for providing the name of the issuer) prior to providing the 
information required or permitted by Appendix M1 or M2 to part 226, 
as applicable.
    ii. Web page. If the issuer discloses a link to a Web site as 
part of the minimum payment disclosure pursuant to comment 7(b)(12)-
4, the issuer may not provide advertisements or marketing materials 
(except for providing the name of the issuer) on the Web page 
accessed by the link, including pop-up marketing materials or banner 
marketing materials, prior to providing the information required or 
permitted by Appendix M1 or M2 to part 226, as applicable.
    7(b)(12)(ii)(A)(3) Small depository institution issuers.
    1. Small depository institution issuers regulated by the Federal 
Trade Commission. Small depository institution issuers, as defined 
in Sec.  226.7(b)(12)(ii)(A)(3), that are subject to the Federal 
Trade Commission's authority to enforce the act and this regulation 
must comply with Sec.  226.7(b)(12)(ii)(B), instead of Sec.  
226.7(b)(12)(ii)(A)(3).
    7(b)(12)(v) Exemptions.
    1. Exemption for credit card accounts with a fixed repayment 
period. The exemption in Sec.  226.7(b)(12)(v)(E) applies only if 
the account agreement specifies a fixed repayment period for the 
entire account, such as requiring a minimum payment that will pay 
off the entire balance on the account in one year. This exemption 
would apply, for example, to accounts that have been closed due to 
delinquency and where 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 required 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 required 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)(v)(F).
    2. Exemption for certain credit card accounts with fixed 
repayment period feature. The exemption in Sec.  226.7(b)(12)(v)(F) 
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 requiring a minimum 
payment that will pay off the entire balance on that feature in one 
year. For example, assume a retail card has several features. One 
feature is a general revolving feature, where the required 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 required 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 relates to 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)(13) Format requirements.
    1. Combined deposit account and credit account statements. Some 
financial institutions provide information about deposit account and 
open-end credit account activity on one periodic statement. For 
purposes of providing disclosures on the front of the first page of 
the periodic statement pursuant to Sec.  226.7(b)(13), the first 
page of such a combined statement shall be the page on which credit 
transactions first appear.

Section 226.8--Identifying Transactions on Periodic Statements

    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 or creditor. ``Sale credit'' 
includes:
    i. The purchase of funds-transfer services (such as a wire 
transfer) from an intermediary.
    ii. The purchase of services from the card issuer or creditor. 
For the purchase of services that are costs imposed as part of the 
plan under Sec.  226.6(b)(3), card issuers and creditors comply with 
the requirements for identifying transactions under this section by 
disclosing the fees in accordance with the requirements of Sec.  
226.7(b)(6). For the purchases of services that are not costs 
imposed as part of the plan, card issuers and creditors may, at 
their option, identify transactions under this section or in 
accordance with the requirements of Sec.  226.7(b)(6).
    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

[[Page 5480]]

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 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)(1)(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.''
    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.

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 Model Forms G-3 
and G-3(A) in Appendix G to part 226.
    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 Model Forms G-4 
and G-4(A) in Appendix G to part 226.
    9(b) Disclosures for supplemental credit access devices and 
additional features.
    1. Credit access device--examples. Credit access 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 account feature--examples. A new credit account 
feature would include, for example:
    i. The addition of overdraft checking to an existing account 
(although the regular checks that could trigger the overdraft 
feature are not themselves ``devices'').
    ii. 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)(2).
    1. Different finance charge terms. Except as provided in Sec.  
226.9(b)(3) for checks that access a credit card account, 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 account-opening 
disclosures reflecting the terms of the added device or feature or 
by giving only the finance charge disclosures for the added device 
or feature.
    9(b)(3) Checks that access a credit card account.
    9(b)(3)(i) Disclosures.
    1. Front of the page containing the checks. The following would 
comply with the requirement that the tabular disclosures provided 
pursuant to Sec.  226.9(b)(3) appear on the front of the page 
containing the checks:
    i. Providing the tabular disclosure on the front of the first 
page on which checks appear, for an offer where checks are provided 
on multiple pages;

[[Page 5481]]

    ii. Providing the tabular disclosure on the front of a mini-book 
or accordion booklet containing the checks; or
    iii. Providing the tabular disclosure on the front of the 
solicitation letter, when the checks are printed on the front of the 
same page as the solicitation letter even if the checks can be 
separated by the consumer from the solicitation letter using 
perforations.
    Paragraph 9(b)(3)(i)(D).
    1. Grace period. Creditors may use the following language to 
describe a grace period on check transactions: ``Your due date is 
[at least]----days after the close of each billing cycle. We will 
not charge you interest on check transactions if you pay your entire 
balance by the due date each month.'' Creditors may use the 
following language to describe that no grace period on check 
transactions is offered, as applicable: ``We will begin charging 
interest on these checks on the transaction date.''
    9(c) Change in terms.
    9(c)(1) Rules affecting home-equity plans.
    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. 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(a) or increases the minimum payment, unless an 
exception under Sec.  226.9(c)(1)(ii) 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)(1)(i) 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:
    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)(i): 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)(1)(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 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)(1) 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.  226.5b(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 minimum 
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)(1)(ii) 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.
    9(c)(1)(iii) Notice to restrict credit.
    1. Written request for reinstatement. If a creditor requires the 
request for reinstatement of credit privileges to be in writing, the 
notice under Sec.  226.9(c)(1)(iii) must state that fact.
    2. Notice not required. A creditor need not provide a notice 
under this paragraph if, pursuant to the commentary to Sec.  
226.5b(f)(2), a creditor freezes a line or reduces a credit line 
rather than terminating a plan and accelerating the balance.
    9(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 a rate increases 
under a properly disclosed variable-rate plan. 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

[[Page 5482]]

controlled by state or other applicable law, such as 12 CFR 227.24. 
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 28-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 
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 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 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)(i): 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 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.
    6. Examples. See comment 9(g)-1 for examples of how an issuer 
that is subject to 12 CFR 227.24 or similar law may comply with the 
timing requirements for notices required by Sec.  226.9(c)(2)(i).
    9(c)(2)(ii) Charges not covered by Sec.  226.6(b)(1) and (b)(2).
    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)(3) but is not required to 
be disclosed as part of the account-opening summary table under 
Sec.  226.6(b)(1) and (b)(2), the creditor may either, at its option 
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 provide notice orally or in writing, or 
electronically if the consumer requests the service electronically, 
of the amount of the charge to an affected consumer before the 
consumer agrees to or becomes obligated to pay the charge, at a time 
and in a manner that a consumer would be likely to notice the 
disclosure. (See the commentary under Sec.  226.5(a)(1)(iii) 
regarding disclosure of such changes in electronic form.) 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)(3) but is not 
required to be disclosed in the account-opening summary table under 
Sec.  226.6(b)(1) and (b)(2). 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, or electronic notice if the consumer 
requests the service electronically, of the amount of the charge to 
an affected consumer before the consumer agrees to or becomes 
obligated to pay the charge, at a time and in a manner that the 
consumer would be likely to notice the disclosure. (See comment 
5(b)(1)(ii)-1 for examples of disclosures given at a time and in a 
manner that the consumer would be likely to notice them.)
    9(c)(2)(iii) Disclosure requirements.
    9(c)(2)(iii)(A) Changes to terms described in account-opening 
table.
    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 the how 
the rate is determined, as explained in Sec.  226.6(b)(2)(i)(A). For 
example, if a creditor is changing from using a prime rate to using 
the LIBOR in calculating a variable rate, 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 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)(1) and 
(b)(2) 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 creditor may 
combine the two notices. This would occur if penalty pricing has 
been triggered, and other terms are changing on the consumer's 
account at the same time.
    8. Content. Sample 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: (i) a variable rate is being changed to a 
non-variable rate; and (ii) the late payment fee is

[[Page 5483]]

being increased in accordance with a formula that depends on the 
outstanding balance on the account. The sample explains when the new 
rate will apply to new transactions and to which balances the 
current rate will continue to apply.
    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).
    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.
    3. Changing from a variable rate to a non-variable rate. If a 
creditor is changing a rate applicable to a consumer's account from 
a variable rate to a non-variable rate, the creditor must provide a 
notice as otherwise required under Sec.  226.9(c) even if the 
variable rate at the time of the change is higher than the non-
variable rate. (See comment 9(c)(2)(iii)(A)-3.)
    4. Changing from a non-variable rate to a variable rate. If a 
creditor is changing a rate applicable to a consumer's account from 
a non-variable rate to a variable rate, the creditor must provide a 
notice as otherwise required under Sec.  226.9(c) even if the non-
variable rate is higher than the variable rate at the time of the 
change. (See comment 9(c)(2)(iii)(A)-4.)
    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)(5) 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 within the last 30 days before the disclosure is provided.
    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, 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. Sec.  226.9(e) and 226.7, the periodic 
statement must comply with the rules in Sec. Sec.  226.5a and 226.7. 
For example, a description substantially similar to the heading 
describing the grace period required by Sec.  226.5a(b)(5) 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. 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 the 
disclosures relate to one another. 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.'' 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

[[Page 5484]]

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 provider. 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 to 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 provider, 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 to part 226.)
    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 provider 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.
    9(g) Increase in rates due to delinquency or default or as a 
penalty.
    1. Relationship between Regulation Z, 12 CFR 226.9(c) and (g), 
and Regulation AA, 12 CFR 227.24 or similar law--examples. Issuers 
subject to 12 CFR 227.24 or similar law are prohibited from 
increasing the annual percentage rate for a category of transactions 
on any consumer credit card account unless specifically permitted by 
one of the exceptions in those rules. The following examples 
illustrate the relationship between the notice requirements of Sec.  
226.9(c) and (g) and 12 CFR 227.24 or similar law:
    i. Assume that, at account opening on January 1 of year one, an 
issuer discloses, in accordance with the applicable notice 
requirements of Sec.  226.6, that the annual percentage rate for 
purchases is a non-variable rate of 15% and will apply for six 
months. The issuer also discloses that, after six months, the annual 
percentage rate for purchases will be a variable rate that is 
currently 18% and will be adjusted quarterly by adding a margin of 8 
percentage points to a publicly-available index not under the 
issuer's control. Finally, the issuer discloses that the annual 
percentage rate for cash advances is the same variable rate that 
will apply to purchases after six months. The payment due date for 
the account is the twenty-fifth day of the month and the required 
minimum periodic payments are applied to accrued interest and fees 
but do not reduce the purchase and cash advance balances.
    A. On January 15, the consumer uses the account to make a $2,000 
purchase and a $500 cash advance. No other transactions are made on 
the account. At the start of each quarter, the issuer adjusts the 
variable rate that applies to the $500 cash advance consistent with 
changes in the index, as permitted under 12 CFR 227.24 or similar 
law. All required minimum periodic payments are received on or 
before the payment due date until May of year one, when the payment 
due on May 25 is received by the issuer on May 28. The issuer is 
prohibited by 12 CFR 227.24 or similar law from increasing the rates 
that apply to the $2,000 purchase, the $500 cash advance, or future 
purchases and cash advances. Six months after account opening (July 
1), the issuer begins accruing interest on the $2,000 purchase at 
the previously-disclosed variable rate determined using an 8-point 
margin as permitted by 12 CFR 227.24 or similar law. Because no 
other increases in rate were disclosed at account opening, the 
issuer may not under 12 CFR 227.24 or similar law subsequently 
increase the variable rate that applies to the $2,000 purchase and 
the $500 cash advance (except due to increases in the index). On 
November 16, the issuer provides a notice pursuant to Sec.  226.9(c) 
informing the consumer of a new variable rate that will apply on 
January 1 of year two (calculated by using the same index and an 
increased margin of 12 percentage points). On January 1 of year two, 
the issuer increases the margin used to determine the variable rate 
that applies to new purchases to 12 percentage points, as permitted 
by 12 CFR 227.24 or similar law. On January 15 of year two, the 
consumer makes a $300 purchase. The issuer applies the variable rate 
determined using the 12-point margin to the $300 purchase but not 
the outstanding $2,000 balance for purchases.
    B. Same facts as above except that the required minimum periodic 
payment due on May 25 of year one is not received by the issuer 
until June 30 of year one. Because the issuer received the required 
minimum periodic payment more than 30 days after the payment due 
date, 12 CFR 227.24 or similar law permits the issuer to increase 
the annual percentage rate applicable to the $2,000 purchase, the 
$500 cash advance, and future purchases and cash advances. However, 
the issuer must first comply with the notice requirements in Sec.  
226.9(g). Thus, if the issuer provided a notice pursuant to Sec.  
226.9(g) on June 25 stating that all rates on the account would be 
increased to a non-variable penalty rate of 30%, the issuer could 
apply that 30% rate beginning on August 9 to all outstanding 
balances and future transactions.
    ii. Assume that, at account opening on January 1 of year one, a 
issuer discloses in accordance with the applicable notice 
requirements of Sec.  226.6 that the annual percentage rate for 
purchases will increase as follows: A non-variable rate of 5% for 
six months; a non-variable rate of 10% for the following six months; 
and thereafter a variable rate that is currently 15% that will be 
adjusted monthly by adding a margin of 5 percentage points to a 
publicly-available index not under the issuer's control. The payment 
due date for the account is the fifteenth day of the month and the 
required minimum periodic payments are applied to accrued interest 
and fees but do not reduce the purchase balance. On January 15, the 
consumer uses the account to make a $1,500 purchase. Six months 
after account opening (July 1), the issuer begins accruing interest 
on the $1,500 purchase at the previously-disclosed 10% non-variable 
rate (as permitted under 12 CFR 227.24 or similar law). On September 
15, the consumer uses the account to make a $700 purchase. On 
November 16, the issuer provides a notice pursuant to Sec.  226.9(c) 
disclosing a new variable rate that will apply on January 1 of year 
two (calculated by using the same index and an increased margin of 8 
percentage points). One year after account opening (January 1 of 
year two), pursuant to 12 CFR 227.24 or similar law the issuer 
begins accruing interest on the $2,200 purchase balance at the 
previously-disclosed variable rate determined using a 5-point 
margin. Because the variable rate determined using the 8-point 
margin was not disclosed at account opening, the issuer may not 
under 12 CFR 227.24 or similar law apply that rate to the $2,200 
purchase balance. Furthermore, because no other increases in rate 
were disclosed at account opening, the issuer may not under 12 CFR 
227.24 or similar law subsequently increase the variable rate that 
applies to the $2,200 purchase balance (except due to increases in 
the index). The issuer may, however, under 12 CFR 227.24 or similar 
law apply the variable rate determined using the 8-point margin to 
purchases made on or after January 1 of year two.
    iii. Assume that, at account opening on January 1 of year one, 
an issuer discloses in accordance with the applicable notice 
requirements in Sec.  226.6 that the annual percentage rate for 
purchases is a variable rate determined by adding a margin of 6 
percentage points to a publicly-available index outside of the 
issuer's control. The issuer also discloses that a non-variable 
penalty rate of 28% may apply if the consumer makes a late payment. 
The due

[[Page 5485]]

date for the account is the fifteenth of the month. On May 30 of 
year two, the account has an outstanding purchase balance of $1,000. 
On May 31, the creditor provides a notice pursuant to Sec.  226.9(c) 
informing the consumer of a new variable rate that will apply 
effective July 16 for all purchases made on or after June 8 
(calculated by using the same index and an increased margin of 8 
percentage points). On June 7, the consumer makes a $500 purchase. 
On June 8, the consumer makes a $200 purchase. On June 25, the 
issuer has not received the payment due on June 15 and provides the 
consumer with a notice pursuant to Sec.  226.9(g) stating that the 
penalty rate of 28% will apply as of August 9 to all transactions 
made on or after July 3 that includes the content required by Sec.  
226.9(g)(3)(i). On July 4, the consumer makes a $300 purchase.
    A. The payment due on June 15 of year two is received on June 
26. On July 16, 12 CFR 227.24 or similar law permits the issuer to 
apply the variable rate determined using the 8-point margin to the 
$200 purchase made on June 8 but does not permit the issuer to apply 
this rate to the $1,500 purchase balance. On August 9, 12 CFR 227.24 
or similar law permits the issuer to apply the 28% penalty rate to 
the $300 purchase made on July 4 but does not permit the issuer to 
apply this rate to the $1,500 purchase balance (which remains at the 
variable rate determined using the 6-point margin) or the $200 
purchase (which remains at the variable rate determined using the 8-
point margin).
    B. Same facts as above except the payment due on September 15 of 
year two is received on October 20. The issuer is permitted under 12 
CFR 227.24 or similar law to apply the 28% penalty rate to all 
balances on the account and to future transactions because it has 
not received payment within 30 days after the due date. However, in 
order to apply the 28% penalty rate to the entire $2,000 purchase 
balance, the issuer must provide an additional notice pursuant to 
Sec.  226.9(g). This notice must be sent no earlier than October 16, 
which is the first day the account became more than 30 days 
delinquent.
    C. Same facts as paragraph A. above except the payment due on 
June 15 of year two is received on July 20. The issuer is permitted 
under 12 CFR 227.24 or similar law to apply the 28% penalty rate to 
all balances on the account and to future transactions because it 
has not received payment within 30 days after the due date. Because 
the issuer provided a notice pursuant to Sec.  226.9(g) on June 24 
disclosing the 28% penalty rate, the issuer may apply the 28% 
penalty rate to all balances on the account as well as any future 
transactions on August 9 without providing an additional notice 
pursuant to Sec.  226.9(g).
    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 notices pursuant to both Sec.  226.9(c)(2)(iii) 
and (g)(3) to a consumer, the creditor may combine the two notices. 
This would occur when penalty pricing has been triggered, 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).
    9(g)(4) Exceptions.
    9(g)(4)(ii) Decrease in credit limit.
    The following illustrates the requirements of Sec.  
226.9(g)(4)(ii). Assume that a creditor decreased the credit limit 
applicable to a consumer's account and sent a notice pursuant to 
Sec.  226.9(g)(4)(ii) on January 1, stating among other things that 
the penalty rate would apply if the consumer's balance exceeded the 
new credit limit as of February 16. If the consumer's balance 
exceeded the credit limit on February 16, the creditor could impose 
the penalty rate on that date. However, a creditor could not apply 
the penalty rate if the consumer's balance did not exceed the new 
credit limit on February 16, even if the consumer's balance had 
exceeded the new credit limit on several dates between January 1 and 
February 15. If the consumer's balance did not exceed the new credit 
limit on February 16 but the consumer conducted a transaction on 
February 17 that caused the balance to exceed the new credit limit, 
the general rule in Sec.  226.9(g)(1)(ii) would apply and the 
creditor would be required to give an additional 45 days' notice 
prior to imposition of the penalty rate (but under these 
circumstances the consumer would have no ability to cure the over-
the-limit balance in order to avoid penalty pricing).

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 a preauthorized 
payment or telephone bill-payment arrangement, payment is received 
when the creditor gets the third party payor's check or other 
transfer medium, such as an electronic fund transfer, as long as the 
payment meets the creditor's requirements as specified under Sec.  
226.10(b).
    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.
    10(b) Specific requirements for payments.
    1. Payment by electronic fund transfer. A creditor may be 
prohibited from specifying payment by preauthorized electronic fund 
transfer. (See section 913 of the Electronic Fund Transfer Act.)
    2. Payment via creditor's Web site. 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).
    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.
    10(d) Crediting of payments when creditor does not receive or 
accept payments on due date.
    1. Example. A day on which the creditor does not receive or 
accept payments by mail may occur, for example, if the U.S. Postal 
Service does not deliver mail on that date.

Section 226.11--Treatment of Credit Balances; Account Termination

    11(a) Credit balances.
    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(a)(2)) from the consumer.
    iii. Refunding any credit balance upon the consumer's oral or 
electronic request.
    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.

[[Page 5486]]

    2. Amount of refund. The phrases any part of the remaining 
credit balance in Sec.  226.11(a)(2) and any part of the credit 
balance remaining in the account in Sec.  226.11(a)(3) mean 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 11(a)(2).
    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 11(a)(3).
    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.
    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 
does not incur a finance charge, even if credit cards or other 
access devices associated with the account expire after a stated 
period. Creditors may still terminate such accounts for inactivity 
consistent with Sec.  226.11(b)(2).

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.)
    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 
Sec.  226.12(a) becomes an accepted credit card when received by the 
cardholder.
    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 an overdraft plan tied to 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.
    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 (12 CFR 
part 205), 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, provided that the new card is 
honored by at least one of the persons that honored the original 
card. However, unless the change in the merchant base is the 
addition of an affiliate of the existing merchant base, the 
substitution of a new card for another on an unsolicited basis is 
not permissible where the account is inactive. A credit card cannot 
be issued in these circumstances without a request or application. 
For purposes of Sec.  226.12(a), an account is inactive if no credit 
has been extended and if the account has no outstanding balance for 
the prior 24 months. (See Sec.  226.11(b)(2).)
    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

[[Page 5487]]

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 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, including 
providing an affidavit or filing a police report; 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. For example, the creditor may include a 
signature line on a billing rights form that the cardholder may send 
in to provide notice of the claim. However, a creditor may not 
require the cardholder to provide an affidavit or signed statement 
under penalty of perjury as part of a reasonable investigation.
    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.
    4. Checks that access a credit card account. The liability 
provisions for unauthorized use under Sec.  226.12(b)(1) 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.
    12(b)(1)(ii) Limitation on amount.
    1. Meaning of authority. Section 226.12(b)(1)(i) 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.
    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 coworker) 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, but is not limited to, a transaction 
initiated by a person who has obtained the credit card from the 
consumer, or otherwise initiated the transaction, through fraud or 
robbery.
    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 
in Sec.  226.12(b)(2).
    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.
    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.
    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, a signature, 
photograph, or fingerprint on the card or other biometric means, 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.

[[Page 5488]]

    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 or the Internet by a person without 
authority to do so, using a credit card account number 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), no liability may be imposed on the cardholder.
    12(b)(3) Notification to card issuer.
    1. How notice must be provided. Notice given in a normal 
business manner--for example, by mail, telephone, or personal 
visit--is 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. (See also comment 12(b)(1)-4.)
    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 than 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.
    3. Transactions excluded. Section 226.12(c) 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: (i) Late charges in the order of entry to the account; 
then to (ii) finance charges in the order of entry to the account; 
and then to (iii) 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.
    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, the Internet 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 comment 12(c)-3.) 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 plans. (See 
comment 12(c)-3.) 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 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)(A).
    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, and may instead file 
a claim for the property or service purchased with the credit card 
with the card issuer directly.
    Paragraph 12(c)(3)(i)(B).
    1. Geographic limitation. The question of where a transaction 
occurs (as in the case of mail, Internet, or telephone orders, for 
example) is to be determined under state or other applicable law.
    Paragraph 12(c)(3)(ii).
    1. Merchant honoring card. The exceptions (stated in Sec.  
226.12(c)(3)(ii)) to the amount

[[Page 5489]]

and geographic limitations in Sec.  226.12(c)(3)(i)(B) 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 account-opening 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 include at least one of the following (or a substantially 
similar procedure that evidences the consumer's awareness and 
intent):
    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 account 
as of a date within that time period.

Section 226.13--Billing Error Resolution

    1. Creditor's failure to comply with billing error provisions. 
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.)
    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.
    Paragraph 13(a)(1).
    1. Actual, implied, or apparent authority. Whether use of a 
credit card or open-end credit plan is authorized is determined by 
state or other applicable law. (See comment 12(b)(1)(ii)-1.)
    Paragraph 13(a)(3).
    1. Coverage. i. Section 226.13(a)(3) covers disputes about goods 
or services that are ``not accepted'' or ``not delivered * * * as 
agreed''; for example:
    A. 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.
    B. Delivery of property or services different from that agreed 
upon.
    C. Delivery of the wrong quantity.
    D. Late delivery.
    E. Delivery to the wrong location.
    ii. 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.
    2. Application to purchases made using a third-party payment 
intermediary. Section 226.13(a)(3) generally 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. However, the extension of 
credit must be made at the time the consumer purchases the good or 
service and match the amount of the transaction to purchase the good 
or service (including ancillary taxes and fees). Under these 
circumstances, the property or service for which the extension of 
credit is made is

[[Page 5490]]

not the payment service, but rather the good or service that the 
consumer has purchased using the payment service. Thus, for example, 
Sec.  226.13(a)(3) would not apply to purchases using a third-party 
payment intermediary that is funded through use of an open-end 
credit plan if:
    i. The extension of credit is made to fund the third-party 
payment intermediary ``account,'' but the consumer does not 
contemporaneously use those funds to purchase a good or service at 
that time.
    ii. The extension of credit is made to fund only a portion of 
the purchase amount, and the consumer uses other sources to fund the 
remaining amount.
    3. Notice to merchant not required. A consumer is not required 
to first notify the merchant or other payee from whom he or she has 
purchased goods or services and attempt to resolve a dispute 
regarding the good or service before providing a billing-error 
notice to the creditor under Sec.  226.13(a)(3) asserting that the 
goods or services were not accepted or delivered as agreed.
    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, if 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 of billing error notice by consumer. The creditor 
need not comply with the requirements of Sec.  226.13(c) through (g) 
of this section if the consumer concludes that no billing error 
occurred and voluntarily withdraws the billing error notice. The 
consumer's withdrawal of a billing error notice may be oral, 
electronic or written.
    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(a)(5) or 
(b)(5)(iii), 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).
    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.
    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.
    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)(3)-3, and 12(c)-1.)
    Paragraph 13(c)(2).
    1. Time for resolution. The phrase two complete billing cycles 
means two actual billing cycles occurring after receipt of the 
billing error notice, not a measure of time equal to two billing 
cycles. For example, if a creditor on a monthly billing cycle 
receives a billing error notice mid-cycle, it has the remainder of 
that cycle plus the next two full billing cycles to resolve the 
error.
    2. Finality of error resolution procedure. A creditor must 
comply with the error resolution procedures and complete its 
investigation to determine whether an error occurred within two 
complete billing cycles as set forth in paragraph (c)(2) of this 
section. Thus, for example, the creditor would be prohibited from 
reversing amounts previously credited for an alleged billing error 
even if the creditor obtains evidence after the error resolution 
time period has passed indicating that the billing error did not 
occur as asserted by the consumer. Similarly, if a creditor fails to 
mail or deliver a written explanation setting forth the reason why 
the billing error did not occur as asserted, or otherwise fails to 
comply with the error resolution procedures set forth in Sec.  
226.13(f), the creditor generally must credit the disputed amount 
and related finance or other charges, as applicable, to the 
consumer's account.
    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 
Sec.  226.13(d)(4), 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 Sec.  226.13(d)(4) 
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 grace 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 grace period, the 
consumer would not lose the grace period 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 automatic payment plans, 
whether or not the consumer's asset account is held by the card 
issuer or by another financial institution. It does not apply to 
automatic or bill-payment plans offered by financial institutions 
other than the credit card issuer.
    5. Automatic payment plans--time of notice. While the card 
issuer does not have

[[Page 5491]]

to restore or prevent the debiting of a disputed amount if the 
billing error notice arrives after the three business-day cut-off, 
the card issuer must, however, prevent the automatic debit of any 
part of the disputed amount that is still outstanding and unresolved 
at the time of the next scheduled debit date.
    13(d)(2) Adverse credit reports prohibited.
    1. Report 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.
    3. Discovery of information after investigation period. See 
comment 13(c)(2)-2.
    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 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).)
    3. Reasonable investigation. A creditor must conduct a 
reasonable investigation before it determines that no billing error 
occurred or that a different billing error occurred from that 
asserted. In conducting its investigation of an allegation of a 
billing error, the creditor may reasonably request the consumer's 
cooperation. The creditor may not automatically deny a claim based 
solely on the consumer's failure or refusal to comply with a 
particular request, including providing an affidavit or filing a 
police report. However, if the creditor otherwise has no knowledge 
of facts confirming the billing error, the lack of information 
resulting from the consumer's failure or refusal to comply with a 
particular request may lead the creditor reasonably to terminate the 
investigation. The procedures involved in investigating alleged 
billing errors may differ depending on the billing error type.
    i. Unauthorized transaction. In conducting an investigation of a 
notice of billing error alleging an unauthorized transaction under 
Sec.  226.13(a)(1), actions such as the following represent steps 
that a creditor may take, as appropriate, in conducting a reasonable 
investigation:
    A. Reviewing the types or amounts of purchases made in relation 
to the consumer's previous purchasing pattern.
    B. Reviewing where the purchases were delivered in relation to 
the consumer's residence or place of business.
    C. Reviewing where the purchases were made in relation to where 
the consumer resides or has normally shopped.
    D. Comparing any signature on credit slips for the purchases to 
the signature of the consumer (or an authorized user in the case of 
a credit card account) in the creditor's records, including other 
credit slips.
    E. Requesting documentation to assist in the verification of the 
claim.
    F. Requesting a written, signed statement from the consumer (or 
authorized user, in the case of a credit card account). For example, 
the creditor may include a signature line on a billing rights form 
that the consumer may send in to provide notice of the claim. 
However, a creditor may not require the consumer to provide an 
affidavit or signed statement under penalty of perjury as a part of 
a reasonable investigation.
    G. Requesting a copy of a police report, if one was filed.
    H. Requesting information regarding the consumer's knowledge of 
the person who allegedly obtained an extension of credit on the 
account or of that person's authority to do so.
    ii. Nondelivery of property or services. In conducting an 
investigation of a billing error notice alleging the nondelivery of 
property or services under Sec.  226.13(a)(3), 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.
    iii. Incorrect information. In conducting an investigation of a 
billing error notice alleging that information appearing on a 
periodic statement is incorrect because a person honoring the 
consumer's credit card or otherwise accepting an access device for 
an open-end plan has made an incorrect report to the creditor, the 
creditor shall not deny the assertion unless it conducts a 
reasonable investigation and determines that the information was 
correct.
    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. 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.  226.6(a)(1) or (b)(2) and Sec.  
226.7(a)(8) or (b)(8) to pay any disputed amounts due without 
incurring additional finance or other charges. However, the creditor 
need not allow a grace period disclosed under the above-mentioned 
sections to pay the amount due under Sec.  226.13(g)(1) if no error 
occurred and the consumer was not entitled to a grace period at the 
time the consumer asserted the error. 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

[[Page 5492]]

undisputed charges in full, the creditor may assess finance charges 
on the disputed balance for the entire period the item was in 
dispute.
    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 grace 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, credit inadvertently 
extended incident to an electronic fund transfer, such as under an 
overdraft service not subject to Regulation Z, 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\th 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.  226.5a, 226.5b, 
226.6, 226.7, 226.9, 226.15, 226.16, and 226.26.
    2. Rounding. The regulation does not require that the annual 
percentage rate be calculated to any particular number of decimal 
places; rounding is permissible within the \1/8\th 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.
    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. The 
regulation 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 itself, 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--in general.
    1. Corresponding annual percentage rate computation. For 
purposes of Sec. Sec.  226.5a, 226.5b, 226.6, 226.7(a)(4) or (b)(4), 
226.9, 226.15, 226.16, and 226.26, 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.
    14(c) Optional effective annual percentage rate for periodic 
statements for creditors offering open-end plans subject to the 
requirements of Sec.  226.5b.
    1. General rule. The periodic statement may reflect (under Sec.  
226.7(a)(7)) the annualized equivalent of the rate actually applied 
during a particular cycle; this rate may differ from the 
corresponding annual percentage rate because of the inclusion of, 
for example, fixed, minimum, or transaction charges. Sections 
226.14(c)(1) through (c)(4) state the computation rules for the 
effective rate.
    2. Charges related to opening, renewing, or continuing an 
account. Sections 226.14(c)(2) and (c)(3) exclude 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. 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.) 
This rule 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.
    3. 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 percent 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.
    4. 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.
    5. 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

[[Page 5493]]

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)-5.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.
    14(c)(1) Solely periodic rates imposed.
    1. 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\ percent on balances up to $500, and 1 
percent 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 percent on $300, or as 15.75 percent on 
a balance of $800 (the quotient of $10.50 divided by $800, 
multiplied by 12).
    14(c)(2) Minimum or fixed charge, but not transaction charge, 
imposed.
    1. Certain charges not based on periodic rates. Section 
226.14(c)(2) specifies use of the quotient method to determine the 
annual percentage rate 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 percent 
(\1/40\ x 12).
    2. No balance. 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 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.
    14(c)(3) Transaction charge imposed.
    1. 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 percent 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 to part 226.
    2. 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 to part 226 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.''
    14(d) Calculations where daily periodic rate applied.
    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) and (c)(2) 
cannot be used when a daily rate is being applied to a series of 
daily balances, Sec.  226.14(d) provides two alternative ways to 
calculate the annual percentage rate--either of which satisfies the 
provisions of Sec.  226.7(a)(7).
    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)(3)-2 for 
guidance on an appropriate calculation method.

Section 226.16--Advertising

    1. Clear and conspicuous standard--general. 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, other than the format 
requirements related to the disclosure of a promotional rate or 
payment under Sec.  226.16(d)(6) or a promotional rate under Sec.  
226.16(g). Other than the disclosure of certain terms described in 
Sec. Sec.  226.16(d)(6) or (g), the credit terms need not be printed 
in a certain type size nor need they appear in any particular place 
in the advertisement.
    2. Clear and conspicuous standard--promotional rates or 
payments.
    i. For purposes of Sec.  226.16(d)(6), a clear and conspicuous 
disclosure means that the required information in Sec.  
226.16(d)(6)(ii)(A)-(C) is disclosed with equal prominence and in 
close proximity to the promotional rate or payment to which it 
applies. If the information in Sec.  226.16(d)(6)(ii)(A)-(C) is the 
same type size and is located immediately next to or directly above 
or below the promotional rate or payment to which it applies, 
without any intervening text or graphical displays, the disclosures 
would be deemed to be equally prominent and in close proximity. 
Notwithstanding the above, for electronic advertisements that 
disclose promotional rates or payments, compliance with the 
requirements of Sec.  226.16(c) is deemed to satisfy the clear and 
conspicuous standard.
    ii. For purposes of Sec.  226.16(g)(4) as it applies to written 
or electronic advertisements only, a clear and conspicuous 
disclosure means the required information in Sec.  226.16(g)(4)(i) 
and (g)(4)(ii) must be equally prominent to the promotional rate to 
which it applies. If the information in Sec.  226.16(g)(4)(i) and 
(g)(4)(ii) is the same type size as the promotional rate to which it 
applies, the disclosures would be deemed to be equally prominent.
    3. Clear and conspicuous standard--Internet advertisements for 
home-equity plans. For purposes of this section, a clear and 
conspicuous disclosure for visual text advertisements on the 
Internet for home-equity plans subject to the requirements of Sec.  
226.5b means that the required disclosures are not obscured by 
techniques such as graphical displays, shading, coloration, or other 
devices and comply with all other requirements for clear and 
conspicuous disclosures under Sec.  226.16(d). (See also comment 
16(c)(1)-2.)

[[Page 5494]]

    4. Clear and conspicuous standard--televised advertisements for 
home-equity plans. For purposes of this section, including 
alternative disclosures as provided for by Sec.  226.16(e), a clear 
and conspicuous disclosure in the context of visual text 
advertisements on television for home-equity plans subject to the 
requirements of Sec.  226.5b means that the required disclosures are 
not obscured by techniques such as graphical displays, shading, 
coloration, or other devices, are displayed in a manner that allows 
for a consumer to read the information required to be disclosed, and 
comply with all other requirements for clear and conspicuous 
disclosures under Sec.  226.16(d). For example, very fine print in a 
television advertisement would not meet the clear and conspicuous 
standard if consumers cannot see and read the information required 
to be disclosed.
    5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative 
disclosures as provided for by Sec.  226.16(e), a clear and 
conspicuous disclosure in the context of an oral advertisement for 
home-equity plans subject to the requirements of Sec.  226.5b, 
whether by radio, television, the Internet, or other medium, means 
that the required disclosures are given at a speed and volume 
sufficient for a consumer to hear and comprehend them. For example, 
information stated very rapidly at a low volume in a radio or 
television advertisement would not meet the clear and conspicuous 
standard if consumers cannot hear and comprehend the information 
required to be disclosed.
    6. 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.
    7. Effective date. For guidance on the applicability of the 
Board's revisions to Sec.  226.16 published on July 30, 2008, see 
comment 1(d)(5)-1.
    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.
    Paragraph (b)(1).
    1. 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.
    2. Implicit terms. Section 226.16(b) applies even if the 
triggering term is not stated explicitly, but may be readily 
determined from the advertisement.
    3. 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 6(a)(2)-1 and Sec.  
226.6(b)(3)(iii)(B).)
    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.
    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; or may give the rate as of a specified recent date. The 
additional requirement in Sec.  226.16(b)(1)(ii) 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 Sec.  
226.6(a)(1)(ii) or (b)(4)(ii).
    6. Membership fees for open-end (not home-secured) plans. For 
purposes of Sec.  226.16(b)(1)(iii), membership fees that may be 
imposed on open-end (not home-secured) plans shall have the same 
meaning as in Sec.  226.5a(b)(2).
    Paragraph (b)(2).
    1. Assumptions. In stating the total of payments and the time 
period to repay the obligation, assuming that the consumer pays only 
the periodic payment amounts advertised, as required under Sec.  
226.16(b)(2), the following additional assumptions may be made:
    i. Payments are made timely so as not to be considered late by 
the creditor;
    ii. Payments are made each period, and no debt cancellation or 
suspension agreement, or skip payment feature applies to the 
account;
    iii. No interest rate changes will affect the account;
    iv. No other balances are currently carried or will be carried 
on the account;
    v. No taxes or ancillary charges are or will be added to the 
obligation;
    vi. Goods or services are delivered on a single date; and
    vii. The consumer is not currently and will not become 
delinquent on the account.
    2. Positive periodic payment amounts. Only positive periodic 
payment amounts trigger the additional disclosures under Sec.  
226.16(b)(2). Therefore, if the periodic payment amount advertised 
is not a positive amount (e.g., ``No payments''), the advertisement 
need not state the total of payments and the time period to repay 
the obligation.
    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 (such as an 
advertisement appearing on an Internet Web site). The rule applies 
only if the advertisement contains one or more of the triggering 
terms from Sec.  226.16(b).
    2. Electronic advertisement. If an electronic advertisement 
(such as an advertisement appearing on an Internet Web site) 
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.
    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.

[[Page 5495]]

    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 (d)(8).)
    3. Statements of tax deductibility. An advertisement that refers 
to deductibility for tax purposes is not misleading if it includes a 
statement such as ``consult a tax advisor regarding the 
deductibility of interest.'' An advertisement distributed in paper 
form or through the Internet (rather than by radio or television) 
that states that the advertised extension of credit may exceed the 
fair market value of the consumer's dwelling is not misleading if it 
clearly and conspicuously states the required information in 
Sec. Sec.  226.16(d)(4)(i) and (d)(4)(ii).
    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. Promotional rates and payments in advertisements for home-
equity plans. Section 226.16(d)(6) requires additional disclosures 
for promotional rates or payments.
    i. Variable-rate plans. In advertisements for variable-rate 
plans, if the advertised annual percentage rate is based on (or the 
advertised payment is derived from) the index and margin that will 
be used to make rate (or payment) adjustments over the term of the 
loan, then there is no promotional rate or promotional payment. If, 
however, the advertised annual percentage rate is not based on (or 
the advertised payment is not derived from) the index and margin 
that will be used to make rate (or payment) adjustments, and a 
reasonably current application of the index and margin would result 
in a higher annual percentage rate (or, given an assumed balance, a 
higher payment) then there is a promotional rate or promotional 
payment.
    ii. Equal prominence, close proximity. Information required to 
be disclosed in Sec.  226.16(d)(6)(ii) that is immediately next to 
or directly above or below the promotional rate or payment (but not 
in a footnote) is deemed to be closely proximate to the listing. 
Information required to be disclosed in Sec.  226.16(d)(6)(ii) that 
is in the same type size as the promotional rate or payment is 
deemed to be equally prominent.
    iii. Amounts and time periods of payments. Section 
226.16(d)(6)(ii)(C) requires disclosure of the amount and time 
periods of any payments that will apply under the plan. This section 
may require disclosure of several payment amounts, including any 
balloon payment. For example, if an advertisement for a home-equity 
plan offers a $100,000 five-year line of credit and assumes that the 
entire line is drawn resulting in a minimum payment of $800 per 
month for the first six months, increasing to $1,000 per month after 
month six, followed by a $50,000 balloon payment after five years, 
the advertisement must disclose the amount and time period of each 
of the two monthly payment streams, as well as the amount and timing 
of the balloon payment, with equal prominence and in close proximity 
to the promotional payment. However, if the final payment could not 
be more than twice the amount of other minimum payments, the final 
payment need not be disclosed.
    iv. Plans other than variable-rate plans. For a plan other than 
a variable-rate plan, if an advertised payment is calculated in the 
same way as other payments based on an assumed balance, the fact 
that the minimum payment could increase solely if the consumer made 
an additional draw does not make the payment a promotional payment. 
For example, if a payment of $500 results from an assumed $10,000 
draw, and the payment would increase to $1,000 if the consumer made 
an additional $10,000 draw, the payment is not a promotional 
payment.
    v. Conversion option. Some home-equity plans permit the consumer 
to repay all or part of the balance during the draw period at a 
fixed rate (rather than a variable rate) and over a specified time 
period. The fixed-rate conversion option does not, by itself, make 
the rate or payment that would apply if the consumer exercised the 
fixed-rate conversion option a promotional rate or payment.
    vi. Preferred-rate provisions. Some home-equity plans contain a 
preferred-rate provision, where the rate will increase upon the 
occurrence of some event, such as the consumer-employee leaving the 
creditor's employ, the consumer closing an existing deposit account 
with the creditor, or the consumer revoking an election to make 
automated payments. A preferred-rate provision does not, by itself, 
make the rate or payment under the preferred-rate provision a 
promotional rate or payment.
    6. Reasonably current index and margin. For the purposes of this 
section, an index and margin is considered reasonably current if:
    i. For direct mail advertisements, it was in effect within 60 
days before mailing;
    ii. For advertisements in electronic form it was in effect 
within 30 days before the advertisement is sent to a consumer's e-
mail address, or in the case of an advertisement made on an Internet 
Web site, when viewed by the public; or
    iii. For printed advertisements made available to the general 
public, including ones contained in a catalog, magazine, or other 
generally available publication, it was in effect within 30 days 
before printing.
    7. 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)(i) and (b)(1)(iii).
    8. Inapplicability of closed-end rules. Advertisements for home-
equity plans are governed solely by the requirements in Sec.  
226.16, except Sec.  226.16(g), 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.
    9. Balloon payment. See comment 5b(d)(5)(ii)-3 for information 
not required to be stated in advertisements, and on situations in 
which the balloon payment requirement does not apply.
    16(e) Alternative disclosures--television or radio 
advertisements.
    1. Multi-purpose telephone number. When an advertised 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 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.
    2. Statement accompanying toll free number. Language must 
accompany a telephone number indicating that disclosures are 
available by calling the telephone number, such as ``call 1-800-000-
0000 for details about credit costs and terms.''
    16(g) Promotional rates.
    1. Rate in effect at the end of the promotional period. If the 
annual percentage rate that will be in effect at the end of the 
promotional period (i.e., the post-promotional rate) is a variable 
rate, the post-promotional rate for purposes of Sec.  
226.16(g)(2)(i) is the rate that would have applied at the time the 
promotional rate was advertised if the promotional rate was not 
offered, consistent with the accuracy requirements in Sec.  
226.5a(c)(2) and (e)(4), as applicable.
    2. Immediate proximity. For written or electronic 
advertisements, 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. For written or 
electronic advertisements, information required to be disclosed in 
Sec.  226.16(g)(4)(i) and (g)(4)(ii) that is in the same paragraph 
as the first listing of the promotional rate is deemed to be in a 
prominent location closely proximate to the listing. Information 
disclosed in a footnote will not be considered in a prominent 
location closely proximate to the listing.
    4. First listing. For purposes of Sec.  226.16(g)(4) as it 
applies to written or

[[Page 5496]]

electronic advertisements, the first listing of the promotional 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 promotional rate does not appear on the front side of 
the first page of the principal promotional document, then the first 
listing of the promotional rate is the most prominent listing of the 
rate on the subsequent pages of the principal promotional document. 
If the promotional 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 promotional rate. If 
the promotional rate does not appear on the front side of the first 
page of a document, then the first listing of the promotional rate 
is the most prominent listing of the rate on the subsequent pages of 
the document. If the listing of the promotional rate with the 
largest type size on the front side of the first page (or subsequent 
pages if the promotional rate is not listed on the front side of the 
first page) of the principal promotional document (or each document 
listing the promotional rate if the promotional 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. Consistent with comment 
16(c)-1, a catalog or multiple-page advertisement is considered one 
document for purposes of Sec.  226.16(g)(4).
    5. Post-promotional rate depends on consumer's creditworthiness. 
For purposes of disclosing the rate that may apply after the end of 
the promotional 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%).
* * * * *

Section 226.26--Use of Annual Percentage Rate in Oral Disclosures

* * * * *
    26(a) Open-end credit.
    1. Information that may be given. The creditor may state 
periodic rates in addition to the required annual percentage rate, 
but it need not do so. If the annual percentage rate is unknown 
because transaction charges, loan fees, or similar finance charges 
may be imposed, the creditor must give the corresponding annual 
percentage rate (that is, the periodic rate multiplied by the number 
of periods in a year, as described in Sec. Sec.  226.6(a)(1)(ii) and 
(b)(4)(i)(A) and 226.7(a)(4) and (b)(4)). In such cases, the 
creditor may, but need not, also give the consumer information about 
other finance charges and other charges.
* * * * *

Section 226.27--Language of Disclosures

    1. Subsequent disclosures. If a creditor provides account-
opening disclosures in a language other than English, subsequent 
disclosures need not be in that other language. For example, if the 
creditor gave Spanish-language account-opening disclosures, periodic 
statements and change-in-terms notices may be made in English.
* * * * *

Section 226.28--Effect on State Laws

    28(a) Inconsistent disclosure requirements.
* * * * *
    6. Rules for other fair credit billing provisions. The second 
part of the criteria for fair credit billing relates to the other 
rules implementing chapter 4 of the act (addressed in Sec. Sec.  
226.4(c)(8), 226.5(b)(2)(ii), 226.6(a)(5) and (b)(5)(iii), 
226.7(a)(9) and (b)(9), 226.9(a), 226.10, 226.11, 226.12(c) through 
(f), 226.13, and 226.21). Section 226.28(a)(2)(ii) provides that the 
test of inconsistency is whether the creditor can comply with state 
law without violating Federal law. For example:
    i. A state law that allows the card issuer to offset the 
consumer's credit-card indebtedness against funds held by the card 
issuer would be preempted, since Sec.  226.12(d) prohibits such 
action.
    ii. A state law that requires periodic statements to be sent 
more than 14 days before the end of a free-ride period would not be 
preempted.
    iii. A state law that permits consumers to assert claims and 
defenses against the card issuer without regard to the $50 and 100-
mile limitations of Sec.  226.12(c)(3)(ii) would not be preempted.
    iv. In paragraphs ii. and iii. of this comment, compliance with 
state law would involve no violation of the Federal law.
* * * * *

Section 226.30--Limitation on Rates

* * * * *
    8. Manner of stating the maximum interest rate. The maximum 
interest rate must be stated in the credit contract either as a 
specific amount or in any other manner that would allow the consumer 
to easily ascertain, at the time of entering into the obligation, 
what the rate ceiling will be over the term of the obligation.
    i. For example, the following statements would be sufficiently 
specific:
    A. The maximum interest rate will not exceed X%.
    B. The interest rate will never be higher than X percentage 
points above the initial rate of Y%.
    C. The interest rate will not exceed X%, or X percentage points 
above [a rate to be determined at some future point in time], 
whichever is less.
    D. The maximum interest rate will not exceed X%, or the state 
usury ceiling, whichever is less.
    ii. The following statements would not comply with this section:
    A. The interest rate will never be higher than X percentage 
points over the prevailing market rate.
    B. The interest rate will never be higher than X percentage 
points above [a rate to be determined at some future point in time].
    C. The interest rate will not exceed the state usury ceiling 
which is currently X%.
    iii. A creditor may state the maximum rate in terms of a maximum 
annual percentage rate that may be imposed. Under an open-end credit 
plan, this normally would be the corresponding annual percentage 
rate. (See generally Sec.  226.6(a)(1)(ii) and (b)(4)(i)(A).)

Appendix F--Optional Annual Percentage Rate Computations for Creditors 
Offering Open-End Plans Subject to the Requirements of Sec.  226.5B

    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 comment 14(c)(3)-2 for 
guidance on an appropriate calculation method.

Appendices 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, 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)-(D), G-18(A) (except as permitted pursuant to Sec.  
226.7(b)(2)), G-18(B)-(C), G-19, G-20, and G-21. 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. Except as otherwise specifically 
required, 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. 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 or debt 
suspension 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.

[[Page 5497]]

Appendix G--Open-End Model Forms and Clauses

    1. Models G-1 and G-1(A). The model disclosures in G-1 and G-
1(A) (different balance computation methods) may be used in both the 
account-opening 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, except where Sec.  226.7(b)(5) applies. For 
creditors using model G-1, 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. If unpaid interest or 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 Sec.  226.7(a)(5) and (b)(5).) For open-end plans 
subject to the requirements of Sec.  226.5b, creditors may, at their 
option, use the clauses in G-1 or G-1(A).
    2. Models G-2 and G-2(A). These models contain the notice of 
liability for unauthorized use of a credit card. 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 properly 
use G-2(A).
    3. Models G-3, G-3(A), G-4 and G-4(A).
    i. These set out 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. 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 (not home-
secured) plans that not subject to the requirements of Sec.  226.5b, 
creditors properly use G-3(A) and G-4(A). 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:
    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.
    C. Include instructions for consumers, at the consumer's option, 
to communicate with the creditor electronically or in writing.
    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), samples G-10(B) and G-10(C), model G-10(D), 
sample G-10(E), model G-17(A), and samples G-17(B), 17(C) and 17(D). 
i. Model G-10(A) and Samples G-10(B) and G-10(C) illustrate, in the 
tabular format, the disclosures required under Sec.  226.5a for 
applications and solicitations for credit cards other than charge 
cards. Model G-10(D) and Sample G-10(E) illustrate the tabular 
format disclosure for charge card applications and solicitations and 
reflect the disclosures in the table. Model G-17(A) and Samples G-
17(B), G-17(C) and G-17(D) illustrate, in the tabular format, the 
disclosures required under Sec.  226.6(b)(2) for account-opening 
disclosures.
    ii. Except as otherwise permitted, disclosures must be 
substantially similar in sequence and format to Models G-10(A), G-
10(D) and G-17(A). While proper use of the model forms will be 
deemed in compliance with the regulation, card issuers and other 
creditors offering open-end (not home-secured) plans are permitted 
to disclose the annual percentage rates for purchases, cash 
advances, or balance transfers in the same row in the table for any 
transaction types for which the issuer or creditor charges the same 
annual percentage rate. Similarly, card issuer and other creditors 
offering open-end (not home-secured) plans are permitted to disclose 
fees of the same amount in the same row if the fees are in the same 
category. Fees in different categories may not be disclosed in the 
same row. For example, a transaction fee and a penalty fee that are 
of the same amount may not be disclosed in the same row. Card 
issuers and other creditors offering open-end (not home-secured) 
plans are also permitted to use headings other than those in the 
forms if they are clear and concise and are substantially similar to 
the headings contained in model forms, with the following 
exceptions. The heading ``penalty APR'' must be used when describing 
rates that may increase due to default or delinquency or as a 
penalty, and in relation to required insurance, or debt cancellation 
or suspension coverage, the term ``required'' and the name of the 
product must be used. (See also Sec. Sec.  226.5a(b)(5) and 
226.6(b)(2)(v) for guidance on headings that must be used to 
describe the grace period, or lack of grace period, in the 
disclosures required under Sec.  226.5a for applications and 
solicitations for credit cards other than charge cards, and the 
disclosures required under Sec.  226.6(b)(2) for account-opening 
disclosures, respectively.)
    iii. Models G-10(A) and G-17(A) contain two alternative headings 
(``Minimum Interest Charge'' and ``Minimum Charge'') for disclosing 
a minimum interest or fixed finance charge under Sec. Sec.  
226.5a(b)(3) and 226.6(b)(2)(iii). If a creditor imposes a minimum 
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'' or a substantially 
similar heading. Other minimum or fixed finance charges should be 
disclosed under the heading ``Minimum Charge'' or a substantially 
similar heading.
    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)(2)(ii). If the only fee for issuance 
or availability of credit disclosed under Sec.  226.5a(b)(2) or 
Sec.  226.6(b)(2)(ii) is an annual fee, a creditor should use the 
heading ``Annual Fee'' or a substantially similar heading 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)(2)(ii) other than, or in addition to, an annual fee, the 
creditor should use the heading ``Set-up and Maintenance Fees'' or a 
substantially similar heading 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)(1) and (2) 
disclosures, samples G-10(B), G-10(C), G-17(B), G-17(C) and G-17(D) 
are designed to be printed on an 8\1/2\ x 14 inch sheet of paper. A 
creditor may use a smaller sheet of paper, such as 8\1/2\ x 11 inch 
sheet of paper. If the table is not provided on a single side of a 
sheet of paper, the creditor must include a reference or references, 
such as ``SEE BACK OF PAGE for more important information about your 
account.'' at the bottom of each page indicating that the table 
continues onto an additional page or pages. A creditor that splits 
the table onto two or more pages must disclose the table on 
consecutive pages and may not include any intervening information 
between portions of the table. 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 Arial font 
style, except for the purchase annual percentage rate which is shown 
in 16-point type).
    B. Sufficient spacing between lines of the text.

[[Page 5498]]

    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 
two components: the applicable balance transfer rate and a cross 
reference to the balance transfer fee. The samples show these two 
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.
    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.
    vii. Creditors are allowed to use color, shading and similar 
graphic techniques with respect to the table, so long as the table 
remains substantially similar to the model and sample forms in 
Appendix G.
    6. Model G-11. 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.
    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.
    8. Samples G-18(A)-(E). 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) through G-18(E) to comply with these requirements, as 
applicable.
    9. Samples G-18(D) and (E). Samples G-18(D) and G-18(E) 
illustrate how creditors may comply with proximity requirements for 
payment information on periodic statements. Creditors that offer 
card accounts with a charge card feature and a revolving feature may 
change the disclosure to make clear to which feature the disclosures 
apply.
    10. Forms G-18(F)-(G). Forms G-18(F) and G-18(G) are intended as 
a compliance aid to illustrate front sides of a periodic statement, 
and how a periodic statement for open-end (not home-secured) plans 
might be designed to comply with the requirements of Sec.  226.7. 
The samples contain information that is not required by Regulation 
Z. The samples also present information in additional formats that 
are not required by Regulation Z.
    i. Creditors are not required to use a certain paper size in 
disclosing the Sec.  226.7 disclosures. However, Forms G-18(F) and 
G-18(G) are designed to be printed on an 8 x 14 inch sheet of paper.
    ii. The due date for a payment, if a late-payment fee or penalty 
rate may be imposed, must appear on the front of the first page of 
the statement. See Samples G-18(D) and G-18(E) that illustrate how a 
creditor may comply with proximity requirements for other 
disclosures. The payment information disclosures appear in the upper 
right-hand corner on Samples G-18(F) and G-18(G), but may be located 
elsewhere, as long as they appear on the front of the first page of 
the periodic statement. The summary of account activity presented on 
Samples G-18(F) and G-18(G) is not itself a required disclosure, 
although the previous balance and the new balance, presented in the 
summary, must be disclosed in a clear and conspicuous manner on 
periodic statements.
    iii. Additional information not required by Regulation Z may be 
presented on the statement. The information need not be located in 
any particular place or be segregated from disclosures required by 
Regulation Z, although the effect of proximity requirements for 
required disclosures, such as the due date, may cause the additional 
information to be segregated from those disclosures required to be 
disclosed in close proximity to one another. Any additional 
information must be presented consistent with the creditor's 
obligation to provide required disclosures in a clear and 
conspicuous manner.
    iv. Model Forms G-18(F) and G-18(G) demonstrate two examples of 
ways in which transactions could be presented on the periodic 
statement. Model Form G-18(G) presents transactions grouped by type 
and Model Form G-18(F) presents transactions in a list in 
chronological order. Neither of these approaches to presenting 
transactions is required; a creditor may present transactions 
differently, such as in a list grouped by authorized user or other 
means.
    11. Model Form G-19. See Sec.  226.9(b)(3) regarding the 
headings required to be disclosed when describing in the tabular 
disclosure a grace period (or lack of a grace period) offered on 
check transactions that access a credit card account.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-31185 Filed 1-28-09; 8:45 am]
BILLING CODE 6210-01-P