[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Rules and Regulations]
[Pages 79768-80080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31715]



[[Page 79767]]

Vol. 76

Thursday,

No. 246

December 22, 2011

Part II





Bureau of Consumer Financial Protection





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12 CFR Part 1026





Truth in Lending (Regulation Z); Interim Final Rule

  Federal Register / Vol. 76, No. 246 / Thursday, December 22, 2011 / 
Rules and Regulations  

[[Page 79768]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2011-0031]
RIN 3170-AA06


Truth in Lending (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Interim final rule with request for public comment.

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SUMMARY: Title X of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) transferred rulemaking authority for a 
number of consumer financial protection laws from seven Federal 
agencies to the Bureau of Consumer Financial Protection (Bureau) as of 
July 21, 2011. The Bureau is in the process of republishing the 
regulations implementing those laws with technical and conforming 
changes to reflect the transfer of authority and certain other changes 
made by the Dodd-Frank Act. In light of the transfer of the Board of 
Governors of the Federal Reserve System's (Board's) rulemaking 
authority for the Truth in Lending Act (TILA) to the Bureau, the Bureau 
is publishing for public comment an interim final rule establishing a 
new Regulation Z (Truth in Lending). This interim final rule does not 
impose any new substantive obligations on persons subject to the 
existing Regulation Z, previously published by the Board.

DATES: This interim final rule is effective December 30, 2011. Comments 
must be received on or before February 21, 2012.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2011-
0031 or RIN 3170-AA06, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail: Monica Jackson, Office of the Executive Secretary, 
Bureau of Consumer Financial Protection, 1500 Pennsylvania Avenue NW., 
(Attn: 1801 L Street), Washington, DC 20220.
     Hand Delivery/Courier in Lieu of Mail: Monica Jackson, 
Office of the Executive Secretary, Bureau of Consumer Financial 
Protection, 1700 G Street NW., Washington, DC 20006.
    All submissions must include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. In general, 
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public 
inspection and copying at 1700 G Street NW., Washington, DC 20006, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect the documents by 
telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
You should not include sensitive personal information, such as account 
numbers or social security numbers. The Bureau will not edit comments 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Catherine Henderson or Paul Mondor, 
Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION:

I. Background

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that the informed use of credit resulting from consumers' awareness of 
the cost of credit would enhance economic stability and would 
strengthen competition among consumer credit providers. One of the 
purposes of TILA is to provide 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. TILA's disclosures 
differ depending on whether credit is an open-end (revolving) plan or a 
closed-end (installment) loan. TILA also contains procedural and 
substantive protections for consumers.
    Historically, Regulation Z of the Board of Governors of the Federal 
Reserve System (Board), 12 CFR part 226, has implemented TILA. The 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) \1\ amended a number of consumer financial protection laws, 
including TILA. In addition to various substantive amendments, the 
Dodd-Frank Act transferred rulemaking authority for TILA to the Bureau 
of Consumer Financial Protection (Bureau), effective July 21, 2011.\2\ 
See sections 1061 and 1100A of the Dodd-Frank Act. Pursuant to the 
Dodd-Frank Act and TILA, as amended, the Bureau is publishing for 
public comment an interim final rule establishing a new Regulation Z 
(Truth in Lending), 12 CFR Part 1026, implementing TILA (except with 
respect to persons excluded from the Bureau's rulemaking authority by 
section 1029 of the Dodd-Frank Act).
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ Section 1029 of the Dodd-Frank Act excludes from this 
transfer of authority, subject to certain exceptions, any rulemaking 
authority over a motor vehicle dealer that is predominantly engaged 
in the sale and servicing of motor vehicles, the leasing and 
servicing of motor vehicles, or both.
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II. Summary of the Interim Final Rule

A. General

    The interim final rule substantially duplicates the Board's 
Regulation Z as the Bureau's new Regulation Z, 12 CFR part 1026, making 
only certain non-substantive, technical, formatting, and stylistic 
changes. To minimize any potential confusion, the Bureau is preserving 
the numbering system of the Board's Regulation Z, other than the new 
part number. While this interim final rule generally incorporates the 
Board's existing regulatory text, appendices (including model forms and 
clauses), and supplements, the rule has been edited as necessary to 
reflect nomenclature and other technical amendments required by the 
Dodd-Frank Act. Notably, this interim final rule does not impose any 
new substantive obligations on regulated entities.

B. Specific Changes

    References to the Board and its administrative structure have been 
replaced with references to the Bureau. In particular, certain model 
and sample forms in Appendix G (Open-End Model Forms and Clauses) have 
been revised to change references to the Board (and its Web site) to 
the Bureau (and its Web site). The revised forms are the Applications 
and Solicitations model and samples for credit cards, G-10(A) through 
G-10(C), and the Account-Opening model and samples for credit cards, G-
17(A) through G-17(C). Similarly, references to other agencies that no 
longer exist (e.g., the Office of Thrift Supervision and the Federal 
Home Loan Bank Board) have been updated as appropriate.
    Conforming edits have been made to internal cross-references and 
addresses for filing applications and notices. Certain comments 
reflecting the Board's past state law preemption and exemption 
determinations have been amended to clarify that these determinations 
continue in effect pending Bureau action to the contrary. Appendix I, 
entitled ``Federal Enforcement Agencies,'' is being removed and 
reserved because it was designed to be informational only and is 
unnecessary for purposes of implementing the TILA, as amended. 
Conforming edits have also been made to reflect the scope of the 
Bureau's authority pursuant to TILA, as amended by the Dodd-Frank Act. 
Historical references that are no longer applicable,

[[Page 79769]]

and references to effective dates that have passed, have been removed 
as appropriate.
    In addition, certain changes have been made to the text of the 
Board's Regulation Z to conform to current codification standards of 
the Code of Federal Regulations. For example, previously undesignated 
paragraphs in the regulation and the official commentary have been 
enumerated, and footnotes have been eliminated and their substance 
moved to the body of the regulation as appropriate. Other provisions 
have been redesignated as necessary to accommodate these changes.
    Most significantly, the Board's Sec. Sec.  226.5a and 226.5b have 
been renumbered as Sec. Sec.  1026.60 and 1026.40, respectively. These 
two sections, as numbered in the Board's existing Regulation Z, do not 
meet the current requirements for section numbering for publication in 
the Code of Federal Regulations. See 1 CFR 21.11(g). Because existing 
Sec.  226.5a relates to credit card disclosures, the Bureau is 
codifying it as Sec.  1026.60 so that it will appear in subpart G, 
Special Rules Applicable to Credit Card Accounts and Open-End Credit 
Offered to College Students. Because existing Sec.  226.5b relates to 
home-equity plans, the Bureau is codifying it as Sec.  1026.40 so that 
it will appear in subpart E, Special Rules for Certain Home Mortgage 
Transactions. All existing cross-references to these two sections are 
changed accordingly throughout the Bureau's new Regulation Z.
    In addition, existing Sec. Sec.  226.5a(b)(15) and 226.6(b)(2)(xiv) 
require card issuers to include in their applications and solicitations 
disclosures and their account opening disclosures, respectively, 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. This interim final rule revises those provisions to 
require a reference to the Bureau in Sec. Sec.  1026.60(b)(15) and 
1026.6(b)(2)(xiv). As noted above, the affected model forms in Appendix 
G are revised accordingly. The Bureau recognizes that this change to 
the disclosure requirements will require card issuers that maintain 
standardized disclosure forms in their systems to make modifications to 
those systems. To afford adequate time to make such modifications, the 
Bureau is also adding to Sec. Sec.  1026.60(b)(15) and 
1026.6(b)(2)(xiv) a provision that, until January 1, 2013, issuers may 
substitute for the required reference a reference to the Web site 
established by the Board of Governors of the Federal Reserve System. 
Similarly, the Bureau is adding to comment app. G-5 a new paragraph 
viii to clarify that, until January 1, 2013, issuers using model forms 
G-10(A) and G-17(A) may substitute references to the Board and its Web 
site for the references to the Bureau and its Web site contained in 
those models. This provision preserves the safe harbor for card issuers 
using the old version of these models until they have modified their 
systems as necessary, provided they do so by January 1, 2013.
    Finally, the Bureau is correcting two typographical errors in the 
Board's existing Regulation Z in conjunction with its republication as 
the Bureau's Regulation Z. Following is a discussion of each 
correction, in order by section of the regulation.
Section 1026.36 Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling
36(a) Loan Originator and Mortgage Broker Defined
    The Board's existing comment 36(a)-4 contains a typographical error 
that inadvertently misstates the test for whether a person is a loan 
originator subject to the rules governing compensation paid to loan 
originators. Under existing Sec.  226.36(a)(1), a loan originator is 
defined as a person who, for compensation or other monetary gain, or in 
expectation of compensation or other monetary gain, arranges, 
negotiates, or otherwise obtains an extension of consumer credit for 
another person. Thus, the test essentially has two components, both of 
which must be present for a person to be a loan originator: (i) 
compensation or monetary gain; and (ii) the arranging, negotiating, or 
otherwise obtaining of consumer credit.
    The comment discusses this test in the context of managers and 
administrative staff, who generally are not loan originators under the 
definition, but it frames the discussion in the negative. The comment 
provides that such persons are not loan originators if they do not 
arrange, negotiate, or otherwise obtain an extension of credit for a 
consumer, and their compensation is not based on whether any particular 
loan is originated. Thus, as written, the comment could be read to 
require that, to be excluded from coverage as loan originators, 
managers and administrative staff must both not arrange extensions of 
consumer credit and not receive compensation that depends on a 
particular loan being originated. Such a reading would be contrary to 
the definition in the regulation, which covers a person only if both 
components are present. For this reason, the Bureau's comment 36(a)-4 
reads ``or'' where the Board's existing comment reads ``and,'' thus 
ensuring that the comment is consistent with the regulatory provision.
Section 1026.46 Special Disclosure Requirements for Private Education 
Loans
46(b) Definitions
46(b)(5) Private Education Loan
46(b)(5)(iii)
    The Board's existing Sec.  226.46(b)(5)(iii) provides that the term 
``private education loan'' does not include ``open-end credit any loan 
that is secured by real property or a dwelling.'' As adopted by the 
Board, this provision inadvertently omitted the word ``or'' between 
``open-end credit'' and ``any loan that is secured by real property or 
a dwelling.'' Thus, as written, the provision is unclear but could be 
interpreted to exclude from ``private education loan'' only open-end 
credit that is secured by real property or a dwelling, whereas it was 
intended to exclude all open-end credit, regardless of whether secured, 
and all loans that are secured by real property or a dwelling, whether 
open- or closed-end. In the SUPPLEMENTARY INFORMATION to the final rule 
that adopted Sec.  226.46(b)(5)(iii), the Board stated that the term 
``private education loan'' was being adopted substantially as proposed 
and noted that under the proposal ``[a] private education loan excluded 
any credit otherwise made under an open-end credit plan. It also 
excluded any closed-end loan secured by real property or a dwelling.'' 
74 FR 41194, 41203 (Aug. 14, 2009). To correct this error, the Bureau's 
Sec.  1026.46(b)(5)(iii) inserts the word ``or'' in the appropriate 
place.

III. Legal Authority

A. Rulemaking Authority

    The Bureau is issuing this interim final rule pursuant to its 
authority under TILA and the Dodd-Frank Act. Effective July 21, 2011, 
section 1061 of the Dodd-Frank Act transferred to the Bureau the 
``consumer financial protection functions'' previously vested in 
certain other Federal agencies. The term ``consumer financial 
protection function'' is defined to include ``all authority to 
prescribe rules or issue orders or guidelines pursuant to any Federal 
consumer financial law, including performing appropriate functions to 
promulgate and review

[[Page 79770]]

such rules, orders, and guidelines.'' \3\ TILA is a Federal consumer 
financial law.\4\ Accordingly, effective July 21, 2011, except with 
respect to persons excluded from the Bureau's rulemaking authority by 
section 1029 of the Dodd-Frank Act, the authority of the Board to issue 
regulations pursuant to TILA transferred to the Bureau.\5\
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    \3\ Public Law 111-203, section 1061(a)(1). Effective on the 
designated transfer date, the Bureau is also granted ``all powers 
and duties'' vested in each of the Federal agencies, relating to the 
consumer financial protection functions, on the day before the 
designated transfer date. Until this and other interim final rules 
take effect, existing regulations for which rulemaking authority 
transferred to the Bureau continue to govern persons covered by this 
rule. See 76 FR 43569 (July 21, 2011).
    \4\ Public Law 111-203, section 1002(14) (defining ``Federal 
consumer financial law'' to include the ``enumerated consumer 
laws''); id. Section 1002(12) (defining ``enumerated consumer laws'' 
to include TILA).
    \5\ Section 1066 of the Dodd-Frank Act grants the Secretary of 
the Treasury interim authority to perform certain functions of the 
Bureau. Pursuant to that authority, Treasury is publishing this 
interim final rule on behalf of the Bureau.
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    The TILA, as amended, authorizes the Bureau to ``prescribe 
regulations to carry out the purposes of [TILA].'' \6\ These 
regulations may contain such classifications, differentiations, or 
other provisions, and may provide for such adjustments and exceptions 
for any class of transactions, that in the Bureau's judgment are 
necessary or proper to effectuate the purpose of TILA, facilitate 
compliance with TILA, or prevent circumvention or evasion of TILA.\7\ 
Numerous other provisions of TILA, as amended, also authorize the 
Bureau to issue regulations, including model forms and changes.\8\ In 
its existing regulation, the Board used this TILA authority to 
establish extensive rules that promote the informed use of credit by 
mandating disclosures and to regulate substantively certain credit 
practices.\9\
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    \6\ Public Law 111-203, section 1100A(2); 15 U.S.C. 1604(a).
    \7\ Id.
    \8\ See, generally, 15 U.S.C. 1601 et seq.
    \9\ See the Board's Regulation Z, 12 CFR Part 226.
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B. Authority To Issue an Interim Final Rule Without Prior Notice and 
Comment

    The Administrative Procedure Act (APA) \10\ generally requires 
public notice and an opportunity to comment before promulgation of 
regulations.\11\ The APA provides exceptions to notice-and-comment 
procedures, however, where an agency for good cause finds that such 
procedures are impracticable, unnecessary, or contrary to the public 
interest or when a rulemaking relates to agency organization, 
procedure, and practice.\12\ The Bureau finds that there is good cause 
to conclude that providing notice and opportunity for comment would be 
unnecessary and contrary to the public interest under these 
circumstances. In addition, substantially all the changes made by this 
interim final rule, which were necessitated by the Dodd-Frank Act's 
transfer of TILA authority from the Board to the Bureau, relate to 
agency organization, procedure, and practice and are thus exempt from 
the APA's notice-and-comment requirements.
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    \10\ 5 U.S.C. 551 et seq.
    \11\ 5 U.S.C. 553(b), (c).
    \12\ 5 U.S.C. 553(b)(3)(A), (B).
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    The Bureau's good cause findings are based on the following 
considerations. As an initial matter, the Board's existing regulation 
was a result of notice-and-comment rulemaking to the extent required. 
Moreover, the interim final rule published today does not impose any 
new, substantive obligations on regulated entities. Rather, the interim 
final rule makes only non-substantive, technical changes to the 
existing text of the regulation, such as renumbering, changing internal 
cross-references, replacing appropriate nomenclature to reflect the 
transfer of authority to the Bureau, and changing certain addresses. 
Given the technical nature of these changes, and the fact that the 
interim final rule does not impose any additional substantive 
requirements on covered entities, an opportunity for prior public 
comment is unnecessary. In addition, recodifying the Board's 
regulations to reflect the transfer of authority to the Bureau will 
help facilitate compliance with TILA and its implementing regulations, 
and the new regulations will help reduce uncertainty regarding the 
applicable regulatory framework. Using notice-and-comment procedures 
would delay this process and thus be contrary to the public interest.
    The APA generally requires that rules be published not less than 30 
days before their effective dates. See 5 U.S.C. 553(d). As with the 
notice and comment requirement, however, the APA allows an exception 
when ``otherwise provided by the agency for good cause found and 
published with the rule.'' 5 U.S.C. 553(d)(3). The Bureau finds that 
there is good cause for providing less than 30 days notice here. A 
delayed effective date would harm consumers and regulated entities by 
needlessly perpetuating discrepancies between the amended statutory 
text and the implementing regulation, thereby hindering compliance and 
prolonging uncertainty regarding the applicable regulatory 
framework.\13\
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    \13\ This interim final rule is one of 14 companion rulemakings 
that together restate and recodify the implementing regulations 
under 14 existing consumer financial laws (part III.C, below, lists 
the 14 laws involved). In the interest of proper coordination of 
this overall regulatory framework, which includes numerous cross-
references among some of the regulations, the Bureau is establishing 
the same effective date of December 30, 2011 for those rules 
published on or before that date and making those published 
thereafter (if any) effective immediately.
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    In addition, delaying the effective date of the interim final rule 
for 30 days would provide no practical benefit to regulated entities in 
this context and in fact could operate to their detriment. As discussed 
above, the interim final rule published today does not impose any new, 
substantive obligations on regulated entities. Instead, the rule makes 
only non-substantive, technical changes to the existing text of the 
regulation. Thus, regulated entities that are already in compliance 
with the existing rules will not need to modify business practices as a 
result of this rule. To the extent that one-time modifications to forms 
are required, the Bureau has provided an ample implementation period to 
allow appropriate advance notice and facilitate compliance without 
suspending the benefits of the interim final rule during the 
intervening period.

C. Section 1022(b)(2) of the Dodd-Frank Act

    In developing the interim final rule, the Bureau has conducted an 
analysis of potential benefits, costs, and impacts.\14\ The Bureau 
believes that the interim final rule will benefit consumers and covered 
persons by updating and recodifying Regulation Z to reflect the 
transfer of authority to the Bureau and certain other changes mandated 
by the Dodd-Frank Act. This will help facilitate compliance with TILA 
and its implementing regulations and help

[[Page 79771]]

reduce any uncertainty regarding the applicable regulatory framework. 
Although the interim final rule will require certain creditors to 
modify certain credit and charge card disclosures to reflect the 
transfer of authority to the Bureau, as discussed below, the interim 
final rule will not impose any new substantive obligations on consumers 
or covered persons and is not expected to have any impact on consumers' 
access to consumer financial products and services.
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    \14\ Section 1022(b)(2)(A) of the Dodd-Frank Act addresses the 
consideration of the potential benefits and costs of regulation to 
consumers and covered persons, including the potential reduction of 
access by consumers to consumer financial products or services; the 
impact on depository institutions and credit unions with $10 billion 
or less in total assets as described in section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas. Section 
1022(b)(2)(B) requires that the Bureau ``consult with the 
appropriate prudential regulators or other Federal agencies prior to 
proposing a rule and during the comment process regarding 
consistency with prudential, market, or systemic objectives 
administered by such agencies.'' The manner and extent to which 
these provisions apply to interim final rules and to costs, 
benefits, and impacts that are compelled by statutory changes rather 
than discretionary Bureau action is unclear. Nevertheless, to inform 
this rulemaking more fully, the Bureau performed the described 
analyses and consultations.
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    As discussed above in part II of this SUPPLEMENTARY INFORMATION, 
consistent with the existing regulation, the Bureau's Sec. Sec.  
1026.6(b)(2)(xiv) and 1026.60(b)(15) require creditors to include in 
certain disclosures for credit and charge cards a reference to the 
Bureau and its Web site. The Bureau's new Model Forms G-10(A) and G-
17(A) reflect that requirement. To afford creditors sufficient time to 
modify their existing forms, Sec. Sec.  1026.6(b)(2)(xiv) and 
1026.60(b)(15) provide that, until January 1, 2013, issuers may 
substitute for the required Bureau reference the existing reference to 
the Web site established by the Board of Governors of the Federal 
Reserve System. Similarly, comment app. G-5.viii provides that, until 
January 1, 2013, issuers using model forms G-10(A) and G-17(A) may use 
existing references to the Board and its Web site instead of the 
references to the Bureau and its Web site contained in those models.
    Thus, by January 1, 2013, certain categories of creditors will need 
to make one-time revisions to certain credit and charge card disclosure 
forms. The Bureau estimates, assuming approximately four hours per 
creditor for the systems updates, that the roughly 102,410 affected 
creditors will incur costs of approximately $25,832,636. These costs 
may be overstated to the extent that multiple firms use the same 
software vendors, who are able to spread any costs over all of their 
affected clients. These estimates may also be overstated because the 
Bureau is giving creditors one year to effect the changes, thus 
allowing creditors to include the changes in routine, scheduled systems 
updates during the next year. These one-time changes to the affected 
disclosures ultimately will provide ongoing benefits to consumers by 
providing them with accurate information on where on the Internet to 
look for helpful information on credit card accounts.
    Although not required by the interim final rule, creditors may 
incur some costs in updating compliance manuals and related materials 
to reflect the new numbering and other technical changes reflected in 
the new Regulation Z, including the renumbering of the Board's 
Sec. Sec.  226.5a and 226.5b as new Sec. Sec.  1026.60 and 1026.40, 
respectively. The Bureau has worked to reduce any such burden by 
preserving the existing numbering to the extent possible, and believes 
that such costs will likely be minimal. These changes could be handled 
in the short term by providing a short, standalone summary alerting 
users to the changes and in the long term could be combined with other 
updates at the firm's convenience. The Bureau intends to continue 
investigating the possible costs to affected firms of updating manuals 
and related materials to reflect these changes and solicits comments on 
this and other issues discussed in this section.
    The interim final rule will have no unique impact on depository 
institutions or credit unions with $10 billion or less in assets as 
described in section 1026(a) of the Dodd-Frank Act. Also, the interim 
final rule will have no unique impact on rural consumers.
    In undertaking the process of recodifying Regulation Z, as well as 
regulations implementing thirteen other existing consumer financial 
laws,\15\ the Bureau consulted the Federal Deposit Insurance 
Corporation, the Office of the Comptroller of the Currency, the 
National Credit Union Administration, the Board of Governors of the 
Federal Reserve System, the Federal Trade Commission, and the 
Department of Housing and Urban Development, including with respect to 
consistency with any prudential, market, or systemic objectives that 
may be administered by such agencies.\16\ The Bureau also has consulted 
with the Office of Management and Budget for technical assistance. The 
Bureau expects to have further consultations with the appropriate 
Federal agencies during the comment period.
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    \15\ The fourteen laws implemented by this and its companion 
rulemakings are: The Consumer Leasing Act, the Electronic Fund 
Transfer Act (except with respect to section 920 of that Act), the 
Equal Credit Opportunity Act, the Fair Credit Reporting Act (except 
with respect to sections 615(e) and 628 of that act), the Fair Debt 
Collection Practices Act, Subsections (b) through (f) of section 43 
of the Federal Deposit Insurance Act, sections 502 through 509 of 
the Gramm-Leach-Bliley Act (except for section 505 as it applies to 
section 501(b)), the Home Mortgage Disclosure Act, the Real Estate 
Settlement Procedures Act, the S.A.F.E. Mortgage Licensing Act, the 
Truth in Lending Act, the Truth in Savings Act, section 626 of the 
Omnibus Appropriations Act, 2009, and the Interstate Land Sales Full 
Disclosure Act.
    \16\ In light of the technical but voluminous nature of this 
recodification project, the Bureau focused the consultation process 
on a representative sample of the recodified regulations, while 
making information on the other regulations available. The Bureau 
expects to conduct differently its future consultations regarding 
substantive rulemakings.
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IV. Request for Comment

    Although notice and comment rulemaking procedures are not required, 
the Bureau invites comments on this notice. Commenters are specifically 
encouraged to identify any technical issues raised by the rule. The 
Bureau is also seeking comment in response to a notice published at 76 
FR 75825 (Dec. 5, 2011) concerning its efforts to identify priorities 
for streamlining regulations that it has inherited from other Federal 
agencies to address provisions that are outdated, unduly burdensome, or 
unnecessary.

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact of its regulations on small 
entities, including small businesses, small governmental units, and 
small not-for-profit organizations.\17\ The RFA generally requires an 
agency to conduct an initial regulatory flexibility analysis (IRFA) and 
a final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\18\ The Bureau also is subject to 
certain additional procedures under the RFA involving the convening of 
a panel to consult with small business representatives prior to 
proposing a rule for which an IRFA is required.\19\
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    \17\ 5 U.S.C. 601 et seq.
    \18\ 5 U.S.C. 603, 604.
    \19\ 5 U.S.C. 609.
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    The IRFA and FRFA requirements described above apply only where a 
notice of proposed rulemaking is required,\20\ and the panel 
requirement applies only when a rulemaking requires an IRFA.\21\ As 
discussed above in part III, a notice of proposed rulemaking is not 
required for this rulemaking.
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    \20\ 5 U.S.C. 603(a), 604(a); 5 U.S.C. 553(b)(B).
    \21\ 5 U.S.C. 609(b).
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    In addition, as discussed above, this interim final rule has only a 
minor impact on entities subject to Regulation Z. Accordingly, the 
undersigned certifies that this interim final rule will not have a 
significant economic impact on a substantial number of small entities. 
The rule imposes no new, substantive obligations on covered entities 
and will require only minor, one-time adjustments to certain model

[[Page 79772]]

forms, as discussed in part III above. Moreover, as noted, the per-firm 
cost estimate discussed above may be overstated to the extent that 
multiple firms use the same software vendors, who are able to spread 
costs over all of their affected clients. Small entities, in 
particular, are especially likely to rely on outside vendors for 
disclosure compliance systems and therefore may have even less burden 
in complying with the one-time changes required by this interim final 
rule.

VI. Paperwork Reduction Act

    The Bureau may not conduct or sponsor, and a respondent is not 
required to respond to, an information collection unless it displays a 
currently valid Office of Management and Budget (OMB) control number. 
This rule contains information collection requirements under the 
Paperwork Reduction Act (PRA), which have been previously approved by 
OMB, and the ongoing PRA burden for which is unchanged by this rule. 
There are no new information collection requirements in this interim 
final rule. The Bureau's OMB control number for this information 
collection is: 3170-0015.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit unions, Mortgages, 
National banks, Reporting and recordkeeping requirements, Savings 
associations, Truth in lending.

Authority and Issuance

    For the reasons set forth above, the Bureau of Consumer Financial 
Protection adds Part 1026 to Chapter X in Title 12 of the Code of 
Federal Regulations to read as follows:

PART 1026--TRUTH IN LENDING (REGULATION Z)

Subpart A--General
Sec.
1026.1 Authority, purpose, coverage, organization, enforcement, and 
liability.
1026.2 Definitions and rules of construction.
1026.3 Exempt transactions.
1026.4 Finance charge.
Subpart B--Open-End Credit
1026.5 General disclosure requirements.
1026.6 Account-opening disclosures.
1026.7 Periodic statement.
1026.8 Identifying transactions on periodic statements.
1026.9 Subsequent disclosure requirements.
1026.10 Payments.
1026.11 Treatment of credit balances; account termination.
1026.12 Special credit card provisions.
1026.13 Billing error resolution.
1026.14 Determination of annual percentage rate.
1026.15 Right of rescission.
1026.16 Advertising.
Subpart C--Closed-End Credit
1026.17 General disclosure requirements.
1026.18 Content of disclosures.
1026.19 Certain mortgage and variable-rate transactions.
1026.20 Subsequent disclosure requirements.
1026.21 Treatment of credit balances.
1026.22 Determination of annual percentage rate.
1026.23 Right of rescission.
1026.24 Advertising.
Subpart D--Miscellaneous
1026.25 Record retention.
1026.26 Use of annual percentage rate in oral disclosures.
1026.27 Language of disclosures.
1026.28 Effect on state laws.
1026.29 State exemptions.
1026.30 Limitation on rates.
Subpart E--Special Rules for Certain Home Mortgage Transactions
1026.31 General rules.
1026.32 Requirements for certain closed-end home mortgages.
1026.33 Requirements for reverse mortgages.
1026.34 Prohibited acts or practices in connection with high-cost 
mortgages.
1026.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.
1026.36 Prohibited acts or practices in connection with credit 
secured by a dwelling.
1026.37-1026.38 [Reserved]
1026.39 Mortgage transfer disclosures.
1026.40 Requirements for home equity plans.
1026.41 [Reserved]
1026.42 Valuation independence.
1026.43-1026.45 [Reserved]
Subpart F--Special Rules for Private Education Loans
1026.46 Special disclosure requirements for private education loans.
1026.47 Content of disclosures.
1026.48 Limitations on private education loans.
Subpart G--Special Rules Applicable to Credit Card Accounts and Open-
End Credit Offered to College Students
1026.51 Ability to Pay.
1026.52 Limitations on fees.
1026.53 Allocation of payments.
1026.54 Limitations on the imposition of finance charges.
1026.55 Limitations on increasing annual percentage rates, fees, and 
charges.
1026.56 Requirements for over-the-limit transactions.
1026.57 Reporting and marketing rules for college student open-end 
credit.
1026.58 Internet posting of credit card agreements.
1026.59 Reevaluation of rate increases.
1026.60 Credit and charge card applications and solicitations.
Appendix A to Part 1026--Effect on State Laws
Appendix B to Part 1026--State Exemptions
Appendix C to Part 1026--Issuance of Official Interpretations
Appendix D to Part 1026--Multiple Advance Construction Loans
Appendix E to Part 1026--Rules for Card Issuers That Bill on a 
Transaction-by-Transaction Basis
Appendix F to Part 1026--Optional Annual Percentage Rate 
Computations for Creditors Offering Open-End Credit Plans Secured by 
a Consumer's Dwelling
Appendix G to Part 1026--Open-End Model Forms and Clauses
Appendix H to Part 1026-- Closed-End Model Forms and Clauses
Appendix I to Part 1026--[Reserved]
Appendix J to Part 1026--Annual Percentage Rate Computations for 
Closed-End Credit Transactions
Appendix K to Part 1026--Total Annual Loan Cost Rate Computations 
for Reverse Mortgage Transactions
Appendix L to Part 1026--Assumed Loan Periods for Computations of 
Total Annual Loan Cost Rates
Appendix M1 to Part 1026--Repayment Disclosures
Appendix M2 to Part 1026--Sample Calculations of Repayment 
Disclosures
Supplement I to Part 1026--Official Interpretations


    Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq.

Subpart A--General


Sec.  1026.1  Authority, purpose, coverage, organization, enforcement, 
and liability.

    (a) Authority. This part, known as Regulation Z, is issued by the 
Bureau of Consumer Financial Protection 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 part 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 part 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. 3170-0015.
    (b) Purpose. The purpose of this part is to promote the informed 
use of consumer credit by requiring disclosures about its terms and 
cost. The regulation also includes substantive protections. It 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 generally govern 
charges for consumer credit, except that several provisions in

[[Page 79773]]

Subpart G set forth special rules addressing certain charges applicable 
to credit card accounts under an open-end (not home-secured) consumer 
credit plan. 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.  1026.40 and mortgages that are subject to the 
requirements of Sec.  1026.32. The regulation prohibits certain acts or 
practices in connection with credit secured by a dwelling in Sec.  
1026.36, and credit secured by a consumer's principal dwelling in Sec.  
1026.35. The regulation also regulates certain practices of creditors 
who extend private education loans as defined in Sec.  1026.46(b)(5).
    (c) Coverage. (1) In general, this part applies to each individual 
or business that offers or extends credit, other than a person excluded 
from coverage of this part by section 1029 of the Consumer Financial 
Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, 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.
    (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.  1026.40 apply to 
persons who are not creditors but who provide applications for home-
equity plans to consumers.
    (4) Furthermore, certain requirements of Sec.  1026.57 apply to 
institutions of higher education.
    (d) Organization. The regulation is divided into subparts and 
appendices as follows:
    (1) Subpart A contains general information. It sets forth:
    (i) The authority, purpose, coverage, and organization of the 
regulation;
    (ii) The definitions of basic terms;
    (iii) The transactions that are exempt from coverage; and
    (iv) The method of determining the finance charge.
    (2) Subpart B contains the rules for open-end credit. It requires 
that 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.  1026.60 and Sec.  1026.40, 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 percentage 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 mortgage transactions. 
Section 1026.32 requires certain disclosures and provides limitations 
for closed-end loans that have rates or fees above specified amounts. 
Section 1026.33 requires special disclosures, including the total 
annual loan cost rate, for reverse mortgage transactions. Section 
1026.34 prohibits specific acts and practices in connection with 
closed-end mortgage transactions that are subject to Sec.  1026.32. 
Section 1026.35 prohibits specific acts and practices in connection 
with closed-end higher-priced mortgage loans, as defined in Sec.  
1026.35(a). Section 1026.36 prohibits specific acts and practices in 
connection with an extension of credit secured by a dwelling.
    (6) Subpart F relates to private education loans. It contains rules 
on disclosures, limitations on changes in terms after approval, the 
right to cancel the loan, and limitations on co-branding in the 
marketing of private education loans.
    (7) Subpart G relates to credit card accounts under an open-end 
(not home-secured) consumer credit plan (except for Sec.  1026.57(c), 
which applies to all open-end credit plans). Section 1026.51 contains 
rules on evaluation of a consumer's ability to make the required 
payments under the terms of an account. Section 1026.52 limits the fees 
that a consumer can be required to pay with respect to an open-end (not 
home-secured) consumer credit plan during the first year after account 
opening. Section 1026.53 contains rules on allocation of payments in 
excess of the minimum payment. Section 1026.54 sets forth certain 
limitations on the imposition of finance charges as the result of a 
loss of a grace period. Section 1026.55 contains limitations on 
increases in annual percentage rates, fees, and charges for credit card 
accounts. Section 1026.56 prohibits the assessment of fees or charges 
for over-the-limit transactions unless the consumer affirmatively 
consents to the creditor's payment of over-the-limit transactions. 
Section 1026.57 sets forth rules for reporting and marketing of college 
student open-end credit. Section 1026.58 sets forth requirements for 
the Internet posting of credit card accounts under an open-end (not 
home-secured) consumer credit plan.
    (8) Several appendices contain information such as the procedures 
for determinations about state laws, state exemptions and issuance of 
official interpretations, special rules for certain kinds of credit 
plans, 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, Public Law 
100-86, 101 Stat. 552, incorporates by reference administrative 
enforcement and civil liability provisions of sections 108 and 130 of 
the Act.


Sec.  1026.2  Definitions and rules of construction.

    (a) Definitions. For purposes of this part, 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]
    (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) Bureau means the Bureau of Consumer Financial Protection.
    (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,

[[Page 79774]]

for purposes of rescission under Sec. Sec.  1026.15 and 1026.23, and 
for purposes of Sec. Sec.  1026.19(a)(1)(ii), 1026.19(a)(2), 1026.31, 
and 1026.46(d)(4), 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 a credit card to another natural person. For purposes 
of Sec.  1026.12(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 rescission 
under Sec. Sec.  1026.15 and 1026.23, 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)(i) Credit card means any card, plate, or other single credit 
device that may be used from time to time to obtain credit.
    (ii) Credit card account under an open-end (not home-secured) 
consumer credit plan means any open-end credit account that is accessed 
by a credit card, except:
    (A) A home-equity plan subject to the requirements of Sec.  1026.40 
that is accessed by a credit card; or
    (B) An overdraft line of credit that is accessed by a debit card or 
an account number.
    (iii) 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 who regularly extends consumer credit that is subject 
to a finance charge or is payable by written agreement in more than 
four installments (not including a down payment), and 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.  1026.4(c)(8) (Discounts), 1026.9(d) 
(Finance charge imposed at time of transaction), and 1026.12(e) (Prompt 
notification of returns and crediting of refunds), a person that honors 
a credit card.
    (iii) For purposes of subpart B, any card issuer that extends 
either open-end credit or credit that is not subject to a finance 
charge and is not payable by written agreement in more than four 
installments.
    (iv) For purposes of subpart B (except for the credit and charge 
card disclosures contained in Sec. Sec.  1026.60 and 1026.9(e) and (f), 
the finance charge disclosures contained in Sec.  1026.6(a)(1) and 
(b)(3)(i) and Sec.  1026.7(a)(4) through (7) and (b)(4) through (6) and 
the right of rescission set forth in Sec.  1026.15) and subpart C, any 
card issuer that extends closed-end credit that is subject to a finance 
charge or is payable by written agreement in more than four 
installments.
    (v) A person regularly extends consumer credit only if it extended 
credit (other than credit subject to the requirements of Sec.  1026.32) 
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.  1026.32 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 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

[[Page 79775]]

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. Sec.  1026.6 and 1026.18, the term does not 
include an interest that arises solely by operation of law. However, 
for purposes of the right of rescission under Sec. Sec.  1026.15 and 
1026.23, 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 part, 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 part, the words used have the meanings 
given to them by state law or contract.
    (4) Where the word amount is used in this part to describe 
disclosure requirements, it refers to a numerical amount.


Sec.  1026.3  Exempt transactions.

    This part does not apply to the following:
    (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 applicable threshold amount. (1) Exemption. (i) 
Requirements. An extension of credit in which the amount of credit 
extended exceeds the applicable threshold amount or in which there is 
an express written commitment to extend credit in excess of the 
applicable threshold amount, unless the extension of credit is:
    (A) Secured by any real property, or by personal property used or 
expected to be used as the principal dwelling of the consumer; or
    (B) A private education loan as defined in Sec.  1026.46(b)(5).
    (ii) Annual adjustments. The threshold amount in paragraph 
(b)(1)(i) of this section is adjusted annually to reflect increases in 
the Consumer Price Index for Urban Wage Earners and Clerical Workers, 
as applicable. See the official commentary to this paragraph (b) for 
the threshold amount applicable to a specific extension of credit or 
express written commitment to extend credit.
    (2) Transition rule for open-end accounts exempt prior to July 21, 
2011. An open-end account that is exempt on July 20, 2011 based on an 
express written commitment to extend credit in excess of $25,000 
remains exempt until December 31, 2011 unless:
    (i) The creditor takes a security interest in any real property, or 
in personal property used or expected to be used as the principal 
dwelling of the consumer; or
    (ii) The creditor reduces the express written commitment to extend 
credit to $25,000 or less.
    (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.).


Sec.  1026.4  Finance charge.

    (a) Definition. The finance charge is the cost of consumer credit 
as a dollar amount. It includes any charge payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor as an incident to or a condition of the extension of credit. 
It does not include any charge of a type payable in a comparable cash 
transaction.
    (1) Charges by third parties. The finance charge includes fees and 
amounts charged by someone other than the creditor, unless otherwise 
excluded under this section, if the creditor:
    (i) Requires the use of a third party as a condition of or an 
incident to the extension of credit, even if the consumer can choose 
the third party; or
    (ii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (2) Special rule; closing agent charges. Fees charged by a third 
party that conducts the loan closing (such as a settlement agent, 
attorney, or escrow or title company) are finance charges only if the 
creditor:
    (i) Requires the particular services for which the consumer is 
charged;
    (ii) Requires the imposition of the charge; or
    (iii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (3) Special rule; mortgage broker fees. Fees charged by a mortgage 
broker (including fees paid by the consumer directly to the broker or 
to the creditor for delivery to the broker) are finance charges even if 
the creditor does not require the consumer to use a mortgage broker and 
even if the creditor does not retain any portion of the charge.
    (b) Examples of finance charges. The finance charge includes the 
following types of charges, except for charges specifically excluded by 
paragraphs (c) through (e) of this section:
    (1) Interest, time price differential, and any amount payable under 
an add-on or discount system of additional charges.
    (2) Service, transaction, activity, and carrying charges, including 
any charge imposed on a checking or other transaction account to the 
extent that the charge exceeds the charge for a similar account without 
a credit feature.
    (3) Points, loan fees, assumption fees, finder's fees, and similar 
charges.

[[Page 79776]]

    (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.  1026.17(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, may 
be excluded from the finance charge if the following conditions are 
met:
    (i) The insurance coverage may be obtained from a person of the 
consumer's choice, and this fact is disclosed. (A creditor may reserve 
the right to refuse to accept, for reasonable cause, an insurer offered 
by the consumer.)
    (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.  1026.17(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.  1026.17(g), and certain closed-end credit 
transactions involving a debt cancellation agreement that limits the 
total amount of indebtedness subject to coverage;
    (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

[[Page 79777]]

    (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


Sec.  1026.5  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, in a form that the consumer may keep, except that:
    (A) The following disclosures need not be written: Disclosures 
under Sec.  1026.6(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.  1026.6(b)(2) and related disclosures of charges under Sec.  
1026.9(c)(2)(iii)(B); disclosures under Sec.  1026.9(c)(2)(vi); 
disclosures under Sec.  1026.9(d) when a finance charge is imposed at 
the time of the transaction; and disclosures under Sec.  
1026.56(b)(1)(i).
    (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.  1026.60; home-equity disclosures under Sec.  
1026.40(d); the alternative summary billing-rights statement under 
Sec.  1026.9(a)(2); the credit and charge card renewal disclosures 
required under Sec.  1026.9(e); and the payment requirements under 
Sec.  1026.10(b), except as provided in Sec.  1026.7(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.  1026.60, 1026.40, 
and 1026.16 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.  1026.40, 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. The terms need not be 
more conspicuous when used for periodic statement disclosures under 
Sec.  1026.7(a)(4) and for advertisements under Sec.  1026.16.
    (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.  1026.60(a)(2).
    (ii) Certain disclosures for home-equity plans must precede other 
disclosures and must be given in accordance with the requirements of 
Sec.  1026.40(a).
    (iii) Certain account-opening disclosures must be provided in a 
tabular format in accordance with the requirements of Sec.  
1026.6(b)(1).
    (iv) Certain disclosures provided on periodic statements must be 
grouped together in accordance with the requirements of Sec.  
1026.7(b)(6) and (b)(13).
    (v) Certain disclosures provided on periodic statements must be 
given in accordance with the requirements of Sec.  1026.7(b)(12).
    (vi) Certain disclosures accompanying checks that access a credit 
card account must be provided in a tabular format in accordance with 
the requirements of Sec.  1026.9(b)(3).
    (vii) Certain disclosures provided in a change-in-terms notice must 
be provided in a tabular format in accordance with the requirements of 
Sec.  1026.9(c)(2)(iv)(D).
    (viii) Certain disclosures provided when a rate is increased due to 
delinquency, default or as a penalty must be provided in a tabular 
format in accordance with the requirements of Sec.  1026.9(g)(3)(ii).
    (b) Time of disclosures. (1) Account-opening disclosures. (i) 
General rule. The creditor shall furnish account-opening disclosures 
required by Sec.  1026.6 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.  
1026.6(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.  1026.40.
    (iii) Telephone purchases. Disclosures required by Sec.  1026.6 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

[[Page 79778]]

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.  1026.6; 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.  1026.4(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.  1026.60(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.  1026.40 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.  1026.4(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.  1026.5(b)(1)(iv)(A).
    (2) Periodic statements. (i) Statement required. The creditor shall 
mail or deliver a periodic statement as required by Sec.  1026.7 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) Timing requirements. (A) Credit card accounts under an open-
end (not home-secured) consumer credit plan. For credit card accounts 
under an open-end (not home-secured) consumer credit plan, a card 
issuer must adopt reasonable procedures designed to ensure that:
    (1) Periodic statements are mailed or delivered at least 21 days 
prior to the payment due date disclosed on the statement pursuant to 
Sec.  1026.7(b)(11)(i)(A); and
    (2) The card issuer does not treat as late for any purpose a 
required minimum periodic payment received by the card issuer within 21 
days after mailing or delivery of the periodic statement disclosing the 
due date for that payment.
    (B) Open-end consumer credit plans. For accounts under an open-end 
consumer credit plan, a creditor must adopt reasonable procedures 
designed to ensure that:
    (1) If a grace period applies to the account:
    (i) Periodic statements are mailed or delivered at least 21 days 
prior to the date on which the grace period expires; and
    (ii) The creditor does not impose finance charges as a result of 
the loss of the grace period if a payment that satisfies the terms of 
the grace period is received by the creditor within 21 days after 
mailing or delivery of the periodic statement.
    (2) Regardless of whether a grace period applies to the account:
    (i) Periodic statements are mailed or delivered at least 14 days 
prior to the date on which the required minimum periodic payment must 
be received in order to avoid being treated as late for any purpose; 
and
    (ii) The creditor does not treat as late for any purpose a required 
minimum periodic payment received by the creditor within 14 days after 
mailing or delivery of the periodic statement.
    (3) For purposes of paragraph (b)(2)(ii)(B) of this section, 
``grace period'' means a period within which any credit extended may be 
repaid without incurring a finance charge due to a periodic interest 
rate.
    (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.  1026.60.
    (4) Home-equity plans. Disclosures for home-equity plans shall be 
made in accordance with the timing requirements of Sec.  1026.40(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 part 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.  1026.15 is applicable, however, the 
disclosures required by Sec. Sec.  1026.6 and 1026.15(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 
part, although new disclosures may be required under Sec.  1026.9(c).


Sec.  1026.6  Account-opening disclosures.

    (a) Rules affecting home-equity plans. The requirements of this 
paragraph (a) apply only to home-equity plans subject to the 
requirements of Sec.  1026.40. 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, 
and the corresponding annual percentage rate. 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

[[Page 79779]]

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.
    (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, including a description of how any finance charge other 
than the periodic rate will be determined.
    (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.  1026.40(d), as applicable:
    (i) A statement of the conditions under which the creditor may take 
certain action, as described in Sec.  1026.40(d)(4)(i), such as 
terminating the plan or changing the terms.
    (ii) The payment information described in Sec.  1026.40(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.  1026.40(d)(9).
    (iv) A statement of any transaction requirements as described in 
Sec.  1026.40(d)(10).
    (v) A statement regarding the tax implications as described in 
Sec.  1026.40(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.  
1026.40(d)(6) and (d)(12)(ii).
    (vii) The variable-rate disclosures described in Sec.  
1026.40(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as 
well as the disclosure described in Sec.  1026.40(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.  
1026.12(c) and 1026.13 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.  1026.40.
    (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.
    (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 or maximum limits on fee amounts 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: 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 (v) (except for (b)(2)(i)(D)(2)) and 
(b)(2)(vii) through (xiv) of this section shall be in the table. 
Disclosures required by paragraphs (b)(2)(i)(D)(2), (b)(2)(i)(D)(3), 
(b)(2)(vi), and (b)(2)(xv) of this section shall be placed directly 
below the table. Disclosures required by paragraphs (b)(3) through (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-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.  1026.14(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.  1026.16(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 creditor must disclose a rate based on the applicable 
index or

[[Page 79780]]

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. Consistent with paragraph 
(b)(2)(i) of this section, the premium initial rate for purchases must 
be in at least 16-point type. 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 creditor also discloses the time period 
during which the premium initial rate will remain in effect. 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) and (b)(2)(i)(D)(3) 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.  1026.16(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.
    (3) Employee preferential rates. If a creditor discloses in the 
table a preferential annual percentage rate for which only employees of 
the creditor, employees of a third party, or other individuals with 
similar affiliations with the creditor or third party, such as 
executive officers, directors, or principal shareholders are eligible, 
the creditor must briefly disclose directly beneath the table the 
circumstances under which such preferential rate may be revoked, and 
the rate that will apply after such preferential rate is revoked.
    (E) Point of sale where APRs vary by state or based on 
creditworthiness. Creditors imposing annual percentage rates that vary 
by state or based on the consumer's creditworthiness 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:
    (1) The specific annual percentage rate applicable to the 
consumer's account; or
    (2) The range of the annual percentage rates, if the disclosure 
includes a statement that the annual percentage rate varies by state or 
will be determined based on the consumer's creditworthiness 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) Credit card accounts under an open-end (not home-secured) 
consumer credit plan. Notwithstanding paragraphs (b)(2)(i)(B) and 
(b)(2)(i)(C) of this section, for credit card accounts under an open-
end (not home-secured) plan, issuers must disclose in the table:
    (1) Any introductory rate as that term is defined in Sec.  
1026.16(g)(2)(ii) that would apply to the account, consistent with the 
requirements of paragraph (b)(2)(i)(B) of this section, and
    (2) 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 Bureau to 
reflect changes in the Consumer Price Index. The Bureau 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. 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.  1026.60(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.

[[Page 79781]]

    (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.  1026.4(b)(7) or 
debt cancellation or suspension coverage described in Sec.  
1026.4(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 Bureau and 
a statement that consumers may obtain on the Web site information about 
shopping for and using credit cards. Until January 1, 2013, issuers may 
substitute for this reference a reference to the Web site established 
by the Board of Governors of the Federal Reserve System.
    (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.  1026.4(a) and Sec.  
1026.4(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.  1026.4(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.
    (F) The effect(s) of an increase.
    (G) Except as specified in paragraph (b)(4)(ii)(H) of this section, 
a rate is accurate if it is a rate as of a specified date and this rate 
was in effect within the last 30 days before the disclosures are 
provided.
    (H) Creditors imposing annual percentage rates that vary according 
to an index that is not under the creditor's control 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 disclose in the 
table a rate, or range of rates to the

[[Page 79782]]

extent permitted by Sec.  1026.6(b)(2)(i)(E), that was in effect within 
the last 90 days before the disclosures are provided, along with a 
reference directing the consumer to the account agreement or other 
disclosure provided with the account-opening table where an annual 
percentage rate applicable to the consumer's account in effect within 
the last 30 days before the disclosures are provided is disclosed.
    (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. Sec.  1026.4(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.  1026.4(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.  
1026.12(c) and 1026.13 and that is substantially similar to the 
statement found in Model Form G-3(A) in Appendix G to this part.


Sec.  1026.7  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.  1026.40. 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.  1026.8.
    (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, and 
the corresponding annual percentage rate. 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.
    (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.  1026.14(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.  
1026.9(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.  1026.40.
    (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.  1026.8.
    (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 disclosed. For variable-rate plans, the fact that the 
annual percentage rate may vary.

[[Page 79783]]

    (ii) Exception. A promotional rate, as that term is defined in 
Sec.  1026.16(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.  1026.60(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.  1026.60(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.  1026.6(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 to this 
part.
    (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.  1026.9(c), or a rate increase notice required 
by Sec.  1026.9(g), on or with the periodic statement, must disclose 
the information in Sec.  1026.9(c)(2)(iv)(A) and (c)(2)(iv)(B) (if 
applicable) or Sec.  1026.9(g)(3)(i) on the periodic statement in 
accordance with the format requirements in Sec.  1026.9(c)(2)(iv)(D), 
and Sec.  1026.9(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.  
1026.9(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, for a credit card 
account under an open-end (not home-secured) consumer credit plan, a 
card issuer must provide on each periodic statement:
    (A) The due date for a payment. The due date disclosed pursuant to 
this paragraph shall be the same day of the month for each billing 
cycle.
    (B) The amount of any 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 card issuer may state the range of 
fees, or the highest fee and an indication that the fee imposed could 
be lower. If the rate may be increased for more than one feature or 
balance, the card issuer may state the range of rates or the highest 
rate that could apply and at the issuer's option an indication that the 
rate imposed could be lower.
    (ii) Exception. The requirements of paragraph (b)(11)(i) of this 
section do not apply to the following:
    (A) Periodic statements provided solely for charge card accounts; 
and
    (B) Periodic statements provided for a charged-off account where 
payment of the entire account balance is due immediately.
    (12) Repayment disclosures. (i) In general. Except as provided in 
paragraphs (b)(12)(ii) and (b)(12)(v) of this section, for a credit 
card account under an open-end (not home-secured) consumer credit plan, 
a card issuer must provide the following disclosures on each periodic 
statement:
    (A) The following statement with a bold heading: ``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;''
    (B) The minimum payment repayment estimate, as described in 
Appendix M1 to this part. If the minimum payment repayment estimate is 
less than 2 years, the card issuer must disclose the estimate in 
months. Otherwise, the estimate must be disclosed in years and rounded 
to the nearest whole year;
    (C) The minimum payment total cost estimate, as described in 
Appendix M1 to this part. The minimum payment total cost estimate must 
be rounded either to the nearest whole dollar or to the nearest cent, 
at the card issuer's option;
    (D) A statement that the minimum payment repayment estimate and the 
minimum payment total cost estimate are based on the current 
outstanding balance shown on the periodic statement. A statement that 
the minimum payment repayment estimate and the minimum payment total 
cost estimate are based on the assumption that only minimum payments 
are made and no other amounts are added to the balance;
    (E) A toll-free telephone number where the consumer may obtain from 
the card issuer information about credit counseling services consistent 
with paragraph (b)(12)(iv) of this section; and
    (F)(1) Except as provided in paragraph (b)(12)(i)(F)(2) of this 
section, the following disclosures:
    (i) The estimated monthly payment for repayment in 36 months, as 
described in Appendix M1 to this part. The estimated monthly payment 
for repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the card issuer's option;
    (ii) A statement that the card issuer estimates that the consumer 
will repay the outstanding balance shown on the periodic statement in 3 
years if the consumer pays the estimated monthly payment each month for 
3 years;
    (iii) The total cost estimate for repayment in 36 months, as 
described in Appendix M1 to this part. The total cost estimate for 
repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the card issuer's option; and
    (iv) The savings estimate for repayment in 36 months, as described 
in

[[Page 79784]]

Appendix M1 to this part. The savings estimate for repayment in 36 
months must be rounded either to the nearest whole dollar or to the 
nearest cent, at the card issuer's option.
    (2) The requirements of paragraph (b)(12)(i)(F)(1) of this section 
do not apply to a periodic statement in any of the following 
circumstances:
    (i) The minimum payment repayment estimate that is disclosed on the 
periodic statement pursuant to paragraph (b)(12)(i)(B) of this section 
after rounding is three years or less;
    (ii) The estimated monthly payment for repayment in 36 months, as 
described in Appendix M1 to this part, after rounding as set forth in 
paragraph (b)(12)(i)(F)(1)(i) of this section that is calculated for a 
particular billing cycle is less than the minimum payment required for 
the plan for that billing cycle; and
    (iii) A billing cycle where an account has both a balance in a 
revolving feature where the required minimum payments for this feature 
will not amortize that balance in a fixed amount of time specified in 
the account agreement and a balance in a fixed repayment feature where 
the required minimum payment for this fixed repayment feature will 
amortize that balance in a fixed amount of time specified in the 
account agreement which is less than 36 months.
    (ii) Negative or no amortization. If negative or no amortization 
occurs when calculating the minimum payment repayment estimate as 
described in Appendix M1 of this part, a card issuer must provide the 
following disclosures on the periodic statement instead of the 
disclosures set forth in paragraph (b)(12)(i) of this section:
    (A) The following statement: ``Minimum Payment Warning: Even if you 
make no more charges using this card, if you make only the minimum 
payment each month we estimate you will never pay off the balance shown 
on this statement because your payment will be less than the interest 
charged each month'';
    (B) The following statement: ``If you make more than the minimum 
payment each period, you will pay less in interest and pay off your 
balance sooner'';
    (C) The estimated monthly payment for repayment in 36 months, as 
described in Appendix M1 to this part. The estimated monthly payment 
for repayment in 36 months must be rounded either to the nearest whole 
dollar or to the nearest cent, at the issuer's option;
    (D) A statement that the card issuer estimates that the consumer 
will repay the outstanding balance shown on the periodic statement in 3 
years if the consumer pays the estimated monthly payment each month for 
3 years; and
    (E) A toll-free telephone number where the consumer may obtain from 
the card issuer information about credit counseling services consistent 
with paragraph (b)(12)(iv) of this section.
    (iii) Format requirements. A card issuer must provide the 
disclosures required by paragraph (b)(12)(i) or (b)(12)(ii) of this 
section in accordance with the format requirements of paragraph (b)(13) 
of this section, and in a format substantially similar to Samples G-
18(C)(1), G-18(C)(2) and G-18(C)(3) in Appendix G to this part, as 
applicable.
    (iv) Provision of information about credit counseling services. (A) 
Required information. To the extent available from the United States 
Trustee or a bankruptcy administrator, a card issuer must provide 
through the toll-free telephone number disclosed pursuant to paragraphs 
(b)(12)(i) or (b)(12)(ii) of this section the name, street address, 
telephone number, and Web site address for at least three organizations 
that have been approved by the United States Trustee or a bankruptcy 
administrator pursuant to 11 U.S.C. 111(a)(1) to provide credit 
counseling services in, at the card issuer's option, either the state 
in which the billing address for the account is located or the state 
specified by the consumer.
    (B) Updating required information. At least annually, a card issuer 
must update the information provided pursuant to paragraph 
(b)(12)(iv)(A) of this section for consistency with the information 
available from the United States Trustee or a bankruptcy administrator.
    (v) Exemptions. Paragraph (b)(12) of this section does not apply 
to:
    (A) Charge card accounts that require payment of outstanding 
balances in full at the end of each billing cycle;
    (B) 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
    (C) 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 
disclosures 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 disclosures required by paragraph (b)(12) of this 
section shall be grouped together. Sample G-18(D) in Appendix G to this 
part sets forth an example of how these terms may be grouped.
    (14) Deferred interest or similar transactions. For accounts with 
an outstanding balance subject to a deferred interest or similar 
program, the date by which that outstanding balance must be paid in 
full in order to avoid the obligation to pay finance charges on such 
balance must be disclosed on the front of any page of each periodic 
statement issued during the deferred interest period beginning with the 
first periodic statement issued during the deferred interest period 
that reflects the deferred interest or similar transaction. The 
disclosure provided pursuant to this paragraph must be substantially 
similar to Sample G-18(H) in Appendix G to this part.


Sec.  1026.8  Identifying transactions on periodic statements.

    The creditor shall identify credit transactions on or with the 
first periodic statement that reflects the transaction by furnishing 
the following information, as applicable:
    (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 of the property or services purchased, 
for creditors and sellers that are the same or related; or
    (ii) The seller's name; and the city and state or foreign country 
where the transaction took place. 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.
    (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.

[[Page 79785]]

    (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; 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.
    (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.  1026.13(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.  
1026.2(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.


Sec.  1026.9  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.  1026.6(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.  1026.5(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.  1026.40 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.  1026.6(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 to the consumer, and the finance charge terms for the 
feature or device differ from disclosures previously given, the 
disclosures required by Sec.  1026.6(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.  1026.40, if 
checks that can be used to access a credit card account are provided 
more than 30 days after account-opening disclosures under Sec.  
1026.6(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.  
1026.16(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 accordance with the accuracy 
requirements set forth in paragraph (b)(3)(ii) of this section.
    (2) [Reserved]
    (C) Any transaction fees applicable to the checks disclosed under 
Sec.  1026.6(b)(2)(iv); 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.
    (iii) Variable rates. If any annual percentage rate required to be 
disclosed pursuant to paragraph (b)(3)(i) 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

[[Page 79786]]

calculate the variable rate shall not be disclosed in the table. A 
disclosure of any applicable limitations on rate increases shall not be 
included in the table.
    (c) Change in terms. (1) Rules affecting home-equity plans. (i) 
Written notice required. For home-equity plans subject to the 
requirements of Sec.  1026.40, whenever any term required to be 
disclosed under Sec.  1026.6(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.  1026.40, 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.  1026.40, if the creditor prohibits additional 
extensions of credit or reduces the credit limit pursuant to Sec.  
1026.40(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. (A) General. For plans other 
than home-equity plans subject to the requirements of Sec.  1026.40, 
except as provided in paragraphs (c)(2)(i)(B), (c)(2)(iii) and 
(c)(2)(v) of this section, when a significant change in account terms 
as described in paragraph (c)(2)(ii) of this section is made, 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 as described in paragraph 
(c)(2)(i)(B) of this section; for such changes, notice must be given in 
accordance with the timing requirements of paragraph (c)(2)(i)(B) of 
this section. 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.
    (B) Changes agreed to by the consumer. 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 paragraph (c)(2)(i)(B) applies only 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. The following are not considered agreements between the 
consumer and the creditor for purposes of this paragraph (c)(2)(i)(B): 
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); 
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; and the consumer's request to 
reopen a closed account or to upgrade an existing account to another 
account offered by the creditor with different credit or other 
features.
    (ii) Significant changes in account terms. For purposes of this 
section, a ``significant change in account terms'' means a change to a 
term required to be disclosed under Sec.  1026.6(b)(1) and (b)(2), an 
increase in the required minimum periodic payment, a change to a term 
required to be disclosed under Sec.  1026.6(b)(4), or the acquisition 
of a security interest.
    (iii) Charges not covered by Sec.  1026.6(b)(1) and (b)(2). Except 
as provided in paragraph (c)(2)(vi) of this section, if a creditor 
increases any component of a charge, or introduces a new charge, 
required to be disclosed under Sec.  1026.6(b)(3) that is not a 
significant change in account terms as described in paragraph 
(c)(2)(ii) of this section, a creditor must 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.
    (iv) Disclosure requirements. (A) Significant changes in account 
terms. If a creditor makes a significant change in account terms as 
described in paragraph (c)(2)(ii) of this section, the notice provided 
pursuant to paragraph (c)(2)(i) of this section must provide the 
following information:
    (1) A summary of the changes made to terms required by Sec.  
1026.6(b)(1) and (b)(2) or Sec.  1026.6(b)(4), a description of any 
increase in the required minimum periodic payment, and a description of 
any security interest being acquired by the creditor;
    (2) A statement that changes are being made to the account;
    (3) For accounts other than credit card accounts under an open-end 
(not home-secured) consumer credit plan subject to Sec.  
1026.9(c)(2)(iv)(B), 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;
    (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; and
    (8) If the change in terms being disclosed is an increase in an 
annual percentage rate for a credit card account under an open-end (not 
home-secured) consumer credit plan, a statement of no more than four 
principal reasons for the rate increase, listed in their order of 
importance.
    (B) Right to reject for credit card accounts under an open-end (not 
home-secured) consumer credit plan. In addition to the disclosures in 
paragraph (c)(2)(iv)(A) of this section, if a card issuer makes a 
significant change in account terms on a credit card account under an 
open-end (not home-secured)

[[Page 79787]]

consumer credit plan, the creditor must generally provide the following 
information on the notice provided pursuant to paragraph (c)(2)(i) of 
this section. This information is not required to be provided in the 
case of an increase in the required minimum periodic payment, an 
increase in a fee as a result of a reevaluation of a determination made 
under Sec.  1026.52(b)(1)(i) or an adjustment to the safe harbors in 
Sec.  1026.52(b)(1)(ii) to reflect changes in the Consumer Price Index, 
a change in an annual percentage rate applicable to a consumer's 
account, an increase in a fee previously reduced consistent with 50 
U.S.C. app. 527 or a similar Federal or state statute or regulation if 
the amount of the increased fee does not exceed the amount of that fee 
prior to the reduction, or when the change results from the creditor 
not receiving the consumer's required minimum periodic payment within 
60 days after the due date for that payment:
    (1) A statement that the consumer has the right to reject the 
change or changes prior to the effective date of the changes, unless 
the consumer fails to make a required minimum periodic payment within 
60 days after the due date for that payment;
    (2) Instructions for rejecting the change or changes, and a toll-
free telephone number that the consumer may use to notify the creditor 
of the rejection; and
    (3) If applicable, a statement that if the consumer rejects the 
change or changes, the consumer's ability to use the account for 
further advances will be terminated or suspended.
    (C) Changes resulting from failure to make minimum periodic payment 
within 60 days from due date for credit card accounts under an open-end 
(not home-secured) consumer credit plan. For a credit card account 
under an open-end (not home-secured) consumer credit plan:
    (1) If the significant change required to be disclosed pursuant to 
paragraph (c)(2)(i) of this section is an increase in an annual 
percentage rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) based on the consumer's 
failure to make a minimum periodic payment within 60 days from the due 
date for that payment, the notice provided pursuant to paragraph 
(c)(2)(i) of this section must state that the increase will cease to 
apply to transactions that occurred prior to or within 14 days of 
provision of the notice, if the creditor receives six consecutive 
required minimum periodic payments on or before the payment due date, 
beginning with the first payment due following the effective date of 
the increase.
    (2) If the significant change required to be disclosed pursuant to 
paragraph (c)(2)(i) of this section is an increase in a fee or charge 
required to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) based on the consumer's failure to make a minimum periodic 
payment within 60 days from the due date for that payment, the notice 
provided pursuant to paragraph (c)(2)(i) of this section must also 
state the reason for the increase.
    (D) Format requirements. (1) Tabular format. The summary of changes 
described in paragraph (c)(2)(iv)(A)(1) of this section must be in a 
tabular format (except for a summary of any increase in the required 
minimum periodic payment, a summary of a term required to be disclosed 
under Sec.  1026.6(b)(4) that is not required to be disclosed under 
Sec.  1026.6(b)(1) and (b)(2), or a description of any security 
interest being acquired by the creditor), 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.  1026.6(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.  1026.6(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)(iv)(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)(2)(iv)(A)(1) of this section must immediately follow the 
information described in paragraph (c)(2)(iv)(A)(2) through 
(c)(2)(iv)(A)(7) and, if applicable, paragraphs (c)(2)(iv)(A)(8), 
(c)(2)(iv)(B), and (c)(2)(iv)(C) of this section, and be substantially 
similar to the format shown in Sample G-20 or G-21 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)(iv)(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)(iv)(A)(1) of this section may be on more than one page, and may 
use both the front and reverse sides, so long as the table begins on 
the front of the first page of the notice and there is a reference on 
the first page indicating that the table continues on the following 
page. The summary of changes described in paragraph (c)(2)(iv)(A)(1) of 
this section must immediately follow the information described in 
paragraph (c)(2)(iv)(A)(2) through (c)(2)(iv)(A)(7) and, if applicable, 
paragraphs (c)(2)(iv)(A)(8), (c)(2)(iv)(B), and (c)(2)(iv)(C), of this 
section, substantially similar to the format shown in Sample G-20 or G-
21 in Appendix G to this part.
    (v) Notice not required. For open-end plans (other than home equity 
plans subject to the requirements of Sec.  1026.40) a creditor is not 
required to provide notice under this section:
    (A) 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)(vi) of 
this section) or termination of an account or plan; when the change 
results from an agreement involving a court proceeding; when the change 
is an extension of the grace period; or if the change is applicable 
only to checks that access a credit card account and the changed terms 
are disclosed on or with the checks in accordance with paragraph (b)(3) 
of this section;
    (B) When the change is an increase in an annual percentage rate or 
fee upon the expiration of a specified period of time, provided that:
    (1) Prior to commencement of that period, the creditor disclosed in 
writing to the consumer, in a clear and conspicuous manner, the length 
of the period and the annual percentage rate or fee that would apply 
after expiration of the period;
    (2) The disclosure of the length of the period and the annual 
percentage rate or fee that would apply after expiration of the period 
are set forth in close proximity and in equal prominence to the first 
listing of the disclosure of the rate or fee that applies during the 
specified period of time; and
    (3) The annual percentage rate or fee that applies after that 
period does not exceed the rate or fee disclosed pursuant to paragraph 
(c)(2)(v)(B)(1) of this paragraph or, if the rate disclosed pursuant to 
paragraph (c)(2)(v)(B)(1) of this section was a variable rate, the rate 
following any such increase is a variable rate determined by the same 
formula (index and margin) that was used to calculate the variable rate 
disclosed pursuant to paragraph (c)(2)(v)(B)(1);

[[Page 79788]]

    (C) When the change is an increase in a variable annual percentage 
rate in accordance with a credit card or other account agreement that 
provides for changes in the rate according to operation of an index 
that is not under the control of the creditor and is available to the 
general public; or
    (D) When the change is an increase in an annual percentage rate, a 
fee or charge required to be disclosed under Sec.  1026.6(b)(2)(ii), 
(b)(2)(iii), (b)(2)(viii), (b)(2)(ix), (b)(2)(ix) or (b)(2)(xii), or 
the required minimum periodic payment due to the completion of a 
workout or temporary hardship arrangement by the consumer or the 
consumer's failure to comply with the terms of such an arrangement, 
provided that:
    (1) The annual percentage rate or fee or charge applicable to a 
category of transactions or the required minimum periodic payment 
following any such increase does not exceed the rate or fee or charge 
or required minimum periodic payment that applied to that category of 
transactions prior to commencement of the arrangement or, if the rate 
that applied to a category of transactions prior to the commencement of 
the workout or temporary hardship 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 or temporary hardship 
arrangement; and
    (2) The creditor has provided the consumer, prior to the 
commencement of such arrangement, with a clear and conspicuous 
disclosure of the terms of the arrangement (including any increases due 
to such completion or failure). This disclosure must generally be 
provided in writing. However, a creditor may provide the disclosure of 
the terms of the arrangement orally by telephone, provided that the 
creditor mails or delivers a written disclosure of the terms of the 
arrangement to the consumer as soon as reasonably practicable after the 
oral disclosure is provided.
    (vi) Reduction of the credit limit. For open-end plans that are not 
subject to the requirements of Sec.  1026.40, 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.  1026.60, 1026.6 and 1026.7.
    (e) Disclosures upon renewal of credit or charge card. (1) Notice 
prior to renewal. 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.  1026.60, including any fee based on account activity 
or inactivity or any card issuer that has changed or amended any term 
of a cardholder's account required to be disclosed under Sec.  
1026.6(b)(1) and (b)(2) that has not previously been disclosed to the 
consumer, shall mail or deliver written notice of the renewal to the 
cardholder. If the card issuer imposes any annual or other periodic fee 
for renewal, 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 any renewal fee is initially charged to 
the account. If the card issuer has changed or amended any term 
required to be disclosed under Sec.  1026.6(b)(1) and (b)(2) and such 
changed or amended term has not previously been disclosed to the 
consumer, the notice shall be provided at least 30 days prior to the 
scheduled renewal date of the consumer's credit or charge card. The 
notice shall contain the following information:
    (i) The disclosures contained in Sec.  1026.60(b)(1) through (b)(7) 
that would apply if the account were renewed; and
    (ii) How and when the cardholder may terminate credit availability 
under the account to avoid paying the renewal fee, if applicable.
    (2) 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.  1026.60, 
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.  1026.40, 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:

[[Page 79789]]

    (i) A rate is increased due to the consumer's delinquency or 
default; or
    (ii) A rate is increased as a penalty for one or more events 
specified in the account agreement, such as making a late payment or 
obtaining an extension of credit that exceeds the credit limit.
    (2) Timing of written notice. Whenever any notice is required to be 
given pursuant to paragraph (g)(1) of this section, the creditor shall 
provide written notice of the increase in rates at least 45 days prior 
to the effective date of the increase. The notice must be provided 
after the occurrence of the events described in paragraphs (g)(1)(i) 
and (g)(1)(ii) of this section that trigger the imposition of the rate 
increase.
    (3)(i) Disclosure requirements for rate increases. (A) General. 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:
    (1) A statement that the delinquency or default rate or penalty 
rate, as applicable, has been triggered;
    (2) The date on which the delinquency or default rate or penalty 
rate will apply;
    (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;
    (4) A statement indicating to which balances the delinquency or 
default rate or penalty rate will be applied;
    (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 minimum periodic 
payment within 60 days from the due date for that payment; and
    (6) For a credit card account under an open-end (not home-secured) 
consumer credit plan, a statement of no more than four principal 
reasons for the rate increase, listed in their order of importance.
    (B) Rate increases resulting from failure to make minimum periodic 
payment within 60 days from due date. For a credit card account under 
an open-end (not home-secured) consumer credit plan, if the rate 
increase required to be disclosed pursuant to paragraph (g)(1) of this 
section is an increase pursuant to Sec.  1026.55(b)(4) based on the 
consumer's failure to make a minimum periodic payment within 60 days 
from the due date for that payment, the notice provided pursuant to 
paragraph (g)(1) of this section must also state that the increase will 
cease to apply to transactions that occurred prior to or within 14 days 
of provision of the notice, if the creditor receives six consecutive 
required minimum periodic payments on or before the payment due date, 
beginning with the first payment due following the effective date of 
the increase.
    (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)(iv) 
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)(iv) or (g)(4) of this section.
    (4) Exception for decrease in credit limit. A creditor is not 
required to provide a notice pursuant to paragraph (g)(1) of this 
section prior to increasing the rate for obtaining an extension of 
credit that exceeds the credit limit, provided that:
    (i) The creditor provides at least 45 days in advance of imposing 
the penalty rate a notice, in writing, that includes:
    (A) A statement that the credit limit on the account has been or 
will be decreased.
    (B) A statement indicating the date on which the penalty rate will 
apply, if the outstanding balance exceeds the credit limit as of that 
date;
    (C) A statement that the penalty rate will not be imposed on the 
date specified in paragraph (g)(4)(i)(B) of this section, if the 
outstanding balance does not exceed the credit limit as of that date;
    (D) 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;
    (E) A statement indicating to which balances the penalty rate may 
be applied; and
    (F) 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 60 days from the due date for that payment; and
    (ii) 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 (g)(4)(i)(B) of this section.
    (iii)(A) If a notice provided pursuant to paragraph (g)(4)(i) of 
this section is included on or with a periodic statement, the 
information described in paragraph (g)(4)(i) of this section must be in 
the form of a table and provided on the front of any page of the 
periodic statement; or
    (B) If a notice required by paragraph (g)(4)(i) of this section is 
not included on or with a periodic statement, the information described 
in paragraph (g)(4)(i) 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)(iv) or (g)(1) of this section.
    (h) Consumer rejection of certain significant changes in terms. (1) 
Right to reject. If paragraph (c)(2)(iv)(B) of this section requires 
disclosure of the consumer's right to reject a significant change to an 
account term, the consumer may reject that change by notifying the 
creditor of the rejection before the effective date of the change.
    (2) Effect of rejection. If a creditor is notified of a rejection 
of a significant change to an account term as provided in paragraph 
(h)(1) of this section, the creditor must not:
    (i) Apply the change to the account;
    (ii) Impose a fee or charge or treat the account as in default 
solely as a result of the rejection; or
    (iii) Require repayment of the balance on the account using a 
method that is less beneficial to the consumer than one of the methods 
listed in Sec.  1026.55(c)(2).
    (3) Exception. Section 1026.9(h) does not apply when the creditor 
has not received the consumer's required minimum periodic payment 
within 60 days after the due date for that payment.


Sec.  1026.10  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.

[[Page 79790]]

    (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 (except as 
provided in paragraph (b)(3) of this section), provided that such cut-
off times shall be no earlier than 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.
    (3) In-person payments on credit card accounts. (i) General. 
Notwithstanding Sec.  1026.10(b), payments on a credit card account 
under an open-end (not home-secured) consumer credit plan made in 
person at a branch or office of a card issuer that is a financial 
institution prior to the close of business of that branch or office 
shall be considered received on the date on which the consumer makes 
the payment. A card issuer that is a financial institution shall not 
impose a cut-off time earlier than the close of business for any such 
payments made in person at any branch or office of the card issuer at 
which such payments are accepted. Notwithstanding Sec.  
1026.10(b)(2)(ii), a card issuer may impose a cut-off time earlier than 
5 p.m. for such payments, if the close of business of the branch or 
office is earlier than 5 p.m.
    (ii) Financial institution. For purposes of paragraph (b)(3) of 
this section, ``financial institution'' shall mean a bank, savings 
association, or credit union.
    (4) Nonconforming payments. (i) In general. Except as provided in 
paragraph (b)(4)(ii) of this section, if a creditor specifies, on or 
with the periodic statement, requirements for the consumer to follow in 
making payments as permitted under this Sec.  1026.10, but accepts a 
payment that does not conform to the requirements, the creditor shall 
credit the payment within five days of receipt.
    (ii) Payment methods promoted by creditor. If a creditor promotes a 
method for making payments, such payments shall be considered 
conforming payments in accordance with this paragraph (b) and shall be 
credited 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.
    (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. (1) General. Except as provided in paragraph 
(d)(2) of this section, if a creditor does not receive or accept 
payments by mail on the due date for payments, the creditor may 
generally not treat a payment received the next business day as late 
for any purpose. For purposes of this paragraph (d), the ``next 
business day'' means the next day on which the creditor accepts or 
receives payments by mail.
    (2) Payments accepted or received other than by mail. If a creditor 
accepts or receives payments made on the due date by a method other 
than mail, such as electronic or telephone payments, the creditor is 
not required to treat a payment made by that method on the next 
business day as timely, even if it does not accept mailed payments on 
the due date.
    (e) Limitations on fees related to method of payment. For credit 
card accounts under an open-end (not home-secured) consumer credit 
plan, a creditor may not impose a separate fee to allow consumers to 
make a payment by any method, such as mail, electronic, or telephone 
payments, unless such payment method involves an expedited service by a 
customer service representative of the creditor. For purposes of 
paragraph (e) of this section, the term ``creditor'' includes a third 
party that collects, receives, or processes payments on behalf of a 
creditor.
    (f) Changes by card issuer. If a card issuer makes a material 
change in the address for receiving payments or procedures for handling 
payments, and such change causes a material delay in the crediting of a 
payment to the consumer's account during the 60-day period following 
the date on which such change took effect, the card issuer may not 
impose any late fee or finance charge for a late payment on the credit 
card account during the 60-day period following the date on which the 
change took effect.


Sec.  1026.11  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.
    (c) Timely settlement of estate debts. (1) General rule. (i) 
Reasonable policies and procedures required. For credit card accounts 
under an open-end (not home-secured) consumer credit plan, card issuers 
must adopt reasonable written policies and procedures designed to 
ensure that an administrator of an estate of a deceased accountholder 
can determine the amount of and pay any balance on the account in a 
timely manner.
    (ii) Application to joint accounts. Paragraph (c) of this section 
does not apply to the account of a deceased consumer if a joint 
accountholder remains on the account.
    (2) Timely statement of balance. (i) Requirement. Upon request by 
the administrator of an estate, a card issuer must provide the 
administrator with the amount of the balance on a deceased consumer's 
account in a timely manner.
    (ii) Safe harbor. For purposes of paragraph (c)(2)(i) of this 
section, providing the amount of the balance on the account within 30 
days of receiving the request is deemed to be timely.
    (3) Limitations after receipt of request from administrator. (i) 
Limitation on

[[Page 79791]]

fees and increases in annual percentage rates. After receiving a 
request from the administrator of an estate for the amount of the 
balance on a deceased consumer's account, a card issuer must not impose 
any fees on the account (such as a late fee, annual fee, or over-the-
limit fee) or increase any annual percentage rate, except as provided 
by Sec.  1026.55(b)(2).
    (ii) Limitation on trailing or residual interest. A card issuer 
must waive or rebate any additional finance charge due to a periodic 
interest rate if payment in full of the balance disclosed pursuant to 
paragraph (c)(2) of this section is received within 30 days after 
disclosure.


Sec.  1026.12  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.
    (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 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.
    (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 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
    (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. (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.
    (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 in the 
same state as the cardholder's current designated address or, if not 
within the same state, within 100 miles from that address.
    (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.  
1026.13(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

[[Page 79792]]

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 1026) or Regulation E (12 
CFR part 1005) applies in instances involving both credit and 
electronic fund transfer aspects, refer to Regulation E, 12 CFR 
1005.12(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.


Sec.  1026.13  Billing error resolution.

    (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.  1026.7(a)(2) or (b)(2), as applicable, and 1026.8.
    (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. A billing error notice is a written 
notice from a consumer that:
    (1) Is received by a creditor at the address disclosed under Sec.  
1026.7(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:
    (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). 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.
    (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 15 U.S.C. 1666(e) 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, a creditor 
determines that no billing error occurred or that a different billing 
error occurred from that asserted, the creditor

[[Page 79793]]

shall within the time limits in paragraph (c)(2) of this section:
    (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.  1026.6(a)(1) 
or (b)(2)(v), as applicable, and Sec.  1026.7(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.  
1026.6(a)(1) or (b)(2)(v), as applicable, and Sec.  1026.7(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 1005.11 governing 
error resolution rather than those of paragraphs (a), (b), (c), (e), 
(f), and (h) of this section.


Sec.  1026.14  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. An error in disclosure of the annual 
percentage rate or finance charge shall not, in itself, be considered a 
violation of this part if:
    (1) The error resulted from a corresponding error in a calculation 
tool used in good faith by the creditor; and
    (2) Upon discovery of the error, the creditor promptly discontinues 
use of that calculation tool for disclosure purposes, and notifies the 
Bureau 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.  1026.60, 1026.40, 
1026.6, 1026.7(a)(4) or (b)(4), 1026.9, 1026.15, 1026.16, 1026.26, 
1026.55, and 1026.56 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 credit plans secured by a 
consumer's dwelling. A creditor offering an open-end plan subject to 
the requirements of Sec.  1026.40 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.  1026.7(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 and multiplying the quotient (expressed as a 
percentage) by the number of billing cycles in a year. 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.
    (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, 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. 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.

[[Page 79794]]

    (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.


Sec.  1026.15  Right of rescission.

    (a) Consumer's right to rescind. (1)(i) Except as provided in 
paragraph (a)(1)(ii) of this section, in a credit plan in which a 
security interest is or will be retained or acquired in a consumer's 
principal dwelling, each consumer whose ownership interest is or will 
be subject to the security interest shall have the right to rescind: 
each credit extension made under the plan; the plan when the plan is 
opened; a security interest when added or increased to secure an 
existing plan; and the increase when a credit limit on the plan is 
increased.
    (ii) As provided in section 125(e) of the Act, the consumer does 
not have the right to rescind each credit extension made under the plan 
if such extension is made in accordance with a previously established 
credit limit for the plan.
    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram, or other means of written 
communication. Notice is considered given when mailed, or when filed 
for telegraphic transmission, or, if sent by other means, when 
delivered to the creditor's designated place of business.
    (3) The consumer may exercise the right to rescind until midnight 
of the third business day following the occurrence described in 
paragraph (a)(1) of this section that gave rise to the right of 
rescission, delivery of the notice required by paragraph (b) of this 
section, or delivery of all material disclosures, whichever occurs 
last. If the required notice and material disclosures are not 
delivered, the right to rescind shall expire 3 years after the 
occurrence giving rise to the right of rescission, or upon transfer of 
all of the consumer's interest in the property, or upon sale of the 
property, whichever occurs first. In the case of certain administrative 
proceedings, the rescission period shall be extended in accordance with 
section 125(f) of the Act. The term material disclosures means the 
information that must be provided to satisfy the requirements in Sec.  
1026.6 with regard to the method of determining the finance charge and 
the balance upon which a finance charge will be imposed, the annual 
percentage rate, the amount or method of determining the amount of any 
membership or participation fee that may be imposed as part of the 
plan, and the payment information described in Sec.  1026.40(d)(5)(i) 
and (ii) that is required under Sec.  1026.6(e)(2).
    (4) When more than one consumer has the right to rescind, the 
exercise of the right by one consumer shall be effective as to all 
consumers.
    (b) Notice of right to rescind. In any transaction or occurrence 
subject to rescission, a creditor shall deliver two copies of the 
notice of the right to rescind to each consumer entitled to rescind 
(one copy to each if the notice is delivered in electronic form in 
accordance with the consumer consent and other applicable provisions of 
the E-Sign Act). The notice shall identify the transaction or 
occurrence and clearly and conspicuously disclose the following:
    (1) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (2) The consumer's right to rescind, as described in paragraph 
(a)(1) of this section.
    (3) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (4) The effects of rescission, as described in paragraph (d) of 
this section.
    (5) The date the rescission period expires.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right to rescind under paragraph (e) of this section, no money shall be 
disbursed other than in escrow, no services shall be performed, and no 
materials delivered until after the rescission period has expired and 
the creditor is reasonably satisfied that the consumer has not 
rescinded. A creditor does not violate this section if a third party 
with no knowledge of the event activating the rescission right does not 
delay in providing materials or services, as long as the debt incurred 
for those materials or services is not secured by the property subject 
to rescission.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void, and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of 
rescission, the creditor shall return any money or property that has 
been given to anyone in connection with the transaction and shall take 
any action necessary to reflect the termination of the security 
interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its 
obligation under paragraph (d)(2) of this section. When the creditor 
has complied with that paragraph, the consumer shall tender the money 
or property to the creditor or, where the latter would be impracticable 
or inequitable, tender its reasonable value. At the consumer's option, 
tender of property may be made at the location of the property or at 
the consumer's residence. Tender of money must be made at the 
creditor's designated place of business. If the creditor does not take 
possession of the money or property within 20 calendar days after the 
consumer's tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d)(2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. The consumer may modify 
or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited.
    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A credit plan in which a state agency is a creditor.


Sec.  1026.16  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.

[[Page 79795]]

    (b) Advertisement of terms that require additional disclosures. (1) 
Any term required to be disclosed under Sec.  1026.6(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.  1026.6(a)(1) or 
(a)(2) set forth affirmatively or negatively in an advertisement for a 
home-equity plan subject to the requirements of Sec.  1026.40 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:
    (i) Any minimum, fixed, transaction, activity or similar charge 
that is a finance charge under Sec.  1026.4 that could be imposed.
    (ii) Any periodic rate that may be applied expressed as an annual 
percentage rate as determined under Sec.  1026.14(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.  1026.6 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.  1026.6(a)(1) or (a)(2) 
or the payment terms of the plan are set forth, affirmatively or 
negatively, in an advertisement for a home-equity plan subject to the 
requirements of Sec.  1026.40, 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.  
1026.14(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. 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:
    (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

[[Page 79796]]

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.  1026.40 or 1026.16(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 and fees. (1) Scope. The requirements of this 
paragraph apply to any advertisement of an open-end (not home-secured) 
plan, including promotional materials accompanying applications or 
solicitations subject to Sec.  1026.60(c) or accompanying applications 
or solicitations subject to Sec.  1026.60(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 a 
promotional rate or promotional fee may be applicable.
    (iv) Promotional fee means a fee required to be disclosed under 
Sec.  1026.6(b)(1) and (2) applicable to an open-end (not home-secured) 
plan, or 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 fee that will be in effect at the end of that period for such plan 
or types of balances or transactions.
    (v) Introductory fee means a promotional fee offered in connection 
with the opening of an account.
    (3) Stating the term ``introductory''. If any annual percentage 
rate or fee that may be applied to the account is an introductory rate 
or introductory fee, the term introductory or intro must be in 
immediate proximity to each listing of the introductory rate or 
introductory fee in a written or electronic advertisement.
    (4) Stating the promotional period and post-promotional rate or 
fee. If any annual percentage rate that may be applied to the account 
is a promotional rate under paragraph (g)(2)(i) of this section or any 
fee that may be applied to the account is a promotional fee under 
paragraph (g)(2)(iv) of this section, the information in paragraphs 
(g)(4)(i) and, as applicable, (g)(4)(ii) or (iii) of this section must 
be stated in a clear and conspicuous manner in the advertisement. If 
the rate or fee is stated in a written or electronic advertisement, the 
information in paragraphs (g)(4)(i) and, as applicable, (g)(4)(ii) or 
(iii) of this section must also be stated in a prominent location 
closely proximate to the first listing of the promotional rate or 
promotional fee.
    (i) When the promotional rate or promotional fee will end;
    (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.  
1026.60(c)(2), 1026.60(d)(3), 1026.60(e)(4), or 1026.16(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; and
    (iii) The fee that will apply after the end of the promotional 
period.
    (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.
    (h) Deferred interest or similar offers. (1) Scope. The 
requirements of this paragraph apply to any advertisement of an open-
end credit plan not subject to Sec.  1026.40, including promotional 
materials accompanying applications or solicitations subject to Sec.  
1026.60(c) or accompanying applications or solicitations subject to 
Sec.  1026.60(e).
    (2) Definitions. ``Deferred interest'' means finance charges, 
accrued on balances or transactions, that a consumer is not obligated 
to pay or that will be waived or refunded to a consumer if those 
balances or transactions are paid in full by a specified date. The 
maximum period from the date the consumer becomes obligated for the 
balance or transaction until the specified date by which the consumer 
must pay the balance or transaction in full in order to avoid finance 
charges, or receive a waiver or refund of finance charges, is the 
``deferred interest period.'' ``Deferred interest'' does not include 
any finance charges the consumer avoids paying in connection with any 
recurring grace period.
    (3) Stating the deferred interest period. If a deferred interest 
offer is advertised, the deferred interest period must be stated in a 
clear and conspicuous manner in the advertisement. If the phrase ``no 
interest'' or similar term regarding the possible avoidance of interest 
obligations under the deferred interest program is stated, the term 
``if paid in

[[Page 79797]]

full'' must also be stated in a clear and conspicuous manner preceding 
the disclosure of the deferred interest period in the advertisement. If 
the deferred interest offer is included in a written or electronic 
advertisement, the deferred interest period and, if applicable, the 
term ``if paid in full'' must also be stated in immediate proximity to 
each statement of ``no interest,'' ``no payments,'' ``deferred 
interest,'' ``same as cash,'' or similar term regarding interest or 
payments during the deferred interest period.
    (4) Stating the terms of the deferred interest or similar offer. If 
any deferred interest offer is advertised, the information in 
paragraphs (h)(4)(i) and (h)(4)(ii) of this section must be stated in 
the advertisement, in language similar to Sample G-24 in Appendix G to 
this part. If the deferred interest offer is included in a written or 
electronic advertisement, the information in paragraphs (h)(4)(i) and 
(h)(4)(ii) of this section must also be stated in a prominent location 
closely proximate to the first statement of ``no interest,'' ``no 
payments,'' ``deferred interest,'' ``same as cash,'' or similar term 
regarding interest or payments during the deferred interest period.
    (i) A statement that interest will be charged from the date the 
consumer becomes obligated for the balance or transaction subject to 
the deferred interest offer if the balance or transaction is not paid 
in full within the deferred interest period; and
    (ii) A statement, if applicable, that interest will be charged from 
the date the consumer incurs the balance or transaction subject to the 
deferred interest offer if the account is in default before the end of 
the deferred interest period.
    (5) Envelope excluded. The requirements in paragraph (h)(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.

Subpart C--Closed-End Credit


Sec.  1026.17  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the 
disclosures required by this subpart clearly and conspicuously in 
writing, in a form that the consumer may keep. 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.  1026.17(g), 1026.19(b), and 1026.24 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. The disclosures shall be grouped together, shall be 
segregated from everything else, and shall not contain any information 
not directly related to the disclosures required under Sec.  1026.18 or 
Sec.  1026.47. The disclosures may include an acknowledgment of 
receipt, the date of the transaction, and the consumer's name, address, 
and account number. The following disclosures may be made together with 
or separately from other required disclosures: the creditor's identity 
under Sec.  1026.18(a), the variable rate example under Sec.  
1026.18(f)(1)(iv), insurance or debt cancellation under Sec.  
1026.18(n), and certain security interest charges under Sec.  
1026.18(o). The itemization of the amount financed under Sec.  
1026.18(c)(1) must be separate from the other disclosures under Sec.  
1026.18, except for private education loan disclosures made in 
compliance with Sec.  1026.47.
    (2) Except for private education loan disclosures made in 
compliance with Sec.  1026.47, the terms ``finance charge'' and 
``annual percentage rate,'' when required to be disclosed under Sec.  
1026.18(d) and (e) together with a corresponding amount or percentage 
rate, shall be more conspicuous than any other disclosure, except the 
creditor's identity under Sec.  1026.18(a). For private education loan 
disclosures made in compliance with Sec.  1026.47, the term ``annual 
percentage rate,'' and the corresponding percentage rate must be less 
conspicuous than the term ``finance charge'' and corresponding amount 
under Sec.  1026.18(d), the interest rate under Sec. Sec.  
1026.47(b)(1)(i) and (c)(1), and the notice of the right to cancel 
under Sec.  1026.47(c)(4).
    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain residential mortgage 
transactions, special timing requirements are set forth in Sec.  
1026.19(a). In certain variable-rate transactions, special timing 
requirements for variable-rate disclosures are set forth in Sec.  
1026.19(b) and Sec.  1026.20(c). For private education loan disclosures 
made in compliance with Sec.  1026.47, special timing requirements are 
set forth in Sec.  1026.46(d). In certain transactions involving mail 
or telephone orders or a series of sales, the timing of disclosures may 
be delayed in accordance with paragraphs (g) and (h) of this section.
    (c) Basis of disclosures and use of estimates. (1) The disclosures 
shall reflect the terms of the legal obligation between the parties.
    (2)(i) If any information necessary for an accurate disclosure is 
unknown to the creditor, the creditor shall make the disclosure based 
on the best information reasonably available at the time the disclosure 
is provided to the consumer, and shall state clearly that the 
disclosure is an estimate.
    (ii) For a transaction in which a portion of the interest is 
determined on a per-diem basis and collected at consummation, any 
disclosure affected by the per-diem interest shall be considered 
accurate if the disclosure is based on the information known to the 
creditor at the time that the disclosure documents are prepared for 
consummation of the transaction.
    (3) The creditor may disregard the effects of the following in 
making calculations and disclosures.
    (i) That payments must be collected in whole cents.
    (ii) That dates of scheduled payments and advances may be changed 
because the scheduled date is not a business day.
    (iii) That months have different numbers of days.
    (iv) The occurrence of leap year.
    (4) In making calculations and disclosures, the creditor may 
disregard any irregularity in the first period that falls within the 
limits described below and any payment schedule irregularity that 
results from the irregular first period:
    (i) For transactions in which the term is less than 1 year, a first 
period not more than 6 days shorter or 13 days longer than a regular 
period;
    (ii) For transactions in which the term is at least 1 year and less 
than 10 years, a first period not more than 11 days shorter or 21 days 
longer than a regular period; and
    (iii) For transactions in which the term is at least 10 years, a 
first period shorter than or not more than 32 days longer than a 
regular period.
    (5) If an obligation is payable on demand, the creditor shall make 
the disclosures based on an assumed maturity of 1 year. If an alternate 
maturity date is stated in the legal obligation between the parties, 
the disclosures shall be based on that date.
    (6)(i) A series of advances under an agreement to extend credit up 
to a certain amount may be considered as one transaction.
    (ii) When a multiple-advance loan to finance the construction of a 
dwelling

[[Page 79798]]

may be permanently financed by the same creditor, the construction 
phase and the permanent phase may be treated as either one transaction 
or more than one transaction.
    (d) Multiple creditors; multiple consumers. If a transaction 
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 part 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 obligation. If the 
transaction is rescindable under Sec.  1026.23, however, the 
disclosures shall be made to each consumer who has the right to 
rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the 
required disclosures, the inaccuracy is not a violation of this part, 
although new disclosures may be required under paragraph (f) of this 
section, Sec.  1026.19, Sec.  1026.20, or Sec.  1026.48(c)(4).
    (f) Early disclosures. Except for private education loan 
disclosures made in compliance with Sec.  1026.47, if disclosures 
required by this subpart are given before the date of consummation of a 
transaction and a subsequent event makes them inaccurate, the creditor 
shall disclose before consummation (subject to the provisions of Sec.  
1026.19(a)(2) and Sec.  1026.19(a)(5)(iii)):
    (1) Any changed term unless the term was based on an estimate in 
accordance with Sec.  1026.17(c)(2) and was labeled an estimate;
    (2) All changed terms, if the annual percentage rate at the time of 
consummation varies from the annual percentage rate disclosed earlier 
by more than \1/8\ of 1 percentage point in a regular transaction, or 
more than \1/4\ of 1 percentage point in an irregular transaction, as 
defined in Sec.  1026.22(a).
    (g) Mail or telephone orders--delay in disclosures. Except for 
private education loan disclosures made in compliance with Sec.  
1026.47, if a creditor receives a purchase order or a request for an 
extension of credit by mail, telephone, or facsimile machine without 
face-to-face or direct telephone solicitation, the creditor may delay 
the disclosures until the due date of the first payment, if the 
following information for representative amounts or ranges of credit is 
made available in written form or in electronic form to the consumer or 
to the public before the actual purchase order or request:
    (1) The cash price or the principal loan amount.
    (2) The total sale price.
    (3) The finance charge.
    (4) The annual percentage rate, and if the rate may increase after 
consummation, the following disclosures:
    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (5) The terms of repayment.
    (h) Series of sales--delay in disclosures. If a credit sale is one 
of a series made under an agreement providing that subsequent sales may 
be added to an outstanding balance, the creditor may delay the required 
disclosures until the due date of the first payment for the current 
sale, if the following two conditions are met:
    (1) The consumer has approved in writing the annual percentage rate 
or rates, the range of balances to which they apply, and the method of 
treating any unearned finance charge on an existing balance.
    (2) The creditor retains no security interest in any property after 
the creditor has received payments equal to the cash price and any 
finance charge attributable to the sale of that property. For purposes 
of this provision, in the case of items purchased on different dates, 
the first purchased is deemed the first item paid for; in the case of 
items purchased on the same date, the lowest priced is deemed the first 
item paid for.
    (i) Interim student credit extensions. For transactions involving 
an interim credit extension under a student credit program for which an 
application is received prior to the mandatory compliance date of 
Sec. Sec.  1026.46, 47, and 48, the creditor need not make the 
following disclosures: the finance charge under Sec.  1026.18(d), the 
payment schedule under Sec.  1026.18(g), the total of payments under 
Sec.  1026.18(h), or the total sale price under Sec.  1026.18(j) at the 
time the credit is actually extended. The creditor must make complete 
disclosures at the time the creditor and consumer agree upon the 
repayment schedule for the total obligation. At that time, a new set of 
disclosures must be made of all applicable items under Sec.  1026.18.


Sec.  1026.18  Content of disclosures.

    For each transaction, the creditor shall disclose the following 
information as applicable:
    (a) Creditor. The identity of the creditor making the disclosures.
    (b) Amount financed. The amount financed, using that term, and a 
brief description such as the amount of credit provided to you or on 
your behalf. The amount financed is calculated by:
    (1) Determining the principal loan amount or the cash price 
(subtracting any downpayment);
    (2) Adding any other amounts that are financed by the creditor and 
are not part of the finance charge; and
    (3) Subtracting any prepaid finance charge.
    (c) Itemization of amount financed. (1) Except as provided in 
paragraphs (c)(2) and (c)(3) of this section, a separate written 
itemization of the amount financed, including:
    (i) The amount of any proceeds distributed directly to the 
consumer.
    (ii) The amount credited to the consumer's account with the 
creditor.
    (iii) Any amounts paid to other persons by the creditor on the 
consumer's behalf. The creditor shall identify those persons. The 
following payees may be described using generic or other general terms 
and need not be further identified: public officials or government 
agencies, credit reporting agencies, appraisers, and insurance 
companies.
    (iv) The prepaid finance charge.
    (2) The creditor need not comply with paragraph (c)(1) of this 
section if the creditor provides a statement that the consumer has the 
right to receive a written itemization of the amount financed, together 
with a space for the consumer to indicate whether it is desired, and 
the consumer does not request it.
    (3) Good faith estimates of settlement costs provided for 
transactions subject to the Real Estate Settlement Procedures Act (12 
U.S.C. 2601 et seq.) may be substituted for the disclosures required by 
paragraph (c)(1) of this section.
    (d) Finance charge. The finance charge, using that term, and a 
brief description such as ``the dollar amount the credit will cost 
you.''
    (1) Mortgage loans. In a transaction secured by real property or a 
dwelling, the disclosed finance charge and other disclosures affected 
by the disclosed finance charge (including the amount financed and the 
annual percentage rate) shall be treated as accurate if the amount 
disclosed as the finance charge:
    (i) Is understated by no more than $100; or
    (ii) Is greater than the amount required to be disclosed.
    (2) Other credit. In any other transaction, the amount disclosed as 
the finance charge shall be treated as accurate if, in a transaction 
involving an amount financed of $1,000 or less, it is not more than $5 
above or below the amount required to be disclosed; or, in a 
transaction involving an amount financed of more than $1,000, it is not

[[Page 79799]]

more than $10 above or below the amount required to be disclosed.
    (e) Annual percentage rate. The annual percentage rate, using that 
term, and a brief description such as ``the cost of your credit as a 
yearly rate.'' For any transaction involving a finance charge of $5 or 
less on an amount financed of $75 or less, or a finance charge of $7.50 
or less on an amount financed of more than $75, the creditor need not 
disclose the annual percentage rate.
    (f) Variable rate. (1) Except as provided in paragraph (f)(3) of 
this section, if the annual percentage rate may increase after 
consummation in a transaction not secured by the consumer's principal 
dwelling or in a transaction secured by the consumer's principal 
dwelling with a term of one year or less, the following disclosures:
    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (iv) An example of the payment terms that would result from an 
increase.
    (2) If the annual percentage rate may increase after consummation 
in a transaction secured by the consumer's principal dwelling with a 
term greater than one year, the following disclosures:
    (i) The fact that the transaction contains a variable-rate feature.
    (ii) A statement that variable-rate disclosures have been provided 
earlier.
    (3) Information provided in accordance with Sec. Sec.  
1026.18(f)(2) and 1026.19(b) may be substituted for the disclosures 
required by paragraph (f)(1) of this section.
    (g) Payment schedule. Other than for a transaction that is subject 
to paragraph (s) of this section, the number, amounts, and timing of 
payments scheduled to repay the obligation.
    (1) In a demand obligation with no alternate maturity date, the 
creditor may comply with this paragraph by disclosing the due dates or 
payment periods of any scheduled interest payments for the first year.
    (2) In a transaction in which a series of payments varies because a 
finance charge is applied to the unpaid principal balance, the creditor 
may comply with this paragraph by disclosing the following information:
    (i) The dollar amounts of the largest and smallest payments in the 
series.
    (ii) A reference to the variations in the other payments in the 
series.
    (h) Total of payments. The total of payments, using that term, and 
a descriptive explanation such as ``the amount you will have paid when 
you have made all scheduled payments.'' In any transaction involving a 
single payment, the creditor need not disclose the total of payments.
    (i) Demand feature. If the obligation has a demand feature, that 
fact shall be disclosed. When the disclosures are based on an assumed 
maturity of 1 year as provided in Sec.  1026.17(c)(5), that fact shall 
also be disclosed.
    (j) Total sale price. In a credit sale, the total sale price, using 
that term, and a descriptive explanation (including the amount of any 
downpayment) such as ``the total price of your purchase on credit, 
including your downpayment of $----.'' The total sale price is the sum 
of the cash price, the items described in paragraph (b)(2), and the 
finance charge disclosed under paragraph (d) of this section.
    (k) Prepayment. (1) When an obligation includes a finance charge 
computed from time to time by application of a rate to the unpaid 
principal balance, a statement indicating whether or not a penalty may 
be imposed if the obligation is prepaid in full.
    (2) When an obligation includes a finance charge other than the 
finance charge described in paragraph (k)(1) of this section, a 
statement indicating whether or not the consumer is entitled to a 
rebate of any finance charge if the obligation is prepaid in full.
    (l) Late payment. Any dollar or percentage charge that may be 
imposed before maturity due to a late payment, other than a deferral or 
extension charge.
    (m) Security interest. The fact that the creditor has or will 
acquire a security interest in the property purchased as part of the 
transaction, or in other property identified by item or type.
    (n) Insurance and debt cancellation. The items required by Sec.  
1026.4(d) in order to exclude certain insurance premiums and debt 
cancellation fees from the finance charge.
    (o) Certain security interest charges. The disclosures required by 
Sec.  1026.4(e) in order to exclude from the finance charge certain 
fees prescribed by law or certain premiums for insurance in lieu of 
perfecting a security interest.
    (p) Contract reference. A statement that the consumer should refer 
to the appropriate contract document for information about nonpayment, 
default, the right to accelerate the maturity of the obligation, and 
prepayment rebates and penalties. At the creditor's option, the 
statement may also include a reference to the contract for further 
information about security interests and, in a residential mortgage 
transaction, about the creditor's policy regarding assumption of the 
obligation.
    (q) Assumption policy. In a residential mortgage transaction, a 
statement whether or not a subsequent purchaser of the dwelling from 
the consumer may be permitted to assume the remaining obligation on its 
original terms.
    (r) Required deposit. If the creditor requires the consumer to 
maintain a deposit as a condition of the specific transaction, a 
statement that the annual percentage rate does not reflect the effect 
of the required deposit. A required deposit need not include, for 
example:
    (1) An escrow account for items such as taxes, insurance or 
repairs;
    (2) A deposit that earns not less than 5 percent per year; or
    (3) Payments under a Morris Plan.
    (s) Interest rate and payment summary for mortgage transactions. 
For a closed-end transaction secured by real property or a dwelling, 
other than a transaction secured by a consumer's interest in a 
timeshare plan described in 11 U.S.C. 101(53D), the creditor shall 
disclose the following information about the interest rate and 
payments:
    (1) Form of disclosures. The information in paragraphs (s)(2)-(4) 
of this section shall be in the form of a table, with no more than five 
columns, with headings and format substantially similar to Model Clause 
H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. The table 
shall contain only the information required in paragraphs (s)(2)-(4) of 
this section, shall be placed in a prominent location, and shall be in 
a minimum 10-point font.
    (2) Interest rates. (i) Amortizing loans. (A) For a fixed-rate 
mortgage, the interest rate at consummation.
    (B) For an adjustable-rate or step-rate mortgage:
    (1) The interest rate at consummation and the period of time until 
the first interest rate adjustment may occur, labeled as the 
``introductory rate and monthly payment'';
    (2) The maximum interest rate that may apply during the first five 
years after the date on which the first regular periodic payment will 
be due and the earliest date on which that rate may apply, labeled as 
``maximum during first five years''; and
    (3) The maximum interest rate that may apply during the life of the 
loan and the earliest date on which that rate may apply, labeled as 
``maximum ever.''
    (C) If the loan provides for payment increases as described in 
paragraph (s)(3)(i)(B) of this section, the interest rate in effect at 
the time the first such payment increase is scheduled to occur and the 
date on which the increase will occur, labeled as ``first adjustment'' 
if the loan is an adjustable-rate mortgage or, otherwise, labeled as 
``first increase.''
    (ii) Negative amortization loans. For a negative amortization loan:

[[Page 79800]]

    (A) The interest rate at consummation and, if it will adjust after 
consummation, the length of time until it will adjust, and the label 
``introductory'' or ``intro'';
    (B) The maximum interest rate that could apply when the consumer 
must begin making fully amortizing payments under the terms of the 
legal obligation;
    (C) If the minimum required payment will increase before the 
consumer must begin making fully amortizing payments, the maximum 
interest rate that could apply at the time of the first payment 
increase and the date the increase is scheduled to occur; and
    (D) If a second increase in the minimum required payment may occur 
before the consumer must begin making fully amortizing payments, the 
maximum interest rate that could apply at the time of the second 
payment increase and the date the increase is scheduled to occur.
    (iii) Introductory rate disclosure for amortizing adjustable-rate 
mortgages. For an amortizing adjustable-rate mortgage, if the interest 
rate at consummation is less than the fully-indexed rate, placed in a 
box directly beneath the table required by paragraph (s)(1) of this 
section, in a format substantially similar to Model Clause H-4(I) in 
Appendix H to this part:
    (A) The interest rate that applies at consummation and the period 
of time for which it applies;
    (B) A statement that, even if market rates do not change, the 
interest rate will increase at the first adjustment and a designation 
of the place in sequence of the month or year, as applicable, of such 
rate adjustment; and
    (C) The fully-indexed rate.
    (3) Payments for amortizing loans. (i) Principal and interest 
payments. If all periodic payments will be applied to accrued interest 
and principal, for each interest rate disclosed under paragraph 
(s)(2)(i) of this section:
    (A) The corresponding periodic principal and interest payment, 
labeled as ``principal and interest;''
    (B) If the periodic payment may increase without regard to an 
interest rate adjustment, the payment that corresponds to the first 
such increase and the earliest date on which the increase could occur;
    (C) If an escrow account will be established, an estimate of the 
amount of taxes and insurance, including any mortgage insurance, 
payable with each periodic payment; and
    (D) The sum of the amounts disclosed under paragraphs (s)(3)(i)(A) 
and (C) of this section or (s)(3)(i)(B) and (C) of this section, as 
applicable, labeled as ``total estimated monthly payment.''
    (ii) Interest-only payments. If the loan is an interest-only loan, 
for each interest rate disclosed under paragraph (s)(2)(i) of this 
section, the corresponding periodic payment and:
    (A) If the payment will be applied to only accrued interest, the 
amount applied to interest, labeled as ``interest payment,'' and a 
statement that none of the payment is being applied to principal;
    (B) If the payment will be applied to accrued interest and 
principal, an itemization of the amount of the first such payment 
applied to accrued interest and to principal, labeled as ``interest 
payment'' and ``principal payment,'' respectively;
    (C) The escrow information described in paragraph (s)(3)(i)(C) of 
this section; and
    (D) The sum of all amounts required to be disclosed under 
paragraphs (s)(3)(ii)(A) and (C) of this section or (s)(3)(ii)(B) and 
(C) of this section, as applicable, labeled as ``total estimated 
monthly payment.''
    (4) Payments for negative amortization loans. For negative 
amortization loans:
    (i)(A) The minimum periodic payment required until the first 
payment increase or interest rate increase, corresponding to the 
interest rate disclosed under paragraph (s)(2)(ii)(A) of this section;
    (B) The minimum periodic payment that would be due at the first 
payment increase and the second, if any, corresponding to the interest 
rates described in paragraphs (s)(2)(ii)(C) and (D) of this section; 
and
    (C) A statement that the minimum payment pays only some interest, 
does not repay any principal, and will cause the loan amount to 
increase;
    (ii) The fully amortizing periodic payment amount at the earliest 
time when such a payment must be made, corresponding to the interest 
rate disclosed under paragraph (s)(2)(ii)(B) of this section; and
    (iii) If applicable, in addition to the payments in paragraphs 
(s)(4)(i) and (ii) of this section, for each interest rate disclosed 
under paragraph (s)(2)(ii) of this section, the amount of the fully 
amortizing periodic payment, labeled as the ``full payment option,'' 
and a statement that these payments pay all principal and all accrued 
interest.
    (5) Balloon payments. (i) Except as provided in paragraph 
(s)(5)(ii) of this section, if the transaction will require a balloon 
payment, defined as a payment that is more than two times a regular 
periodic payment, the balloon payment shall be disclosed separately 
from other periodic payments disclosed in the table under this 
paragraph (s), outside the table and in a manner substantially similar 
to Model Clause H-4(J) in Appendix H to this part.
    (ii) If the balloon payment is scheduled to occur at the same time 
as another payment required to be disclosed in the table pursuant to 
paragraph (s)(3) or (s)(4) of this section, then the balloon payment 
must be disclosed in the table.
    (6) Special disclosures for loans with negative amortization. For a 
negative amortization loan, the following information, in close 
proximity to the table required in paragraph (s)(1) of this section, 
with headings, content, and format substantially similar to Model 
Clause H-4(G) in Appendix H to this part:
    (i) The maximum interest rate, the shortest period of time in which 
such interest rate could be reached, the amount of estimated taxes and 
insurance included in each payment disclosed, and a statement that the 
loan offers payment options, two of which are shown.
    (ii) The dollar amount of the increase in the loan's principal 
balance if the consumer makes only the minimum required payments for 
the maximum possible time and the earliest date on which the consumer 
must begin making fully amortizing payments, assuming that the maximum 
interest rate is reached at the earliest possible time.
    (7) Definitions. For purposes of this Sec.  1026.18(s):
    (i) The term ``adjustable-rate mortgage'' means a transaction 
secured by real property or a dwelling for which the annual percentage 
rate may increase after consummation.
    (ii) The term ``step-rate mortgage'' means a transaction secured by 
real property or a dwelling for which the interest rate will change 
after consummation, and the rates that will apply and the periods for 
which they will apply are known at consummation.
    (iii) The term ``fixed-rate mortgage'' means a transaction secured 
by real property or a dwelling that is not an adjustable-rate mortgage 
or a step-rate mortgage.
    (iv) The term ``interest-only'' means that, under the terms of the 
legal obligation, one or more of the periodic payments may be applied 
solely to accrued interest and not to loan principal; an ``interest-
only loan'' is a loan that permits interest-only payments.
    (v) The term ``amortizing loan'' means a loan in which payment of 
the periodic payments does not result in an increase in the principal 
balance under the terms of the legal obligation; the term

[[Page 79801]]

``negative amortization'' means payment of periodic payments that will 
result in an increase in the principal balance under the terms of the 
legal obligation; the term ``negative amortization loan'' means a loan, 
other than a reverse mortgage subject to Sec.  1026.33, that provides 
for a minimum periodic payment that covers only a portion of the 
accrued interest, resulting in negative amortization.
    (vi) The term ``fully-indexed rate'' means the interest rate 
calculated using the index value and margin at the time of 
consummation.
    (t) `` No-guarantee-to-refinance'' statement. (1) Disclosure. For a 
closed-end transaction secured by real property or a dwelling, other 
than a transaction secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D), the creditor shall disclose a 
statement that there is no guarantee the consumer can refinance the 
transaction to lower the interest rate or periodic payments.
    (2) Format. The statement required by paragraph (t)(1) of this 
section must be in a form substantially similar to Model Clause H-4(K) 
in Appendix H to this part.


Sec.  1026.19  Certain mortgage and variable-rate transactions.

    (a) Mortgage transactions subject to RESPA. (1)(i) Time of 
disclosures. In a mortgage transaction subject to the Real Estate 
Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is secured by 
the consumer's dwelling, other than a home equity line of credit 
subject to Sec.  1026.40 or mortgage transaction subject to paragraph 
(a)(5) of this section, the creditor shall make good faith estimates of 
the disclosures required by Sec.  1026.18 and shall deliver or place 
them in the mail not later than the third business day after the 
creditor receives the consumer's written application.
    (ii) Imposition of fees. Except as provided in paragraph 
(a)(1)(iii) of this section, neither a creditor nor any other person 
may impose a fee on a consumer in connection with the consumer's 
application for a mortgage transaction subject to paragraph (a)(1)(i) 
of this section before the consumer has received the disclosures 
required by paragraph (a)(1)(i) of this section. If the disclosures are 
mailed to the consumer, the consumer is considered to have received 
them three business days after they are mailed.
    (iii) Exception to fee restriction. A creditor or other person may 
impose a fee for obtaining the consumer's credit history before the 
consumer has received the disclosures required by paragraph (a)(1)(i) 
of this section, provided the fee is bona fide and reasonable in 
amount.
    (2) Waiting periods for early disclosures and corrected 
disclosures. (i) The creditor shall deliver or place in the mail the 
good faith estimates required by paragraph (a)(1)(i) of this section 
not later than the seventh business day before consummation of the 
transaction.
    (ii) If the annual percentage rate disclosed under paragraph 
(a)(1)(i) of this section becomes inaccurate, as defined in Sec.  
1026.22, the creditor shall provide corrected disclosures with all 
changed terms. The consumer must receive the corrected disclosures no 
later than three business days before consummation. If the corrected 
disclosures are mailed to the consumer or delivered to the consumer by 
means other than delivery in person, the consumer is deemed to have 
received the corrected disclosures three business days after they are 
mailed or delivered.
    (3) Consumer's waiver of waiting period before consummation. If the 
consumer determines that the extension of credit is needed to meet a 
bona fide personal financial emergency, the consumer may modify or 
waive the seven-business-day waiting period or the three-business-day 
waiting period required by paragraph (a)(2) of this section, after 
receiving the disclosures required by Sec.  1026.18. To modify or waive 
a waiting period, the consumer shall give the creditor a dated written 
statement that describes the emergency, specifically modifies or waives 
the waiting period, and bears the signature of all the consumers who 
are primarily liable on the legal obligation. Printed forms for this 
purpose are prohibited.
    (4) Notice. Disclosures made pursuant to paragraph (a)(1) or 
paragraph (a)(2) of this section shall contain the following statement: 
``You are not required to complete this agreement merely because you 
have received these disclosures or signed a loan application.'' The 
disclosure required by this paragraph shall be grouped together with 
the disclosures required by paragraphs (a)(1) or (a)(2) of this 
section.
    (5) Timeshare plans. In a mortgage transaction subject to the Real 
Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is 
secured by a consumer's interest in a timeshare plan described in 11 
U.S.C. 101(53(D)):
    (i) The requirements of paragraphs (a)(1) through (a)(4) of this 
section do not apply;
    (ii) The creditor shall make good faith estimates of the 
disclosures required by Sec.  1026.18 before consummation, or shall 
deliver or place them in the mail not later than three business days 
after the creditor receives the consumer's written application, 
whichever is earlier; and
    (iii) If the annual percentage rate at the time of consummation 
varies from the annual percentage rate disclosed under paragraph 
(a)(5)(ii) of this section by more than \1/8\ of 1 percentage point in 
a regular transaction or more than \1/4\ of 1 percentage point in an 
irregular transaction, as defined in Sec.  1026.22, the creditor shall 
disclose all the changed terms no later than consummation or 
settlement.
    (b) Certain variable-rate transactions. Except as provided in 
paragraph (d) of this section, if the annual percentage rate may 
increase after consummation in a transaction secured by the consumer's 
principal dwelling with a term greater than one year, the following 
disclosures must be provided at the time an application form is 
provided or before the consumer pays a non-refundable fee, whichever is 
earlier (except that the disclosures may be delivered or placed in the 
mail not later than three business days following receipt of a 
consumer's application when the application reaches the creditor by 
telephone, or through an intermediary agent or broker):
    (1) The booklet titled Consumer Handbook on Adjustable Rate 
Mortgages, or a suitable substitute.
    (2) A loan program disclosure for each variable-rate program in 
which the consumer expresses an interest. The following disclosures, as 
applicable, shall be provided:
    (i) The fact that the interest rate, payment, or term of the loan 
can change.
    (ii) The index or formula used in making adjustments, and a source 
of information about the index or formula.
    (iii) An explanation of how the interest rate and payment will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (iv) A statement that the consumer should ask about the current 
margin value and current interest rate.
    (v) The fact that the interest rate will be discounted, and a 
statement that the consumer should ask about the amount of the interest 
rate discount.
    (vi) The frequency of interest rate and payment changes.
    (vii) Any rules relating to changes in the index, interest rate, 
payment amount, and outstanding loan balance including, for example, an 
explanation of interest rate or payment limitations, negative 
amortization, and interest rate carryover.
    (viii) At the option of the creditor, either of the following:

[[Page 79802]]

    (A) A historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program disclosure. The example shall reflect the most recent 15 years 
of index values. The example shall reflect all significant loan program 
terms, such as negative amortization, interest rate carryover, interest 
rate discounts, and interest rate and payment limitations, that would 
have been affected by the index movement during the period.
    (B) The maximum interest rate and payment for a $10,000 loan 
originated at the initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure assuming the 
maximum periodic increases in rates and payments under the program; and 
the initial interest rate and payment for that loan and a statement 
that the periodic payment may increase or decrease substantially 
depending on changes in the rate.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on either:
    (A) The most recent payment shown in the historical example in 
paragraph (b)(2)(viii)(A) of this section; or
    (B) The initial interest rate used to calculate the maximum 
interest rate and payment in paragraph (b)(2)(viii)(B) of this section.
    (x) The fact that the loan program contains a demand feature.
    (xi) The type of information that will be provided in notices of 
adjustments and the timing of such notices.
    (xii) A statement that disclosure forms are available for the 
creditor's other variable-rate loan programs.
    (c) Electronic disclosures. For an application that is accessed by 
the consumer in electronic form, the disclosures required by paragraph 
(b) of this section may be provided to the consumer in electronic form 
on or with the application.
    (d) Information provided in accordance with variable-rate 
regulations of other Federal agencies may be substituted for the 
disclosures required by paragraph (b) of this section.


Sec.  1026.20  Subsequent disclosure requirements.

    (a) Refinancings. A refinancing occurs when an existing obligation 
that was subject to this subpart is satisfied and replaced by a new 
obligation undertaken by the same consumer. A refinancing is a new 
transaction requiring new disclosures to the consumer. The new finance 
charge shall include any unearned portion of the old finance charge 
that is not credited to the existing obligation. The following shall 
not be treated as a refinancing:
    (1) A renewal of a single payment obligation with no change in the 
original terms.
    (2) A reduction in the annual percentage rate with a corresponding 
change in the payment schedule.
    (3) An agreement involving a court proceeding.
    (4) A change in the payment schedule or a change in collateral 
requirements as a result of the consumer's default or delinquency, 
unless the rate is increased, or the new amount financed exceeds the 
unpaid balance plus earned finance charge and premiums for continuation 
of insurance of the types described in Sec.  1026.4(d).
    (5) The renewal of optional insurance purchased by the consumer and 
added to an existing transaction, if disclosures relating to the 
initial purchase were provided as required by this subpart.
    (b) Assumptions. An assumption occurs when a creditor expressly 
agrees in writing with a subsequent consumer to accept that consumer as 
a primary obligor on an existing residential mortgage transaction. 
Before the assumption occurs, the creditor shall make new disclosures 
to the subsequent consumer, based on the remaining obligation. If the 
finance charge originally imposed on the existing obligation was an 
add-on or discount finance charge, the creditor need only disclose:
    (1) The unpaid balance of the obligation assumed.
    (2) The total charges imposed by the creditor in connection with 
the assumption.
    (3) The information required to be disclosed under Sec.  
1026.18(k), (l), (m), and (n).
    (4) The annual percentage rate originally imposed on the 
obligation.
    (5) The payment schedule under Sec.  1026.18(g) and the total of 
payments under Sec.  1026.18(h) based on the remaining obligation.
    (c) Variable-rate adjustments. Except as provided in paragraph (d) 
of this section, an adjustment to the interest rate with or without a 
corresponding adjustment to the payment in a variable-rate transaction 
subject to Sec.  1026.19(b) is an event requiring new disclosures to 
the consumer. At least once each year during which an interest rate 
adjustment is implemented without an accompanying payment change, and 
at least 25, but no more than 120, calendar days before a payment at a 
new level is due, the following disclosures, as applicable, must be 
delivered or placed in the mail:
    (1) The current and prior interest rates.
    (2) The index values upon which the current and prior interest 
rates are based.
    (3) The extent to which the creditor has foregone any increase in 
the interest rate.
    (4) The contractual effects of the adjustment, including the 
payment due after the adjustment is made, and a statement of the loan 
balance.
    (5) The payment, if different from that referred to in paragraph 
(c)(4) of this section, that would be required to fully amortize the 
loan at the new interest rate over the remainder of the loan term.
    (d) Information provided in accordance with variable-rate 
subsequent disclosure regulations of other Federal agencies may be 
substituted for the disclosure required by paragraph (c) of this 
section.


Sec.  1026.21  Treatment of credit balances.

    When a credit balance in excess of $1 is created in connection with 
a transaction (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 a consumer), the creditor shall:
    (a) Credit the amount of the credit balance to the consumer's 
account;
    (b) Refund any part of the remaining credit balance, upon the 
written request of the consumer; and
    (c) Make a good faith effort to refund to the consumer by cash, 
check, or money order, or credit to a deposit account of the consumer, 
any part of the credit balance remaining in the account for more than 6 
months, except that 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.


Sec.  1026.22  Determination of annual percentage rate.

    (a) Accuracy of annual percentage rate. (1) The annual percentage 
rate is a measure of the cost of credit, expressed as a yearly rate, 
that relates the amount and timing of value received by the consumer to 
the amount and timing of payments made. The annual percentage rate 
shall be determined in accordance with either the actuarial method or 
the United States Rule method. Explanations, equations and instructions 
for determining the annual

[[Page 79803]]

percentage rate in accordance with the actuarial method are set forth 
in Appendix J to this part. An error in disclosure of the annual 
percentage rate or finance charge shall not, in itself, be considered a 
violation of this part if:
    (i) The error resulted from a corresponding error in a calculation 
tool used in good faith by the creditor; and
    (ii) Upon discovery of the error, the creditor promptly 
discontinues use of that calculation tool for disclosure purposes and 
notifies the Bureau in writing of the error in the calculation tool.
    (2) As a general rule, the annual percentage rate shall be 
considered accurate if it is not more than \1/8\ of 1 percentage point 
above or below the annual percentage rate determined in accordance with 
paragraph (a)(1) of this section.
    (3) In an irregular transaction, the annual percentage rate shall 
be considered accurate if it is not more than \1/4\ of 1 percentage 
point above or below the annual percentage rate determined in 
accordance with paragraph (a)(1) of this section. For purposes of this 
paragraph (a)(3), an irregular transaction is one that includes one or 
more of the following features: multiple advances, irregular payment 
periods, or irregular payment amounts (other than an irregular first 
period or an irregular first or final payment).
    (4) Mortgage loans. If the annual percentage rate disclosed in a 
transaction secured by real property or a dwelling varies from the 
actual rate determined in accordance with paragraph (a)(1) of this 
section, in addition to the tolerances applicable under paragraphs 
(a)(2) and (3) of this section, the disclosed annual percentage rate 
shall also be considered accurate if:
    (i) The rate results from the disclosed finance charge; and
    (ii)(A) The disclosed finance charge would be considered accurate 
under Sec.  1026.18(d)(1); or
    (B) For purposes of rescission, if the disclosed finance charge 
would be considered accurate under Sec.  1026.23(g) or (h), whichever 
applies.
    (5) Additional tolerance for mortgage loans. In a transaction 
secured by real property or a dwelling, in addition to the tolerances 
applicable under paragraphs (a)(2) and (3) of this section, if the 
disclosed finance charge is calculated incorrectly but is considered 
accurate under Sec.  1026.18(d)(1) or Sec.  1026.23(g) or (h), the 
disclosed annual percentage rate shall be considered accurate:
    (i) If the disclosed finance charge is understated, and the 
disclosed annual percentage rate is also understated but it is closer 
to the actual annual percentage rate than the rate that would be 
considered accurate under paragraph (a)(4) of this section;
    (ii) If the disclosed finance charge is overstated, and the 
disclosed annual percentage rate is also overstated but it is closer to 
the actual annual percentage rate than the rate that would be 
considered accurate under paragraph (a)(4) of this section.
    (b) Computation tools. (1) The Regulation Z Annual Percentage Rate 
Tables produced by the Bureau may be used to determine the annual 
percentage rate, and any rate determined from those tables in 
accordance with the accompanying instructions complies with the 
requirements of this section. Volume I of the tables applies to single 
advance transactions involving up to 480 monthly payments or 104 weekly 
payments. It may be used for regular transactions and for transactions 
with any of the following irregularities: an irregular first period, an 
irregular first payment, and an irregular final payment. Volume II of 
the tables applies to transactions involving multiple advances and any 
type of payment or period irregularity.
    (2) Creditors may use any other computation tool in determining the 
annual percentage rate if the rate so determined equals the rate 
determined in accordance with Appendix J to this part, within the 
degree of accuracy set forth in paragraph (a) of this section.
    (c) Single add-on rate transactions. If a single add-on rate is 
applied to all transactions with maturities up to 60 months and if all 
payments are equal in amount and period, a single annual percentage 
rate may be disclosed for all those transactions, so long as it is the 
highest annual percentage rate for any such transaction.
    (d) Certain transactions involving ranges of balances. For purposes 
of disclosing the annual percentage rate referred to in Sec.  
1026.17(g)(4) (Mail or telephone orders--delay in disclosures) and (h) 
(Series of sales--delay in disclosures), if the same finance charge is 
imposed on all balances within a specified range of balances, the 
annual percentage rate computed for the median balance may be disclosed 
for all the balances. However, if the annual percentage rate computed 
for the median balance understates the annual percentage rate computed 
for the lowest balance by more than 8 percent of the latter rate, the 
annual percentage rate shall be computed on whatever lower balance will 
produce an annual percentage rate that does not result in an 
understatement of more than 8 percent of the rate determined on the 
lowest balance.


Sec.  1026.23  Right of rescission.

    (a) Consumer's right to rescind. (1) In a credit transaction in 
which a security interest is or will be retained or acquired in a 
consumer's principal dwelling, each consumer whose ownership interest 
is or will be subject to the security interest shall have the right to 
rescind the transaction, except for transactions described in paragraph 
(f) of this section. For purposes of this section, the addition to an 
existing obligation of a security interest in a consumer's principal 
dwelling is a transaction. The right of rescission applies only to the 
addition of the security interest and not the existing obligation. The 
creditor shall deliver the notice required by paragraph (b) of this 
section but need not deliver new material disclosures. Delivery of the 
required notice shall begin the rescission period.
    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram or other means of written 
communication. Notice is considered given when mailed, when filed for 
telegraphic transmission or, if sent by other means, when delivered to 
the creditor's designated place of business.
    (3)(i) The consumer may exercise the right to rescind until 
midnight of the third business day following consummation, delivery of 
the notice required by paragraph (b) of this section, or delivery of 
all material disclosures, whichever occurs last. If the required notice 
or material disclosures are not delivered, the right to rescind shall 
expire 3 years after consummation, upon transfer of all of the 
consumer's interest in the property, or upon sale of the property, 
whichever occurs first. In the case of certain administrative 
proceedings, the rescission period shall be extended in accordance with 
section 125(f) of the Act.
    (ii) For purposes of this paragraph (a)(3), the term ``material 
disclosures'' means the required disclosures of the annual percentage 
rate, the finance charge, the amount financed, the total of payments, 
the payment schedule, and the disclosures and limitations referred to 
in Sec. Sec.  1026.32(c) and (d) and 1026.35(b)(2).
    (4) When more than one consumer in a transaction has the right to 
rescind, the exercise of the right by one consumer shall be effective 
as to all consumers.
    (b)(1) Notice of right to rescind. In a transaction subject to 
rescission, a creditor shall deliver two copies of the

[[Page 79804]]

notice of the right to rescind to each consumer entitled to rescind 
(one copy to each if the notice is delivered in electronic form in 
accordance with the consumer consent and other applicable provisions of 
the E-Sign Act). The notice shall be on a separate document that 
identifies the transaction and shall clearly and conspicuously disclose 
the following:
    (i) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (ii) The consumer's right to rescind the transaction.
    (iii) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (iv) The effects of rescission, as described in paragraph (d) of 
this section.
    (v) The date the rescission period expires.
    (2) Proper form of notice. To satisfy the disclosure requirements 
of paragraph (b)(1) of this section, the creditor shall provide the 
appropriate model form in Appendix H of this part or a substantially 
similar notice.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right of rescission under paragraph (e) of this section, no money shall 
be disbursed other than in escrow, no services shall be performed and 
no materials delivered until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of 
rescission, the creditor shall return any money or property that has 
been given to anyone in connection with the transaction and shall take 
any action necessary to reflect the termination of the security 
interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its 
obligation under paragraph (d)(2) of this section. When the creditor 
has complied with that paragraph, the consumer shall tender the money 
or property to the creditor or, where the latter would be impracticable 
or inequitable, tender its reasonable value. At the consumer's option, 
tender of property may be made at the location of the property or at 
the consumer's residence. Tender of money must be made at the 
creditor's designated place of business. If the creditor does not take 
possession of the money or property within 20 calendar days after the 
consumer's tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d)(2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. The consumer may modify 
or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited.
    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A refinancing or consolidation by the same creditor of an 
extension of credit already secured by the consumer's principal 
dwelling. The right of rescission shall apply, however, to the extent 
the new amount financed exceeds the unpaid principal balance, any 
earned unpaid finance charge on the existing debt, and amounts 
attributed solely to the costs of the refinancing or consolidation.
    (3) A transaction in which a state agency is a creditor.
    (4) An advance, other than an initial advance, in a series of 
advances or in a series of single-payment obligations that is treated 
as a single transaction under Sec.  1026.17(c)(6), if the notice 
required by paragraph (b) of this section and all material disclosures 
have been given to the consumer.
    (5) A renewal of optional insurance premiums that is not considered 
a refinancing under Sec.  1026.20(a)(5).
    (g) Tolerances for accuracy. (1) One-half of 1 percent tolerance. 
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the 
finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge:
    (i) Is understated by no more than \1/2\ of 1 percent of the face 
amount of the note or $100, whichever is greater; or
    (ii) Is greater than the amount required to be disclosed.
    (2) One percent tolerance. In a refinancing of a residential 
mortgage transaction with a new creditor (other than a transaction 
covered by Sec.  1026.32), if there is no new advance and no 
consolidation of existing loans, the finance charge and other 
disclosures affected by the finance charge (such as the amount financed 
and the annual percentage rate) shall be considered accurate for 
purposes of this section if the disclosed finance charge:
    (i) Is understated by no more than 1 percent of the face amount of 
the note or $100, whichever is greater; or
    (ii) Is greater than the amount required to be disclosed.
    (h) Special rules for foreclosures. (1) Right to rescind. After the 
initiation of foreclosure on the consumer's principal dwelling that 
secures the credit obligation, the consumer shall have the right to 
rescind the transaction if:
    (i) A mortgage broker fee that should have been included in the 
finance charge was not included; or
    (ii) The creditor did not provide the properly completed 
appropriate model form in Appendix H of this part, or a substantially 
similar notice of rescission.
    (2) Tolerance for disclosures. After the initiation of foreclosure 
on the consumer's principal dwelling that secures the credit 
obligation, the finance charge and other disclosures affected by the 
finance charge (such as the amount financed and the annual percentage 
rate) shall be considered accurate for purposes of this section if the 
disclosed finance charge:
    (i) Is understated by no more than $35; or
    (ii) Is greater than the amount required to be disclosed.


Sec.  1026.24  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) Clear and conspicuous standard. Disclosures required by this 
section shall be made clearly and conspicuously.
    (c) Advertisement of rate of finance charge. If an advertisement 
states a rate of finance charge, it shall state the rate as an ``annual 
percentage rate,'' using that term. If the annual percentage rate may 
be increased after consummation, the advertisement shall state that 
fact. If an advertisement is for credit not secured by a dwelling, the 
advertisement shall not state any other rate, except that a simple 
annual rate or periodic rate that is applied to an unpaid balance may 
be stated in conjunction with, but not more conspicuously than, the 
annual percentage rate. If an advertisement is for credit secured by a 
dwelling, the advertisement shall not state any other rate, except that 
a simple annual rate that is applied to an unpaid balance may be stated 
in conjunction with, but

[[Page 79805]]

not more conspicuously than, the annual percentage rate.
    (d) Advertisement of terms that require additional disclosures. (1) 
Triggering terms. If any of the following terms is set forth in an 
advertisement, the advertisement shall meet the requirements of 
paragraph (d)(2) of this section:
    (i) The amount or percentage of any downpayment.
    (ii) The number of payments or period of repayment.
    (iii) The amount of any payment.
    (iv) The amount of any finance charge.
    (2) Additional terms. An advertisement stating any of the terms in 
paragraph (d)(1) of this section shall state the following terms, as 
applicable (an example of one or more typical extensions of credit with 
a statement of all the terms applicable to each may be used):
    (i) The amount or percentage of the downpayment.
    (ii) The terms of repayment, which reflect the repayment 
obligations over the full term of the loan, including any balloon 
payment.
    (iii) The ``annual percentage rate,'' using that term, and, if the 
rate may be increased after consummation, that fact.
    (e) 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 (d)(2) 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 the credit terms in paragraph (d)(1) of this 
section 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 paragraph (d)(2) of this section 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.
    (f) Disclosure of rates and payments in advertisements for credit 
secured by a dwelling.
    (1) Scope. The requirements of this paragraph apply to any 
advertisement for credit secured by a dwelling, other than television 
or radio advertisements, including promotional materials accompanying 
applications.
    (2) Disclosure of rates. (i) In general. If an advertisement for 
credit secured by a dwelling states a simple annual rate of interest 
and more than one simple annual rate of interest will apply over the 
term of the advertised loan, the advertisement shall disclose in a 
clear and conspicuous manner:
    (A) Each simple annual rate of interest that will apply. In 
variable-rate transactions, a rate determined by adding an index and 
margin shall be disclosed based on a reasonably current index and 
margin;
    (B) The period of time during which each simple annual rate of 
interest will apply; and
    (C) The annual percentage rate for the loan. If such rate is 
variable, the annual percentage rate shall comply with the accuracy 
standards in Sec. Sec.  1026.17(c) and 1026.22.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(2)(i) of this section, clearly and conspicuously disclosed means 
that the required information in paragraphs (f)(2)(i)(A) through (C) 
shall be disclosed with equal prominence and in close proximity to any 
advertised rate that triggered the required disclosures. The required 
information in paragraph (f)(2)(i)(C) may be disclosed with greater 
prominence than the other information.
    (3) Disclosure of payments. (i) In general. In addition to the 
requirements of paragraph (c) of this section, if an advertisement for 
credit secured by a dwelling states the amount of any payment, the 
advertisement shall disclose in a clear and conspicuous manner:
    (A) The amount of each payment that will apply over the term of the 
loan, including any balloon payment. In variable-rate transactions, 
payments that will be determined based on the application of the sum of 
an index and margin shall be disclosed based on a reasonably current 
index and margin;
    (B) The period of time during which each payment will apply; and
    (C) In an advertisement for credit secured by a first lien on a 
dwelling, the fact that the payments do not include amounts for taxes 
and insurance premiums, if applicable, and that the actual payment 
obligation will be greater.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(3)(i) of this section, a clear and conspicuous disclosure means 
that the required information in paragraphs (f)(3)(i)(A) and (B) shall 
be disclosed with equal prominence and in close proximity to any 
advertised payment that triggered the required disclosures, and that 
the required information in paragraph (f)(3)(i)(C) shall be disclosed 
with prominence and in close proximity to the advertised payments.
    (4) Envelope excluded. The requirements in paragraphs (f)(2) and 
(f)(3) 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.
    (g) Alternative disclosures--television or radio advertisements. An 
advertisement made through television or radio stating any of the terms 
requiring additional disclosures under paragraph (d)(2) of this section 
may comply with paragraph (d)(2) of this section either by:
    (1) Stating clearly and conspicuously each of the additional 
disclosures required under paragraph (d)(2) of this section; or
    (2) Stating clearly and conspicuously the information required by 
paragraph (d)(2)(iii) of this section 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 additional cost 
information.
    (h) Tax implications. If an advertisement distributed in paper form 
or through the Internet (rather than by radio or television) is for a 
loan 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:
    (1) 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
    (2) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.
    (i) Prohibited acts or practices in advertisements for credit 
secured by a dwelling. The following acts or practices are prohibited 
in advertisements for credit secured by a dwelling:
    (1) Misleading advertising of ``fixed'' rates and payments. Using 
the word ``fixed'' to refer to rates, payments, or the credit 
transaction in an advertisement for variable-rate transactions or other 
transactions where the payment will increase, unless:

[[Page 79806]]

    (i) In the case of an advertisement solely for one or more 
variable-rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement before the first 
use of the word ``fixed'' and is at least as conspicuous as any use of 
the word ``fixed'' in the advertisement; and
    (B) Each use of the word ``fixed'' to refer to a rate or payment is 
accompanied by an equally prominent and closely proximate statement of 
the time period for which the rate or payment is fixed, and the fact 
that the rate may vary or the payment may increase after that period;
    (ii) In the case of an advertisement solely for non-variable-rate 
transactions where the payment will increase (e.g., a stepped-rate 
mortgage transaction with an initial lower payment), each use of the 
word ``fixed'' to refer to the payment is accompanied by an equally 
prominent and closely proximate statement of the time period for which 
the payment is fixed, and the fact that the payment will increase after 
that period; or
    (iii) In the case of an advertisement for both variable-rate 
transactions and non-variable-rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement with equal 
prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,'' 
or similar terms; and
    (B) Each use of the word ``fixed'' to refer to a rate, payment, or 
the credit transaction either refers solely to the transactions for 
which rates are fixed and complies with paragraph (i)(1)(ii) of this 
section, if applicable, or, if it refers to the variable-rate 
transactions, is accompanied by an equally prominent and closely 
proximate statement of the time period for which the rate or payment is 
fixed, and the fact that the rate may vary or the payment may increase 
after that period.
    (2) Misleading comparisons in advertisements. Making any comparison 
in an advertisement between actual or hypothetical credit payments or 
rates and any payment or simple annual rate that will be available 
under the advertised product for a period less than the full term of 
the loan, unless:
    (i) In general. The advertisement includes a clear and conspicuous 
comparison to the information required to be disclosed under Sec.  
1026.24(f)(2) and (3); and
    (ii) Application to variable-rate transactions. If the 
advertisement is for a variable-rate transaction, and the advertised 
payment or simple annual rate is based on the index and margin that 
will be used to make subsequent rate or payment adjustments over the 
term of the loan, the advertisement includes an equally prominent 
statement in close proximity to the payment or rate that the payment or 
rate is subject to adjustment and the time period when the first 
adjustment will occur.
    (3) Misrepresentations about government endorsement. Making any 
statement in an advertisement that the product offered is a 
``government loan program'', ``government-supported loan'', or is 
otherwise endorsed or sponsored by any Federal, state, or local 
government entity, unless the advertisement is for an FHA loan, VA 
loan, or similar loan program that is, in fact, endorsed or sponsored 
by a Federal, state, or local government entity.
    (4) Misleading use of the current lender's name. Using the name of 
the consumer's current lender in an advertisement that is not sent by 
or on behalf of the consumer's current lender, unless the 
advertisement:
    (i) Discloses with equal prominence the name of the person or 
creditor making the advertisement; and
    (ii) Includes a clear and conspicuous statement that the person 
making the advertisement is not associated with, or acting on behalf 
of, the consumer's current lender.
    (5) Misleading claims of debt elimination. Making any misleading 
claim in an advertisement that the mortgage product offered will 
eliminate debt or result in a waiver or forgiveness of a consumer's 
existing loan terms with, or obligations to, another creditor.
    (6) Misleading use of the term ``counselor''. Using the term 
``counselor'' in an advertisement to refer to a for-profit mortgage 
broker or mortgage creditor, its employees, or persons working for the 
broker or creditor that are involved in offering, originating or 
selling mortgages.
    (7) Misleading foreign-language advertisements. Providing 
information about some trigger terms or required disclosures, such as 
an initial rate or payment, only in a foreign language in an 
advertisement, but providing information about other trigger terms or 
required disclosures, such as information about the fully-indexed rate 
or fully amortizing payment, only in English in the same advertisement.

Subpart D--Miscellaneous


Sec.  1026.25  Record retention.

    (a) General rule. A creditor shall retain evidence of compliance 
with this part (other than advertising requirements under Sec. Sec.  
1026.16 and 1026.24) for 2 years after the date disclosures are 
required to be made or action is required to be taken. The 
administrative agencies responsible for enforcing the regulation may 
require creditors under their jurisdictions to retain records for a 
longer period if necessary to carry out their enforcement 
responsibilities under section 108 of the Act.
    (b) Inspection of records. A creditor shall permit the agency 
responsible for enforcing this part with respect to that creditor to 
inspect its relevant records for compliance.


Sec.  1026.26  Use of annual percentage rate in oral disclosures.

    (a) Open-end credit. In an oral response to a consumer's inquiry 
about the cost of open-end credit, only the annual percentage rate or 
rates shall be stated, except that the periodic rate or rates also may 
be stated. If the annual percentage rate cannot be determined in 
advance because there are finance charges other than a periodic rate, 
the corresponding annual percentage rate shall be stated, and other 
cost information may be given.
    (b) Closed-end credit. In an oral response to a consumer's inquiry 
about the cost of closed-end credit, only the annual percentage rate 
shall be stated, except that a simple annual rate or periodic rate also 
may be stated if it is applied to an unpaid balance. If the annual 
percentage rate cannot be determined in advance, the annual percentage 
rate for a sample transaction shall be stated, and other cost 
information for the consumer's specific transaction may be given.


Sec.  1026.27  Language of disclosures.

    Disclosures required by this part may be made in a language other 
than English, provided that the disclosures are made available in 
English upon the consumer's request. This requirement for providing 
English disclosures on request does not apply to advertisements subject 
to Sec. Sec.  1026.16 and 1026.24.


Sec.  1026.28  Effect on state laws.

    (a) Inconsistent disclosure requirements. (1) Except as provided in 
paragraph (d) of this section, state law requirements that are 
inconsistent with the requirements contained in chapter 1 (General 
Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit 
Advertising) of the Act and the implementing provisions of this part 
are preempted to the extent of the inconsistency. A state law is

[[Page 79807]]

inconsistent if it requires a creditor to make disclosures or take 
actions that contradict the requirements of the Federal law. A state 
law is contradictory if it requires the use of the same term to 
represent a different amount or a different meaning than the Federal 
law, or if it requires the use of a term different from that required 
in the Federal law to describe the same item. A creditor, state, or 
other interested party may request the Bureau to determine whether a 
state law requirement is inconsistent. After the Bureau determines that 
a state law is inconsistent, a creditor may not make disclosures using 
the inconsistent term or form.
    (2)(i) State law requirements are inconsistent with the 
requirements contained in sections 161 (Correction of billing errors) 
or 162 (Regulation of credit reports) of the Act and the implementing 
provisions of this part and are preempted if they provide rights, 
responsibilities, or procedures for consumers or creditors that are 
different from those required by the Federal law. However, a state law 
that allows a consumer to inquire about an open-end credit account and 
imposes on the creditor an obligation to respond to such inquiry after 
the time allowed in the Federal law for the consumer to submit written 
notice of a billing error shall not be preempted in any situation where 
the time period for making written notice under this part has expired. 
If a creditor gives written notice of a consumer's rights under such 
state law, the notice shall state that reliance on the longer time 
period available under state law may result in the loss of important 
rights that could be preserved by acting more promptly under Federal 
law; it shall also explain that the state law provisions apply only 
after expiration of the time period for submitting a proper written 
notice of a billing error under the Federal law. If the state 
disclosures are made on the same side of a page as the required Federal 
disclosures, the state disclosures shall appear under a demarcation 
line below the Federal disclosures, and the Federal disclosures shall 
be identified by a heading indicating that they are made in compliance 
with Federal law.
    (ii) State law requirements are inconsistent with the requirements 
contained in chapter 4 (Credit billing) of the Act (other than section 
161 or 162) and the implementing provisions of this part and are 
preempted if the creditor cannot comply with state law without 
violating Federal law.
    (iii) A state may request the Bureau to determine whether its law 
is inconsistent with chapter 4 of the Act and its implementing 
provisions.
    (b) Equivalent disclosure requirements. If the Bureau determines 
that a disclosure required by state law (other than a requirement 
relating to the finance charge, annual percentage rate, or the 
disclosures required under Sec.  1026.32) is substantially the same in 
meaning as a disclosure required under the Act or this part, creditors 
in that state may make the state disclosure in lieu of the Federal 
disclosure. A creditor, state, or other interested party may request 
the Bureau to determine whether a state disclosure is substantially the 
same in meaning as a Federal disclosure.
    (c) Request for determination. The procedures under which a request 
for a determination may be made under this section are set forth in 
Appendix A.
    (d) Special rule for credit and charge cards. State law 
requirements relating to the disclosure of credit information in any 
credit or charge card application or solicitation that is subject to 
the requirements of section 127(c) of chapter 2 of the Act (Sec.  
1026.60 of the regulation) or in any renewal notice for a credit or 
charge card that is subject to the requirements of section 127(d) of 
chapter 2 of the Act (Sec.  1026.9(e) of the regulation) are preempted. 
State laws relating to the enforcement of section 127(c) and (d) of the 
Act are not preempted.


Sec.  1026.29  State exemptions.

    (a) General rule. Any state may apply to the Bureau to exempt a 
class of transactions within the state from the requirements of chapter 
2 (Credit transactions) or chapter 4 (Credit billing) of the Act and 
the corresponding provisions of this part. The Bureau shall grant an 
exemption if it determines that:
    (1) The state law is substantially similar to the Federal law or, 
in the case of chapter 4, affords the consumer greater protection than 
the Federal law; and
    (2) There is adequate provision for enforcement.
    (b) Civil liability. (1) No exemptions granted under this section 
shall extend to the civil liability provisions of sections 130 and 131 
of the Act.
    (2) If an exemption has been granted, the disclosures required by 
the applicable state law (except any additional requirements not 
imposed by Federal law) shall constitute the disclosures required by 
the Act.
    (c) Applications. The procedures under which a state may apply for 
an exemption under this section are set forth in Appendix B to this 
part.


Sec.  1026.30  Limitation on rates.

    A creditor shall include in any consumer credit contract secured by 
a dwelling and subject to the Act and this part the maximum interest 
rate that may be imposed during the term of the obligation when:
    (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.

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec.  1026.31  General rules.

    (a) Relation to other subparts in this part. The requirements and 
limitations of this subpart are in addition to and not in lieu of those 
contained in other subparts of this part.
    (b) Form of disclosures. The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing, in a 
form that the consumer may keep. 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.).
    (c) Timing of disclosure. (1) Disclosures for certain closed-end 
home mortgages. The creditor shall furnish the disclosures required by 
Sec.  1026.32 at least three business days prior to consummation of a 
mortgage transaction covered by Sec.  1026.32.
    (i) Change in terms. After complying with paragraph (c)(1) of this 
section and prior to consummation, if the creditor changes any term 
that makes the disclosures inaccurate, new disclosures shall be 
provided in accordance with the requirements of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
by telephone if the consumer initiates the change and if, at 
consummation:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation.
    (iii) Consumer's waiver of waiting period before consummation. The 
consumer may, after receiving the disclosures required by paragraph 
(c)(1) of this section, modify or waive the three-day waiting period 
between delivery of those disclosures and consummation if the consumer 
determines that the extension of credit is needed to meet a bona fide 
personal

[[Page 79808]]

financial emergency. To modify or waive the right, the consumer shall 
give the creditor a dated written statement that describes the 
emergency, specifically modifies or waives the waiting period, and 
bears the signature of all the consumers entitled to the waiting 
period. Printed forms for this purpose are prohibited, except when 
creditors are permitted to use printed forms pursuant to Sec.  
1026.23(e)(2).
    (2) Disclosures for reverse mortgages. The creditor shall furnish 
the disclosures required by Sec.  1026.33 at least three business days 
prior to:
    (i) Consummation of a closed-end credit transaction; or
    (ii) The first transaction under an open-end credit plan.
    (d) Basis of disclosures and use of estimates. (1) Legal 
Obligation. Disclosures shall reflect the terms of the legal obligation 
between the parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available at the 
time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (3) Per-diem interest. For a transaction in which a portion of the 
interest is determined on a per-diem basis and collected at 
consummation, any disclosure affected by the per-diem interest shall be 
considered accurate if the disclosure is based on the information known 
to the creditor at the time that the disclosure documents are prepared.
    (e) Multiple creditors; multiple consumers. If a transaction 
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 part 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 obligation. If the 
transaction is rescindable under Sec.  1026.15 or Sec.  1026.23, 
however, the disclosures shall be made to each consumer who has the 
right to rescind.
    (f) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the 
required disclosures, the inaccuracy is not a violation of Regulation Z 
(12 CFR part 1026), although new disclosures may be required for 
mortgages covered by Sec.  1026.32 under paragraph (c) of this section, 
Sec.  1026.9(c), Sec.  1026.19, or Sec.  1026.20.
    (g) Accuracy of annual percentage rate. For purposes of Sec.  
1026.32, the annual percentage rate shall be considered accurate, and 
may be used in determining whether a transaction is covered by Sec.  
1026.32, if it is accurate according to the requirements and within the 
tolerances under Sec.  1026.22. The finance charge tolerances for 
rescission under Sec.  1026.23(g) or (h) shall not apply for this 
purpose.


Sec.  1026.32  Requirements for certain closed-end home mortgages.

    (a) Coverage. (1) Except as provided in paragraph (a)(2) of this 
section, the requirements of this section apply to a consumer credit 
transaction that is secured by the consumer's principal dwelling, and 
in which either:
    (i) The annual percentage rate at consummation will exceed by more 
than 8 percentage points for first-lien loans, or by more than 10 
percentage points for subordinate-lien loans, the yield on Treasury 
securities having comparable periods of maturity to the loan maturity 
as of the fifteenth day of the month immediately preceding the month in 
which the application for the extension of credit is received by the 
creditor; or
    (ii) The total points and fees payable by the consumer at or before 
loan closing will exceed the greater of 8 percent of the total loan 
amount, or $400; the $400 figure shall be adjusted annually on January 
1 by the annual percentage change in the Consumer Price Index that was 
reported on the preceding June 1.
    (2) This section does not apply to the following:
    (i) A residential mortgage transaction.
    (ii) A reverse mortgage transaction subject to Sec.  1026.33.
    (iii) An open-end credit plan subject to subpart B of this part.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) For purposes of paragraph (a)(1)(ii) of this section, points 
and fees means:
    (i) All items required to be disclosed under Sec.  1026.4(a) and 
1026.4(b), except interest or the time-price differential;
    (ii) All compensation paid to mortgage brokers;
    (iii) All items listed in Sec.  1026.4(c)(7) (other than amounts 
held for future payment of taxes) unless the charge is reasonable, the 
creditor receives no direct or indirect compensation in connection with 
the charge, and the charge is not paid to an affiliate of the creditor; 
and
    (iv) Premiums or other charges for credit life, accident, health, 
or loss-of-income insurance, or debt-cancellation coverage (whether or 
not the debt-cancellation coverage is insurance under applicable law) 
that provides for cancellation of all or part of the consumer's 
liability in the event of the loss of life, health, or income or in the 
case of accident, written in connection with the credit transaction.
    (2) Affiliate means any company that controls, is controlled by, or 
is under common control with another company, as set forth in the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
    (c) Disclosures. In addition to other disclosures required by this 
part, in a mortgage subject to this section, the creditor shall 
disclose the following in conspicuous type size:
    (1) Notices. The following statement: ``You are not required to 
complete this agreement merely because you have received these 
disclosures or have signed a loan application. If you obtain this loan, 
the lender will have a mortgage on your home. You could lose your home, 
and any money you have put into it, if you do not meet your obligations 
under the loan.''
    (2) Annual percentage rate. The annual percentage rate.
    (3) Regular payment; balloon payment. The amount of the regular 
monthly (or other periodic) payment and the amount of any balloon 
payment. The regular payment disclosed under this paragraph shall be 
treated as accurate if it is based on an amount borrowed that is deemed 
accurate and is disclosed under paragraph (c)(5) of this section.
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be disclosed under Sec.  1026.30.
    (5) Amount borrowed. For a mortgage refinancing, the total amount 
the consumer will borrow, as reflected by the face amount of the note; 
and where the amount borrowed includes premiums or other charges for 
optional credit insurance or debt-cancellation coverage, that fact 
shall be stated, grouped together with the disclosure of the amount 
borrowed. The disclosure of the amount borrowed shall be treated as 
accurate if it is not more than $100 above or below the amount required 
to be disclosed.
    (d) Limitations. A mortgage transaction subject to this section 
shall not include the following terms:
    (1)(i) Balloon payment. For a loan with a term of less than five 
years, a payment schedule with regular periodic payments that when 
aggregated do not fully amortize the outstanding principal balance.

[[Page 79809]]

    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 
section do not apply to loans with maturities of less than one year, if 
the purpose of the loan is a ``bridge'' loan connected with the 
acquisition or construction of a dwelling intended to become the 
consumer's principal dwelling.
    (2) Negative amortization. A payment schedule with regular periodic 
payments that cause the principal balance to increase.
    (3) Advance payments. A payment schedule that consolidates more 
than two periodic payments and pays them in advance from the proceeds.
    (4) Increased interest rate. An increase in the interest rate after 
default.
    (5) Rebates. A refund calculated by a method less favorable than 
the actuarial method (as defined by section 933(d) of the Housing and 
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of 
interest arising from a loan acceleration due to default.
    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 
of this section, a penalty for paying all or part of the principal 
before the date on which the principal is due. A prepayment penalty 
includes computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992, 15 
U.S.C. 1615(d).
    (7) Prepayment penalty exception. A mortgage transaction subject to 
this section may provide for a prepayment penalty (including a refund 
calculated according to the rule of 78s) otherwise permitted by law if, 
under the terms of the loan:
    (i) The penalty will not apply after the two-year period following 
consummation;
    (ii) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor;
    (iii) At consummation, the consumer's total monthly debt payments 
(including amounts owed under the mortgage) do not exceed 50 percent of 
the consumer's monthly gross income, as verified in accordance with 
Sec.  1026.34(a)(4)(ii); and
    (iv) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (8) Due-on-demand clause. A demand feature that permits the 
creditor to terminate the loan in advance of the original maturity date 
and to demand repayment of the entire outstanding balance, except in 
the following circumstances:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the loan;
    (ii) The consumer fails to meet the repayment terms of the 
agreement for any outstanding balance; or
    (iii) There is any action or inaction by the consumer that 
adversely affects the creditor's security for the loan, or any right of 
the creditor in such security.


Sec.  1026.33  Requirements for reverse mortgages.

    (a) Definition. For purposes of this subpart, reverse mortgage 
transaction means a nonrecourse consumer credit obligation in which:
    (1) A mortgage, deed of trust, or equivalent consensual security 
interest securing one or more advances is created in the consumer's 
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is 
due and payable (other than in the case of default) only after:
    (i) The consumer dies;
    (ii) The dwelling is transferred; or
    (iii) The consumer ceases to occupy the dwelling as a principal 
dwelling.
    (b) Content of disclosures. In addition to other disclosures 
required by this part, in a reverse mortgage transaction the creditor 
shall provide the following disclosures in a form substantially similar 
to the model form found in paragraph (d) of Appendix K of this part:
    (1) Notice. A statement that the consumer is not obligated to 
complete the reverse mortgage transaction merely because the consumer 
has received the disclosures required by this section or has signed an 
application for a reverse mortgage loan.
    (2) Total annual loan cost rates. A good-faith projection of the 
total cost of the credit, determined in accordance with paragraph (c) 
of this section and expressed as a table of ``total annual loan cost 
rates,'' using that term, in accordance with Appendix K of this part.
    (3) Itemization of pertinent information. An itemization of loan 
terms, charges, the age of the youngest borrower and the appraised 
property value.
    (4) Explanation of table. An explanation of the table of total 
annual loan cost rates as provided in the model form found in paragraph 
(d) of Appendix K of this part.
    (c) Projected total cost of credit. The projected total cost of 
credit shall reflect the following factors, as applicable:
    (1) Costs to consumer. All costs and charges to the consumer, 
including the costs of any annuity the consumer purchases as part of 
the reverse mortgage transaction.
    (2) Payments to consumer. All advances to and for the benefit of 
the consumer, including annuity payments that the consumer will receive 
from an annuity that the consumer purchases as part of the reverse 
mortgage transaction.
    (3) Additional creditor compensation. Any shared appreciation or 
equity in the dwelling that the creditor is entitled by contract to 
receive.
    (4) Limitations on consumer liability. Any limitation on the 
consumer's liability (such as nonrecourse limits and equity 
conservation agreements).
    (5) Assumed annual appreciation rates. Each of the following 
assumed annual appreciation rates for the dwelling:
    (i) 0 percent.
    (ii) 4 percent.
    (iii) 8 percent.
    (6) Assumed loan period. (i) Each of the following assumed loan 
periods, as provided in Appendix L of this part:
    (A) Two years.
    (B) The actuarial life expectancy of the consumer to become 
obligated on the reverse mortgage transaction (as of that consumer's 
most recent birthday). In the case of multiple consumers, the period 
shall be the actuarial life expectancy of the youngest consumer (as of 
that consumer's most recent birthday).
    (C) The actuarial life expectancy specified by paragraph 
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded 
to the nearest full year.
    (ii) At the creditor's option, the actuarial life expectancy 
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a 
factor of .5 and rounded to the nearest full year.


Sec.  1026.34  Prohibited acts or practices in connection with high-
cost mortgages.

    (a) Prohibited acts or practices for high-cost mortgages. A 
creditor extending mortgage credit subject to Sec.  1026.32 shall not:
    (1) Home improvement contracts. Pay a contractor under a home 
improvement contract from the proceeds of a mortgage covered by Sec.  
1026.32, other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement 
signed by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (2) Notice to assignee. Sell or otherwise assign a mortgage subject 
to Sec.  1026.32 without furnishing the following statement to the 
purchaser or

[[Page 79810]]

assignee: ``Notice: This is a mortgage subject to special rules under 
the Federal Truth in Lending Act. Purchasers or assignees of this 
mortgage could be liable for all claims and defenses with respect to 
the mortgage that the borrower could assert against the creditor.''
    (3) Refinancings within one-year period. Within one year of having 
extended credit subject to Sec.  1026.32, refinance any loan subject to 
Sec.  1026.32 to the same borrower into another loan subject to Sec.  
1026.32, unless the refinancing is in the borrower's interest. An 
assignee holding or servicing an extension of mortgage credit subject 
to Sec.  1026.32, shall not, for the remainder of the one-year period 
following the date of origination of the credit, refinance any loan 
subject to Sec.  1026.32 to the same borrower into another loan subject 
to Sec.  1026.32, unless the refinancing is in the borrower's interest. 
A creditor (or assignee) is prohibited from engaging in acts or 
practices to evade this provision, including a pattern or practice of 
arranging for the refinancing of its own loans by affiliated or 
unaffiliated creditors, or modifying a loan agreement (whether or not 
the existing loan is satisfied and replaced by the new loan) and 
charging a fee.
    (4) Repayment ability. Extend credit subject to Sec.  1026.32 to a 
consumer based on the value of the consumer's collateral without regard 
to the consumer's repayment ability as of consummation, including the 
consumer's current and reasonably expected income, employment, assets 
other than the collateral, current obligations, and mortgage-related 
obligations.
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec.  1026.35(b)(3)(i), and similar expenses.
    (ii) Verification of repayment ability. Under this paragraph (a)(4) 
a creditor must verify the consumer's repayment ability as follows:
    (A) A creditor must verify amounts of income or assets that it 
relies on to determine repayment ability, including expected income or 
assets, by the consumer's Internal Revenue Service Form W-2, tax 
returns, payroll receipts, financial institution records, or other 
third-party documents that provide reasonably reliable evidence of the 
consumer's income or assets.
    (B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not 
violated paragraph (a)(4)(ii) if the amounts of income and assets that 
the creditor relied upon in determining repayment ability are not 
materially greater than the amounts of the consumer's income or assets 
that the creditor could have verified pursuant to paragraph 
(a)(4)(ii)(A) at the time the loan was consummated.
    (C) A creditor must verify the consumer's current obligations.
    (iii) Presumption of compliance. A creditor is presumed to have 
complied with this paragraph (a)(4) with respect to a transaction if 
the creditor:
    (A) Verifies the consumer's repayment ability as provided in 
paragraph (a)(4)(ii);
    (B) Determines the consumer's repayment ability using the largest 
payment of principal and interest scheduled in the first seven years 
following consummation and taking into account current obligations and 
mortgage-related obligations as defined in paragraph (a)(4)(i); and
    (C) Assesses the consumer's repayment ability taking into account 
at least one of the following: The ratio of total debt obligations to 
income, or the income the consumer will have after paying debt 
obligations.
    (iv) Exclusions from presumption of compliance. Notwithstanding the 
previous paragraph, no presumption of compliance is available for a 
transaction for which:
    (A) The regular periodic payments for the first seven years would 
cause the principal balance to increase; or
    (B) The term of the loan is less than seven years and the regular 
periodic payments when aggregated do not fully amortize the outstanding 
principal balance.
    (v) Exemption. This paragraph (a)(4) does not apply to temporary or 
``bridge'' loans with terms of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months.
    (b) Prohibited acts or practices for dwelling-secured loans; open-
end credit. In connection with credit secured by the consumer's 
dwelling that does not meet the definition in Sec.  1026.2(a)(20), a 
creditor shall not structure a home-secured loan as an open-end plan to 
evade the requirements of Sec.  1026.32.


Sec.  1026.35  Prohibited acts or practices in connection with higher-
priced mortgage loans.

    (a) Higher-priced mortgage loans. (1) For purposes of this section, 
except as provided in paragraph (b)(3)(v) of this section, a higher-
priced mortgage loan is a consumer credit transaction secured by the 
consumer's principal dwelling with an annual percentage rate that 
exceeds the average prime offer rate for a comparable transaction as of 
the date the interest rate is set by 1.5 or more percentage points for 
loans secured by a first lien on a dwelling, or by 3.5 or more 
percentage points for loans secured by a subordinate lien on a 
dwelling.
    (2) ``Average prime offer rate'' means an annual percentage rate 
that is derived from average interest rates, points, and other loan 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics. The Bureau publishes average prime offer rates for a 
broad range of types of transactions in a table updated at least weekly 
as well as the methodology the Bureau uses to derive these rates.
    (3) Notwithstanding paragraph (a)(1) of this section, the term 
``higher-priced mortgage loan'' does not include a transaction to 
finance the initial construction of a dwelling, a temporary or 
``bridge'' loan with a term of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months, a reverse-mortgage transaction subject 
to Sec.  1026.33, or a home equity line of credit subject to Sec.  
1026.40.
    (b) Rules for higher-priced mortgage loans. Higher-priced mortgage 
loans are subject to the following restrictions:
    (1) Repayment ability. A creditor shall not extend credit based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation as provided in Sec.  
1026.34(a)(4).
    (2) Prepayment penalties. A loan may not include a penalty 
described by Sec.  1026.32(d)(6) unless:
    (i) The penalty is otherwise permitted by law, including Sec.  
1026.32(d)(7) if the loan is a mortgage transaction described in Sec.  
1026.32(a); and
    (ii) Under the terms of the loan:
    (A) The penalty will not apply after the two-year period following 
consummation;
    (B) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor; 
and
    (C) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (3) Escrows. (i) Failure to escrow for property taxes and 
insurance. Except as provided in paragraph (b)(3)(ii) of this section, 
a creditor may not extend a loan secured by a first lien on a principal 
dwelling unless an escrow account is established before consummation 
for payment of property taxes and

[[Page 79811]]

premiums for mortgage-related insurance required by the creditor, such 
as insurance against loss of or damage to property, or against 
liability arising out of the ownership or use of the property, or 
insurance protecting the creditor against the consumer's default or 
other credit loss.
    (ii) Exemptions for loans secured by shares in a cooperative and 
for certain condominium units. (A) Escrow accounts need not be 
established for loans secured by shares in a cooperative; and
    (B) Insurance premiums described in paragraph (b)(3)(i) of this 
section need not be included in escrow accounts for loans secured by 
condominium units, where the condominium association has an obligation 
to the condominium unit owners to maintain a master policy insuring 
condominium units.
    (iii) Cancellation. A creditor or servicer may permit a consumer to 
cancel the escrow account required in paragraph (b)(3)(i) of this 
section only in response to a consumer's dated written request to 
cancel the escrow account that is received no earlier than 365 days 
after consummation.
    (iv) Definition of escrow account. For purposes of this section, 
``escrow account'' shall have the same meaning as in 12 CFR 1024.17(b) 
as amended.
    (v) ``Jumbo'' loans. For purposes of this Sec.  1026.35(b)(3), for 
a transaction with a principal obligation at consummation that exceeds 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac, the coverage threshold set forth in paragraph (a)(1) of 
this section for loans secured by a first lien on a dwelling shall be 
2.5 or more percentage points greater than the applicable average prime 
offer rate.
    (4) Evasion; open-end credit. In connection with credit secured by 
a consumer's principal dwelling that does not meet the definition of 
open-end credit in Sec.  1026.2(a)(20), a creditor shall not structure 
a home-secured loan as an open-end plan to evade the requirements of 
this section.


Sec.  1026.36  Prohibited acts or practices in connection with credit 
secured by a dwelling.

    (a) Loan originator and mortgage broker defined. (1) Loan 
originator. For purposes of this section, the term ``loan originator'' 
means with respect to a particular transaction, a person who for 
compensation or other monetary gain, or in expectation of compensation 
or other monetary gain, arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person. The term ``loan 
originator'' includes an employee of the creditor if the employee meets 
this definition. The term ``loan originator'' includes the creditor 
only if the creditor does not provide the funds for the transaction at 
consummation out of the creditor's own resources, including drawing on 
a bona fide warehouse line of credit, or out of deposits held by the 
creditor.
    (2) Mortgage broker. For purposes of this section, a mortgage 
broker with respect to a particular transaction is any loan originator 
that is not an employee of the creditor.
    (b) [Reserved]
    (c) Servicing practices. (1) In connection with a consumer credit 
transaction secured by a consumer's principal dwelling, no servicer 
shall:
    (i) Fail to credit a payment to the consumer's loan account as of 
the date of receipt, except when a delay in crediting does not result 
in any charge to the consumer or in the reporting of negative 
information to a consumer reporting agency, or except as provided in 
paragraph (c)(2) of this section;
    (ii) Impose on the consumer any late fee or delinquency charge in 
connection with a payment, when the only delinquency is attributable to 
late fees or delinquency charges assessed on an earlier payment, and 
the payment is otherwise a full payment for the applicable period and 
is paid on its due date or within any applicable grace period; or
    (iii) Fail to provide, within a reasonable time after receiving a 
request from the consumer or any person acting on behalf of the 
consumer, an accurate statement of the total outstanding balance that 
would be required to satisfy the consumer's obligation in full as of a 
specified date.
    (2) If a servicer specifies in writing requirements for the 
consumer to follow in making payments, but accepts a payment that does 
not conform to the requirements, the servicer shall credit the payment 
as of 5 days after receipt.
    (3) For purposes of this paragraph (c), the terms ``servicer'' and 
``servicing'' have the same meanings as provided in 12 CFR 1024.2(b), 
as amended.
    (d) Prohibited payments to loan originators. (1) Payments based on 
transaction terms or conditions. (i) In connection with a consumer 
credit transaction secured by a dwelling, no loan originator shall 
receive and no person shall pay to a loan originator, directly or 
indirectly, compensation in an amount that is based on any of the 
transaction's terms or conditions.
    (ii) For purposes of this paragraph (d)(1), the amount of credit 
extended is not deemed to be a transaction term or condition, provided 
compensation received by or paid to a loan originator, directly or 
indirectly, is based on a fixed percentage of the amount of credit 
extended; however, such compensation may be subject to a minimum or 
maximum dollar amount.
    (iii) This paragraph (d)(1) shall not apply to any transaction in 
which paragraph (d)(2) of this section applies.
    (2) Payments by persons other than consumer. If any loan originator 
receives compensation directly from a consumer in a consumer credit 
transaction secured by a dwelling:
    (i) No loan originator shall receive compensation, directly or 
indirectly, from any person other than the consumer in connection with 
the transaction; and
    (ii) No person who knows or has reason to know of the consumer-paid 
compensation to the loan originator (other than the consumer) shall pay 
any compensation to a loan originator, directly or indirectly, in 
connection with the transaction.
    (3) Affiliates. For purposes of this paragraph (d), affiliates 
shall be treated as a single ``person.''
    (e) Prohibition on steering. (1) General. In connection with a 
consumer credit transaction secured by a dwelling, a loan originator 
shall not direct or ``steer'' a consumer to consummate a transaction 
based on the fact that the originator will receive greater compensation 
from the creditor in that transaction than in other transactions the 
originator offered or could have offered to the consumer, unless the 
consummated transaction is in the consumer's interest.
    (2) Permissible transactions. A transaction does not violate 
paragraph (e)(1) of this section if the consumer is presented with loan 
options that meet the conditions in paragraph (e)(3) of this section 
for each type of transaction in which the consumer expressed an 
interest. For purposes of paragraph (e) of this section, the term 
``type of transaction'' refers to whether:
    (i) A loan has an annual percentage rate that cannot increase after 
consummation;
    (ii) A loan has an annual percentage rate that may increase after 
consummation; or
    (iii) A loan is a reverse mortgage.
    (3) Loan options presented. A transaction satisfies paragraph 
(e)(2) of this section only if the loan originator presents the loan 
options required by that paragraph and all of the following conditions 
are met:
    (i) The loan originator must obtain loan options from a significant 
number of the creditors with which the

[[Page 79812]]

originator regularly does business and, for each type of transaction in 
which the consumer expressed an interest, must present the consumer 
with loan options that include:
    (A) The loan with the lowest interest rate;
    (B) The loan with the lowest interest rate without negative 
amortization, a prepayment penalty, interest-only payments, a balloon 
payment in the first 7 years of the life of the loan, a demand feature, 
shared equity, or shared appreciation; or, in the case of a reverse 
mortgage, a loan without a prepayment penalty, or shared equity or 
shared appreciation; and
    (C) The loan with the lowest total dollar amount for origination 
points or fees and discount points.
    (ii) The loan originator must have a good faith belief that the 
options presented to the consumer pursuant to paragraph (e)(3)(i) of 
this section are loans for which the consumer likely qualifies.
    (iii) For each type of transaction, if the originator presents to 
the consumer more than three loans, the originator must highlight the 
loans that satisfy the criteria specified in paragraph (e)(3)(i) of 
this section.
    (4) Number of loan options presented. The loan originator can 
present fewer than three loans and satisfy paragraphs (e)(2) and 
(e)(3)(i) of this section if the loan(s) presented to the consumer 
satisfy the criteria of the options in paragraph (e)(3)(i) of this 
section and the provisions of paragraph (e)(3) of this section are 
otherwise met.
    (f) This section does not apply to a home-equity line of credit 
subject to Sec.  1026.40. Section 1026.36(d) and (e) do not apply to a 
loan that is secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D).


Sec. Sec.  1026.37-1026.38  [Reserved]


Sec.  1026.39  Mortgage transfer disclosures.

    (a) Scope. The disclosure requirements of this section apply to any 
covered person except as otherwise provided in this section. For 
purposes of this section:
    (1) A ``covered person'' means any person, as defined in Sec.  
1026.2(a)(22), that becomes the owner of an existing mortgage loan by 
acquiring legal title to the debt obligation, whether through a 
purchase, assignment or other transfer, and who acquires more than one 
mortgage loan in any twelve-month period. For purposes of this section, 
a servicer of a mortgage loan shall not be treated as the owner of the 
obligation if the servicer holds title to the loan, or title is 
assigned to the servicer, solely for the administrative convenience of 
the servicer in servicing the obligation.
    (2) A ``mortgage loan'' means any consumer credit transaction that 
is secured by the principal dwelling of a consumer.
    (b) Disclosure required. Except as provided in paragraph (c) of 
this section, each covered person is subject to the requirements of 
this section and shall mail or deliver the disclosures required by this 
section to the consumer on or before the 30th calendar day following 
the date of transfer.
    (1) Form of disclosures. The disclosures required by this section 
shall be provided clearly and conspicuously in writing, in a form that 
the consumer may keep. The disclosures required by this section 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.).
    (2) The date of transfer. For purposes of this section, the date of 
transfer to the covered person may, at the covered person's option, be 
either the date of acquisition recognized in the books and records of 
the acquiring party, or the date of transfer recognized in the books 
and records of the transferring party.
    (3) Multiple consumers. If more than one consumer is liable on the 
obligation, a covered person may mail or deliver the disclosures to any 
consumer who is primarily liable.
    (4) Multiple transfers. If a mortgage loan is acquired by a covered 
person and subsequently sold, assigned, or otherwise transferred to 
another covered person, a single disclosure may be provided on behalf 
of both covered persons if the disclosure satisfies the timing and 
content requirements applicable to each covered person.
    (5) Multiple covered persons. If an acquisition involves multiple 
covered persons who jointly acquire the loan, a single disclosure must 
be provided on behalf of all covered persons.
    (c) Exceptions. Notwithstanding paragraph (b) of this section, a 
covered person is not subject to the requirements of this section with 
respect to a particular mortgage loan if:
    (1) The covered person sells, or otherwise transfers or assigns 
legal title to the mortgage loan on or before the 30th calendar day 
following the date that the covered person acquired the mortgage loan 
which shall be the date of transfer recognized for purposes of 
paragraph (b)(2) of this section;
    (2) The mortgage loan is transferred to the covered person in 
connection with a repurchase agreement that obligates the transferor to 
repurchase the loan. However, if the transferor does not repurchase the 
loan, the covered person must provide the disclosures required by this 
section within 30 days after the date that the transaction is 
recognized as an acquisition on its books and records; or
    (3) The covered person acquires only a partial interest in the loan 
and the party authorized to receive the consumer's notice of the right 
to rescind and resolve issues concerning the consumer's payments on the 
loan does not change as a result of the transfer of the partial 
interest.
    (d) Content of required disclosures. The disclosures required by 
this section shall identify the loan that was sold, assigned or 
otherwise transferred, and state the following:
    (1) The name, address, and telephone number of the covered person.
    (i) If a single disclosure is provided on behalf of more than one 
covered person, the information required by this paragraph shall be 
provided for each of them unless paragraph (d)(1)(ii) of this section 
applies.
    (ii) If a single disclosure is provided on behalf of more than one 
covered person and one of them has been authorized in accordance with 
paragraph (d)(3) of this section to receive the consumer's notice of 
the right to rescind and resolve issues concerning the consumer's 
payments on the loan, the information required by paragraph (d)(1) of 
this section may be provided only for that covered person.
    (2) The date of transfer.
    (3) The name, address and telephone number of an agent or party 
authorized to receive notice of the right to rescind and resolve issues 
concerning the consumer's payments on the loan. However, no information 
is required to be provided under this paragraph if the consumer can use 
the information provided under paragraph (d)(1) of this section for 
these purposes.
    (4) Where transfer of ownership of the debt to the covered person 
is or may be recorded in public records, or, alternatively, that the 
transfer of ownership has not been recorded in public records at the 
time the disclosure is provided.
    (e) Optional disclosures. In addition to the information required 
to be disclosed under paragraph (d) of this section, a covered person 
may, at its option, provide any other information regarding the 
transaction.


Sec.  1026.40  Requirements for home equity plans.

    The requirements of this section apply to open-end credit plans 
secured

[[Page 79813]]

by the consumer's dwelling. For purposes of this section, an annual 
percentage rate is the annual percentage rate corresponding to the 
periodic rate as determined under Sec.  1026.14(b).
    (a) Form of disclosures. (1) General. The disclosures required by 
paragraph (d) of this section shall be made clearly and conspicuously 
and shall be grouped together and segregated from all unrelated 
information. The disclosures may be provided on the application form or 
on a separate form. The disclosure described in paragraph (d)(4)(iii), 
the itemization of third-party fees described in paragraph (d)(8), and 
the variable-rate information described in paragraph (d)(12) of this 
section may be provided separately from the other required disclosures.
    (2) Precedence of certain disclosures. The disclosures described in 
paragraph (d)(1) through (4)(ii) of this section shall precede the 
other required disclosures.
    (3) For an application 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.
    (b) Time of disclosures. The disclosures and brochure required by 
paragraphs (d) and (e) of this section shall be provided at the time an 
application is provided to the consumer. The disclosures and the 
brochure may be delivered or placed in the mail not later than three 
business days following receipt of a consumer's application in the case 
of applications contained in magazines or other publications, or when 
the application is received by telephone or through an intermediary 
agent or broker.
    (c) Duties of third parties. Persons other than the creditor who 
provide applications to consumers for home equity plans must provide 
the brochure required under paragraph (e) of this section at the time 
an application is provided. If such persons have the disclosures 
required under paragraph (d) of this section for a creditor's home 
equity plan, they also shall provide the disclosures at such time. The 
disclosures and the brochure may be delivered or placed in the mail not 
later than three business days following receipt of a consumer's 
application in the case of applications contained in magazines or other 
publications, or when the application is received by telephone or 
through an intermediary agent or broker.
    (d) Content of disclosures. The creditor shall provide the 
following disclosures, as applicable:
    (1) Retention of information. A statement that the consumer should 
make or otherwise retain a copy of the disclosures.
    (2) Conditions for disclosed terms. (i) A statement of the time by 
which the consumer must submit an application to obtain specific terms 
disclosed and an identification of any disclosed term that is subject 
to change prior to opening the plan.
    (ii) A statement that, if a disclosed term changes (other than a 
change due to fluctuations in the index in a variable-rate plan) prior 
to opening the plan and the consumer therefore elects not to open the 
plan, the consumer may receive a refund of all fees paid in connection 
with the application.
    (3) Security interest and risk to home. A statement that the 
creditor will acquire a security interest in the consumer's dwelling 
and that loss of the dwelling may occur in the event of default.
    (4) Possible actions by creditor. (i) A statement that, under 
certain conditions, the creditor may terminate the plan and require 
payment of the outstanding balance in full in a single payment and 
impose fees upon termination; prohibit additional extensions of credit 
or reduce the credit limit; and, as specified in the initial agreement, 
implement certain changes in the plan.
    (ii) A statement that the consumer may receive, upon request, 
information about the conditions under which such actions may occur.
    (iii) In lieu of the disclosure required under paragraph (d)(4)(ii) 
of this section, a statement of such conditions.
    (5) Payment terms. The payment terms of the plan. If different 
payment terms may apply to the draw and any repayment period, or if 
different payment terms may apply within either period, the disclosures 
shall reflect the different payment terms. The payment terms of the 
plan include:
    (i) The length of the draw period and any repayment period.
    (ii) An explanation of how the minimum periodic payment will be 
determined and the timing of the payments. If paying only the minimum 
periodic payments may not repay any of the principal or may repay less 
than the outstanding balance, a statement of this fact, as well as a 
statement that a balloon payment may result. A balloon payment results 
if paying the minimum periodic payments does not fully amortize the 
outstanding balance by a specified date or time, and the consumer must 
repay the entire outstanding balance at such time.
    (iii) An example, based on a $10,000 outstanding balance and a 
recent annual percentage rate, showing the minimum periodic payment, 
any balloon payment, and the time it would take to repay the $10,000 
outstanding balance if the consumer made only those payments and 
obtained no additional extensions of credit. For fixed-rate plans, a 
recent annual percentage rate is a rate that has been in effect under 
the plan within the twelve months preceding the date the disclosures 
are provided to the consumer. For variable-rate plans, a recent annual 
percentage rate is the most recent rate provided in the historical 
example described in paragraph (d)(12)(xi) of this section or a rate 
that has been in effect under the plan since the date of the most 
recent rate in the table.
    (6) Annual percentage rate. For fixed-rate plans, a recent annual 
percentage rate imposed under the plan and a statement that the rate 
does not include costs other than interest. A recent annual percentage 
rate is a rate that has been in effect under the plan within the twelve 
months preceding the date the disclosures are provided to the consumer.
    (7) Fees imposed by creditor. An itemization of any fees imposed by 
the creditor to open, use, or maintain the plan, stated as a dollar 
amount or percentage, and when such fees are payable.
    (8) Fees imposed by third parties to open a plan. A good faith 
estimate, stated as a single dollar amount or range, of any fees that 
may be imposed by persons other than the creditor to open the plan, as 
well as a statement that the consumer may receive, upon request, a good 
faith itemization of such fees. In lieu of the statement, the 
itemization of such fees may be provided.
    (9) Negative amortization. A statement that negative amortization 
may occur and that negative amortization increases the principal 
balance and reduces the consumer's equity in the dwelling.
    (10) Transaction requirements. Any limitations on the number of 
extensions of credit and the amount of credit that may be obtained 
during any time period, as well as any minimum outstanding balance and 
minimum draw requirements, stated as dollar amounts or percentages.
    (11) Tax implications. A statement that the consumer should consult 
a tax advisor regarding the deductibility of interest and charges under 
the plan.
    (12) Disclosures for variable-rate plans. For a plan in which the 
annual percentage rate is variable, the following disclosures, as 
applicable:
    (i) The fact that the annual percentage rate, payment, or term may 
change due to the variable-rate feature.

[[Page 79814]]

    (ii) A statement that the annual percentage rate does not include 
costs other than interest.
    (iii) The index used in making rate adjustments and a source of 
information about the index.
    (iv) An explanation of how the annual percentage rate will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (v) A statement that the consumer should ask about the current 
index value, margin, discount or premium, and annual percentage rate.
    (vi) A statement that the initial annual percentage rate is not 
based on the index and margin used to make later rate adjustments, and 
the period of time such initial rate will be in effect.
    (vii) The frequency of changes in the annual percentage rate.
    (viii) Any rules relating to changes in the index value and the 
annual percentage rate and resulting changes in the payment amount, 
including, for example, an explanation of payment limitations and rate 
carryover.
    (ix) A statement of any annual or more frequent periodic 
limitations on changes in the annual percentage rate (or a statement 
that no annual limitation exists), as well as a statement of the 
maximum annual percentage rate that may be imposed under each payment 
option.
    (x) The minimum periodic payment required when the maximum annual 
percentage rate for each payment option is in effect for a $10,000 
outstanding balance, and a statement of the earliest date or time the 
maximum rate may be imposed.
    (xi) An historical example, based on a $10,000 extension of credit, 
illustrating how annual percentage rates and payments would have been 
affected by index value changes implemented according to the terms of 
the plan. The historical example shall be based on the most recent 15 
years of index values (selected for the same time period each year) and 
shall reflect all significant plan terms, such as negative 
amortization, rate carryover, rate discounts, and rate and payment 
limitations, that would have been affected by the index movement during 
the period.
    (xii) A statement that rate information will be provided on or with 
each periodic statement.
    (e) Brochure. The home equity brochure entitled ``What You Should 
Know About Home Equity Lines of Credit'' or a suitable substitute shall 
be provided.
    (f) Limitations on home equity plans. No creditor may, by contract 
or otherwise:
    (1) Change the annual percentage rate unless:
    (i) Such change is based on an index that is not under the 
creditor's control; and
    (ii) Such index is available to the general public.
    (2) Terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term (except for reverse mortgage 
transactions that are subject to paragraph (f)(4) of this section) 
unless:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the plan;
    (ii) The consumer fails to meet the repayment terms of the 
agreement for any outstanding balance;
    (iii) Any action or inaction by the consumer adversely affects the 
creditor's security for the plan, or any right of the creditor in such 
security; or
    (iv) Federal law dealing with credit extended by a depository 
institution to its executive officers specifically requires that as a 
condition of the plan the credit shall become due and payable on 
demand, provided that the creditor includes such a provision in the 
initial agreement.
    (3) Change any term, except that a creditor may:
    (i) Provide in the initial agreement that it may prohibit 
additional extensions of credit or reduce the credit limit during any 
period in which the maximum annual percentage rate is reached. A 
creditor also may provide in the initial agreement that specified 
changes will occur if a specified event takes place (for example, that 
the annual percentage rate will increase a specified amount if the 
consumer leaves the creditor's employment).
    (ii) Change the index and margin used under the plan if the 
original index is no longer available, the new index has an historical 
movement substantially similar to that of the original index, and the 
new index and margin would have resulted in an annual percentage rate 
substantially similar to the rate in effect at the time the original 
index became unavailable.
    (iii) Make a specified change if the consumer specifically agrees 
to it in writing at that time.
    (iv) Make a change that will unequivocally benefit the consumer 
throughout the remainder of the plan.
    (v) Make an insignificant change to terms.
    (vi) Prohibit additional extensions of credit or reduce the credit 
limit applicable to an agreement during any period in which:
    (A) The value of the dwelling that secures the plan declines 
significantly below the dwelling's appraised value for purposes of the 
plan;
    (B) The creditor reasonably believes that the consumer will be 
unable to fulfill the repayment obligations under the plan because of a 
material change in the consumer's financial circumstances;
    (C) The consumer is in default of any material obligation under the 
agreement;
    (D) The creditor is precluded by government action from imposing 
the annual percentage rate provided for in the agreement;
    (E) The priority of the creditor's security interest is adversely 
affected by government action to the extent that the value of the 
security interest is less than 120 percent of the credit line; or
    (F) The creditor is notified by its regulatory agency that 
continued advances constitute an unsafe and unsound practice.
    (4) For reverse mortgage transactions that are subject to Sec.  
1026.33, terminate a plan and demand repayment of the entire 
outstanding balance in advance of the original term except:
    (i) In the case of default;
    (ii) If the consumer transfers title to the property securing the 
note;
    (iii) If the consumer ceases using the property securing the note 
as the primary dwelling; or
    (iv) Upon the consumer's death.
    (g) Refund of fees. A creditor shall refund all fees paid by the 
consumer to anyone in connection with an application if any term 
required to be disclosed under paragraph (d) of this section changes 
(other than a change due to fluctuations in the index in a variable-
rate plan) before the plan is opened and, as a result, the consumer 
elects not to open the plan.
    (h) Imposition of nonrefundable fees. Neither a creditor nor any 
other person may impose a nonrefundable fee in connection with an 
application until three business days after the consumer receives the 
disclosures and brochure required under this section. If the 
disclosures and brochure are mailed to the consumer, the consumer is 
considered to have received them three business days after they are 
mailed.


Sec.  1026.41  [Reserved]


Sec.  1026.42  Valuation independence.

    (a) Scope. This section applies to any consumer credit transaction 
secured by the consumer's principal dwelling.
    (b) Definitions. For purposes of this section:
    (1) ``Covered person'' means a creditor with respect to a covered 
transaction or

[[Page 79815]]

a person that provides ``settlement services,'' as defined in 12 U.S.C. 
2602(3) and implementing regulations, in connection with a covered 
transaction.
    (2) ``Covered transaction'' means an extension of consumer credit 
that is or will be secured by the consumer's principal dwelling, as 
defined in Sec.  1026.2(a)(19).
    (3) ``Valuation'' means an estimate of the value of the consumer's 
principal dwelling in written or electronic form, other than one 
produced solely by an automated model or system.
    (4) ``Valuation management functions'' means:
    (i) Recruiting, selecting, or retaining a person to prepare a 
valuation;
    (ii) Contracting with or employing a person to prepare a valuation;
    (iii) Managing or overseeing the process of preparing a valuation, 
including by providing administrative services such as receiving orders 
for and receiving a valuation, submitting a completed valuation to 
creditors and underwriters, collecting fees from creditors and 
underwriters for services provided in connection with a valuation, and 
compensating a person that prepares valuations; or
    (iv) Reviewing or verifying the work of a person that prepares 
valuations.
    (c) Valuation of consumer's principal dwelling. (1) Coercion. In 
connection with a covered transaction, no covered person shall or shall 
attempt to directly or indirectly cause the value assigned to the 
consumer's principal dwelling to be based on any factor other than the 
independent judgment of a person that prepares valuations, through 
coercion, extortion, inducement, bribery, or intimidation of, 
compensation or instruction to, or collusion with a person that 
prepares valuations or performs valuation management functions.
    (i) Examples of actions that violate paragraph (c)(1) include:
    (A) Seeking to influence a person that prepares a valuation to 
report a minimum or maximum value for the consumer's principal 
dwelling;
    (B) Withholding or threatening to withhold timely payment to a 
person that prepares a valuation or performs valuation management 
functions because the person does not value the consumer's principal 
dwelling at or above a certain amount;
    (C) Implying to a person that prepares valuations that current or 
future retention of the person depends on the amount at which the 
person estimates the value of the consumer's principal dwelling;
    (D) Excluding a person that prepares a valuation from consideration 
for future engagement because the person reports a value for the 
consumer's principal dwelling that does not meet or exceed a 
predetermined threshold; and
    (E) Conditioning the compensation paid to a person that prepares a 
valuation on consummation of the covered transaction.
    (2) Mischaracterization of value. (i) Misrepresentation. In 
connection with a covered transaction, no person that prepares 
valuations shall materially misrepresent the value of the consumer's 
principal dwelling in a valuation. A misrepresentation is material for 
purposes of this paragraph (c)(2)(i) if it is likely to significantly 
affect the value assigned to the consumer's principal dwelling. A bona 
fide error shall not be a misrepresentation.
    (ii) Falsification or alteration. In connection with a covered 
transaction, no covered person shall falsify and no covered person 
other than a person that prepares valuations shall materially alter a 
valuation. An alteration is material for purposes of this paragraph 
(c)(2)(ii) if it is likely to significantly affect the value assigned 
to the consumer's principal dwelling.
    (iii) Inducement of mischaracterization. In connection with a 
covered transaction, no covered person shall induce a person to violate 
paragraph (c)(2)(i) or (ii) of this section.
    (3) Permitted actions. Examples of actions that do not violate 
paragraph (c)(1) or (c)(2) include:
    (i) Asking a person that prepares a valuation to consider 
additional, appropriate property information, including information 
about comparable properties, to make or support a valuation;
    (ii) Requesting that a person that prepares a valuation provide 
further detail, substantiation, or explanation for the person's 
conclusion about the value of the consumer's principal dwelling;
    (iii) Asking a person that prepares a valuation to correct errors 
in the valuation;
    (iv) Obtaining multiple valuations for the consumer's principal 
dwelling to select the most reliable valuation;
    (v) Withholding compensation due to breach of contract or 
substandard performance of services; and
    (vi) Taking action permitted or required by applicable Federal or 
state statute, regulation, or agency guidance.
    (d) Prohibition on conflicts of interest. (1)(i) In general. No 
person preparing a valuation or performing valuation management 
functions for a covered transaction may have a direct or indirect 
interest, financial or otherwise, in the property or transaction for 
which the valuation is or will be performed.
    (ii) Employees and affiliates of creditors; providers of multiple 
settlement services. In any covered transaction, no person violates 
paragraph (d)(1)(i) of this section based solely on the fact that the 
person:
    (A) Is an employee or affiliate of the creditor; or
    (B) Provides a settlement service in addition to preparing 
valuations or performing valuation management functions, or based 
solely on the fact that the person's affiliate performs another 
settlement service.
    (2) Employees and affiliates of creditors with assets of more than 
$250 million for both of the past two calendar years. For any covered 
transaction in which the creditor had assets of more than $250 million 
as of December 31st for both of the past two calendar years, a person 
subject to paragraph (d)(1)(i) of this section who is employed by or 
affiliated with the creditor does not have a conflict of interest in 
violation of paragraph (d)(1)(i) of this section based on the person's 
employment or affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation;
    (ii) The person preparing a valuation or performing valuation 
management functions reports to a person who is not part of the 
creditor's loan production function, as defined in paragraph (d)(5)(i) 
of this section, and whose compensation is not based on the closing of 
the transaction to which the valuation relates; and
    (iii) No employee, officer or director in the creditor's loan 
production function, as defined in paragraph (d)(5)(i) of this section, 
is directly or indirectly involved in selecting, retaining, 
recommending or influencing the selection of the person to prepare a 
valuation or perform valuation management functions, or to be included 
in or excluded from a list of approved persons who prepare valuations 
or perform valuation management functions.
    (3) Employees and affiliates of creditors with assets of $250 
million or less for either of the past two calendar years. For any 
covered transaction in which the creditor had assets of $250 million or 
less as of December 31st for either of the past two calendar years, a 
person subject to paragraph (d)(1)(i) of this section who is employed 
by or affiliated with the creditor does not have a conflict of interest 
in violation of

[[Page 79816]]

paragraph (d)(1)(i) of this section based on the person's employment or 
affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation; and
    (ii) The creditor requires that any employee, officer or director 
of the creditor who orders, performs, or reviews a valuation for a 
covered transaction abstain from participating in any decision to 
approve, not approve, or set the terms of that transaction.
    (4) Providers of multiple settlement services. For any covered 
transaction, a person who prepares a valuation or performs valuation 
management functions in addition to performing another settlement 
service for the transaction, or whose affiliate performs another 
settlement service for the transaction, does not have a conflict of 
interest in violation of paragraph (d)(1)(i) of this section as a 
result of the person or the person's affiliate performing another 
settlement service for the transaction if:
    (i) The creditor had assets of more than $250 million as of 
December 31st for both of the past two calendar years and the 
conditions in paragraph (d)(2)(i)-(iii) are met; or
    (ii) The creditor had assets of $250 million or less as of December 
31st for either of the past two calendar years and the conditions in 
paragraph (d)(3)(i)-(ii) are met.
    (5) Definitions. For purposes of this paragraph (d), the following 
definitions apply:
    (i) Loan production function. The term ``loan production function'' 
means an employee, officer, director, department, division, or other 
unit of a creditor with responsibility for generating covered 
transactions, approving covered transactions, or both.
    (ii) Settlement service. The term ``settlement service'' has the 
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C. 
2601 et seq.
    (iii) Affiliate. The term ``affiliate'' has the same meaning as in 
Regulation Y of the Board of Governors of the Federal Reserve System, 
12 CFR 225.2(a).
    (e) When extension of credit prohibited. In connection with a 
covered transaction, a creditor that knows, at or before consummation, 
of a violation of paragraph (c) or (d) of this section in connection 
with a valuation shall not extend credit based on the valuation, unless 
the creditor documents that it has acted with reasonable diligence to 
determine that the valuation does not materially misstate or 
misrepresent the value of the consumer's principal dwelling. For 
purposes of this paragraph (e), a valuation materially misstates or 
misrepresents the value of the consumer's principal dwelling if the 
valuation contains a misstatement or misrepresentation that affects the 
credit decision or the terms on which credit is extended.
    (f) Customary and reasonable compensation. (1) Requirement to 
provide customary and reasonable compensation to fee appraisers. In any 
covered transaction, the creditor and its agents shall compensate a fee 
appraiser for performing appraisal services at a rate that is customary 
and reasonable for comparable appraisal services performed in the 
geographic market of the property being appraised. For purposes of 
paragraph (f) of this section, ``agents'' of the creditor do not 
include any fee appraiser as defined in paragraph (f)(4)(i) of this 
section.
    (2) Presumption of compliance. A creditor and its agents shall be 
presumed to comply with paragraph (f)(1) of this section if:
    (i) The creditor or its agents compensate the fee appraiser in an 
amount that is reasonably related to recent rates paid for comparable 
appraisal services performed in the geographic market of the property 
being appraised. In determining this amount, a creditor or its agents 
shall review the factors below and make any adjustments to recent rates 
paid in the relevant geographic market necessary to ensure that the 
amount of compensation is reasonable:
    (A) The type of property,
    (B) The scope of work,
    (C) The time in which the appraisal services are required to be 
performed,
    (D) Fee appraiser qualifications,
    (E) Fee appraiser experience and professional record, and
    (F) Fee appraiser work quality; and
    (ii) The creditor and its agents do not engage in any 
anticompetitive acts in violation of state or Federal law that affect 
the compensation paid to fee appraisers, including:
    (A) Entering into any contracts or engaging in any conspiracies to 
restrain trade through methods such as price fixing or market 
allocation, as prohibited under section 1 of the Sherman Antitrust Act, 
15 U.S.C. 1, or any other relevant antitrust laws; or
    (B) Engaging in any acts of monopolization such as restricting any 
person from entering the relevant geographic market or causing any 
person to leave the relevant geographic market, as prohibited under 
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other 
relevant antitrust laws.
    (3) Alternative presumption of compliance. A creditor and its 
agents shall be presumed to comply with paragraph (f)(1) of this 
section if the creditor or its agents determine the amount of 
compensation paid to the fee appraiser by relying on information about 
rates that:
    (i) Is based on objective third-party information, including fee 
schedules, studies, and surveys prepared by independent third parties 
such as government agencies, academic institutions, and private 
research firms;
    (ii) Is based on recent rates paid to a representative sample of 
providers of appraisal services in the geographic market of the 
property being appraised or the fee schedules of those providers; and
    (iii) In the case of information based on fee schedules, studies, 
and surveys, such fee schedules, studies, or surveys, or the 
information derived therefrom, excludes compensation paid to fee 
appraisers for appraisals ordered by appraisal management companies, as 
defined in paragraph (f)(4)(iii) of this section.
    (4) Definitions. For purposes of this paragraph (f), the following 
definitions apply:
    (i) Fee appraiser. The term ``fee appraiser'' means:
    (A) A natural person who is a state-licensed or state-certified 
appraiser and receives a fee for performing an appraisal, but who is 
not an employee of the person engaging the appraiser; or
    (B) An organization that, in the ordinary course of business, 
employs state-licensed or state-certified appraisers to perform 
appraisals, receives a fee for performing appraisals, and is not 
subject to the requirements of section 1124 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3353).
    (ii) Appraisal services. The term ``appraisal services'' means the 
services required to perform an appraisal, including defining the scope 
of work, inspecting the property, reviewing necessary and appropriate 
public and private data sources (for example, multiple listing 
services, tax assessment records and public land records), developing 
and rendering an opinion of value, and preparing and submitting the 
appraisal report.
    (iii) Appraisal management company. The term ``appraisal management 
company'' means any person authorized to perform one or more of the 
following actions on behalf of the creditor:
    (A) Recruit, select, and retain fee appraisers;

[[Page 79817]]

    (B) Contract with fee appraisers to perform appraisal services;
    (C) Manage the process of having an appraisal performed, including 
providing administrative services such as receiving appraisal orders 
and appraisal reports, submitting completed appraisal reports to 
creditors and underwriters, collecting fees from creditors and 
underwriters for services provided, and compensating fee appraisers for 
services performed; or
    (D) Review and verify the work of fee appraisers.
    (g) Mandatory reporting. (1) Reporting required. Any covered person 
that reasonably believes an appraiser has not complied with the Uniform 
Standards of Professional Appraisal Practice or ethical or professional 
requirements for appraisers under applicable state or Federal statutes 
or regulations shall refer the matter to the appropriate state agency 
if the failure to comply is material. For purposes of this paragraph 
(g)(1), a failure to comply is material if it is likely to 
significantly affect the value assigned to the consumer's principal 
dwelling.
    (2) Timing of reporting. A covered person shall notify the 
appropriate state agency within a reasonable period of time after the 
person determines that there is a reasonable basis to believe that a 
failure to comply required to be reported under paragraph (g)(1) of 
this section has occurred.
    (3) Definition. For purposes of this paragraph (g), ``state 
agency'' means ``state appraiser certifying and licensing agency'' 
under 12 U.S.C. 3350(1) and any implementing regulations. The 
appropriate state agency to which a covered person must refer a matter 
under paragraph (g)(1) of this section is the agency for the state in 
which the consumer's principal dwelling is located.


Sec. Sec.  1026.43-1026.45  [Reserved]

Subpart F--Special Rules for Private Education Loans


Sec.  1026.46  Special disclosure requirements for private education 
loans.

    (a) Coverage. The requirements of this subpart apply to private 
education loans as defined in Sec.  1026.46(b)(5). A creditor may, at 
its option, comply with the requirements of this subpart for an 
extension of credit subject to Sec. Sec.  1026.17 and 1026.18 that is 
extended to a consumer for expenses incurred after graduation from a 
law, medical, dental, veterinary, or other graduate school and related 
to relocation, study for a bar or other examination, participation in 
an internship or residency program, or similar purposes.
    (1) Relation to other subparts in this part. Except as otherwise 
specifically provided, the requirements and limitations of this subpart 
are in addition to and not in lieu of those contained in other subparts 
of this Part.
    (2) [Reserved]
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) Covered educational institution means:
    (i) An educational institution that meets the definition of an 
institution of higher education, as defined in paragraph (b)(2) of this 
section, without regard to the institution's accreditation status; and
    (ii) Includes an agent, officer, or employee of the institution of 
higher education. An agent means an institution-affiliated organization 
as defined by section 151 of the Higher Education Act of 1965 (20 
U.S.C. 1019) or an officer or employee of an institution-affiliated 
organization.
    (2) Institution of higher education has the same meaning as in 
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 
1001-1002) and the implementing regulations published by the U.S. 
Department of Education.
    (3) Postsecondary educational expenses means any of the expenses 
that are listed as part of the cost of attendance, as defined under 
section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), of 
a student at a covered educational institution. These expenses include 
tuition and fees, books, supplies, miscellaneous personal expenses, 
room and board, and an allowance for any loan fee, origination fee, or 
insurance premium charged to a student or parent for a loan incurred to 
cover the cost of the student's attendance.
    (4) Preferred lender arrangement has the same meaning as in section 
151 of the Higher Education Act of 1965 (20 U.S.C. 1019).
    (5) Private education loan means an extension of credit that:
    (i) Is not made, insured, or guaranteed under Title IV of the 
Higher Education Act of 1965 (20 U.S.C. 1070 et seq.);
    (ii) Is extended to a consumer expressly, in whole or in part, for 
postsecondary educational expenses, regardless of whether the loan is 
provided by the educational institution that the student attends;
    (iii) Does not include open-end credit or any loan that is secured 
by real property or a dwelling; and
    (iv) Does not include an extension of credit in which the covered 
educational institution is the creditor if:
    (A) The term of the extension of credit is 90 days or less; or
    (B) an interest rate will not be applied to the credit balance and 
the term of the extension of credit is one year or less, even if the 
credit is payable in more than four installments.
    (c) Form of disclosures. (1) Clear and conspicuous. The disclosures 
required by this subpart shall be made clearly and conspicuously.
    (2) Transaction disclosures. (i) The disclosures required under 
Sec. Sec.  1026.47(b) and (c) shall be made in writing, in a form that 
the consumer may keep. The disclosures shall be grouped together, shall 
be segregated from everything else, and shall not contain any 
information not directly related to the disclosures required under 
Sec. Sec.  1026.47(b) and (c), which include the disclosures required 
under Sec.  1026.18.
    (ii) The disclosures may include an acknowledgement of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number. The following disclosures may be made together with or 
separately from other required disclosures: the creditor's identity 
under Sec.  1026.18(a), insurance or debt cancellation under Sec.  
1026.18(n), and certain security interest charges under Sec.  
1026.18(o).
    (iii) The term ``finance charge'' and corresponding amount, when 
required to be disclosed under Sec.  1026.18(d), and the interest rate 
required to be disclosed under Sec. Sec.  1026.47(b)(1)(i) and (c)(1), 
shall be more conspicuous than any other disclosure, except the 
creditor's identity under Sec.  1026.18(a).
    (3) Electronic disclosures. The disclosures required under 
Sec. Sec.  1026.47(b) and (c) 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.  1026.47(a) may be provided to the 
consumer in electronic form on or with an application or solicitation 
that is accessed by the consumer in electronic form without regard to 
the consumer consent or other provisions of the E-Sign Act. The form 
required to be received under Sec.  1026.48(e) may be accepted by the 
creditor in electronic form as provided for in that section.
    (d) Timing of disclosures. (1) Application or solicitation 
disclosures. (i) The disclosures required by Sec.  1026.47(a) shall be 
provided on or with any application or solicitation. For purposes of 
this subpart, the term solicitation means an offer of credit that does 
not require the consumer to complete an application. A ``firm offer of 
credit'' as defined in section 603(l) of

[[Page 79818]]

the Fair Credit Reporting Act (15 U.S.C. 1681a(l)) is a solicitation 
for purposes of this section.
    (ii) The creditor may, at its option, disclose orally the 
information in Sec.  1026.47(a) in a telephone application or 
solicitation. Alternatively, if the creditor does not disclose orally 
the information in Sec.  1026.47(a), the creditor must provide the 
disclosures or place them in the mail no later than three business days 
after the consumer has applied for the credit, except that, if the 
creditor either denies the consumer's application or provides or places 
in the mail the disclosures in Sec.  1026.47(b) no later than three 
business days after the consumer requests the credit, the creditor need 
not also provide the Sec.  1026.47(a) disclosures.
    (iii) Notwithstanding paragraph (d)(1)(i) of this section, for a 
loan that the consumer may use for multiple purposes including, but not 
limited to, postsecondary educational expenses, the creditor need not 
provide the disclosures required by Sec.  1026.47(a).
    (2) Approval disclosures. The creditor shall provide the 
disclosures required by Sec.  1026.47(b) before consummation on or with 
any notice of approval provided to the consumer. If the creditor mails 
notice of approval, the disclosures must be mailed with the notice. If 
the creditor communicates notice of approval by telephone, the creditor 
must mail the disclosures within three business days of providing the 
notice of approval. If the creditor communicates notice of approval 
electronically, the creditor may provide the disclosures in electronic 
form in accordance with Sec.  1026.46(d)(3); otherwise the creditor 
must mail the disclosures within three business days of communicating 
the notice of approval. If the creditor communicates approval in 
person, the creditor must provide the disclosures to the consumer at 
that time.
    (3) Final disclosures. The disclosures required by Sec.  1026.47(c) 
shall be provided after the consumer accepts the loan in accordance 
with Sec.  1026.48(c)(1).
    (4) Receipt of mailed disclosures. If the disclosures under 
paragraphs (d)(1), (d)(2) or (d)(3) of this section are mailed to the 
consumer, the consumer is considered to have received them three 
business days after they are mailed.
    (e) Basis of disclosures and use of estimates. (1) Legal 
obligation. Disclosures shall reflect the terms of the legal obligation 
between the parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available at the 
time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (f) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor 
will comply with the requirements that this part 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 obligation.
    (g) Effect of subsequent events. (1) Approval disclosures. If a 
disclosure under Sec.  1026.47(b) becomes inaccurate because of an 
event that occurs after the creditor delivers the required disclosures, 
the inaccuracy is not a violation of Regulation Z (12 CFR part 1026), 
although new disclosures may be required under Sec.  1026.48(c).
    (2) Final disclosures. If a disclosure under Sec.  1026.47(c) 
becomes inaccurate because of an event that occurs after the creditor 
delivers the required disclosures, the inaccuracy is not a violation of 
Regulation Z (12 CFR part 1026).


Sec.  1026.47  Content of disclosures.

    (a) Application or solicitation disclosures. A creditor shall 
provide the disclosures required under paragraph (a) of this section on 
or with a solicitation or an application for a private education loan.
    (1) Interest Rates. (i) The interest rate or range of interest 
rates applicable to the loan and actually offered by the creditor at 
the time of application or solicitation. If the rate will depend, in 
part, on a later determination of the consumer's creditworthiness or 
other factors, a statement that the rate for which the consumer may 
qualify will depend on the consumer's creditworthiness and other 
factors, if applicable.
    (ii) Whether the interest rates applicable to the loan are fixed or 
variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the interest rate adjustments, or lack 
thereof; a statement that the consumer's actual rate could be higher or 
lower than the rates disclosed under paragraph (a)(1)(i) of this 
section, if applicable; and, if the limitation is determined by 
applicable law, that fact.
    (iv) Whether the applicable interest rates typically will be higher 
if the loan is not co-signed or guaranteed.
    (2) Fees and default or late payment costs. (i) An itemization of 
the fees or range of fees required to obtain the private education 
loan.
    (ii) Any fees, changes to the interest rate, and adjustments to 
principal based on the consumer's defaults or late payments.
    (3) Repayment terms. (i) The term of the loan, which is the period 
during which regularly scheduled payments of principal and interest 
will be due.
    (ii) A description of any payment deferral options, or, if the 
consumer does not have the option to defer payments, that fact.
    (iii) For each payment deferral option applicable while the student 
is enrolled at a covered educational institution:
    (A) Whether interest will accrue during the deferral period; and
    (B) If interest accrues, whether payment of interest may be 
deferred and added to the principal balance.
    (iv) A statement that if the consumer files for bankruptcy, the 
consumer may still be required to pay back the loan.
    (4) Cost estimates. An example of the total cost of the loan 
calculated as the total of payments over the term of the loan:
    (i) Using the highest rate of interest disclosed under paragraph 
(a)(1) of this section and including all finance charges applicable to 
loans at that rate;
    (ii) Using an amount financed of $10,000, or $5000 if the creditor 
only offers loans of this type for less than $10,000; and
    (iii) Calculated for each payment option.
    (5) Eligibility. Any age or school enrollment eligibility 
requirements relating to the consumer or cosigner.
    (6) Alternatives to private education loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under Title IV of the Higher Education Act of 1965 
(20 U.S.C. 1070 et seq.).
    (ii) The interest rates available under each program under Title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.) and 
whether the rates are fixed or variable.
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the student attends, or at the Web 
site of the U.S. Department of Education, including an appropriate Web 
site address.
    (iv) A statement that a covered educational institution may have 
school-specific education loan benefits and terms not detailed on the 
disclosure form.
    (7) Rights of the consumer. A statement that if the loan is 
approved, the terms of the loan will be available and will not change 
for 30 days except as a result of adjustments to the interest

[[Page 79819]]

rate and other changes permitted by law.
    (8) Self-certification information. A statement that, before the 
loan may be consummated, the consumer must complete the self-
certification form and that the form may be obtained from the 
institution of higher education that the student attends.
    (b) Approval disclosures. On or with any notice of approval 
provided to the consumer, the creditor shall disclose the information 
required under Sec.  1026.18 and the following information:
    (1) Interest rate. (i) The interest rate applicable to the loan.
    (ii) Whether the interest rate is fixed or variable.
    (iii) If the interest rate may increase after consummation of the 
transaction, any limitations on the rate adjustments, or lack thereof.
    (2) Fees and default or late payment costs. (i) An itemization of 
the fees or range of fees required to obtain the private education 
loan.
    (ii) Any fees, changes to the interest rate, and adjustments to 
principal based on the consumer's defaults or late payments.
    (3) Repayment terms. (i) The principal amount of the loan for which 
the consumer has been approved.
    (ii) The term of the loan, which is the period during which 
regularly scheduled payments of principal and interest will be due.
    (iii) A description of the payment deferral option chosen by the 
consumer, if applicable, and any other payment deferral options that 
the consumer may elect at a later time.
    (iv) Any payments required while the student is enrolled at a 
covered educational institution, based on the deferral option chosen by 
the consumer.
    (v) The amount of any unpaid interest that will accrue while the 
student is enrolled at a covered educational institution, based on the 
deferral option chosen by the consumer.
    (vi) A statement that if the consumer files for bankruptcy, the 
consumer may still be required to pay back the loan.
    (vii) An estimate of the total amount of payments calculated based 
on:
    (A) The interest rate applicable to the loan. Compliance with Sec.  
1026.18(h) constitutes compliance with this requirement.
    (B) The maximum possible rate of interest for the loan or, if a 
maximum rate cannot be determined, a rate of 25%.
    (C) If a maximum rate cannot be determined, the estimate of the 
total amount for repayment must include a statement that there is no 
maximum rate and that the total amount for repayment disclosed under 
paragraph (b)(3)(vii)(B) of this section is an estimate and will be 
higher if the applicable interest rate increases.
    (viii) The maximum monthly payment based on the maximum rate of 
interest for the loan or, if a maximum rate cannot be determined, a 
rate of 25%. If a maximum cannot be determined, a statement that there 
is no maximum rate and that the monthly payment amount disclosed is an 
estimate and will be higher if the applicable interest rate increases.
    (4) Alternatives to private education loans. (i) A statement that 
the consumer may qualify for Federal student financial assistance 
through a program under Title IV of the Higher Education Act of 1965 
(20 U.S.C. 1070 et seq.).
    (ii) The interest rates available under each program under Title IV 
of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.), and 
whether the rates are fixed or variable.
    (iii) A statement that the consumer may obtain additional 
information concerning Federal student financial assistance from the 
institution of higher education that the student attends, or at the Web 
site of the U.S. Department of Education, including an appropriate Web 
site address.
    (5) Rights of the consumer. (i) A statement that the consumer may 
accept the terms of the loan until the acceptance period under Sec.  
1026.48(c)(1) has expired. The statement must include the specific date 
on which the acceptance period expires, based on the date upon which 
the consumer receives the disclosures required under this subsection 
for the loan. The disclosure must also specify the method or methods by 
which the consumer may communicate acceptance.
    (ii) A statement that, except for changes to the interest rate and 
other changes permitted by law, the rates and terms of the loan may not 
be changed by the creditor during the period described in paragraph 
(b)(5)(i) of this section.
    (c) Final disclosures. After the consumer has accepted the loan in 
accordance with Sec.  1026.48(c)(1), the creditor shall disclose to the 
consumer the information required by Sec.  1026.18 and the following 
information:
    (1) Interest rate. Information required to be disclosed under Sec.  
1026.47(b)(1).
    (2) Fees and default or late payment costs. Information required to 
be disclosed under Sec.  1026.47(b)(2).
    (3) Repayment terms. Information required to be disclosed under 
Sec.  1026.47(b)(3).
    (4) Cancellation right. A statement that:
    (i) The consumer has the right to cancel the loan, without penalty, 
at any time before the cancellation period under Sec.  1026.48(d) 
expires, and
    (ii) Loan proceeds will not be disbursed until after the 
cancellation period under Sec.  1026.48(d) expires. The statement must 
include the specific date on which the cancellation period expires and 
state that the consumer may cancel by that date. The statement must 
also specify the method or methods by which the consumer may cancel. If 
the creditor permits cancellation by mail, the statement must specify 
that the consumer's mailed request will be deemed timely if placed in 
the mail not later than the cancellation date specified on the 
disclosure. The disclosures required by this paragraph (c)(4) must be 
made more conspicuous than any other disclosure required under this 
section, except for the finance charge, the interest rate, and the 
creditor's identity, which must be disclosed in accordance with the 
requirements of Sec.  1026.46(c)(2)(iii).


Sec.  1026.48  Limitations on private education loans.

    (a) Co-branding prohibited. (1) Except as provided in paragraph (b) 
of this section, a creditor, other than the covered educational 
institution itself, shall not use the name, emblem, mascot, or logo of 
a covered educational institution, or other words, pictures, or symbols 
identified with a covered educational institution, in the marketing of 
private education loans in a way that implies that the covered 
education institution endorses the creditor's loans.
    (2) A creditor's marketing of private education loans does not 
imply that the covered education institution endorses the creditor's 
loans if the marketing includes a clear and conspicuous disclosure that 
is equally prominent and closely proximate to the reference to the 
covered educational institution that the covered educational 
institution does not endorse the creditor's loans and that the creditor 
is not affiliated with the covered educational institution.
    (b) Endorsed lender arrangements. If a creditor and a covered 
educational institution have entered into an arrangement where the 
covered educational institution agrees to endorse the creditor's 
private education loans, and such arrangement is not prohibited by 
other applicable law or regulation, paragraph (a)(1) of this section 
does not apply if the private education loan marketing includes a clear 
and conspicuous disclosure that is equally prominent and closely 
proximate to the reference to the covered educational institution that 
the creditor's loans are

[[Page 79820]]

not offered or made by the covered educational institution, but are 
made by the creditor.
    (c) Consumer's right to accept. (1) The consumer has the right to 
accept the terms of a private education loan at any time within 30 
calendar days following the date on which the consumer receives the 
disclosures required under Sec.  1026.47(b).
    (2) Except for changes permitted under paragraphs (c)(3) and 
(c)(4), the rate and terms of the private education loan that are 
required to be disclosed under Sec. Sec.  1026.47(b) and (c) may not be 
changed by the creditor prior to the earlier of:
    (i) The date of disbursement of the loan; or
    (ii) The expiration of the 30 calendar day period described in 
paragraph (c)(1) of this section if the consumer has not accepted the 
loan within that time.
    (3) Exceptions not requiring re-disclosure. (i) Notwithstanding 
paragraph (c)(2) of this section, nothing in this section prevents the 
creditor from:
    (A) Withdrawing an offer before consummation of the transaction if 
the extension of credit would be prohibited by law or if the creditor 
has reason to believe that the consumer has committed fraud in 
connection with the loan application;
    (B) Changing the interest rate based on adjustments to the index 
used for a loan;
    (C) Changing the interest rate and terms if the change will 
unequivocally benefit the consumer; or
    (D) Reducing the loan amount based upon a certification or other 
information received from the covered educational institution, or from 
the consumer, indicating that the student's cost of attendance has 
decreased or the consumer's other financial aid has increased. A 
creditor may make corresponding changes to the rate and other terms 
only to the extent that the consumer would have received the terms if 
the consumer had applied for the reduced loan amount.
    (ii) If the creditor changes the rate or terms of the loan under 
this paragraph (c)(3), the creditor need not provide the disclosures 
required under Sec.  1026.47(b) for the new loan terms, nor need the 
creditor provide an additional 30-day period to the consumer to accept 
the new terms of the loan under paragraph (c)(1) of this section.
    (4) Exceptions requiring re-disclosure. (i) Notwithstanding 
paragraphs (c)(2) or (c)(3) of this section, nothing in this section 
prevents the creditor, at its option, from changing the rate or terms 
of the loan to accommodate a specific request by the consumer. For 
example, if the consumer requests a different repayment option, the 
creditor may, but need not, offer to provide the requested repayment 
option and make any other changes to the rate and terms.
    (ii) If the creditor changes the rate or terms of the loan under 
this paragraph (c)(4), the creditor shall provide the disclosures 
required under Sec.  1026.47(b) and shall provide the consumer the 30-
day period to accept the loan under paragraph (c)(1) of this section. 
The creditor shall not make further changes to the rates and terms of 
the loan, except as specified in paragraphs (c)(3) and (4) of this 
section. Except as permitted under Sec.  1026.48(c)(3), unless the 
consumer accepts the loan offered by the creditor in response to the 
consumer's request, the creditor may not withdraw or change the rates 
or terms of the loan for which the consumer was approved prior to the 
consumer's request for a change in loan terms.
    (d) Consumer's right to cancel. The consumer may cancel a private 
education loan, without penalty, until midnight of the third business 
day following the date on which the consumer receives the disclosures 
required by Sec.  1026.47(c). No funds may be disbursed for a private 
education loan until the three-business day period has expired.
    (e) Self-certification form. For a private education loan intended 
to be used for the postsecondary educational expenses of a student 
while the student is attending an institution of higher education, the 
creditor shall obtain from the consumer or the institution of higher 
education the form developed by the Secretary of Education under 
section 155 of the Higher Education Act of 1965, signed by the 
consumer, in written or electronic form, before consummating the 
private education loan.
    (f) Provision of information by preferred lenders. A creditor that 
has a preferred lender arrangement with a covered educational 
institution shall provide to the covered educational institution the 
information required under Sec. Sec.  1026.47(a)(1) through (5), for 
each type of private education loan that the lender plans to offer to 
consumers for students attending the covered educational institution 
for the period beginning July 1 of the current year and ending June 30 
of the following year. The creditor shall provide the information 
annually by the later of the 1st day of April, or within 30 days after 
entering into, or learning the creditor is a party to, a preferred 
lender arrangement.

Subpart G--Special Rules Applicable to Credit Card Accounts and 
Open-End Credit Offered to College Students


Sec.  1026.51  Ability to Pay.

    (a) General rule. (1)(i) Consideration of ability to pay. A card 
issuer must not open a credit card account for a consumer under an 
open-end (not home-secured) consumer credit plan, or increase any 
credit limit applicable to such account, unless the card issuer 
considers the consumer's independent ability to make the required 
minimum periodic payments under the terms of the account based on the 
consumer's income or assets and current obligations.
    (ii) Reasonable policies and procedures. Card issuers must 
establish and maintain reasonable written policies and procedures to 
consider a consumer's independent income or assets and current 
obligations. Reasonable policies and procedures to consider a 
consumer's independent ability to make the required payments include 
the consideration of at least one of the following: The ratio of debt 
obligations to income; the ratio of debt obligations to assets; or the 
income the consumer will have after paying debt obligations. It would 
be unreasonable for a card issuer to not review any information about a 
consumer's income, assets, or current obligations, or to issue a credit 
card to a consumer who does not have any independent income or assets.
    (2) Minimum periodic payments. (i) Reasonable method. For purposes 
of paragraph (a)(1) of this section, a card issuer must use a 
reasonable method for estimating the minimum periodic payments the 
consumer would be required to pay under the terms of the account.
    (ii) Safe harbor. A card issuer complies with paragraph (a)(2)(i) 
of this section if it estimates required minimum periodic payments 
using the following method:
    (A) The card issuer assumes utilization, from the first day of the 
billing cycle, of the full credit line that the issuer is considering 
offering to the consumer; and
    (B) The card issuer uses a minimum payment formula employed by the 
issuer for the product the issuer is considering offering to the 
consumer or, in the case of an existing account, the minimum payment 
formula that currently applies to that account, provided that:
    (1) If the applicable minimum payment formula includes interest 
charges, the card issuer estimates those charges using an interest rate 
that the

[[Page 79821]]

issuer is considering offering to the consumer for purchases or, in the 
case of an existing account, the interest rate that currently applies 
to purchases; and
    (2) If the applicable minimum payment formula includes mandatory 
fees, the card issuer must assume that such fees have been charged to 
the account.
    (b) Rules affecting young consumers. (1) Applications from young 
consumers. A card issuer may not open a credit card account under an 
open-end (not home-secured) consumer credit plan for a consumer less 
than 21 years old, unless the consumer has submitted a written 
application and the card issuer has:
    (i) Financial information indicating the consumer has an 
independent ability to make the required minimum periodic payments on 
the proposed extension of credit in connection with the account, 
consistent with paragraph (a) of this section; or
    (ii)(A) A signed agreement of a cosigner, guarantor, or joint 
applicant who is at least 21 years old to be either secondarily liable 
for any debt on the account incurred by the consumer before the 
consumer has attained the age of 21 or jointly liable with the consumer 
for any debt on the account, and
    (B) Financial information indicating such cosigner, guarantor, or 
joint applicant has the independent ability to make the required 
minimum periodic payments on such debts, consistent with paragraph (a) 
of this section.
    (2) Credit line increases for young consumers. If a credit card 
account has been opened pursuant to paragraph (b)(1)(ii) of this 
section, no increase in the credit limit may be made on such account 
before the consumer attains the age of 21 unless the cosigner, 
guarantor, or joint accountholder who assumed liability at account 
opening agrees in writing to assume liability on the increase.


Sec.  1026.52  Limitations on fees.

    (a) Limitations prior to account opening and during first year 
after account opening. (1) General rule. Except as provided in 
paragraph (a)(2) of this section, the total amount of fees a consumer 
is required to pay with respect to a credit card account under an open-
end (not home-secured) consumer credit plan prior to account opening 
and during the first year after account opening must not exceed 25 
percent of the credit limit in effect when the account is opened. For 
purposes of this paragraph, an account is considered open no earlier 
than the date on which the account may first be used by the consumer to 
engage in transactions.
    (2) Fees not subject to limitations. Paragraph (a) of this section 
does not apply to:
    (i) Late payment fees, over-the-limit fees, and returned-payment 
fees; or
    (ii) Fees that the consumer is not required to pay with respect to 
the account.
    (3) Rule of construction. Paragraph (a) of this section does not 
authorize the imposition or payment of fees or charges otherwise 
prohibited by law.
    (b) Limitations on penalty fees. A card issuer must not impose a 
fee for violating the terms or other requirements of a credit card 
account under an open-end (not home-secured) consumer credit plan 
unless the dollar amount of the fee is consistent with paragraphs 
(b)(1) and (b)(2) of this section.
    (1) General rule. Except as provided in paragraph (b)(2) of this 
section, a card issuer may impose a fee for violating the terms or 
other requirements of a credit card account under an open-end (not 
home-secured) consumer credit plan if the dollar amount of the fee is 
consistent with either paragraph (b)(1)(i) or (b)(1)(ii) of this 
section.
    (i) Fees based on costs. A card issuer may impose a fee for 
violating the terms or other requirements of an account if the card 
issuer has determined that the dollar amount of the fee represents a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of that type of violation. A card issuer must reevaluate this 
determination at least once every twelve months. If as a result of the 
reevaluation the card issuer determines that a lower fee represents a 
reasonable proportion of the total costs incurred by the card issuer as 
a result of that type of violation, the card issuer must begin imposing 
the lower fee within 45 days after completing the reevaluation. If as a 
result of the reevaluation the card issuer determines that a higher fee 
represents a reasonable proportion of the total costs incurred by the 
card issuer as a result of that type of violation, the card issuer may 
begin imposing the higher fee after complying with the notice 
requirements in Sec.  1026.9.
    (ii) Safe harbors. A card issuer may impose a fee for violating the 
terms or other requirements of an account if the dollar amount of the 
fee does not exceed, as applicable:
    (A) $25.00;
    (B) $35.00 if the card issuer previously imposed a fee pursuant to 
paragraph (b)(1)(ii)(A) of this section for a violation of the same 
type that occurred during the same billing cycle or one of the next six 
billing cycles; or
    (C) Three percent of the delinquent balance on a charge card 
account that requires payment of outstanding balances in full at the 
end of each billing cycle if the card issuer has not received the 
required payment for two or more consecutive billing cycles.
    (D) The amounts in paragraphs (b)(1)(ii)(A) and (b)(1)(ii)(B) of 
this section will be adjusted annually by the Bureau to reflect changes 
in the Consumer Price Index.
    (2) Prohibited fees. (i) Fees that exceed dollar amount associated 
with violation. (A) Generally. A card issuer must not impose a fee for 
violating the terms or other requirements of a credit card account 
under an open-end (not home-secured) consumer credit plan that exceeds 
the dollar amount associated with the violation.
    (B) No dollar amount associated with violation. A card issuer must 
not impose a fee for violating the terms or other requirements of a 
credit card account under an open-end (not home-secured) consumer 
credit plan when there is no dollar amount associated with the 
violation. For purposes of paragraph (b)(2)(i) of this section, there 
is no dollar amount associated with the following violations:
    (1) Transactions that the card issuer declines to authorize;
    (2) Account inactivity; and
    (3) The closure or termination of an account.
    (ii) Multiple fees based on a single event or transaction. A card 
issuer must not impose more than one fee for violating the terms or 
other requirements of a credit card account under an open-end (not 
home-secured) consumer credit plan based on a single event or 
transaction. A card issuer may, at its option, comply with this 
prohibition by imposing no more than one fee for violating the terms or 
other requirements of an account during a billing cycle.


Sec.  1026.53  Allocation of payments.

    (a) General rule. Except as provided in paragraph (b) of this 
section, when a consumer makes a payment in excess of the required 
minimum periodic payment for a credit card account under an open-end 
(not home-secured) consumer credit plan, the card issuer must allocate 
the excess amount first to the balance with the highest annual 
percentage rate and any remaining portion to the other balances in 
descending order based on the applicable annual percentage rate.
    (b) Special rules. (1) Accounts with balances subject to deferred 
interest or similar program. When a balance on a credit card account 
under an open-end

[[Page 79822]]

(not home-secured) consumer credit plan is subject to a deferred 
interest or similar program that provides that a consumer will not be 
obligated to pay interest that accrues on the balance if the balance is 
paid in full prior to the expiration of a specified period of time:
    (i) Last two billing cycles. The card issuer must allocate any 
amount paid by the consumer in excess of the required minimum periodic 
payment consistent with paragraph (a) of this section, except that, 
during the two billing cycles immediately preceding expiration of the 
specified period, the excess amount must be allocated first to the 
balance subject to the deferred interest or similar program and any 
remaining portion allocated to any other balances consistent with 
paragraph (a) of this section; or
    (ii) Consumer request. The card issuer may at its option allocate 
any amount paid by the consumer in excess of the required minimum 
periodic payment among the balances on the account in the manner 
requested by the consumer.
    (2) Accounts with secured balances. When a balance on a credit card 
account under an open-end (not home-secured) consumer credit plan is 
secured, the card issuer may at its option allocate any amount paid by 
the consumer in excess of the required minimum periodic payment to that 
balance if requested by the consumer.


Sec.  1026.54  Limitations on the imposition of finance charges.

    (a) Limitations on imposing finance charges as a result of the loss 
of a grace period. (1) General rule. Except as provided in paragraph 
(b) of this section, a card issuer must not impose finance charges as a 
result of the loss of a grace period on a credit card account under an 
open-end (not home-secured) consumer credit plan if those finance 
charges are based on:
    (i) Balances for days in billing cycles that precede the most 
recent billing cycle; or
    (ii) Any portion of a balance subject to a grace period that was 
repaid prior to the expiration of the grace period.
    (2) Definition of grace period. For purposes of paragraph (a)(1) of 
this section, ``grace period'' has the same meaning as in Sec.  
1026.5(b)(2)(ii)(B)(3).
    (b) Exceptions. Paragraph (a) of this section does not apply to:
    (1) Adjustments to finance charges as a result of the resolution of 
a dispute under Sec.  1026.12 or Sec.  1026.13; or
    (2) Adjustments to finance charges as a result of the return of a 
payment.


Sec.  1026.55  Limitations on increasing annual percentage rates, fees, 
and charges.

    (a) General rule. Except as provided in paragraph (b) of this 
section, a card issuer must not increase an annual percentage rate or a 
fee or charge required to be disclosed under Sec.  1026.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) on a credit card account under an open-end 
(not home-secured) consumer credit plan.
    (b) Exceptions. A card issuer may increase an annual percentage 
rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to an exception 
set forth in this paragraph even if that increase would not be 
permitted under a different exception.
    (1) Temporary rate, fee, or charge exception. A card issuer may 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
upon the expiration of a specified period of six months or longer, 
provided that:
    (i) Prior to the commencement of that period, the card issuer 
disclosed in writing to the consumer, in a clear and conspicuous 
manner, the length of the period and the annual percentage rate, fee, 
or charge that would apply after expiration of the period; and
    (ii) Upon expiration of the specified period:
    (A) The card issuer must not apply an annual percentage rate, fee, 
or charge to transactions that occurred prior to the period that 
exceeds the annual percentage rate, fee, or charge that applied to 
those transactions prior to the period;
    (B) If the disclosures required by paragraph (b)(1)(i) of this 
section are provided pursuant to Sec.  1026.9(c), the card issuer must 
not apply an annual percentage rate, fee, or charge to transactions 
that occurred within 14 days after provision of the notice that exceeds 
the annual percentage rate, fee, or charge that applied to that 
category of transactions prior to provision of the notice; and
    (C) The card issuer must not apply an annual percentage rate, fee, 
or charge to transactions that occurred during the period that exceeds 
the increased annual percentage rate, fee, or charge disclosed pursuant 
to paragraph (b)(1)(i) of this section.
    (2) Variable rate exception. A card issuer may increase an annual 
percentage rate when:
    (i) The annual percentage rate varies according to an index that is 
not under the card issuer's control and is available to the general 
public; and
    (ii) The increase in the annual percentage rate is due to an 
increase in the index.
    (3) Advance notice exception. A card issuer may increase an annual 
percentage rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with the 
applicable notice requirements in Sec.  1026.9(b), (c), or (g), 
provided that:
    (i) If a card issuer discloses an increased annual percentage rate, 
fee, or charge pursuant to Sec.  1026.9(b), the card issuer must not 
apply that rate, fee, or charge to transactions that occurred prior to 
provision of the notice;
    (ii) If a card issuer discloses an increased annual percentage 
rate, fee, or charge pursuant to Sec.  1026.9(c) or (g), the card 
issuer must not apply that rate, fee, or charge to transactions that 
occurred prior to or within 14 days after provision of the notice; and
    (iii) This exception does not permit a card issuer to increase an 
annual percentage rate or a fee or charge required to be disclosed 
under Sec.  1026.6(b)(2)(ii), (iii), or (xii) during the first year 
after the account is opened, while the account is closed, or while the 
card issuer does not permit the consumer to use the account for new 
transactions. For purposes of this paragraph, an account is considered 
open no earlier than the date on which the account may first be used by 
the consumer to engage in transactions.
    (4) Delinquency exception. A card issuer may increase an annual 
percentage rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) due to the card issuer 
not receiving the consumer's required minimum periodic payment within 
60 days after the due date for that payment, provided that:
    (i) The card issuer must disclose in a clear and conspicuous manner 
in the notice of the increase pursuant to Sec.  1026.9(c) or (g):
    (A) A statement of the reason for the increase; and
    (B) That the increased annual percentage rate, fee, or charge will 
cease to apply if the card issuer receives six consecutive required 
minimum periodic payments on or before the payment due date beginning 
with the first payment due following the effective date of the 
increase; and
    (ii) If the card issuer receives six consecutive required minimum 
periodic payments on or before the payment due date beginning with the 
first payment due following the effective date of the increase, the 
card issuer must reduce any annual percentage rate, fee, or charge 
increased pursuant to this

[[Page 79823]]

exception to the annual percentage rate, fee, or charge that applied 
prior to the increase with respect to transactions that occurred prior 
to or within 14 days after provision of the Sec.  1026.9(c) or (g) 
notice.
    (5) Workout and temporary hardship arrangement exception. A card 
issuer may increase an annual percentage rate or a fee or charge 
required to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) due to the consumer's completion of a workout or temporary 
hardship arrangement or the consumer's failure to comply with the terms 
of such an arrangement, provided that:
    (i) Prior to commencement of the arrangement (except as provided in 
Sec.  1026.9(c)(2)(v)(D)), the card issuer has provided the consumer 
with a clear and conspicuous written disclosure of the terms of the 
arrangement (including any increases due to the completion or failure 
of the arrangement); and
    (ii) Upon the completion or failure of the arrangement, the card 
issuer must not apply to any transactions that occurred prior to 
commencement of the arrangement an annual percentage rate, fee, or 
charge that exceeds the annual percentage rate, fee, or charge that 
applied to those transactions prior to commencement of the arrangement.
    (6) Servicemembers Civil Relief Act exception. If an annual 
percentage rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (iii), or (xii) has been decreased pursuant to 50 
U.S.C. app. 527 or a similar Federal or state statute or regulation, a 
card issuer may increase that annual percentage rate, fee, or charge 
once 50 U.S.C. app. 527 or the similar statute or regulation no longer 
applies, provided that the card issuer must not apply to any 
transactions that occurred prior to the decrease an annual percentage 
rate, fee, or charge that exceeds the annual percentage rate, fee, or 
charge that applied to those transactions prior to the decrease.
    (c) Treatment of protected balances. (1) Definition of protected 
balance. For purposes of this paragraph, ``protected balance'' means 
the amount owed for a category of transactions to which an increased 
annual percentage rate or an increased fee or charge required to be 
disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
cannot be applied after the annual percentage rate, fee, or charge for 
that category of transactions has been increased pursuant to paragraph 
(b)(3) of this section.
    (2) Repayment of protected balance. The card issuer must not 
require repayment of the protected balance using a method that is less 
beneficial to the consumer than one of the following methods:
    (i) The method of repayment for the account before the effective 
date of the increase;
    (ii) An amortization period of not less than five years, beginning 
no earlier than the effective date of the increase; or
    (iii) A required minimum periodic payment that includes a 
percentage of the balance that is equal to no more than twice the 
percentage required before the effective date of the increase.
    (d) Continuing application. This section continues to apply to a 
balance on a credit card account under an open-end (not home-secured) 
consumer credit plan after:
    (1) The account is closed or acquired by another creditor; or
    (2) The balance is transferred from a credit card account under an 
open-end (not home-secured) consumer credit plan issued by a creditor 
to another credit account issued by the same creditor or its affiliate 
or subsidiary (unless the account to which the balance is transferred 
is subject to Sec.  1026.40).
    (e) Promotional waivers or rebates of interest, fees, and other 
charges. If a card issuer promotes the waiver or rebate of finance 
charges due to a periodic interest rate or fees or charges required to 
be disclosed under Sec.  1026.6(b)(2)(ii), (iii), or (xii) and applies 
the waiver or rebate to a credit card account under an open-end (not 
home-secured) consumer credit plan, any cessation of the waiver or 
rebate on that account constitutes an increase in an annual percentage 
rate, fee, or charge for purposes of this section.


Sec.  1026.56  Requirements for over-the-limit transactions.

    (a) Definition. For purposes of this section, the term ``over-the-
limit transaction'' means any extension of credit by a card issuer to 
complete a transaction that causes a consumer's credit card account 
balance to exceed the credit limit.
    (b) Opt-in requirement. (1) General. A card issuer shall not assess 
a fee or charge on a consumer's credit card account under an open-end 
(not home-secured) consumer credit plan for an over-the-limit 
transaction unless the card issuer:
    (i) Provides the consumer with an oral, written or electronic 
notice, segregated from all other information, describing the 
consumer's right to affirmatively consent, or opt in, to the card 
issuer's payment of an over-the-limit transaction;
    (ii) Provides a reasonable opportunity for the consumer to 
affirmatively consent, or opt in, to the card issuer's payment of over-
the-limit transactions;
    (iii) Obtains the consumer's affirmative consent, or opt-in, to the 
card issuer's payment of such transactions;
    (iv) Provides the consumer with confirmation of the consumer's 
consent in writing, or if the consumer agrees, electronically; and
    (v) Provides the consumer notice in writing of the right to revoke 
that consent following the assessment of an over-the-limit fee or 
charge.
    (2) Completion of over-the-limit transactions without consumer 
consent. Notwithstanding the absence of a consumer's affirmative 
consent under paragraph (b)(1)(iii) of this section, a card issuer may 
pay any over-the-limit transaction on a consumer's account provided 
that the card issuer does not impose any fee or charge on the account 
for paying that over-the-limit transaction.
    (c) Method of election. A card issuer may permit a consumer to 
consent to the card issuer's payment of any over-the-limit transaction 
in writing, orally, or electronically, at the card issuer's option. The 
card issuer must also permit the consumer to revoke his or her consent 
using the same methods available to the consumer for providing consent.
    (d) Timing and placement of notices. (1) Initial notice. (i) 
General. The notice required by paragraph (b)(1)(i) of this section 
shall be provided prior to the assessment of any over-the-limit fee or 
charge on a consumer's account.
    (ii) Oral or electronic consent. If a consumer consents to the card 
issuer's payment of any over-the-limit transaction by oral or 
electronic means, the card issuer must provide the notice required by 
paragraph (b)(1)(i) of this section immediately prior to obtaining that 
consent.
    (2) Confirmation of opt-in. The notice required by paragraph 
(b)(1)(iv) of this section may be provided no later than the first 
periodic statement sent after the consumer has consented to the card 
issuer's payment of over-the-limit transactions.
    (3) Notice of right of revocation. The notice required by paragraph 
(b)(1)(v) of this section shall be provided on the front of any page of 
each periodic statement that reflects the assessment of an over-the-
limit fee or charge on a consumer's account.
    (e) Content. (1) Initial notice. The notice required by paragraph 
(b)(1)(i) of this section shall include all applicable items in this 
paragraph (e)(1) and may

[[Page 79824]]

not contain any information not specified in or otherwise permitted by 
this paragraph.
    (i) Fees. The dollar amount of any fees or charges assessed by the 
card issuer on a consumer's account for an over-the-limit transaction;
    (ii) APRs. Any increased periodic rate(s) (expressed as an annual 
percentage rate(s)) that may be imposed on the account as a result of 
an over-the-limit transaction; and
    (iii) Disclosure of opt-in right. An explanation of the consumer's 
right to affirmatively consent to the card issuer's payment of over-
the-limit transactions, including the method(s) by which the consumer 
may consent.
    (2) Subsequent notice. The notice required by paragraph (b)(1)(v) 
of this section shall describe the consumer's right to revoke any 
consent provided under paragraph (b)(1)(iii) of this section, including 
the method(s) by which the consumer may revoke.
    (3) Safe harbor. Use of Model Forms G-25(A) or G-25(B) of Appendix 
G to this part, or substantially similar notices, constitutes 
compliance with the notice content requirements of paragraph (e) of 
this section.
    (f) Joint relationships. If two or more consumers are jointly 
liable on a credit card account under an open-end (not home-secured) 
consumer credit plan, the card issuer shall treat the affirmative 
consent of any of the joint consumers as affirmative consent for that 
account. Similarly, the card issuer shall treat a revocation of consent 
by any of the joint consumers as revocation of consent for that 
account.
    (g) Continuing right to opt in or revoke opt-in. A consumer may 
affirmatively consent to the card issuer's payment of over-the-limit 
transactions at any time in the manner described in the notice required 
by paragraph (b)(1)(i) of this section. Similarly, the consumer may 
revoke the consent at any time in the manner described in the notice 
required by paragraph (b)(1)(v) of this section.
    (h) Duration of opt-in. A consumer's affirmative consent to the 
card issuer's payment of over-the-limit transactions is effective until 
revoked by the consumer, or until the card issuer decides for any 
reason to cease paying over-the-limit transactions for the consumer.
    (i) Time to comply with revocation request. A card issuer must 
comply with a consumer's revocation request as soon as reasonably 
practicable after the card issuer receives it.
    (j) Prohibited practices. Notwithstanding a consumer's affirmative 
consent to a card issuer's payment of over-the-limit transactions, a 
card issuer is prohibited from engaging in the following practices:
    (1) Fees or charges imposed per cycle. (i) General rule. A card 
issuer may not impose more than one over-the-limit fee or charge on a 
consumer's credit card account per billing cycle, and, in any event, 
only if the credit limit was exceeded during the billing cycle. In 
addition, except as provided in paragraph (j)(1)(ii) of this section, a 
card issuer may not impose an over-the-limit fee or charge on the 
consumer's credit card account for more than three billing cycles for 
the same over-the-limit transaction where the consumer has not reduced 
the account balance below the credit limit by the payment due date for 
either of the last two billing cycles.
    (ii) Exception. The prohibition in paragraph (j)(1)(i) of this 
section on imposing an over-the-limit fee or charge in more than three 
billing cycles for the same over-the-limit transaction(s) does not 
apply if another over-the-limit transaction occurs during either of the 
last two billing cycles.
    (2) Failure to promptly replenish. A card issuer may not impose an 
over-the-limit fee or charge solely because of the card issuer's 
failure to promptly replenish the consumer's available credit following 
the crediting of the consumer's payment under Sec.  1026.10.
    (3) Conditioning. A card issuer may not condition the amount of a 
consumer's credit limit on the consumer affirmatively consenting to the 
card issuer's payment of over-the-limit transactions if the card issuer 
assesses a fee or charge for such service.
    (4) Over-the-limit fees attributed to fees or interest. A card 
issuer may not impose an over-the-limit fee or charge for a billing 
cycle if a consumer exceeds a credit limit solely because of fees or 
interest charged by the card issuer to the consumer's account during 
that billing cycle. For purposes of this paragraph (j)(4), the relevant 
fees or interest charges are charges imposed as part of the plan under 
Sec.  1026.6(b)(3).


Sec.  1026.57  Reporting and marketing rules for college student open-
end credit.

    (a) Definitions. (1) College student credit card. The term 
``college student credit card'' as used in this section means a credit 
card issued under a credit card account under an open-end (not home-
secured) consumer credit plan to any college student.
    (2) College student. The term ``college student'' as used in this 
section means a consumer who is a full-time or part-time student of an 
institution of higher education.
    (3) Institution of higher education. The term ``institution of 
higher education'' as used in this section has the same meaning as in 
sections 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 
1001 and 1002).
    (4) Affiliated organization. The term ``affiliated organization'' 
as used in this section means an alumni organization or foundation 
affiliated with or related to an institution of higher education.
    (5) College credit card agreement. The term ``college credit card 
agreement'' as used in this section means any business, marketing or 
promotional agreement between a card issuer and an institution of 
higher education or an affiliated organization in connection with which 
college student credit cards are issued to college students currently 
enrolled at that institution.
    (b) Public disclosure of agreements. An institution of higher 
education shall publicly disclose any contract or other agreement made 
with a card issuer or creditor for the purpose of marketing a credit 
card.
    (c) Prohibited inducements. No card issuer or creditor may offer a 
college student any tangible item to induce such student to apply for 
or open an open-end consumer credit plan offered by such card issuer or 
creditor, if such offer is made:
    (1) On the campus of an institution of higher education;
    (2) Near the campus of an institution of higher education; or
    (3) At an event sponsored by or related to an institution of higher 
education.
    (d) Annual report to the Bureau. (1) Requirement to report. Any 
card issuer that was a party to one or more college credit card 
agreements in effect at any time during a calendar year must submit to 
the Bureau an annual report regarding those agreements in the form and 
manner prescribed by the Bureau.
    (2) Contents of report. The annual report to the Bureau must 
include the following:
    (i) Identifying information about the card issuer and the 
agreements submitted, including the issuer's name, address, and 
identifying number (such as an RSSD ID number or tax identification 
number);
    (ii) A copy of any college credit card agreement to which the card 
issuer was a party that was in effect at any time during the period 
covered by the report;
    (iii) A copy of any memorandum of understanding in effect at any 
time during the period covered by the report between the card issuer 
and an institution of higher education or affiliated organization that 
directly or indirectly relates to the college credit card agreement or 
that controls or

[[Page 79825]]

directs any obligations or distribution of benefits between any such 
entities;
    (iv) The total dollar amount of any payments pursuant to a college 
credit card agreement from the card issuer to an institution of higher 
education or affiliated organization during the period covered by the 
report, and the method or formula used to determine such amounts;
    (v) The total number of credit card accounts opened pursuant to any 
college credit card agreement during the period covered by the report; 
and
    (vi) The total number of credit card accounts opened pursuant to 
any such agreement that were open at the end of the period covered by 
the report.
    (3) Timing of reports. Except for the initial report described in 
this paragraph (d)(3), a card issuer must submit its annual report for 
each calendar year to the Bureau by the first business day on or after 
March 31 of the following calendar year.


Sec.  1026.58  Internet posting of credit card agreements.

    (a) Applicability. The requirements of this section apply to any 
card issuer that issues credit cards under a credit card account under 
an open-end (not home-secured) consumer credit plan.
    (b) Definitions. (1) Agreement. For purposes of this section, 
``agreement'' or ``credit card agreement'' means the written document 
or documents evidencing the terms of the legal obligation, or the 
prospective legal obligation, between a card issuer and a consumer for 
a credit card account under an open-end (not home-secured) consumer 
credit plan. ``Agreement'' or ``credit card agreement'' also includes 
the pricing information, as defined in Sec.  1026.58(b)(7).
    (2) Amends. For purposes of this section, an issuer ``amends'' an 
agreement if it makes a substantive change (an ``amendment'') to the 
agreement. A change is substantive if it alters the rights or 
obligations of the card issuer or the consumer under the agreement. Any 
change in the pricing information, as defined in Sec.  1026.58(b)(7), 
is deemed to be substantive.
    (3) Business day. For purposes of this section, ``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.
    (4) Card issuer. For purposes of this section, ``card issuer'' or 
``issuer'' means the entity to which a consumer is legally obligated, 
or would be legally obligated, under the terms of a credit card 
agreement.
    (5) Offers. For purposes of this section, an issuer ``offers'' or 
``offers to the public'' an agreement if the issuer is soliciting or 
accepting applications for accounts that would be subject to that 
agreement.
    (6) Open account. For purposes of this section, an account is an 
``open account'' or ``open credit card account'' if it is a credit card 
account under an open-end (not home-secured) consumer credit plan and 
either:
    (i) The cardholder can obtain extensions of credit on the account; 
or
    (ii) There is an outstanding balance on the account that has not 
been charged off. An account that has been suspended temporarily (for 
example, due to a report by the cardholder of unauthorized use of the 
card) is considered an ``open account'' or ``open credit card 
account.''
    (7) Pricing information. For purposes of this section, ``pricing 
information'' means the information listed in Sec.  1026.6(b)(2)(i) 
through (b)(2)(xii). Pricing information does not include temporary or 
promotional rates and terms or rates and terms that apply only to 
protected balances.
    (8) Private label credit card account and private label credit card 
plan. For purposes of this section:
    (i) ``private label credit card account'' means a credit card 
account under an open-end (not home-secured) consumer credit plan with 
a credit card that can be used to make purchases only at a single 
merchant or an affiliated group of merchants; and
    (ii) ``private label credit card plan'' means all of the private 
label credit card accounts issued by a particular issuer with credit 
cards usable at the same single merchant or affiliated group of 
merchants.
    (c) Submission of agreements to Bureau. (1) Quarterly submissions. 
A card issuer must make quarterly submissions to the Bureau, in the 
form and manner specified by the Bureau. Quarterly submissions must be 
sent to the Bureau no later than the first business day on or after 
January 31, April 30, July 31, and October 31 of each year. Each 
submission must contain:
    (i) Identifying information about the card issuer and the 
agreements submitted, including the issuer's name, address, and 
identifying number (such as an RSSD ID number or tax identification 
number);
    (ii) The credit card agreements that the card issuer offered to the 
public as of the last business day of the preceding calendar quarter 
that the card issuer has not previously submitted to the Bureau;
    (iii) Any credit card agreement previously submitted to the Bureau 
that was amended during the preceding calendar quarter and that the 
card issuer offered to the public as of the last business day of the 
preceding calendar quarter, as described in Sec.  1026.58(c)(3); and
    (iv) Notification regarding any credit card agreement previously 
submitted to the Bureau that the issuer is withdrawing, as described in 
Sec.  1026.58(c)(4), (c)(5), (c)(6), and (c)(7).
    (2) [Reserved]
    (3) Amended agreements. If a credit card agreement has been 
submitted to the Bureau, the agreement has not been amended and the 
card issuer continues to offer the agreement to the public, no 
additional submission regarding that agreement is required. If a credit 
card agreement that previously has been submitted to the Bureau is 
amended and the card issuer offered the amended agreement to the public 
as of the last business day of the calendar quarter in which the change 
became effective, the card issuer must submit the entire amended 
agreement to the Bureau, in the form and manner specified by the 
Bureau, by the first quarterly submission deadline after the last day 
of the calendar quarter in which the change became effective.
    (4) Withdrawal of agreements. If a card issuer no longer offers to 
the public a credit card agreement that previously has been submitted 
to the Bureau, the card issuer must notify the Bureau, in the form and 
manner specified by the Bureau, by the first quarterly submission 
deadline after the last day of the calendar quarter in which the issuer 
ceased to offer the agreement.
    (5) De minimis exception. (i) A card issuer is not required to 
submit any credit card agreements to the Bureau if the card issuer had 
fewer than 10,000 open credit card accounts as of the last business day 
of the calendar quarter.
    (ii) If an issuer that previously qualified for the de minimis 
exception ceases to qualify, the card issuer must begin making 
quarterly submissions to the Bureau no later than the first quarterly 
submission deadline after the date as of which the issuer ceased to 
qualify.
    (iii) If a card issuer that did not previously qualify for the de 
minimis exception qualifies for the de minimis exception, the card 
issuer must continue to make quarterly submissions to the Bureau until 
the issuer notifies the Bureau that the card issuer is withdrawing all 
agreements it previously submitted to the Bureau.
    (6) Private label credit card exception. (i) A card issuer is not 
required to

[[Page 79826]]

submit to the Bureau a credit card agreement if, as of the last 
business day of the calendar quarter, the agreement:
    (A) Is offered for accounts under one or more private label credit 
card plans each of which has fewer than 10,000 open accounts; and
    (B) Is not offered to the public other than for accounts under such 
a plan.
    (ii) If an agreement that previously qualified for the private 
label credit card exception ceases to qualify, the card issuer must 
submit the agreement to the Bureau no later than the first quarterly 
submission deadline after the date as of which the agreement ceased to 
qualify.
    (iii) If an agreement that did not previously qualify for the 
private label credit card exception qualifies for the exception, the 
card issuer must continue to make quarterly submissions to the Bureau 
with respect to that agreement until the issuer notifies the Bureau 
that the agreement is being withdrawn.
    (7) Product testing exception. (i) A card issuer is not required to 
submit to the Bureau a credit card agreement if, as of the last 
business day of the calendar quarter, the agreement:
    (A) Is offered as part of a product test offered to only a limited 
group of consumers for a limited period of time;
    (B) Is used for fewer than 10,000 open accounts; and
    (C) Is not offered to the public other than in connection with such 
a product test.
    (ii) If an agreement that previously qualified for the product 
testing exception ceases to qualify, the card issuer must submit the 
agreement to the Bureau no later than the first quarterly submission 
deadline after the date as of which the agreement ceased to qualify.
    (iii) If an agreement that did not previously qualify for the 
product testing exception qualifies for the exception, the card issuer 
must continue to make quarterly submissions to the Bureau with respect 
to that agreement until the issuer notifies the Bureau that the 
agreement is being withdrawn.
    (8) Form and content of agreements submitted to the Bureau. (i) 
Form and content generally. (A) Each agreement must contain the 
provisions of the agreement and the pricing information in effect as of 
the last business day of the preceding calendar quarter.
    (B) Agreements must not include any personally identifiable 
information relating to any cardholder, such as name, address, 
telephone number, or account number.
    (C) The following are not deemed to be part of the agreement for 
purposes of Sec.  1026.58, and therefore are not required to be 
included in submissions to the Bureau:
    (1) Disclosures required by state or Federal law, such as affiliate 
marketing notices, privacy policies, billing rights notices, or 
disclosures under the E-Sign Act;
    (2) Solicitation materials;
    (3) Periodic statements;
    (4) Ancillary agreements between the issuer and the consumer, such 
as debt cancellation contracts or debt suspension agreements;
    (5) Offers for credit insurance or other optional products and 
other similar advertisements; and
    (6) Documents that may be sent to the consumer along with the 
credit card or credit card agreement such as a cover letter, a 
validation sticker on the card, or other information about card 
security.
    (D) Agreements must be presented in a clear and legible font.
    (ii) Pricing information. (A) Pricing information must be set forth 
in a single addendum to the agreement. The addendum must contain all of 
the pricing information, as defined by Sec.  1026.58(b)(7). The 
addendum may, but is not required to, contain any other information 
listed in Sec.  1026.6(b), provided that information is complete and 
accurate as of the applicable date under Sec.  1026.58. The addendum 
may not contain any other information.
    (B) Pricing information that may vary from one cardholder to 
another depending on the cardholder's creditworthiness or state of 
residence or other factors must be disclosed either by setting forth 
all the possible variations (such as purchase APRs of 13 percent, 15 
percent, 17 percent, and 19 percent) or by providing a range of 
possible variations (such as purchase APRs ranging from 13 percent to 
19 percent).
    (C) If a rate included in the pricing information is a variable 
rate, the issuer must identify the index or formula used in setting the 
rate and the margin. Rates that may vary from one cardholder to another 
must be disclosed by providing the index and the possible margins (such 
as the prime rate plus 5 percent, 8 percent, 10 percent, or 12 percent) 
or range of margins (such as the prime rate plus from 5 to 12 percent). 
The value of the rate and the value of the index are not required to be 
disclosed.
    (iii) Optional variable terms addendum. Provisions of the agreement 
other than the pricing information that may vary from one cardholder to 
another depending on the cardholder's creditworthiness or state of 
residence or other factors may be set forth in a single addendum to the 
agreement separate from the pricing information addendum.
    (iv) Integrated agreement. Issuers may not provide provisions of 
the agreement or pricing information in the form of change-in-terms 
notices or riders (other than the pricing information addendum and the 
optional variable terms addendum). Changes in provisions or pricing 
information must be integrated into the text of the agreement, the 
pricing information addendum or the optional variable terms addendum, 
as appropriate.
    (d) Posting of agreements offered to the public. (1) Except as 
provided below, a card issuer must post and maintain on its publicly 
available Web site the credit card agreements that the issuer is 
required to submit to the Bureau under Sec.  1026.58(c). With respect 
to an agreement offered solely for accounts under one or more private 
label credit card plans, an issuer may fulfill this requirement by 
posting and maintaining the agreement in accordance with the 
requirements of this section on the publicly available Web site of at 
least one of the merchants at which credit cards issued under each 
private label credit card plan with 10,000 or more open accounts may be 
used.
    (2) Except as provided in Sec.  1026.58(d), agreements posted 
pursuant to Sec.  1026.58(d) must conform to the form and content 
requirements for agreements submitted to the Bureau specified in Sec.  
1026.58(c)(8).
    (3) Agreements posted pursuant to Sec.  1026.58(d) may be posted in 
any electronic format that is readily usable by the general public. 
Agreements must be placed in a location that is prominent and readily 
accessible by the public and must be accessible without submission of 
personally identifiable information.
    (4) The card issuer must update the agreements posted on its Web 
site pursuant to Sec.  1026.58(d) at least as frequently as the 
quarterly schedule required for submission of agreements to the Bureau 
under Sec.  1026.58(c). If the issuer chooses to update the agreements 
on its Web site more frequently, the agreements posted on the issuer's 
Web site may contain the provisions of the agreement and the pricing 
information in effect as of a date other than the last business day of 
the preceding calendar quarter.
    (e) Agreements for all open accounts. (1) Availability of 
individual cardholder's agreement. With respect to any open credit card 
account, a card issuer must either:
    (i) Post and maintain the cardholder's agreement on its Web site; 
or
    (ii) Promptly provide a copy of the cardholder's agreement to the 
cardholder upon the cardholder's request. If the card issuer makes an 
agreement available upon request, the issuer must provide the 
cardholder with

[[Page 79827]]

the ability to request a copy of the agreement both by using the 
issuer's Web site (such as by clicking on a clearly identified box to 
make the request) and by calling a readily available telephone line the 
number for which is displayed on the issuer's Web site and clearly 
identified as to purpose. The card issuer must send to the cardholder 
or otherwise make available to the cardholder a copy of the 
cardholder's agreement in electronic or paper form no later than 30 
days after the issuer receives the cardholder's request.
    (2) Special rule for issuers without interactive Web sites. An 
issuer that does not maintain a Web site from which cardholders can 
access specific information about their individual accounts, instead of 
complying with Sec.  1026.58(e)(1), may make agreements available upon 
request by providing the cardholder with the ability to request a copy 
of the agreement by calling a readily available telephone line, the 
number for which is displayed on the issuer's Web site and clearly 
identified as to purpose or included on each periodic statement sent to 
the cardholder and clearly identified as to purpose. The issuer must 
send to the cardholder or otherwise make available to the cardholder a 
copy of the cardholder's agreement in electronic or paper form no later 
than 30 days after the issuer receives the cardholder's request.
    (3) Form and content of agreements. (i) Except as provided in Sec.  
1026.58(e), agreements posted on the card issuer's Web site pursuant to 
Sec.  1026.58(e)(1)(i) or made available upon the cardholder's request 
pursuant to Sec.  1026.58(e)(1)(ii) or (e)(2) must conform to the form 
and content requirements for agreements submitted to the Bureau 
specified in Sec.  1026.58(c)(8).
    (ii) If the card issuer posts an agreement on its Web site or 
otherwise provides an agreement to a cardholder electronically under 
Sec.  1026.58(e), the agreement may be posted or provided in any 
electronic format that is readily usable by the general public and must 
be placed in a location that is prominent and readily accessible to the 
cardholder.
    (iii) Agreements posted or otherwise provided pursuant to Sec.  
1026.58(e) may contain personally identifiable information relating to 
the cardholder, such as name, address, telephone number, or account 
number, provided that the issuer takes appropriate measures to make the 
agreement accessible only to the cardholder or other authorized 
persons.
    (iv) Agreements posted or otherwise provided pursuant to Sec.  
1026.58(e) must set forth the specific provisions and pricing 
information applicable to the particular cardholder. Provisions and 
pricing information must be complete and accurate as of a date no more 
than 60 days prior to:
    (A) The date on which the agreement is posted on the card issuer's 
Web site under Sec.  1026.58(e)(1)(i); or
    (B) The date the cardholder's request is received under Sec.  
1026.58(e)(1)(ii) or (e)(2).
    (v) Agreements provided upon cardholder request pursuant to Sec.  
1026.58(e)(1)(ii) or (e)(2) may be provided by the issuer in either 
electronic or paper form, regardless of the form of the cardholder's 
request.
    (f) E-Sign Act requirements. Card issuers may provide credit card 
agreements in electronic form under Sec.  1026.58(d) and (e) without 
regard to the consumer notice and consent requirements of section 
101(c) of the Electronic Signatures in Global and National Commerce Act 
(E-Sign Act) (15 U.S.C. 7001 et seq.).


Sec.  1026.59  Reevaluation of rate increases.

    (a) General rule.(1) Evaluation of increased rate. If a card issuer 
increases an annual percentage rate that applies to a credit card 
account under an open-end (not home-secured) consumer credit plan, 
based on the credit risk of the consumer, market conditions, or other 
factors, or increased such a rate on or after January 1, 2009, and 45 
days' advance notice of the rate increase is required pursuant to Sec.  
1026.9(c)(2) or (g), the card issuer must:
    (i) Evaluate the factors described in paragraph (d) of this 
section; and
    (ii) Based on its review of such factors, reduce the annual 
percentage rate applicable to the consumer's account, as appropriate.
    (2) Rate reductions. (i) Timing. If a card issuer is required to 
reduce the rate applicable to an account pursuant to paragraph (a)(1) 
of this section, the card issuer must reduce the rate not later than 45 
days after completion of the evaluation described in paragraph (a)(1).
    (ii) Applicability of rate reduction. Any reduction in an annual 
percentage rate required pursuant to paragraph (a)(1) of this section 
shall apply to:
    (A) Any outstanding balances to which the increased rate described 
in paragraph (a)(1) of this section has been applied; and
    (B) New transactions that occur after the effective date of the 
rate reduction that would otherwise have been subject to the increased 
rate.
    (b) Policies and procedures. A card issuer must have reasonable 
written policies and procedures in place to conduct the review 
described in paragraph (a) of this section.
    (c) Timing. A card issuer that is subject to paragraph (a) of this 
section must conduct the review described in paragraph (a)(1) of this 
section not less frequently than once every six months after the rate 
increase.
    (d) Factors. (1) In general. Except as provided in paragraph (d)(2) 
of this section, a card issuer must review either:
    (i) The factors on which the increase in an annual percentage rate 
was originally based; or
    (ii) The factors that the card issuer currently considers when 
determining the annual percentage rates applicable to similar new 
credit card accounts under an open-end (not home-secured) consumer 
credit plan.
    (2) Rate increases imposed between January 1, 2009 and February 21, 
2010. For rate increases imposed between January 1, 2009 and February 
21, 2010, an issuer must consider the factors described in paragraph 
(d)(1)(ii) when conducting the first two reviews required under 
paragraph (a) of this section, unless the rate increase subject to 
paragraph (a) of this section was based solely upon factors specific to 
the consumer, such as a decline in the consumer's credit risk, the 
consumer's delinquency or default, or a violation of the terms of the 
account.
    (e) Rate increases due to delinquency. If an issuer increases a 
rate applicable to a consumer's account pursuant to Sec.  1026.55(b)(4) 
based on the card issuer not receiving the consumer's required minimum 
periodic payment within 60 days after the due date, the issuer is not 
required to perform the review described in paragraph (a) of this 
section prior to the sixth payment due date after the effective date of 
the increase. However, if the annual percentage rate applicable to the 
consumer's account is not reduced pursuant to Sec.  1026.55(b)(4)(ii), 
the card issuer must perform the review described in paragraph (a) of 
this section. The first such review must occur no later than six months 
after the sixth payment due following the effective date of the rate 
increase.
    (f) Termination of obligation to review factors. The obligation to 
review factors described in paragraph (a) and (d) of this section 
ceases to apply:
    (1) If the issuer reduces the annual percentage rate applicable to 
a credit card account under an open-end (not home-secured) consumer 
credit plan to the rate applicable immediately prior to the increase, 
or, if the rate applicable immediately prior to the increase was a 
variable rate, to a variable rate

[[Page 79828]]

determined by the same formula (index and margin) that was used to 
calculate the rate applicable immediately prior to the increase; or
    (2) If the issuer reduces the annual percentage rate to a rate that 
is lower than the rate described in paragraph (f)(1) of this section.
    (g) Acquired accounts. (1) General. Except as provided in paragraph 
(g)(2) of this section, this section applies to credit card accounts 
that have been acquired by the card issuer from another card issuer. A 
card issuer that complies with this section by reviewing the factors 
described in paragraph (d)(1)(i) must review the factors considered by 
the card issuer from which it acquired the accounts in connection with 
the rate increase.
    (2) Review of acquired portfolio. If, not later than six months 
after the acquisition of such accounts, a card issuer reviews all of 
the credit card accounts it acquires in accordance with the factors 
that it currently considers in determining the rates applicable to its 
similar new credit card accounts:
    (i) Except as provided in paragraph (g)(2)(iii), the card issuer is 
required to conduct reviews described in paragraph (a) of this section 
only for rate increases that are imposed as a result of its review 
under this paragraph. See Sec. Sec.  1026.9 and 1026.55 for additional 
requirements regarding rate increases on acquired accounts.
    (ii) Except as provided in paragraph (g)(2)(iii) of this section, 
the card issuer is not required to conduct reviews in accordance with 
paragraph (a) of this section for any rate increases made prior to the 
card issuer's acquisition of such accounts.
    (iii) If as a result of the card issuer's review, an account is 
subject to, or continues to be subject to, an increased rate as a 
penalty, or due to the consumer's delinquency or default, the 
requirements of paragraph (a) of this section apply.
    (h) Exceptions. (1) Servicemembers Civil Relief Act exception. The 
requirements of this section do not apply to increases in an annual 
percentage rate that was previously decreased pursuant to 50 U.S.C. 
app. 527, provided that such a rate increase is made in accordance with 
Sec.  1026.55(b)(6).
    (2) Charged off accounts. The requirements of this section do not 
apply to accounts that the card issuer has charged off in accordance 
with loan-loss provisions.


Sec.  1026.60  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.
    (iii) Disclosures required by paragraphs (b)(1)(iv)(B), 
(b)(1)(iv)(C) 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 required to be disclosed pursuant to paragraph 
(b)(1)(ii) of this section, any rate that will apply after a premium 
initial rate expires required to be disclosed under paragraph 
(b)(1)(iii) of this section, and any fee or percentage amounts or 
maximum limits on fee amounts 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: 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 required by 
paragraph (a)(2)(i) of this section: 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.  1026.40;
    (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

[[Page 79829]]

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.  1026.14(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 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.  1026.16(g)(2)(ii), 
the card issuer must disclose in the table the introductory rate, the 
time period during which the introductory rate will remain in effect, 
and must use the term ``introductory'' or ``intro'' in immediate 
proximity to the introductory rate. The card issuer also 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)(2), (d)(3), or (e)(4) of this section, as applicable.
    (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 and 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. The issuer must also disclose in the table 
the rate that will apply after the premium initial rate expires, in at 
least 16-point type.
    (iv) Penalty rates. (A) In general. Except as provided in paragraph 
(b)(1)(iv)(B) and (C) 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 card issuer must disclose pursuant to this paragraph (b)(1) 
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.  1026.16(g)(2)(ii), in the table 
or in any written or electronic 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.
    (C) Employee preferential rates. If a card issuer discloses in the 
table a preferential annual percentage rate for which only employees of 
the card issuer, employees of a third party, or other individuals with 
similar affiliations with the card issuer or third party, such as 
executive officers, directors, or principal shareholders are eligible, 
the card issuer must briefly disclose directly beneath the table the 
circumstances under which such preferential rate may be revoked, and 
the rate that will apply after such preferential 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.
    (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 Bureau to 
reflect changes in the Consumer Price Index. The Bureau shall calculate 
each year a price level adjusted minimum interest charge using the 
Consumer Price Index in effect on 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

[[Page 79830]]

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.  1026.4(b)(7) or 
debt cancellation or suspension coverage described in Sec.  
1026.4(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 Bureau and a statement that consumers may obtain on the Web site 
information about shopping for and using credit cards. Until January 1, 
2013, issuers may substitute for this reference a reference to the Web 
site established by the Board of Governors of the Federal Reserve 
System.
    (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 
email 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 email 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.  1026.5(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

[[Page 79831]]

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) 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.
    (3) Previous balance. This balance is the outstanding balance at 
the beginning of the billing cycle.
    (4) Daily balance. For each day in the billing cycle, this balance 
is figured by taking the beginning balance each day, adding any new 
purchases, and subtracting any payment and credits.

Appendix A to Part 1026--Effect on State Laws

Request for Determination

    A request for a determination that a state law is inconsistent 
or that a state law is substantially the same as the Act and 
regulation shall be in writing and addressed to the Executive 
Secretary, Bureau of Consumer Financial Protection, 1700 G Street 
NW., Washington, DC 20006. The request shall be made pursuant to the 
procedures herein.

Supporting Documents

    A request for a determination shall include the following items:
    (1) The text of the state statute, regulation, or other document 
that is the subject of the request.
    (2) Any other statute, regulation, or judicial or administrative 
opinion that implements, interprets, or applies the relevant 
provision.
    (3) A comparison of the state law with the corresponding 
provision of the Federal law, including a full discussion of the 
basis for the requesting party's belief that the state provision is 
either inconsistent or substantially the same.
    (4) Any other information that the requesting party believes may 
assist the Bureau in its determination.

Public Notice of Determination

    Notice that the Bureau intends to make a determination (either 
on request or on its own motion) will be published in the Federal 
Register, with an opportunity for public comment, unless the Bureau 
finds that notice and opportunity for comment would be 
impracticable, unnecessary, or contrary to the public interest and 
publishes its reasons for such decision.
    Subject to the Bureau's rules on Disclosure of Records and 
Information (12 CFR Part 1070), all requests made, including any 
documents and other material submitted in support of the requests, 
will be made available for public inspection and copying.

Notice After Determination

    Notice of a final determination will be published in the Federal 
Register, and the Bureau will furnish a copy of such notice to the 
party who made the request and to the appropriate state official.

Reversal of Determination

    The Bureau reserves the right to reverse a determination for any 
reason bearing on the coverage or effect of state or Federal law.
    Notice of reversal of a determination will be published in the 
Federal Register and a copy furnished to the appropriate state 
official.

Appendix B to Part 1026--State Exemptions

Application

    Any state may apply to the Bureau for a determination that a 
class of transactions subject to state law is exempt from the 
requirements of the Act and this part. An application shall be in 
writing and addressed to the Executive Secretary, Bureau of Consumer 
Financial Protection, 1700 G Street, NW., Washington, DC 20006, and 
shall be signed by the appropriate state official. The application 
shall be made pursuant to the procedures herein.

Supporting Documents

    An application shall be accompanied by:
    (1) The text of the state statute or regulation that is the 
subject of the application, and any other statute, regulation, or 
judicial or administrative opinion that implements, interprets, or 
applies it.
    (2) A comparison of the state law with the corresponding 
provisions of the Federal law.
    (3) The text of the state statute or regulation that provides 
for civil and criminal liability and administrative enforcement of 
the state law.
    (4) A statement of the provisions for enforcement, including an 
identification of the state office that administers the relevant 
law, information on the funding and the number and qualifications of 
personnel engaged in enforcement, and a description of the 
enforcement procedures to be followed, including information on 
examination procedures, practices, and policies. If an exemption 
application extends to federally chartered institutions, the 
applicant must furnish evidence that arrangements have been made 
with the appropriate Federal agencies to ensure adequate enforcement 
of state law in regard to such creditors.
    (5) A statement of reasons to support the applicant's claim that 
an exemption should be granted.

Public Notice of Application

    Notice of an application will be published, with an opportunity 
for public comment, in the Federal Register, unless the Bureau finds 
that notice and opportunity for comment would be impracticable, 
unnecessary, or contrary to the public interest and publishes its 
reasons for such decision.
    Subject to the Bureau's rules on Disclosure of Records and 
Information (12 CFR Part 1070), all applications made, including any 
documents and other material submitted in support of the 
applications, will be made available for public inspection and 
copying.

Favorable Determination

    If the Bureau determines on the basis of the information before 
it that an exemption should be granted, notice of the exemption will 
be published in the Federal Register, and a copy furnished to the 
applicant and to each Federal official responsible for 
administrative enforcement.
    The appropriate state official shall inform the Bureau within 30 
days of any change in its relevant law or regulations. The official 
shall file with the Bureau such periodic reports as the Bureau may 
require.

[[Page 79832]]

    The Bureau will inform the appropriate state official of any 
subsequent amendments to the Federal law, regulation, 
interpretations, or enforcement policies that might require an 
amendment to state law, regulation, interpretations, or enforcement 
procedures.

Adverse Determination

    If the Bureau makes an initial determination that an exemption 
should not be granted, the Bureau will afford the applicant a 
reasonable opportunity to demonstrate further that an exemption is 
proper. If the Bureau ultimately finds that an exemption should not 
be granted, notice of an adverse determination will be published in 
the Federal Register and a copy furnished to the applicant.

Revocation of Exemption

    The Bureau reserves the right to revoke an exemption if at any 
time it determines that the standards required for an exemption are 
not met.
    Before taking such action, the Bureau will notify the 
appropriate state official of its intent, and will afford the 
official such opportunity as it deems appropriate in the 
circumstances to demonstrate that revocation is improper. If the 
Bureau ultimately finds that revocation is proper, notice of the 
Bureau's intention to revoke such exemption will be published in the 
Federal Register with a reasonable period of time for interested 
persons to comment.
    Notice of revocation of an exemption will be published in the 
Federal Register. A copy of such notice will be furnished to the 
appropriate state official and to the Federal officials responsible 
for enforcement. Upon revocation of an exemption, creditors in that 
state shall then be subject to the requirements of the Federal law.

Appendix C to Part 1026--Issuance of Official Interpretations

Official Interpretations

    Interpretations of this part issued by officials of the Bureau 
provide the protection afforded under section 130(f) of the Act. 
Except in unusual circumstances, such interpretations will not be 
issued separately but will be incorporated in an official commentary 
to the regulation which will be amended periodically.

Requests for Issuance of Official Interpretations

    A request for an official interpretation shall be in writing and 
addressed to the Assistant Director, Office of Regulations, Division 
of Research, Markets, and Regulations, Bureau of Consumer Financial 
Protection, 1700 G Street, NW., Washington, DC 20006. The request 
shall contain a complete statement of all relevant facts concerning 
the issue, including copies of all pertinent documents.

Scope of Interpretations

    No interpretations will be issued approving creditors' forms, 
statements, or calculation tools or methods. This restriction does 
not apply to forms, statements, tools, or methods whose use is 
required or sanctioned by a government agency.

Appendix D to Part 1026--Multiple Advance Construction Loans

    Section 1026.17(c)(6) permits creditors to treat multiple 
advance loans to finance construction of a dwelling that may be 
permanently financed by the same creditor either as a single 
transaction or as more than one transaction. If the actual schedule 
of advances is not known, the following methods may be used to 
estimate the interest portion of the finance charge and the annual 
percentage rate and to make disclosures. If the creditor chooses to 
disclose the construction phase separately, whether interest is 
payable periodically or at the end of construction, part I may be 
used. If the creditor chooses to disclose the construction and the 
permanent financing as one transaction, part II may be used.

Part I--Construction Period Disclosed Separately

    A. If interest is payable only on the amount actually advanced 
for the time it is outstanding:
    1. Estimated interest--Assume that one-half of the commitment 
amount is outstanding at the contract interest rate for the entire 
construction period.
    2. Estimated annual percentage rate--Assume a single payment 
loan that matures at the end of the construction period. The finance 
charge is the sum of the estimated interest and any prepaid finance 
charge. The amount financed for computation purposes is determined 
by subtracting any prepaid finance charge from one-half of the 
commitment amount.
    3. Repayment schedule--The number and amounts of any interest 
payments may be omitted in disclosing the payment schedule under 
Sec.  1026.18(g). The fact that interest payments are required and 
the timing of such payments shall be disclosed.
    4. Amount financed--The amount financed for disclosure purposes 
is the entire commitment amount less any prepaid finance charge.
    B. If interest is payable on the entire commitment amount 
without regard to the dates or amounts of actual disbursement:
    1. Estimated interest--Assume that the entire commitment amount 
is outstanding at the contract interest rate for the entire 
construction period.
    2. Estimated annual percentage rate--Assume a single payment 
loan that matures at the end of the construction period. The finance 
charge is the sum of the estimated interest and any prepaid finance 
charge. The amount financed for computation purposes is determined 
by subtracting any prepaid finance charge from one-half of the 
commitment amount.
    3. Repayment schedule--Interest payments shall be disclosed in 
making the repayment schedule disclosure under Sec.  1026.18(g).
    4. Amount financed--The amount financed for disclosure purposes 
is the entire commitment amount less any prepaid finance charge.

[[Page 79833]]

[GRAPHIC] [TIFF OMITTED] TR22DE11.000

Part II--Construction and Permanent Financing Disclosed as One 
Transaction

    A. The creditor shall estimate the interest payable during the 
construction period to be included in the total finance charge as 
follows:
    1. If interest is payable only on the amount actually advanced 
for the time it is outstanding, assume that one-half of the 
commitment amount is outstanding at the contract interest rate for 
the entire construction period.
    2. If interest is payable on the entire commitment amount 
without regard to the dates or amounts of actual disbursements, 
assume that the entire commitment amount is outstanding at the 
contract rate for the entire construction period.
    B. The creditor shall compute the estimated annual percentage 
rate as follows:
    1. Estimated interest payable during the construction period 
shall be treated for computation purposes as a prepaid finance 
charge (although it shall not be treated as a prepaid finance charge 
for disclosure purposes).
    2. The number of payment shall not include any payments of 
interest only that are made during the construction period.
    3. The first payment period shall consist of one-half of the 
construction period plus the period between the end of the 
construction period and the amortization payment.
    C. The creditor shall disclose the repayment schedule as 
follows:
    1. For loans under paragraph A.1. of Part II, without reflecting 
the number or amounts of payments of interest only that are made 
during the construction period. The fact that interest payments must 
be made and the timing of such payments shall be disclosed.
    2. For loans under paragraph A.2. of Part II, including any 
payments of interest only that are made during the construction 
period.
    D. The creditor shall disclose the amount financed as the entire 
commitment amount less any prepaid finance charge.
BILLING CODE 4810-AM-P

[[Page 79834]]

[GRAPHIC] [TIFF OMITTED] TR22DE11.001

[GRAPHIC] [TIFF OMITTED] TR22DE11.002

BILLING CODE 4810-AM-C

[[Page 79835]]

Appendix E to Part 1026--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 1026.6(a)(5) or Sec.  1026.6(b)(5)(iii).
    2. Section 1026.6(a)(2) or Sec.  1026.6(b)(3)(ii)(B), as 
applicable. The disclosure required by Sec.  1026.6(a)(2) or Sec.  
1026.6(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 1026.6(a)(4) or Sec.  1026.6(b)(5)(ii).
    4. Section 1026.7(a)(2) or Sec.  1026.7(b)(2), as applicable; 
Sec.  1026.7(a)(9) or Sec.  1026.7(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 1026.9(a). Creditors may comply by mailing or 
delivering the statement required by Sec.  1026.6(a)(5) or Sec.  
1026.6(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.  1026.6(a)(5) or Sec.  1026.6(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 1026.9(c). A tabular format is not required.
    7. Section 1026.10.
    8. Section 1026.11(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 1026.12 including Sec.  1026.12(c) and (d), as 
applicable. Section 1026.12(e) is inapplicable.
    10. Section 1026.13, 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 1026.15, as applicable.

Appendix F to Part 1026--Optional Annual Percentage Rate Computations 
for Creditors Offering Open-End Credit Plans Secured by a Consumer's 
Dwelling

    In determining the denominator of the fraction under Sec.  
1026.14(c)(3), no amount will be used more than once when adding the 
sum of the balances 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. Previous balance--none.
    A specific transaction of $100 occurs on the first day of the 
billing cycle. The average daily balance is $100. A specific 
transaction charge of 3% is applicable to the specific transaction. 
The periodic rate is 1[frac12]% 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[frac12]%) 
multiplied by 12 (the number of months in a year), i.e., 54%.
    2. Previous balance--$100.
    A specific transaction of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $150. A specific 
transaction charge of 3% is applicable to the specific transaction. 
The periodic rate is 1[frac12]% 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[frac12]% x 12 = 42%.
    3. If, in example 2, the periodic rate applies only to the 
previous balance, the numerator is $4.50 and the denominator is $200 
(the amount of the transaction, $100, plus the balance subject only 
to the periodic rate, the $100 previous balance). As explained in 
example 1, the annual percentage rate is 2[frac14]% x 12 = 27%.
    4. If, in example 2, the periodic rate applies only to an 
adjusted balance (previous balance less payments and credits) and 
the consumer made a payment of $50 at the midpoint of the billing 
cycle, the numerator is $3.75 and the denominator is $150 (the 
amount of the transaction, $100, plus the balance subject to the 
periodic rate, the $50 adjusted balance). As explained in example 1, 
the annual percentage rate is 2[frac12]% x 12 = 30%.
    5. Previous balance--$100.
    A specific transaction (check) of $100 occurs at the midpoint of 
the billing cycle. The average daily balance is $150. The specific 
transaction charge is $.25 per check. The periodic rate is 
1[frac12]% applied to the average daily balance. The numerator is 
the amount of the finance charge, which is $2.50 and includes the 
$.25 check charge and the $2.25 resulting from the application of 
the periodic rate. The denominator is the full amount of the 
specific transaction (which is $100) plus the amount by which the 
average daily balance exceeds the amount of the specific transaction 
(which in this case is $50), totaling $150. As explained in example 
1, the annual percentage rate would be 1-2/3% x 12 = 20%.
    6. Previous balance--none.
    A specific transaction of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $50. The specific 
transaction charge is 3% of the transaction amount or $3.00. The 
periodic rate is 1[frac12]% 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[frac34]% x 12 = 45%.

Appendix G to Part 1026--Open-End Model Forms and Clauses

G-1 Balance Computation Methods Model Clauses (Home-equity Plans) 
(Sec. Sec.  1026.6 and 1026.7)
G-1(A) Balance Computation Methods Model Clauses (Plans other than 
Home-equity Plans) (Sec. Sec.  1026.6 and 1026.7)
G-2 Liability for Unauthorized Use Model Clause (Home-equity Plans) 
(Sec.  1026.12)
G-2(A) Liability for Unauthorized Use Model Clause (Plans Other Than 
Home-equity Plans) (Sec.  1026.12)
G-3 Long-Form Billing-Error Rights Model Form (Home-equity Plans) 
(Sec. Sec.  1026.6 and 1026.9)
G-3(A Long-Form Billing-Error Rights Model Form (Plans Other Than 
Home-equity Plans) (Sec. Sec.  1026.6 and 1026.9)
G-4 Alternative Billing-Error Rights Model Form (Home-equity Plans) 
(Sec.  1026.9)
G-4(A Alternative Billing-Error Rights Model Form (Plans Other Than 
Home-equity Plans) (Sec.  1026.9)
G-5 Rescission Model Form (When Opening an Account) (Sec.  1026.15)

[[Page 79836]]

G-6 Rescission Model Form (For Each Transaction) (Sec.  1026.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.  
1026.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.  
1026.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.  
1026.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards) 
(Sec.  1026.60(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.  
1026.60(b))
    G-10(C) Applications and Solicitations Sample (Credit Cards) 
(Sec.  1026.60(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards) 
(Sec.  1026.60(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.  
1026.60(b))
G-11 Applications and Solicitations Made Available to General Public 
Model Clauses (Sec.  1026.60(e))
G-12 Reserved
G-13(A) Change in Insurance Provider Model Form (Combined Notice) 
(Sec.  1026.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec.  1026.9(f)(2))
G-14A Home-equity Sample
G-14B Home-equity Sample
G-1 Home-equity Model Clauses
G-16(A) Debt Suspension Model Clause (Sec.  1026.4(d)(3))
    G-16(B) Debt Suspension Sample (Sec.  1026.4(d)(3))
G-17(A) Account-opening Model Form (Sec.  1026.6(b)(2))
G-17(B) Account-opening Sample (Sec.  1026.6(b)(2))
G-17(C) Account-opening Sample (Sec.  1026.6(b)(2))
G-17(D) Account-opening Sample (Sec.  1026.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec.  
1026.7(b))
G-18(B) Late Payment Fee Sample (Sec.  1026.7(b))
G-18(C)(1) Minimum Payment Warning (When Amortization Occurs and the 
36-Month Disclosures Are Required) (Sec.  1026.7(b))
G-18(C)(2) Minimum Payment Warning (When Amortization Occurs and the 
36-Month Disclosures Are Not Required) (Sec.  1026.7(b))
G-18(C)(3) Minimum Payment Warning (When Negative or No Amortization 
Occurs) (Sec.  1026.7(b))
G-18(D) Periodic Statement New Balance, Due Date, Late Payment and 
Minimum Payment Sample (Credit cards) (Sec.  1026.7(b))
G-18(E) [Reserved]
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-18(H) Deferred Interest Periodic Statement Clause
G-19 Checks Accessing a Credit Card Account Sample (Sec.  
1026.9(b)(3))
G-20 Change-in-Terms Sample (Increase in Annual Percentage Rate) 
(Sec.  1026.9(c)(2))
G-21 Change-in-Terms Sample (Increase in Fees) (Sec.  1026.9(c)(2))
G-22 Penalty Rate Increase Sample (Payment 60 or Fewer Days Late) 
(Sec.  1026.9(g)(3))
G-23 Penalty Rate Increase Sample (Payment More Than 60 Days Late) 
(Sec.  1026.9(g)(3))
G-24 Deferred Interest Offer Clauses (Sec.  1026.16(h))
G-25(A) Consent Form for Over-the-Limit Transactions (Sec.  1026.56)
G-25(B) Revocation Notice for Periodic Statement Regarding Over-the-
Limit Transactions (Sec.  1026.56)

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 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.

[[Page 79837]]

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 email 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 email 
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 email 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)

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 email 
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.

[[Page 79838]]

    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 email 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 email 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 email 
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.
    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 is 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 4810-AM-P

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G-11--Applications and Solicitations Made Available to the General 
Public Model Clauses

(a) Disclosure of Required Credit Information

    The information about the costs of the card described in this 
[application]/[solicitation] is accurate as of (month/year). This 
information may have changed after that date. To find out what may 
have changed, [call us at (telephone number)][write to us at 
(address)].

(b) 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.

[[Page 79848]]

    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. [(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.

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

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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%.

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G-18(E) [Reserved]

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G-18(H)--Deferred Interest Periodic Statement Clause

    [You must pay your promotional balance in full by [date] to 
avoid paying accrued interest charges.]

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BILLING CODE 4810-AM-C

[[Page 79870]]

G-24--Deferred Interest Offer Clauses

(a) For Credit Card Accounts Under an Open-End (Not Home-Secured) 
Consumer Credit Plan

    [Interest will be charged to your account from the purchase date 
if the purchase balance is not paid in full within the/by [deferred 
interest period/date] or if you make a late payment.]

(b) For Other Open-End Plans

    [Interest will be charged to your account from the purchase date 
if the purchase balance is not paid in full within the/by [deferred 
interest period/date] or if your account is otherwise in default.]

G-25(A)--Consent Form for Over-the-Credit Limit Transactions

Your Choice Regarding Over-the-Credit Limit Coverage

    Unless you tell us otherwise, we will decline any transaction 
that causes you to go over your credit limit. If you want us to 
authorize these transactions, you can request over-the-credit limit 
coverage.
    If you have over-the-credit limit coverage and you go over your 
credit limit, we will charge you a fee of up to $35. We may also 
increase your APRs to the Penalty APR of XX.XX%. You will only pay 
one fee per billing cycle, even if you go over your limit multiple 
times in the same cycle.
    Even if you request over-the-credit limit coverage, in some 
cases we may still decline a transaction that would cause you to go 
over your limit, such as if you are past due or significantly over 
your credit limit.
    If you want over-the-limit coverage and to allow us to authorize 
transactions that go over your credit limit, please:

--Call us at [telephone number];
--Visit [Web site]; or
--Check or initial the box below, and return the form to us at 
[address].
--------------------
    -- I want over-the-limit coverage. I understand that if I go 
over my credit limit, my APRs may be increased and I will be charged 
a fee of up to $35. [I have the right to cancel this coverage at any 
time.]
    [-- I do not want over-the-limit coverage. I understand that 
transactions that exceed my credit limit will not be authorized.]
Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------

G-25(B)--Revocation Notice for Periodic Statement Regarding Over-the-
Credit Limit Transactions

    You currently have over-the-credit limit coverage on your 
account, which means that we pay transactions that cause you go to 
over your credit limit. If you do go over your credit limit, we will 
charge you a fee of up to $35. We may also increase your APRs. To 
remove over-the-credit-limit coverage from your account, call us at 
1-800-xxxxxxx or visit [insert Web site].
    [You may also write us at: [insert address].]
    [You may also check or initial the box below and return this 
form to us at: [insert address].
    -- I want to cancel over-the-limit coverage for my account.

Printed Name:----------------------------------------------------------
Date:------------------------------------------------------------------
[Account Number]:------------------------------------------------------

Appendix H to Part 1026--Closed-End Model Forms and Clauses

H-1 Credit Sale Model Form (Sec.  1026.18)
H-2 Loan Model Form (Sec.  1026.18)
H-3 Amount Financed Itemization Model Form (Sec.  1026.18(c))
H-4(A) Variable-Rate Model Clauses (Sec.  1026.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec.  1026.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec.  1026.19(b))
H-4(D) Variable-Rate Model Clauses (Sec.  1026.20(c))
H-4(E) Fixed-Rate Mortgage Interest Rate and Payment Summary Model 
Clause (Sec.  1026.18(s))
H-4(F) Adjustable-Rate Mortgage or Step-Rate Mortgage Interest Rate 
and Payment Summary Model Clause (Sec.  1026.18(s))
H-4(G) Mortgage with Negative Amortization Interest Rate and Payment 
Summary Model Clause (Sec.  1026.18(s))
    H-4(H) Fixed-Rate Mortgage with Interest-Only Interest Rate and 
Payment Summary Model Clause (Sec.  1026.18(s))
H-4(I) Adjustable-Rate Mortgage Introductory Rate Disclosure Model 
Clause (Sec.  1026.18(s)(2)(iii))
H-4(J) Balloon Payment Disclosure Model Clause (Sec.  1026.18(s)(5))
H-4(K) No Guarantee to Refinance Statement Model Clause (Sec.  
1026.18(t))
H-5 Demand Feature Model Clauses (Sec.  1026.18(i))
H-6 Assumption Policy Model Clause (Sec.  1026.18(q))
H-7 Required Deposit Model Clause (Sec.  1026.18(r))
H-8 Rescission Model Form (General) (Sec.  1026.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor)) 
(Sec.  1026.23)
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.  1026.19(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-18 Private Education Loan Application and Solicitation Model Form
H-19 Private Education Loan Approval Model Form
H-20 Private Education Loan Final Model Form
H-21 Private Education Loan Application and Solicitation Sample
H-22 Private Education Loan Approval Sample
H-23 Private Education Loan Final Sample
BILLING CODE 4810-AM-P

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H-4(C)--Variable-Rate Model Clauses

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.
    How Your Interest Rate and Payment Are Determined
     Your interest rate will be based on [an index plus a 
margin] [a formula].
     Your payment will be based on the interest rate, loan 
balance, and loan term.

    --[The interest rate will be based on (identification of index) 
plus our margin. Ask for our current interest rate and margin.]

[[Page 79874]]

    --[The interest rate will be based on (identification of 
formula). Ask us for our current interest rate.]
    --Information about the index [formula for rate adjustments] is 
published [can be found] ------------.
--[The initial interest rate is not based on the (index) (formula) 
used to make later adjustments. Ask us for the amount of current 
interest rate discounts.]

How Your Interest Rate Can Change

     Your interest rate can change (frequency).
     [Your interest rate cannot increase or decrease more 
than ---- percentage points at each adjustment.]
     Your interest rate cannot increase [or decrease] more 
than ---- percentage points over the term of the loan.

How Your Payment Can Change

     Your payment can change (frequency) based on changes in 
the interest rate.
     [Your payment cannot increase more than (amount or 
percentage) at each adjustment.]
     You will be notified in writing -------- days before 
the due date of a payment at a new level. This notice will contain 
information about your interest rates, payment amount, and loan 
balance.
     [You will be notified once each year during which 
interest rate adjustments, but no payment adjustments, have been 
made to your loan. This notice will contain information about your 
interest rates, payment amount, and loan balance.]
     [For example, on a $10,000 [term] loan with an initial 
interest rate of -------- [(the rate shown in the interest rate 
column below for the year 19 --------)] [(in effect (month) (year)], 
the maximum amount that the interest rate can rise under this 
program is -------- percentage points, to --------%, and the monthly 
payment can rise from a first-year payment of $-------- to a maximum 
of $-------- in the ---------- year. To see what your payments would 
be, divide your mortgage amount by $10,000; then multiply the 
monthly payment by that amount. (For example, the monthly payment 
for a mortgage amount of $60,000 would be: $60,000 / $10,000 = 6; 6 
x -------- = $-------- per month.)]
    [Example
    The example below shows how your payments would have changed 
under this ARM program based on actual changes in the index from 
1982 to 1996. This does not necessarily indicate how your index will 
change in the future.
    The example is based on the following assumptions:

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H-4(I)--Introductory Rate Model Clause

    [Introductory Rate Notice
    You have a discounted introductory rate of -------- % that ends 
after (period).
    In the (period in sequence), even if market rates do not change, 
this rate will increase to ---- %.]

H-4(J)--Balloon Payment Model Clause

    [Final Balloon Payment due (date): $------------]

H-4(K)--``No-Guarantee-to-Refinance'' Statement Model Clause

    There is no guarantee that you will be able to refinance to 
lower your rate and payments.

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H-9--Rescission Model Form (Refinancing With Original Creditor)

NOTICE OF RIGHT TO CANCEL

Your Right To Cancel

    You are entering into a new transaction to increase the amount 
of credit previously provided to you. Your home is the security for 
this new transaction. You have a legal right under Federal law to 
cancel this new transaction, without cost, within three business 
days from whichever of the following events occurs last:
    (1) the date of this new transaction, which is ------------; or
    (2) the date you received your new Truth in Lending disclosures; 
or
    (3) the date you received this notice of your right to cancel.
    If you cancel this new transaction, it will not affect any 
amount that you presently owe. Your home is the security for that 
amount. Within 20 calendar days after we receive your notice of 
cancellation of this new transaction, we must take the steps 
necessary to reflect the fact that your home does not secure the 
increase of credit. We must also return any money you have given to 
us or anyone else in connection with this new transaction.
    You may keep any money we have given you in this new transaction 
until we have done the things mentioned above, but you must then 
offer to return the money at the address below.
    If we do not take possession of the money within 20 calendar 
days of your offer, you may keep it without further obligation.

[[Page 79881]]

How To Cancel

    If you decide to cancel this new transaction, you may do so by 
notifying us in writing, at

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

(Creditor's name and business address).

    You may use any written statement that is signed and dated by 
you and states your intention to cancel, or you may use this notice 
by dating and signing below. Keep one copy of this notice because it 
contains important information about your rights.
    If you cancel by mail or telegram, you must send the notice no 
later than midnight of
-----------------------------------------------------------------------

(Date)-----------------------------------------------------------------
(or midnight of the third business day following the latest of the 
three events listed above).

    If you send or deliver your written notice to cancel some other 
way, it must be delivered to the above address no later than that 
time.

I WISH TO CANCEL

Consumer's Signature---------------------------------------------------
Date-------------------------------------------------------------------
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H-14--Variable-Rate Mortgage Sample

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

How Your Interest Rate and Payment Are Determined

     Your interest rate will be based on an index rate plus 
a margin.
     Your payment will be based on the interest rate, loan 
balance, and loan term.

--The interest rate will be based on the weekly average yield on 
United States Treasury securities adjusted to a constant maturity of 
1 year (your index), plus our margin. Ask us for our current 
interest rate and margin.
--Information about the index rate is published weekly in the Wall 
Street Journal.
     Your interest rate will equal the index rate plus our 
margin unless your interest rate ``caps'' limit the amount of change 
in the interest rate.

How Your Interest Rate Can Change

     Your interest rate can change yearly.
     Your interest rate cannot increase or decrease more 
than 2 percentage points per year.
     Your interest rate cannot increase or decrease more 
than 5 percentage points over the term of the loan.

How Your Monthly Payment Can Change

     Your monthly payment can increase or decrease 
substantially based on annual changes in the interest rate.
     [For example, on a $10,000, 30-year loan with an 
initial interest rate of 12.41 percent in effect in July 1996, the 
maximum amount that the interest rate can rise under this program is 
5 percentage points, to 17.41 percent, and the monthly payment can 
rise from a first-year payment of $106.03 to a maximum of $145.34 in 
the fourth year. To see what your payment is, divide your mortgage 
amount by $10,000; then multiply the monthly payment by that amount. 
(For example, the monthly payment for a mortgage amount of $60,000 
would be: $60,000 / $10,000 = 6; 6 x 106.03 = $636.18 per month.)
     You will be notified in writing 25 days before the 
annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan 
balance.]
    Example
    The example below shows how your payments would have changed 
under this ARM program based on actual changes in the index from 
1982 to 1996. This does not necessarily indicate how your index will 
change in the future. The example is based on the following 
assumptions:
BILLING CODE 4810-AM-P

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    Note: To see what your payments would have been during that 
period, divide your mortgage amount by $10,000; then multiply the 
monthly payment by that amount. (For example, in 1996 the monthly 
payment for a mortgage amount of $60,000 taken out in 1982 would be: 
$60,000/$10,000=6; 6x$106.73=$640.38.)

     You will be notified in writing 25 days before the 
annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan 
balance.]

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

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BILLING CODE 4810-AM-C

Appendix I to Part 1026--[Reserved]

Appendix J to Part 1026--Annual Percentage Rate Computations for 
Closed-End Credit Transactions

(a) Introduction

    (1) Section 1026.22(a) of Regulation Z provides that the annual 
percentage rate for other than open-end credit transactions shall be 
determined in accordance with either the actuarial method or the 
United States Rule method. This appendix contains an explanation of 
the actuarial method as well as equations, instructions and examples 
of how this method applies to single advance and multiple advance 
transactions.
    (2) Under the actuarial method, at the end of each unit-period 
(or fractional unit-period) the unpaid balance of the amount 
financed is increased by the finance charge earned during that 
period and is decreased by the total payment (if any) made at the 
end of that period. The determination of unit-periods and fractional 
unit-periods shall be consistent with the definitions and rules in 
paragraphs (b)(3), (4) and (5) of this section and the general 
equation in paragraph (b)(8) of this section.
    (3) In contrast, under the United States Rule method, at the end 
of each payment period, the unpaid balance of the amount financed is 
increased by the finance charge earned during that payment period 
and is decreased by the payment made at the end of that payment 
period. If the payment is less than the finance charge earned, the 
adjustment of the unpaid balance of the amount financed is postponed 
until the end of the next payment period. If at that time the sum of 
the two payments is still less than the total earned finance charge 
for the two payment periods, the adjustment of the unpaid balance of 
the amount financed is postponed still another payment period, and 
so forth.

(B) Instructions and Equations for the Actuarial Method

(1) General Rule

    The annual percentage rate shall be the nominal annual 
percentage rate determined by multiplying the unit-period rate by 
the number of unit-periods in a year.

(2) Term of the Transaction

    The term of the transaction begins on the date of its 
consummation, except that if the finance charge or any portion of it 
is earned beginning on a later date, the term begins on the later 
date. The term ends on the date the last payment is due, except that 
if an advance is scheduled after that date, the term ends on the 
later date. For computation purposes, the length of the term shall 
be equal to the time interval between any point in time on the 
beginning date to the same point in time on the ending date.

(3) Definitions of Time Intervals

    (i) A period is the interval of time between advances or between 
payments and includes the interval of time between the date the 
finance charge begins to be earned and the date of the first advance 
thereafter or the date of the first payment thereafter, as 
applicable.
    (ii) A common period is any period that occurs more than once in 
a transaction.
    (iii) A standard interval of time is a day, week, semimonth, 
month, or a multiple of a week or a month up to, but not exceeding, 
1 year.
    (iv) All months shall be considered equal. Full months shall be 
measured from any point in time on a given date of a given month to 
the same point in time on the same date of another month. If a 
series of payments (or advances) is scheduled for the last day of 
each month, months shall be measured from the last day of the given 
month to the last day of another month. If payments (or advances) 
are scheduled for the 29th or 30th of each month, the last day of 
February shall be used when applicable.

(4) Unit-Period

    (i) In all transactions other than a single advance, single 
payment transaction, the unit-period shall be that common period, 
not to exceed 1 year, that occurs most frequently in the 
transaction, except that
    (A) If 2 or more common periods occur with equal frequency, the 
smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods 
rounded to the nearest whole standard interval of time. If the 
average is equally near 2 standard intervals of time, the lower 
shall be the unit-period.
    (ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1 
year.

(5) Number of Unit-Periods Between 2 Given Dates

    (i) The number of days between 2 dates shall be the number of 
24-hour intervals between any point in time on the first date to the 
same point in time on the second date.
    (ii) If the unit-period is a month, the number of full unit-
periods between 2 dates shall be the number of months measured back 
from the later date. The remaining fraction of a unit-period shall 
be the number of days measured forward from the earlier date to the 
beginning of the first full unit-period, divided by 30. If the unit-
period is a month, there are 12 unit-periods per year.
    (iii) If the unit-period is a semimonth or a multiple of a month 
not exceeding 11 months, the number of days between 2 dates shall be 
30 times the number of full months measured back from the later 
date, plus the number of remaining days. The number of full unit-
periods and the remaining fraction of a unit-period shall be 
determined by dividing such number of days by 15 in the case of a 
semimonthly unit-period or by the appropriate multiple of 30 in the 
case of a multimonthly unit-period. If the unit-period is a 
semimonth, the number of unit-periods

[[Page 79901]]

per year shall be 24. If the number of unit-periods is a multiple of 
a month, the number of unit-periods per year shall be 12 divided by 
the number of months per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a 
week, the number of full unit-periods and the remaining fractions of 
a unit-period shall be determined by dividing the number of days 
between the 2 given dates by the number of days per unit-period. If 
the unit-period is a day, the number of unit-periods per year shall 
be 365. If the unit-period is a week or a multiple of a week, the 
number of unit-periods per year shall be 52 divided by the number of 
weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-
periods between 2 dates shall be the number of full years (each 
equal to 12 months) measured back from the later date. The remaining 
fraction of a unit-period shall be
    (A) The remaining number of months divided by 12 if the 
remaining interval is equal to a whole number of months, or
    (B) The remaining number of days divided by 365 if the remaining 
interval is not equal to a whole number of months.
    (vi) In a single advance, single payment transaction in which 
the term is less than a year and is equal to a whole number of 
months, the number of unit-periods in the term shall be 1, and the 
number of unit-periods per year shall be 12 divided by the number of 
months in the term or 365 divided by the number of days in the term.
    (vii) In a single advance, single payment transaction in which 
the term is less than a year and is not equal to a whole number of 
months, the number of unit-periods in the term shall be 1, and the 
number of unit-periods per year shall be 365 divided by the number 
of days in the term.

(6) Percentage Rate for a Fraction of a Unit-Period

    The percentage rate of finance charge for a fraction (less than 
1) of a unit-period shall be equal to such fraction multiplied by 
the percentage rate of finance charge per unit-period.
BILLING CODE 4810-AM-P
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[GRAPHIC] [TIFF OMITTED] TR22DE11.071

BILLING CODE 4810-AM-C

Appendix K to Part 1026--Total Annual Loan Cost Rate Computations for 
Reverse Mortgage Transactions

    (a) Introduction. Creditors are required to disclose a series of 
total annual loan cost rates for each reverse mortgage transaction. 
This appendix contains the equations creditors must use in computing 
the total annual loan cost rate for various transactions, as well as 
instructions, explanations, and examples for various transactions. 
This appendix is modeled after Appendix J of this part (Annual 
Percentage Rates Computations for Closed-end Credit Transactions); 
creditors should consult Appendix J of this part for additional 
guidance in using the formulas for reverse mortgages.
    (b) Instructions and equations for the total annual loan cost 
rate. (1) General rule. The total annual loan cost rate shall be the 
nominal total annual loan cost rate

[[Page 79911]]

determined by multiplying the unit-period rate by the number of 
unit-periods in a year.
    (2) Term of the transaction. For purposes of total annual loan 
cost disclosures, the term of a reverse mortgage transaction is 
assumed to begin on the first of the month in which consummation is 
expected to occur. If a loan cost or any portion of a loan cost is 
initially incurred beginning on a date later than consummation, the 
term of the transaction is assumed to begin on the first of the 
month in which that loan cost is incurred. For purposes of total 
annual loan cost disclosures, the term ends on each of the assumed 
loan periods specified in Sec.  1026.33(c)(6).
    (3) Definitions of time intervals. (i) A period is the interval 
of time between advances.
    (ii) A common period is any period that occurs more than once in 
a transaction.
    (iii) A standard interval of time is a day, week, semimonth, 
month, or a multiple of a week or a month up to, but not exceeding, 
1 year.
    (iv) All months shall be considered to have an equal number of 
days.
    (4) Unit-period. (i) In all transactions other than single-
advance, single-payment transactions, the unit-period shall be that 
common period, not to exceed one year, that occurs most frequently 
in the transaction, except that:
    (A) If two or more common periods occur with equal frequency, 
the smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods 
rounded to the nearest whole standard interval of time. If the 
average is equally near two standard intervals of time, the lower 
shall be the unit-period.
    (ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 
one year.
    (5) Number of unit-periods between two given dates. (i) The 
number of days between two dates shall be the number of 24-hour 
intervals between any point in time on the first date to the same 
point in time on the second date.
    (ii) If the unit-period is a month, the number of full unit-
periods between two dates shall be the number of months. If the 
unit-period is a month, the number of unit-periods per year shall be 
12.
    (iii) If the unit-period is a semimonth or a multiple of a month 
not exceeding 11 months, the number of days between two dates shall 
be 30 times the number of full months. The number of full unit-
periods shall be determined by dividing the number of days by 15 in 
the case of a semimonthly unit-period or by the appropriate multiple 
of 30 in the case of a multimonthly unit-period. If the unit-period 
is a semimonth, the number of unit-periods per year shall be 24. If 
the number of unit-periods is a multiple of a month, the number of 
unit-periods per year shall be 12 divided by the number of months 
per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a 
week, the number of full unit-periods shall be determined by 
dividing the number of days between the two given dates by the 
number of days per unit-period. If the unit-period is a day, the 
number of unit-periods per year shall be 365. If the unit-period is 
a week or a multiple of a week, the number of unit-periods per year 
shall be 52 divided by the number of weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-
periods between two dates shall be the number of full years (each 
equal to 12 months).
    (6) Symbols. The symbols used to express the terms of a 
transaction in the equation set forth in paragraph (b)(8) of this 
appendix are defined as follows:

Aj = The amount of each periodic or lump-sum advance to 
the consumer under the reverse mortgage transaction.
i = Percentage rate of the total annual loan cost per unit-period, 
expressed as a decimal equivalent.
j = The number of unit-periods until the jth advance.
n = The number of unit-periods between consummation and repayment of 
the debt.
Pn = Min (Baln, Valn). This is the 
maximum amount that the creditor can be repaid at the specified loan 
term.
Baln = Loan balance at time of repayment, including all 
costs and fees incurred by the consumer (including any shared 
appreciation or shared equity amount) compounded to time n at the 
creditor's contract rate of interest.
Valn = Val0(1 + [sigma])\y\, where 
Val0 is the property value at consummation, [sigma] is 
the assumed annual rate of appreciation for the dwelling, and y is 
the number of years in the assumed term. Valn must be 
reduced by the amount of any equity reserved for the consumer by 
agreement between the parties, or by 7 percent (or the amount or 
percentage specified in the credit agreement), if the amount 
required to be repaid is limited to the net proceeds of sale.
[sigma] = The summation operator.

    Symbols used in the examples shown in this appendix are defined 
as follows:
[GRAPHIC] [TIFF OMITTED] TR22DE11.072

w = The number of unit-periods per year.
I = wi x 100 = the nominal total annual loan cost rate.

    (7) General equation. The total annual loan cost rate for a 
reverse mortgage transaction must be determined by first solving the 
following formula, which sets forth the relationship between the 
advances to the consumer and the amount owed to the creditor under 
the terms of the reverse mortgage agreement for the loan cost rate 
per unit-period (the loan cost rate per unit-period is then 
multiplied by the number of unit-periods per year to obtain the 
total annual loan cost rate I; that is, I = wi):
[GRAPHIC] [TIFF OMITTED] TR22DE11.073


[[Page 79912]]


    (8) Solution of general equation by iteration process. (i) The 
general equation in paragraph (b)(7) of this appendix, when applied 
to a simple transaction for a reverse mortgage loan of equal monthly 
advances of $350 each, and with a total amount owed of $14,313.08 at 
an assumed repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR22DE11.074

Using the iteration procedures found in steps 1 through 4 of 
(b)(9)(i) of Appendix J of this part, the total annual loan cost 
rate, correct to two decimals, is 48.53%.
    (ii) In using these iteration procedures, it is expected that 
calculators or computers will be programmed to carry all available 
decimals throughout the calculation and that enough iterations will 
be performed to make virtually certain that the total annual loan 
cost rate obtained, when rounded to two decimals, is correct. Total 
annual loan cost rates in the examples below were obtained by using 
a 10-digit programmable calculator and the iteration procedure 
described in Appendix J of this part.
    (9) Assumption for discretionary cash advances. If the consumer 
controls the timing of advances made after consummation (such as in 
a credit line arrangement), the creditor must use the general 
formula in paragraph (b)(7) of this appendix. The total annual loan 
cost rate shall be based on the assumption that 50 percent of the 
principal loan amount is advanced at closing, or in the case of an 
open-end transaction, at the time the consumer becomes obligated 
under the plan. Creditors shall assume the advances are made at the 
interest rate then in effect and that no further advances are made 
to, or repayments made by, the consumer during the term of the 
transaction or plan.
    (10) Assumption for variable-rate reverse mortgage transactions. 
If the interest rate for a reverse mortgage transaction may increase 
during the loan term and the amount or timing is not known at 
consummation, creditors shall base the disclosures on the initial 
interest rate in effect at the time the disclosures are provided.
    (11) Assumption for closing costs. In calculating the total 
annual loan cost rate, creditors shall assume all closing and other 
consumer costs are financed by the creditor.
    (c) Examples of total annual loan cost rate computations. (1) 
Lump-sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer 
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%

P10 = Min (103,385.84, 137,662.72)
[GRAPHIC] [TIFF OMITTED] TR22DE11.075

i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
    (2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer 
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.076

Total annual loan cost rate (100(.009061140 x 12)) = 10.87%
    (3) Lump sum advance at consummation and monthly advances 
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer 
at age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR22DE11.077


[[Page 79913]]


Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
    (d) Reverse mortgage model form and sample form. (1) Model form.

Total Annual Loan Cost Rate

Loan Terms

    Age of youngest borrower:
    Appraised property value:
    Interest rate:
    Monthly advance:
    Initial draw:
    Line of credit:

Initial Loan Charges

    Closing costs:
    Mortgage insurance premium:
    Annuity cost:

Monthly Loan Charges

    Servicing fee:

Other Charges:

    Mortgage insurance:
    Shared Appreciation:

Repayment Limits

----------------------------------------------------------------------------------------------------------------
                                                              Total annual loan cost rate
     Assumed annual appreciation     ---------------------------------------------------------------------------
              (percent)                                    [ ]-year loan      [ ]-year loan      [ ]-year loan
                                       2-year loan term        term]               term               term
----------------------------------------------------------------------------------------------------------------
0...................................  .................                [ ]  .................  .................
4...................................  .................                [ ]  .................  .................
8...................................  .................                [ ]  .................  .................
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you 
keep the loan and how much your house appreciates in value. 
Generally, the longer you keep a reverse mortgage, the lower the 
total annual loan cost rate will be.
    This table shows the estimated cost of your reverse mortgage 
loan, expressed as an annual rate. It illustrates the cost for three 
[four] loan terms: 2 years, [half of life expectancy for someone 
your age,] that life expectancy, and 1.4 times that life expectancy. 
The table also shows the cost of the loan, assuming the value of 
your home appreciates at three different rates: 0%, 4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically 
include principal, interest, closing costs, mortgage insurance 
premiums, annuity costs, and servicing costs (but not costs when you 
sell the home).
    The rates in this table are estimates. Your actual cost may 
differ if, for example, the amount of your loan advances varies or 
the interest rate on your mortgage changes.
    Signing an Application or Receiving These Disclosures Does Not 
Require You To Complete This Loan
    (2) Sample Form.

Total Annual Loan Cost Rate

Loan Terms

    Age of youngest borrower: 75
    Appraised property value: $100,000
    Interest rate: 9%
    Monthly advance: $301.80
    Initial draw: $1,000
    Line of credit: $4,000

Initial Loan Charges

    Closing costs: $5,000
    Mortgage insurance premium: None
    Annuity cost: None

Monthly Loan Charges

    Servicing fee: None

Other Charges

    Mortgage insurance: None
    Shared Appreciation: None

Repayment Limits

    Net proceeds estimated at 93% of projected home sale

----------------------------------------------------------------------------------------------------------------
                                                              Total annual loan cost rate
     Assumed annual appreciation     ---------------------------------------------------------------------------
              (percent)                2-year loan term   6-year loan term  12-year loan term  17-year loan term
                                          (percent)          (percent)          (percent)          (percent)
----------------------------------------------------------------------------------------------------------------
0...................................              39.00            [14.94]               9.86               3.87
4...................................              39.00            [14.94]              11.03              10.14
8...................................              39.00            [14.94]              11.03              10.20
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you 
keep the loan and how much your house appreciates in value. 
Generally, the longer you keep a reverse mortgage, the lower the 
total annual loan cost rate will be.
    This table shows the estimated cost of your reverse mortgage 
loan, expressed as an annual rate. It illustrates the cost for three 
[four] loan terms: 2 years, [half of life expectancy for someone 
your age,] that life expectancy, and 1.4 times that life expectancy. 
The table also shows the cost of the loan, assuming the value of 
your home appreciates at three different rates: 0%, 4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically 
include principal, interest, closing costs, mortgage insurance 
premiums, annuity costs, and servicing costs (but not disposition 
costs--costs when you sell the home).
    The rates in this table are estimates. Your actual cost may 
differ if, for example, the amount of your loan advances varies or 
the interest rate on your mortgage changes.
    Signing an Application or Receiving These Disclosures Does Not 
Require You To Complete This Loan

Appendix L to Part 1026--Assumed Loan Periods for Computations of Total 
Annual Loan Cost Rates

    (a) Required tables. In calculating the total annual loan cost 
rates in accordance with Appendix K of this part, creditors shall 
assume three loan periods, as determined by the following table.
    (b) Loan periods. (1) Loan Period 1 is a two-year loan period.
    (2) Loan Period 2 is the life expectancy in years of the 
youngest borrower to become obligated on the reverse mortgage loan, 
as shown in the U.S. Decennial Life Tables for 1979-1981 for 
females, rounded to the nearest whole year.
    (3) Loan Period 3 is the life expectancy figure in Loan Period 
3, multiplied by 1.4 and rounded to the nearest full year (life 
expectancy figures at .5 have been rounded up to 1).
    (4) At the creditor's option, an additional period may be 
included, which is the life expectancy figure in Loan Period 2, 
multiplied by .5 and rounded to the nearest full year (life 
expectancy figures at .5 have been rounded up to 1).

----------------------------------------------------------------------------------------------------------------
                                                           [Optional loan     Loan period 2
      Age of youngest  borrower         Loan period 1       period  (in     (life expectancy)    Loan period 3
                                          (in years)          years)]           (in years)         (in years)
----------------------------------------------------------------------------------------------------------------
62..................................                  2               [11]                 21                 29
63..................................                  2               [10]                 20                 28

[[Page 79914]]

 
64..................................                  2               [10]                 19                 27
65..................................                  2                [9]                 18                 25
66..................................                  2                [9]                 18                 25
67..................................                  2                [9]                 17                 24
68..................................                  2                [8]                 16                 22
69..................................                  2                [8]                 16                 22
70..................................                  2                [8]                 15                 21
71..................................                  2                [7]                 14                 20
72..................................                  2                [7]                 13                 18
73..................................                  2                [7]                 13                 18
74..................................                  2                [6]                 12                 17
75..................................                  2                [6]                 12                 17
76..................................                  2                [6]                 11                 15
77..................................                  2                [5]                 10                 14
78..................................                  2                [5]                 10                 14
79..................................                  2                [5]                  9                 13
80..................................                  2                [5]                  9                 13
81..................................                  2                [4]                  8                 11
82..................................                  2                [4]                  8                 11
83..................................                  2                [4]                  7                 10
84..................................                  2                [4]                  7                 10
85..................................                  2                [3]                  6                  8
86..................................                  2                [3]                  6                  8
87..................................                  2                [3]                  6                  8
88..................................                  2                [3]                  5                  7
89..................................                  2                [3]                  5                  7
90..................................                  2                [3]                  5                  7
91..................................                  2                [2]                  4                  6
92..................................                  2                [2]                  4                  6
93..................................                  2                [2]                  4                  6
94..................................                  2                [2]                  4                  6
95 and over.........................                  2                [2]                  3                  4
----------------------------------------------------------------------------------------------------------------

Appendix M1 to Part 1026--Repayment Disclosures

    (a) Definitions. (1) ``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) ``Deferred interest or similar plan'' means a plan where a 
consumer will not be obligated to pay interest that accrues on 
balances or transactions if those balances or transactions are paid 
in full prior to the expiration of a specified period of time.
    (b) Calculating minimum payment repayment estimates. (1) Minimum 
payment formulas. When calculating the minimum payment repayment 
estimate, 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. In this case, the issuer must disclose the longest 
repayment period calculated. 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, 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 must disclose 5 years as the repayment period 
for the entire balance to the consumer. 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, card issuers may assume no promotional terms apply to the 
account. For example, assume that a promotional minimum payment of 
$10 applies to an account for six months, and then after the 
promotional period expires, the minimum payment is calculated as 2 
percent of the outstanding balance on the account or $20 whichever 
is greater. An issuer may assume during the promotional period that 
the $10 promotional minimum payment does not apply, and instead 
calculate the minimum payment disclosures based on the minimum 
payment formula of 2 percent of the outstanding balance or $20, 
whichever is greater. Alternatively, during the promotional period, 
an issuer in calculating the minimum payment repayment estimate may 
apply the promotional minimum payment until it expires and then 
apply the minimum payment formula that applies after the promotional 
minimum payment expires. In the above example, an issuer could 
calculate the minimum payment repayment estimate during the 
promotional period by applying the $10 promotional minimum payment 
for the first six months and then applying the 2 percent or $20 
(whichever is greater) minimum payment formula after the promotional 
minimum payment expires. In calculating the minimum payment 
repayment estimate during a promotional period, an issuer may not 
assume that the promotional minimum payment will apply until the 
outstanding balance is paid off by making only minimum payments 
(assuming the repayment estimate is longer than the promotional 
period). In the above example, the issuer may not calculate the 
minimum payment repayment estimate during the promotional period by 
assuming that the $10 promotional minimum payment will apply beyond 
the six months until the outstanding balance is repaid.
    (2) Annual percentage rate. When calculating the minimum payment 
repayment estimate, a 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, 
other than deferred interest or similar plans, a card issuer in 
calculating the minimum payment repayment estimate during the 
promotional period must apply the promotional annual percentage 
rate(s) until it expires and then must apply the rate that applies 
after the promotional rate(s) expires. If the rate that applies 
after the promotional rate(s) expires is a variable rate, a card 
issuer must calculate that rate based on the applicable index or 
formula. This variable rate is accurate if it was in effect within 
the last 30 days before the minimum payment repayment estimate is 
provided. For deferred interest plans or similar plans, if minimum 
payments under the deferred interest or similar plan will repay the 
balances or transactions in full prior to the expiration of the 
specified period of time, a

[[Page 79915]]

card issuer must assume that the consumer will not be obligated to 
pay the accrued interest. This means, in calculating the minimum 
payment repayment estimate, the card issuer must apply a zero 
percent annual percentage rate to the balance subject to the 
deferred interest or similar plan. If, however, minimum payments 
under the deferred interest plan or similar plan may not repay the 
balances or transactions in full prior to the expiration of the 
specified period of time, a card issuer must assume that a consumer 
will not repay the balances or transactions in full prior to the 
expiration of the specified period of time and thus the consumer 
will be obligated to pay the accrued interest. This means, in 
calculating the minimum payment repayment estimate, the card issuer 
must apply the annual percentage rate at which interest is accruing 
to the balance subject to the deferred interest or similar plan.
    (3) Beginning balance. When calculating the minimum payment 
repayment estimate, a card issuer 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 minimum payment 
repayment estimate, a card issuer may round the beginning balance as 
described above to the nearest whole dollar.
    (4) Assumptions. When calculating the minimum payment repayment 
estimate, a card issuer 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, except as provided in 
paragraph (b)(2) of this Appendix. For example, if a penalty annual 
percentage rate currently applies to a consumer's account, a card 
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 finance charge after the final month in a series of 
payments).
    (vi) The average daily balance method is used to calculate the 
balance.
    (vii) All months are the same length 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 (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.
    (viii) Payments are credited either on the last day of the month 
or the last day of the billing cycle.
    (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 minimum payment repayment estimate, 
the assumed payments, current balance and interest charges for each 
month may be rounded to the nearest cent, as shown in Appendix M2 to 
this part.
    (5) Tolerance. A minimum payment repayment estimate shall be 
considered accurate if it is not more than 2 months above or below 
the minimum payment repayment estimate determined in accordance with 
the guidance in this Appendix (prior to rounding described in Sec.  
1026.7(b)(12)(i)(B) and without use of the assumptions listed in 
paragraph (b)(4) of this Appendix to the extent a card issuer 
chooses instead to use the account terms that apply to a consumer's 
account). For example, assume the minimum payment repayment estimate 
calculated using the guidance in this Appendix is 28 months (2 
years, 4 months), and the minimum payment repayment estimate 
calculated by the issuer is 30 months (2 years, 6 months). The 
minimum payment repayment estimate should be disclosed as 2 years, 
due to the rounding rule set forth in Sec.  1026.7(b)(12)(i)(B). 
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 minimum payment 
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 Sec.  
1026.7(b)(12)(i)(B), the issuer would be in compliance with this 
guidance. For example, assume the minimum payment repayment estimate 
calculated using the guidance in this Appendix is 32 months (2 
years, 8 months), and the minimum payment repayment estimate 
calculated by the issuer is 38 months (3 years, 2 months). Under the 
rounding rule set forth in Sec.  1026.7(b)(12)(i)(B), 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 minimum 
payment repayment estimate calculated by the issuer is outside the 2 
months' tolerance amount.
    (c) Calculating the minimum payment total cost estimate. When 
calculating the minimum payment total cost estimate, a card issuer 
must total the dollar amount of the interest and principal that the 
consumer would pay if he or she made minimum payments for the length 
of time calculated as the minimum payment repayment estimate under 
paragraph (b) of this Appendix. The minimum payment total cost 
estimate is deemed to be accurate if it is based on a minimum 
payment repayment estimate that is within the tolerance guidance set 
forth in paragraph (b)(5) of this Appendix. For example, assume the 
minimum payment repayment estimate calculated using the guidance in 
this Appendix is 28 months (2 years, 4 months), and the minimum 
payment repayment estimate calculated by the issuer is 30 months (2 
years, 6 months). The minimum payment total cost estimate will be 
deemed accurate even if it is based on the 30 month estimate for 
length of repayment, because the issuer's minimum payment repayment 
estimate is within the 2 months' tolerance, prior to rounding. In 
addition, assume the minimum payment repayment estimate calculated 
under this Appendix is 32 months (2 years, 8 months), and the 
minimum payment repayment estimate calculated by the issuer is 38 
months (3 years, 2 months). Under the rounding rule set forth in 
Sec.  1026.7(b)(12)(i)(B), both of these estimates would be rounded 
and disclosed to the consumer as 3 years. If the issuer based the 
minimum payment total cost estimate on 38 months (or any other 
minimum payment repayment estimate that would be rounded to 3 
years), the minimum payment total cost estimate would be deemed to 
be accurate.
    (d) Calculating the estimated monthly payment for repayment in 
36 months. (1) In general. When calculating the estimated monthly 
payment for repayment in 36 months, a card issuer must calculate the 
estimated monthly payment amount that would be required to pay off 
the outstanding balance shown on the statement within 36 months, 
assuming the consumer paid the same amount each month for 36 months.
    (2) Weighted annual percentage rate. In calculating the 
estimated monthly payment for repayment in 36 months, an issuer may 
use a weighted annual percentage rate that is based on the annual 
percentage rates that apply to a cardholder's account and the 
portion of the balance to which the rate applies, as shown in 
Appendix M2 to this part. If a card issuer uses a weighted annual 
percentage rate and any promotional terms related to annual 
percentage rates apply to a cardholder's account, other than 
deferred interest plans or similar plans, in calculating the 
weighted annual percentage rate, the issuer must calculate a 
weighted average of the promotional rate and the rate that will 
apply after the promotional rate expires based on the percentage of 
36 months each rate will apply, as shown in Appendix M2 to this 
part. For deferred interest plans or similar plans, if minimum 
payments under the deferred interest or similar plan will repay the 
balances or transactions in full prior to the expiration of the 
specified period of time, if a card issuer uses a weighted annual 
percentage rate, the card issuer must assume that the consumer will 
not be obligated to pay the accrued interest. This means, in 
calculating the weighted annual percentage rate, the card issuer 
must apply a zero percent annual percentage rate to the balance 
subject to the deferred interest or similar plan. If, however, 
minimum payments under the deferred interest plan or similar plan 
may not repay the balances or transactions in full prior to the 
expiration of the specified period of time, a card issuer in 
calculating the weighted annual percentage rate must assume that a 
consumer will not repay the balances or transactions in full

[[Page 79916]]

prior to the expiration of the specified period of time and thus the 
consumer will be obligated to pay the accrued interest. This means, 
in calculating the weighted annual percentage rate, the card issuer 
must apply the annual percentage rate at which interest is accruing 
to the balance subject to the deferred interest or similar plan. A 
card issuer may use a method of calculating the estimated monthly 
payment for repayment in 36 months other than a weighted annual 
percentage rate, so long as the calculation results in the same 
payment amount each month and so long as the total of the payments 
would pay off the outstanding balance shown on the periodic 
statement within 36 months.
    (3) Assumptions. In calculating the estimated monthly payment 
for repayment in 36 months, a card issuer must use the same terms 
described in paragraph (b) of this Appendix, as appropriate.
    (4) Tolerance. An estimated monthly payment for repayment in 36 
months shall be considered accurate if it is not more than 10 
percent above or below the estimated monthly payment for repayment 
in 36 months determined in accordance with the guidance in this 
Appendix (after rounding described in Sec.  
1026.7(b)(12)(i)(F)(1)(i)).
    (e) Calculating the total cost estimate for repayment in 36 
months. When calculating the total cost estimate for repayment in 36 
months, a card issuer must total the dollar amount of the interest 
and principal that the consumer would pay if he or she made the 
estimated monthly payment calculated under paragraph (d) of this 
appendix each month for 36 months. The total cost estimate for 
repayment in 36 months shall be considered accurate if it is based 
on the estimated monthly payment for repayment in 36 months that is 
calculated in accordance with paragraph (d) of this appendix.
    (f) Calculating the savings estimate for repayment in 36 months. 
When calculating the savings estimate for repayment in 36 months, if 
a card issuer chooses under Sec.  1026.7(b)(12)(i) to round the 
disclosures to the nearest whole dollar when disclosing them on the 
periodic statement, the card issuer must calculate the savings 
estimate for repayment in 36 months by subtracting the total cost 
estimate for repayment in 36 months calculated under paragraph (e) 
of this appendix (rounded to the nearest whole dollar) from the 
minimum payment total cost estimate calculated under paragraph (c) 
of this appendix (rounded to the nearest whole dollar). If a card 
issuer chooses under Sec.  1026.7(b)(12)(i), however, to round the 
disclosures to the nearest cent when disclosing them on the periodic 
statement, the card issuer must calculate the savings estimate for 
repayment in 36 months by subtracting the total cost estimate for 
repayment in 36 months calculated under paragraph (e) of this 
appendix (rounded to the nearest cent) from the minimum payment 
total cost estimate calculated under paragraph (c) of this appendix 
(rounded to the nearest cent). The savings estimate for repayment in 
36 months shall be considered accurate if it is based on the total 
cost estimate for repayment in 36 months that is calculated in 
accordance with paragraph (e) of this appendix and the minimum 
payment total cost estimate calculated under paragraph (c) of this 
appendix.

Appendix M2 to Part 1026--Sample Calculations of Repayment Disclosures

    The following is an example of how to calculate the minimum 
payment repayment estimate, the minimum payment total cost estimate, 
the estimated monthly payment for repayment in 36 months, the total 
cost estimate for repayment in 36 months, and the savings estimate 
for repayment in 36 months using the guidance in Appendix M1 to this 
part where three annual percentage rates apply (where one of the 
rates is a promotional APR), the total outstanding balance is $1000, 
and the minimum payment formula is 2 percent of the outstanding 
balance or $20, whichever is greater. The following calculation is 
written in SAS code.
    data one;
/*
Note:
pmt01 = estimated monthly payment to repay balance in 36 months 
sumpmts36 = sum of payments for repayment in 36 months
month = number of months to repay total balance if making only 
minimum payments
pmt = minimum monthly payment
fc = monthly finance charge
sumpmts = sum of payments for minimum payments
*/
* inputs;
* annual percentage rates; apr1 = 0.0; apr2 = 0.17; apr3 = 0.21; * 
insert in ascending order;
* outstanding balances; cbal1 = 500; cbal2 = 250; cbal3 = 250;
* dollar minimum payment; dmin = 20;
* percent minimum payment; pmin = 0.02; * (0.02 + perrate);
* promotional rate information;
* last month for promotional rate; expm = 6; * = 0 if no promotional 
rate;
* regular rate; rrate = .17; * = 0 if no promotional rate;
array apr(3); array perrate(3);
days = 365/12; * calculate days in month;
* calculate estimated monthly payment to pay off balances in 36 
months, and total cost of repaying balance in 36 months;
array xperrate(3);
do I = 1 to 3;
xperrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
if expmgt 0 then xperrate1a = (expm/36) * xperrate1 + (1-(expm/36)) 
* (rrate/365) * days; else xperrate1a = xperrate1;
tbal = cbal1 + cbal2 + cbal3;
perrate36 = (cbal1 * xperrate1a + cbal2 * xperrate2 + cbal3 * 
xperrate3)/(cbal1 + cbal2 + cbal3);
* months to repay; dmonths = 36;
* initialize counters for sum of payments for repayment in 36 
months; Sumpmts36 = 0;
    pvaf = (1-(1 + perrate36) ** -dmonths)/perrate36; * calculate 
present value of annuity factor;
pmt01 = round(tbal/pvaf,0.01); * calculate monthly payment for 
designated number of months;
sumpmts36 = pmt01 * 36;
* calculate time to repay and total cost of making minimum payments 
each month;
* initialize counter for months, and sum of payments;
month = 0;
sumpmts = 0;
do I = 1 to 3;
perrate(I) = (apr(I)/365) * days; * calculate periodic rate;
end;
put perrate1 = perrate2 = perrate3 =;
eins:
month = month + 1; * increment month counter;
pmt = round(pmin * tbal,0.01); * calculate payment as percentage of 
balance;
if month geexpm and expm ne 0 then perrate1 = (rrate/365) * days;
if pmtltdmin then pmt = dmin; * set dollar minimum payment;
array xxxbal(3); array cbal(3);
do I = 1 to 3;
xxxbal(I) = round(cbal(I) * (1 + perrate(I)),0.01);
end;
fc = xxxbal1 + xxxbal2 + xxxbal3 - tbal;
if pmtgt (tbal + fc) then do;
do I = 1 to 3;
if cbal(I) gt 0 then pmt = round(cbal(I) * (1 + perrate(I)),0.01); * 
set final payment amount;
end;
end;
if pmt le xxxbal1 then do;
cbal1 = xxxbal1 - pmt;
cbal2 = xxxbal2;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal1 and xxxbal2 gt 0 and pmt le (xxxbal1 + xxxbal2) 
then do;
cbal2 = xxxbal2 - (pmt - xxxbal1);
cbal1 = 0;
cbal3 = xxxbal3;
end;
if pmtgt xxxbal2 and xxxbal3 gt 0 then do;
cbal3 = xxxbal3 - (pmt - xxxbal1 - xxxbal2);
cbal2 = 0;
end;
sumpmts = sumpmts + pmt; * increment sum of payments;
tbal = cbal1 + cbal2 + cbal3; * calculate new total balance;
* print month, balance, payment amount, and finance charge;
put month = tbal = cbal1 = cbal2 = cbal3 = pmt = fc =;
if tbalgt 0 then go to eins; * go to next month if balance is 
greater than zero;
* initialize total cost savings;
savtot = 0;
savtot = round(sumpmts,1)--round (sumpmts36,1);
* print number of months to repay debt if minimum payments made, 
final balance (zero), total cost if minimum payments made, estimated 
monthly payment for repayment in 36 months, total cost for repayment 
in 36 months, and total savings if repaid in 36 months;
put title = ` ';
put title = `number of months to repay debt if minimum payment made, 
final balance, total cost if minimum payments made, estimated 
monthly payment for

[[Page 79917]]

repayment in 36 months, total cost for repayment in 36 months, and 
total savings if repaid in 36 months';
put month = tbal = sumpmts = pmt01 = sumpmts36 = savtot =;
put title = ` ';
run;

Supplement I to Part 1026--Official Interpretations

Introduction

    1. Official status. This commentary is the vehicle by which the 
Bureau of Consumer Financial Protection issues official 
interpretations of Regulation Z. Good faith compliance with this 
commentary affords protection from liability under section 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 Bureau of Consumer Financial 
Protection.
    2. Procedure for requesting interpretations. Under Appendix C of 
the regulation, anyone may request an official interpretation. 
Interpretations that are adopted will be incorporated in this 
commentary following publication in the Federal Register. No 
official 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.  1026.18(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 1026.1--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.  1026.2. 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.

Section 1026.2--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 1026).
    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.
    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.  1026.16 and 1026.24, not just those that 
meet the definition of creditor in Sec.  1026.2(a)(17). Thus, home 
builders, merchants, and others who are not themselves creditors 
must comply with the advertising provisions of the regulation if 
they advertise consumer credit transactions. However, under section 
145 of the Act, the owner and the personnel of the medium in which 
an advertisement appears, or through which it is disseminated, are 
not subject to civil liability for violations.

2(a)(4) Billing Cycle or Cycle

    1. Intervals. In open-end credit plans, the billing cycle 
determines the intervals for which periodic disclosure statements 
are required; these intervals are also used as measuring points for 
other duties of the creditor. Typically, billing cycles are monthly, 
but they may be more frequent or less frequent (but not less 
frequent than quarterly).
    2. Creditors that do not bill. The term cycle is interchangeable 
with billing cycle for definitional purposes, since some creditors' 
cycles do not involve the sending of bills in the traditional sense 
but only statements of account activity. This is commonly the case 
with financial institutions when periodic payments are made through 
payroll deduction or through automatic debit of the consumer's asset 
account.
    3. Equal cycles. Although cycles must be equal, there is a 
permissible variance to account for weekends, holidays, and 
differences in the number of days in months. If the actual date of 
each statement does not vary by more than four days from a fixed 
``day'' (for example, the third Thursday of each month) or ``date'' 
(for example, the 15th of each month) that the creditor regularly 
uses, the intervals between statements are considered equal. The 
requirement that cycles be equal applies even if the creditor 
applies a daily periodic rate to determine the finance charge. The 
requirement that intervals be equal does not apply to the 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. Rule for rescission, disclosures for certain mortgage 
transactions, and private

[[Page 79918]]

education loans. A more precise rule for what is a business day (all 
calendar days except Sundays and the Federal legal holidays 
specified in 5 U.S.C. 6103(a)) applies when the right of rescission, 
the receipt of disclosures for certain dwelling-secured mortgage 
transactions under Sec. Sec.  1026.19(a)(1)(ii), 1026.19(a)(2), 
1026.31(c), or the receipt of disclosures for private education 
loans under Sec.  1026.46(d)(4) is involved. 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). In cases where the more precise rule applies, the observed 
holiday (in the example, July 3) is a business day.

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.  1026.12(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.  1026.18 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.  1026.18(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.  1026.18(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.  
1026.15 and 1026.23, 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.  1026.3(a), is considered to be extended to a 
natural person for purposes of the definition of consumer.

2(a)(12) Consumer Credit

    1. Primary purpose. There is no precise test for what 
constitutes credit offered or extended for personal, family, or 
household purposes, nor for what constitutes the primary purpose. 
(See, however, the discussion of business purposes in the commentary 
to Sec.  1026.3(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

[[Page 79919]]

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.  1026.4, 
regardless of how the fee is characterized under state law. Where 
the fee charged constitutes a finance charge under Sec.  1026.4 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.  
1026.2(a)(17).)

Paragraph 2(a)(15)

    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.
    C. An account number that accesses a credit account, unless the 
account number can access an open-end line of credit to purchase 
goods or services. For example, if a creditor provides a consumer 
with an open-end line of credit that can be accessed by an account 
number in order to transfer funds into another account (such as an 
asset account with the same creditor), the account number is not a 
credit card for purposes of Sec.  1026.2(a)(15)(i). However, if the 
account number can also access the line of credit to purchase goods 
or services (such as an account number that can be used to purchase 
goods or services on the Internet), the account number is a credit 
card for purposes of Sec.  1026.2(a)(15)(i), regardless of whether 
the creditor treats such transactions as purchases, cash advances, 
or some other type of transaction. Furthermore, if the line of 
credit can also be accessed by a card (such as a debit card), that 
card is a credit card for purposes of Sec.  1026.2(a)(15)(i).
    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. In particular, 
references to credit card accounts under an open-end (not home-
secured) consumer credit plan in Subparts B and G generally include 
charge cards. The term charge card is, however, distinguished from 
credit card or credit card account under an open-end (not home-
secured) consumer credit plan in Sec. Sec.  1026.60, 
1026.6(b)(2)(xiv), 1026.7(b)(11), 1026.7(b)(12), 1026.9(e), 
1026.9(f), 1026.28(d), 1026.52(b)(1)(ii)(C), and Appendices G-10 
through G-13.
    4. Credit card account under an open-end (not home-secured) 
consumer credit plan. An open-end consumer credit account is a 
credit card account under an open-end (not home-secured) consumer 
credit plan for purposes of Sec.  1026.2(a)(15)(ii) if:
    i. The account is accessed by a credit card, as defined in Sec.  
1026.2(a)(15)(i); and
    ii. The account is not excluded under Sec.  1026.2(a)(15)(ii)(A) 
or (a)(15)(ii)(B).

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.  1026.18(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.  1026.17(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.  1026.20(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 1026.4 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.  
1026.17(c)(1) for further discussion of this point.)
    5. Credit extensions for educational purposes. A credit 
extension for educational purposes in which an educational 
institution is the creditor may be treated as either a credit sale 
or a loan, regardless of whether the funds are given directly to the 
student, credited to the student's account, or disbursed to other 
persons on the student's behalf. The disclosure of the total sale 
price need not be given if the transaction is treated as a loan.

2(a)(17) Creditor

    1. General. The definition contains four independent tests. If 
any one of the tests is met, the person is a creditor for purposes 
of that particular test.

Paragraph 2(a)(17)(i)

    1. Prerequisites. This test is composed of two requirements, 
both of which must be met in order for a particular credit extension 
to be subject to the regulation and for the credit extension to 
count towards satisfaction of the numerical tests mentioned in Sec.  
1026.2(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.  1026.2(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

[[Page 79920]]

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 1026.2(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 
1026.2(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.  
1026.2(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.  1026.18(b).
    B. It may, but need not, be reflected in the payment schedule 
under Sec.  1026.18(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.  1026.18(h) must equal the sum of the payments 
disclosed under Sec.  1026.18(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.  1026.18(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.  1026.2(a)(24), 1026.15, and 1026.23.)
    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.  1026.3(b).

2(a)(20) Open-End Credit

    1. General. This definition describes the characteristics of 
open-end credit (for which the applicable disclosure and other rules 
are contained in Subpart B), as distinct from closed-end credit. 
Open-end credit is consumer credit that is extended under a plan and 
meets all 3 criteria set forth in the definition.
    2. Existence of a plan. The definition requires that there be a 
plan, which connotes a contractual arrangement between the creditor 
and the consumer. Some creditors offer programs containing a number 
of different credit features. The consumer has a single account with 
the institution that can be accessed repeatedly via a number of sub-
accounts established for the different program features and rate 
structures. Some features of the program might be used repeatedly 
(for example, an overdraft line) while others 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

[[Page 79921]]

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.  1026.2(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.  1026.40(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.  1026.2(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 and \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\th 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 part 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 part.

2(a)(23) Prepaid Finance Charge

    1. General. Prepaid finance charges must be taken into account 
under Sec.  1026.18(b) in computing the disclosed amount financed, 
and must be disclosed if the creditor provides an itemization of the 
amount financed under Sec.  1026.18(c).
    2. Examples. i. Common examples of prepaid finance charges 
include:
    A. Buyer's points.
    B. Service fees.
    C. Loan fees.
    D. Finder's fees.
    E. Loan-guarantee insurance.
    F. Credit-investigation fees.
    ii. However, in order for these or any other finance charges to 
be considered prepaid, they must be either paid separately in cash 
or check or withheld from the proceeds. Prepaid finance charges 
include any portion of the finance charge paid prior to or at 
closing or settlement.
    3. Exclusions. Add-on and discount finance charges are not 
prepaid finance charges for purposes of this part. 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.  1026.18(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.  1026.4, 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.  
1026.4(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:

[[Page 79922]]

    i. Section 1026.4(c)(7)--exclusions from the finance charge.
    ii. Section 1026.15(f)--exemption from the right of rescission.
    iii. Section 1026.18(q)--whether or not the obligation is 
assumable.
    iv. Section 1026.20(b)--disclosure requirements for assumptions.
    v. Section 1026.23(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.  1026.15(a) and 1026.23(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.  1026.17(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.  1026.18(q) 
(assumability policies). However, the rescission rules of Sec. Sec.  
1026.15 and 1026.23 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.  1026.20(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.  1026.2(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.  1026.18, but the creditor is not 
precluded from preserving these rights elsewhere in the contract 
documents, or invoking and enforcing such rights, if it is otherwise 
lawful to do so. If the creditor is unsure whether a particular 
interest is one of the excluded interests, the creditor may, at its 
option, consider such interests as security interests for Truth in 
Lending purposes.
    3. Incidental interests. i. Incidental interests in property 
that are not security interests include, among other things:
    A. Assignment of rents.
    B. Right to condemnation proceeds.
    C. Interests in accessories and replacements.
    D. Interests in escrow accounts, such as for taxes and 
insurance.
    E. Waiver of homestead or personal property rights.
    ii. The notion of an incidental interest does not encompass an 
explicit security interest in an insurance policy if that policy is 
the primary collateral for the transaction--for example, in an 
insurance premium financing transaction.
    4. Operation of law. Interests that arise solely by operation of 
law are excluded from the general definition. Also excluded are 
interests arising by operation of law that are merely repeated or 
referred to in the contract. However, if the creditor has an 
interest that arises by operation of law, such as a vendor's lien, 
and takes an independent security interest in the same property, 
such as a UCC security interest, the latter interest is a 
disclosable security interest unless otherwise provided.
    5. Rescission rules. Security interests that arise solely by 
operation of law are security interests for purposes of rescission. 
Examples of such interests are mechanics' and materialmen's liens.
    6. Specificity of disclosure. A creditor need not separately 
disclose multiple security interests that it may hold in the same 
collateral. The creditor need only disclose that the transaction is 
secured by the collateral, even when security interests from prior 
transactions remain of record and a new security interest is taken 
in connection with the transaction. In disclosing the fact that the 
transaction is secured by the collateral, the creditor also need not 
disclose how the security interest arose. For example, in a closed-
end credit transaction, a rescission notice need not specifically 
state that a new security interest is ``acquired'' or an existing 
security interest is ``retained'' in the transaction. The 
acquisition or retention of a security interest in the consumer's 
principal dwelling instead may be disclosed in a rescission notice 
with a general statement such as the following: ``Your home is the 
security for the new transaction.''

2(b) Rules of Construction

    1. [Reserved]
    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 1026.3--Exempt Transactions

    1. Relationship to Sec.  1026.12. The provisions in Sec.  
1026.12(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.

[[Page 79923]]

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.  
1026.12(a) and 1026.12(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.  
1026.13 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 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 Applicable Threshold Amount

    1. Threshold amount. For purposes of Sec.  1026.3(b), the 
threshold amount in effect during a particular period is the amount 
stated below for that period. The threshold amount is adjusted 
effective January 1 of each year by any annual percentage increase 
in the Consumer Price Index for Urban Wage Earners and Clerical 
Workers (CPI-W) that was in effect on the preceding June 1. This 
comment will be amended to provide the threshold amount for the 
upcoming year after the annual percentage change in the CPI-W that 
was in effect on June 1 becomes available. Any increase in the 
threshold amount will be rounded to the nearest $100 increment. For 
example, if the annual percentage increase in the CPI-W would result 
in a $950 increase in the threshold amount, the threshold amount 
will be increased by $1,000. However, if the annual percentage 
increase in the CPI-W would result in a $949 increase in the 
threshold amount, the threshold amount will be increased by $900.
    i. Prior to July 21, 2011, the threshold amount is $25,000.
    ii. From July 21, 2011 through December 31, 2011, the threshold 
amount is $50,000.
    iii. From January 1, 2012 through December 31, 2012, the 
threshold amount is $51,800.

[[Page 79924]]

    2. Open-end credit. i. Qualifying for exemption. An open-end 
account is exempt under Sec.  1026.3(b) (unless secured by any real 
property, or by 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 an initial extension of credit at or after 
account opening that exceeds the threshold amount in effect at the 
time the initial extension is made. If a creditor makes an initial 
extension of credit after account opening that does not exceed the 
threshold amount in effect at the time the extension is made, the 
creditor must have satisfied all of the applicable requirements of 
this Part from the date the account was opened (or earlier, if 
applicable), including but not limited to the requirements of Sec.  
1026.6 (account-opening disclosures), Sec.  1026.7 (periodic 
statements), Sec.  1026.52 (limitations on fees), and Sec.  1026.55 
(limitations on increasing annual percentages rates, fees, and 
charges). For example:
    1. Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does 
not make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $60,000. In this 
circumstance, no requirements of this Part apply to the account.
    2. Assume that the threshold amount in effect on January 1 is 
$50,000. On February 1, an account is opened but the creditor does 
not make an initial extension of credit at that time. On July 1, the 
creditor makes an initial extension of credit of $50,000 or less. In 
this circumstance, the account is not exempt and the creditor must 
have satisfied all of the applicable requirements of this Part from 
the date the account was opened (or earlier, if applicable).
    B. The creditor makes a firm written commitment at account 
opening to extend a total amount of credit in excess of the 
threshold amount in effect at the time the account is opened with no 
requirement of additional credit information for any advances on the 
account (except as permitted from time to time with respect to open-
end accounts pursuant to Sec.  1026.2(a)(20)).
    ii. Subsequent changes generally. Subsequent changes to an open-
end account or the threshold amount may result in the account no 
longer qualifying for the exemption in Sec.  1026.3(b). In these 
circumstances, the creditor must begin to comply with all of the 
applicable requirements of this Part within a reasonable period of 
time after the account ceases to be exempt. Once an account ceases 
to be exempt, the requirements of this Part apply to any balances on 
the account. The creditor, however, is not required to comply with 
the requirements of this Part with respect to the period of time 
during which the account was exempt. For example, if an open-end 
credit account ceases to be exempt, the creditor must within a 
reasonable period of time provide the disclosures required by Sec.  
1026.6 reflecting the current terms of the account and begin to 
provide periodic statements consistent with Sec.  1026.7. However, 
the creditor is not required to disclose fees or charges imposed 
while the account was exempt. Furthermore, if the creditor provided 
disclosures consistent with the requirements of this Part while the 
account was exempt, it is not required to provide disclosures 
required by Sec.  1026.6 reflecting the current terms of the 
account. See also comment 3(b)-4.
    iii. Subsequent changes when exemption is based on initial 
extension of credit. If a creditor makes an initial extension of 
credit that exceeds the threshold amount in effect at that time, the 
open-end account remains exempt under Sec.  1026.3(b) regardless of 
a subsequent increase in the threshold amount, including an increase 
pursuant to Sec.  1026.3(b)(1)(ii) as a result of an increase in the 
CPI-W. Furthermore, in these circumstances, the account remains 
exempt even if there are no further extensions of credit, subsequent 
extensions of credit do not exceed the threshold amount, the account 
balance is subsequently reduced below the threshold amount (such as 
through repayment of the extension), or the credit limit for the 
account is subsequently reduced below the threshold amount. However, 
if the initial extension of credit on an account does not exceed the 
threshold amount in effect at the time of the extension, the account 
is not exempt under Sec.  1026.3(b) even if a subsequent extension 
exceeds the threshold amount or if the account balance later exceeds 
the threshold amount (for example, due to the subsequent accrual of 
interest).
    iv. Subsequent changes when exemption is based on firm 
commitment. A. General. If a creditor makes a firm written 
commitment at account opening to extend a total amount of credit 
that exceeds the threshold amount in effect at that time, the open-
end account remains exempt under Sec.  1026.3(b) regardless of a 
subsequent increase in the threshold amount pursuant to Sec.  
1026.3(b)(1)(ii) as a result of an increase in the CPI-W. However, 
see comment 3(b)-6 with respect to the increase in the threshold 
amount from $25,000 to $50,000. If an open-end account is exempt 
under Sec.  1026.3(b) based on a firm commitment to extend credit, 
the account remains exempt even if the amount of credit actually 
extended does not exceed the threshold amount. In contrast, if the 
firm commitment does not exceed the threshold amount at account 
opening, the account is not exempt under Sec.  1026.3(b) even if the 
account balance later exceeds the threshold amount. In addition, if 
a creditor reduces a firm commitment, the account ceases to be 
exempt unless the reduced firm commitment exceeds the threshold 
amount in effect at the time of the reduction. For example:
    1. Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
1026.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. If during year one the creditor reduces its firm 
commitment to $53,000, the account remains exempt under Sec.  
1026.3(b). However, if during year one the creditor reduces its firm 
commitment to $40,000, the account is no longer exempt under Sec.  
1026.3(b).
    2. Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
1026.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. If the threshold amount is $56,000 on January 1 of year 
six as a result of increases in the CPI-W, the account remains 
exempt. However, if the creditor reduces its firm commitment to 
$54,000 on July 1 of year six, the account ceases to be exempt under 
Sec.  1026.3(b).
    B. Initial extension of credit. If an open-end account qualifies 
for a Sec.  1026.3(b) exemption at account opening based on a firm 
commitment, that account may also subsequently qualify for a Sec.  
1026.3(b) exemption based on an initial extension of credit. 
However, that initial extension must be a single advance in excess 
of the threshold amount in effect at the time the extension is made. 
In addition, the account must continue to qualify for an exemption 
based on the firm commitment until the initial extension of credit 
is made. For example:
    1. Assume that, at account opening in year one, the threshold 
amount in effect is $50,000 and the account is exempt under Sec.  
1026.3(b) based on the creditor's firm commitment to extend $55,000 
in credit. The account is not used for an extension of credit during 
year one. On January 1 of year two, the threshold amount is 
increased to $51,000 pursuant to Sec.  1026.3(b)(1)(ii) as a result 
of an increase in the CPI-W. On July 1 of year two, the consumer 
uses the account for an initial extension of $52,000. As a result of 
this extension of credit, the account remains exempt under Sec.  
1026.3(b) even if, after July 1 of year two, the creditor reduces 
the firm commitment to $51,000 or less.
    2. Same facts as in paragraph iv.B.1 above except that the 
consumer uses the account for an initial extension of $30,000 on 
July 1 of year two and for an extension of $22,000 on July 15 of 
year two. In these circumstances, the account is not exempt under 
Sec.  1026.3(b) based on the $30,000 initial extension of credit 
because that extension did not exceed the applicable threshold 
amount ($51,000), although the account remains exempt based on the 
firm commitment to extend $55,000 in credit.
    3. Same facts as in paragraph iv.B.1 above except that, on April 
1 of year two, the creditor reduces the firm commitment to $50,000, 
which is below the $51,000 threshold then in effect. Because the 
account ceases to qualify for a Sec.  1026.3(b) exemption on April 1 
of year two, the account does not qualify for a Sec.  1026.3(b) 
exemption based on a $52,000 initial extension of credit on July 1 
of year two.
    3. Closed-end credit. i. Qualifying for exemption. A closed-end 
loan is exempt under Sec.  1026.3(b) (unless the extension of credit 
is secured by any real property, or by personal property used or 
expected to be used as the consumer's principal dwelling; or is a 
private education loan as defined in Sec.  1026.46(b)(5)), if either 
of the following conditions is met:
    A. The creditor makes an extension of credit at consummation 
that exceeds the threshold amount in effect at the time of 
consummation. In these circumstances, the loan remains exempt under 
Sec.  1026.3(b) even if the amount owed is subsequently reduced 
below the threshold amount (such as through repayment of the loan).

[[Page 79925]]

    B. The creditor makes a commitment at consummation to extend a 
total amount of credit in excess of the threshold amount in effect 
at the time of consummation. In these circumstances, the loan 
remains exempt under Sec.  1026.3(b) even if the total amount of 
credit extended does not exceed the threshold amount.
    ii. Subsequent changes. If a creditor makes a closed-end 
extension of credit or commitment to extend closed-end credit that 
exceeds the threshold amount in effect at the time of consummation, 
the closed-end loan remains exempt under Sec.  1026.3(b) regardless 
of a subsequent increase in the threshold amount. However, a closed-
end loan is not exempt under Sec.  1026.3(b) merely because it is 
used to satisfy and replace an existing exempt loan, unless the new 
extension of credit is itself exempt under the applicable threshold 
amount. For example, assume a closed-end loan that qualified for a 
Sec.  1026.3(b) exemption at consummation in year one is refinanced 
in year ten and that the new loan amount is less than the threshold 
amount in effect in year ten. In these circumstances, the creditor 
must comply with all of the applicable requirements of this Part 
with respect to the year ten transaction if the original loan is 
satisfied and replaced by the new loan, which is not exempt under 
Sec.  1026.3(b). See also comment 3(b)-4.
    4. Addition of a security interest in real property or a 
dwelling after account opening or consummation. i. Open-end credit. 
For open-end accounts, if, after account opening, a security 
interest is taken in any real property, or in personal property used 
or expected to be used as the consumer's principal dwelling, a 
previously exempt account ceases to be exempt under Sec.  1026.3(b) 
and the creditor must begin to comply with all of the applicable 
requirements of this Part within a reasonable period of time. See 
comment 3(b)-2.ii. If a security interest is taken in the consumer's 
principal dwelling, the creditor must also give the consumer the 
right to rescind the security interest consistent with Sec.  
1026.15.
    ii. Closed-end credit. For closed-end loans, if, after 
consummation, a security interest is taken in any real property, or 
in personal property used or expected to be used as the consumer's 
principal dwelling, an exempt loan remains exempt under Sec.  
1026.3(b). However, the addition of a security interest in the 
consumer's principal dwelling is a transaction for purposes of Sec.  
1026.23 and the creditor must give the consumer the right to rescind 
the security interest consistent with that section. See Sec.  
1026.23(a)(1) and the accompanying commentary. In contrast, if a 
closed-end loan that is exempt under Sec.  1026.3(b) is satisfied 
and replaced by a loan that is secured by any real property, or by 
personal property used or expected to be used as the consumer's 
principal dwelling, the new loan is not exempt under Sec.  1026.3(b) 
and the creditor must comply with all of the applicable requirements 
of this Part. See comment 3(b)-3.
    5. Application to extensions secured by mobile homes. Because a 
mobile home can be a dwelling under Sec.  1026.2(a)(19), the 
exemption in Sec.  1026.3(b) does not apply to a credit extension 
secured by a mobile home that is used or expected to be used as the 
principal dwelling of the consumer. See comment 3(b)-4.
    6. Transition rule for open-end accounts exempt prior to July 
21, 2011. Section 1026.3(b)(2) applies only to open-end accounts 
opened prior to July 21, 2011. Section 1026.3(b)(2) does not apply 
if a security interest is taken by the creditor in any real 
property, or in personal property used or expected to be used as the 
consumer's principal dwelling. If, on July 20, 2011, an open-end 
account is exempt under Sec.  1026.3(b) based on a firm commitment 
to extend credit in excess of $25,000, the account remains exempt 
under Sec.  1026.3(b)(2) until December 31, 2011 (unless the firm 
commitment is reduced to $25,000 or less). If the firm commitment is 
increased on or before December 31, 2011 to an amount in excess of 
$50,000, the account remains exempt under Sec.  1026.3(b)(1) 
regardless of subsequent increases in the threshold amount as a 
result of increases in the CPI-W. If the firm commitment is not 
increased on or before December 31, 2011 to an amount in excess of 
$50,000, the account ceases to be exempt under Sec.  1026.3(b) based 
on a firm commitment to extend credit. For example:
    i. Assume that, on July 20, 2011, the account is exempt under 
Sec.  1026.3(b) based on the creditor's firm commitment to extend 
$30,000 in credit. On November 1, 2011, the creditor increases the 
firm commitment on the account to $55,000. In these circumstances, 
the account remains exempt under Sec.  1026.3(b)(1) regardless of 
subsequent increases in the threshold amount as a result of 
increases in the CPI-W.
    ii. Same facts as paragraph i above except, on November 1, 2011, 
the creditor increases the firm commitment on the account to 
$40,000. In these circumstances, the account ceases to be exempt 
under Sec.  1026.3(b)(2) after December 31, 2011, and the creditor 
must begin to comply with the applicable requirements of this Part.

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 loans made, insured, or 
guaranteed under Title IV of the Higher Education Act of 1965 (20 
U.S.C. 1070 et seq.). This exemption does not apply to private 
education loans as defined by Sec.  1026.46(b)(5).

Section 1026.4--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.

[[Page 79926]]

    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.  1026.4(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.  1026.4(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.  1026.4(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.
    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 (1) fees imposed when transactions are made in a 
foreign currency and converted to U.S. dollars; (2) fees imposed 
when transactions are made in U.S. dollars outside the U.S.; and (3) 
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.  1026.9(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.

[[Page 79927]]

    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.  1026.4. For example, a 
fee that would be paid in a comparable cash transaction may be 
excluded under Sec.  1026.4(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.  1026.4(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.  1026.4(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).

4(b) Examples of Finance Charges

    1. Relationship to other provisions. Charges or fees shown as 
examples of finance charges in Sec.  1026.4(b) may be excludable 
under Sec.  1026.4(c), (d), or (e). For example:
    i. Premiums for credit life insurance, shown as an example of a 
finance charge under Sec.  1026.4(b)(7), may be excluded if the 
requirements of Sec.  1026.4(d)(1) are met.
    ii. Appraisal fees mentioned in Sec.  1026.4(b)(4) are excluded 
for real property or residential mortgage transactions under Sec.  
1026.4(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.  1026.4(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.  1026.4(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.  1026.4(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.  
1026.4(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.  1026.4(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.  1026.4(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.  1026.40 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.  
1026.40 (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.  1026.4(b)(7) and (b)(8) are finance charges and 
are not excludable. For example, 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.  1026.4(b)(9) 
include, for example, the following situation: The seller of land 
offers individual tracts for $10,000 each. If the purchaser pays 
cash, the price is $9,000, but if the purchaser finances the tract 
with the seller the price is $10,000. The $1,000 difference is a 
finance charge for those who buy the tracts on credit.
    2. Exception for cash discounts. 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

[[Page 79928]]

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 account or a credit card if either (1) no price is tagged or 
posted, or (2) two prices are tagged or posted * * *.
    ii. For example, in the sale of motor vehicle fuel, the tagged 
or posted price is the price displayed at the pump. As a result, the 
higher price (the open-end credit or credit card price) must be 
displayed at the pump, either alone or along with the cash price. 
Service station operators may designate separate pumps or separate 
islands as being for either cash or credit purchases and display 
only the appropriate prices at the various pumps. If a pump is 
capable of displaying on its meter either a cash or a credit price 
depending upon the consumer's means of payment, both the cash price 
and the credit price must be displayed at the pump. A service 
station operator may display the cash price of fuel by itself on a 
curb sign, as long as the sign clearly indicates that the price is 
limited to cash purchases.

Paragraph 4(b)(10)

    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 consummation in closed-end credit transactions or after 
the opening of a home-equity plan subject to the requirements of 
Sec.  1026.40 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.  1026.40 (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.  1026.4(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.  1026.4(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 1026.4(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.  1026.4(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.  1026.4(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.  
1026.4(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.  
1026.4(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.  1026.4(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.  1026.4(a).)

4(c)(7) Real-Estate Related Fees

    1. Real estate or residential mortgage transaction charges. The 
list of charges in

[[Page 79929]]

Sec.  1026.4(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.  1026.4(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.  1026.4(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.  
1026.4(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 1026.4(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.  1026.4(d)(4). The rules 
on location of insurance and debt cancellation and debt suspension 
disclosures for closed-end transactions are in Sec.  1026.17(a). For 
purposes of Sec.  1026.4(d), all references to insurance also 
include debt cancellation and debt suspension coverage unless the 
context indicates otherwise.
    2. Timing of disclosures. If disclosures are given early, for 
example under Sec.  1026.17(f) or Sec.  1026.19(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.  1026.4(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.  1026.4(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.  1026.6(a)(4), Sec.  1026.6(b)(5)(ii), 
or Sec.  1026.18(m). See the commentary to Sec.  1026.4(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.  1026.4.
    7. Signatures. If the creditor offers a number of insurance 
options under Sec.  1026.4(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.  1026.2(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.  1026.4(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.  1026.4(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

[[Page 79930]]

disclosed, unless one of the options discussed under comment 4(d)-12 
is available. For purposes of Sec.  1026.4(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.  1026.4(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.  
1026.4(d)(3) rather than according to Sec.  1026.4(d)(2) for 
property insurance.
    2. Disclosures. Creditors can comply with Sec.  1026.4(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 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 1026 
for guidance on how to provide the disclosure required by Sec.  
1026.4(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.  1026.4(d)(3) or, as applicable, 
Sec.  1026.4(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.  1026.4(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.  1026.4(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.  
1026.4(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.  1026.4(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.  1026.4(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.  1026.4(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 1026.5--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.  1026.60, highlighted account-opening 
disclosures under Sec.  1026.6(b)(1), highlighted disclosure on 
checks that access a credit card under Sec.  1026.9(b)(3), 
highlighted change-in-terms disclosures under Sec.  
1026.9(c)(2)(iv)(D), and highlighted disclosures when a rate is 
increased due to delinquency, default or for a penalty under Sec.  
1026.9(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.

[[Page 79931]]

    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.  1026.60, highlighted 
account-opening disclosures under Sec.  1026.6(b)(1), highlighted 
disclosures on checks that access a credit card account under Sec.  
1026.9(b)(3), highlighted change-in-terms disclosures under Sec.  
1026.9(c)(2)(iv)(D), and highlighted disclosures when a rate is 
increased due to delinquency, default or penalty pricing under Sec.  
1026.9(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.  1026.60(b)(1) and 
1026.6(b)(2)(i).)
    4. Integrated document. The creditor may make both the account-
opening disclosures (Sec.  1026.6) and the periodic-statement 
disclosures (Sec.  1026.7) 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.  1026.9(d), and 
notices, such as the correction notice required to be sent to the 
consumer under Sec.  1026.13(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.  1026.5(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)

    1. Disclosures not subject to E-Sign Act. See the commentary to 
Sec.  1026.5(a)(1)(ii)(A) regarding disclosures (in addition to 
those specified under Sec.  1026.5(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.  1026.40, 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.  1026.5(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.  
1026.6(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.  1026.7(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.  1026.6(a)(1)(iii) and 
(a)(1)(iv), they may be equally conspicuous as the disclosures 
required under Sec. Sec.  1026.6(a)(1)(ii) and 1026.7(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.  1026.40, 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.  1026.40, 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.  1026.5(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.  1026.6 must be given before the consumer becomes 
obligated on the open-end credit plan. (See the commentary to Sec.  
1026.17 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.  1026.6 
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.  1026.60 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.  1026.60 
may

[[Page 79932]]

establish procedures that comply with both Sec. Sec.  1026.60 and 
1026.6 in a single disclosure statement.
    6. Substitution or replacement of credit card accounts. i. 
Generally. When a card issuer substitutes or replaces an existing 
credit card account with another credit card account, the card 
issuer must either provide notice of the terms of the new account 
consistent with Sec.  1026.6(b) or provide notice of the changes in 
the terms of the existing account consistent with Sec.  
1026.9(c)(2). Whether a substitution or replacement results in the 
opening of a new account or a change in the terms of an existing 
account for purposes of the disclosure requirements in Sec. Sec.  
1026.6(b) and 1026.9(c)(2) is determined in light of all the 
relevant facts and circumstances. For additional requirements and 
limitations related to the substitution or replacement of credit 
card accounts, see Sec. Sec.  1026.12(a) and 1026.55(d) and comments 
12(a)(1)-1 through -8, 12(a)(2)-1 through -9, 55(b)(3)-3, and 55(d)-
1 through -3.
    ii. Relevant facts and circumstances. Listed below are facts and 
circumstances that are relevant to whether a substitution or 
replacement results in the opening of a new account or a change in 
the terms of an existing account for purposes of the disclosure 
requirements in Sec. Sec.  1026.6(b) and 1026.9(c)(2). When most of 
the facts and circumstances listed below are present, the 
substitution or replacement likely constitutes the opening of a new 
account for which Sec.  1026.6(b) disclosures are appropriate. When 
few of the facts and circumstances listed below are present, the 
substitution or replacement likely constitutes a change in the terms 
of an existing account for which Sec.  1026.9(c)(2) disclosures are 
appropriate.
    A. Whether the card issuer provides the consumer with a new 
credit card;
    B. Whether the card issuer provides the consumer with a new 
account number;
    C. Whether the account provides new features or benefits after 
the substitution or replacement (such as rewards on purchases);
    D. Whether the account can be used to conduct transactions at a 
greater or lesser number of merchants after the substitution or 
replacement (such as when a retail card is replaced with a cobranded 
general purpose credit card that can be used at a wider number of 
merchants);
    E. Whether the card issuer implemented the substitution or 
replacement on an individualized basis (such as in response to a 
consumer's request); and
    F. Whether the account becomes a different type of open-end plan 
after the substitution or replacement (such as when a charge card is 
replaced by a credit card).
    iii. Replacement as a result of theft or unauthorized use. 
Notwithstanding paragraphs i and ii above, a card issuer that 
replaces a credit card or provides a new account number because the 
consumer has reported the card stolen or because the account appears 
to have been used for unauthorized transactions is not required to 
provide a notice under Sec. Sec.  1026.6(b) or 1026.9(c)(2) unless 
the card issuer has changed a term of the account that is subject to 
Sec. Sec.  1026.6(b) or 1026.9(c)(2).

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.  1026.6(b)(2). (Charges imposed as part of 
an open-end (not home-secured plan) that are not specified under 
Sec.  1026.6(b)(2) may alternatively be disclosed in electronic 
form; see the commentary to Sec.  1026.5(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

    1. Membership fees. See Sec.  1026.60(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.  1026.4(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.  1026.4(c)(1) prior to receiving the 
account-opening disclosures.
    4. Home-equity plans. Creditors offering home-equity plans 
subject to the requirements of Sec.  1026.40 are subject to the 
requirements of Sec.  1026.40(h) regarding the collection of fees.

5(b)(2) Periodic Statements

5(b)(2)(i) Statement Required

    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.  1026.13(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.  1026.5(b)(2)(i), for example, when the 
draw period of an open-end credit plan

[[Page 79933]]

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.  1026.5(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.

5(b)(2)(ii) Timing Requirements

    1. Mailing or delivery of periodic statements. A creditor is not 
required to determine the specific date on which a periodic 
statement is mailed or delivered to an individual consumer for 
purposes of Sec.  1026.5(b)(2)(ii). A creditor complies with Sec.  
1026.5(b)(2)(ii) if it has adopted reasonable procedures designed to 
ensure that periodic statements are mailed or delivered to consumers 
no later than a certain number of days after the closing date of the 
billing cycle and adds that number of days to the 21-day or 14-day 
period required by Sec.  1026.5(b)(2)(ii) when determining, as 
applicable, the payment due date for purposes of Sec.  
1026.5(b)(2)(ii)(A), the date on which any grace period expires for 
purposes of Sec.  1026.5(b)(2)(ii)(B)(1), or the date after which 
the payment will be treated as late for purposes of Sec.  
1026.5(b)(2)(ii)(B)(2). For example:
    A. If a creditor has adopted reasonable procedures designed to 
ensure that periodic statements for a credit card account under an 
open-end (not home-secured) consumer credit plan or an account under 
an open-end consumer credit plan that provides a grace period are 
mailed or delivered to consumers no later than three days after the 
closing date of the billing cycle, the payment due date for purposes 
of Sec.  1026.5(b)(2)(ii)(A) and the date on which any grace period 
expires for purposes of Sec.  1026.5(b)(2)(ii)(B)(1) must be no less 
than 24 days after the closing date of the billing cycle. Similarly, 
in these circumstances, the limitations in Sec.  1026.5(b)(2)(ii)(A) 
and (b)(2)(ii)(B)(1) on treating a payment as late and imposing 
finance charges apply for 24 days after the closing date of the 
billing cycle.
    B. If a creditor has adopted reasonable procedures designed to 
ensure that periodic statements for an account under an open-end 
consumer credit plan that does not provide a grace period are mailed 
or delivered to consumers no later than five days after the closing 
date of the billing cycle, the date on which a payment must be 
received in order to avoid being treated as late for purposes of 
Sec.  1026.5(b)(2)(ii)(B)(2) must be no less than 19 days after the 
closing date of the billing cycle. Similarly, in these 
circumstances, the limitation in Sec.  1026.5(b)(2)(ii)(B)(2) on 
treating a payment as late for any purpose applies for 19 days after 
the closing date of the billing cycle.
    2. Treating a payment as late for any purpose. Treating a 
payment as late for any purpose includes increasing the annual 
percentage rate as a penalty, reporting the consumer as delinquent 
to a credit reporting agency, assessing a late fee or any other fee, 
initiating collection activities, or terminating benefits (such as 
rewards on purchases) based on the consumer's failure to make a 
payment within a specified amount of time or by a specified date. 
The prohibitions in Sec.  1026.5(b)(2)(ii)(A)(2) and 
(b)(2)(B)(2)(ii) on treating a payment as late for any purpose apply 
only during the 21-day or 14-day period (as applicable) following 
mailing or delivery of the periodic statement stating the due date 
for that payment and only if the required minimum periodic payment 
is received within that period. For example:
    i. Assume that, for a credit card account under an open-end (not 
home-secured) consumer credit plan, a periodic statement mailed on 
April 4 states that a required minimum periodic payment of $50 is 
due on April 25. If the card issuer does not receive any payment on 
or before April 25, Sec.  1026.5(b)(2)(ii)(A)(2) does not prohibit 
the card issuer from treating the required minimum periodic payment 
as late.
    ii. Same facts as in paragraph i above. On April 20, the card 
issuer receives a payment of $30 and no additional payment is 
received on or before April 25. Section 1026.5(b)(2)(ii)(A)(2) does 
not prohibit the card issuer from treating the required minimum 
periodic payment as late.
    iii. Same facts as in paragraph i above. On May 4, the card 
issuer has not received the $50 required minimum periodic payment 
that was due on April 25. The periodic statement mailed on May 4 
states that a required minimum periodic payment of $150 is due on 
May 25. Section 1026.5(b)(2)(ii)(A)(2) does not permit the card 
issuer to treat the $150 required minimum periodic payment as late 
until April 26. However, the card issuer may continue to treat the 
$50 required minimum periodic payment as late during this period.
    iv. Assume that, for an account under an open-end consumer 
credit plan that does not provide a grace period, a periodic 
statement mailed on September 10 states that a required minimum 
periodic payment of $100 is due on September 24. If the creditor 
does not receive any payment on or before September 24, Sec.  
1026.5(b)(2)(ii)(B)(2)(ii) does not prohibit the creditor from 
treating the required minimum periodic payment as late.
    3. Grace periods. i. Definition of grace period. For purposes of 
Sec.  1026.5(b)(2)(ii)(B), ``grace period'' means a period within 
which any credit extended may be repaid without incurring a finance 
charge due to a periodic interest rate. A deferred interest or 
similar promotional program under which the consumer is not 
obligated to pay interest that accrues on a balance if that balance 
is paid in full prior to the expiration of a specified period of 
time is not a grace period for purposes of Sec.  
1026.5(b)(2)(ii)(B). Similarly, a period following the payment due 
date during which a late payment fee will not be imposed is not a 
grace period for purposes of Sec.  1026.5(b)(2)(ii)(B). See comments 
7(b)(11)-1, 7(b)(11)-2, and 54(a)(1)-2.
    ii. Applicability of Sec.  1026.5(b)(2)(ii)(B)(1). Section 
1026.5(b)(2)(ii)(B)(1) applies if an account is eligible for a grace 
period when the periodic statement is mailed or delivered. Section 
1026.5(b)(2)(ii)(B)(1) does not require the creditor to provide a 
grace period or prohibit the creditor from placing limitations and 
conditions on a grace period to the extent consistent with Sec.  
1026.5(b)(2)(ii)(B) and Sec.  1026.54. See comment 54(a)(1)-1. 
Furthermore, the prohibition in Sec.  1026.5(b)(2)(ii)(B)(1)(ii) 
applies only during the 21-day period following mailing or delivery 
of the periodic statement and applies only when the creditor 
receives a payment within that 21-day period that satisfies the 
terms of the grace period.
    iii. Example. Assume that the billing cycles for an account 
begin on the first day of the month and end on the last day of the 
month and that the payment due date for the account is the twenty-
fifth of the month. Assume also that, under the terms of the 
account, the balance at the end of a billing cycle must be paid in 
full by the following payment due date in order for the account to 
remain eligible for the grace period. At the end of the April 
billing cycle, the balance on the account is $500. The grace period 
applies to the $500 balance because the balance for the March 
billing cycle was paid in full on April 25. Accordingly, Sec.  
1026.5(b)(2)(ii)(B)(1)(i) requires the creditor to have reasonable 
procedures designed to ensure that the periodic statement reflecting 
the $500 balance is mailed or delivered on or before May 4. 
Furthermore, Sec.  1026.5(b)(2)(ii)(B)(1)(ii) requires the creditor 
to have reasonable procedures designed to ensure that the creditor 
does not impose finance charges as a result of the loss of the grace 
period if a $500 payment is received on or before May 25. However, 
if the creditor receives a payment of $300 on April 25, Sec.  
1026.5(b)(2)(ii)(B)(1)(ii) would not prohibit the creditor from 
imposing finance charges as a result of the loss of the grace period 
(to the extent permitted by Sec.  1026.54).
    4. Application of Sec.  1026.5(b)(2)(ii) to charge card and 
charged-off accounts. i. Charge card accounts. For purposes of Sec.  
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card 
account under an open-end (not home-secured) consumer credit plan is 
the date the card issuer is required to disclose on the periodic 
statement pursuant to Sec.  1026.7(b)(11)(i)(A). Because Sec.  
1026.7(b)(11)(ii) provides that Sec.  1026.7(b)(11)(i) does not 
apply to periodic statements provided solely for charge card 
accounts, Sec.  1026.5(b)(2)(ii)(A)(1) also does not apply to the 
mailing or delivery of periodic statements provided solely for such 
accounts. However, in these circumstances, Sec.  
1026.5(b)(2)(ii)(A)(2) requires the card issuer to have reasonable 
procedures designed to ensure that a payment is not treated as late 
for any purpose during the 21-day period following mailing or 
delivery of the statement. A card issuer that complies with Sec.  
1026.5(b)(2)(ii)(A) as discussed above with respect to a charge card 
account has also complied with Sec.  1026.5(b)(2)(ii)(B)(2). Section 
1026.5(b)(2)(ii)(B)(1) does not apply

[[Page 79934]]

to charge card accounts because, for purposes of Sec.  
1026.5(b)(2)(ii)(B), a grace period is a period within which any 
credit extended may be repaid without incurring a finance charge due 
to a periodic interest rate and, consistent with Sec.  
1026.2(a)(15)(iii), charge card accounts do not impose a finance 
charge based on a periodic rate.
    ii. Charged-off accounts. For purposes of Sec.  
1026.5(b)(2)(ii)(A)(1), the payment due date for a credit card 
account under an open-end (not home-secured) consumer credit plan is 
the date the card issuer is required to disclose on the periodic 
statement pursuant to Sec.  1026.7(b)(11)(i)(A). Because Sec.  
1026.7(b)(11)(ii) provides that Sec.  1026.7(b)(11)(i) does not 
apply to periodic statements provided for charged-off accounts where 
full payment of the entire account balance is due immediately, Sec.  
1026.5(b)(2)(ii)(A)(1) also does not apply to the mailing or 
delivery of periodic statements provided solely for such accounts. 
Furthermore, although Sec.  1026.5(b)(2)(ii)(A)(2) requires the card 
issuer to have reasonable procedures designed to ensure that a 
payment is not treated as late for any purpose during the 21-day 
period following mailing or delivery of the statement, Sec.  
1026.5(b)(2)(ii)(A)(2) does not prohibit a card issuer from 
continuing to treat prior payments as late during that period. See 
comment 5(b)(2)(ii)-2. Similarly, although Sec.  
1026.5(b)(2)(ii)(B)(2) applies to open-end consumer credit accounts 
in these circumstances, Sec.  1026.5(b)(2)(ii)(B)(2)(ii) does not 
prohibit a creditor from continuing treating prior payments as late 
during the 14-day period following mailing or delivery of a periodic 
statement. Section 1026.5(b)(2)(ii)(B)(1) does not apply to charged-
off accounts where full payment of the entire account balance is due 
immediately because such accounts do not provide a grace period.
    5. Consumer request to pick up periodic statements. When a 
consumer initiates a request, the creditor may permit, but may not 
require, the consumer to pick up periodic statements. If the 
consumer wishes to pick up a statement, the statement must be made 
available in accordance with Sec.  1026.5(b)(2)(ii).
    6. Deferred interest and similar promotional programs. See 
comment 7(b)-1.iv.

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.  1026.5(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.  1026.15.
    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.  1026.60(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 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.  
1026.9(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 1026.6--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

[[Page 79935]]

the account-opening disclosures (as is required by Sec.  
1026.6(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.  1026.5(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.  
1026.6(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.  1026.30 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\ percent 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.  
1026.6(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 1026.)
    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.)

Paragraph 6(a)(1)(iv)

    1. Finance charges. In addition to disclosing the periodic 
rate(s) under Sec.  1026.6(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.  1026.4(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.  1026.6(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.  1026.13 (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.  1026.4(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.  1026.4(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.  1026.4(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.  1026.4(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.  1026.4(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

[[Page 79936]]

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.  
1026.40(d) along with the disclosures required under Sec.  1026.6. 
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 40(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.  1026.5(a)(1). The segregation standard set forth 
in Sec.  1026.40(a) does not apply to home-equity disclosures 
provided under Sec.  1026.6.
    3. Disclosure of payment and variable-rate examples. i. The 
payment-example disclosure in Sec.  1026.40(d)(5)(iii) and the 
variable-rate information in Sec.  1026.40(d)(12)(viii), (d)(12)(x), 
(d)(12)(xi), and (d)(12)(xii) need not be provided with the 
disclosures under Sec.  1026.6 if the disclosures under Sec.  
1026.40(d) were provided in a form the consumer could keep; and the 
disclosures of the payment example under Sec.  1026.40(d)(5)(iii), 
the maximum-payment example under Sec.  1026.40(d)(12)(x) and the 
historical table under Sec.  1026.40(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.  
1026.40(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.  1026.40(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.  1026.40(a)), 
the disclosures under Sec.  1026.40(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.  
1026.40(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.  1026.6. Specifically, the 
creditor must make the disclosures in Sec.  1026.6(a)(3), state the 
corresponding annual percentage rate, and provide the variable-rate 
information required in Sec.  1026.6(a)(1)(ii) for the repayment 
phase. To the extent the corresponding annual percentage rate, the 
information in Sec.  1026.6(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.  1026.9(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 commentary to Sec.  1026.60(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.  1026.6(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 (A) the rate applicable to the consumer's account, or 
(B) 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 (A) the specific fee 
applicable to the consumer's account, or (B) 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. 
Issuers of credit card accounts under an open-end (not home-secured) 
consumer credit plan are subject to limitations on the circumstances 
under which an introductory rate may be revoked. (See comment 
60(b)(1)-5 for guidance on how a card issuer 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 1026.
    2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to Sec.  1026.6 
disclosures.
    3. Terminology. Section 1026.6(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

[[Page 79937]]

1026; but see Sec.  1026.5(a)(2) for terminology requirements 
applicable to Sec.  1026.6(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, however, may not 
disclose under Sec.  1026.6(b)(2)(v) the limitations on the 
imposition of finance charges as a result of a loss of a grace 
period in Sec.  1026.54, or the impact of payment allocation on 
whether interest is charged on transactions as a result of a loss of 
a grace period. Some creditors may offer a grace period on all types 
of transactions under which interest will not be charged on 
transactions if the consumer pays the outstanding balance shown on a 
periodic statement in full by the due date shown on that statement 
for one or more billing cycles. In these circumstances, Sec.  
1026.6(b)(2)(v) requires that the creditor disclose the grace period 
and the conditions for its applicability using the following 
language, or substantially similar language, as applicable: ``Your 
due date is [at least] ------ days after the close of each billing 
cycle. We will not charge you any interest on your account if you 
pay your entire balance by the due date each month.'' However, other 
creditors may offer a grace period on all types of transactions 
under which interest may be charged on transactions even if the 
consumer pays the outstanding balance shown on a periodic statement 
in full by the due date shown on that statement each billing cycle. 
In these circumstances, Sec.  1026.6(b)(2)(v) requires the creditor 
to amend the above disclosure language to describe accurately the 
conditions on the applicability of the grace period.
    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. Some creditors do not offer a 
grace period on cash advances and balance transfers, but offer a 
grace period for all purchases under which interest will not be 
charged on purchases if the consumer pays the outstanding balance 
shown on a periodic statement in full by the due date shown on that 
statement for one or more billing cycles. In these circumstances, 
Sec.  1026.6(b)(2)(v) requires that the creditor disclose the grace 
period for purchases and the conditions for its applicability, and 
the lack of a grace period for cash advances and balance transfers 
using the following language, or substantially similar language, as 
applicable: ``Your due date is [at least] ------ days after the 
close of each billing cycle. We will not charge you any interest on 
purchases if you pay your entire balance by the due date each month. 
We will begin charging interest on cash advances and balance 
transfers on the transaction date.'' However, other creditors may 
offer a grace period on all purchases under which interest may be 
charged on purchases even if the consumer pays the outstanding 
balance shown on a periodic statement in full by the due date shown 
on that statement each billing cycle. In these circumstances, Sec.  
1026.6(a)(2)(v) requires the creditor to amend the above disclosure 
language to describe accurately the conditions on the applicability 
of the grace period. Also, some creditors may not offer a grace 
period on cash advances and balance transfers, and will begin 
charging interest on these transactions from a date other than the 
transaction date, such as the posting date. In these circumstances, 
Sec.  1026.6(a)(2)(v) requires the creditor to amend the above 
disclosure language to be accurate.

6(b)(2)(vi) Balance Computation Method

    1. Use of same balance computation method for all features. In 
cases where the balance for each feature is computed using the same 
balance computation method, a single identification of the name of 
the balance computation method is sufficient. In this case, a 
creditor may use an appropriate name listed in Sec.  1026.60(g) 
(e.g., ``average daily balance (including new purchases)'') to 
satisfy the requirement to disclose the name of the method for all 
features on the account, even though the name only refers to 
purchases. For example, if a creditor uses the average daily balance 
method including new transactions for all features, a creditor may 
use the name ``average daily balance (including new purchases)'' 
listed in Sec.  1026.60(g)(i) to satisfy the requirement to disclose 
the name of the balance computation method for all features. As an 
alternative, in this situation, a creditor may revise the balance 
computation names listed in Sec.  1026.60(g) to refer more broadly 
to all new credit transactions, such as using the language ``new 
transactions'' or ``current transactions'' (e.g., ``average daily 
balance (including new transactions)''), rather than simply 
referring to new purchases when the same method is used to calculate 
the balances for all features of the account. 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.
    2. Use of balance computation names in Sec.  1026.60(g) for 
balances other than purchases. The names of the balance computation 
methods listed in Sec.  1026.60(g) describe balance computation 
methods for purchases. When a creditor is disclosing the name of the 
balance computation methods separately for each feature, in using 
the names listed in Sec.  1026.60(g) to satisfy the requirements of 
Sec.  1026.6(b)(2)(vi) for features other than purchases, a creditor 
must revise the names listed in Sec.  1026.60(g) to refer to the 
other features. For example, when disclosing the name of the balance 
computation method applicable to cash advances, a creditor must 
revise the name listed in Sec.  1026.60(g)(i) to disclose it as 
``average daily balance (including new cash advances)'' when the 
balance for cash advances is figured by adding the outstanding 
balance (including new cash advances and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. Similarly, a creditor must 
revise the name listed in Sec.  1026.60(g)(ii) to disclose it as 
``average daily balance (excluding new cash advances)'' when the 
balance for cash advances is figured by adding the outstanding 
balance (excluding new cash advances and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. See comment 6(b)(2)(vi)-1 for 
guidance on the use of one balance computation name when the same 
balance computation 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.  1026.4 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.  1026.60(b)(5) and 
1026.6(b)(2)(v) to satisfy a creditor's duty to provide consistent 
terminology under Sec.  1026.5(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.  1026.4(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.

[[Page 79938]]

    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

6(b)(4)(i)(B) Range of Balances

    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.

6(b)(4)(i)(D) Balance Computation Method

    1. Explanation of balance computation method. Creditors do not 
provide a sufficient explanation of a balance computation method by 
using a shorthand phrase such as ``previous balance method'' or the 
name of a balance computation method listed in Sec.  1026.60(g). 
(See Model Clauses G-1(A) in Appendix G to part 1026. See Sec.  
1026.6(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.  
1026.6(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 a specified event or events, the creditor 
must identify the events or events. Examples include the consumer 
not making the required minimum payment when due, or the termination 
of an employee preferred rate when the employment relationship is 
terminated.
    2. Rate that will apply after initial rate changes. i. Increased 
margins. If the initial rate is based on an index and the rate may 
increase due to a change in the margin applied to the index, the 
creditor must disclose the increased margin. If more than one margin 
could apply, the creditor may disclose the highest margin.
    ii. Risk-based pricing. In some plans, the amount of the rate 
change depends on how the creditor weighs the occurrence of events 
specified in the account agreement that authorize the creditor to 
change rates, as well as other factors. Creditors must state the 
increased rate that may apply. At the creditor's option, the 
creditor may state the possible rates as a range, or by stating 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. Card issuers subject to Sec.  1026.55 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.  1026.4(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.  1026.6(b)(5)(i) if they 
provide those disclosures in accordance with Sec.  1026.4(d). For 
example, if the disclosures required by Sec.  1026.4(d) are provided 
at application, creditors need not repeat those disclosures at 
account opening.

[[Page 79939]]

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.  1026.9(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 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 1026.7--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.  
1026.7(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.  1026.13(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.  1026.7(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.  1026.7(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.  1026.7(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.  1026.7(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 1026.7(a)(5) only 
requires disclosure of the balance(s) to which a periodic rate was 
applied and does not apply to balances on

[[Page 79940]]

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. 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:
    i. 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.
    ii. 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.  
1026.7(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

7(a)(6)(i) Finance Charges

    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.  1026.14(c)(3).)

7(a)(6)(ii) Other Charges

    1. Identification. In identifying any other charges actually 
imposed during the billing cycle, the type is adequately described 
as late charge or membership fee, for example. Similarly, closing 
costs or settlement costs, for example, may be used to describe 
charges imposed in connection with real estate transactions that are 
excluded from the finance charge under Sec.  1026.4(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.  
1026.4(e) are not required to be disclosed as other charges under 
Sec.  1026.6(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

[[Page 79941]]

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.  1026.40. For home-
equity plans subject to the requirements of Sec.  1026.40, 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.  1026.7(a)(4) 
must calculate that rate in accordance with Sec.  1026.14(c).
    2. Labels. Creditors that choose to disclose an annual 
percentage rate calculated under Sec.  1026.14(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.  1026.14(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.  1026.7(b)(4). If 
the two rates represent different values, creditors must label the 
rates differently to meet the clear and conspicuous standard under 
Sec.  1026.5(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 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, email 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 email 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 or similar 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. ``Deferred interest'' has the same meaning as in Sec.  
1026.16(h)(2) and associated commentary. The following provides 
guidance for a deferred interest or similar plan where, for example, 
no interest charge is imposed on a $500 purchase made in January if 
the $500 balance is paid by July 31.
    i. Annual percentage rates. Under Sec.  1026.7(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 or similar feature, if the deferred interest balance is not 
paid by a certain date, July 31 in this example, interest charges 
applicable to the billing cycles between the date of purchase in 
January and July 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 July 31 must appear on periodic 
statements for the billing cycles between the date of purchase and 
July 31. However, if the consumer does not pay the deferred interest 
balance by July 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 July 31.
    ii. Balances subject to periodic rates. Under Sec.  
1026.7(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 July 31 in this example. Periodic 
statements sent for those billing cycles should not include the 
deferred interest balance in the balance disclosed under Sec.  
1026.7(b)(5). This amount must be separately disclosed on periodic 
statements and identified by a term other than the term used to 
identify the balance disclosed under Sec.  1026.7(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.  1026.7(b)(5) should 
include the deferred interest balance for that billing cycle.
    iii. Amount of interest charge. Under Sec.  1026.7(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 July 31 in this 
example, but otherwise will not impose interest for billing cycles 
between the date of purchase and July 31. Periodic statements for 
billing cycles preceding July 31 in this example should not include 
in the interest charge disclosed under Sec.  1026.7(b)(6)(ii) the 
amounts a consumer may owe if the deferred interest balance is not 
paid in full by July 31. In this example, the February periodic 
statement should not identify as interest charges interest 
attributable to the $500 January purchase. This amount must be 
separately disclosed on periodic statements and 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.  1026.7(b)(6)(ii) for the billing cycle in 
which the interest charge is debited to the account.
    iv. Due date to avoid obligation for finance charges under a 
deferred interest or similar program. Section 1026.7(b)(14) requires 
disclosure on periodic statements of the date by which any 
outstanding balance subject to a deferred interest or similar 
program must be paid in full in order to avoid the obligation for 
finance charges on such balance. This disclosure must appear on the 
front of any page of each periodic statement issued during the 
deferred interest period beginning with the first periodic statement 
issued during the deferred interest period that reflects the 
deferred interest or similar transaction.

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

[[Page 79942]]

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.  1026.7(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.  1026.13(e) and (f).) 
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.
    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.  1026.7(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.  1026.7(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.  1026.7(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 periodic interest 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.  1026.7(b)(6)(iii).
    4. Fees. Creditors that identify fees in accordance with Sec.  
1026.7(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.i.

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. 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:
    i. 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.
    ii. If two or more daily periodic interest rates may be imposed, 
the balances to which the rates are applicable may be stated as:
    A. A balance for each day in the billing cycle.
    B. A balance for each day in the billing cycle on which the 
balance in the account changes.
    C. Two or more average daily balances, each applicable to the 
daily periodic interest rates imposed for the time that those rates 
were in effect. The creditor may, at its option, explain that 
interest is or may be determined by (1) multiplying each of the 
average balances by the number of days in the billing cycle (or if 
the daily rate varied during the cycle, by multiplying by the number 
of days the applicable rate was in effect), (2) multiplying each of 
the results by the applicable daily periodic rate, and (3) adding 
these products together.
    5. Information to compute balance. In connection with disclosing 
the 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.

[[Page 79943]]

    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.  
1026.7(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 name of the balance 
computation method is also sufficient (assuming, of course, that all 
portions of the balance were computed using the same method). In 
these cases, a creditor may use an appropriate name listed in Sec.  
1026.60(g) (e.g., ``average daily balance (including new purchases) 
'') as the single identification of the name of the balance 
computation method applicable to all features, even though the name 
only refers to purchases. For example, if a creditor uses the 
average daily balance method including new transactions for all 
features, a creditor may use the name ``average daily balance 
(including new purchases) '' listed in Sec.  1026.60(g)(i) to 
satisfy the requirement to disclose the name of the balance 
computation method for all features. As an alternative, in this 
situation, a creditor may revise the balance computation names 
listed in Sec.  1026.60(g) to refer more broadly to all new credit 
transactions, such as using the language ``new transactions'' or 
``current transactions'' (e.g., ``average daily balance (including 
new transactions) ''), rather than simply referring to new 
purchases, when the same method is used to calculate the balances 
for all features of the account.
    8. Use of balance computation names in Sec.  1026.60(g) for 
balances other than purchases. The names of the balance computation 
methods listed in Sec.  1026.60(g) describe balance computation 
methods for purchases. When a creditor is disclosing the name of the 
balance computation methods separately for each feature, in using 
the names listed in Sec.  1026.60(g) to satisfy the requirements of 
Sec.  1026.7(b)(5) for features other than purchases, a creditor 
must revise the names listed in Sec.  1026.60(g) to refer to the 
other features. For example, when disclosing the name of the balance 
computation method applicable to cash advances, a creditor must 
revise the name listed in Sec.  1026.60(g)(i) to disclose it as 
``average daily balance (including new cash advances)'' when the 
balance for cash advances is figured by adding the outstanding 
balance (including new cash advances and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. Similarly, a creditor must 
revise the name listed in Sec.  1026.60(g)(ii) to disclose it as 
``average daily balance (excluding new cash advances) '' when the 
balance for cash advances is figured by adding the outstanding 
balance (excluding new cash advances and deducting payments and 
credits) for each day in the billing cycle, and then dividing by the 
number of days in the billing cycle. See comment 7(b)(5)-7 for 
guidance on the use of one balance computation method explanation or 
name when multiple balances are disclosed.

7(b)(6) Charges Imposed

    1. Examples of charges. See commentary to Sec.  1026.6(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 and interest charged 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 calendar-year-to-date totals at the 
end of the calendar year by separately aggregating finance charges 
attributable to periodic interest rates and 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 separate year-to-date totals for interest charged and 
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 separate year-to-date totals for 
interest charged and fees imposed January 1, 2011, through December 
31, 2011.
    B. A creditor may disclose calendar-year-to-date totals at the 
end of the calendar year by separately aggregating finance charges 
attributable to periodic interest rates and 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 separate year-to-date totals for interest charged and 
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.
    6. Acquired accounts. An institution that acquires an account or 
plan must include, as applicable, fees and charges imposed on the 
account or plan prior to the acquisition in the aggregate 
disclosures provided under Sec.  1026.7(b)(6) for the acquired 
account or plan. Alternatively, the institution may provide separate 
totals reflecting activity prior and subsequent to the account or 
plan acquisition. For example, a creditor that acquires an account 
or plan on August 12 of a given calendar year may provide one total 
for the period from January 1 to August 11 and a separate total for 
the period beginning on August 12.
    7. Account upgrades. A creditor that upgrades, or otherwise 
changes, a consumer's plan to a different open-end credit plan must 
include, as applicable, fees and charges imposed for that portion of 
the calendar year prior to the upgrade or change in the consumer's 
plan in the aggregate disclosures provided pursuant to Sec.  
1026.7(b)(6) for the new plan. For example, assume a consumer has 
incurred $125 in fees for the calendar year to date for a retail 
credit card account, which is then replaced by a cobranded credit 
card account also issued by the creditor. In this case, the creditor 
must reflect the $125 in fees incurred prior to the replacement of 
the retail credit card account in the calendar year-to-date totals 
provided for the cobranded credit card account. Alternatively, the 
institution may provide two separate totals reflecting activity 
prior and subsequent to the plan upgrade or change.

7(b)(7) Change-in-Terms and Increased Penalty Rate Summary for Open-End 
(Not Home-Secured) Plan

    1. Location of summary tables. If a change-in-terms notice 
required by Sec.  1026.9(c)(2) is provided on or with a periodic 
statement, a

[[Page 79944]]

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.  
1026.9(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.  1026.5(a)(2)(i).)
    2. Deferred interest transactions. See comment 7(b)-1.iv.
    3. Limitation on the imposition of finance charges in Sec.  
1026.54. Section 1026.7(b)(8) does not require a card issuer to 
disclose the limitations on the imposition of finance charges as a 
result of a loss of a grace period in Sec.  1026.54, or the impact 
of payment allocation on whether interest is charged on transactions 
as a result of a loss of a grace period.

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, email 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 email 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 card issuer may assess a 
late payment fee if a payment is not received by a certain date, the 
card issuer may 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 card issuer has the 
contractual right to impose the fee. A card issuer 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.  1026.7(b)(11).
    2. 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. In addition, a card 
issuer may be restricted by the terms of the account agreement from 
imposing a late payment fee until a payment is late for a certain 
number of days following a due date. For example, assume a payment 
is due on March 10 and the account agreement or state law provides 
that a late payment fee cannot be assessed before March 21. A card 
issuer 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 the card issuer is restricted by the 
account agreement or state or other law from imposing a late payment 
fee unless a payment is late for a certain number of days following 
the due date (March 21 in this example). Consumers' rights under 
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 card issuer would 
disclose March 10 as the due date for purposes of Sec.  
1026.7(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 card issuer 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. A card issuer that 
imposes a range of late payment fees or rates on a credit card 
account under an open-end (not home-secured) consumer credit 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 card issuer 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 card issuer 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).
    6. Same day each month. The requirement that the due date be the 
same day each month means that the due date must generally be the 
same numerical date. For example, a consumer's due date could be the 
25th of every month. In contrast, a due date that is the same 
relative date but not numerical date each month, such as the third 
Tuesday of the month, generally would not comply with this 
requirement. However, a consumer's due date may be the last day of 
each month, even though that date will not be the same numerical 
date. For example, if a consumer's due date is the last day of each 
month, it will fall on February 28th (or February 29th in a leap 
year) and on August 31st.
    7. Change in due date. A creditor may adjust a consumer's due 
date from time to time provided that the new due date will be the 
same numerical date each month on an ongoing basis. For example, a 
creditor may choose to honor a consumer's request to change from a 
due date that is the 20th of each month to the 5th of each month, or 
may choose to change a consumer's due date from time to time for 
operational reasons. See comment 2(a)(4)-3 for guidance on 
transitional billing cycles.
    8. Billing cycles longer than one month. The requirement that 
the due date be the same day each month does not prohibit billing 
cycles that are two or three months, provided that the due date for 
each billing cycle is on the same numerical date of the month. For 
example, a creditor that establishes two-month billing cycles could 
send a consumer periodic statements disclosing due dates of January 
25, March 25, and May 25.
    9. Payment due date when the creditor does not accept or receive 
payments by mail. If the due date in a given month falls on a day on 
which the creditor does not receive or accept payments by mail and 
the creditor is required to treat a payment received the next 
business day as timely pursuant to Sec.  1026.10(d), the creditor 
must disclose the due date according to the legal obligation between 
the parties, not the date as of which the creditor is permitted to 
treat the payment as late. For example, assume that the consumer's 
due date is the 4th of every month and the creditor does not accept 
or receive payments by mail on Thursday, July 4. Pursuant to Sec.  
1026.10(d), the creditor may not treat a mailed payment received on 
the following business day, Friday, July 5, as late for any purpose. 
The creditor must nonetheless disclose July 4 as the due date on the 
periodic statement and may not disclose a July 5 due date.

7(b)(12) Repayment Disclosures

    1. Rounding. In disclosing on the periodic statement the minimum 
payment total cost estimate, the estimated monthly payment for 
repayment in 36 months, the total cost estimate for repayment in 36 
months, and the savings estimate for repayment in 36 months under 
Sec.  1026.7(b)(12)(i) or (b)(12)(ii) as applicable, a card issuer, 
at its option, must either round these disclosures to the nearest 
whole dollar or to the nearest cent. Nonetheless, an issuer's 
rounding for all of these disclosures must be consistent. An issuer 
may round all of these disclosures to the nearest whole dollar when 
disclosing them on the periodic statement, or may round all of these 
disclosures to the nearest cent. An issuer may not, however, round 
some of the disclosures to the nearest whole

[[Page 79945]]

dollar, while rounding other disclosures to the nearest cent.

Paragraph 7(b)(12)(i)(F)

    1. Minimum payment repayment estimate disclosed on the periodic 
statement is three years or less. Section 1026.7(b)(12)(i)(F)(2)(i) 
provides that a credit card issuer is not required to provide the 
disclosures related to repayment in 36 months if the minimum payment 
repayment estimate disclosed under Sec.  1026.7(b)(12)(i)(B) after 
rounding is 3 years or less. For example, if the minimum payment 
repayment estimate is 2 years 6 months to 3 years 5 months, issuers 
would be required under Sec.  1026.7(b)(12)(i)(B) to disclose that 
it would take 3 years to pay off the balance in full if making only 
the minimum payment. In these cases, an issuer would not be required 
to disclose the 36-month disclosures on the periodic statement 
because the minimum payment repayment estimate disclosed to the 
consumer on the periodic statement (after rounding) is 3 years or 
less.

7(b)(12)(iv) Provision of Information About Credit Counseling Services

    1. Approved organizations. Section 1026.7(b)(12)(iv)(A) requires 
card issuers to provide information regarding at least three 
organizations that have been approved by the United States Trustee 
or a bankruptcy administrator pursuant to 11 U.S.C. 111(a)(1) to 
provide credit counseling services in, at the card issuer's option, 
either the state in which the billing address for the account is 
located or the state specified by the consumer. A card issuer does 
not satisfy the requirements in Sec.  1026.7(b)(12)(iv)(A) by 
providing information regarding providers that have been approved 
pursuant to 11 U.S.C. 111(a)(2) to offer personal financial 
management courses.
    2. Information regarding approved organizations. i. Provision of 
information obtained from United States Trustee or bankruptcy 
administrator. A card issuer complies with the requirements of Sec.  
1026.7(b)(12)(iv)(A) if, through the toll-free number disclosed 
pursuant to Sec.  1026.7(b)(12)(i) or (b)(12)(ii), it provides the 
consumer with information obtained from the United States Trustee or 
a bankruptcy administrator, such as information obtained from the 
Web site operated by the United States Trustee. Section 
1026.7(b)(12)(iv)(A) does not require a card issuer to provide 
information that is not available from the United States Trustee or 
a bankruptcy administrator. If, for example, the Web site address 
for an organization approved by the United States Trustee is not 
available from the Web site operated by the United States Trustee, a 
card issuer is not required to provide a Web site address for that 
organization. However, Sec.  1026.7(b)(12)(iv)(B) requires the card 
issuer to, at least annually, update the information it provides for 
consistency with the information provided by the United States 
Trustee or a bankruptcy administrator.
    ii. Provision of information consistent with request of approved 
organization. If requested by an approved organization, a card 
issuer may at its option provide, in addition to the name of the 
organization obtained from the United States Trustee or a bankruptcy 
administrator, another name used by that organization through the 
toll-free number disclosed pursuant to Sec.  1026.7(b)(12)(i) or 
(b)(12)(ii). In addition, if requested by an approved organization, 
a card issuer may at its option provide through the toll-free number 
disclosed pursuant to Sec.  1026.7(b)(12)(i) or (b)(12)(ii) a street 
address, telephone number, or Web site address for the organization 
that is different than the street address, telephone number, or Web 
site address obtained from the United States Trustee or a bankruptcy 
administrator. However, if requested by an approved organization, a 
card issuer must not provide information regarding that organization 
through the toll-free number disclosed pursuant to Sec.  
1026.7(b)(12)(i) or (b)(12)(ii).
    iii. Information regarding approved organizations that provide 
credit counseling services in a language other than English. A card 
issuer may at its option provide through the toll-free number 
disclosed pursuant to Sec.  1026.7(b)(12)(i) or (b)(12)(ii) 
information regarding approved organizations that provide credit 
counseling services in languages other than English. In the 
alternative, a card issuer may at its option state that such 
information is available from the Web site operated by the United 
States Trustee. Disclosing this Web site address does not by itself 
constitute a statement that organizations have been approved by the 
United States Trustee for purposes of comment 7(b)(12)(iv)-2.iv.
    iv. Statements regarding approval by the United States Trustee 
or a bankruptcy administrator. Section 1026.7(b)(12)(iv) does not 
require a card issuer to disclose through the toll-free number 
disclosed pursuant to Sec.  1026.7(b)(12)(i) or (b)(12)(ii) that 
organizations have been approved by the United States Trustee or a 
bankruptcy administrator. However, if a card issuer chooses to make 
such a disclosure, Sec.  1026.7(b)(12)(iv) requires that the card 
issuer also disclose that:
    A. The United States Trustee or a bankruptcy administrator has 
determined that the organizations meet the minimum requirements for 
nonprofit pre-bankruptcy budget and credit counseling;
    B. The organizations may provide other credit counseling 
services that have not been reviewed by the United States Trustee or 
a bankruptcy administrator; and
    C. The United States Trustee or the bankruptcy administrator 
does not endorse or recommend any particular organization.
    3. Automated response systems or devices. At their option, card 
issuers 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 information required by Sec.  
1026.7(b)(12)(iv) by inputting information using a touch-tone 
telephone or similar device.
    4. Toll-free telephone number. A card issuer may provide a toll-
free telephone number that is designed to handle customer service 
calls generally, so long as the option to receive the information 
required by Sec.  1026.7(b)(12)(iv) is prominently disclosed to the 
consumer. For automated systems, the option to receive the 
information required by Sec.  1026.7(b)(12)(iv) 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 information about credit counseling 
services.'' 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 information about accessing credit counseling 
services.
    5. Third parties. At their option, card issuers may use a third 
party to establish and maintain a toll-free telephone number for use 
by the issuer to provide the information required by Sec.  
1026.7(b)(12)(iv).
    6. Web site address. When making the repayment disclosures on 
the periodic statement pursuant to Sec.  1026.7(b)(12), a card 
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 the information required by Sec.  
1026.7(b)(12)(iv), so long as the information provided on the Web 
site complies with Sec.  1026.7(b)(12)(iv). The Web site address 
disclosed must take consumers directly to the Web page where 
information about accessing credit counseling may be obtained. In 
the alternative, the card issuer may disclose the Web site address 
for the Web page operated by the United States Trustee where 
consumers may obtain information about approved credit counseling 
organizations. Disclosing this Web site address does not by itself 
constitute a statement that organizations have been approved by the 
United States Trustee for purposes of comment 7(b)(12)(iv)-2.iv.
    7. Advertising or marketing information. If a consumer requests 
information about credit counseling services, 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 by Sec.  1026.7(b)(12)(iv). 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)(iv)-4, an issuer may provide a toll-free telephone number 
that is designed to handle customer service calls generally, so long 
as the option to receive the information required by Sec.  
1026.7(b)(12)(iv) through that toll-free telephone number is 
prominently disclosed to the consumer. Once the consumer selects the 
option to receive the information required by Sec.  
1026.7(b)(12)(iv), the issuer may not provide advertisements or 
marketing materials to the consumer (except for providing the name 
of the issuer) prior to providing the required information.
    ii. Web page. If the issuer discloses a link to a Web site 
address as part of the disclosures pursuant to comment 7(b)(12)(iv)-
6, the issuer may not provide advertisements or marketing materials 
(except for providing the name of the issuer) on the Web page 
accessed by the address prior to providing the information required 
by Sec.  1026.7(b)(12)(iv).

[[Page 79946]]

7(b)(12)(v) Exemptions

    1. Billing cycle where paying the minimum payment due for that 
billing cycle will pay the outstanding balance on the account for 
that billing cycle. Under Sec.  1026.7(b)(12)(v)(C), a card issuer 
is exempt from the repayment disclosure requirements set forth in 
Sec.  1026.7(b)(12) 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 repayment disclosure requirements for that 
particular billing cycle. In addition, this exemption would apply to 
a charged-off account where payment of the entire account balance is 
due immediately.

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.  1026.7(b)(13), the first 
page of such a combined statement shall be the page on which credit 
transactions first appear.

Section 1026.8--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.  1026.6(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.  1026.7(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.  1026.7(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 should reflect each 
installment due, together with either any other identifying 
information required by Sec.  1026.8(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.  1026.8(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 1026.9--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:

[[Page 79947]]

    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 1026.

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 1026.

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.  
1026.9(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.  1026.9(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;
    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.
    2. Combined disclosures for checks and other transactions 
subject to the same terms. A card issuer may include in the tabular 
disclosure provided pursuant to Sec.  1026.9(b)(3) disclosures 
regarding the terms offered on non-check transactions, provided that 
such transactions are subject to the same terms that are required to 
be disclosed pursuant to Sec.  1026.9(b)(3)(i) for the checks that 
access a credit card account. However, a card issuer may not include 
in the table information regarding additional terms that are not 
required disclosures for checks that access a credit card account 
pursuant to Sec.  1026.9(b)(3).

Paragraph 9(b)(3)(i)(D)

    1. Grace period. A creditor may not disclose under Sec.  
1026.9(b)(3)(i)(D) the limitations on the imposition of finance 
charges as a result of a loss of a grace period in Sec.  1026.54, or 
the impact of payment allocation on whether interest is charged on 
transactions as a result of a loss of a grace period. Some creditors 
may offer a grace period on credit extended by the use of an access 
check under which interest will not be charged on the check 
transactions if the consumer pays the outstanding balance shown on a 
periodic statement in full by the due date shown on that statement 
for one or more billing cycles. In these circumstances, Sec.  
1026.9(b)(3)(i)(D) requires that the creditor disclose the grace 
period using the following language, or substantially similar 
language, as applicable: ``Your due date is [at least] ---- days 
after the close of each billing cycle. We will not charge you any 
interest on check transactions if you pay your entire balance by the 
due date each month.'' However, other creditors may offer a grace 
period on check transactions under which interest may be charged on 
check transactions even if the consumer pays the outstanding balance 
shown on a periodic statement in full by the due date shown on that 
statement each billing cycle. In these circumstances, Sec.  
1026.9(b)(3)(i)(D) requires the creditor to amend the above 
disclosure language to describe accurately the conditions on the 
applicability of the grace period. 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.  1026.40(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.  
1026.9(c) because they are controlled by state or other applicable 
law include:
    i. The types of changes a creditor may make. (But see Sec.  
1026.40(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.  1026.6(a) or increases the minimum payment, unless an 
exception under Sec.  1026.9(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.  1026.9(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

[[Page 79948]]

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.  
1026.9(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 1026.9(c)(1) applies when, by written 
agreement under Sec.  1026.40(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.  1026.30), or 
a variable-rate feature is added to a fixed-rate plan, the creditor 
must include the disclosures required by Sec.  1026.40(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.  1026.40(d)(5)(iii) 
(and, in variable-rate plans, the disclosures required by Sec.  
1026.40(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.  
1026.40(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.  1026.40(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.  1026.40(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.  1026.9(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.  
1026.40(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.  
1026.9(g)(1), no notice of a change in terms need be given if the 
specific change is set forth initially consistent with any 
applicable requirements, such as rate or fee increases upon 
expiration of a specific period of time that were disclosed in 
accordance with Sec.  1026.9(c)(2)(v)(B) or rate increases under a 
properly disclosed variable-rate plan in accordance with Sec.  
1026.9(c)(2)(v)(C). In contrast, notice must be given if the 
contract allows the creditor to increase a rate or fee at its 
discretion.
    2. State law issues. Some issues are not addressed by Sec.  
1026.9(c)(2) because they are controlled by state or other 
applicable laws. These issues include the types of changes a 
creditor may make, to the extent otherwise permitted by this part.
    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 affects any of the terms described in Sec.  
1026.9(c)(2)(i), unless an exception under Sec.  1026.9(c)(2)(v) 
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. 
See also Sec.  1026.7(b)(11)(i)(A) regarding the general requirement 
that the payment due date for a credit card account under an open-
end (not home-secured) consumer credit plan must be the same day 
each month.
    4. Relationship to Sec.  1026.9(b). If a creditor adds a feature 
to the account on the type of terms otherwise required to be 
disclosed under Sec.  1026.6, the creditor must satisfy: The 
requirement to provide the finance charge disclosures for the added 
feature under Sec.  1026.9(b); and any applicable requirement to 
provide a change-in-terms notice under Sec.  1026.9(c), including 
any advance notice that must be provided. For example, if a creditor 
adds a balance transfer feature to an account more than 30 days 
after account-opening disclosures are provided, it must give the 
finance charge disclosures for the balance transfer feature under 
Sec.  1026.9(b) as well as comply with the change-in-terms notice 
requirements under Sec.  1026.9(c), including providing notice of 
the change at least 45 days prior to the effective date of the 
change. Similarly, if a creditor makes a balance transfer offer on 
finance charge terms that are higher than those previously disclosed 
for balance transfers, it would also generally be required to 
provide a change-in-terms notice at least 45 days in advance of the 
effective date of the change. A creditor may provide a single notice 
under Sec.  1026.9(c) to satisfy the notice requirements of both 
paragraphs (b) and (c) of Sec.  1026.9. For checks that access a 
credit card account subject to the disclosure requirements in Sec.  
1026.9(b)(3), a creditor is not subject to the notice requirements 
under Sec.  1026.9(c) even if the applicable rate or fee is higher 
than those previously disclosed for such checks. Thus, for example, 
the creditor need not wait 45 days before applying the new rate or 
fee for transactions made using such checks, but the creditor must 
make the required disclosures on or with the checks in accordance 
with Sec.  1026.9(b)(3).

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.  1026.5(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. Changes agreed to by the consumer. See also comment 
5(b)(1)(i)-6.
    4. Form of change-in-terms notice. Except if Sec.  
1026.9(c)(2)(iv) applies, a complete new set of the initial 
disclosures containing the changed term complies with Sec.  
1026.9(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 creditor must 
provide a description of any security interest it is acquiring under 
Sec.  1026.9(c)(2)(iv). A copy of the security agreement that 
describes the collateral securing the consumer's account may also be

[[Page 79949]]

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 55(a)-1 and 55(b)-3 for examples of how 
a card issuer that is subject to Sec.  1026.55 may comply with the 
timing requirements for notices required by Sec.  1026.9(c)(2)(i).

9(c)(2)(iii) Charges not Covered by Sec.  1026.6(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.  1026.6(b)(3) but is not required to 
be disclosed as part of the account-opening summary table under 
Sec.  1026.6(b)(1) and (b)(2), the creditor must either, at its 
option (i) provide at least 45 days' written advance notice before 
the change becomes effective to comply with the requirements of 
Sec.  1026.9(c)(2)(i), or (ii) 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.  
1026.5(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.  1026.6(b)(3) but is 
not required to be disclosed in the account-opening summary table 
under Sec.  1026.6(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)(iv) Disclosure Requirements

    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.  
1026.9(c)(2)(iv), and include a reminder that the rate is a variable 
rate. For example, if a creditor is changing the margin for a 
variable rate that uses the prime rate as an index, the creditor 
must disclose in the table the new rate (as calculated using the new 
margin) and indicate that the rate varies with the market based on 
the prime rate.
    2. Changing index for calculating a variable rate. If a creditor 
is changing the index used to calculate a variable rate, the 
creditor must disclose the amount of the new rate (as calculated 
using the new index) and indicate that the rate varies and how the 
rate is determined, as explained in Sec.  1026.6(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 a rate applicable to a consumer's account from 
a variable rate to a non-variable rate, the creditor generally must 
provide a notice as otherwise required under Sec.  1026.9(c) even if 
the variable rate at the time of the change is higher than the non-
variable rate. However, a creditor is not required to provide a 
notice under Sec.  1026.9(c) if the creditor provides the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in 
connection with changing a variable rate to a lower non-variable 
rate. Similarly, a creditor is not required to provide a notice 
under Sec.  1026.9(c) when changing a variable rate to a lower non-
variable rate in order to comply with 50 U.S.C. app. 527 or a 
similar Federal or state statute or regulation. Finally, a creditor 
is not required to provide a notice under Sec.  1026.9(c) when 
changing a variable rate to a lower non-variable rate in order to 
comply with Sec.  1026.55(b)(4).
    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 generally must 
provide a notice as otherwise required under Sec.  1026.9(c) even if 
the non-variable rate is higher than the variable rate at the time 
of the change. However, a creditor is not required to provide a 
notice under Sec.  1026.9(c) if the creditor provides the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) in 
connection with changing a non-variable rate to a lower variable 
rate. Similarly, a creditor is not required to provide a notice 
under Sec.  1026.9(c) when changing a non-variable rate to a lower 
variable rate in order to comply with 50 U.S.C. app. 527 or a 
similar Federal or state statute or regulation. Finally, a creditor 
is not required to provide a notice under Sec.  1026.9(c) when 
changing a non-variable rate to a lower variable rate in order to 
comply with Sec.  1026.55(b)(4). See comment 55(b)(2)-4 regarding 
the limitations in Sec.  1026.55(b)(2) on changing the rate that 
applies to a protected balance from a non-variable rate to a 
variable rate.
    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.  1026.6(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.  1026.9(c)(2)(iv) with a 
notice described in Sec.  1026.9(g)(3). If a creditor is required to 
provide a notice described in Sec.  1026.9(c)(2)(iv) and a notice 
described in Sec.  1026.9(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.  1026.9(c)(2)(iv) when a variable rate 
is being changed to a non-variable rate on a credit card account. 
The sample explains when the new rate will apply to new transactions 
and to which balances the current rate will continue to apply. 
Sample G-21 contains an example of how to comply with the 
requirements in Sec.  1026.9(c)(2)(iv) when the late payment fee on 
a credit card account is being increased, and the returned payment 
fee is also being increased. The sample discloses the consumer's 
right to reject the changes in accordance with Sec.  1026.9(h).
    9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to disclosures required 
under Sec.  1026.9(c)(2)(iv)(A)(1).
    10. Terminology. See Sec.  1026.5(a)(2) for terminology 
requirements applicable to disclosures required under Sec.  
1026.9(c)(2)(iv)(A)(1).
    11. Reasons for increase. i. In general. Section 
1026.9(c)(2)(iv)(A)(8) requires card issuers to disclose the 
principal reason(s) for increasing an annual percentage rate 
applicable to a credit card account under an open-end (not home-
secured) consumer credit plan. The regulation does not mandate a 
minimum number of reasons that must be disclosed. However, the 
specific reasons disclosed under Sec.  1026.9(c)(2)(iv)(A)(8) are 
required to relate to and accurately describe the principal factors 
actually considered by the card issuer in increasing the rate. A 
card issuer may describe the reasons for the increase in general 
terms. For example, the notice of a rate increase triggered by a 
decrease of 100 points in a consumer's credit score may state that 
the increase is due to ``a decline in your creditworthiness'' or ``a 
decline in your credit score.'' Similarly, a notice of a rate 
increase triggered by a 10% increase in the card issuer's cost of 
funds may be disclosed as ``a change in market conditions.'' In some 
circumstances, it may be appropriate for a card issuer to combine 
the disclosure of several reasons in one statement. However, Sec.  
1026.9(c)(2)(iv)(A)(8)

[[Page 79950]]

requires that the notice specifically disclose any violation of the 
terms of the account on which the rate is being increased, such as a 
late payment or a returned payment, if such violation of the account 
terms is one of the four principal reasons for the rate increase.
    ii. Example. Assume that a consumer made a late payment on the 
credit card account on which the rate increase is being imposed, 
made a late payment on a credit card account with another card 
issuer, and the consumer's credit score decreased, in part due to 
such late payments. The card issuer may disclose the reasons for the 
rate increase as a decline in the consumer's credit score and the 
consumer's late payment on the account subject to the increase. 
Because the late payment on the credit card account with the other 
issuer also likely contributed to the decline in the consumer's 
credit score, it is not required to be separately disclosed. 
However, the late payment on the credit card account on which the 
rate increase is being imposed must be specifically disclosed even 
if that late payment also contributed to the decline in the 
consumer's credit score.

9(c)(2)(v) 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.  1026.9(c)(2)(vi).
    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. i. Skipped or reduced payments. If a credit 
program allows consumers to skip or reduce one or more payments 
during the year, no notice of the change in terms is required either 
prior to the reduction in payments or upon resumption of the higher 
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 payment schedule, 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 skip feature may also be used to notify the 
consumer of the resumption of the original payment schedule, either 
by stating explicitly when the higher resumes or by indicating the 
duration of the skip option. Language such as ``You may skip your 
October payment'' may serve as the change-in-terms notice.
    ii. Temporary reductions in interest rates or fees. If a credit 
program involves temporary reductions in an interest rate or fee, no 
notice of the change in terms is required either prior to the 
reduction or upon resumption of the original rate or fee if these 
features are disclosed in advance in accordance with the 
requirements of Sec.  1026.9(c)(2)(v)(B). Otherwise, the creditor 
must give notice prior to resuming the original rate or fee, even 
though no notice is required prior to the reduction. The notice 
provided prior to resuming the original rate or fee must comply with 
the timing requirements of Sec.  1026.9(c)(2)(i) and the content and 
format requirements of Sec.  1026.9(c)(2)(iv)(A), (B) (if 
applicable), (C) (if applicable), and (D). See comment 55(b)-3 for 
guidance regarding the application of Sec.  1026.55 in these 
circumstances.
    3. Changing from a variable rate to a non-variable rate. See 
comment 9(c)(2)(iv)-3.
    4. Changing from a non-variable rate to a variable rate. See 
comment 9(c)(2)(iv)-4.
    5. Temporary rate or fee reductions offered by telephone. The 
timing requirements of Sec.  1026.9(c)(2)(v)(B) are deemed to have 
been met, and written disclosures required by Sec.  
1026.9(c)(2)(v)(B) may be provided as soon as reasonably practicable 
after the first transaction subject to a rate that will be in effect 
for a specified period of time (a temporary rate) or the imposition 
of a fee that will be in effect for a specified period of time (a 
temporary fee) if:
    i. The consumer accepts the offer of the temporary rate or 
temporary fee by telephone;
    ii. The creditor permits the consumer to reject the temporary 
rate or temporary fee offer and have the rate or rates or fee that 
previously applied to the consumer's balances reinstated for 45 days 
after the creditor mails or delivers the written disclosures 
required by Sec.  1026.9(c)(2)(v)(B), except that the creditor need 
not permit the consumer to reject a temporary rate or temporary fee 
offer if the rate or rates or fee that will apply following 
expiration of the temporary rate do not exceed the rate or rates or 
fee that applied immediately prior to commencement of the temporary 
rate or temporary fee; and
    iii. The disclosures required by Sec.  1026.9(c)(2)(v)(B) and 
the consumer's right to reject the temporary rate or temporary fee 
offer and have the rate or rates or fee that previously applied to 
the consumer's account reinstated, if applicable, are disclosed to 
the consumer as part of the temporary rate or temporary fee offer.
    6. First listing. The disclosures required by Sec.  
1026.9(c)(2)(v)(B)(1) are only required to be provided in close 
proximity and in equal prominence to the first listing of the 
temporary rate or fee in the disclosure provided to the consumer. 
For purposes of Sec.  1026.9(c)(2)(v)(B), the first statement of the 
temporary rate or fee is the most prominent listing on the front 
side of the first page of the disclosure. If the temporary rate or 
fee does not appear on the front side of the first page of the 
disclosure, then the first listing of the temporary rate or fee is 
the most prominent listing of the temporary rate on the subsequent 
pages of the disclosure. For advertising requirements for 
promotional rates, see Sec.  1026.16(g).
    7. Close proximity--point of sale. Creditors providing the 
disclosures required by Sec.  1026.9(c)(2)(v)(B) of this section in 
person in connection with financing the purchase of goods or 
services may, at the creditor's option, disclose the annual 
percentage rate or fee that would apply after expiration of the 
period on a separate page or document from the temporary rate or fee 
and the length of the period, provided that the disclosure of the 
annual percentage rate or fee that would apply after the expiration 
of the period is equally prominent to, and is provided at the same 
time as, the disclosure of the temporary rate or fee and length of 
the period.
    8. Disclosure of annual percentage rates. If a rate disclosed 
pursuant to Sec.  1026.9(c)(2)(v)(B) or (c)(2)(v)(D) is a variable 
rate, the creditor must disclose the fact that the rate may vary and 
how the rate is determined. For example, a creditor could state 
``After October 1, 2009, your APR will be 14.99%. This APR will vary 
with the market based on the Prime Rate.''
    9. Deferred interest or similar programs. If the applicable 
conditions are met, the exception in Sec.  1026.9(c)(2)(v)(B) 
applies to deferred interest or similar promotional programs under 
which the consumer is not obligated to pay interest that accrues on 
a balance if that balance is paid in full prior to the expiration of 
a specified period of time. For purposes of this comment and Sec.  
1026.9(c)(2)(v)(B), ``deferred interest'' has the same meaning as in 
Sec.  1026.16(h)(2) and associated commentary. For such programs, a 
creditor must disclose pursuant to Sec.  1026.9(c)(2)(v)(B)(1) the 
length of the deferred interest period and the rate that will apply 
to the balance subject to the deferred interest program if that 
balance is not paid in full prior to expiration of the deferred 
interest period. Examples of language that a creditor may use to 
make the required disclosures under Sec.  1026.9(c)(2)(v)(B)(1) 
include:
    i. ``No interest if paid in full in 6 months. If the balance is 
not paid in full in 6 months, interest will be imposed from the date 
of purchase at a rate of 15.99%.''
    ii. ``No interest if paid in full by December 31, 2010. If the 
balance is not paid in full by that date, interest will be imposed 
from the transaction date at a rate of 15%.''
    10. Relationship between Sec. Sec.  1026.9(c)(2)(v)(B) and 
1026.6(b). A disclosure of the information described in Sec.  
1026.9(c)(2)(v)(B)(1) provided in the account-opening table in 
accordance with Sec.  1026.6(b) complies with the requirements of 
Sec.  1026.9(c)(2)(v)(B)(2), if the listing of the introductory rate 
in such tabular disclosure also is the first listing as described in 
comment 9(c)(2)(v)-6.
    11. Disclosure of the terms of a workout or temporary hardship 
arrangement. In order for the exception in Sec.  1026.9(c)(2)(v)(D) 
to apply, the disclosure provided to the consumer pursuant to Sec.  
1026.9(c)(2)(v)(D)(2) must set forth:
    i. The annual percentage rate that will apply to balances 
subject to the workout or temporary hardship arrangement;
    ii. The annual percentage rate that will apply to such balances 
if the consumer completes or fails to comply with the terms of, the 
workout or temporary hardship arrangement;

[[Page 79951]]

    iii. Any reduced fee or charge of a type required to be 
disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), (b)(2)(viii), 
(b)(2)(ix), (b)(2)(xi), or (b)(2)(xii) that will apply to balances 
subject to the workout or temporary hardship arrangement, as well as 
the fee or charge that will apply if the consumer completes or fails 
to comply with the terms of the workout or temporary hardship 
arrangement;
    iv. Any reduced minimum periodic payment that will apply to 
balances subject to the workout or temporary hardship arrangement, 
as well as the minimum periodic payment that will apply if the 
consumer completes or fails to comply with the terms of the workout 
or temporary hardship arrangement; and
    v. If applicable, that the consumer must make timely minimum 
payments in order to remain eligible for the workout or temporary 
hardship arrangement.
    12. Index not under creditor's control. See comment 55(b)(2)-2 
for guidance on when an index is deemed to be under a creditor's 
control.
    13. Temporary rates--relationship to Sec.  1026.59. i. General. 
Section 1026.59 requires a card issuer to review rate increases 
imposed due to the revocation of a temporary rate. In some 
circumstances, Sec.  1026.59 may require an issuer to reinstate a 
reduced temporary rate based on that review. If, based on a review 
required by Sec.  1026.59, a creditor reinstates a temporary rate 
that had been revoked, the card issuer is not required to provide an 
additional notice to the consumer when the reinstated temporary rate 
expires, if the card issuer provided the disclosures required by 
Sec.  1026.9(c)(2)(v)(B) prior to the original commencement of the 
temporary rate. See Sec.  1026.55 and the associated commentary for 
guidance on the permissibility and applicability of rate increases.
    ii. Example. A consumer opens a new credit card account under an 
open-end (not home-secured) consumer credit plan on January 1, 2011. 
The annual percentage rate applicable to purchases is 18%. The card 
issuer offers the consumer a 15% rate on purchases made between 
January 1, 2012 and January 1, 2014. Prior to January 1, 2012, the 
card issuer discloses, in accordance with Sec.  1026.9(c)(2)(v)(B), 
that the rate on purchases made during that period will increase to 
the standard 18% rate on January 1, 2014. In March 2012, the 
consumer makes a payment that is ten days late. The card issuer, 
upon providing 45 days' advance notice of the change under Sec.  
1026.9(g), increases the rate on new purchases to 18% effective as 
of June 1, 2012. On December 1, 2012, the issuer performs a review 
of the consumer's account in accordance with Sec.  1026.59. Based on 
that review, the card issuer is required to reduce the rate to the 
original 15% temporary rate as of January 15, 2013. On January 1, 
2014, the card issuer may increase the rate on purchases to 18%, as 
previously disclosed prior to January 1, 2012, without providing an 
additional notice to the consumer.

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.  1026.60. (See Sec.  
1026.60(a)(5) and the accompanying commentary for discussion of the 
types of accounts subject to Sec.  1026.60.) The disclosure 
requirements are triggered when a card issuer imposes any annual or 
other periodic fee on such an account or if the card issuer has 
changed or amended any term of a cardholder's account required to be 
disclosed under Sec.  1026.6(b)(1) and (b)(2) that has not 
previously been disclosed to the consumer, whether or not the card 
issuer originally was required to provide the application and 
solicitation disclosures described in Sec.  1026.60.
    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, if applicable. 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.  1026.9(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.
    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.
    10. Disclosure of changes in terms required to be disclosed 
pursuant to Sec.  1026.6(b)(1) and (b)(2). Clear and conspicuous 
disclosure of a changed term on a periodic statement provided to a 
consumer prior to renewal of the consumer's account constitutes 
prior disclosure of that term for purposes of Sec.  1026.9(e)(1). 
Card issuers should refer to Sec.  1026.9(c)(2) for additional 
timing, content, and formatting requirements that apply to certain 
changes in terms under that paragraph.

9(e)(2) Notification on Periodic Statements

    1. Combined disclosures. If a single disclosure is used to 
comply with both Sec. Sec.  1026.9(e) and 1026.7, the periodic 
statement must comply with the rules in Sec. Sec.  1026.60 and 
1026.7. For example, a description substantially similar to the 
heading describing the grace period required by Sec.  1026.60(b)(5) 
must be used and the name of the balance-calculation method must be 
identified (if listed in Sec.  1026.60(g)) to comply with the 
requirements of Sec.  1026.60. 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. 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

[[Page 79952]]

required information on its periodic statements. A card issuer that 
does so, however, 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.  1026.60 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.  1026.9(f) are the same as those subject to Sec.  
1026.9(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 AppendixG-13 to part 1026.)
    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.  1026.9(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 Sec.  1026.9(c) and (g) and Sec.  
1026.55--examples. Card issuers subject to Sec.  1026.55 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 Sec.  1026.55(b). 
See comments 55(a)-1 and 55(b)-3 and the commentary to Sec.  
1026.55(b)(4) for examples that illustrate the relationship between 
the notice requirements of Sec.  1026.9(c) and (g) and Sec.  
1026.55.
    2. Affected consumers. If a single credit account involves 
multiple consumers that may be affected by the change, the creditor 
should refer to Sec.  1026.5(d) to determine the number of notices 
that must be given.
    3. Combining a notice described in Sec.  1026.9(g)(3) with a 
notice described in Sec.  1026.9(c)(2)(iv). If a creditor is 
required to provide notices pursuant to both Sec.  1026.9(c)(2)(iv) 
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. Sample G-22 contains an example of how to comply 
with the requirements in Sec.  1026.9(g)(3)(i) when the rate on a 
consumer's credit card account is being increased to a penalty rate 
as described in Sec.  1026.9(g)(1)(ii), based on a late payment that 
is not more than 60 days late. Sample G-23 contains an example of 
how to comply with the requirements in Sec.  1026.9(g)(3)(i) when 
the rate increase is triggered by a delinquency of more than 60 
days.
    5. Clear and conspicuous standard. See comment 5(a)(1)-1 for the 
clear and conspicuous standard applicable to disclosures required 
under Sec.  1026.9(g).
    6. Terminology. See Sec.  1026.5(a)(2) for terminology 
requirements applicable to disclosures required under Sec.  
1026.9(g).
    7. Reasons for increase. See comment 9(c)(2)(iv)-11 for guidance 
on disclosure of the reasons for a rate increase for a credit card 
account under an open-end (not home-secured) consumer credit plan.

9(g)(4) Exception for Decrease in Credit Limit

    1. The following illustrates the requirements of Sec.  
1026.9(g)(4). Assume that a creditor decreased the credit limit 
applicable to a consumer's account and sent a notice pursuant to 
Sec.  1026.9(g)(4) 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.  1026.9(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).

9(h) Consumer Rejection of Certain Significant Changes in Terms

    1. Circumstances in which Sec.  1026.9(h) does not apply. 
Section 1026.9(h) applies when Sec.  1026.9(c)(2)(iv)(B) requires 
disclosure of the consumer's right to reject a significant change to 
an account term. Thus, for example, Sec.  1026.9(h) does not apply 
to changes to the terms of home equity plans subject to the 
requirements of Sec.  1026.40 that are accessible by a credit or 
charge card because Sec.  1026.9(c)(2) does not apply to such plans. 
Similarly, Sec.  1026.9(h) does not apply in the following 
circumstances because Sec.  1026.9(c)(2)(iv)(B) does not require 
disclosure of the right to reject in those circumstances: (i) An 
increase in the required minimum periodic payment; (ii) a change in 
an annual percentage rate applicable to a consumer's account (such 
as changing the margin or index for calculating a variable rate, 
changing from a variable rate to a non-variable rate, or changing 
from a non-variable rate to a variable rate); (iii) a change in the 
balance computation method necessary to comply with Sec.  1026.54; 
and (iv) when the change results from the creditor not receiving the 
consumer's required minimum periodic payment within 60 days after 
the due date for that payment.

9(h)(1) Right To Reject

    1. Reasonable requirements for submission of rejections. A 
creditor may establish reasonable requirements for the submission of 
rejections pursuant to Sec.  1026.9(h)(1). For example:
    i. It would be reasonable for a creditor to require that 
rejections be made by the primary account holder and that the 
consumer identify the account number.
    ii. It would be reasonable for a creditor to require that 
rejections be made only using the toll-free telephone number 
disclosed pursuant to Sec.  1026.9(c). It would also be reasonable 
for a creditor to designate additional channels for the submission 
of rejections (such as an address for rejections submitted by mail) 
so long as the creditor does not require that rejections be 
submitted through such additional channels.
    iii. It would be reasonable for a creditor to require that 
rejections be received before the effective date disclosed pursuant 
to Sec.  1026.9(c) and to treat the account as not subject to Sec.  
1026.9(h) if a rejection is received on or after that date. It would 
not, however, be reasonable to require that rejections be submitted 
earlier than the day before the effective date. If a creditor is 
unable to process all rejections received before the effective date, 
the creditor may delay implementation of the change in terms until 
all rejections have been processed. In the alternative, the creditor 
could implement the change on the effective date and then, on any 
account for which a timely rejection was received, reverse the 
change and remove or credit any interest charges or fees imposed as 
a result of the change. For example, if the effective date for a 
change in terms is June 15 and the creditor cannot process all 
rejections received by telephone on June 14 until June 16, the 
creditor may delay imposition of the change until June 17. 
Alternatively, the creditor could implement

[[Page 79953]]

the change for all affected accounts on June 15 and then, once all 
rejections have been processed, return any account for which a 
timely rejection was received to the prior terms and ensure that the 
account is not assessed any additional interest or fees as a result 
of the change or that the account is credited for such interest or 
fees.
    2. Use of account following provision of notice. A consumer does 
not waive or forfeit the right to reject a significant change in 
terms by using the account for transactions prior to the effective 
date of the change. Similarly, a consumer does not revoke a 
rejection by using the account for transactions after the rejection 
is received.

Paragraph 9(h)(2)(ii)

    1. Termination or suspension of credit availability. Section 
1026.9(h)(2)(ii) does not prohibit a creditor from terminating or 
suspending credit availability as a result of the consumer's 
rejection of a significant change in terms.
    2. Solely as a result of rejection. A creditor is prohibited 
from imposing a fee or charge or treating an account as in default 
solely as a result of the consumer's rejection of a significant 
change in terms. For example, if credit availability is terminated 
or suspended as a result of the consumer's rejection of a 
significant change in terms, a creditor is prohibited from imposing 
a periodic fee that was not charged before the consumer rejected the 
change (such as a closed account fee). See also comment 55(d)-1. 
However, regardless of whether credit availability is terminated or 
suspended as a result of the consumer's rejection, a creditor is not 
prohibited from continuing to charge a periodic fee that was charged 
before the rejection. Similarly, a creditor that charged a fee for 
late payment before a change was rejected is not prohibited from 
charging that fee after rejection of the change.

Paragraph 9(h)(2)(iii)

    1. Relevant date for repayment methods. Once a consumer has 
rejected a significant change in terms, Sec.  1026.9(h)(2)(iii) 
prohibits the creditor from requiring repayment of the balance on 
the account using a method that is less beneficial to the consumer 
than one of the methods listed in Sec.  1026.55(c)(2). When applying 
the methods listed in Sec.  1026.55(c)(2) pursuant to Sec.  
1026.9(h)(2)(iii), a creditor may utilize the date on which the 
creditor was notified of the rejection or a later date (such as the 
date on which the change would have gone into effect but for the 
rejection). For example, assume that on April 16 a creditor provides 
a notice pursuant to Sec.  1026.9(c) informing the consumer that the 
monthly maintenance fee for the account will increase effective June 
1. The notice also states that the consumer may reject the increase 
by calling a specified toll-free telephone number before June 1 but 
that, if the consumer does so, credit availability for the account 
will be terminated. On May 5, the consumer calls the toll-free 
number and exercises the right to reject. If the creditor chooses to 
establish a five-year amortization period for the balance on the 
account consistent with Sec.  1026.55(c)(2)(ii), that period may 
begin no earlier than the date on which the creditor was notified of 
the rejection (May 5). However, the creditor may also begin the 
amortization period on the date on which the change would have gone 
into effect but for the rejection (June 1).
    2. Balance on the account. i. In general. When applying the 
methods listed in Sec.  1026.55(c)(2) pursuant to Sec.  
1026.9(h)(2)(iii), the provisions in Sec.  1026.55(c)(2) and the 
guidance in the commentary to Sec.  1026.55(c)(2) regarding 
protected balances also apply to a balance on the account subject to 
Sec.  1026.9(h)(2)(iii). If a creditor terminates or suspends credit 
availability based on a consumer's rejection of a significant change 
in terms, the balance on the account that is subject to Sec.  
1026.9(h)(2)(iii) is the balance at the end of the day on which 
credit availability is terminated or suspended. However, if a 
creditor does not terminate or suspend credit availability based on 
the consumer's rejection, the balance on the account subject to 
Sec.  1026.9(h)(2)(iii) is the balance at the end of the day on 
which the creditor was notified of the rejection or, at the 
creditor's option, a later date.
    ii. Example. Assume that on June 16 a creditor provides a notice 
pursuant to Sec.  1026.9(c) informing the consumer that the annual 
fee for the account will increase effective August 1. The notice 
also states that the consumer may reject the increase by calling a 
specified toll-free telephone number before August 1 but that, if 
the consumer does so, credit availability for the account will be 
terminated. On July 20, the account has a purchase balance of $1,000 
and the consumer calls the toll-free number and exercises the right 
to reject. On July 22, a $200 purchase is charged to the account. If 
the creditor terminates credit availability on July 25 as a result 
of the rejection, the balance subject to the repayment limitations 
in Sec.  1026.9(h)(2)(iii) is the $1,200 purchase balance at the end 
of the day on July 25. However, if the creditor does not terminate 
credit availability as a result of the rejection, the balance 
subject to the repayment limitations in Sec.  1026.9(h)(2)(iii) is 
the $1,000 purchase balance at the end of the day on the date the 
creditor was notified of the rejection (July 20), although the 
creditor may, at its option, treat the $200 purchase as part of the 
balance subject to Sec.  1026.9(h)(2)(iii).

9(h)(3) Exception

    1. Examples. Section 1026.9(h)(3) provides that Sec.  1026.9(h) 
does not apply when the creditor has not received the consumer's 
required minimum periodic payment within 60 days after the due date 
for that payment. The following examples illustrate the application 
of this exception:
    i. Account becomes more than 60 days delinquent before notice 
provided. Assume that a credit card account is opened on January 1 
of year one and that the payment due date for the account is the 
fifteenth day of the month. On June 20 of year two, the creditor has 
not received the required minimum periodic payments due on April 15, 
May 15, and June 15. On June 20, the creditor provides a notice 
pursuant to Sec.  1026.9(c) informing the consumer that a monthly 
maintenance fee of $10 will be charged beginning on August 4. 
However, Sec.  1026.9(c)(2)(iv)(B) does not require the creditor to 
notify the consumer of the right to reject because the creditor has 
not received the April 15 minimum payment within 60 days after the 
due date. Furthermore, the exception in Sec.  1026.9(h)(3) applies 
and the consumer may not reject the fee.
    ii. Account becomes more than 60 days delinquent after 
rejection. Assume that a credit card account is opened on January 1 
of year one and that the payment due date for the account is the 
fifteenth day of the month. On April 20 of year two, the creditor 
has not received the required minimum periodic payment due on April 
15. On April 20, the creditor provides a notice pursuant to Sec.  
1026.9(c) informing the consumer that an annual fee of $100 will be 
charged beginning on June 4. The notice further states that the 
consumer may reject the fee by calling a specified toll-free 
telephone number before June 4 but that, if the consumer does so, 
credit availability for the account will be terminated. On May 5, 
the consumer calls the toll-free telephone number and rejects the 
fee. Section 1026.9(h)(2)(i) prohibits the creditor from charging 
the $100 fee to the account. If, however, the creditor does not 
receive the minimum payments due on April 15 and May 15 by June 15, 
Sec.  1026.9(h)(3) permits the creditor to charge the $100 fee. The 
creditor must provide a second notice of the fee pursuant to Sec.  
1026.9(c), but Sec.  1026.9(c)(2)(iv)(B) does not require the 
creditor to disclose the right to reject and Sec.  1026.9(h)(3) does 
not allow the consumer to reject the fee. Similarly, the 
restrictions in Sec.  1026.9(h)(2)(ii) and (iii) no longer apply.

Section 1026.10--Payments

10(a) General Rule.

    1. Crediting date. Section 1026.10(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.  
1026.10(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

[[Page 79954]]

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 5 p.m. or any later 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 methods promoted by creditor. If a creditor promotes 
a specific payment method, any payments made via that method (prior 
to any cut-off time specified by the creditor, to the extent 
permitted by Sec.  1026.10(b)(2)) are generally conforming payments 
for purposes of Sec.  1026.10(b). For example:
    i. 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 prior to the creditor's specified cut-off time, if any, would 
generally be conforming payments for purposes of Sec.  1026.10(b).
    ii. If a creditor promotes payment by telephone (for example, by 
including the option to pay by telephone in a menu of options 
provided to consumers at a toll-free number disclosed on its 
periodic statement), payments made by telephone would generally be 
conforming payments for purposes of Sec.  1026.10(b).
    iii. If a creditor promotes in-person payments, for example by 
stating in an advertisement that payments may be made in person at 
its branch locations, such in-person payments made at a branch or 
office of the creditor generally would be conforming payments for 
purposes of Sec.  1026.10(b).
    iv. If a creditor promotes that payments may be made through an 
unaffiliated third party, such as by disclosing the Web site address 
of that third party on the periodic statement, payments made via 
that third party's Web site generally would be conforming payments 
for purposes of Sec.  1026.10(b). In contrast, if a customer service 
representative of the creditor confirms to a consumer that payments 
may be made via an unaffiliated third party, but the creditor does 
not otherwise promote that method of payment, Sec.  1026.10(b) 
permits the creditor to treat payments made via such third party as 
nonconforming payments in accordance with Sec.  1026.10(b)(4).
    3. Acceptance of nonconforming payments. If the creditor accepts 
a nonconforming payment (for example, payment mailed to a branch 
office, when the creditor had specified that payment be sent to a 
different location), 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.  1026.10(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.
    5. Payments made at point of sale. If a card issuer that is a 
financial institution issues a credit card under an open-end (not 
home-secured) consumer credit plan that can be used only for 
transactions with a particular merchant or merchants or a credit 
card that is cobranded with the name of a particular merchant or 
merchants, and a consumer is able to make a payment on that credit 
card account at a retail location maintained by such a merchant, 
that retail location is not considered to be a branch or office of 
the card issuer for purposes of Sec.  1026.10(b)(3).
    6. In-person payments on credit card accounts. For purposes of 
Sec.  1026.10(b)(3), payments made in person at a branch or office 
of a financial institution include payments made with the direct 
assistance of, or to, a branch or office employee, for example a 
teller at a bank branch. A payment made at the bank branch without 
the direct assistance of a branch or office employee, for example a 
payment placed in a branch or office mail slot, is not a payment 
made in person for purposes of Sec.  1026.10(b)(3).
    7. In-person payments at affiliate of card issuer. If an 
affiliate of a card issuer that is a financial institution shares a 
name with the card issuer, such as ``ABC,'' and accepts in-person 
payments on the card issuer's credit card accounts, those payments 
are subject to the requirements of Sec.  1026.10(b)(3).

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.
    2. Treating a payment as late for any purpose. See comment 
5(b)(2)(ii)-2 for guidance on treating a payment as late for any 
purpose. When an account is not eligible for a grace period, 
imposing a finance charge due to a periodic interest rate does not 
constitute treating a payment as late.

10(e) Limitations on Fees Related to Method of Payment

    1. Separate fee to allow consumers to make a payment. For 
purposes of Sec.  1026.10(e), the term ``separate fee'' means a fee 
imposed on a consumer for making a payment to the consumer's 
account. A fee or other charge imposed if payment is made after the 
due date, such as a late fee or finance charge, is not a separate 
fee to allow consumers to make a payment for purposes of Sec.  
1026.10(e).
    2. Expedited. For purposes of Sec.  1026.10(e), the term 
``expedited'' means crediting a payment the same day or, if the 
payment is received after any cut-off time established by the 
creditor, the next business day.
    3. Service by a customer service representative. Service by a 
customer service representative of a creditor means any payment made 
to the consumer's account with the assistance of a live 
representative or agent of the creditor, including those made in 
person, on the telephone, or by electronic means. A customer service 
representative does not include automated means of making payment 
that do not involve a live representative or agent of the creditor, 
such as a voice response unit or interactive voice response system. 
Service by a customer service representative includes any payment 
transaction which involves the assistance of a live representative 
or agent of the creditor, even if an automated system is required 
for a portion of the transaction.
    4. Creditor. For purposes of Sec.  1026.10(e), the term 
``creditor'' includes a third party that collects, receives, or 
processes payments on behalf of a creditor. For example:
    i. Assume that a creditor uses a service provider to receive, 
collect, or process on the creditor's behalf payments made through 
the creditor's Web site or made through an automated telephone 
payment service. In these circumstances, the service provider would 
be considered a creditor for purposes of paragraph (e).
    ii. Assume that a consumer pays a fee to a money transfer or 
payment service in order to transmit a payment to the creditor on 
the consumer's behalf. In these circumstances, the money transfer or 
payment service would not be considered a creditor for purposes of 
paragraph (e).
    iii. Assume that a consumer has a checking account at a 
depository institution. The consumer makes a payment to the creditor 
from the checking account using a bill payment service provided by 
the depository institution. In these circumstances, the depository 
institution would not be considered a creditor for purposes of 
paragraph (e).

10(f) Changes by Card Issuer

    1. Address for receiving payment. For purposes of Sec.  
1026.10(f), ``address for receiving payment'' means a mailing 
address for receiving payment, such as a post office box, or the 
address of a branch or office at which payments on credit card 
accounts are accepted.
    2. Materiality. For purposes of Sec.  1026.10(f), a ``material 
change'' means any change in the address for receiving payment or 
procedures for handling cardholder payments which causes a material 
delay in the crediting of a payment. ``Material delay'' means any 
delay in crediting payment to a consumer's account which would 
result in a late payment and the imposition of a late fee or finance 
charge. A delay in crediting a payment which does not result in a 
late fee or finance charge would be immaterial.
    3. Safe harbor. i. General. A card issuer may elect not to 
impose a late fee or finance charge on a consumer's account for the 
60-day period following a change in address for receiving payment or 
procedures for handling cardholder payments which could reasonably 
be expected to cause a material delay in crediting of a payment to 
the consumer's account. For purposes of Sec.  1026.10(f), a late fee 
or finance charge is not imposed if the fee or charge is waived or 
removed, or an amount equal to the fee or charge is credited to the 
account.
    ii. Retail location. For a material change in the address of a 
retail location or procedures for handling cardholder payments at a 
retail

[[Page 79955]]

location, a card issuer may impose a late fee or finance charge on a 
consumer's account for a late payment during the 60-day period 
following the date on which the change took effect. However, if a 
card issuer is notified by a consumer no later than 60 days after 
the card issuer transmitted the first periodic statement that 
reflects the late fee or finance charge for a late payment that the 
late payment was caused by such change, the card issuer must waive 
or remove any late fee or finance charge, or credit an amount equal 
to any late fee or finance charge, imposed on the account during the 
60-day period following the date on which the change took effect.
    4. Examples. i. A card issuer changes the mailing address for 
receiving payments by mail from a five-digit postal zip code to a 
nine-digit postal zip code. A consumer mails a payment using the 
five-digit postal zip code. The change in mailing address is 
immaterial and it does not cause a delay. Therefore, a card issuer 
may impose a late fee or finance charge for a late payment on the 
account.
    ii. A card issuer changes the mailing address for receiving 
payments by mail from one post office box number to another post 
office box number. For a 60-day period following the change, the 
card issuer continues to use both post office box numbers for the 
collection of payments received by mail. The change in mailing 
address would not cause a material delay in crediting a payment 
because payments would be received and credited at both addresses. 
Therefore, a card issuer may impose a late fee or finance charge for 
a late payment on the account during the 60-day period following the 
date on which the change took effect.
    iii. Same facts as paragraph ii above, except the prior post 
office box number is no longer valid and mail sent to that address 
during the 60-day period following the change would be returned to 
sender. The change in mailing address is material and the change 
could cause a material delay in the crediting of a payment because a 
payment sent to the old address could be delayed past the due date. 
If, as a result, a consumer makes a late payment on the account 
during the 60-day period following the date on which the change took 
effect, a card issuer may not impose any late fee or finance charge 
for the late payment.
    iv. A card issuer permanently closes a local branch office at 
which payments are accepted on credit card accounts. The permanent 
closing of the local branch office is a material change in address 
for receiving payment. Relying on the safe harbor, the card issuer 
elects not to impose a late fee or finance charge for the 60-day 
period following the local branch closing for late payments on 
consumer accounts which the issuer reasonably determines are 
associated with the local branch and which could reasonably be 
expected to have been caused by the branch closing.
    v. A consumer has elected to make payments automatically to a 
credit card account, such as through a payroll deduction plan or a 
third party payor's preauthorized payment arrangement. A card issuer 
changes the procedures for handling such payments and as a result, a 
payment is delayed and not credited to the consumer's account before 
the due date. In these circumstances, a card issuer may not impose 
any late fee or finance charge during the 60-day period following 
the date on which the change took effect for a late payment on the 
account.
    vi. A card issuer no longer accepts payments in person at a 
retail location as a conforming method of payment, which is a 
material change in the procedures for handling cardholder payment. 
In the 60-day period following the date on which the change took 
effect, a consumer attempts to make a payment in person at a retail 
location of a card issuer. As a result, the consumer makes a late 
payment and the issuer charges a late fee on the consumer's account. 
The consumer notifies the card issuer of the late fee for the late 
payment which was caused by the material change. In order to comply 
with Sec.  1026.10(f), the card issuer must waive or remove the late 
fee or finance charge, or credit the consumer's account in an amount 
equal to the late fee or finance charge.
    5. Finance charge due to periodic interest rate. When an account 
is not eligible for a grace period, imposing a finance charge due to 
a periodic interest rate does not constitute imposition of a finance 
charge for a late payment for purposes of Sec.  1026.10(f).

Section 1026.11--Treatment of Credit Balances; Account Termination

11(a) Credit Balances

    1. Timing of refund. The creditor may also fulfill its 
obligations under Sec.  1026.11 by:
    i. Refunding any credit balance to the consumer immediately.
    ii. Refunding any credit balance prior to receiving a written 
request (under Sec.  1026.11(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.
    2. Amount of refund. The phrases any part of the remaining 
credit balance in Sec.  1026.11(a)(2) and any part of the credit 
balance remaining in the account in Sec.  1026.11(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 1026.11 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.  1026.11(b)(2).

11(c) Timely Settlement of Estate Debts

    1. Administrator of an estate. For purposes of Sec.  1026.11(c), 
the term ``administrator'' means an administrator, executor, or any 
personal representative of an estate who is authorized to act on 
behalf of the estate.
    2. Examples. The following are examples of reasonable procedures 
that satisfy this rule:
    i. A card issuer may decline future transactions and terminate 
the account upon receiving reasonable notice of the consumer's 
death.
    ii. A card issuer may credit the account for fees and charges 
imposed after the date of receiving reasonable notice of the 
consumer's death.
    iii. A card issuer may waive the estate's liability for all 
charges made to the account after receiving reasonable notice of the 
consumer's death.
    iv. A card issuer may authorize an agent to handle matters in 
accordance with the requirements of this rule.
    v. A card issuer may require administrators of an estate to 
provide documentation indicating authority to act on behalf of the 
estate.
    vi. A card issuer may establish or designate a department, 
business unit, or communication channel for administrators, such as 
a specific mailing address or toll-free number, to handle matters in 
accordance with the requirements of this rule.
    vii. A card issuer may direct administrators, who call a general 
customer service toll-free number or who send correspondence by mail 
to an address for general correspondence, to an appropriate customer 
service representative, department, business unit, or communication 
channel to handle matters in accordance with the requirements of 
this rule.
    2. Request by an administrator of an estate. A card issuer may 
receive a request for the amount of the balance on a deceased 
consumer's account in writing or by telephone call from the 
administrator of an estate. If a request is made in writing, such as 
by mail, the request is received on the date the card issuer 
receives the correspondence.
    3. Timely statement of balance. A card issuer must disclose the 
balance on a

[[Page 79956]]

deceased consumer's account, upon request by the administrator of 
the decedent's estate. A card issuer may provide the amount, if any, 
by a written statement or by telephone. This does not preclude a 
card issuer from providing the balance amount to appropriate 
persons, other than the administrator, such as the spouse or a 
relative of the decedent, who indicate that they may pay any 
balance. This provision does not relieve card issuers of the 
requirements to provide a periodic statement, under Sec.  
1026.5(b)(2). A periodic statement, under Sec.  1026.5(b)(2), may 
satisfy the requirements of Sec.  1026.11(c)(2), if provided within 
30 days of receiving a request by an administrator of the estate.
    4. Imposition of fees and interest charges. Section 
1026.11(c)(3) does not prohibit a card issuer from imposing fees and 
finance charges due to a periodic interest rate based on balances 
for days that precede the date on which the card issuer receives a 
request pursuant to Sec.  1026.11(c)(2). For example, if the last 
day of the billing cycle is June 30 and the card issuer receives a 
request pursuant to Sec.  1026.11(c)(2) on June 25, the card issuer 
may charge interest that accrued prior to June 25.
    5. Example. A card issuer receives a request from an 
administrator for the amount of the balance on a deceased consumer's 
account on March 1. The card issuer discloses to the administrator 
on March 25 that the balance is $1,000. If the card issuer receives 
payment in full of the $1,000 on April 24, the card issuer must 
waive or rebate any additional interest that accrued on the $1,000 
balance between March 25 and April 24. If the card issuer receives a 
payment of $1,000 on April 25, the card issuer is not required to 
waive or rebate interest charges on the $1,000 balance in respect of 
the period between March 25 and April 25. If the card issuer 
receives a partial payment of $500 on April 24, the card issuer is 
not required to waive or rebate interest charges on the $1,000 
balance in respect of the period between March 25 and April 25.
    6. Application to joint accounts. A card issuer may impose fees 
and charges on an account of a deceased consumer if a joint 
accountholder remains on the account. If only an authorized user 
remains on the account of a deceased consumer, however, then a card 
issuer may not impose fees and charges.

Section 1026.12--Special Credit Card Provisions

    1. Scope. Sections 1026.12(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 1026.12(a) and 
(b) are exceptions to the general rule that the regulation applies 
only to consumer credit. (See Sec. Sec.  1026.1 and 1026.3.)
    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.  1026.12(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.  
1026.2 and used in Sec.  1026.12(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.  
1026.12(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.  1026.6. The issuer will violate 
the rule against unsolicited issuance if, for example, at the time 
the card is sent a credit plan can be accessed by the card or the 
recipient of the unsolicited card has been preapproved for credit 
that the recipient can access by contacting the issuer and 
activating the card.
    8. Unsolicited issuance of PINs. A card issuer may issue 
personal identification numbers (PINs) to existing credit 
cardholders without a specific request from the cardholders, 
provided the PINs cannot be used alone to obtain credit. For 
example, the PINs may be necessary if consumers wish to use their 
existing credit cards at automated teller machines or at merchant 
locations with point of sale terminals that require PINs.

Paragraph 12(a)(2)

    1. Renewal. Renewal generally contemplates the regular 
replacement of existing cards because of, for example, security 
reasons or new technology or systems. It also includes the re-
issuance of cards that have been suspended temporarily, but does not 
include the opening of a new account after a previous account was 
closed.
    2. Substitution--examples. Substitution encompasses the 
replacement of one card with another because the underlying account 
relationship has changed in some way--such as when the card issuer 
has:
    i. Changed its name.
    ii. Changed the name of the card.
    iii. Changed the credit or other features available on the 
account. For example, the original card could be used to make 
purchases and obtain cash advances at teller windows. The substitute 
card might be usable, in addition, for obtaining cash advances 
through automated teller machines. (If the substitute card 
constitutes an access device, as defined in Regulation E, then the 
Regulation E issuance rules would have to be followed.) The 
substitution of one card with another on an unsolicited basis is not 
permissible, however, where in conjunction with the substitution an 
additional credit card account is opened and the consumer is able to 
make new purchases or advances under both the original and the new 
account with the new card. For example, if a retail card issuer 
replaces its credit card with a combined retailer/bank card, each of 
the creditors maintains a separate account, and both accounts can be 
accessed for new transactions by use of the new credit card, the 
card cannot be provided to a consumer without solicitation.
    iv. Substituted a card user's name on the substitute card for 
the cardholder's name appearing on the original card.
    v. Changed the merchant base, 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.  1026.12(a), an account is inactive if no 
credit has been

[[Page 79957]]

extended and if the account has no outstanding balance for the prior 
24 months. (See Sec.  1026.11(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 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.  
1026.6, 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.  1026.9(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. Requiring 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.  1026.12(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.  1026.13 
apply to both of these types of transactions.

12(b)(1)(ii) Limitation on Amount

    1. Meaning of authority. Section 1026.12(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.  1026.12(b)(2).

Paragraph 12(b)(2)(ii)

    1. Disclosure of liability and means of notifying issuer. The 
disclosures referred to in Sec.  1026.12(b)(2)(ii) may be given, for 
example, with the initial disclosures under Sec.  1026.6, 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.  1026.12(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

[[Page 79958]]

readable without physical aids) must be used in conjunction with a 
secret code or the like, it would not constitute sufficient means of 
identification. Sufficient identification also does not exist if a 
``pool'' or group card, issued to a corporation and signed by a 
corporate agent who will not be a user of the card, is intended to 
be used by another employee for whom no means of identification is 
provided.
    3. Transactions not involving card. The cardholder may not be 
held liable under Sec.  1026.12(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.  
1026.12(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.  1026.13. The liability protections 
afforded to cardholders in Sec.  1026.12 do not depend upon the 
cardholder's following the error resolution procedures in Sec.  
1026.13. For example, the written notification and time limit 
requirements of Sec.  1026.13 do not affect the Sec.  1026.12 
protections. (See also comment 12(b)-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.  1026.12(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.  1026.12(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.  1026.13. The Sec.  1026.12(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.  1026.13, that section 
operates independently of Sec.  1026.12(c). The cardholder whose 
asserted billing error involves undelivered goods may institute the 
error resolution procedures of Sec.  1026.13; but whether or not the 
cardholder has done so, the cardholder may assert claims or defenses 
under Sec.  1026.12(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 1026.12(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 1026.12(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. However, when a consumer has asserted a claim 
or defense against a creditor pursuant to Sec.  1026.12(c), the 
creditor must apply any payment or other credit in a manner that 
avoids or minimizes any reduction in the amount subject to that 
claim or defense. Accordingly, to determine the amount of credit 
outstanding for purposes of this section, payments and other credits 
must be applied first to amounts other than the disputed 
transaction.
    i. For examples of how to comply with Sec. Sec.  1026.12 and 
1026.53 for credit card accounts under an open-end (not home-
secured) consumer credit plan, see comment 53-3.
    ii. For other types of credit card accounts, creditors may, at 
their option, apply payments consistent with Sec.  1026.53 and 
comment 53-3. In the alternative, payments and other credits may be 
applied to: Late charges in the order of entry to the account; then 
to finance charges in the order of entry to the account; and then to 
any debits other than the transaction subject to the claim or 
defense in the order of entry to the account. In these 
circumstances, 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

[[Page 79959]]

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.

12(c)(3)(ii) Exclusion

    1. Merchant honoring card. The exceptions (stated in Sec.  
1026.12(c)(3)(ii)) to the amount and geographic limitations in Sec.  
1026.12(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.  1026.12(d)(1), 
unless done in the context of one of the exceptions specified in 
Sec.  1026.12(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.  1026.12(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.  1026.6. 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.  
1026.12(d)(2). For a security interest to qualify for the exception 
under Sec.  1026.12(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.  
1026.12(d)(2).
    2. Security interest--after-acquired property. As used in Sec.  
1026.12(d)(2), 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.  1026.12(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.  1026.12(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 1026.13--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.

[[Page 79960]]

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 1026.13(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 1026.13(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 1026.13(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 not the payment service, but rather the good or 
service that the consumer has purchased using the payment service. 
Thus, for example, Sec.  1026.13(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.  1026.13(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.  1026.13(a) or a request for additional clarification 
under Sec.  1026.13(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.  1026.13(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.  1026.6(a)(5) or 
(b)(5)(iii), and 1026.9(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.  1026.13(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.  1026.12. The consumer's rights under 
the billing error provisions in Sec.  1026.13 are independent of the 
provisions set forth in Sec.  1026.12(b) and (c). (See comments 
12(b)-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 Sec.  1026.13(c)(2). Thus, 
for example, Sec.  1026.13(c)(2) prohibits a creditor 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.  1026.13(f), the 
creditor generally must credit the disputed amount and related 
finance or other charges, as applicable, to the consumer's account. 
However, if a consumer receives more than one credit to correct the 
same billing error, Sec.  1026.13 does not prevent a creditor from 
reversing amounts it has previously credited to correct that error, 
provided that the total amount of the remaining credits is equal to 
or more than the amount of the error and that the consumer does not 
incur any fees or other charges as a result of the timing of the 
creditor's reversal. For example, assume that a consumer asserts a 
billing error with respect to a $100 transaction and that the 
creditor posts a $100 credit to the consumer's account to correct 
that error during the time period set forth in Sec.  1026.13(c)(2). 
However, following that time period, a merchant or other person 
honoring the credit card issues a $100 credit to the consumer to 
correct the same error. In these circumstances, Sec.  1026.13(c)(2) 
does not prohibit the creditor from reversing its $100 credit once 
the $100 credit from the merchant or other person has posted to the 
consumer's account.

13(d) Rules Pending Resolution

    1. Disputed amount. Disputed amount is the dollar amount alleged 
by the consumer to

[[Page 79961]]

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.  1026.13(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.  1026.13(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.  1026.13(d)(1) to withhold related 
finance and other charges. The disclosure under Sec.  1026.13(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 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.  
1026.8) 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.  1026.13(g)(1), provided it is sent within the time limit for 
resolution. (See commentary to Sec.  1026.13(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.  1026.13(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. Requiring 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

[[Page 79962]]

notice alleging the nondelivery of property or services under Sec.  
1026.13(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.  1026.13(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.  1026.13(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.  1026.6(a)(1) or (b)(2) and Sec.  
1026.7(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.  1026.13(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 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.  1026.13(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.  
1026.13(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.  
1026.13(i), which provides that certain error resolution procedures 
in both this part 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 (12 
CFR Part 1005) provisions (such as timing and notice) for the entire 
transaction.
    ii. The creditor need not provisionally credit the consumer's 
account, under 12 CFR 1005.11(c)(2)(i), for any portion of the 
unpaid extension of credit.
    iii. The creditor must credit the consumer's account under Sec.  
1005.11(c) with any finance or other charges incurred as a result of 
the alleged error.
    iv. The provisions of Sec. Sec.  1026.13(d) and (g) apply only 
to the credit portion of the transaction.

Section 1026.14--Determination of Annual Percentage Rate

14(a) General Rule

    1. Tolerance. The tolerance of 1/8th 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.  1026.60, 1026.40, 
1026.6, 1026.7, 1026.9, 1026.15, 1026.16, 1026.26, 1026.55, and 
1026.56.
    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 1/8th 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.  
1026.14(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.
    6. Effect of leap year. Any variance in the annual percentage 
rate that occurs solely by reason of the addition of February 29 in 
a leap year may be disregarded, and such a rate may be disclosed 
without regard to such variance.

[[Page 79963]]

14(b) Annual Percentage Rate--In General

    1. Corresponding annual percentage rate computation. For 
purposes of Sec. Sec.  1026.60, 1026.40, 1026.6, 1026.7(a)(4) or 
(b)(4), 1026.9, 1026.15, 1026.16, 1026.26, 1026.55, and 1026.56, 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 Credit Plans Secured by a Consumer's 
Dwelling

    1. General rule. The periodic statement may reflect (under Sec.  
1026.7(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 
1026.14(c)(1) through (c)(4) state the computation rules for the 
effective rate.
    2. Charges related to opening, renewing, or continuing an 
account. Sections 1026.14(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.  1026.4(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.  1026.14(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.  1026.14(c)(2) is 
appropriate.
    4. Small finance charges. Section 1026.14(c)(4) gives the 
creditor an alternative to Sec.  1026.14(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.  1026.14(c)(2), 
the creditor may disclose an annual percentage rate of 18 percent if 
the periodic rate generally applicable to all balances is 1 and \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 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 1026.14(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 \1/2\ 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 
1026.14(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.  1026.14(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 1026.14(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

[[Page 79964]]

determine the components of this formula, see Appendix F to part 
1026.
    2. Daily rate with specific transaction charge. Section 
1026.14(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 1026 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 1026.14(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.  1026.14(c)(1)(ii) and (c)(2) 
cannot be used when a daily rate is being applied to a series of 
daily balances, Sec.  1026.14(d) provides two alternative ways to 
calculate the annual percentage rate--either of which satisfies the 
provisions of Sec.  1026.7(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 1026.15--Right of Rescission

    1. Transactions not covered. Credit extensions that are not 
subject to the regulation are not covered by Sec.  1026.15 even if 
the customer's principal dwelling is the collateral securing the 
credit. For this purpose, credit extensions also would include the 
occurrences listed in comment 15(a)(1)-1. For example, the right of 
rescission does not apply to the opening of a business-purpose 
credit line, even though the loan is secured by the customer's 
principal dwelling.

15(a) Consumer's Right To Rescind

Paragraph 15(a)(1)

    1. Occurrences subject to right. Under an open-end credit plan 
secured by the consumer's principal dwelling, the right of 
rescission generally arises with each of the following occurrences:
    i. Opening the account.
    ii. Each credit extension.
    iii. Increasing the credit limit.
    iv. Adding to an existing account a security interest in the 
consumer's principal dwelling.
    v. Increasing the dollar amount of the security interest taken 
in the dwelling to secure the plan. For example, a consumer may open 
an account with a $10,000 credit limit, $5,000 of which is initially 
secured by the consumer's principal dwelling. The consumer has the 
right to rescind at that time and (except as noted in Sec.  
1026.15(a)(1)(ii)) with each extension on the account. Later, if the 
creditor decides that it wants the credit line fully secured, and 
increases the amount of its interest in the consumer's dwelling, the 
consumer has the right to rescind the increase.
    2. Exceptions. Although the consumer generally has the right to 
rescind with each transaction on the account, Section 125(e) of the 
Act provides an exception: the creditor need not provide the right 
to rescind at the time of each credit extension made under an open-
end credit plan secured by the consumer's principal dwelling to the 
extent that the credit extended is in accordance with a previously 
established credit limit for the plan. This limited rescission 
option is available whether or not the plan existed prior to the 
effective date of the Act.
    3. Security interest arising from transaction. i. In order for 
the right of rescission to apply, the security interest must be 
retained as part of the credit transaction. For example:
    A. A security interest that is acquired by a contractor who is 
also extending the credit in the transaction.
    B. A mechanic's or materialman's lien that is retained by a 
subcontractor or supplier of a contractor-creditor, even when the 
latter has waived its own security interest in the consumer's home.
    ii. The security interest is not part of the credit transaction, 
and therefore the transaction is not subject to the right of 
rescission when, for example:
    A. A mechanic's or materialman's lien is obtained by a 
contractor who is not a party to the credit transaction but merely 
is paid with the proceeds of the consumer's cash advance.
    B. All security interests that may arise in connection with the 
credit transaction are validly waived.
    C. The creditor obtains a lien and completion bond that in 
effect satisfies all liens against the consumer's principal dwelling 
as a result of the credit transaction.
    iii. Although liens arising by operation of law are not 
considered security interests for purposes of disclosure under Sec.  
1026.2, that section specifically includes them in the definition 
for purposes of the right of rescission. Thus, even though an 
interest in the consumer's principal dwelling is not a required 
disclosure under Sec.  1026.6(c), it may still give rise to the 
right of rescission.
    4. Consumer. To be a consumer within the meaning of Sec.  
1026.2, that person must at least have an ownership interest in the 
dwelling that is encumbered by the creditor's security interest, 
although that person need not be a signatory to the credit 
agreement. For example, if only one spouse enters into a secured 
plan, the other spouse is a consumer if the ownership interest of 
that spouse is subject to the security interest.
    5. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or 
other second home would not be a principal dwelling. A transaction 
secured by a second home (such as a vacation home) that is not 
currently being used as the consumer's principal dwelling is not 
rescindable, even if the consumer intends to reside there in the 
future. When a consumer buys or builds a new dwelling that will 
become the consumer's principal dwelling within one year or upon 
completion of construction, the new dwelling is considered the 
principal dwelling if it secures the open-end credit line. In that 
case, the transaction secured by the new dwelling is a residential 
mortgage transaction and is not rescindable. For example, if a 
consumer whose principal dwelling is currently A builds B, to be 
occupied by the consumer upon completion of construction, an advance 
on an open-end line to finance B and secured by B is a residential 
mortgage transaction. Dwelling, as defined in Sec.  1026.2, includes 
structures that are classified as personalty under state law. For 
example, a transaction secured by a mobile home, trailer, or 
houseboat used as the consumer's principal dwelling may be 
rescindable.
    6. Special rule for principal dwelling. Notwithstanding the 
general rule that consumers may have only one principal dwelling, 
when the consumer is acquiring or constructing a new principal 
dwelling, a credit plan or extension that is subject to Regulation Z 
and is secured by the equity in the consumer's current principal 
dwelling is subject to the right of rescission regardless of the 
purpose of that loan (for example, an advance to be used as a bridge 
loan). For example, if a consumer whose principal dwelling is 
currently A builds B, to be occupied by the consumer upon completion 
of construction, a loan to finance B and secured by A is subject to 
the right of rescission. Moreover, a loan secured by both A and B 
is, likewise, rescindable.

Paragraph 15(a)(2)

    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec.  1026.15(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.  
1026.15(d)(2) does not begin to run until the notification has been 
received. The creditor may designate an agent to receive the 
notification so long as the agent's name and address appear on the 
notice provided to the consumer under Sec.  1026.15(b). Where the 
creditor fails to provide the consumer with a designated address for 
sending the notification of rescission, delivery of the notification 
to the person or address to which the consumer has been directed to 
send payments constitutes delivery to the creditor or assignee. 
State law determines whether delivery of the notification to a third 
party other than the person to whom payments are made is delivery to 
the creditor or assignee, in the case where the creditor fails to 
designate an address for sending the notification of rescission.

Paragraph 15(a)(3)

    1. Rescission period. i. The period within which the consumer 
may exercise the right to rescind runs for 3 business days from the 
last of 3 events:
    A. The occurrence that gives rise to the right of rescission.
    B. Delivery of all material disclosures that are relevant to the 
plan.
    C. Delivery to the consumer of the required rescission notice.

[[Page 79965]]

    ii. For example, an account is opened on Friday, June 1, and the 
disclosures and notice of the right to rescind were given on 
Thursday, May 31; the rescission period will expire at midnight of 
the third business day after June 1--that is, Tuesday June 5. In 
another example, if the disclosures are given and the account is 
opened on Friday, June 1, and the rescission notice is given on 
Monday, June 4, the rescission period expires at midnight of the 
third business day after June 4--that is Thursday, June 7. The 
consumer must place the rescission notice in the mail, file it for 
telegraphic transmission, or deliver it to the creditor's place of 
business within that period in order to exercise the right.
    2. Material disclosures. Section 1026.15(a)(3) sets forth the 
material disclosures that must be provided before the rescission 
period can begin to run. The creditor must provide sufficient 
information to satisfy the requirements of Sec.  1026.6 for these 
disclosures. A creditor may satisfy this requirement by giving an 
initial disclosure statement that complies with the regulation. 
Failure to give the other required initial disclosures (such as the 
billing rights statement) or the information required under Sec.  
1026.40 does not prevent the running of the rescission period, 
although that failure may result in civil liability or 
administrative sanctions. The payment terms set forth in Sec.  
1026.15(a)(3) apply to any repayment phase set forth in the 
agreement. Thus, the payment terms described in Sec.  1026.6(e)(2) 
for any repayment phase as well as for the draw period are 
``material disclosures.''
    3. Material disclosures--variable rate program. For a variable 
rate program, the material disclosures also include the disclosures 
listed in Sec.  1026.6(a)(1)(ii): the circumstances under which the 
rate may increase; the limitations on the increase; and the effect 
of an increase. The disclosures listed in Sec.  1026.6(a)(1)(ii) for 
any repayment phase also are material disclosures for variable-rate 
programs.
    4. Unexpired right of rescission. i. When the creditor has 
failed to take the action necessary to start the three-day 
rescission period running the right to rescind automatically lapses 
on the occurrence of the earliest of the following three events:
    A. The expiration of three years after the occurrence giving 
rise to the right of rescission.
    B. Transfer of all the consumer's interest in the property.
    C. Sale of the consumer's interest in the property, including a 
transaction in which the consumer sells the dwelling and takes back 
a purchase money note and mortgage or retains legal title through a 
device such as an installment sale contract.
    ii. Transfer of all the consumer's interest includes such 
transfers as bequests and gifts. A sale or transfer of the property 
need not be voluntary to terminate the right to rescind. For 
example, a foreclosure sale would terminate an unexpired right to 
rescind. As provided in section 125 of the Act, the three-year limit 
may be extended by an administrative proceeding to enforce the 
provisions of Sec.  1026.15. A partial transfer of the consumer's 
interest, such as a transfer bestowing co-ownership on a spouse, 
does not terminate the right of rescission.

Paragraph 15(a)(4)

    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any one of them may exercise that right and 
cancel the transaction on behalf of all. For example, if both a 
husband and wife have the right to rescind a transaction, either 
spouse acting alone may exercise the right and both are bound by the 
rescission.

15(b) Notice of Right To Rescind

    1. Who receives notice. Each consumer entitled to rescind must 
be given two copies of the rescission notice and the material 
disclosures.In a transaction involving joint owners, both of whom 
are entitled to rescind, both must receive the notice of the right 
to rescind and disclosures. For example, if both spouses are 
entitled to rescind a transaction, each must receive two copies of 
the rescission notice (one copy to each if the notice is provided in 
electronic form in accordance with the consumer consent and other 
applicable provisions of the E-Sign Act) and one copy of the 
disclosures.
    2. Format. The rescission notice may be physically separated 
from the material disclosures or combined with the material 
disclosures, so long as the information required to be included on 
the notice is set forth in a clear and conspicuous manner. See the 
model notices in Appendix G.
    3. Content. The notice must include all of the information 
outlined in Sec.  1026.15(b)(1) through (5). The requirement in 
Sec.  1026.15(b) that the transaction or occurrence be identified 
may be met by providing the date of the transaction or occurrence. 
The notice may include additional information related to the 
required information, such as:
    i. A description of the property subject to the security 
interest.
    ii. A statement that joint owners may have the right to rescind 
and that a rescission by one is effective for all.
    iii. The name and address of an agent of the creditor to receive 
notice of rescission.
    4. Time of providing notice. The notice required by Sec.  
1026.15(b) need not be given before the occurrence giving rise to 
the right of rescission. The creditor may deliver the notice after 
the occurrence, but the rescission period will not begin to run 
until the notice is given. For example, if the creditor provides the 
notice on May 15, but disclosures were given and the credit limit 
was raised on May 10, the 3-business-day rescission period will run 
from May 15.

15(c) Delay of Creditor's Performance

    1. General rule. i. Until the rescission period has expired and 
the creditor is reasonably satisfied that the consumer has not 
rescinded, the creditor must not, either directly or through a third 
party:
    A. Disburse advances to the consumer.
    B. Begin performing services for the consumer.
    C. Deliver materials to the consumer.
    ii. A creditor may, however, continue to allow transactions 
under an existing open-end credit plan during a rescission period 
that results solely from the addition of a security interest in the 
consumer's principal dwelling. (See comment 15(c)-3 for other 
actions that may be taken during the delay period.)
    2. Escrow. The creditor may disburse advances during the 
rescission period in a valid escrow arrangement. The creditor may 
not, however, appoint the consumer as ``trustee'' or ``escrow 
agent'' and distribute funds to the consumer in that capacity during 
the delay period.
    3. Actions during the delay period. Section 1026.15(c) does not 
prevent the creditor from taking other steps during the delay, short 
of beginning actual performance. Unless otherwise prohibited, such 
as by state law, the creditor may, for example:
    i. Prepare the cash advance check.
    ii. Perfect the security interest.
    iii. Accrue finance charges during the delay period.
    4. Performance by third party. The creditor is relieved from 
liability for failure to delay performance if a third party with no 
knowledge that the rescission right has been activated provides 
materials or services, as long as any debt incurred for materials or 
services obtained by the consumer during the rescission period is 
not secured by the security interest in the consumer's dwelling. For 
example, if a consumer uses a bank credit card to purchase materials 
from a merchant in an amount below the floor limit, the merchant 
might not contact the card issuer for authorization and therefore 
would not know that materials should not be provided.
    5. Delay beyond rescission period. i. The creditor must wait 
until it is reasonably satisfied that the consumer has not 
rescinded. For example, the creditor may satisfy itself by doing one 
of the following:
    A. Waiting a reasonable time after expiration of the rescission 
period to allow for delivery of a mailed notice.
    B. Obtaining a written statement from the consumer that the 
right has not been exercised.
    ii. When more than one consumer has the right to rescind, the 
creditor cannot reasonably rely on the assurance of only one 
consumer, because other consumers may exercise the right.

15(d) Effects of Rescission

Paragraph 15(d)(1)

    1. Termination of security interest. Any security interest 
giving rise to the right of rescission becomes void when the 
consumer exercises the right of rescission. The security interest is 
automatically negated, regardless of its status and whether or not 
it was recorded or perfected. Under Sec.  1026.15(d)(2), however, 
the creditor must take any action necessary to reflect the fact that 
the security interest no longer exists.
    2. Extent of termination. The creditor's security interest is 
void to the extent that it is related to the occurrence giving rise 
to the right of rescission. For example, upon rescission:
    i. If the consumer's right to rescind is activated by the 
opening of a plan, any security interest in the principal dwelling 
is void.
    ii. If the right arises due to an increase in the credit limit, 
the security interest is void as to the amount of credit extensions 
over the prior limit, but the security interest in

[[Page 79966]]

amounts up to the original credit limit is unaffected.
    iii. If the right arises with each individual credit extension, 
then the interest is void as to that extension, and other extensions 
are unaffected.

Paragraph 15(d)(2)

    1. Refunds to consumer. The consumer cannot be required to pay 
any amount in the form of money or property either to the creditor 
or to a third party as part of the occurrence subject to the right 
of rescission. Any amounts of this nature already paid by the 
consumer must be refunded. ``Any amount'' includes finance charges 
already accrued, as well as other charges such as broker fees, 
application and commitment fees, or fees for a title search or 
appraisal, whether paid to the creditor, paid by the consumer 
directly to a third party, or passed on from the creditor to the 
third party. It is irrelevant that these amounts may not represent 
profit to the creditor. For example:
    i. If the occurrence is the opening of the plan, the creditor 
must return any membership or application fee paid.
    ii. If the occurrence is the increase in a credit limit or the 
addition of a security interest, the creditor must return any fee 
imposed for a new credit report or filing fees.
    iii. If the occurrence is a credit extension, the creditors must 
return fees such as application, title, and appraisal or survey 
fees, as well as any finance charges related to the credit 
extension.
    2. Amounts not refundable to consumer. Creditors need not return 
any money given by the consumer to a third party outside of the 
occurrence, such as costs incurred for a building permit or for a 
zoning variance. Similarly, the term any amount does not apply to 
money or property given by the creditor to the consumer; those 
amounts must be tendered by the consumer to the creditor under Sec.  
1026.15(d)(3).
    3. Reflection of security interest termination. The creditor 
must take whatever steps are necessary to indicate that the security 
interest is terminated. Those steps include the cancellation of 
documents creating the security interest, and the filing of release 
or termination statements in the public record. In a transaction 
involving subcontractors or suppliers that also hold security 
interests related to the occurrence rescinded by the consumer, the 
creditor must insure that the termination of their security 
interests is also reflected. The 20-day period for the creditor's 
action refers to the time within which the creditor must begin the 
process. It does not require all necessary steps to have been 
completed within that time, but the creditor is responsible for 
seeing the process through to completion.

Paragraph 15(d)(3)

    1. Property exchange. Once the creditor has fulfilled its 
obligation under Sec.  1026.15(d)(2), the consumer must tender to 
the creditor any property or money the creditor has already 
delivered to the consumer. At the consumer's option, property may be 
tendered at the location of the property. For example, if fixtures 
or furniture have been delivered to the consumer's home, the 
consumer may tender them to the creditor by making them available 
for pick-up at the home, rather than physically returning them to 
the creditor's premises. Money already given to the consumer must be 
tendered at the creditor's place of business. For purpose of 
property exchange, the following additional rules apply:
    i. A cash advance is considered money for purposes of this 
section even if the creditor knows what the consumer intends to 
purchase with the money.
    ii. In a 3-party open-end credit plan (that is, if the creditor 
and seller are not the same or related persons), extensions by the 
creditor that are used by the consumer for purchases from third-
party sellers are considered to be the same as cash advances for 
purposes of tendering value to the creditor, even though the 
transaction is a purchase for other purposes under the regulation. 
For example, if a consumer exercises the unexpired right to rescind 
after using a 3-party credit card for one year, the consumer would 
tender the amount of the purchase price for the items charged to the 
account, rather than tendering the items themselves to the creditor.
    2. Reasonable value. If returning the property would be 
extremely burdensome to the consumer, the consumer may offer the 
creditor its reasonable value rather than returning the property 
itself. For example, if building materials have already been 
incorporated into the consumer's dwelling, the consumer may pay 
their reasonable value.

Paragraph 15(d)(4)

    1. Modifications. The procedures outlined in Sec.  1026.15(d)(2) 
and (3) may be modified by a court. For example, when a consumer is 
in bankruptcy proceedings and prohibited from returning anything to 
the creditor, or when the equities dictate, a modification might be 
made. The sequence of procedures under Sec.  1026.15(d)(2) and (3), 
or a court's modification of those procedures under Sec.  
1026.15(d)(4), does not affect a consumer's substantive right to 
rescind and to have the loan amount adjusted accordingly. Where the 
consumer's right to rescind is contested by the creditor, a court 
would normally determine whether the consumer has a right to rescind 
and determine the amounts owed before establishing the procedures 
for the parties to tender any money or property.

15(e) Consumer's Waiver of Right To Rescind

    1. Need for waiver. To waive the right to rescind, the consumer 
must have a bona fide personal financial emergency that must be met 
before the end of the rescission period. The existence of the 
consumer's waiver will not, of itself, automatically insulate the 
creditor from liability for failing to provide the right of 
rescission.
    2. Procedure. To waive or modify the right to rescind, the 
consumer must give a written statement that specifically waives or 
modifies the right, and also includes a brief description of the 
emergency. Each consumer entitled to rescind must sign the waiver 
statement. In a transaction involving multiple consumers, such as a 
husband and wife using their home as collateral, the waiver must 
bear the signatures of both spouses.

15(f) Exempt Transactions

    1. Residential mortgage transaction. Although residential 
mortgage transactions would seldom be made on bona fide open-end 
credit plans (under which repeated transactions must be reasonably 
contemplated), an advance on an open-end plan could be for a 
downpayment for the purchase of a dwelling that would then secure 
the remainder of the line. In such a case, only the particular 
advance for the downpayment would be exempt from the rescission 
right.
    2. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempt from Sec.  1026.15.
    3. Spreader clause. When the creditor holds a mortgage or deed 
of trust on the consumer's principal dwelling and that mortgage or 
deed of trust contains a ``spreader clause'' (also known as a 
``dragnet'' or cross-collateralization clause), subsequent 
occurrences such as the opening of a plan or individual credit 
extensions are subject to the right of rescission to the same degree 
as if the security interest were taken directly to secure the open-
end plan, unless the creditor effectively waives its security 
interest under the spreader clause with respect to the subsequent 
open-end credit extensions.

Section 1026.16--Advertising

    1. Clear and conspicuous standard--general. Section 1026.16 is 
subject to the general ``clear and conspicuous'' standard for 
subpart B (see Sec.  1026.5(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.  1026.16(d)(6), a promotional rate or promotional 
fee under Sec.  1026.16(g), or a deferred interest or similar offer 
under Sec.  1026.16(h). Other than the disclosure of certain terms 
described in Sec. Sec.  1026.16(d)(6), (g), or (h), 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; deferred interest or similar offers. i. For purposes of 
Sec.  1026.16(d)(6), a clear and conspicuous disclosure means that 
the required information in Sec.  1026.16(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.  1026.16(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.  1026.16(c) is deemed to satisfy the clear and 
conspicuous standard.
    ii. For purposes of Sec.  1026.16(g)(4) as it applies to written 
or electronic advertisements only, a clear and conspicuous 
disclosure means the required information in Sec.  1026.16(g)(4)(i) 
and, as applicable, (g)(4)(ii)

[[Page 79967]]

and (g)(4)(iii) must be equally prominent to the promotional rate or 
promotional fee to which it applies. If the information in Sec.  
1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and (g)(4)(iii) is 
the same type size as the promotional rate or promotional fee to 
which it applies, the disclosures would be deemed to be equally 
prominent. For purposes of Sec.  1026.16(h)(3) as it applies to 
written or electronic advertisements only, a clear and conspicuous 
disclosure means the required information in Sec.  1026.16(h)(3) 
must be equally prominent to each statement of ``no interest,'' ``no 
payments,'' ``deferred interest,'' ``same as cash,'' or similar term 
regarding interest or payments during the deferred interest period. 
If the information required to be disclosed under Sec.  
1026.16(h)(3) is the same type size as the statement of ``no 
interest,'' ``no payments,'' ``deferred interest,'' ``same as 
cash,'' or similar term regarding interest or payments during the 
deferred interest period, the disclosure 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.  
1026.40 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.  1026.16(d). (See also comment 
16(c)(1)-2.)
    4. Clear and conspicuous standard--televised advertisements for 
home-equity plans. For purposes of this section, including 
alternative disclosures as provided for by Sec.  1026.16(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.  1026.40 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.  1026.16(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.  1026.16(e), a clear and 
conspicuous disclosure in the context of an oral advertisement for 
home-equity plans subject to the requirements of Sec.  1026.40, 
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.

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 1026.16(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 16(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.  1026.6.
    2. Implicit terms. Section 1026.16(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.  1026.16(b)(1)(iii) 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.  
1026.6(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.  1026.6. 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.  
1026.16(b)(1)(ii), 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.  1026.16(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.  
1026.6(a)(1)(ii) or (b)(4)(ii).
    6. Membership fees for open-end (not home-secured) plans. For 
purposes of Sec.  1026.16(b)(1)(iii), membership fees that may be 
imposed on open-end (not home-secured) plans shall have the same 
meaning as in Sec.  1026.60(b)(2).

Paragraph 16(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.  
1026.16(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.  
1026.16(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.  
1026.16(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.  1026.16(c).

Paragraph 16(c)(1)

    1. General. Section 1026.16(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.  1026.16(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

[[Page 79968]]

Sec.  1026.16(c)(1), any statement of terms set forth in Sec.  
1026.6 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.  1026.16(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.
    2. Fees to open the plan. Section 1026.16(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.  1026.40(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.  1026.16(d)(4)(i) and (d)(4)(ii).
    4. Misleading terms prohibited. Under Sec.  1026.16(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 1026.16(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.  1026.16(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.  1026.16(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 
1026.16(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 
email 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.  1026.16, not solely 
the rules in Sec.  1026.16(d). If an advertisement contains 
information (such as the payment terms) that triggers the duty under 
Sec.  1026.16(d) to state the annual percentage rate, the additional 
disclosures in Sec.  1026.16(b) must be provided in the 
advertisement. While Sec.  1026.16(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.  
1026.16(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.  
1026.16, except Sec.  1026.16(g), and not by the closed-end 
advertising rules in Sec.  1026.24. Thus, if a creditor states 
payment information about the repayment phase, this will trigger the 
duty to provide additional information under Sec.  1026.16, but not 
under Sec.  1026.24.
    9. Balloon payment. See comment 40(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

[[Page 79969]]

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 and Fees

    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.  
1026.16(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.  
1026.60(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 or 
introductory fee 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.  1026.16(g)(4)(i) and, as applicable, (g)(4)(ii) and 
(g)(4)(iii) that is in the same paragraph as the first listing of 
the promotional rate or promotional fee 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.  1026.16(g)(4) as it 
applies to written or electronic advertisements, the first listing 
of the promotional rate or promotional fee is the most prominent 
listing of the rate or fee 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 or promotional fee does not appear on the front 
side of the first page of the principal promotional document, then 
the first listing of the promotional rate or promotional fee is the 
most prominent listing of the rate or fee on the subsequent pages of 
the principal promotional document. If the promotional rate or 
promotional fee 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 or fee on the front side of 
the first page of each document listing the promotional rate or 
promotional fee. If the promotional rate or promotional fee does not 
appear on the front side of the first page of a document, then the 
first listing of the promotional rate or promotional fee is the most 
prominent listing of the rate or fee on the subsequent pages of the 
document. If the listing of the promotional rate or promotional fee 
with the largest type size on the front side of the first page (or 
subsequent pages if the promotional rate or promotional fee is not 
listed on the front side of the first page) of the principal 
promotional document (or each document listing the promotional rate 
or promotional fee if the promotional rate or promotional fee 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.  1026.16(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%).

16(h) Deferred Interest or Similar Offers

    1. Deferred interest or similar offers clarified. Deferred 
interest or similar offers do not include offers that allow a 
consumer to skip payments during a specified period of time, and 
under which the consumer is not obligated under any circumstances 
for any interest or other finance charges that could be attributable 
to that period. Deferred interest or similar offers also do not 
include 0% annual percentage rate offers where a consumer is not 
obligated under any circumstances for interest attributable to the 
time period the 0% annual percentage rate was in effect, though such 
offers may be considered promotional rates under Sec.  
1026.16(g)(2)(i). Deferred interest or similar offers also do not 
include skip payment programs that have no required minimum payment 
for one or more billing cycles but where interest continues to 
accrue and is imposed during that period.
    2. Deferred interest period clarified. Although the terms of an 
advertised deferred interest or similar offer may provide that a 
creditor may charge the accrued interest if the balance is not paid 
in full by a certain date, creditors sometimes have an informal 
policy or practice that delays charging the accrued interest for 
payment received a brief period of time after the date upon which a 
creditor has the contractual right to charge the accrued interest. 
The advertisement need not include the end of an informal ``courtesy 
period'' in disclosing the deferred interest period under Sec.  
1026.16(h)(3).
    3. Immediate proximity. For written or electronic 
advertisements, including the deferred interest period in the same 
phrase as the statement of ``no interest,'' ``no payments,'' 
``deferred interest,'' or ``same as cash'' or similar term regarding 
interest or payments during the deferred interest period is deemed 
to be in immediate proximity of the statement.
    4. Prominent location closely proximate. For written or 
electronic advertisements, information required to be disclosed in 
Sec.  1026.16(h)(4)(i) and (ii) that is in the same paragraph as the 
first statement of ``no interest,'' ``no payments,'' ``deferred 
interest,'' or ``same as cash'' or similar term regarding interest 
or payments during the deferred interest period is deemed to be in a 
prominent location closely proximate to the statement. Information 
disclosed in a footnote is not considered in a prominent location 
closely proximate to the statement.
    5. First listing. For purposes of Sec.  1026.16(h)(4) as it 
applies to written or electronic advertisements, the first statement 
of ``no interest,'' ``no payments,'' ``deferred interest,'' ``same 
as cash,'' or similar term regarding interest or payments during the 
deferred interest period is the most prominent listing of one of 
these statements 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 one of 
the statements does not appear on the front side of the first page 
of the principal promotional document, then the first listing of one 
of these statements is the most prominent listing of a statement on 
the subsequent pages of the principal promotional document. If one 
of the statements is not listed on the principal promotional 
document or there is no principal promotional document, the first 
listing of one of these statements is the most prominent listing of 
the statement on the front side of the first page of each document 
containing one of these statements. If one of the statements does 
not appear on the front side of the first page of a document, then 
the first listing of one of these statements is the most prominent 
listing of a statement on the subsequent pages of the document. If 
the listing of one of these statements with the largest type size on 
the front side of the first page (or subsequent pages if one of 
these statements is not listed on the front side of the first page) 
of the principal promotional document (or each document listing one 
of these statements if a statement 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.  1026.16(h)(4).
    6. Additional information. Consistent with comment 5(a)-2, the 
information required under Sec.  1026.16(h)(4) need not be 
segregated from other information regarding the deferred interest or 
similar offer. Advertisements may also be required to provide 
additional information pursuant to Sec.  1026.16(b) though such 
information need not be integrated with the information required 
under Sec.  1026.16(h)(4).
    7. Examples. Examples of disclosures that could be used to 
comply with the requirements of Sec.  1026.16(h)(3) include: ``no 
interest if paid in full within 6 months'' and ``no interest if paid 
in full by December 31, 2010.''

Subpart C--Closed-End Credit

Section 1026.17--General Disclosure Requirements

17(a) Form of Disclosures

Paragraph 17(a)(1)

    1. Clear and conspicuous. This standard requires that 
disclosures be in a reasonably

[[Page 79970]]

understandable form. For example, while the regulation requires no 
mathematical progression or format, the disclosures must be 
presented in a way that does not obscure the relationship of the 
terms to each other. In addition, although no minimum type size is 
mandated (except for the interest rate and payment summary for 
mortgage transactions required by Sec.  1026.18(s)), the disclosures 
must be legible, whether typewritten, handwritten, or printed by 
computer.
    2. Segregation of disclosures. i. The disclosures may be grouped 
together and segregated from other information in a variety of ways. 
For example, the disclosures may appear on a separate sheet of paper 
or may be set off from other information on the contract or other 
documents:
    A. By outlining them in a box.
    B. By bold print dividing lines.
    C. By a different color background.
    D. By a different type style.
    ii. The general segregation requirement described in this 
subparagraph does not apply to the disclosures required under 
Sec. Sec.  1026.19(b) and 1026.20(c) although the disclosures must 
be clear and conspicuous.
    3. Location. The regulation imposes no specific location 
requirements on the segregated disclosures. For example:
    i. They may appear on a disclosure statement separate from all 
other material.
    ii. They may be placed on the same document with the credit 
contract or other information, so long as they are segregated from 
that information.
    iii. They may be shown on the front or back of a document.
    iv. They need not begin at the top of a page.
    v. They may be continued from one page to another.
    4. Content of segregated disclosures. Section 1026.17(a)(1) 
contains exceptions to the requirement that the disclosures under 
Sec.  1026.18 be segregated from material that is not directly 
related to those disclosures. Section 1026.17(a)(1) lists the items 
that may be added to the segregated disclosures, even though not 
directly related to those disclosures. The section also lists the 
items required under Sec.  1026.18 that may be deleted from the 
segregated disclosures and appear elsewhere. Any one or more of 
these additions or deletions may be combined and appear either 
together with or separate from the segregated disclosures. The 
itemization of the amount financed under Sec.  1026.18(c), however, 
must be separate from the other segregated disclosures under Sec.  
1026.18, except for private education loan disclosures made in 
compliance with Sec.  1026.47. If a creditor chooses to include the 
security interest charges required to be itemized under Sec.  
1026.4(e) and Sec.  1026.18(o) in the amount financed itemization, 
it need not list these charges elsewhere.
    5. Directly related. The segregated disclosures may, at the 
creditor's option, include any information that is directly related 
to those disclosures. The following is directly related information:
    i. A description of a grace period after which a late payment 
charge will be imposed. For example, the disclosure given under 
Sec.  1026.18(l) may state that a late charge will apply to ``any 
payment received more than 15 days after the due date.''
    ii. A statement that the transaction is not secured. For 
example, the creditor may add a category labeled ``unsecured'' or 
``not secured'' to the security interest disclosures given under 
Sec.  1026.18(m).
    iii. The basis for any estimates used in making disclosures. For 
example, if the maturity date of a loan depends solely on the 
occurrence of a future event, the creditor may indicate that the 
disclosures assume that event will occur at a certain time.
    iv. The conditions under which a demand feature may be 
exercised. For example, in a loan subject to demand after five 
years, the disclosures may state that the loan will become payable 
on demand in five years.
    v. An explanation of the use of pronouns or other references to 
the parties to the transaction. For example, the disclosures may 
state, `` `You' refers to the customer and `we' refers to the 
creditor.''
    vi. Instructions to the creditor or its employees on the use of 
a multiple-purpose form. For example, the disclosures may state, 
``Check box if applicable.''
    vii. A statement that the borrower may pay a minimum finance 
charge upon prepayment in a simple-interest transaction. For 
example, when state law prohibits penalties, but would allow a 
minimum finance charge in the event of prepayment, the creditor may 
make the Sec.  1026.18(k)(1) disclosure by stating, ``You may be 
charged a minimum finance charge.''
    viii. A brief reference to negative amortization in variable-
rate transactions. For example, in the variable-rate disclosure, the 
creditor may include a short statement such as ``Unpaid interest 
will be added to principal.'' (See the commentary to Sec.  
1026.18(f)(1)(iii).)
    ix. A brief caption identifying the disclosures. For example, 
the disclosures may bear a general title such as ``Federal Truth in 
Lending Disclosures'' or a descriptive title such as ``Real Estate 
Loan Disclosures.''
    x. A statement that a due-on-sale clause or other conditions on 
assumption are contained in the loan document. For example, the 
disclosure given under Sec.  1026.18(q) may state, ``Someone buying 
your home may, subject to conditions in the due-on-sale clause 
contained in the loan document, assume the remainder of the mortgage 
on the original terms.''
    xi. If a state or Federal law prohibits prepayment penalties and 
excludes the charging of interest after prepayment from coverage as 
a penalty, a statement that the borrower may have to pay interest 
for some period after prepayment in full. The disclosure given under 
Sec.  1026.18(k) may state, for example, ``If you prepay your loan 
on other than the regular installment date, you may be assessed 
interest charges until the end of the month.''
    xii. More than one hypothetical example under Sec.  
1026.18(f)(1)(iv) in transactions with more than one variable-rate 
feature. For example, in a variable-rate transaction with an option 
permitting consumers to convert to a fixed-rate transaction, the 
disclosures may include an example illustrating the effects on the 
payment terms of an increase resulting from conversion in addition 
to the example illustrating an increase resulting from changes in 
the index.
    xiii. The disclosures set forth under Sec.  1026.18(f)(1) for 
variable-rate transactions subject to Sec.  1026.18(f)(2).
    xiv. A statement whether or not a subsequent purchaser of the 
property securing an obligation may be permitted to assume the 
remaining obligation on its original terms.
    xv. A late-payment fee disclosure under Sec.  1026.18(l) on a 
single payment loan.
    xvi. The notice set forth in Sec.  1026.19(a)(4), in a closed-
end transaction not subject to Sec.  1026.19(a)(1)(i). In a mortgage 
transaction subject to Sec.  1026.19(a)(1)(i), the creditor must 
disclose the notice contained in Sec.  1026.19(a)(4) grouped 
together with the disclosures made under Sec.  1026.18. See comment 
19(a)(4)-1.
    6. Multiple-purpose forms. The creditor may design a disclosure 
statement that can be used for more than one type of transaction, so 
long as the required disclosures for individual transactions are 
clear and conspicuous. (See the commentary to Appendices G and H for 
a discussion of the treatment of disclosures that do not apply to 
specific transactions.) Any disclosure listed in Sec.  1026.18 
(except the itemization of the amount financed under Sec.  
1026.18(c) for transactions other than private education loans) may 
be included on a standard disclosure statement even though not all 
of the creditor's transactions include those features. For example, 
the statement may include:
    i. The variable rate disclosure under Sec.  1026.18(f).
    ii. The demand feature disclosure under Sec.  1026.18(i).
    iii. A reference to the possibility of a security interest 
arising from a spreader clause, under Sec.  1026.18(m).
    iv. The assumption policy disclosure under Sec.  1026.18(q).
    v. The required deposit disclosure under Sec.  1026.18(r).
    7. Balloon payment financing with leasing characteristics. In 
certain credit sale or loan transactions, a consumer may reduce the 
dollar amount of the payments to be made during the course of the 
transaction by agreeing to make, at the end of the loan term, a 
large final payment based on the expected residual value of the 
property. The consumer may have a number of options with respect to 
the final payment, including, among other things, retaining the 
property and making the final payment, refinancing the final 
payment, or transferring the property to the creditor in lieu of the 
final payment. Such transactions may have some of the 
characteristics of lease transactions subject to Regulation M (12 
CFR Part 1013), but are considered credit transactions where the 
consumer assumes the indicia of ownership, including the risks, 
burdens and benefits of ownership upon consummation. These 
transactions are governed by the disclosure requirements of this 
part instead of Regulation M. Creditors should not include in the 
segregated Truth in Lending disclosures additional information. 
Thus, disclosures should show the large final

[[Page 79971]]

payment in the payment schedule and should not, for example, reflect 
the other options available to the consumer at maturity.

Paragraph 17(a)(2)

    1. When disclosures must be more conspicuous. The following 
rules apply to the requirement that the terms ``annual percentage 
rate'' (except for private education loan disclosures made in 
compliance with Sec.  1026.47) and ``finance charge'' be shown more 
conspicuously:
    i. The terms must be more conspicuous only in relation to the 
other required disclosures under Sec.  1026.18. For example, when 
the disclosures are included on the contract document, those two 
terms need not be more conspicuous as compared to the heading on the 
contract document or information required by state law.
    ii. The terms need not be more conspicuous except as part of the 
finance charge and annual percentage rate disclosures under Sec.  
1026.18(d) and (e), although they may, at the creditor's option, be 
highlighted wherever used in the required disclosures. For example, 
the terms may, but need not, be highlighted when used in disclosing 
a prepayment penalty under Sec.  1026.18(k) or a required deposit 
under Sec.  1026.18(r).
    iii. The creditor's identity under Sec.  1026.18(a) may, but 
need not, be more prominently displayed than the finance charge and 
annual percentage rate.
    iv. The terms need not be more conspicuous than figures 
(including, for example, numbers, percentages, and dollar signs).
    2. Making disclosures more conspicuous. The terms ``finance 
charge'' and (except for private education loan disclosures made in 
compliance with Sec.  1026.47) ``annual percentage rate'' may be 
made more conspicuous in any way that highlights them in relation to 
the other required disclosures. For example, they may be:
    i. Capitalized when other disclosures are printed in capital and 
lower case.
    ii. Printed in larger type, bold print or different type face.
    iii. Printed in a contrasting color.
    iv. Underlined.
    v. Set off with asterisks.

17(b) Time of Disclosures

    1. Consummation. As a general rule, disclosures must be made 
before ``consummation'' of the transaction. The disclosures need not 
be given by any particular time before consummation, except in 
certain mortgage transactions and variable-rate transactions secured 
by the consumer's principal dwelling with a term greater than one 
year under Sec.  1026.19, and in private education loan transactions 
disclosed in compliance with Sec. Sec.  1026.46 and 1026.47. (See 
the commentary to Sec.  1026.2(a)(13) regarding the definition of 
consummation.)
    2. Converting open-end to closed-end credit. Except for home 
equity plans subject to Sec.  1026.40 in which the agreement 
provides for a repayment phase, 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. (See 
the commentary to Sec.  1026.19(b) for the timing rules for 
additional disclosures required upon the conversion to a variable-
rate transaction secured by a consumer's principal dwelling with a 
term greater than one year.) If consummation of the closed-end 
transaction occurs at the same time as the consumer enters into the 
open-end agreement, the closed-end credit disclosures may be given 
at the time of conversion. If disclosures are delayed until 
conversion and the closed-end transaction has a variable-rate 
feature, disclosures should be based on the rate in effect at the 
time of conversion. (See the commentary to Sec.  1026.5 regarding 
conversion of closed-end to open-end credit.)
    3. Disclosures provided on credit contracts. Creditors must give 
the required disclosures to the consumer in writing, in a form that 
the consumer may keep, before consummation of the transaction. See 
Sec.  1026.17(a)(1) and (b). Sometimes the disclosures are placed on 
the same document with the credit contract. Creditors are not 
required to give the consumer two separate copies of the document 
before consummation, one for the consumer to keep and a second copy 
for the consumer to execute. The disclosure requirement is satisfied 
if the creditor gives a copy of the document containing the 
unexecuted credit contract and disclosures to the consumer to read 
and sign; and the consumer receives a copy to keep at the time the 
consumer becomes obligated. It is not sufficient for the creditor 
merely to show the consumer the document containing the disclosures 
before the consumer signs and becomes obligated. The consumer must 
be free to take possession of and review the document in its 
entirety before signing.
    i. Example. To illustrate, a creditor gives a consumer a 
multiple-copy form containing a credit agreement and TILA 
disclosures. The consumer reviews and signs the form and returns it 
to the creditor, who separates the copies and gives one copy to the 
consumer to keep. The creditor has satisfied the disclosure 
requirement.

17(c) Basis of Disclosures and Use of Estimates

Paragraph 17(c)(1)

    1. Legal obligation. The disclosures shall reflect the credit 
terms to which the parties are legally bound as of the outset of the 
transaction. In the case of disclosures required under Sec.  
1026.20(c), the disclosures shall reflect the credit terms to which 
the parties are legally bound when the disclosures are provided. The 
legal obligation is determined by applicable state law or other law. 
(Certain transactions are specifically addressed in this commentary. 
See, for example, the discussion of buydown transactions elsewhere 
in the commentary to Sec.  1026.17(c).) 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.
    2. Modification of obligation. The legal obligation normally is 
presumed to be contained in the note or contract that evidences the 
agreement. But this presumption is rebutted if another agreement 
between the parties legally modifies that note or contract. If the 
parties informally agree to a modification of the legal obligation, 
the modification should not be reflected in the disclosures unless 
it rises to the level of a change in the terms of the legal 
obligation. For example:
    i. If the creditor offers a preferential rate, such as an 
employee preferred rate, the disclosures should reflect the terms of 
the legal obligation. (See the commentary to Sec.  1026.19(b) for an 
example of a preferred-rate transaction that is a variable-rate 
transaction.)
    ii. If the contract provides for a certain monthly payment 
schedule but payments are made on a voluntary payroll deduction plan 
or an informal principal-reduction agreement, the disclosures should 
reflect the schedule in the contract.
    iii. If the contract provides for regular monthly payments but 
the creditor informally permits the consumer to defer payments from 
time to time, for instance, to take account of holiday seasons or 
seasonal employment, the disclosures should reflect the regular 
monthly payments.
    3. Third-party buydowns. In certain transactions, a seller or 
other third party may pay an amount, either to the creditor or to 
the consumer, in order to reduce the consumer's payments or buy down 
the interest rate for all or a portion of the credit term. For 
example, a consumer and a bank agree to a mortgage with an interest 
rate of 15% and level payments over 25 years. By a separate 
agreement, the seller of the property agrees to subsidize the 
consumer's payments for the first 2 years of the mortgage, giving 
the consumer an effective rate of 12% for that period.
    i. If the lower rate is reflected in the credit contract between 
the consumer and the bank, the disclosures must take the buydown 
into account. For example, the annual percentage rate must be a 
composite rate that takes account of both the lower initial rate and 
the higher subsequent rate, and the payment schedule disclosures 
must reflect the 2 payment levels. However, the amount paid by the 
seller would not be specifically reflected in the disclosures given 
by the bank, since that amount constitutes seller's points and thus 
is not part of the finance charge.
    ii. If the lower rate is not reflected in the credit contract 
between the consumer and the bank and the consumer is legally bound 
to the 15% rate from the outset, the disclosures given by the bank 
must not reflect the seller buydown in any way. For example, the 
annual percentage rate and payment schedule would not take into 
account the reduction in the interest rate and payment level for the 
first 2 years resulting from the buydown.
    4. Consumer buydowns. In certain transactions, the consumer may 
pay an amount to the creditor to reduce the payments or obtain a 
lower interest rate on the transaction. Consumer buydowns must be 
reflected in the disclosures given for that transaction. To 
illustrate, in a mortgage transaction, the creditor and consumer 
agree

[[Page 79972]]

to a note specifying a 14 percent interest rate. However, in a 
separate document, the consumer agrees to pay an amount to the 
creditor at consummation in return for a reduction in the interest 
rate to 12 percent for a portion of the mortgage term. The amount 
paid by the consumer may be deposited in an escrow account or may be 
retained by the creditor. Depending upon the buydown plan, the 
consumer's prepayment of the obligation may or may not result in a 
portion of the amount being credited or refunded to the consumer. In 
the disclosures given for the mortgage, the creditor must reflect 
the terms of the buydown agreement.
    i. For example:
    A. The amount paid by the consumer is a prepaid finance charge 
(even if deposited in an escrow account).
    B. A composite annual percentage rate must be calculated, taking 
into account both interest rates, as well as the effect of the 
prepaid finance charge.
    C. The payment schedule must reflect the multiple payment levels 
resulting from the buydown.
    ii. The rules regarding consumer buydowns do not apply to 
transactions known as ``lender buydowns.'' In lender buydowns, a 
creditor pays an amount (either into an account or to the party to 
whom the obligation is sold) to reduce the consumer's payments or 
interest rate for all or a portion of the credit term. Typically, 
these transactions are structured as a buydown of the interest rate 
during an initial period of the transaction with a higher than usual 
rate for the remainder of the term. The disclosures for lender 
buydowns should be based on the terms of the legal obligation 
between the consumer and the creditor. (See comment 17(c)(1)-3 for 
the analogous rules concerning third-party buydowns.)
    5. Split buydowns. In certain transactions, a third party (such 
as a seller) and a consumer both pay an amount to the creditor to 
reduce the interest rate. The creditor must include the portion paid 
by the consumer in the finance charge and disclose the corresponding 
multiple payment levels and composite annual percentage rate. The 
portion paid by the third party and the corresponding reduction in 
interest rate, however, should not be reflected in the disclosures 
unless the lower rate is reflected in the credit contract. (See the 
discussion on third-party and consumer buydown transactions 
elsewhere in the commentary to Sec.  1026.17(c).)
    6. Wrap-around financing. Wrap-around transactions, usually 
loans, involve the creditor's wrapping the outstanding balance on an 
existing loan and advancing additional funds to the consumer. The 
pre-existing loan, which is wrapped, may be to the same consumer or 
to a different consumer. In either case, the consumer makes a single 
payment to the new creditor, who makes the payments on the pre-
existing loan to the original creditor. Wrap-around loans or sales 
are considered new single-advance transactions, with an amount 
financed equaling the sum of the new funds advanced by the wrap 
creditor and the remaining principal owed to the original creditor 
on the pre-existing loan. In disclosing the itemization of the 
amount financed, the creditor may use a label such as ``the amount 
that will be paid to creditor X'' to describe the remaining 
principal balance on the pre-existing loan. This approach to Truth 
in Lending calculations has no effect on calculations required by 
other statutes, such as state usury laws.
    7. Wrap-around financing with balloon payments. For wrap-around 
transactions involving a large final payment of the new funds before 
the maturity of the pre-existing loan, the amount financed is the 
sum of the new funds and the remaining principal on the pre-existing 
loan. The disclosures should be based on the shorter term of the 
wrap loan, with a large final payment of both the new funds and the 
total remaining principal on the pre-existing loan (although only 
the wrap loan will actually be paid off at that time).
    8. Basis of disclosures in variable-rate transactions. The 
disclosures for a variable-rate transaction must be given for the 
full term of the transaction and must be based on the terms in 
effect at the time of consummation. Creditors should base the 
disclosures only on the initial rate and should not assume that this 
rate will increase. For example, in a loan with an initial rate of 
10 percent and a 5 percentage points rate cap, creditors should base 
the disclosures on the initial rate and should not assume that this 
rate will increase 5 percentage points. However, in a variable-rate 
transaction with a seller buydown that is reflected in the credit 
contract, a consumer buydown, or a discounted or premium rate, 
disclosures should not be based solely on the initial terms. In 
those transactions, the disclosed annual percentage rate should be a 
composite rate based on the rate in effect during the initial period 
and the rate that is the basis of the variable-rate feature for the 
remainder of the term. (See the commentary to Sec.  1026.17(c) for a 
discussion of buydown, discounted, and premium transactions and the 
commentary to Sec.  1026.19(a)(2) for a discussion of the 
redisclosure in certain mortgage transactions with a variable-rate 
feature.)
    9. Use of estimates in variable-rate transactions. The variable-
rate feature does not, by itself, make the disclosures estimates.
    10. Discounted and premium variable-rate transactions. In some 
variable-rate transactions, 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 
charged to consumers is lower than the rate would be if it were 
calculated using the index or formula. However, in some cases the 
initial rate may be higher. In a discounted transaction, 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 Treasury bill rate at consummation 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.
    i. When creditors use an initial interest rate that is not 
calculated using the index or formula for later rate adjustments, 
the disclosures should reflect a composite annual percentage rate 
based on the initial rate for as long as it is charged and, for the 
remainder of the term, the rate that would have been applied using 
the index or formula at the time of consummation. The rate at 
consummation need not be used if a contract provides for a delay in 
the implementation of changes in an index value. For example, if the 
contract specifies that rate changes are based on the index value in 
effect 45 days before the change date, creditors may use any index 
value in effect during the 45 day period before consummation in 
calculating a composite annual percentage rate.
    ii. The effect of the multiple rates must also be reflected in 
the calculation and disclosure of the finance charge, total of 
payments, and payment schedule.
    iii. If a loan contains a rate or payment cap that would prevent 
the initial rate or payment, at the time of the first adjustment, 
from changing to the rate determined by the index or formula at 
consummation, the effect of that rate or payment cap should be 
reflected in the disclosures.
    iv. Because these transactions involve irregular payment 
amounts, an annual percentage rate tolerance of [frac14] of 1 
percent applies, in accordance with Sec.  1026.22(a)(3).
    v. Examples of discounted variable-rate transactions include:
    A. A 30-year loan for $100,000 with no prepaid finance charges 
and rates determined by the Treasury bill rate plus 2 percent. Rate 
and payment adjustments are made annually. Although the Treasury 
bill rate at the time of consummation is 10 percent, the creditor 
sets the interest rate for one year at 9 percent, instead of 12 
percent according to the formula. The disclosures should reflect a 
composite annual percentage rate of 11.63 percent based on 9 percent 
for one year and 12 percent for 29 years. Reflecting those two rate 
levels, the payment schedule should show 12 payments of $804.62 and 
348 payments of $1,025.31. The finance charge should be $266,463.32 
and the total of payments $366,463.32.
    B. Same loan as above, except with a 2 percent rate cap on 
periodic adjustments. The disclosures should reflect a composite 
annual percentage rate of 11.53 percent based on 9 percent for the 
first year, 11 percent for the second year, and 12 percent for the 
remaining 28 years. Reflecting those three rate levels, the payment 
schedule should show 12 payments of $804.62, 12 payments of $950.09, 
and 336 payments of $1,024.34. The finance charge should be 
$265,234.76 and the total of payments $365,234.76.
    C. Same loan as above, except with a 7 \1/2\ percent cap on 
payment adjustments. The disclosures should reflect a composite 
annual percentage rate of 11.64 percent, based on 9 percent for one 
year and 12 percent for 29 years. Because of the payment cap, five 
levels of payments should be reflected. The payment schedule should 
show 12 payments of $804.62, 12 payments of $864.97, 12 payments of 
$929.84, 12 payments of $999.58, and 312 payments of $1,070.04. The 
finance charge should be $277,040.60, and the total of payments 
$377,040.60.
    vi. A loan in which the initial interest rate is set according 
to the index or formula used for later adjustments but is not set at 
the

[[Page 79973]]

value of the index or formula at consummation is not a discounted 
variable-rate loan. For example, if a creditor commits to an initial 
rate based on the formula on a date prior to consummation, but the 
index has moved during the period between that time and 
consummation, a creditor should base its disclosures on the initial 
rate.
    11. Examples of variable-rate transactions. Variable-rate 
transactions include:
    i. Renewable balloon-payment instruments where the creditor is 
both unconditionally obligated to renew the balloon-payment loan at 
the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. Disclosures 
must be based on the payment amortization (unless the specified term 
of the obligation with renewals is shorter) and on the rate in 
effect at the time of consummation of the transaction. (Examples of 
conditions within a consumer's control include requirements that a 
consumer be current in payments or continue to reside in the 
mortgaged property. In contrast, setting a limit on the rate at 
which the creditor would be obligated to renew or reserving the 
right to change the credit standards at the time of renewal are 
examples of conditions outside a consumer's control.) If, however, a 
creditor is not obligated to renew as described above, disclosures 
must be based on the term of the balloon-payment loan. Disclosures 
also must be based on the term of the balloon-payment loan in 
balloon-payment instruments in which the legal obligation provides 
that the loan will be renewed by a ``refinancing'' of the 
obligation, as that term is defined by Sec.  1026.20(a). If it 
cannot be determined from the legal obligation that the loan will be 
renewed by a ``refinancing,'' disclosures must be based either on 
the term of the balloon-payment loan or on the payment amortization, 
depending on whether the creditor is unconditionally obligated to 
renew the loan as described above. (This discussion does not apply 
to construction loans subject to Sec.  1026.17(c)(6).)
    ii. ``Shared-equity'' or ``shared-appreciation'' mortgages that 
have a fixed rate of interest and an appreciation share based on the 
consumer's equity in the mortgaged property. The appreciation share 
is payable in a lump sum at a specified time. Disclosures must be 
based on the fixed interest rate. (As discussed in the commentary to 
Sec.  1026.2, other types of shared-equity arrangements are not 
considered ``credit'' and are not subject to Regulation Z.)
    iii. Preferred-rate loans where the terms of the legal 
obligation provide that the initial underlying rate is fixed but 
will increase upon the occurrence of some event, such as an employee 
leaving the employ of the creditor, and the note reflects the 
preferred rate. The disclosures are to be based on the preferred 
rate.
    iv. Graduated-payment mortgages and step-rate transactions 
without a variable-rate feature are not considered variable-rate 
transactions.
    v. ``Price level adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic 
adjustments to payments and the loan balance to reflect changes in 
an index measuring prices or inflation. Disclosures are to be based 
on the fixed interest rate.
    12. Graduated payment adjustable rate mortgages. These mortgages 
involve both a variable interest rate and scheduled variations in 
payment amounts during the loan term. For example, under these 
plans, a series of graduated payments may be scheduled before rate 
adjustments affect payment amounts, or the initial scheduled payment 
may remain constant for a set period before rate adjustments affect 
the payment amount. In any case, the initial payment amount may be 
insufficient to cover the scheduled interest, causing negative 
amortization from the outset of the transaction. In these 
transactions, the disclosures should treat these features as 
follows:
    i. The finance charge includes the amount of negative 
amortization based on the assumption that the rate in effect at 
consummation remains unchanged.
    ii. The amount financed does not include the amount of negative 
amortization.
    iii. As in any variable-rate transaction, the annual percentage 
rate is based on the terms in effect at consummation.
    iv. The schedule of payments discloses the amount of any 
scheduled initial payments followed by an adjusted level of payments 
based on the initial interest rate. Since some mortgage plans 
contain limits on the amount of the payment adjustment, the payment 
schedule may require several different levels of payments, even with 
the assumption that the original interest rate does not increase.
    13. Growth-equity mortgages. i. Also referred to as payment-
escalated mortgages, these mortgage plans involve scheduled payment 
increases to prematurely amortize the loan. The initial payment 
amount is determined as for a long-term loan with a fixed interest 
rate. Payment increases are scheduled periodically, based on changes 
in an index. The larger payments result in accelerated amortization 
of the loan. In disclosing these mortgage plans, creditors may 
either:
    A. Estimate the amount of payment increases, based on the best 
information reasonably available; or
    B. Disclose by analogy to the variable-rate disclosures in 
1026.18(f)(1).
    ii. This discussion does not apply to growth-equity mortgages in 
which the amount of payment increases can be accurately determined 
at the time of disclosure. For these mortgages, as for graduated-
payment mortgages, disclosures should reflect the scheduled 
increases in payments.
    14. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, typically involve the 
disbursement of monthly advances to the consumer for a fixed period 
or until the occurrence of an event such as the consumer's death. 
Repayment of the loan (generally a single payment of principal and 
accrued interest) may be required to be made at the end of the 
disbursements or, for example, upon the death of the consumer. In 
disclosing these transactions, creditors must apply the following 
rules, as applicable:
    i. If the reverse mortgage has a specified period for 
disbursements but repayment is due only upon the occurrence of a 
future event such as the death of the consumer, the creditor must 
assume that disbursements will be made until they are scheduled to 
end. The creditor must assume repayment will occur when 
disbursements end (or within a period following the final 
disbursement which is not longer than the regular interval between 
disbursements). This assumption should be used even though repayment 
may occur before or after the disbursements are scheduled to end. In 
such cases, the creditor may include a statement such as ``The 
disclosures assume that you will repay the loan at the time our 
payments to you end. As provided in your agreement, your repayment 
may be required at a different time.''
    ii. If the reverse mortgage has neither a specified period for 
disbursements nor a specified repayment date and these terms will be 
determined solely by reference to future events including the 
consumer's death, the creditor may assume that the disbursements 
will end upon the consumer's death (estimated by using actuarial 
tables, for example) and that repayment will be required at the same 
time (or within a period following the date of the final 
disbursement which is not longer than the regular interval for 
disbursements). Alternatively, the creditor may base the disclosures 
upon another future event it estimates will be most likely to occur 
first. (If terms will be determined by reference to future events 
which do not include the consumer's death, the creditor must base 
the disclosures upon the occurrence of the event estimated to be 
most likely to occur first.)
    iii. In making the disclosures, the creditor must assume that 
all disbursements and accrued interest will be paid by the consumer. 
For example, if the note has a nonrecourse provision providing that 
the consumer is not obligated for an amount greater than the value 
of the house, the creditor must nonetheless assume that the full 
amount to be disbursed will be repaid. In this case, however, the 
creditor may include a statement such as ``The disclosures assume 
full repayment of the amount advanced plus accrued interest, 
although the amount you may be required to pay is limited by your 
agreement.''
    iv. Some reverse mortgages provide that some or all of the 
appreciation in the value of the property will be shared between the 
consumer and the creditor. Such loans are considered variable-rate 
mortgages, as described in comment 17(c)(1)-11, and the appreciation 
feature must be disclosed in accordance with Sec.  1026.18(f)(1). If 
the reverse mortgage has a variable interest rate, is written for a 
term greater than one year, and is secured by the consumer's 
principal dwelling, the shared appreciation feature must be 
described under Sec.  1026.19(b)(2)(vii).
    15. Morris Plan transactions. When a deposit account is created 
for the sole purpose of accumulating payments and then is applied to 
satisfy entirely the consumer's obligation in the transaction, each 
deposit made into the account is considered the same

[[Page 79974]]

as a payment on a loan for purposes of making disclosures.
    16. Number of transactions. Creditors have flexibility in 
handling credit extensions that may be viewed as multiple 
transactions. For example:
    i. When a creditor finances the credit sale of a radio and a 
television on the same day, the creditor may disclose the sales as 
either 1 or 2 credit sale transactions.
    ii. When a creditor finances a loan along with a credit sale of 
health insurance, the creditor may disclose in one of several ways: 
a single credit sale transaction, a single loan transaction, or a 
loan and a credit sale transaction.
    iii. The separate financing of a downpayment in a credit sale 
transaction may, but need not, be disclosed as 2 transactions (a 
credit sale and a separate transaction for the financing of the 
downpayment).
    17. Special rules for tax refund anticipation loans. Tax refund 
loans, also known as refund anticipation loans (RALs), are 
transactions in which a creditor will lend up to the amount of a 
consumer's expected tax refund. RAL agreements typically require 
repayment upon demand, but also may provide that repayment is 
required when the refund is made. The agreements also typically 
provide that if the amount of the refund is less than the payment 
due, the consumer must pay the difference. Repayment often is made 
by a preauthorized offset to a consumer's account held with the 
creditor when the refund has been deposited by electronic transfer. 
Creditors may charge fees for RALs in addition to fees for filing 
the consumer's tax return electronically. In RAL transactions 
subject to the regulation the following special rules apply:
    i. If, under the terms of the legal obligation, repayment of the 
loan is required when the refund is received by the consumer (such 
as by deposit into the consumer's account), the disclosures should 
be based on the creditor's estimate of the time the refund will be 
delivered even if the loan also contains a demand clause. The 
practice of a creditor to demand repayment upon delivery of refunds 
does not determine whether the legal obligation requires that 
repayment be made at that time; this determination must be made 
according to applicable state or other law. (See comment 17(c)(5)-1 
for the rules regarding disclosures if the loan is payable solely on 
demand or is payable either on demand or on an alternate maturity 
date.)
    ii. If the consumer is required to repay more than the amount 
borrowed, the difference is a finance charge unless excluded under 
Sec.  1026.4. In addition, to the extent that any fees charged in 
connection with the loan (such as for filing the tax return 
electronically) exceed those fees for a comparable cash transaction 
(that is, filing the tax return electronically without a loan), the 
difference must be included in the finance charge.
    18. Pawn Transactions. When, in connection with an extension of 
credit, a consumer pledges or sells an item to a pawnbroker creditor 
in return for a sum of money and retains the right to redeem the 
item for a greater sum (the redemption price) within a specified 
period of time, disclosures are required. In addition to other 
disclosure requirements that may be applicable under Sec.  1026.18, 
for purposes of pawn transactions:
    i. The amount financed is the initial sum paid to the consumer. 
The pawnbroker creditor need not provide a separate itemization of 
the amount financed if that entire amount is paid directly to the 
consumer and the disclosed description of the amount financed is 
``the amount of cash given directly to you'' or a similar phrase.
    ii. The finance charge is the difference between the initial sum 
paid to the consumer and the redemption price plus any other finance 
charges paid in connection with the transaction. (See Sec.  1026.4.)
    iii. The term of the transaction, for calculating the annual 
percentage rate, is the period of time agreed to by the pawnbroker 
creditor and the consumer. The term of the transaction does not 
include a grace period (including any statutory grace period) after 
the agreed redemption date.

Paragraph 17(c)(2)(i)

    1. Basis for estimates. 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 the disclosures are made. The ``reasonably 
available'' standard requires that the creditor, acting in good 
faith, exercise due diligence in obtaining information. For example, 
the creditor must at a minimum utilize generally accepted 
calculation tools, but need not invest in the most sophisticated 
computer program to make a particular type of calculation. The 
creditor normally may rely on the representations of other parties 
in obtaining information. For example, the creditor might look to 
the consumer for the time of consummation, to insurance companies 
for the cost of insurance, or to realtors for taxes and escrow fees. 
The creditor may utilize estimates in making disclosures even though 
the creditor knows that more precise information will be available 
by the point of consummation. However, new disclosures may be 
required under Sec.  1026.17(f) or Sec.  1026.19.
    2. Labeling estimates. Estimates must be designated as such in 
the segregated disclosures. Even though other disclosures are based 
on the same assumption on which a specific estimated disclosure was 
based, the creditor has some flexibility in labeling the estimates. 
Generally, only the particular disclosure for which the exact 
information is unknown is labeled as an estimate. However, when 
several disclosures are affected because of the unknown information, 
the creditor has the option of labeling either every affected 
disclosure or only the disclosure primarily affected. For example, 
when the finance charge is unknown because the date of consummation 
is unknown, the creditor must label the finance charge as an 
estimate and may also label as estimates the total of payments and 
the payment schedule. When many disclosures are estimates, the 
creditor may use a general statement, such as ``all numerical 
disclosures except the late payment disclosure are estimates,'' as a 
method to label those disclosures as estimates.
    3. Simple-interest transactions. If consumers do not make timely 
payments in a simple-interest transaction, some of the amounts 
calculated for Truth in Lending disclosures will differ from amounts 
that consumers will actually pay over the term of the transaction. 
Creditors may label disclosures as estimates in these transactions. 
For example, because the finance charge and total of payments may be 
larger than disclosed if consumers make late payments, creditors may 
label the finance charge and total of payments as estimates. On the 
other hand, creditors may choose not to label disclosures as 
estimates and may base all disclosures on the assumption that 
payments will be made on time, disregarding any possible 
inaccuracies resulting from consumers' payment patterns.

Paragraph 17(c)(2)(ii)

    1. Per-diem interest. This paragraph applies to any numerical 
amount (such as the finance charge, annual percentage rate, or 
payment amount) that is affected by the amount of the per-diem 
interest charge that will be collected at consummation. If the 
amount of per-diem interest used in preparing the disclosures for 
consummation is based on the information known to the creditor at 
the time the disclosure document is prepared, the disclosures are 
considered accurate under this rule, and affected disclosures are 
also considered accurate, even if the disclosures are not labeled as 
estimates. For example, if the amount of per-diem interest used to 
prepare disclosures is less than the amount of per-diem interest 
charged at consummation, and as a result the finance charge is 
understated by $200, the disclosed finance charge is considered 
accurate even though the understatement is not within the $100 
tolerance of Sec.  1026.18(d)(1), and the finance charge was not 
labeled as an estimate. In this example, if in addition to the 
understatement related to the per-diem interest, a $90 fee is 
incorrectly omitted from the finance charge, causing it to be 
understated by a total of $290, the finance charge is considered 
accurate because the $90 fee is within the tolerance in Sec.  
1026.18(d)(1).

Paragraph 17(c)(3)

    1. Minor variations. Section 1026.17(c)(3) allows creditors to 
disregard certain factors in calculating and making disclosures. For 
example:
    i. Creditors may ignore the effects of collecting payments in 
whole cents. Because payments cannot be collected in fractional 
cents, it is often difficult to amortize exactly an obligation with 
equal payments; the amount of the last payment may require 
adjustment to account for the rounding of the other payments to 
whole cents.
    ii. Creditors may base their disclosures on calculation tools 
that assume that all months have an equal number of days, even if 
their practice is to take account of the variations in months for 
purposes of collecting interest. For example, a creditor may use a 
calculation tool based on a 360-day year, when it in fact collects 
interest by applying a factor of 1/365 of the annual rate to 365 
days. This rule does not, however, authorize creditors to ignore, 
for disclosure purposes, the effects of applying 1/360 of an annual 
rate to 365 days.

[[Page 79975]]

    2. Use of special rules. A creditor may utilize the special 
rules in Sec.  1026.17(c)(3) for purposes of calculating and making 
all disclosures for a transaction or may, at its option, use the 
special rules for some disclosures and not others.

Paragraph 17(c)(4)

    1. Payment schedule irregularities. When one or more payments in 
a transaction differ from the others because of a long or short 
first period, the variations may be ignored in disclosing the 
payment schedule, finance charge, annual percentage rate, and other 
terms. For example:
    i. A 36-month auto loan might be consummated on June 8 with 
payments due on July 1 and the first of each succeeding month. The 
creditor may base its calculations on a payment schedule that 
assumes 36 equal intervals and 36 equal installment payments, even 
though a precise computation would produce slightly different 
amounts because of the shorter first period.
    ii. By contrast, in the same example, if the first payment were 
not scheduled until August 1, the irregular first period would 
exceed the limits in Sec.  1026.17(c)(4); the creditor could not use 
the special rule and could not ignore the extra days in the first 
period in calculating its disclosures.
    2. Measuring odd periods. i. In determining whether a 
transaction may take advantage of the rule in Sec.  1026.17(c)(4), 
the creditor must measure the variation against a regular period. 
For purposes of that rule:
    A. The first period is the period from the date on which the 
finance charge begins to be earned to the date of the first payment.
    B. The term is the period from the date on which the finance 
charge begins to be earned to the date of the final payment.
    C. The regular period is the most common interval between 
payments in the transaction.
    ii. In transactions involving regular periods that are monthly, 
semimonthly or multiples of a month, the length of the irregular and 
regular periods may be calculated on the basis of either the actual 
number of days or an assumed 30-day month. In other transactions, 
the length of the periods is based on the actual number of days.
    3. Use of special rules. A creditor may utilize the special 
rules in Sec.  1026.17(c)(4) for purposes of calculating and making 
some disclosures but may elect not to do so for all of the 
disclosures. For example, the variations may be ignored in 
calculating and disclosing the annual percentage rate but taken into 
account in calculating and disclosing the finance charge and payment 
schedule.
    4. Relation to prepaid finance charges. Prepaid finance charges, 
including ``odd-days'' or ``per-diem'' interest, paid prior to or at 
closing may not be treated as the first payment on a loan. Thus, 
creditors may not disregard an irregularity in disclosing such 
finance charges.

Paragraph 17(c)(5)

    1. Demand disclosures. Disclosures for demand obligations are 
based on an assumed 1-year term, unless an alternate maturity date 
is stated in the legal obligation. Whether an alternate maturity 
date is stated in the legal obligation is determined by applicable 
law. An alternate maturity date is not inferred from an informal 
principal reduction agreement or a similar understanding between the 
parties. However, when the note itself specifies a principal 
reduction schedule (for example, ``payable on demand or $2,000 plus 
interest quarterly''), an alternate maturity is stated and the 
disclosures must reflect that date.
    2. Future event as maturity date. An obligation whose maturity 
date is determined solely by a future event, as for example, a loan 
payable only on the sale of property, is not a demand obligation. 
Because no demand feature is contained in the obligation, demand 
disclosures under Sec.  1026.18(i) are inapplicable. The disclosures 
should be based on the creditor's estimate of the time at which the 
specified event will occur, and may indicate the basis for the 
creditor's estimate, as noted in the commentary to Sec.  1026.17(a).
    3. Demand after stated period. Most demand transactions contain 
a demand feature that may be exercised at any point during the term, 
but certain transactions convert to demand status only after a fixed 
period. For example, in states prohibiting due-on-sale clauses, the 
Federal National Mortgage Association (FNMA) requires mortgages that 
it purchases to include a call option rider that may be exercised 
after 7 years. These mortgages are generally written as long-term 
obligations, but contain a demand feature that may be exercised only 
within a 30-day period at 7 years. The disclosures for these 
transactions should be based upon the legally agreed-upon maturity 
date. Thus, if a mortgage containing the 7-year FNMA call option is 
written as a 20-year obligation, the disclosures should be based on 
the 20-year term, with the demand feature disclosed under Sec.  
1026.18(i).
    4. Balloon mortgages. Balloon payment mortgages, with payments 
based on a long-term amortization schedule and a large final payment 
due after a shorter term, are not demand obligations unless a demand 
feature is specifically contained in the contract. For example, a 
mortgage with a term of 5 years and a payment schedule based on 20 
years would not be treated as a mortgage with a demand feature, in 
the absence of any contractual demand provisions. In this type of 
mortgage, disclosures should be based on the 5-year term.

Paragraph 17(c)(6)

    1. Series of advances. Section 1026.17(c)(6)(i) deals with a 
series of advances under an agreement to extend credit up to a 
certain amount. A creditor may treat all of the advances as a single 
transaction or disclose each advance as a separate transaction. If 
these advances are treated as 1 transaction and the timing and 
amounts of advances are unknown, creditors must make disclosures 
based on estimates, as provided in Sec.  1026.17(c)(2). If the 
advances are disclosed separately, disclosures must be provided 
before each advance occurs, with the disclosures for the first 
advance provided by consummation.
    2. Construction loans. Section 1026.17(c)(6)(ii) provides a 
flexible rule for disclosure of construction loans that may be 
permanently financed. These transactions have 2 distinct phases, 
similar to 2 separate transactions. The construction loan may be for 
initial construction or subsequent construction, such as 
rehabilitation or remodeling. The construction period usually 
involves several disbursements of funds at times and in amounts that 
are unknown at the beginning of that period, with the consumer 
paying only accrued interest until construction is completed. Unless 
the obligation is paid at that time, the loan then converts to 
permanent financing in which the loan amount is amortized just as in 
a standard mortgage transaction. Section 1026.17(c)(6)(ii) permits 
the creditor to give either one combined disclosure for both the 
construction financing and the permanent financing, or a separate 
set of disclosures for the 2 phases. This rule is available whether 
the consumer is initially obligated to accept construction financing 
only or is obligated to accept both construction and permanent 
financing from the outset. If the consumer is obligated on both 
phases and the creditor chooses to give 2 sets of disclosures, both 
sets must be given to the consumer initially, because both 
transactions would be consummated at that time. (Appendix D provides 
a method of calculating the annual percentage rate and other 
disclosures for construction loans, which may be used, at the 
creditor's option, in disclosing construction financing.)
    3. Multiple-advance construction loans. Section 1026.17(c)(6)(i) 
and (ii) are not mutually exclusive. For example, in a transaction 
that finances the construction of a dwelling that may be permanently 
financed by the same creditor, the construction phase may consist of 
a series of advances under an agreement to extend credit up to a 
certain amount. In these cases, the creditor may disclose the 
construction phase as either 1 or more than 1 transaction and also 
disclose the permanent financing as a separate transaction.
    4. Residential mortgage transaction. See the commentary to Sec.  
1026.2(a)(24) for a discussion of the effect of Sec.  1026.17(c)(6) 
on the definition of a residential mortgage transaction.
    5. Allocation of points. When a creditor utilizes the special 
rule in Sec.  1026.17(c)(6) to disclose credit extensions as 
multiple transactions, buyers points or similar amounts imposed on 
the consumer must be allocated for purposes of calculating 
disclosures. While such amounts should not be taken into account 
more than once in making calculations, they may be allocated between 
the transactions in any manner the creditor chooses. For example, if 
a construction-permanent loan is subject to 5 points imposed on the 
consumer and the creditor chooses to disclose the 2 phases 
separately, the 5 points may be allocated entirely to the 
construction loan, entirely to the permanent loan, or divided in any 
manner between the two. However, the entire 5 points may not be 
applied twice, that is, to both the construction and the permanent 
phases.

17(d) Multiple Creditors; Multiple Consumers

    1. Multiple creditors. If a credit transaction involves more 
than one creditor:

[[Page 79976]]

    i. The 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 transaction must be given, even if 
the disclosing creditor would not otherwise have been obligated to 
make a particular disclosure. For example, if one of the creditors 
is the seller, the total sale price disclosure under Sec.  
1026.18(j) must be made, even though the disclosing creditor is not 
the seller.
    2. Multiple consumers. When two consumers are joint obligors 
with primary liability on an obligation, the disclosures may be 
given to either one of them. If one consumer is merely a surety or 
guarantor, the disclosures must be given to the principal debtor. In 
rescindable transactions, however, separate disclosures must be 
given to each consumer who has the right to rescind under Sec.  
1026.23, although the disclosures required under Sec.  1026.19(b) 
need only be provided to the consumer who expresses an interest in a 
variable-rate loan program.

17(e) Effect of Subsequent Events

    1. Events causing inaccuracies. Inaccuracies in disclosures are 
not violations if attributable to events occurring after the 
disclosures are made. For example, when the consumer fails to 
fulfill a prior commitment to keep the collateral insured and the 
creditor then provides the coverage and charges the consumer for it, 
such a change does not make the original disclosures inaccurate. The 
creditor may, however, be required to make new disclosures under 
Sec.  1026.17(f) or Sec.  1026.19 if the events occurred between 
disclosure and consummation or under Sec.  1026.20 if the events 
occurred after consummation.

17(f) Early Disclosures

    1. Change in rate or other terms. Redisclosure is required for 
changes that occur between the time disclosures are made and 
consummation if the annual percentage rate in the consummated 
transaction exceeds the limits prescribed in this section, even if 
the initial disclosures would be considered accurate under the 
tolerances in Sec.  1026.18(d) or 1026.22(a). To illustrate:
    i. General. A. If disclosures are made in a regular transaction 
on July 1, the transaction is consummated on July 15, and the actual 
annual percentage rate varies by more than \1/8\ of 1 percentage 
point from the disclosed annual percentage rate, the creditor must 
either redisclose the changed terms or furnish a complete set of new 
disclosures before consummation. Redisclosure is required even if 
the disclosures made on July 1 are based on estimates and marked as 
such.
    B. In a regular transaction, if early disclosures are marked as 
estimates and the disclosed annual percentage rate is within \1/8\ 
of 1 percentage point of the rate at consummation, the creditor need 
not redisclose the changed terms (including the annual percentage 
rate).
    ii. Nonmortgage loan. If disclosures are made on July 1, the 
transaction is consummated on July 15, and the finance charge 
increased by $35 but the disclosed annual percentage rate is within 
the permitted tolerance, the creditor must at least redisclose the 
changed terms that were not marked as estimates. (See Sec.  
1026.18(d)(2) of this part.)
    iii. Mortgage loan. At the time TILA disclosures are prepared in 
July, the loan closing is scheduled for July 31 and the creditor 
does not plan to collect per-diem interest at consummation. 
Consummation actually occurs on August 5, and per-diem interest for 
the remainder of August is collected as a prepaid finance charge. 
Assuming there were no other changes requiring redisclosure, the 
creditor may rely on the disclosures prepared in July that were 
accurate when they were prepared. However, if the creditor prepares 
new disclosures in August that will be provided at consummation, the 
new disclosures must take into account the amount of the per-diem 
interest known to the creditor at that time.
    2. Variable rate. The addition of a variable rate feature to the 
credit terms, after early disclosures are given, requires new 
disclosures.
    3. Content of new disclosures. If redisclosure is required, the 
creditor has the option of either providing a complete set of new 
disclosures, or providing disclosures of only the terms that vary 
from those originally disclosed. (See the commentary to Sec.  
1026.19(a)(2).)
    4. Special rules. In mortgage transactions subject to Sec.  
1026.19, the creditor must redisclose if, between the delivery of 
the required early disclosures and consummation, the annual 
percentage rate changes by more than a stated tolerance. When 
subsequent events occur after consummation, new disclosures are 
required only if there is a refinancing or an assumption within the 
meaning of Sec.  1026.20.

Paragraph 17(f)(2)

    1. Irregular transactions. For purposes of this paragraph, a 
transaction is deemed to be ``irregular'' according to the 
definition in Sec.  1026.22(a)(3).

17(g) Mail or Telephone Orders--Delay in Disclosures

    1. Conditions for use. When the creditor receives a mail or 
telephone request for credit, the creditor may delay making the 
disclosures until the first payment is due if the following 
conditions are met:
    i. The credit request is initiated without face-to-face or 
direct telephone solicitation. (Creditors may, however, use the 
special rule when credit requests are solicited by mail.)
    ii. The creditor has supplied the specified credit information 
about its credit terms either to the individual consumer or to the 
public generally. That information may be distributed through 
advertisements, catalogs, brochures, special mailers, or similar 
means.
    2. Insurance. The location requirements for the insurance 
disclosures under Sec.  1026.18(n) permit them to appear apart from 
the other disclosures. Therefore, a creditor may mail an insurance 
authorization to the consumer and then prepare the other disclosures 
to reflect whether or not the authorization is completed by the 
consumer. Creditors may also disclose the insurance cost on a unit-
cost basis, if the transaction meets the requirements of Sec.  
1026.17(g).

17(h) Series of Sales--Delay in Disclosures

    1. Applicability. The creditor may delay the disclosures for 
individual credit sales in a series of such sales until the first 
payment is due on the current sale, assuming the two conditions in 
this paragraph are met. If those conditions are not met, the general 
timing rules in Sec.  1026.17(b) apply.
    2. Basis of disclosures. Creditors structuring disclosures for a 
series of sales under Sec.  1026.17(h) may compute the total sale 
price as either:
    i. The cash price for the sale plus that portion of the finance 
charge and other charges applicable to that sale; or
    ii. The cash price for the sale, other charges applicable to the 
sale, and the total finance charge and outstanding principal.

17(i) Interim Student Credit Extensions

    1. Definition. Student credit plans involve extensions of credit 
for education purposes where the repayment amount and schedule are 
not known at the time credit is advanced. These plans include loans 
made under any student credit plan, whether government or private, 
where the repayment period does not begin immediately. (Certain 
student credit plans that meet this definition are exempt from 
Regulation Z. See Sec.  1026.3(f).)
    2. Relation to other sections. For disclosures made before the 
mandatory compliance date of the disclosures required under 
Sec. Sec.  1026.46, 47, and 48, paragraph 17(i) permitted creditors 
to omit from the disclosures the terms set forth in that paragraph 
at the time the credit was actually extended. However, creditors 
were required to make complete disclosures at the time the creditor 
and consumer agreed upon the repayment schedule for the total 
obligation. At that time, a new set of disclosures of all applicable 
items under Sec.  1026.18 was required. Most student credit plans 
are subject to the requirements in Sec. Sec.  1026.46, 47, and 48. 
Consequently, for applications for student credit plans received on 
or after the mandatory compliance date of Sec. Sec.  1026.46, 47, 
and 48, the creditor may not omit from the disclosures the terms set 
forth in paragraph 17(i). Instead, the creditor must comply with 
Sec. Sec.  1026.46, 47, and 48, if applicable, or with Sec. Sec.  
1026.17 and 1026.18.
    3. Basis of disclosures. The disclosures given at the time of 
execution of the interim note should reflect two annual percentage 
rates, one for the interim period and one for the repayment period. 
The use of Sec.  1026.17(i) in making disclosures does not, by 
itself, make those disclosures estimates. Any portion of the finance 
charge, such as statutory interest, that is attributable to the 
interim period and is paid by the student (either as a prepaid 
finance charge, periodically during the interim period, in one 
payment at the end of the interim period, or capitalized at the 
beginning of the repayment period) must be reflected in the interim 
annual percentage rate. Interest subsidies, such as payments made by 
either a state or the Federal Government on an interim loan, must be 
excluded in computing the annual percentage rate on the interim 
obligation, when the consumer has no contingent liability for 
payment of those amounts. Any finance charges that are paid 
separately by

[[Page 79977]]

the student at the outset or withheld from the proceeds of the loan 
are prepaid finance charges. An example of this type of charge is 
the loan guarantee fee. The sum of the prepaid finance charges is 
deducted from the loan proceeds to determine the amount financed and 
included in the calculation of the finance charge.
    4. Consolidation. Consolidation of the interim student credit 
extensions through a renewal note with a set repayment schedule is 
treated as a new transaction with disclosures made as they would be 
for a refinancing. Any unearned portion of the finance charge must 
be reflected in the new finance charge and annual percentage rate, 
and is not added to the new amount financed. In itemizing the amount 
financed under Sec.  1026.18(c), the creditor may combine the 
principal balances remaining on the interim extensions at the time 
of consolidation and categorize them as the amount paid on the 
consumer's account.
    5. Approved student credit forms. See the commentary to Appendix 
H regarding disclosure forms approved for use in certain student 
credit programs for which applications were received prior to the 
mandatory compliance date of Sec. Sec.  1026.46, 1026.47, and 
1026.48.

Section 1026.18--Content of Disclosures

    1. As applicable. i. The disclosures required by this section 
need be made only as applicable. Any disclosure not relevant to a 
particular transaction may be eliminated entirely. For example:
    A. In a loan transaction, the creditor may delete disclosure of 
the total sale price.
    B. In a credit sale requiring disclosure of the total sale price 
under Sec.  1026.18(j), the creditor may delete any reference to a 
downpayment where no downpayment is involved.
    ii. Where the amounts of several numerical disclosures are the 
same, the ``as applicable'' language also permits creditors to 
combine the terms, so long as it is done in a clear and conspicuous 
manner. For example:
    A. In a transaction in which the amount financed equals the 
total of payments, the creditor may disclose ``amount financed/total 
of payments,'' together with descriptive language, followed by a 
single amount.
    B. However, if the terms are separated on the disclosure 
statement and separate space is provided for each amount, both 
disclosures must be completed, even though the same amount is 
entered in each space.
    2. Format. See the commentary to Sec.  1026.17 and Appendix H 
for a discussion of the format to be used in making these 
disclosures, as well as acceptable modifications.

18(a) Creditor

    1. Identification of creditor. The creditor making the 
disclosures must be identified. This disclosure may, at the 
creditor's option, appear apart from the other disclosures. Use of 
the creditor's name is sufficient, but the creditor may also include 
an address and/or telephone number. In transactions with multiple 
creditors, any one of them may make the disclosures; the one doing 
so must be identified.

18(b) Amount Financed

    1. Disclosure required. The net amount of credit extended must 
be disclosed using the term amount financed and a descriptive 
explanation similar to the phrase in the regulation.
    2. Rebates and loan premiums. In a loan transaction, the 
creditor may offer a premium in the form of cash or merchandise to 
prospective borrowers. Similarly, in a credit sale transaction, a 
seller's or manufacturer's rebate may be offered to prospective 
purchasers of the creditor's goods or services. At the creditor's 
option, these amounts may be either reflected in the Truth in 
Lending disclosures or disregarded in the disclosures. If the 
creditor chooses to reflect them in the Sec.  1026.18 disclosures, 
rather than disregard them, they may be taken into account in any 
manner as part of those disclosures.

Paragraph 18(b)(1)

    1. Downpayments. A downpayment is defined in Sec.  1026.2(a)(18) 
to include, at the creditor's option, certain deferred downpayments 
or pick-up payments. A deferred downpayment that meets the criteria 
set forth in the definition may be treated as part of the 
downpayment, at the creditor's option.
    i. Deferred downpayments that are not treated as part of the 
downpayment (either because they do not meet the definition or 
because the creditor simply chooses not to treat them as 
downpayments) are included in the amount financed.
    ii. Deferred downpayments that are treated as part of the 
downpayment are not part of the amount financed under Sec.  
1026.18(b)(1).

Paragraph 18(b)(2)

    1. Adding other amounts. Fees or other charges that are not part 
of the finance charge and that are financed rather than paid 
separately at consummation of the transaction are included in the 
amount financed. Typical examples are real estate settlement charges 
and premiums for voluntary credit life and disability insurance 
excluded from the finance charge under Sec.  1026.4. This paragraph 
does not include any amounts already accounted for under Sec.  
1026.18(b)(1), such as taxes, tag and title fees, or the costs of 
accessories or service policies that the creditor includes in the 
cash price.

Paragraph 18(b)(3)

    1. Prepaid finance charges. i. Prepaid finance charges that are 
paid separately in cash or by check should be deducted under Sec.  
1026.18(b)(3) in calculating the amount financed. To illustrate:
    A. A consumer applies for a loan of $2,500 with a $40 loan fee. 
The face amount of the note is $2,500 and the consumer pays the loan 
fee separately by cash or check at closing. The principal loan 
amount for purposes of Sec.  1026.18(b)(1) is $2,500 and $40 should 
be deducted under Sec.  1026.18(b(3), thereby yielding an amount 
financed of $2,460.
    ii. In some instances, as when loan fees are financed by the 
creditor, finance charges are incorporated in the face amount of the 
note. Creditors have the option, when the charges are not add-on or 
discount charges, of determining a principal loan amount under Sec.  
1026.18(b)(1) that either includes or does not include the amount of 
the finance charges. (Thus the principal loan amount may, but need 
not, be determined to equal the face amount of the note.) When the 
finance charges are included in the principal loan amount, they 
should be deducted as prepaid finance charges under Sec.  
1026.18(b)(3). When the finance charges are not included in the 
principal loan amount, they should not be deducted under Sec.  
1026.18(b)(3). The following examples illustrate the application of 
Sec.  1026.18(b) to this type of transaction. Each example assumes a 
loan request of $2,500 with a loan fee of $40; the creditor assesses 
the loan fee by increasing the face amount of the note to $2,540.
    A. If the creditor determines the principal loan amount under 
Sec.  1026.18(b)(1) to be $2,540, it has included the loan fee in 
the principal loan amount and should deduct $40 as a prepaid finance 
charge under Sec.  1026.18(b)(3), thereby obtaining an amount 
financed of $2,500.
    B. If the creditor determines the principal loan amount under 
Sec.  1026.18(b)(1) to be $2,500, it has not included the loan fee 
in the principal loan amount and should not deduct any amount under 
Sec.  1026.18(b)(3), thereby obtaining an amount financed of $2,500.
    iii. The same rules apply when the creditor does not increase 
the face amount of the note by the amount of the charge but collects 
the charge by withholding it from the amount advanced to the 
consumer. To illustrate, the following examples assume a loan 
request of $2,500 with a loan fee of $40; the creditor prepares a 
note for $2,500 and advances $2,460 to the consumer.
    A. If the creditor determines the principal loan amount under 
Sec.  1026.18(b)(1) to be $2,500, it has included the loan fee in 
the principal loan amount and should deduct $40 as a prepaid finance 
charge under Sec.  1026.18(b)(3), thereby obtaining an amount 
financed of $2,460.
    B. If the creditor determines the principal loan amount under 
Sec.  1026.18(b)(1) to be $2,460, it has not included the loan fee 
in the principal loan amount and should not deduct any amount under 
Sec.  1026.18(b)(3), thereby obtaining an amount financed of $2,460.
    iv. Thus in the examples where the creditor derives the net 
amount of credit by determining a principal loan amount that does 
not include the amount of the finance charge, no subtraction is 
appropriate. Creditors should note, however, that although the 
charges are not subtracted as prepaid finance charges in those 
examples, they are nonetheless finance charges and must be treated 
as such.
    2. Add-on or discount charges. All finance charges must be 
deducted from the amount of credit in calculating the amount 
financed. If the principal loan amount reflects finance charges that 
meet the definition of a prepaid finance charge in Sec.  1026.2, 
those charges are included in the Sec.  1026.18(b)(1) amount and 
deducted under Sec.  1026.18(b)(3). However, if the principal loan 
amount includes finance charges that do not meet the definition of a 
prepaid finance charge, the Sec.  1026.18(b)(1) amount must exclude 
those finance charges.

[[Page 79978]]

The following examples illustrate the application of Sec.  
1026.18(b) to these types of transactions. Each example assumes a 
loan request of $1000 for 1 year, subject to a 6 percent precomputed 
interest rate, with a $10 loan fee paid separately at consummation.
    i. The creditor assesses add-on interest of $60 which is added 
to the $1000 in loan proceeds for an obligation with a face amount 
of $1060. The principal for purposes of Sec.  1026.18(b)(1) is 
$1000, no amounts are added under Sec.  1026.18(b)(2), and the $10 
loan fee is a prepaid finance charge to be deducted under Sec.  
1026.18(b)(3). The amount financed is $990.
    ii. The creditor assesses discount interest of $60 and 
distributes $940 to the consumer, who is liable for an obligation 
with a face amount of $1000. The principal under Sec.  1026.18(b)(1) 
is $940, which results in an amount financed of $930, after 
deduction of the $10 prepaid finance charge under Sec.  
1026.18(b)(3).
    iii. The creditor assesses $60 in discount interest by 
increasing the face amount of the obligation to $1060, with the 
consumer receiving $1000. The principal under Sec.  1026.18(b)(1) is 
thus $1000 and the amount financed $990, after deducting the $10 
prepaid finance charge under Sec.  1026.18(b)(3).

18(c) Itemization of Amount Financed

    1. Disclosure required. i. The creditor has 2 alternatives in 
complying with Sec.  1026.18(c):
    A. The creditor may inform the consumer, on the segregated 
disclosures, that a written itemization of the amount financed will 
be provided on request, furnishing the itemization only if the 
customer in fact requests it.
    B. The creditor may provide an itemization as a matter of 
course, without notifying the consumer of the right to receive it or 
waiting for a request.
    ii. Whether given as a matter of course or only on request, the 
itemization must be provided at the same time as the other 
disclosures required by Sec.  1026.18, although separate from those 
disclosures.
    2. Additional information. Section 1026.18(c) establishes only a 
minimum standard for the material to be included in the itemization 
of the amount financed. Creditors have considerable flexibility in 
revising or supplementing the information listed in Sec.  1026.18(c) 
and shown in model form H-3, although no changes are required. The 
creditor may, for example, do one or more of the following:
    i. Include amounts that reflect payments not part of the amount 
financed. For example, escrow items and certain insurance premiums 
may be included, as discussed in the commentary to Sec.  1026.18(g).
    ii. Organize the categories in any order. For example, the 
creditor may rearrange the terms in a mathematical progression that 
depicts the arithmetic relationship of the terms.
    iii. Add categories. For example, in a credit sale, the creditor 
may include the cash price and the downpayment. If the credit sale 
involves a trade-in of the consumer's car and an existing lien on 
that car exceeds the value of the trade-in amount, the creditor may 
disclose the consumer's trade-in value, the creditor's payoff of the 
existing lien, and the resulting additional amount financed.
    iv. Further itemize each category. For example, the amount paid 
directly to the consumer may be subdivided into the amount given by 
check and the amount credited to the consumer's savings account.
    v. Label categories with different language from that shown in 
Sec.  1026.18(c). For example, an amount paid on the consumer's 
account may be revised to specifically identify the account as 
``your auto loan with us.''
    vi. Delete, leave blank, mark ``N/A,'' or otherwise note 
inapplicable categories in the itemization. For example, in a credit 
sale with no prepaid finance charges or amounts paid to others, the 
amount financed may consist of only the cash price less downpayment. 
In this case, the itemization may be composed of only a single 
category and all other categories may be eliminated.
    3. Amounts appropriate to more than one category. When an amount 
may appropriately be placed in any of several categories and the 
creditor does not wish to revise the categories shown in Sec.  
1026.18(c), the creditor has considerable flexibility in determining 
where to show the amount. For example, in a credit sale, the portion 
of the purchase price being financed by the creditor may be viewed 
as either an amount paid to the consumer or an amount paid on the 
consumer's account.
    4. RESPA transactions. The Real Estate Settlement Procedures Act 
(RESPA) requires creditors to provide a good faith estimate of 
closing costs and a settlement statement listing the amounts paid by 
the consumer. Transactions subject to RESPA are exempt from the 
requirements of Sec.  1026.18(c) if the creditor complies with 
RESPA's requirements for a good faith estimate and settlement 
statement. The itemization of the amount financed need not be given, 
even though the content and timing of the good faith estimate and 
settlement statement under RESPA differ from the requirements of 
Sec. Sec.  1026.18(c) and 1026.19(a)(2). If a creditor chooses to 
substitute RESPA's settlement statement for the itemization when 
redisclosure is required under Sec.  1026.19(a)(2), the statement 
must be delivered to the consumer at or prior to consummation. The 
disclosures required by Sec. Sec.  1026.18(c) and 1026.19(a)(2) may 
appear on the same page or on the same document as the good faith 
estimate or the settlement statement, so long as the requirements of 
Sec.  1026.17(a) are met.

Paragraph 18(c)(1)(i)

    1. Amounts paid to consumer. This encompasses funds given to the 
consumer in the form of cash or a check, including joint proceeds 
checks, as well as funds placed in an asset account. It may include 
money in an interest-bearing account even if that amount is 
considered a required deposit under Sec.  1026.18(r). For example, 
in a transaction with total loan proceeds of $500, the consumer 
receives a check for $300 and $200 is required by the creditor to be 
put into an interest-bearing account. Whether or not the $200 is a 
required deposit, it is part of the amount financed. At the 
creditor's option, it may be broken out and labeled in the 
itemization of the amount financed.

Paragraph 18(c)(1)(ii)

    1. Amounts credited to consumer's account. The term consumer's 
account refers to an account in the nature of a debt with that 
creditor. It may include, for example, an unpaid balance on a prior 
loan, a credit sale balance or other amounts owing to that creditor. 
It does not include asset accounts of the consumer such as savings 
or checking accounts.

Paragraph 18(c)(1)(iii)

    1. Amounts paid to others. This includes, for example, tag and 
title fees; amounts paid to insurance companies for insurance 
premiums; security interest fees, and amounts paid to credit 
bureaus, appraisers or public officials. When several types of 
insurance premiums are financed, they may, at the creditor's option, 
be combined and listed in one sum, labeled ``insurance'' or similar 
term. This includes, but is not limited to, different types of 
insurance premiums paid to one company and different types of 
insurance premiums paid to different companies. Except for insurance 
companies and other categories noted in Sec.  1026.18(c)(1)(iii), 
third parties must be identified by name.
    2. Charges added to amounts paid to others. A sum is sometimes 
added to the amount of a fee charged to a consumer for a service 
provided by a third party (such as for an extended warranty or a 
service contract) that is payable in the same amount in comparable 
cash and credit transactions. In the credit transaction, the amount 
is retained by the creditor. Given the flexibility permitted in 
meeting the requirements of the amount financed itemization (see the 
commentary to Sec.  1026.18(c)), the creditor in such cases may 
reflect that the creditor has retained a portion of the amount paid 
to others. For example, the creditor could add to the category 
``amount paid to others'' language such as ``(we may be retaining a 
portion of this amount).''

Paragraph 18(c)(1)(iv)

    1. Prepaid finance charge. Prepaid finance charges that are 
deducted under Sec.  1026.18(b)(3) must be disclosed under this 
section. The prepaid finance charges must be shown as a total amount 
but may, at the creditor's option, also be further itemized and 
described. All amounts must be reflected in this total, even if 
portions of the prepaid finance charge are also reflected elsewhere. 
For example, if at consummation the creditor collects interim 
interest of $30 and a credit report fee of $10, a total prepaid 
finance charge of $40 must be shown. At the creditor's option, the 
credit report fee paid to a third party may also be shown elsewhere 
as an amount included in Sec.  1026.18(c)(1)(iii). The creditor may 
also further describe the 2 components of the prepaid finance 
charge, although no itemization of this element is required by Sec.  
1026.18(c)(1)(iv).
    2. Prepaid mortgage insurance premiums. RESPA requires creditors 
to give consumers a settlement statement disclosing the costs 
associated with mortgage loan transactions. Included on the 
settlement statement are mortgage insurance premiums collected at 
settlement, which are prepaid finance charges. In calculating the 
total amount of

[[Page 79979]]

prepaid finance charges, creditors should use the amount for 
mortgage insurance listed on the line for mortgage insurance on the 
settlement statement (line 1002 on HUD-1 or HUD 1-A), without 
adjustment, even if the actual amount collected at settlement may 
vary because of RESPA's escrow accounting rules. Figures for 
mortgage insurance disclosed in conformance with RESPA shall be 
deemed to be accurate for purposes of Regulation Z.

18(d) Finance Charge

    1. Disclosure required. The creditor must disclose the finance 
charge as a dollar amount, using the term finance charge, and must 
include a brief description similar to that in Sec.  1026.18(d). The 
creditor may, but need not, further modify the descriptor for 
variable rate transactions with a phrase such as which is subject to 
change. The finance charge must be shown on the disclosures only as 
a total amount; the elements of the finance charge must not be 
itemized in the segregated disclosures, although the regulation does 
not prohibit their itemization elsewhere.

18(d)(2) Other Credit

    1. Tolerance. When a finance charge error results in a 
misstatement of the amount financed, or some other dollar amount for 
which the regulation provides no specific tolerance, the misstated 
disclosure does not violate the Act or the regulation if the finance 
charge error is within the permissible tolerance under this 
paragraph.

18(e) Annual Percentage Rate

    1. Disclosure required. The creditor must disclose the cost of 
the credit as an annual rate, using the term annual percentage rate, 
plus a brief descriptive phrase comparable to that used in Sec.  
1026.18(e). For variable rate transactions, the descriptor may be 
further modified with a phrase such as which is subject to change. 
Under Sec.  1026.17(a), the terms annual percentage rate and finance 
charge must be more conspicuous than the other required disclosures.
    2. Exception. Section 1026.18(e) provides an exception for 
certain transactions in which no annual percentage rate disclosure 
is required.

18(f) Variable Rate

    1. Coverage. The requirements of Sec.  1026.18(f) apply to all 
transactions in which the terms of the legal obligation allow the 
creditor to increase the rate originally disclosed to the consumer. 
It includes not only increases in the interest rate but also 
increases in other components, such as the rate of required credit 
life insurance. The provisions, however, do not apply to increases 
resulting from delinquency (including late payment), default, 
assumption, acceleration or transfer of the collateral. Section 
1026.18(f)(1) applies to variable-rate transactions that are not 
secured by the consumer's principal dwelling and to those that are 
secured by the principal dwelling but have a term of one year or 
less. Section 1026.18(f)(2) applies to variable-rate transactions 
that are secured by the consumer's principal dwelling and have a 
term greater than one year. Moreover, transactions subject to Sec.  
1026.18(f)(2) are subject to the special early disclosure 
requirements of Sec.  1026.19(b). (However, ``shared-equity'' or 
``shared-appreciation'' mortgages are subject to the disclosure 
requirements of Sec.  1026.18(f)(1) and not to the requirements of 
Sec. Sec.  1026.18(f)(2) and 1026.19(b) regardless of the general 
coverage of those sections.) Creditors are permitted under Sec.  
1026.18(f)(1) to substitute in any variable-rate transaction the 
disclosures required under Sec.  1026.19(b) for those disclosures 
ordinarily required under Sec.  1026.18(f)(1). Creditors who provide 
variable-rate disclosures under Sec.  1026.19(b) must comply with 
all of the requirements of that section, including the timing of 
disclosures, and must also provide the disclosures required under 
Sec.  1026.18(f)(2). Creditors substituting Sec.  1026.19(b) 
disclosures for Sec.  1026.18(f)(1) disclosures may, but need not, 
also provide disclosures pursuant to Sec.  1026.20(c). (Substitution 
of disclosures under Sec.  1026.18(f)(1) in transactions subject to 
Sec.  1026.19(b) is not permitted.)

Paragraph 18(f)(1)

    1. Terms used in disclosure. In describing the variable rate 
feature, the creditor need not use any prescribed terminology. For 
example, limitations and hypothetical examples may be described in 
terms of interest rates rather than annual percentage rates. The 
model forms in Appendix H provide examples of ways in which the 
variable rate disclosures may be made.
    2. Conversion feature. In variable-rate transactions with an 
option permitting consumers to convert to a fixed-rate transaction, 
the conversion option is a variable-rate feature that must be 
disclosed. In making disclosures under Sec.  1026.18(f)(1), 
creditors should disclose the fact that the rate may increase upon 
conversion; identify the index or formula used to set the fixed 
rate; and state any limitations on and effects of an increase 
resulting from conversion that differ from other variable-rate 
features. Because Sec.  1026.18(f)(1)(iv) requires only one 
hypothetical example (such as an example of the effect on payments 
resulting from changes in the index), a second hypothetical example 
need not be given.

Paragraph 18(f)(1)(i)

    1. Circumstances. The circumstances under which the rate may 
increase include identification of any index to which the rate is 
tied, as well as any conditions or events on which the increase is 
contingent.
    i. When no specific index is used, any identifiable factors used 
to determine whether to increase the rate must be disclosed.
    ii. When the increase in the rate is purely discretionary, the 
fact that any increase is within the creditor's discretion must be 
disclosed.
    iii. When the index is internally defined (for example, by that 
creditor's prime rate), the creditor may comply with this 
requirement by either a brief description of that index or a 
statement that any increase is in the discretion of the creditor. An 
externally defined index, however, must be identified.

Paragraph 18(f)(1)(ii)

    1. Limitations. This includes any maximum imposed on the amount 
of an increase in the rate at any time, as well as any maximum on 
the total increase over the life of the transaction. Except for 
private education loans disclosures, when there are no limitations, 
the creditor may, but need not, disclose that fact, and limitations 
do not include legal limits in the nature of usury or rate ceilings 
under state or Federal statutes or regulations. (See Sec.  1026.30 
for the rule requiring that a maximum interest rate be included in 
certain variable-rate transactions.) For disclosures with respect to 
private education loan disclosures, see comment 47(b)(1)-2.

Paragraph 18(f)(1)(iii)

    1. Effects. Disclosure of the effect of an increase refers to an 
increase in the number or amount of payments or an increase in the 
final payment. In addition, the creditor may make a brief reference 
to negative amortization that may result from a rate increase. (See 
the commentary to Sec.  1026.17(a)(1) regarding directly related 
information.) If the effect cannot be determined, the creditor must 
provide a statement of the possible effects. For example, if the 
exercise of the variable-rate feature may result in either more or 
larger payments, both possibilities must be noted.

Paragraph 18(f)(1)(iv)

    1. Hypothetical example. The example may, at the creditor's 
option appear apart from the other disclosures. The creditor may 
provide either a standard example that illustrates the terms and 
conditions of that type of credit offered by that creditor or an 
example that directly reflects the terms and conditions of the 
particular transaction. In transactions with more than one variable-
rate feature, only one hypothetical example need be provided. (See 
the commentary to Sec.  1026.17(a)(1) regarding disclosure of more 
than one hypothetical example as directly related information.)
    2. Hypothetical example not required. The creditor need not 
provide a hypothetical example in the following transactions with a 
variable-rate feature:
    i. Demand obligations with no alternate maturity date.
    ii. Private education loans as defined in Sec.  1026.46(b)(5).
    iii. Multiple-advance construction loans disclosed pursuant to 
Appendix D, Part I.

Paragraph 18(f)(2)

    1. Disclosure required. In variable-rate transactions that have 
a term greater than one year and are secured by the consumer's 
principal dwelling, the creditor must give special early disclosures 
under Sec.  1026.19(b) in addition to the later disclosures required 
under Sec.  1026.18(f)(2). The disclosures under Sec.  1026.18(f)(2) 
must state that the transaction has a variable-rate feature and that 
variable-rate disclosures have been provided earlier. (See the 
commentary to Sec.  1026.17(a)(1) regarding the disclosure of 
certain directly related information in addition to the variable-
rate disclosures required under Sec.  1026.18(f)(2).)

[[Page 79980]]

18(g) Payment Schedule

    1. Amounts included in repayment schedule. The repayment 
schedule should reflect all components of the finance charge, not 
merely the portion attributable to interest. A prepaid finance 
charge, however, should not be shown in the repayment schedule as a 
separate payment. The payments may include amounts beyond the amount 
financed and finance charge. For example, the disclosed payments 
may, at the creditor's option, reflect certain insurance premiums 
where the premiums are not part of either the amount financed or the 
finance charge, as well as real estate escrow amounts such as taxes 
added to the payment in mortgage transactions.
    2. Deferred downpayments. As discussed in the commentary to 
Sec.  1026.2(a)(18), deferred downpayments or pick-up payments that 
meet the conditions set forth in the definition of downpayment may 
be treated as part of the downpayment. Even if treated as a 
downpayment, that amount may nevertheless be disclosed as part of 
the payment schedule, at the creditor's option.
    3. Total number of payments. In disclosing the number of 
payments for transactions with more than one payment level, 
creditors may but need not disclose as a single figure the total 
number of payments for all levels. For example, in a transaction 
calling for 108 payments of $350, 240 payments of $335, and 12 
payments of $330, the creditor need not state that there will be a 
total of 360 payments.
    4. Timing of payments. i. General rule. Section 1026.18(g) 
requires creditors to disclose the timing of payments. To meet this 
requirement, creditors may list all of the payment due dates. They 
also have the option of specifying the ``period of payments'' 
scheduled to repay the obligation. As a general rule, creditors that 
choose this option must disclose the payment intervals or frequency, 
such as ``monthly''or ``bi-weekly,'' and the calendar date that the 
beginning payment is due. For example, a creditor may disclose that 
payments are due ``monthly beginning on July 1, 1998.'' This 
information, when combined with the number of payments, is necessary 
to define the repayment period and enable a consumer to determine 
all of the payment due dates.
    ii. Exception. In a limited number of circumstances, the 
beginning-payment date is unknown and difficult to determine at the 
time disclosures are made. For example, a consumer may become 
obligated on a credit contract that contemplates the delayed 
disbursement of funds based on a contingent event, such as the 
completion of home repairs. Disclosures may also accompany loan 
checks that are sent by mail, in which case the initial disbursement 
and repayment dates are solely within the consumer's control. In 
such cases, if the beginning-payment date is unknown the creditor 
may use an estimated date and label the disclosure as an estimate 
pursuant to Sec.  1026.17(c). Alternatively, the disclosure may 
refer to the occurrence of a particular event, for example, by 
disclosing that the beginning payment is due ``30 days after the 
first loan disbursement.'' This information also may be included 
with an estimated date to explain the basis for the creditor's 
estimate. See comment 17(a)(1)-5.iii.
    5. Mortgage insurance. The payment schedule should reflect the 
consumer's mortgage insurance payments until the date on which the 
creditor must automatically terminate coverage under applicable law, 
even though the consumer may have a right to request that the 
insurance be cancelled earlier. The payment schedule must reflect 
the legal obligation, as determined by applicable state or other 
law. For example, assume that under applicable law, mortgage 
insurance must terminate after the 130th scheduled monthly payment, 
and the creditor collects at closing and places in escrow two months 
of premiums. If, under the legal obligation, the creditor will 
include mortgage insurance premiums in 130 payments and refund the 
escrowed payments when the insurance is terminated, the payment 
schedule should reflect 130 premium payments. If, under the legal 
obligation, the creditor will apply the amount escrowed to the two 
final insurance payments, the payment schedule should reflect 128 
monthly premium payments. (For assumptions in calculating a payment 
schedule that includes mortgage insurance that must be automatically 
terminated, see comments 17(c)(1)-8 and 17(c)(1)-10.)
    6. Mortgage transactions. Section 1026.18(g) applies only to 
closed-end transactions other than transactions that are subject to 
Sec.  1026.18(s). Section 1026.18(s) applies to closed-end 
transactions secured by real property or a dwelling. Thus, if a 
closed-end consumer credit transaction is secured by real property 
or a dwelling, the creditor discloses an interest rate and payment 
summary table in accordance with Sec.  1026.18(s) and does not 
observe the requirements of Sec.  1026.18(g). On the other hand, if 
a closed-end consumer credit transaction is not secured by real 
property or a dwelling, the creditor discloses a payment schedule in 
accordance with Sec.  1026.18(g) and does not observe the 
requirements of Sec.  1026.18(s).

Paragraph 18(g)(1)

    1. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor has the option of disclosing only the 
due dates or periods of scheduled interest payments in the first 
year (for example, ``interest payable quarterly'' or ``interest due 
the first of each month''). The amounts of the interest payments 
need not be shown.

Paragraph 18(g)(2)

    1. Abbreviated disclosure. The creditor may disclose an 
abbreviated payment schedule when the amount of each regularly 
scheduled payment (other than the first or last payment) includes an 
equal amount to be applied on principal and a finance charge 
computed by application of a rate to the decreasing unpaid balance. 
This option is also available when mortgage-guarantee insurance 
premiums, paid either monthly or annually, cause variations in the 
amount of the scheduled payments, reflecting the continual decrease 
or increase in the premium due. In addition, in transactions where 
payments vary because interest and principal are paid at different 
intervals, the two series of payments may be disclosed separately 
and the abbreviated payment schedule may be used for the interest 
payments. For example, in transactions with fixed quarterly 
principal payments and monthly interest payments based on the 
outstanding principal balance, the amount of the interest payments 
will change quarterly as principal declines. In such cases the 
creditor may treat the interest and principal payments as two 
separate series of payments, separately disclosing the number, 
amount, and due dates of principal payments, and, using the 
abbreviated payment schedule, the number, amount, and due dates of 
interest payments. This option may be used when interest and 
principal are scheduled to be paid on the same date of the month as 
well as on different dates of the month. The creditor using this 
alternative must disclose the dollar amount of the highest and 
lowest payments and make reference to the variation in payments.
    2. Combined payment schedule disclosures. Creditors may combine 
the option in this paragraph with the general payment schedule 
requirements in transactions where only a portion of the payment 
schedule meets the conditions of Sec.  1026.18(g)(2). For example, 
in a graduated payment mortgage where payments rise sharply for 5 
years and then decline over the next 25 years because of decreasing 
mortgage insurance premiums, the first 5 years would be disclosed 
under the general rule in Sec.  1026.18(g) and the next 25 years 
according to the abbreviated schedule in Sec.  1026.18(g)(2).
    3. Effect on other disclosures. Section 1026.18(g)(2) applies 
only to the payment schedule disclosure. The actual amounts of 
payments must be taken into account in calculating and disclosing 
the finance charge and the annual percentage rate.

Paragraph 18(h) Total of Payments

    1. Disclosure required. The total of payments must be disclosed 
using that term, along with a descriptive phrase similar to the one 
in the regulation. The descriptive explanation may be revised to 
reflect a variable rate feature with a brief phrase such as ``based 
on the current annual percentage rate which may change.''
    2. Calculation of total of payments. The total of payments is 
the sum of the payments disclosed under Sec.  1026.18(g). For 
example, if the creditor disclosed a deferred portion of the 
downpayment as part of the payment schedule, that payment must be 
reflected in the total disclosed under this paragraph. To calculate 
the total of payments amount for transactions subject to Sec.  
1026.18(s), creditors should use the rules in Sec.  1026.18(g) and 
associated commentary and, for adjustable-rate transactions, 
comments 17(c)(1)-8 and -10.
    3. Exception. Section 1026.18(h) permits creditors to omit 
disclosure of the total of payments in single-payment transactions. 
This exception does not apply to a transaction calling for a single 
payment of principal combined with periodic payments of interest.
    4. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor may omit disclosure of payment

[[Page 79981]]

amounts under Sec.  1026.18(g)(1). In those transactions, the 
creditor need not disclose the total of payments.

Paragraph 18(i) Demand Feature

    1. Disclosure requirements. The disclosure requirements of this 
provision apply not only to transactions payable on demand from the 
outset, but also to transactions that are not payable on demand at 
the time of consummation but convert to a demand status after a 
stated period. In demand obligations in which the disclosures are 
based on an assumed maturity of 1 year under Sec.  1026.17(c)(5), 
that fact must also be stated. Appendix H contains model clauses 
that may be used in making this disclosure.
    2. Covered demand features. The type of demand feature 
triggering the disclosures required by Sec.  1026.18(i) includes 
only those demand features contemplated by the parties as part of 
the legal obligation. For example, this provision does not apply to 
transactions that covert to a demand status as a result of the 
consumer's default. A due-on-sale clause is not considered a demand 
feature. A creditor may, but need not, treat its contractual right 
to demand payment of a loan made to its executive officers as a 
demand feature to the extent that the contractual right is required 
by Regulation O of the Board of Governors of the Federal Reserve 
System (12 CFR 215.5) or other Federal law.
    3. Relationship to payment schedule disclosures. As provided in 
Sec.  1026.18(g)(1), in demand obligations with no alternate 
maturity date, the creditor need only disclose the due dates or 
payment periods of any scheduled interest payments for the first 
year. If the demand obligation states an alternate maturity, 
however, the disclosed payment schedule must reflect that stated 
term; the special rule in Sec.  1026.18(g)(1) is not available.

Paragraph 18(j) Total Sale Price

    1. Disclosure required. In a credit sale transaction, the total 
sale price must be disclosed using that term, along with a 
descriptive explanation similar to the one in the regulation. For 
variable rate transactions, the descriptive phrase may, at the 
creditor's option, be modified to reflect the variable rate feature. 
For example, the descriptor may read: ``The total cost of your 
purchase on credit, which is subject to change, including your 
downpayment of * * *.'' The reference to a downpayment may be 
eliminated in transactions calling for no downpayment.
    2. Calculation of total sale price. The figure to be disclosed 
is the sum of the cash price, other charges added under Sec.  
1026.18(b)(2), and the finance charge disclosed under Sec.  
1026.18(d).
    3. Effect of existing liens. When a credit sale transaction 
involves property that is being used as a trade-in (an automobile, 
for example) and that has a lien exceeding the value of the trade-
in, the total sale price is affected by the amount of any cash 
provided. (See comment 2(a)(18)-3.) To illustrate, assume a consumer 
finances the purchase of an automobile with a cash price of $20,000. 
Another vehicle used as a trade-in has a value of $8,000 but has an 
existing lien of $10,000, leaving a $2,000 deficit that the consumer 
must finance.
    i. If the consumer pays $1,500 in cash, the creditor may apply 
the cash first to the lien, leaving a $500 deficit, and reflect a 
downpayment of $0. The total sale price would include the $20,000 
cash price, an additional $500 financed under Sec.  1026.18(b)(2), 
and the amount of the finance charge. Alternatively, the creditor 
may reflect a downpayment of $1,500 and finance the $2,000 deficit. 
In that case, the total sale price would include the sum of the 
$20,000 cash price, the $2,000 lien payoff amount as an additional 
amount financed, and the amount of the finance charge.
    ii. If the consumer pays $3,000 in cash, the creditor may apply 
the cash first to extinguish the lien and reflect the remainder as a 
downpayment of $1,000. The total sale price would reflect the 
$20,000 cash price and the amount of the finance charge. (The cash 
payment extinguishes the trade-in deficit and no charges are added 
under Sec.  1026.18(b)(2).) Alternatively, the creditor may elect to 
reflect a downpayment of $3,000 and finance the $2,000 deficit. In 
that case, the total sale price would include the sum of the $20,000 
cash price, the $2,000 lien payoff amount as an additional amount 
financed, and the amount of the finance charge.

18(k) Prepayment

    1. Disclosure required. The creditor must give a definitive 
statement of whether or not a penalty will be imposed or a rebate 
will be given.
    i. The fact that no penalty will be imposed may not simply be 
inferred from the absence of a penalty disclosure; the creditor must 
indicate that prepayment will not result in a penalty.
    ii. If a penalty or refund is possible for one type of 
prepayment, even though not for all, a positive disclosure is 
required. This applies to any type of prepayment, whether voluntary 
or involuntary as in the case of prepayments resulting from 
acceleration.
    iii. Any difference in rebate or penalty policy, depending on 
whether prepayment is voluntary or not, must not be disclosed with 
the segregated disclosures.
    2. Rebate-penalty disclosure. A single transaction may involve 
both a precomputed finance charge and a finance charge computed by 
application of a rate to the unpaid balance (for example, mortgages 
with mortgage-guarantee insurance). In these cases, disclosures 
about both prepayment rebates and penalties are required. Sample 
form H-15 in Appendix H illustrates a mortgage transaction in which 
both rebate and penalty disclosures are necessary.
    3. Prepaid finance charge. The existence of a prepaid finance 
charge in a transaction does not, by itself, require a disclosure 
under Sec.  1026.18(k). A prepaid finance charge is not considered a 
penalty under Sec.  1026.18(k)(1), nor does it require a disclosure 
under Sec.  1026.18(k)(2). At its option, however, a creditor may 
consider a prepaid finance charge to be under Sec.  1026.18(k)(2). 
If a disclosure is made under Sec.  1026.18(k)(2) with respect to a 
prepaid finance charge or other finance charge, the creditor may 
further identify that finance charge. For example, the disclosure 
may state that the borrower ``will not be entitled to a refund of 
the prepaid finance charge'' or some other term that describes the 
finance charge.

Paragraph 18(k)(1)

    1. Penalty. This applies only to those transactions in which the 
interest calculation takes account of all scheduled reductions in 
principal, as well as transactions in which interest calculations 
are made daily. The term penalty as used here encompasses only those 
charges that are assessed strictly because of the prepayment in full 
of a simple-interest obligation, as an addition to all other 
amounts. Items which are penalties include, for example:
    i. Interest charges for any period after prepayment in full is 
made. (See the commentary to Sec.  1026.17(a)(1) regarding 
disclosure of interest charges assessed for periods after prepayment 
in full as directly related information.)
    ii. A minimum finance charge in a simple-interest transaction. 
(See the commentary to Sec.  1026.17(a)(1) regarding the disclosure 
of a minimum finance charge as directly related information.) Items 
which are not penalties include, for example, loan guarantee fees.

Paragraph 18(k)(2)

    1. Rebate of finance charge. i. This applies to any finance 
charges that do not take account of each reduction in the principal 
balance of an obligation. This category includes, for example:
    A. Precomputed finance charges such as add-on charges.
    B. Charges that take account of some but not all reductions in 
principal, such as mortgage guarantee insurance assessed on the 
basis of an annual declining balance, when the principal is reduced 
on a monthly basis.
    ii. No description of the method of computing earned or unearned 
finance charges is required or permitted as part of the segregated 
disclosures under this section.

18(l) Late Payment

    1. Definition. This paragraph requires a disclosure only if 
charges are added to individual delinquent installments by a 
creditor who otherwise considers the transaction ongoing on its 
original terms. Late payment charges do not include:
    i. The right of acceleration.
    ii. Fees imposed for actual collection costs, such as 
repossession charges or attorney's fees.
    iii. Deferral and extension charges.
    iv. The continued accrual of simple interest at the contract 
rate after the payment due date. However, an increase in the 
interest rate is a late payment charge to the extent of the 
increase.
    2. Content of disclosure. Many state laws authorize the 
calculation of late charges on the basis of either a percentage or a 
specified dollar amount, and permit imposition of the lesser or 
greater of the 2 charges. The disclosure made under Sec.  1026.18(l) 
may reflect this alternative. For example, stating that the charge 
in the event of a late payment is 5% of the late amount, not to 
exceed $5.00, is sufficient. Many creditors also permit a grace 
period during which no late charge will be assessed; this fact may 
be disclosed as directly related information. (See the commentary to 
Sec.  1026.17(a).)

[[Page 79982]]

18(m) Security Interest

    1. Purchase money transactions. When the collateral is the item 
purchased as part of, or with the proceeds of, the credit 
transaction, Sec.  1026.18(m) requires only a general identification 
such as ``the property purchased in this transaction.'' However, the 
creditor may identify the property by item or type instead of 
identifying it more generally with a phrase such as ``the property 
purchased in this transaction.'' For example, a creditor may 
identify collateral as ``a motor vehicle,'' or as ``the property 
purchased in this transaction.'' Any transaction in which the credit 
is being used to purchase the collateral is considered a purchase 
money transaction and the abbreviated identification may be used, 
whether the obligation is treated as a loan or a credit sale.
    2. Nonpurchase money transactions. In nonpurchase money 
transactions, the property subject to the security interest must be 
identified by item or type. This disclosure is satisfied by a 
general disclosure of the category of property subject to the 
security interest, such as ``motor vehicles,'' ``securities,'' 
``certain household items,'' or ``household goods.'' (Creditors 
should be aware, however, that the Federal credit practices rules, 
as well as some state laws, prohibit certain security interests in 
household goods.) At the creditor's option, however, a more precise 
identification of the property or goods may be provided.
    3. Mixed collateral. In some transactions in which the credit is 
used to purchase the collateral, the creditor may also take other 
property of the consumer as security. In those cases, a combined 
disclosure must be provided, consisting of an identification of the 
purchase money collateral consistent with comment 18(m)-1 and a 
specific identification of the other collateral consistent with 
comment 18(m)-2.
    4. After-acquired property. An after-acquired property clause is 
not a security interest to be disclosed under Sec.  1026.18(m).
    5. Spreader clause. The fact that collateral for pre-existing 
credit with the institution is being used to secure the present 
obligation constitutes a security interest and must be disclosed. 
(Such security interests may be known as ``spreader'' or ``dragnet'' 
clauses, or as ``cross-collateralization'' clauses.) A specific 
identification of that collateral is unnecessary but a reminder of 
the interest arising from the prior indebtedness is required. The 
disclosure may be made by using language such as ``collateral 
securing other loans with us may also secure this loan.'' At the 
creditor's option, a more specific description of the property 
involved may be given.
    6. Terms used in disclosure. No specified terminology is 
required in disclosing a security interest. Although the disclosure 
may, at the creditor's option, use the term security interest, the 
creditor may designate its interest by using, for example, pledge, 
lien, or mortgage.
    7. Collateral from third party. In certain transactions, the 
consumer's obligation may be secured by collateral belonging to a 
third party. For example, a loan to a student may be secured by an 
interest in the property of the student's parents. In such cases, 
the security interest is taken in connection with the transaction 
and must be disclosed, even though the property encumbered is owned 
by someone other than the consumer.

18(n) Insurance and Debt Cancellation

    1. Location. This disclosure may, at the creditor's option, 
appear apart from the other disclosures. It may appear with any 
other information, including the amount financed itemization, any 
information prescribed by state law, or other supplementary 
material. When this information is disclosed with the other 
segregated disclosures, however, no additional explanatory material 
may be included.
    2. Debt cancellation. Creditors may use the model credit 
insurance disclosures only if the debt cancellation coverage 
constitutes insurance under state law. Otherwise, they may provide a 
parallel disclosure that refers to debt cancellation coverage.

18(o) Certain Security Interest Charges

    1. Format. No special format is required for these disclosures; 
under Sec.  1026.4(e), taxes and fees paid to government officials 
with respect to a security interest may be aggregated, or may be 
broken down by individual charge. For example, the disclosure could 
be labeled ``filing fees and taxes'' and all funds disbursed for 
such purposes may be aggregated in a single disclosure. This 
disclosure may appear, at the creditor's option, apart from the 
other required disclosures. The inclusion of this information on a 
statement required under the Real Estate Settlement Procedures Act 
is sufficient disclosure for purposes of Truth in Lending.

Paragraph 18(p) Contract Reference

    1. Content. Creditors may substitute, for the phrase 
``appropriate contract document,'' a reference to specific 
transaction documents in which the additional information is found, 
such as ``promissory note'' or ``retail installment sale contract.'' 
A creditor may, at its option, delete inapplicable items in the 
contract reference, as for example when the contract documents 
contain no information regarding the right of acceleration.

18(q) Assumption Policy

    1. Policy statement. In many mortgages, the creditor cannot 
determine, at the time disclosure must be made, whether a loan may 
be assumable at a future date on its original terms. For example, 
the assumption clause commonly used in mortgages sold to the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation conditions an assumption on a variety of factors such as 
the creditworthiness of the subsequent borrower, the potential for 
impairment of the lender's security, and execution of an assumption 
agreement by the subsequent borrower. In cases where uncertainty 
exists as to the future assumability of a mortgage, the disclosure 
under Sec.  1026.18(q) should reflect that fact. In making 
disclosures in such cases, the creditor may use phrases such as 
``subject to conditions,'' ``under certain circumstances,'' or 
``depending on future conditions.'' The creditor may provide a brief 
reference to more specific criteria such as a due-on-sale clause, 
although a complete explanation of all conditions is not 
appropriate. For example, the disclosure may state, ``Someone buying 
your home may be allowed to assume the mortgage on its original 
terms, subject to certain conditions, such as payment of an 
assumption fee.'' See comment 17(a)(1)-5 for an example for a 
reference to a due-on-sale clause.
    2. Original terms. The phrase original terms for purposes of 
Sec.  1026.18(q) does not preclude the imposition of an assumption 
fee, but a modification of the basic credit agreement, such as a 
change in the contract interest rate, represents different terms.

18(r) Required Deposit

    1. Disclosure required. The creditor must inform the consumer of 
the existence of a required deposit. (Appendix H provides a model 
clause that may be used in making that disclosure.) Section 
1026.18(r) describes 3 types of deposits that need not be considered 
required deposits. Use of the phrase ``need not'' permits creditors 
to include the disclosure even in cases where there is doubt as to 
whether the deposit constitutes a required deposit.
    2. Pledged account mortgages. In these transactions, a consumer 
pledges as collateral funds that the consumer deposits in an account 
held by the creditor. The creditor withdraws sums from that account 
to supplement the consumer's periodic payments. Creditors may treat 
these pledged accounts as required deposits or they may treat them 
as consumer buydowns in accordance with the commentary to Sec.  
1026.17(c)(1).
    3. Escrow accounts. The escrow exception in Sec.  1026.18(r) 
applies, for example, to accounts for such items as maintenance 
fees, repairs, or improvements, whether in a realty or a nonrealty 
transaction. (See the commentary to Sec.  1026.17(c)(1) regarding 
the use of escrow accounts in consumer buydown transactions.)
    4. Interest-bearing accounts. When a deposit earns at least 5 
percent interest per year, no disclosure is required under Sec.  
1026.18(r). This exception applies whether the deposit is held by 
the creditor or by a third party.
    5. Morris Plan transactions. A deposit under a Morris Plan, in 
which a deposit account is created for the sole purpose of 
accumulating payments and this is applied to satisfy entirely the 
consumer's obligation in the transaction, is not a required deposit.
    6. Examples of amounts excluded. The following are among the 
types of deposits that need not be treated as required deposits:
    i. Requirement that a borrower be a customer or a member even if 
that involves a fee or a minimum balance.
    ii. Required property insurance escrow on a mobile home 
transaction.
    iii. Refund of interest when the obligation is paid in full.
    iv. Deposits that are immediately available to the consumer.
    v. Funds deposited with the creditor to be disbursed (for 
example, for construction) before the loan proceeds are advanced.
    vi. Escrow of condominium fees.
    vii. Escrow of loan proceeds to be released when the repairs are 
completed.

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18(s) Interest Rate and Payment Summary for Mortgage Transactions

    1. In general. Section 1026.18(s) prescribes format and content 
for disclosure of interest rates and monthly (or other periodic) 
payments for mortgage loans. The information in Sec.  1026.18(s)(2)-
(4) is required to be in the form of a table, except as otherwise 
provided, with headings and format substantially similar to Model 
Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. 
A disclosure that does not include the shading shown in a model 
clause but otherwise follows the model clause's headings and format 
is substantially similar to that model clause. Where Sec.  
1026.18(s)(2)-(4) or the applicable model clause requires that a 
column or row of the table be labeled using the word ``monthly'' but 
the periodic payments are not due monthly, the creditor should use 
the appropriate term, such as ``bi-weekly'' or ``quarterly.'' In all 
cases, the table should have no more than five vertical columns 
corresponding to applicable interest rates at various times during 
the loan's term; corresponding payments would be shown in horizontal 
rows. Certain loan types and terms are defined for purposes of Sec.  
1026.18(s) in Sec.  1026.18(s)(7).
    2. Amortizing loans. Loans described as amortizing in Sec. Sec.  
1026.18(s)(2)(i) and 1026.18(s)(3) include interest-only loans if 
they do not also permit negative amortization. (For rules relating 
to loans with balloon payments, see Sec.  1026.18(s)(5)). If an 
amortizing loan is an adjustable-rate mortgage with an introductory 
rate (less than the fully-indexed rate), creditors must provide a 
special explanation of introductory rates. See Sec.  
1026.18(s)(2)(iii).
    3. Negative amortization. For negative amortization loans, 
creditors must follow the rules in Sec. Sec.  1026.18(s)(2)(ii) and 
1026.18(s)(4) in disclosing interest rates and monthly payments. 
Loans with negative amortization also require special explanatory 
disclosures about rates and payments. See Sec.  1026.18(s)(6). Loans 
with negative amortization include ``payment option'' loans, in 
which the consumer is permitted to make minimum payments that will 
cover only some of the interest accruing each month. See also 
comment 17(c)(1)-12, regarding graduated-payment adjustable-rate 
mortgages.

18(s)(2) Interest Rates

18(s)(2)(i) Amortizing Loans

Paragraph 18(s)(2)(i)(A)

    1. Fixed rate loans--payment increases. Although the interest 
rate will not change after consummation for a fixed-rate loan, some 
fixed-rate loans may have periodic payments that increase after 
consummation. For example, the terms of the legal obligation may 
permit the consumer to make interest-only payments for a specified 
period such as the first five years after consummation. In such 
cases, the creditor must include the increased payment under Sec.  
1026.18(s)(3)(ii)(B) in the payment row, and must show the interest 
rate in the column for that payment, even though the rate has not 
changed since consummation. See also comment 17(c)(1)-13, regarding 
growth equity mortgages.

Paragraph 18(s)(2)(i)(B)

    1. Adjustable-rate mortgages and step-rate mortgages. Creditors 
must disclose more than one interest rate for adjustable-rate 
mortgages and step-rate mortgages, in accordance with Sec.  
1026.18(s)(2)(i)(B). Creditors must assume that an adjustable-rate 
mortgage's interest rate will increase after consummation as rapidly 
as possible, taking into account the terms of the legal obligation.
    2. Maximum interest rate during first five years--adjustable-
rate mortgages and step-rate mortgages. The creditor must disclose 
the maximum rate that could apply during the first five years after 
consummation. If there are no interest rate caps other than the 
maximum rate required under Sec.  1026.30, then the creditor should 
disclose only the rate at consummation and the maximum rate. Such a 
table would have only two columns.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps when disclosing the maximum interest 
rate during the first five years. The creditor must also disclose 
the earliest date on which that adjustment may occur.
    ii. If the transaction is a step-rate mortgage, the creditor 
should disclose the rate that will apply after consummation. For 
example, the legal obligation may provide that the rate is 6 percent 
for the first two years following consummation, and then increases 
to 7 percent for at least the next three years. The creditor should 
disclose the maximum rate during the first five years as 7 percent 
and the date on which the rate is scheduled to increase to 7 
percent.
    3. Maximum interest rate at any time. The creditor must disclose 
the maximum rate that could apply at any time during the term of the 
loan and the earliest date on which the maximum rate could apply.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps in disclosing the maximum interest 
rate. For example, if the legal obligation provides that at each 
annual adjustment the rate may increase by no more than 2 percentage 
points, the creditor must take this limit into account in 
determining the earliest date on which the maximum possible rate may 
be reached.
    ii. For a step-rate mortgage, the creditor should disclose the 
highest rate that could apply under the terms of the legal 
obligation and the date on which that rate will first apply.

Paragraph 18(s)(2)(i)(C)

    1. Payment increases. For some loans, the payment may increase 
following consummation for reasons unrelated to an interest rate 
adjustment. For example, an adjustable-rate mortgage may have an 
introductory fixed rate for the first five years following 
consummation and permit the borrower to make interest-only payments 
for the first three years. The disclosure requirement of Sec.  
1026.18(s)(2)(i)(C) applies to all amortizing loans, including 
interest-only loans, if the consumer's payment can increase in the 
manner described in Sec.  1026.18(s)(3)(i)(B), even if it is not the 
type of loan covered by Sec.  1026.18(s)(3)(i). Thus, Sec.  
1026.18(s)(2)(i)(C) requires that the creditor disclose the interest 
rate that corresponds to the first payment that includes principal 
as well as interest, even though the interest rate will not adjust 
at that time. In such cases, if the loan is an interest-only loan, 
the creditor also must disclose the corresponding periodic payment 
pursuant to Sec.  1026.18(s)(3)(ii). The table would show, from left 
to right: The interest rate and payment at consummation with the 
payment itemized to show that the payment is being applied to 
interest only; the interest rate and payment when the interest-only 
option ends; the maximum interest rate and payment during the first 
five years; and the maximum possible interest rate and payment. The 
disclosure requirements of Sec.  1026.18(s)(2)(i)(C) do not apply to 
minor payment variations resulting solely from the fact that months 
have different numbers of days.

18(s)(2)(ii) Negative Amortization Loans

    1. Rate at consummation. In all cases the interest rate in 
effect at consummation must be disclosed, even if it will apply only 
for a short period such as one month.
    2. Rates for adjustable-rate mortgages. The creditor must assume 
that interest rates rise as quickly as possible after consummation, 
in accordance with any interest rate caps under the legal 
obligation. For adjustable-rate mortgages with no rate caps except a 
lifetime maximum, creditors must assume that interest rate reaches 
the maximum at the first adjustment. For example, assume that the 
legal obligation provides for an interest rate at consummation of 
1.5 percent. One month after consummation, the interest rate adjusts 
and will adjust monthly thereafter, according to changes in the 
index. The consumer may make payments that cover only part of the 
interest accrued each month, until the date the principal balance 
reaches 115 percent of its original balance, or until the end of the 
fifth year after consummation, whichever comes first. The maximum 
possible rate is 10.5 percent. No other limits on interest rates 
apply. The minimum required payment adjusts each year, and may 
increase by no more than 7.5 percent over the previous year's 
payment. The creditor should disclose the following rates and the 
dates when they are scheduled to occur: A rate of 1.5 percent for 
the first month following consummation and the minimum payment; a 
rate of 10.5 percent, and the corresponding minimum payment taking 
into account the 7.5 percent limit on payment increases, at the 
beginning of the second year; and a rate of 10.5 percent and the 
corresponding minimum payment taking into account the 7.5 percent 
payment increase limit, at the beginning of the third year. The 
creditor also must disclose the rate of 10.5 percent, the fully 
amortizing payment, and the date on which the consumer must first 
make such a payment under the terms of the legal obligation.

18(s)(2)(iii) Introductory Rate Disclosure for Amortizing Adjustable-
Rate Mortgage

    1. Introductory rate. In some adjustable-rate mortgages, 
creditors may set an initial interest rate that is lower than the 
fully indexed rate at consummation. For amortizing loans with an 
introductory rate,

[[Page 79984]]

creditors must disclose the information required in Sec.  
1026.18(s)(2)(iii) directly below the table.

Paragraph 18(s)(2)(iii)(B)

    1. Place in sequence. ``Designation of the place in sequence'' 
refers to identifying the month or year, as applicable, of the 
change in the rate resulting from the expiration of an introductory 
rate by its place in the sequence of months or years, as applicable, 
of the transaction's term. For example, if a transaction has a 
discounted rate for the first three years, Sec.  
1026.18(s)(2)(iii)(B) requires a statement such as, ``In the fourth 
year, even if market rates do not change, this rate will increase to 
----%.''

Paragraph 18(s)(2)(iii)(C)

    1. Fully indexed rate. The fully indexed rate is defined in 
Sec.  1026.18(s)(7) as the index plus the margin at consummation. 
For purposes of Sec.  1026.18(s)(2)(iii)(C), ``at consummation'' 
refers to disclosures delivered at consummation, or three business 
days before consummation pursuant to Sec.  1026.19(a)(2)(ii); for 
early disclosures delivered within three business days after receipt 
of a consumer's application pursuant to Sec.  1026.19(a)(1), the 
fully indexed rate disclosed under Sec.  1026.18(s)(2)(iii)(C) may 
be based on the index in effect at the time the disclosures are 
provided. The index in effect at consummation (or at the time of 
early disclosures) need not be used if a contract provides for a 
delay in the implementation of changes in an index value. For 
example, if the contract specifies that rate changes are based on 
the index value in effect 45 days before the change date, creditors 
may use any index value in effect during the 45 days before 
consummation (or any earlier date of disclosure) in calculating the 
fully indexed rate to be disclosed.

18(s)(3) Payments for Amortizing Loans

    1. Payments corresponding to interest rates. Creditors must 
disclose the periodic payment that corresponds to each interest rate 
disclosed under Sec.  1026.18(s)(2)(i)(A)-(C). The corresponding 
periodic payment is the regular payment for each such interest rate, 
without regard to any final payment that differs from others because 
of the rounding of periodic payments to account for payment amounts 
including fractions of cents. Balloon payments, however, must be 
disclosed as provided in Sec.  1026.18(s)(5).
    2. Principal and interest payment amounts; examples. i. For 
fixed-rate interest-only transactions, Sec.  1026.18(s)(3)(ii)(B) 
requires scheduled increases in the regular periodic payment amounts 
to be disclosed along with the date of the increase. For example, in 
a fixed-rate interest-only loan, a scheduled increase in the payment 
amount from an interest-only payment to a fully amortizing payment 
must be disclosed. Similarly, in a fixed-rate balloon loan, the 
balloon payment must be disclosed in accordance with Sec.  
1026.18(s)(5).
    ii. For adjustable-rate mortgage transactions, Sec.  
1026.18(s)(3)(i)(A) requires that for each interest rate required to 
be disclosed under Sec.  1026.18(s)(2)(i) (the interest rate at 
consummation, the maximum rate during the first five years, and the 
maximum possible rate) a corresponding payment amount must be 
disclosed.
    iii. The format of the payment disclosure varies depending on 
whether all regular periodic payment amounts will include principal 
and interest, and whether there will be an escrow account for taxes 
and insurance.

Paragraph 18(s)(3)(i)(C)

    1. Taxes and insurance. An estimated payment amount for taxes 
and insurance must be disclosed if the creditor will establish an 
escrow account for such amounts. If the escrow account will include 
amounts for items other than taxes and insurance, such as homeowners 
association dues, the creditor may but is not required to include 
such items in the estimate. When such estimated escrow payments must 
be disclosed in multiple columns of the table, such as for 
adjustable- and step-rate transactions, each column should use the 
same estimate for taxes and insurance except that the estimate 
should reflect changes in periodic mortgage insurance premiums that 
are known to the creditor at the time the disclosure is made. The 
estimated amounts of mortgage insurance premiums should be based on 
the declining principal balance that will occur as a result of 
changes to the interest rate that are assumed for purposes of 
disclosing those rates under Sec.  1026.18(s)(2) and accompanying 
commentary. The payment amount must include estimated amounts for 
property taxes and premiums for mortgage-related insurance required 
by the creditor, such as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use 
of the property, or insurance protecting the creditor against the 
consumer's default or other credit loss. Premiums for credit 
insurance, debt suspension and debt cancellation agreements, 
however, should not be included. Except for periodic mortgage 
insurance premiums included in the escrow payment under Sec.  
1026.18(s)(3)(i)(C), amounts included in the escrow payment 
disclosure such as property taxes and homeowner's insurance 
generally are not finance charges under Sec.  1026.4 and, therefore, 
do not affect other disclosures, including the finance charge and 
annual percentage rate.
    2. Mortgage insurance. Payment amounts under Sec.  
1026.18(s)(3)(i) should reflect the consumer's mortgage insurance 
payments until the date on which the creditor must automatically 
terminate coverage under applicable law, even though the consumer 
may have a right to request that the insurance be cancelled earlier. 
The payment amount must reflect the terms of the legal obligation, 
as determined by applicable state or other law. For example, assume 
that under applicable law, mortgage insurance must terminate after 
the 130th scheduled monthly payment, and the creditor collects at 
closing and places in escrow two months of premiums. If, under the 
legal obligation, the creditor will include mortgage insurance 
premiums in 130 payments and refund the escrowed payments when the 
insurance is terminated, payment amounts disclosed through the 130th 
payment should reflect premium payments. If, under the legal 
obligation, the creditor will apply the amount escrowed to the two 
final insurance payments, payments disclosed through the 128th 
payment should reflect premium payments. The escrow amount reflected 
on the disclosure should include mortgage insurance premiums even if 
they are not escrowed and even if there is no escrow account 
established for the transaction.

Paragraph 18(s)(3)(i)(D)

    1. Total monthly payment. For amortizing loans, each column 
should add up to a total estimated payment. The total estimated 
payment amount should be labeled. If periodic payments are not due 
monthly, the creditor should use the appropriate term such as 
``quarterly'' or ``annually.''

18(s)(3)(ii) Interest-Only Payments

    1. Interest-only loans that are also negative amortization 
loans. The rules in Sec.  1026.18(s)(3)(ii) for disclosing payments 
on interest-only loans apply only if the loan is not also a negative 
amortization loan. If the loan is a negative amortization loan, even 
if it also has an interest-only feature, payments are disclosed 
under the rules in Sec.  1026.18(s)(4).

Paragraph 18(s)(3)(ii)(C)

    1. Escrows. See the commentary under Sec.  1026.18(s)(3)(i)(C) 
for guidance on escrows for purposes of Sec.  1026.18(s)(3)(ii)(C).

18(s)(4) Payments for Negative Amortization Loans

    1. Table. Section 1026.18(s)(1) provides that tables shall 
include only the information required in Sec.  1026.18(s)(2)-(4). 
Thus, a table for a negative amortization loan must contain no more 
than two horizontal rows of payments and no more than five vertical 
columns of interest rates.
    2. Payment amounts. The payment amounts disclosed under Sec.  
1026.18(s)(4) are the minimum or fully amortizing periodic payments, 
as applicable, corresponding to the interest rates disclosed under 
Sec.  1026.18(s)(2)(ii). The corresponding periodic payment is the 
regular payment for each such interest rate, without regard to any 
final payment that differs from the rest because of the rounding of 
periodic payments to account for payment amounts including fractions 
of cents.

Paragraph 18(s)(4)(i)

    1. Minimum required payments. In one row of the table, the 
creditor must disclose the minimum required payment in each column 
of the table, corresponding to each interest rate or adjustment 
required in Sec.  1026.18(s)(2)(ii). The payments in this row must 
be calculated based on an assumption that the consumer makes the 
minimum required payment for as long as possible under the terms of 
the legal obligation. This row should be identified as the minimum 
payment option, and the statement required by Sec.  
1026.18(s)(4)(i)(C) should be included in the heading for the row.

Paragraph 18(s)(4)(iii)

    1. Fully amortizing payments. In one row of the table, the 
creditor must disclose the fully amortizing payment in each column 
of the table, corresponding to each interest rate required in Sec.  
1026.18(s)(2)(ii). The creditor

[[Page 79985]]

must assume, for purposes of calculating the amounts in this row 
that the consumer makes only fully amortizing payments starting with 
the first scheduled payment.

18(s)(5) Balloon Payments

    1. General. A balloon payment is one that is more than two times 
the regular periodic payment. In a reverse mortgage transaction, the 
single payment is not considered a balloon payment. A balloon 
payment must be disclosed outside and below the table, unless the 
balloon payment coincides with an interest rate adjustment or a 
scheduled payment increase. In those cases, the balloon payment must 
be disclosed in the table.

18(s)(6) Special Disclosures for Loans With Negative Amortization

    1. Escrows. See the commentary under Sec.  1026.18(s)(3)(i)(C) 
for guidance on escrows for purposes of Sec.  1026.18(s)(6). Under 
that guidance, because mortgage insurance payments decline over a 
loan's term, the payment amounts shown in the table should reflect 
the mortgage insurance payment that will be applicable at the time 
each disclosed periodic payment will be in effect. Accordingly, the 
disclosed mortgage insurance payment will be zero if it corresponds 
to a periodic payment that will occur after the creditor will be 
legally required to terminate mortgage insurance. On the other hand, 
because only one escrow amount is disclosed under Sec.  
1026.18(s)(6) for negative amortization loans and escrows are not 
itemized in the payment amounts, the single escrow amount disclosed 
should reflect the mortgage insurance amount that will be collected 
at the outset of the loan's term, even though that amount will 
decline in the future and ultimately will be discontinued pursuant 
to the terms of the mortgage insurance policy.

18(s)(7) Definitions

    1. Negative amortization loans. Under Sec.  1026.18(s)(7)(v), a 
negative amortization loan is one that requires only a minimum 
periodic payment that covers only a portion of the accrued interest, 
resulting in negative amortization. For such a loan, Sec.  
1026.18(s)(4)(iii) requires creditors to disclose the fully 
amortizing periodic payment for each interest rate disclosed under 
Sec.  1026.18(s)(2)(ii), in addition to the minimum periodic 
payment, regardless of whether the legal obligation explicitly 
recites that the consumer may make the fully amortizing payment. 
Some loan types that result in negative amortization do not meet the 
definition of negative amortization loan for purposes of Sec.  
1026.18(s). These include, for example, loans requiring level, 
amortizing payments but having a payment schedule containing gaps 
during which interest accrues and is added to the principal balance 
before regular, amortizing payments begin (or resume). For example, 
``seasonal income'' loans may provide for amortizing payments during 
nine months of the year and no payments for the other three months; 
the required minimum payments (when made) are amortizing payments, 
thus such loans are not negative amortization loans under Sec.  
1026.18(s)(7)(v). An adjustable-rate loan that has fixed periodic 
payments that do not adjust when the interest rate adjusts also 
would not be disclosed as a negative amortization loan under Sec.  
1026.18(s). For example, assume the initial rate is 4%, for which 
the fully amortizing payment is $1500. Under the terms of the legal 
obligation, the consumer will make $1500 monthly payments even if 
the interest rate increases, and the additional interest is 
capitalized. The possibility (but not certainty) of negative 
amortization occurring after consummation does not make this 
transaction a negative amortization loan for purposes of Sec.  
1026.18(s). Loans that do not meet the definition of negative 
amortization loan, even if they may have negative amortization, are 
amortizing loans and are disclosed under Sec. Sec.  1026.18(s)(2)(i) 
and 1026.18(s)(3).

Section 1026.19--Certain Mortgage and Variable-Rate Transactions

19(a)(1)(i) Time of Disclosures

    1. Coverage. This section requires early disclosure of credit 
terms in mortgage transactions that are secured by a consumer's 
dwelling (other than home equity lines of credit subject to Sec.  
1026.40 or mortgage transactions secured by an interest in a 
timeshare plan) that are also subject to the Real Estate Settlement 
Procedures Act (RESPA) and its implementing Regulation X. To be 
covered by Sec.  1026.19, a transaction must be a federally related 
mortgage loan under RESPA. ``Federally related mortgage loan'' is 
defined under RESPA (12 U.S.C. 2602) and Regulation X (12 CFR 
1024.2), and is subject to any interpretations by the Bureau.
    2. Timing and use of estimates. The disclosures required by 
Sec.  1026.19(a)(1)(i) must be delivered or mailed not later than 
three business days after the creditor receives the consumer's 
written application. The general definition of ``business day'' in 
Sec.  1026.2(a)(6)--a day on which the creditor's offices are open 
to the public for substantially all of its business functions--is 
used for purposes of Sec.  1026.19(a)(1)(i). See comment 2(a)(6)-1. 
This general definition is consistent with the definition of 
``business day'' in Regulation X--a day on which the creditor's 
offices are open to the public for carrying on substantially all of 
its business functions. See 12 CFR 1024.2. Accordingly, the three-
business-day period in Sec.  1026.19(a)(1)(i) for making early 
disclosures coincides with the time period within which creditors 
subject to RESPA must provide good faith estimates of settlement 
costs. If the creditor does not know the precise credit terms, the 
creditor must base the disclosures on the best information 
reasonably available and indicate that the disclosures are estimates 
under Sec.  1026.17(c)(2). If many of the disclosures are estimates, 
the creditor may include a statement to that effect (such as ``all 
numerical disclosures except the late-payment disclosure are 
estimates'') instead of separately labeling each estimate. In the 
alternative, the creditor may label as an estimate only the items 
primarily affected by unknown information. (See the commentary to 
Sec.  1026.17(c)(2).) The creditor may provide explanatory material 
concerning the estimates and the contingencies that may affect the 
actual terms, in accordance with the commentary to Sec.  
1026.17(a)(1).
    3. Written application. Creditors may rely on RESPA and 
Regulation X (including any interpretations issued by the Bureau) in 
deciding whether a ``written application'' has been received. In 
general, Regulation X defines ``application'' to mean the submission 
of a borrower's financial information in anticipation of a credit 
decision relating to a federally related mortgage loan. See 12 CFR 
1024.2(b). An application is received when it reaches the creditor 
in any of the ways applications are normally transmitted--by mail, 
hand delivery, or through an intermediary agent or broker. (See 
comment 19(b)-3 for guidance in determining whether or not the 
transaction involves an intermediary agent or broker.) If an 
application reaches the creditor through an intermediary agent or 
broker, the application is received when it reaches the creditor, 
rather than when it reaches the agent or broker.
    4. Denied or withdrawn applications. The creditor may determine 
within the three-business-day period that the application will not 
or cannot be approved on the terms requested, as, for example, when 
a consumer applies for a type or amount of credit that the creditor 
does not offer, or the consumer's application cannot be approved for 
some other reason. In that case, or if the consumer withdraws the 
application within the three-business-day period, the creditor need 
not make the disclosures under this section. If the creditor fails 
to provide early disclosures and the transaction is later 
consummated on the original terms, the creditor will be in violation 
of this provision. If, however, the consumer amends the application 
because of the creditor's unwillingness to approve it on its 
original terms, no violation occurs for not providing disclosures 
based on the original terms. But the amended application is a new 
application subject to Sec.  1026.19(a)(1)(i).
    5. Itemization of amount financed. In many mortgage 
transactions, the itemization of the amount financed required by 
Sec.  1026.18(c) will contain items, such as origination fees or 
points, that also must be disclosed as part of the good faith 
estimates of settlement costs required under RESPA. Creditors 
furnishing the RESPA good faith estimates need not give consumers 
any itemization of the amount financed.

19(a)(1)(ii) Imposition of Fees

    1. Timing of fees. The consumer must receive the disclosures 
required by this section before paying or incurring any fee imposed 
by a creditor or other person in connection with the consumer's 
application for a mortgage transaction that is subject to Sec.  
1026.19(a)(1)(i), except as provided in Sec.  1026.19(a)(1)(iii). If 
the creditor delivers the disclosures to the consumer in person, a 
fee may be imposed anytime after delivery. If the creditor places 
the disclosures in the mail, the creditor may impose a fee after the 
consumer receives the disclosures or, in all cases, after midnight 
on the third business day following mailing of the disclosures. For 
purposes of Sec.  1026.19(a)(1)(ii), the term ``business day'' means 
all calendar days except Sundays and legal public holidays referred 
to in Sec.  1026.2(a)(6). See comment 2(a)(6)-2. For example, 
assuming that there are no intervening legal public holidays, a

[[Page 79986]]

creditor that receives the consumer's written application on Monday 
and mails the early mortgage loan disclosure on Tuesday may impose a 
fee on the consumer after midnight on Friday.
    2. Fees restricted. A creditor or other person may not impose 
any fee, such as for an appraisal, underwriting, or broker services, 
until the consumer has received the disclosures required by Sec.  
1026.19(a)(1)(i). The only exception to the fee restriction allows 
the creditor or other person to impose a bona fide and reasonable 
fee for obtaining a consumer's credit history, such as for a credit 
report(s).
    3. Collection of fees. A creditor complies with Sec.  
1026.19(a)(1)(ii) if:
    i. The creditor receives a consumer's written application 
directly from the consumer and does not collect any fee, other than 
a fee for obtaining a consumer's credit history, until the consumer 
receives the early mortgage loan disclosure.
    ii. A third party submits a consumer's written application to a 
creditor and both the creditor and third party do not collect any 
fee, other than a fee for obtaining a consumer's credit history, 
until the consumer receives the early mortgage loan disclosure from 
the creditor.
    iii. A third party submits a consumer's written application to a 
second creditor following a prior creditor's denial of an 
application made by the same consumer (or following the consumer's 
withdrawal), and, if a fee already has been assessed, the new 
creditor or third party does not collect or impose any additional 
fee until the consumer receives an early mortgage loan disclosure 
from the new creditor.

19(a)(1)(iii) Exception to Fee Restriction

    1. Requirements. A creditor or other person may impose a fee 
before the consumer receives the required disclosures if it is for 
obtaining the consumer's credit history, such as by purchasing a 
credit report(s) on the consumer. The fee also must be bona fide and 
reasonable in amount. For example, a creditor may collect a fee for 
obtaining a credit report(s) if it is in the creditor's ordinary 
course of business to obtain a credit report(s). If the criteria in 
Sec.  1026.19(a)(1)(iii) are met, the creditor may describe or refer 
to this fee, for example, as an ``application fee.''

19(a)(2) Waiting Periods for Early Disclosures and Corrected 
Disclosures

    1. Business day definition. For purposes of Sec.  1026.19(a)(2), 
``business day'' means all calendar days except Sundays and the 
legal public holidays referred to in Sec.  1026.2(a)(6). See comment 
2(a)(6)-2.
    2. Consummation after both waiting periods expire. Consummation 
may not occur until both the seven-business-day waiting period and 
the three-business-day waiting period have expired. For example, 
assume a creditor delivers the early disclosures to the consumer in 
person or places them in the mail on Monday, June 1, and the 
creditor then delivers corrected disclosures in person to the 
consumer on Wednesday, June 3. Although Saturday, June 6 is the 
third business day after the consumer received the corrected 
disclosures, consummation may not occur before Tuesday, June 9, the 
seventh business day following delivery or mailing of the early 
disclosures.

Paragraph 19(a)(2)(i)

    1. Timing. The disclosures required by Sec.  1026.19(a)(1)(i) 
must be delivered or placed in the mail no later than the seventh 
business day before consummation. The seven-business-day waiting 
period begins when the creditor delivers the early disclosures or 
places them in the mail, not when the consumer receives or is deemed 
to have received the early disclosures. For example, if a creditor 
delivers the early disclosures to the consumer in person or places 
them in the mail on Monday, June 1, consummation may occur on or 
after Tuesday, June 9, the seventh business day following delivery 
or mailing of the early disclosures.

Paragraph 19(a)(2)(ii)

    1. Conditions for redisclosure. If, at the time of consummation, 
the annual percentage rate disclosed is accurate under Sec.  
1026.22, the creditor does not have to make corrected disclosures 
under Sec.  1026.19(a)(2). If, on the other hand, the annual 
percentage rate disclosed is not accurate under Sec.  1026.22, the 
creditor must make corrected disclosures of all changed terms 
(including the annual percentage rate) so that the consumer receives 
them not later than the third business day before consummation. For 
example, assume consummation is scheduled for Thursday, June 11 and 
the early disclosures for a regular mortgage transaction disclose an 
annual percentage rate of 7.00%:
    i. On Thursday, June 11, the annual percentage rate will be 
7.10%. The creditor is not required to make corrected disclosures 
under Sec.  1026.19(a)(2).
    ii. On Thursday, June 11, the annual percentage rate will be 
7.15%. The creditor must make corrected disclosures so that the 
consumer receives them on or before Monday, June 8.
    2. Content of new disclosures. If redisclosure is required, the 
creditor may provide a complete set of new disclosures, or may 
redisclose only the changed terms. If the creditor chooses to 
provide a complete set of new disclosures, the creditor may but need 
not highlight the new terms, provided that the disclosures comply 
with the format requirements of Sec.  1026.17(a). If the creditor 
chooses to disclose only the new terms, all the new terms must be 
disclosed. For example, a different annual percentage rate will 
almost always produce a different finance charge, and often a new 
schedule of payments; all of these changes would have to be 
disclosed. If, in addition, unrelated terms such as the amount 
financed or prepayment penalty vary from those originally disclosed, 
the accurate terms must be disclosed. However, no new disclosures 
are required if the only inaccuracies involve estimates other than 
the annual percentage rate, and no variable rate feature has been 
added. For a discussion of the requirement to redisclose when a 
variable-rate feature is added, see comment 17(f)-2. For a 
discussion of redisclosure requirements in general, see the 
commentary on Sec.  1026.17(f).
    3. Timing. When redisclosures are necessary because the annual 
percentage rate has become inaccurate, they must be received by the 
consumer no later than the third business day before consummation. 
(For redisclosures triggered by other events, the creditor must 
provide corrected disclosures before consummation. See Sec.  
1026.17(f).) If the creditor delivers the corrected disclosures to 
the consumer in person, consummation may occur any time on the third 
business day following delivery. If the creditor provides the 
corrected disclosures by mail, the consumer is considered to have 
received them three business days after they are placed in the mail, 
for purposes of determining when the three-business-day waiting 
period required under Sec.  1026.19(a)(2)(ii) begins. Creditors that 
use electronic mail or a courier other than the postal service may 
also follow this approach.
    4. Basis for annual percentage rate comparison. To determine 
whether a creditor must make corrected disclosures under Sec.  
1026.22, a creditor compares (a) what the annual percentage rate 
will be at consummation to (b) the annual percentage rate stated in 
the most recent disclosures the creditor made to the consumer. For 
example, assume consummation for a regular mortgage transaction is 
scheduled for Thursday, June 11, the early disclosures provided in 
May stated an annual percentage rate of 7.00%, and corrected 
disclosures received by the consumer on Friday, June 5 stated an 
annual percentage rate of 7.15%:
    i. On Thursday, June 11, the annual percentage rate will be 
7.25%, which exceeds the most recently disclosed annual percentage 
rate by less than the applicable tolerance. The creditor is not 
required to make additional corrected disclosures or wait an 
additional three business days under Sec.  1026.19(a)(2).
    ii. On Thursday, June 11, the annual percentage rate will be 
7.30%, which exceeds the most recently disclosed annual percentage 
rate by more than the applicable tolerance. The creditor must make 
corrected disclosures such that the consumer receives them on or 
before Monday, June 8.

19(a)(3) Consumer's Waiver of Waiting Period Before Consummation

    1. Modification or waiver. A consumer may modify or waive the 
right to a waiting period required by Sec.  1026.19(a)(2) only after 
the creditor makes the disclosures required by Sec.  1026.18. The 
consumer must have a bona fide personal financial emergency that 
necessitates consummating the credit transaction before the end of 
the waiting period. Whether these conditions are met is determined 
by the facts surrounding individual situations. The imminent sale of 
the consumer's home at foreclosure, where the foreclosure sale will 
proceed unless loan proceeds are made available to the consumer 
during the waiting period, is one example of a bona fide personal 
financial emergency. Each consumer who is primarily liable on the 
legal obligation must sign the written statement for the waiver to 
be effective.
    2. Examples of waivers within the seven-business-day waiting 
period. Assume the early disclosures are delivered to the consumer 
in person on Monday, June 1, and at that time the consumer executes 
a waiver of the seven-business-day waiting period (which would end 
on Tuesday, June 9) so

[[Page 79987]]

that the loan can be consummated on Friday, June 5:
    i. If the annual percentage rate on the early disclosures is 
inaccurate under Sec.  1026.22, the creditor must provide a 
corrected disclosure to the consumer before consummation, which 
triggers the three-business-day waiting period in Sec.  
1026.19(a)(2)(ii). After the consumer receives the corrected 
disclosure, the consumer must execute a waiver of the three-
business-day waiting period in order to consummate the transaction 
on Friday, June 5.
    ii. If a change occurs that does not render the annual 
percentage rate on the early disclosures inaccurate under Sec.  
1026.22, the creditor must disclose the changed terms before 
consummation, consistent with Sec.  1026.17(f). Disclosure of the 
changed terms does not trigger an additional waiting period, and the 
transaction may be consummated on June 5 without the consumer giving 
the creditor an additional modification or waiver.
    3. Examples of waivers made after the seven-business-day waiting 
period. Assume the early disclosures are delivered to the consumer 
in person on Monday, June 1 and consummation is scheduled for 
Friday, June 19. On Wednesday, June 17, a change to the annual 
percentage rate occurs:
    i. If the annual percentage rate on the early disclosures is 
inaccurate under Sec.  1026.22, the creditor must provide a 
corrected disclosure to the consumer before consummation, which 
triggers the three-business-day waiting period in Sec.  
1026.19(a)(2). After the consumer receives the corrected disclosure, 
the consumer must execute a waiver of the three-business-day waiting 
period in order to consummate the transaction on Friday, June 19.
    ii. If a change occurs that does not render the annual 
percentage rate on the early disclosures inaccurate under Sec.  
1026.22, the creditor must disclose the changed terms before 
consummation, consistent with Sec.  1026.17(f). Disclosure of the 
changed terms does not trigger an additional waiting period, and the 
transaction may be consummated on Friday, June 19 without the 
consumer giving the creditor an additional modification or waiver.

19(a)(4) Notice

    1. Inclusion in other disclosures. The notice required by Sec.  
1026.19(a)(4) must be grouped together with the disclosures required 
by Sec.  1026.19(a)(1)(i) or Sec.  1026.19(a)(2). See comment 
17(a)(1)-2 for a discussion of the rules for segregating 
disclosures. In other cases, the notice set forth in Sec.  
1026.19(a)(4) may be disclosed together with or separately from the 
disclosures required under Sec.  1026.18. See comment 17(a)(1)-
5.xvi.

19(a)(5) Timeshare Plans

Paragraph 19(a)(5)(ii)

    1. Timing. A mortgage transaction secured by a consumer's 
interest in a ``timeshare plan,'' as defined in 11 U.S.C. 101(53D), 
that is also a federally related mortgage loan under RESPA is 
subject to the requirements of Sec.  1026.19(a)(5) instead of the 
requirements of Sec.  1026.19(a)(1) through Sec.  1026.19(a)(4). See 
comment 19(a)(1)(i)-1. Early disclosures for transactions subject to 
Sec.  1026.19(a)(5) must be given (a) before consummation or (b) 
within three business days after the creditor receives the 
consumer's written application, whichever is earlier. The general 
definition of ``business day'' in Sec.  1026.2(a)(6)--a day on which 
the creditor's offices are open to the public for substantially all 
of its business functions--applies for purposes of Sec.  
1026.19(a)(5)(ii). See comment 2(a)(6)-1. These timing requirements 
are different from the timing requirements under Sec.  
1026.19(a)(1)(i). Timeshare transactions covered by Sec.  
1026.19(a)(5) may be consummated any time after the disclosures 
required by Sec.  1026.19(a)(5)(ii) are provided.
    2. Use of estimates. If the creditor does not know the precise 
credit terms, the creditor must base the disclosures on the best 
information reasonably available and indicate that the disclosures 
are estimates under Sec.  1026.17(c)(2). If many of the disclosures 
are estimates, the creditor may include a statement to that effect 
(such as ``all numerical disclosures except the late-payment 
disclosure are estimates'') instead of separately labeling each 
estimate. In the alternative, the creditor may label as an estimate 
only the items primarily affected by unknown information. (See the 
commentary to Sec.  1026.17(c)(2).) The creditor may provide 
explanatory material concerning the estimates and the contingencies 
that may affect the actual terms, in accordance with the commentary 
to Sec.  1026.17(a)(1).
    3. Written application. For timeshare transactions, creditors 
may rely on comment 19(a)(1)(i)-3 in determining whether a ``written 
application'' has been received.
    4. Denied or withdrawn applications. For timeshare transactions, 
creditors may rely on comment 19(a)(1)(i)-4 in determining that 
disclosures are not required by Sec.  1026.19(a)(5)(ii) because the 
consumer's application will not or cannot be approved on the terms 
requested or the consumer has withdrawn the application.
    5. Itemization of amount financed. For timeshare transactions, 
creditors may rely on comment 19(a)(1)(i)-5 in determining whether 
providing the good faith estimates of settlement costs required by 
RESPA satisfies the requirement of Sec.  1026.18(c) to provide an 
itemization of the amount financed.

Paragraph 19(a)(5)(iii)

    1. Consummation or settlement. For extensions of credit secured 
by a consumer's timeshare plan, when corrected disclosures are 
required, they must be given no later than ``consummation or 
settlement.'' ``Consummation'' is defined in Sec.  1026.2(a). 
``Settlement'' is defined in Regulation X (12 CFR 1024.2(b)) and is 
subject to any interpretations issued by the Bureau. In some cases, 
a creditor may delay redisclosure until settlement, which may be at 
a time later than consummation. If a creditor chooses to redisclose 
at settlement, disclosures may be based on the terms in effect at 
settlement, rather than at consummation. For example, in a variable-
rate transaction, a creditor may choose to base disclosures on the 
terms in effect at settlement, despite the general rule in comment 
17(c)(1)-8 that variable-rate disclosures should be based on the 
terms in effect at consummation.
    2. Content of new disclosures. Creditors may rely on comment 
19(a)(2)(ii)-2 in determining the content of corrected disclosures 
required under Sec.  1026.19(a)(5)(iii).

19(b) Certain Variable-Rate Transactions

    1. Coverage. Section 1026.19(b) applies to all closed-end 
variable-rate transactions that are secured by the consumer's 
principal dwelling and have a term greater than one year. The 
requirements of this section apply not only to transactions 
financing the initial acquisition of the consumer's principal 
dwelling, but also to any other closed-end variable-rate transaction 
secured by the principal dwelling. Closed-end variable-rate 
transactions that are not secured by the principal dwelling, or are 
secured by the principal dwelling but have a term of one year or 
less, are subject to the disclosure requirements of Sec.  
1026.18(f)(1) rather than those of Sec.  1026.19(b). (Furthermore, 
``shared-equity'' or ``shared-appreciation'' mortgages are subject 
to the disclosure requirements of Sec.  1026.18(f)(1) rather than 
those of Sec.  1026.19(b) regardless of the general coverage of 
those sections.) For purposes of this section, the term of a 
variable-rate demand loan is determined in accordance with the 
commentary to Sec.  1026.17(c)(5). In determining whether a 
construction loan that may be permanently financed by the same 
creditor is covered under this section, the creditor may treat the 
construction and the permanent phases as separate transactions with 
distinct terms to maturity or as a single combined transaction. For 
purposes of the disclosures required under Sec.  1026.18, the 
creditor may nevertheless treat the two phases either as separate 
transactions or as a single combined transaction in accordance with 
Sec.  1026.17(c)(6). Finally, in any assumption of a variable-rate 
transaction secured by the consumer's principal dwelling with a term 
greater than one year, disclosures need not be provided under 
Sec. Sec.  1026.18(f)(2)(ii) or 1026.19(b).
    2. Timing. A creditor must give the disclosures required under 
this section at the time an application form is provided or before 
the consumer pays a nonrefundable fee, whichever is earlier.
    i. Intermediary agent or broker. In cases where a creditor 
receives a written application through an intermediary agent or 
broker, however, Sec.  1026.19(b) provides a substitute timing rule 
requiring the creditor to deliver the disclosures or place them in 
the mail not later than three business days after the creditor 
receives the consumer's written application. (See comment 19(b)-3 
for guidance in determining whether or not the transaction involves 
an intermediary agent or broker.) This three-day rule also applies 
where the creditor takes an application over the telephone.
    ii. Telephone request. In cases where the consumer merely 
requests an application over the telephone, the creditor must 
include the early disclosures required under this section with the 
application that is sent to the consumer.
    iii. Mail solicitations. In cases where the creditor solicits 
applications through the

[[Page 79988]]

mail, the creditor must also send the disclosures required under 
this section if an application form is included with the 
solicitation.
    iv. Conversion. In cases where an open-end credit account will 
convert to a closed-end transaction subject to this section under a 
written agreement with the consumer, disclosures under this section 
may be given at the time of conversion. (See the commentary to Sec.  
1026.20(a) for information on the timing requirements for Sec.  
1026.19(b)(2) disclosures when a variable-rate feature is later 
added to a transaction.)
    v. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by 
this section (including the brochure) on or with a blank application 
that is made available to the consumer in electronic form, such as 
on a creditor's Internet Web site. Creditors have flexibility in 
satisfying this requirement. There are various methods creditors 
could use to satisfy the requirement. Whatever method is used, a 
creditor need not confirm that the consumer has read the 
disclosures. Methods include, but are not limited to, the following 
examples:
    A. The disclosures could automatically appear on the screen when 
the application appears;
    B. The disclosures could be located on the same web page as the 
application (whether or not they appear on the initial screen), if 
the application 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. Creditors could provide a link to the electronic disclosures 
on or with the application as long as consumers cannot bypass the 
disclosures before submitting the application. 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 without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to 
submit the application.
    3. Intermediary agent or broker. i. In certain transactions 
involving an ``intermediary agent or broker,'' a creditor may delay 
providing disclosures. A creditor may not delay providing 
disclosures in transactions involving either a legal agent (as 
determined by applicable law) or any other third party that is not 
an ``intermediary agent or broker.'' In determining whether or not a 
transaction involves an ``intermediary agent or broker'' the 
following factors should be considered:
    A. The number of applications submitted by the broker to the 
creditor as compared to the total number of applications received by 
the creditor. The greater the percentage of total loan applications 
submitted by the broker in any given period of time, the less likely 
it is that the broker would be considered an ``intermediary agent or 
broker'' of the creditor during the next period.
    B. The number of applications submitted by the broker to the 
creditor as compared to the total number of applications received by 
the broker. (This factor is applicable only if the creditor has such 
information.) The greater the percentage of total loan applications 
received by the broker that is submitted to a creditor in any given 
period of time, the less likely it is that the broker would be 
considered an ``intermediary agent or broker'' of the creditor 
during the next period.
    C. The amount of work (such as document preparation) the 
creditor expects to be done by the broker on an application based on 
the creditor's prior dealings with the broker and on the creditor's 
requirements for accepting applications, taking into consideration 
the customary practice of brokers in a particular area. The more 
work that the creditor expects the broker to do on an application, 
in excess of what is usually expected of a broker in that area, the 
less likely it is that the broker would be considered an 
``intermediary agent or broker'' of the creditor.
    ii. An example of an ``intermediary agent or broker'' is a 
broker who, customarily within a brief period of time after 
receiving an application, inquires about the credit terms of several 
creditors with whom the broker does business and submits the 
application to one of them. The broker is responsible for only a 
small percentage of the applications received by that creditor. 
During the time the broker has the application, it might request a 
credit report and an appraisal (or even prepare an entire loan 
package if customary in that particular area).
    4. Other variable-rate regulations. Transactions in which the 
creditor is required to comply with and has complied with the 
disclosure requirements of the variable-rate regulations of other 
Federal agencies are exempt from the requirements of Sec.  
1026.19(b), by virtue of Sec.  1026.19(d), and are exempt from the 
requirements of Sec.  1026.20(c), by virtue of Sec.  1026.20(d). The 
exception is also available to creditors that are required by state 
law to comply with the Federal variable-rate regulations noted 
above. Creditors using this exception should comply with the timing 
requirements of those regulations rather than the timing 
requirements of Regulation Z in making the variable-rate 
disclosures.
    5. Examples of variable-rate transactions. i. The following 
transactions, if they have a term greater than one year and are 
secured by the consumer's principal dwelling, constitute variable-
rate transactions subject to the disclosure requirements of Sec.  
1026.19(b).
    A. Renewable balloon-payment instruments where the creditor is 
both unconditionally obligated to renew the balloon-payment loan at 
the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. (See comment 
17(c)(1)-11 for a discussion of conditions within a consumer's 
control in connection with renewable balloon-payment loans.)
    B. Preferred-rate loans where the terms of the legal obligation 
provide that the initial underlying rate is fixed but will increase 
upon the occurrence of some event, such as an employee leaving the 
employ of the creditor, and the note reflects the preferred rate. 
The disclosures under Sec. Sec.  1026.19(b)(1) and 1026.19(b)(2)(v), 
(viii), (ix), and (xii) are not applicable to such loans.
    C. ``Price-level-adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic 
adjustments to payments and the loan balance to reflect changes in 
an index measuring prices or inflation. The disclosures under Sec.  
1026.19(b)(1) are not applicable to such loans, nor are the 
following provisions to the extent they relate to the determination 
of the interest rate by the addition of a margin, changes in the 
interest rate, or interest rate discounts: Section 1026.19(b)(2) 
(i), (iii), (iv), (v), (vi), (vii), (viii), and (ix). (See comments 
20(c)-2 and 30-1 regarding the inapplicability of variable-rate 
adjustment notices and interest rate limitations to price-level-
adjusted or similar mortgages.)
    ii. Graduated-payment mortgages and step-rate transactions 
without a variable-rate feature are not considered variable-rate 
transactions.

Paragraph 19(b)(1)

    1. Substitute. Creditors who wish to use publications other than 
the Consumer Handbook on Adjustable Rate Mortgages, available on the 
Bureau's Web site, must make a good faith determination that their 
brochures are suitable substitutes to the Consumer Handbook. A 
substitute is suitable if it is, at a minimum, comparable to the 
Consumer Handbook in substance and comprehensiveness. Creditors are 
permitted to provide more detailed information than is contained in 
the Consumer Handbook.
    2. Applicability. The Consumer Handbook need not be given for 
variable-rate transactions subject to this section in which the 
underlying interest rate is fixed. (See comment 19(b)-5 for an 
example of a variable-rate transaction where the underlying interest 
rate is fixed.)

Paragraph 19(b)(2)

    1. Disclosure for each variable-rate program. A creditor must 
provide disclosures to the consumer that fully describe each of the 
creditor's variable-rate loan programs in which the consumer 
expresses an interest. If a program is made available only to 
certain customers of an institution, a creditor need not provide 
disclosures for that program to other consumers who express a 
general interest in a creditor's ARM programs. Disclosures must be 
given at the time an application form is provided or before the 
consumer pays a nonrefundable fee, whichever is earlier. If program 
disclosures cannot be provided because a consumer expresses an 
interest in individually negotiating loan terms that are not 
generally offered, disclosures reflecting those terms may be 
provided as soon as reasonably possible after the terms have been 
decided upon, but not later than the time a non-refundable fee is 
paid. If a consumer who has received program disclosures 
subsequently expresses an interest in other available variable-rate 
programs subject to 1026.19(b)(2), or the creditor and consumer 
decide on a program for which the consumer has not received 
disclosures, the creditor

[[Page 79989]]

must provide appropriate disclosures as soon as reasonably possible. 
The creditor, of course, is permitted to give the consumer 
information about additional programs subject to Sec.  1026.19(b) 
initially.
    2. Variable-rate loan program defined. i. Generally, if the 
identification, the presence or absence, or the exact value of a 
loan feature must be disclosed under this section, variable-rate 
loans that differ as to such features constitute separate loan 
programs. For example, separate loan programs would exist based on 
differences in any of the following loan features:
    A. The index or other formula used to calculate interest rate 
adjustments.
    B. The rules relating to changes in the index value, interest 
rate, payments, and loan balance.
    C. The presence or absence of, and the amount of, rate or 
payment caps.
    D. The presence of a demand feature.
    E. The possibility of negative amortization.
    F. The possibility of interest rate carryover.
    G. The frequency of interest rate and payment adjustments.
    H. The presence of a discount feature.
    I. In addition, if a loan feature must be taken into account in 
preparing the disclosures required by Sec.  1026.19(b)(2)(viii), 
variable-rate loans that differ as to that feature constitute 
separate programs under Sec.  1026.19(b)(2).
    ii. If, however, a representative value may be given for a loan 
feature or the feature need not be disclosed under Sec.  
1026.19(b)(2), variable-rate loans that differ as to such features 
do not constitute separate loan programs. For example, separate 
programs would not exist based on differences in the following loan 
features:
    A. The amount of a discount.
    B. The amount of a margin.
    3. Form of program disclosures. A creditor may provide separate 
program disclosure forms for each ARM program it offers or a single 
disclosure form that describes multiple programs. A disclosure form 
may consist of more than one page. For example, a creditor may 
attach a separate page containing the historical payment example for 
a particular program. A disclosure form describing more than one 
program need not repeat information applicable to each program that 
is described. For example, a form describing multiple programs may 
disclose the information applicable to all of the programs in one 
place with the various program features (such as options permitting 
conversion to a fixed rate) disclosed separately. The form, however, 
must state if any program feature that is described is available 
only in conjunction with certain other program features. Both the 
separate and multiple program disclosures may illustrate more than 
one loan maturity or payment amortization--for example, by including 
multiple payment and loan balance columns in the historical payment 
example. Disclosures may be inserted or printed in the Consumer 
Handbook (or a suitable substitute) as long as they are identified 
as the creditor's loan program disclosures.
    4. As applicable. The disclosures required by this section need 
only be made as applicable. Any disclosure not relevant to a 
particular transaction may be eliminated. For example, if the 
transaction does not contain a demand feature, the disclosure 
required under Sec.  1026.19(b)(2)(x) need not be given. As used in 
this section, payment refers only to a payment based on the interest 
rate, loan balance and loan term, and does not refer to payment of 
other elements such as mortgage insurance premiums.
    5. Revisions. A creditor must revise the disclosures required 
under this section once a year as soon as reasonably possible after 
the new index value becomes available. Revisions to the disclosures 
also are required when the loan program changes.

Paragraph 19(b)(2)(i)

    1. Change in interest rate, payment, or term. A creditor must 
disclose the fact that the terms of the legal obligation permit the 
creditor, after consummation of the transaction, to increase (or 
decrease) the interest rate, payment, or term of the loan initially 
disclosed to the consumer. For example, the disclosures for a 
variable-rate program in which the interest rate and payment (but 
not loan term) can change might read, ``Your interest rate and 
payment can change yearly.'' In transactions where the term of the 
loan may change due to rate fluctuations, the creditor must state 
that fact.

Paragraph 19(b)(2)(ii)

    1. Identification of index or formula. If a creditor ties 
interest rate changes to a particular index, this fact must be 
disclosed, along with a source of information about the index. For 
example, if a creditor uses the weekly average yield on U.S. 
Treasury Securities adjusted to a constant maturity as its index, 
the disclosure might read, ``Your index is the weekly average yield 
on U.S. Treasury Securities adjusted to a constant maturity of one 
year published weekly in the Wall Street Journal.'' If no particular 
index is used, the creditor must briefly describe the formula used 
to calculate interest rate changes.
    2. Changes at creditor's discretion. If interest rate changes 
are at the creditor's discretion, this fact must be disclosed. If an 
index is internally defined, such as by a creditor's prime rate, the 
creditor should either briefly describe that index or state that 
interest rate changes are at the creditor's discretion.

Paragraph 19(b)(2)(iii)

    1. Determination of interest rate and payment. This provision 
requires an explanation of how the creditor will determine the 
consumer's interest rate and payment. In cases where a creditor 
bases its interest rate on a specific index and adjusts the index 
through the addition of a margin, for example, the disclosure might 
read, ``Your interest rate is based on the index plus a margin, and 
your payment will be based on the interest rate, loan balance, and 
remaining loan term.'' In transactions where paying the periodic 
payments will not fully amortize the outstanding balance at the end 
of the loan term and where the final payment will equal the periodic 
payment plus the remaining unpaid balance, the creditor must 
disclose this fact. For example, the disclosure might read, ``Your 
periodic payments will not fully amortize your loan and you will be 
required to make a single payment of the periodic payment plus the 
remaining unpaid balance at the end of the loan term.'' The 
creditor, however, need not reflect any irregular final payment in 
the historical example or in the disclosure of the initial and 
maximum rates and payments. If applicable, the creditor should also 
disclose that the rate and payment will be rounded.

Paragraph 19(b)(2)(iv)

    1. Current margin value and interest rate. Because the 
disclosures can be prepared in advance, the interest rate and margin 
may be several months old when the disclosures are delivered. A 
statement, therefore, is required alerting consumers to the fact 
that they should inquire about the current margin value applied to 
the index and the current interest rate. For example, the disclosure 
might state, ``Ask us for our current interest rate and margin.''

Paragraph 19(b)(2)(v)

    1. Discounted and premium interest rate. In some variable-rate 
transactions, 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 charged to consumers is 
lower than the rate would be if it were calculated using the index 
or formula. However, in some cases the initial rate may be higher. 
If the initial interest rate will be a discount or a premium rate, 
creditors must alert the consumer to this fact. For example, if a 
creditor discounted a consumer's initial rate, the disclosure might 
state, ``Your initial interest rate is not based on the index used 
to make later adjustments.'' (See the commentary to Sec.  
1026.17(c)(1) for a further discussion of discounted and premium 
variable-rate transactions.) In addition, the disclosure must 
suggest that consumers inquire about the amount that the program is 
currently discounted. For example, the disclosure might state, ``Ask 
us for the amount our adjustable rate mortgages are currently 
discounted.'' In a transaction with a consumer buydown or with a 
third-party buydown that will be incorporated in the legal 
obligation, the creditor should disclose the program as a discounted 
variable-rate transaction, but need not disclose additional 
information regarding the buydown in its program disclosures. (See 
the commentary to Sec.  1026.19(b)(2)(viii) for a discussion of how 
to reflect the discount or premium in the historical example or the 
maximum rate and payment disclosure).

Paragraph 19(b)(2)(vi)

    1. Frequency. The frequency of interest rate and payment 
adjustments must be disclosed. If interest rate changes will be 
imposed more frequently or at different intervals than payment 
changes, a creditor must disclose the frequency and timing of both 
types of changes. For example, in a variable-rate transaction where 
interest rate changes are made monthly, but payment changes occur on 
an annual basis, this fact must be disclosed. In certain ARM 
transactions, the interval between loan closing and the initial 
adjustment is not known and may be

[[Page 79990]]

different from the regular interval for adjustments. In such cases, 
the creditor may disclose the initial adjustment period as a range 
of the minimum and maximum amount of time from consummation or 
closing. For example, the creditor might state: ``The first 
adjustment to your interest rate and payment will occur no sooner 
than 6 months and no later than 18 months after closing. Subsequent 
adjustments may occur once each year after the first adjustment.'' 
(See comments 19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4 for 
guidance on other disclosures when this alternative disclosure rule 
is used.)

Paragraph 19(b)(2)(vii)

    1. Rate and payment caps. The creditor must disclose limits on 
changes (increases or decreases) in the interest rate or payment. If 
an initial discount is not taken into account in applying overall or 
periodic rate limitations, that fact must be disclosed. If separate 
overall or periodic limitations apply to interest rate increases 
resulting from other events, such as the exercise of a fixed-rate 
conversion option or leaving the creditor's employ, those 
limitations must also be stated. Limitations do not include legal 
limits in the nature of usury or rate ceilings under state or 
Federal statutes or regulations. (See Sec.  1026.30 for the rule 
requiring that a maximum interest rate be included in certain 
variable-rate transactions.) The creditor need not disclose each 
periodic or overall rate limitation that is currently available. As 
an alternative, the creditor may disclose the range of the lowest 
and highest periodic and overall rate limitations that may be 
applicable to the creditor's ARM transactions. For example, the 
creditor might state: ``The limitation on increases to your interest 
rate at each adjustment will be set at an amount in the following 
range: Between 1 and 2 percentage points at each adjustment. The 
limitation on increases to your interest rate over the term of the 
loan will be set at an amount in the following range: Between 4 and 
7 percentage points above the initial interest rate.'' A creditor 
using this alternative rule must include a statement in its program 
disclosures suggesting that the consumer ask about the overall rate 
limitations currently offered for the creditor's ARM programs. (See 
comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3 for an 
explanation of the additional requirements for a creditor using this 
alternative rule for disclosure of periodic and overall rate 
limitations.)
    2. Negative amortization and interest rate carryover. A creditor 
must disclose, where applicable, the possibility of negative 
amortization. For example, the disclosure might state, ``If any of 
your payments is not sufficient to cover the interest due, the 
difference will be added to your loan amount.'' Loans that provide 
for more than one way to trigger negative amortization are separate 
variable-rate programs requiring separate disclosures. (See the 
commentary to Sec.  1026.19(b)(2) for a discussion on the definition 
of a variable-rate loan program and the format for disclosure.) If a 
consumer is given the option to cap monthly payments that may result 
in negative amortization, the creditor must fully disclose the rules 
relating to the option, including the effects of exercising the 
option (such as negative amortization will occur and the principal 
loan balance will increase); however, the disclosure in Sec.  
1026.19(b)(2)(viii) need not be provided.
    3. Conversion option. If a loan program permits consumers to 
convert their variable-rate loans to fixed-rate loans, the creditor 
must disclose that the interest rate may increase if the consumer 
converts the loan to a fixed-rate loan. The creditor must also 
disclose the rules relating to the conversion feature, such as the 
period during which the loan may be converted, that fees may be 
charged at conversion, and how the fixed rate will be determined. 
The creditor should identify any index or other measure or formula 
used to determine the fixed rate and state any margin to be added. 
In disclosing the period during which the loan may be converted and 
the margin, the creditor may use information applicable to the 
conversion feature during the six months preceding preparation of 
the disclosures and state that the information is representative of 
conversion features recently offered by the creditor. The 
information may be used until the program disclosures are otherwise 
revised. Although the rules relating to the conversion option must 
be disclosed, the effect of exercising the option should not be 
reflected elsewhere in the disclosures, such as in the historical 
example or in the calculation of the initial and maximum interest 
rate and payments.
    4. Preferred-rate loans. Section 1026.19(b) applies to 
preferred-rate loans, where the rate will increase upon the 
occurrence of some event, such as an employee leaving the creditor's 
employ, whether or not the underlying rate is fixed or variable. In 
these transactions, the creditor must disclose the event that would 
allow the creditor to increase the rate such as that the rate may 
increase if the employee leaves the creditor's employ. The creditor 
must also disclose the rules relating to termination of the 
preferred rate, such as that fees may be charged when the rate is 
changed and how the new rate will be determined.

Paragraph 19(b)(2)(viii)

    1. Historical example and initial and maximum interest rates and 
payments. A creditor may disclose both the historical example and 
the initial and maximum interest rates and payments.

Paragraph 19(b)(2)(viii)(A)

    1. Index movement. This section requires a creditor to provide 
an historical example, based on a $10,000 loan amount originating in 
1977, showing how interest rate changes implemented according to the 
terms of the loan program would have affected payments and the loan 
balance at the end of each year during a 15-year period. (In all 
cases, the creditor need only calculate the payments and loan 
balance for the term of the loan. For example, in a five-year loan, 
a creditor would show the payments and loan balance for the five-
year term, from 1977 to 1981, with a zero loan balance reflected for 
1981. For the remaining ten years, 1982-1991, the creditor need only 
show the remaining index values, margin and interest rate and must 
continue to reflect all significant loan program terms such as rate 
limitations affecting them.) Pursuant to this section, the creditor 
must provide a history of index values for the preceding 15 years. 
Initially, the disclosures would give the index values from 1977 to 
the present. Each year thereafter, the revised program disclosures 
should include an additional year's index value until 15 years of 
values are shown. If the values for an index have not been available 
for 15 years, a creditor need only go back as far as the values are 
available in giving a history and payment example. In all cases, 
only one index value per year need be shown. Thus, in transactions 
where interest rate adjustments are implemented more frequently than 
once per year, a creditor may assume that the interest rate and 
payment resulting from the index value chosen will stay in effect 
for the entire year for purposes of calculating the loan balance as 
of the end of the year and for reflecting other loan program terms. 
In cases where interest rate changes are at the creditor's 
discretion (see the commentary to Sec.  1026.19(b)(2)(ii)), the 
creditor must provide a history of the rates imposed for the 
preceding 15 years, beginning with the rates in 1977. In giving this 
history, the creditor need only go back as far as the creditor's 
rates can reasonably be determined.
    2. Selection of index values. The historical example must 
reflect the method by which index values are determined under the 
program. If a creditor uses an average of index values or any other 
index formula, the history given should reflect those values. The 
creditor should select one date or, when an average of single values 
is used as an index, one period and should base the example on index 
values measured as of that same date or period for each year shown 
in the history. A date or period at any time during the year may be 
selected, but the same date or period must be used for each year in 
the historical example. For example, a creditor could use values for 
the first business day in July or for the first week ending in July 
for each of the 15 years shown in the example.
    3. Selection of margin. For purposes of the disclosure required 
under Sec.  1026.19(b)(2)(viii)(A), a creditor may select a 
representative margin that has been used during the six months 
preceding preparation of the disclosures, and should disclose that 
the margin is one that the creditor has used recently. The margin 
selected may be used until a creditor revises the disclosure form.
    4. Amount of discount or premium. For purposes of the disclosure 
required under Sec.  1026.19(b)(2)(viii)(A), a creditor may select a 
discount or premium (amount and term) that has been used during the 
six months preceding preparation of the disclosures, and should 
disclose that the discount or premium is one that the creditor has 
used recently. The discount or premium should be reflected in the 
historical example for as long as the discount or premium is in 
effect. A creditor may assume that a discount that would have been 
in effect for any part of a year was in effect for the full year for 
purposes of reflecting it in the historical example. For example, a 
3-month discount may be treated as being in effect for the entire 
first year of

[[Page 79991]]

the example; a 15-month discount may be treated as being in effect 
for the first two years of the example. In illustrating the effect 
of the discount or premium, creditors should adjust the value of the 
interest rate in the historical example, and should not adjust the 
margin or index values. For example, if during the six months 
preceding preparation of the disclosures the fully indexed rate 
would have been 10% but the first year's rate under the program was 
8%, the creditor would discount the first interest rate in the 
historical example by 2 percentage points.
    5. Term of the loan. In calculating the payments and loan 
balances in the historical example, a creditor need not base the 
disclosures on each term to maturity or payment amortization that it 
offers. Instead, disclosures for ARMs may be based upon terms to 
maturity or payment amortizations of 5, 15 and 30 years, as follows: 
ARMs with terms or amortizations from over 1 year to 10 years may be 
based on a 5-year term or amortization; ARMs with terms or 
amortizations from over 10 years to 20 years may be based on a 15-
year term or amortization; and ARMs with terms or amortizations over 
20 years may be based on a 30-year term or amortization. Thus, 
disclosures for ARMs offered with any term from over 1 year to 40 
years may be based solely on terms of 5, 15 and 30 years. Of course, 
a creditor may always base the disclosures on the actual terms or 
amortizations offered. If the creditor bases the disclosures on 5-, 
15- or 30-year terms or payment amortization as provided above, the 
term or payment amortization used in making the disclosure must be 
stated.
    6. Rate caps. A creditor using the alternative rule described in 
comment 19(b)(2)(vii)-1 for disclosure of rate limitations must base 
the historical example upon the highest periodic and overall rate 
limitations disclosed under Sec.  1026.19(b)(2)(vii). In addition, 
the creditor must state the limitations used in the historical 
example. (See comment 19(b)(2)(viii)(B)-3 for an explanation of the 
use of the highest rate limitation in other disclosures.)
    7. Frequency of adjustments. In certain transactions, creditors 
may use the alternative rule described in comment 19(b)(2)(vi)-1 for 
disclosure of the frequency of rate and payment adjustments. In such 
cases, the creditor may assume for purposes of the historical 
example that the first adjustment occurred at the end of the first 
full year in which the adjustment could occur. For example, in an 
ARM in which the first adjustment may occur between 6 and 18 months 
after closing and annually thereafter, the creditor may assume that 
the first adjustment occurred at the end of the first year in the 
historical example. (See comment 19(b)(2)(viii)(B)-4 for an 
explanation of how to compute the maximum interest rate and payment 
when the initial adjustment period is not known.)

Paragraph 19(b)(2)(viii)(B)

    1. Initial and maximum interest rates and payments. The 
disclosure form must state the initial and maximum interest rates 
and payments for a $10,000 loan originated at an initial interest 
rate (index value plus margin adjusted by the amount of any discount 
or premium) in effect as of an identified month and year for the 
loan program disclosure. (See comment 19(b)(2)-5 on revisions to the 
loan program disclosure.) In calculating the maximum payment under 
this paragraph, a creditor should assume that the interest rate 
increases as rapidly as possible under the loan program, and the 
maximum payment disclosed should reflect the amortization of the 
loan during this period. Thus, in a loan with 2 percentage point 
annual (and 5 percentage point overall) interest rate limitations or 
``caps,'' the maximum interest rate would be 5 percentage points 
higher than the initial interest rate disclosed. Moreover, the loan 
would not reach the maximum interest rate until the fourth year 
because of the 2 percentage point annual rate limitations, and the 
maximum payment disclosed would reflect the amortization of the loan 
during this period. If the loan program includes a discounted or 
premium initial interest rate, the initial interest rate should be 
adjusted by the amount of the discount or premium.
    2. Term of the loan. In calculating the initial and maximum 
payments, the creditor need not base the disclosures on each term to 
maturity or payment amortization offered under the program. Instead, 
the creditor may follow the rules set out in comment 
19(b)(2)(viii)(A)-5. If a historical example is provided under Sec.  
1026.19(b)(2)(viii)(A), the terms to maturity or payment 
amortization used in the historical example must be used in 
calculating the initial and maximum payment. In addition, creditors 
must state the term or payment amortization used in making the 
disclosures under this section.
    3. Rate caps. A creditor using the alternative rule for 
disclosure of interest rate limitations described in comment 
19(b)(2)(vii)-1 must calculate the maximum interest rate and payment 
based upon the highest periodic and overall rate limitations 
disclosed under Sec.  1026.19(b)(2)(vii). In addition, the creditor 
must state the rate limitations used in calculating the maximum 
interest rate and payment. (See comment 19(b)(2)(viii)(A)-6 for an 
explanation of the use of the highest rate limitation in other 
disclosures.)
    4. Frequency of adjustments. In certain transactions, a creditor 
may use the alternative rule for disclosure of the frequency of rate 
and payment adjustments described in comment 19(b)(2)(vi)-1. In such 
cases, the creditor must base the calculations of the initial and 
maximum rates and payments upon the earliest possible first 
adjustment disclosed under Sec.  1026.19(b)(2)(vi). (See comment 
19(b)(2)(viii)(A)-7 for an explanation of how to disclose the 
historical example when the initial adjustment period is not known.)
    5. Periodic payment statement. The statement that the periodic 
payment may increase or decrease substantially may be satisfied by 
the disclosure in paragraph 19(b)(2)(vi) if it states for example, 
``your monthly payment can increase or decrease substantially based 
on annual changes in the interest rate.''

Paragraph 19(b)(2)(ix)

    1. Calculation of payments. A creditor is required to include a 
statement on the disclosure form that explains how a consumer may 
calculate his or her actual monthly payments for a loan amount other 
than $10,000. The example should be based upon the most recent 
payment shown in the historical example or upon the initial interest 
rate reflected in the maximum rate and payment disclosure. In 
transactions in which the latest payment shown in the historical 
example is not for the latest year of index values shown (such as in 
a five-year loan), a creditor may provide additional examples based 
on the initial and maximum payments disclosed under Sec.  
1026.19(b)(2)(viii)(B). The creditor, however, is not required to 
calculate the consumer's payments. (See the model clauses in 
Appendix H-4(C).)

Paragraph 19(b)(2)(x)

    1. Demand feature. If a variable-rate loan subject to Sec.  
1026.19(b) requirements contains a demand feature as discussed in 
the commentary to Sec.  1026.18(i), this fact must be disclosed. 
(Pursuant to Sec.  1026.18(i), creditors would also disclose the 
demand feature in the standard disclosures given later.)

Paragraph 19(b)(2)(xi)

    1. Adjustment notices. A creditor must disclose to the consumer 
the type of information that will be contained in subsequent notices 
of adjustments and when such notices will be provided. (See the 
commentary to Sec.  1026.20(c) regarding notices of adjustments.) 
For example, the disclosure might state, ``You will be notified at 
least 25, but no more than 120 days before the due date of a payment 
at a new level. This notice will contain information about the index 
and interest rates, payment amount, and loan balance.'' In 
transactions where there may be interest rate adjustments without 
accompanying payment adjustments in a year, the disclosure might 
read, ``You will be notified once each year during which interest 
rate adjustments, but no payment adjustments, have been made to your 
loan. This notice will contain information about the index and 
interest rates, payment amount, and loan balance.''

Paragraph 19(b)(2)(xii)

    1. Multiple loan programs. A creditor that offers multiple 
variable-rate loan programs is required to have disclosures for each 
variable-rate loan program subject to Sec.  1026.19(b)(2). Unless 
disclosures for all of its variable-rate programs are provided 
initially, the creditor must inform the consumer that other closed-
end variable-rate programs exist, and that disclosure forms are 
available for these additional loan programs. For example, the 
disclosure form might state, ``Information on other adjustable rate 
mortgage programs is available upon request.''

19(c) Electronic Disclosures

    1. Form of disclosures. Whether disclosures must be in 
electronic form depends upon the following:
    i. If a consumer accesses an ARM loan application electronically 
(other than as described under ii. below), such as online at

[[Page 79992]]

a home computer, the creditor must provide the disclosures in 
electronic form (such as with the application form on its Web site) 
in order to meet the requirement to provide disclosures in a timely 
manner on or with the application. If the creditor instead mailed 
paper disclosures to the consumer, this requirement would not be 
met.
    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses an ARM loan application 
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 creditor to provide 
applications to consumers), the creditor may provide disclosures in 
either electronic or paper form, provided the creditor complies with 
the timing, delivery, and retainability requirements of the 
regulation.

Section 1026.20 Subsequent Disclosure Requirements

20(a) Refinancings

    1. Definition. A refinancing is a new transaction requiring a 
complete new set of disclosures. Whether a refinancing has occurred 
is determined by reference to whether the original obligation has 
been satisfied or extinguished and replaced by a new obligation, 
based on the parties' contract and applicable law. The refinancing 
may involve the consolidation of several existing obligations, 
disbursement of new money to the consumer or on the consumer's 
behalf, or the rescheduling of payments under an existing 
obligation. In any form, the new obligation must completely replace 
the prior one.
    i. Changes in the terms of an existing obligation, such as the 
deferral of individual installments, will not constitute a 
refinancing unless accomplished by the cancellation of that 
obligation and the substitution of a new obligation.
    ii. A substitution of agreements that meets the refinancing 
definition will require new disclosures, even if the substitution 
does not substantially alter the prior credit terms.
    2. Exceptions. A transaction is subject to Sec.  1026.20(a) only 
if it meets the general definition of a refinancing. Section 
1026.20(a)(1) through (5) lists 5 events that are not treated as 
refinancings, even if they are accomplished by cancellation of the 
old obligation and substitution of a new one.
    3. Variable-rate. i. If a variable-rate feature was properly 
disclosed under the regulation, a rate change in accord with those 
disclosures is not a refinancing. For example, no new disclosures 
are required when the variable-rate feature is invoked on a 
renewable balloon-payment mortgage that was previously disclosed as 
a variable-rate transaction.
    ii. Even if it is not accomplished by the cancellation of the 
old obligation and substitution of a new one, a new transaction 
subject to new disclosures results if the creditor either:
    A. Increases the rate based on a variable-rate feature that was 
not previously disclosed; or
    B. Adds a variable-rate feature to the obligation. A creditor 
does not add a variable-rate feature by changing the index of a 
variable-rate transaction to a comparable index, whether the change 
replaces the existing index or substitutes an index for one that no 
longer exists.
    iii. If either of the events in paragraph 20(a)-3.ii.A or ii.B 
occurs in a transaction secured by a principal dwelling with a term 
longer than one year, the disclosures required under Sec.  
1026.19(b) also must be given at that time.
    4. Unearned finance charge. In a transaction involving 
precomputed finance charges, the creditor must include in the 
finance charge on the refinanced obligation any unearned portion of 
the original finance charge that is not rebated to the consumer or 
credited against the underlying obligation. For example, in a 
transaction with an add-on finance charge, a creditor advances new 
money to a consumer in a fashion that extinguishes the original 
obligation and replaces it with a new one. The creditor neither 
refunds the unearned finance charge on the original obligation to 
the consumer nor credits it to the remaining balance on the old 
obligation. Under these circumstances, the unearned finance charge 
must be included in the finance charge on the new obligation and 
reflected in the annual percentage rate disclosed on refinancing. 
Accrued but unpaid finance charges are included in the amount 
financed in the new obligation.
    5. Coverage. Section 1026.20(a) applies only to refinancings 
undertaken by the original creditor or a holder or servicer of the 
original obligation. A ``refinancing'' by any other person is a new 
transaction under the regulation, not a refinancing under this 
section.

Paragraph 20(a)(1)

    1. Renewal. This exception applies both to obligations with a 
single payment of principal and interest and to obligations with 
periodic payments of interest and a final payment of principal. In 
determining whether a new obligation replacing an old one is a 
renewal of the original terms or a refinancing, the creditor may 
consider it a renewal even if:
    i. Accrued unpaid interest is added to the principal balance.
    ii. Changes are made in the terms of renewal resulting from the 
factors listed in Sec.  1026.17(c)(3).
    iii. The principal at renewal is reduced by a curtailment of the 
obligation.

Paragraph 20(a)(2)

    1. Annual percentage rate reduction. A reduction in the annual 
percentage rate with a corresponding change in the payment schedule 
is not a refinancing. If the annual percentage rate is subsequently 
increased (even though it remains below its original level) and the 
increase is effected in such a way that the old obligation is 
satisfied and replaced, new disclosures must then be made.
    2. Corresponding change. A corresponding change in the payment 
schedule to implement a lower annual percentage rate would be a 
shortening of the maturity, or a reduction in the payment amount or 
the number of payments of an obligation. The exception in Sec.  
1026.20(a)(2) does not apply if the maturity is lengthened, or if 
the payment amount or number of payments is increased beyond that 
remaining on the existing transaction.

Paragraph 20(a)(3)

    1. Court agreements. This exception includes, for example, 
agreements such as reaffirmations of debts discharged in bankruptcy, 
settlement agreements, and post-judgment agreements. (See the 
commentary to Sec.  1026.2(a)(14) for a discussion of court-approved 
agreements that are not considered ``credit.'')

Paragraph 20(a)(4)

    1. Workout agreements. A workout agreement is not a refinancing 
unless the annual percentage rate is increased or additional credit 
is advanced beyond amounts already accrued plus insurance premiums.

Paragraph 20(a)(5)

    1. Insurance renewal. The renewal of optional insurance added to 
an existing credit transaction is not a refinancing, assuming that 
appropriate Truth in Lending disclosures were provided for the 
initial purchase of the insurance.

20(b) Assumptions

    1. General definition. i. An assumption as defined in Sec.  
1026.20(b) is a new transaction and new disclosures must be made to 
the subsequent consumer. An assumption under the regulation requires 
the following three elements:
    A. A residential mortgage transaction.
    B. An express acceptance of the subsequent consumer by the 
creditor.
    C. A written agreement.
    ii. The assumption of a nonexempt consumer credit obligation 
requires no disclosures unless all three elements are present. For 
example, an automobile dealer need not provide Truth in Lending 
disclosures to a customer who assumes an existing obligation secured 
by an automobile. However, a residential mortgage transaction with 
the elements described in Sec.  1026.20(b) is an assumption that 
calls for new disclosures; the disclosures must be given whether or 
not the assumption is accompanied by changes in the terms of the 
obligation. (See comment 2(a)(24)-5 for a discussion of assumptions 
that are not considered residential mortgage transactions.)
    2. Existing residential mortgage transaction. A transaction may 
be a residential mortgage transaction as to one consumer and not to 
the other consumer. In that case, the creditor must look to the 
assuming consumer in determining whether a residential mortgage 
transaction exists. To illustrate: The original consumer obtained a 
mortgage to purchase a home for vacation purposes. The loan was not 
a residential mortgage transaction as to that consumer. The mortgage 
is assumed by a consumer who will use the home as a principal 
dwelling. As to that consumer, the loan is a residential mortgage 
transaction. For purposes of Sec.  1026.20(b), the assumed loan is 
an ``existing residential mortgage transaction'' requiring 
disclosures, if the other criteria for an assumption are met.

[[Page 79993]]

    3. Express agreement. Expressly agrees means that the creditor's 
agreement must relate specifically to the new debtor and must 
unequivocally accept that debtor as a primary obligor. The following 
events are not construed to be express agreements between the 
creditor and the subsequent consumer:
    i. Approval of creditworthiness.
    ii. Notification of a change in records.
    iii. Mailing of a coupon book to the subsequent consumer.
    iv. Acceptance of payments from the new consumer.
    4. Retention of original consumer. The retention of the original 
consumer as an obligor in some capacity does not prevent the change 
from being an assumption, provided the new consumer becomes a 
primary obligor. But the mere addition of a guarantor to an 
obligation for which the original consumer remains primarily liable 
does not give rise to an assumption. However, if neither party is 
designated as the primary obligor but the creditor accepts payment 
from the subsequent consumer, an assumption exists for purposes of 
Sec.  1026.20(b).
    5. Status of parties. Section 1026.20(b) applies only if the 
previous debtor was a consumer and the obligation is assumed by 
another consumer. It does not apply, for example, when an individual 
takes over the obligation of a corporation.
    6. Disclosures. For transactions that are assumptions within 
this provision, the creditor must make disclosures based on the 
``remaining obligation.'' For example:
    i. The amount financed is the remaining principal balance plus 
any arrearages or other accrued charges from the original 
transaction.
    ii. If the finance charge is computed from time to time by 
application of a percentage rate to an unpaid balance, in 
determining the amount of the finance charge and the annual 
percentage rate to be disclosed, the creditor should disregard any 
prepaid finance charges paid by the original obligor, but must 
include in the finance charge any prepaid finance charge imposed in 
connection with the assumption.
    iii. If the creditor requires the assuming consumer to pay any 
charges as a condition of the assumption, those sums are prepaid 
finance charges as to that consumer, unless exempt from the finance 
charge under Sec.  1026.4. If a transaction involves add-on or 
discount finance charges, the creditor may make abbreviated 
disclosures, as outlined in Sec.  1026.20(b)(1) through (5). 
Creditors providing disclosures pursuant to this section for 
assumptions of variable-rate transactions secured by the consumer's 
principal dwelling with a term longer than one year need not provide 
new disclosures under Sec.  1026.18(f)(2)(ii) or Sec.  1026.19(b). 
In such transactions, a creditor may disclose the variable-rate 
feature solely in accordance with Sec.  1026.18(f)(1).
    7. Abbreviated disclosures. The abbreviated disclosures 
permitted for assumptions of transactions involving add-on or 
discount finance charges must be made clearly and conspicuously in 
writing in a form that the consumer may keep. However, the creditor 
need not comply with the segregation requirement of Sec.  
1026.17(a)(1). The terms annual percentage rate and total of 
payments, when disclosed according to Sec.  1026.20(b)(4) and (5), 
are not subject to the description requirements of Sec.  1026.18(e) 
and (h). The term annual percentage rate disclosed under Sec.  
1026.20(b)(4) need not be more conspicuous than other disclosures.

20(c) Variable-Rate Adjustments

    1. Timing of adjustment notices. This section requires a 
creditor (or a subsequent holder) to provide certain disclosures in 
cases where an adjustment to the interest rate is made in a 
variable-rate transaction subject to Sec.  1026.19(b). There are two 
timing rules, depending on whether payment changes accompany 
interest rate changes. A creditor is required to provide at least 
one notice each year during which interest rate adjustments have 
occurred without accompanying payment adjustments. For payment 
adjustments, a creditor must deliver or place in the mail notices to 
borrowers at least 25, but not more than 120, calendar days before a 
payment at a new level is due. The timing rules also apply to the 
notice required to be given in connection with the adjustment to the 
rate and payment that follows conversion of a transaction subject to 
Sec.  1026.19(b) to a fixed-rate transaction. (In cases where an 
open-end account is converted to a closed-end transaction subject to 
Sec.  1026.19(b), the requirements of this section do not apply 
until adjustments are made following conversion.)
    2. Exceptions. Section 1026.20(c) does not apply to ``shared-
equity,'' ``shared-appreciation,'' or ``price level adjusted'' or 
similar mortgages.
    3. Basis of disclosures. The disclosures required under this 
section shall reflect the terms of the parties' legal obligation, as 
required under Sec.  1026.17(c)(1).

Paragraph 20(c)(1)

    1. Current and prior interest rates. The requirements under this 
paragraph are satisfied by disclosing the interest rate used to 
compute the new adjusted payment amount (``current rate'') and the 
adjusted interest rate that was disclosed in the last adjustment 
notice, as well as all other interest rates applied to the 
transaction in the period since the last notice (``prior rates''). 
(If there has been no prior adjustment notice, the prior rates are 
the interest rate applicable to the transaction at consummation, as 
well as all other interest rates applied to the transaction in the 
period since consummation.) If no payment adjustment has been made 
in a year, the current rate is the new adjusted interest rate for 
the transaction, and the prior rates are the adjusted interest rate 
applicable to the loan at the time of the last adjustment notice, 
and all other rates applied to the transaction in the period between 
the current and last adjustment notices. In disclosing all other 
rates applied to the transaction during the period between notices, 
a creditor may disclose a range of the highest and lowest rates 
applied during that period.

Paragraph 20(c)(2)

    1. Current and prior index values. This section requires 
disclosure of the index or formula values used to compute the 
current and prior interest rates disclosed in Sec.  1026.20(c)(1). 
The creditor need not disclose the margin used in computing the 
rates. If the prior interest rate was not based on an index or 
formula value, the creditor also need not disclose the value of the 
index that would otherwise have been used to compute the prior 
interest rate.

Paragraph 20(c)(3)

    1. Unapplied index increases. The requirement that the consumer 
receive information about the extent to which the creditor has 
foregone any increase in the interest rate is applicable only to 
those transactions permitting interest rate carryover. The amount of 
increase that is foregone at an adjustment is the amount that, 
subject to rate caps, can be applied to future adjustments 
independently to increase, or offset decreases in, the rate that is 
determined according to the index or formula.

Paragraph 20(c)(4)

    1. Contractual effects of the adjustment. The contractual 
effects of an interest rate adjustment must be disclosed including 
the payment due after the adjustment is made whether or not the 
payment has been adjusted. A contractual effect of a rate adjustment 
would include, for example, disclosure of any change in the term or 
maturity of the loan if the change resulted from the rate 
adjustment. In transactions where paying the periodic payments will 
not fully amortize the outstanding balance at the end of the loan 
term and where the final payment will equal the periodic payment 
plus the remaining unpaid balance, the amount of the adjusted 
payment must be disclosed if such payment has changed as a result of 
the rate adjustment. A statement of the loan balance also is 
required. The balance required to be disclosed is the balance on 
which the new adjusted payment is based. If no payment adjustment is 
disclosed in the notice, the balance disclosed should be the loan 
balance on which the payment disclosed under Sec.  1026.20(c)(5) is 
based, if applicable, or the balance at the time the disclosure is 
prepared.

Paragraph 20(c)(5)

    1. Fully-amortizing payment. This paragraph requires a 
disclosure only when negative amortization occurs as a result of the 
adjustment. A disclosure is not required simply because a loan calls 
for non-amortizing or partially amortizing payments. For example, in 
a transaction with a five-year term and payments based on a longer 
amortization schedule, and where the final payment will equal the 
periodic payment plus the remaining unpaid balance, the creditor 
would not have to disclose the payment necessary to fully amortize 
the loan in the remainder of the five-year term. A disclosure is 
required, however, if the payment disclosed under Sec.  
1026.20(c)(4) is not sufficient to prevent negative amortization in 
the loan. The adjustment notice must state the payment required to 
prevent negative amortization. (This paragraph does not apply if the 
payment disclosed in Sec.  1026.20(c)(4) is sufficient to prevent 
negative amortization in the loan but the final payment will be a 
different amount due to rounding.)

[[Page 79994]]

Section 1026.21--Treatment of Credit Balances

Paragraph 21(a)

    1. Credit balance. A credit balance arises whenever the creditor 
receives or holds funds in an account in excess of the total balance 
due from the consumer on that account. A balance might result, for 
example, from the debtor's paying off a loan by transmitting funds 
in excess of the total balance owed on the account, or from the 
early payoff of a loan entitling the consumer to a rebate of 
insurance premiums and finance charges. However, Sec.  1026.21 does 
not determine whether the creditor in fact owes or holds sums for 
the consumer. For example, if a creditor has no obligation to rebate 
any portion of precomputed finance charges on prepayment, the 
consumer's early payoff would not create a credit balance with 
respect to those charges. Similarly, nothing in this provision 
interferes with any rights the creditor may have under the contract 
or under state law with respect to set-off, cross collateralization, 
or similar provisions.
    2. Total balance due. The phrase total balance due refers to the 
total outstanding balance. Thus, this provision does not apply where 
the consumer has simply paid an amount in excess of the payment due 
for a given period.
    3. Timing of refund. The creditor may also fulfill its 
obligation under this section by:
    i. Refunding any credit balance to the consumer immediately.
    ii. Refunding any credit balance prior to a written request from 
the consumer.
    iii. 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.

Paragraph 21(b)

    1. Written requests--standing orders. The creditor is not 
required to honor standing orders requesting refunds of any credit 
balance that may be created on the consumer's account.

Paragraph 21(c)

    1. Good faith effort to refund. The creditor must take positive 
steps to return any credit balance that has remained in the account 
for over 6 months. This includes, if necessary, attempts to trace 
the consumer through the consumer's last known address or telephone 
number, or both.
    2. Good faith effort unsuccessful. Section 1026.21 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.

Section 1026.22--Determination of Annual Percentage Rate

22(a) Accuracy of Annual Percentage Rate

Paragraph 22(a)(1)

    1. Calculation method. The regulation recognizes both the 
actuarial method and the United States Rule Method (U.S. Rule) as 
measures of an exact annual percentage rate. Both methods yield the 
same annual percentage rate when payment intervals are equal. They 
differ in their treatment of unpaid accrued interest.
    2. Actuarial method. When no payment is made, or when the 
payment is insufficient to pay the accumulated finance charge, the 
actuarial method requires that the unpaid finance charge be added to 
the amount financed and thereby capitalized. Interest is computed on 
interest since in succeeding periods the interest rate is applied to 
the unpaid balance including the unpaid finance charge. Appendix J 
provides instructions and examples for calculating the annual 
percentage rate using the actuarial method.
    3. U.S. Rule. The U.S. Rule produces no compounding of interest 
in that any unpaid accrued interest is accumulated separately and is 
not added to principal. In addition, under the U.S. Rule, no 
interest calculation is made until a payment is received.
    4. Basis for calculations. When a transaction involves ``step 
rates'' or ``split rates''--that is, different rates applied at 
different times or to different portions of the principal balance--a 
single composite annual percentage rate must be calculated and 
disclosed for the entire transaction. Assume, for example, a step-
rate transaction in which a $10,000 loan is repayable in 5 years at 
10 percent interest for the first 2 years, 12 percent for years 3 
and 4, and 14 percent for year 5. The monthly payments are $210.71 
during the first 2 years of the term, $220.25 for years 3 and 4, and 
$222.59 for year 5. The composite annual percentage rate, using a 
calculator with a ``discounted cash flow analysis'' or ``internal 
rate of return'' function, is 10.75 percent.
    5. Good faith reliance on faulty calculation tools. Section 
1026.22(a)(1) absolves 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 creditor is not liable only for errors directly attributable to 
the calculation tool itself, including software programs; Sec.  
1026.22(a)(1) 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.

Paragraph 22(a)(2)

    1. Regular transactions. The annual percentage rate for a 
regular transaction is considered accurate if it varies in either 
direction by not more than \1/8\ of 1 percentage point from the 
actual annual percentage rate. For example, when the exact annual 
percentage rate is determined to be 101/8%, a disclosed annual 
percentage rate from 10% to 10 \1/4\%, or the decimal equivalent, is 
deemed to comply with the regulation.

Paragraph 22(a)(3)

    1. Irregular transactions. The annual percentage rate for an 
irregular transaction is considered accurate if it varies in either 
direction by not more than \1/4\ of 1 percentage point from the 
actual annual percentage rate. This tolerance is intended for more 
complex transactions that do not call for a single advance and a 
regular series of equal payments at equal intervals. The \1/4\ of 1 
percentage point tolerance may be used, for example, in a 
construction loan where advances are made as construction 
progresses, or in a transaction where payments vary to reflect the 
consumer's seasonal income. It may also be used in transactions with 
graduated payment schedules where the contract commits the consumer 
to several series of payments in different amounts. It does not 
apply, however, to loans with variable rate features where the 
initial disclosures are based on a regular amortization schedule 
over the life of the loan, even though payments may later change 
because of the variable rate feature.

22(a)(4) Mortgage Loans

    1. Example. If a creditor improperly omits a $75 fee from the 
finance charge on a regular transaction, the understated finance 
charge is considered accurate under Sec.  1026.18(d)(1), and the 
annual percentage rate corresponding to that understated finance 
charge also is considered accurate even if it falls outside the 
tolerance of \1/8\ of 1 percentage point provided under Sec.  
1026.22(a)(2). Because a $75 error was made, an annual percentage 
rate corresponding to a $100 understatement of the finance charge 
would not be considered accurate.

22(a)(5) Additional Tolerance for Mortgage Loans

    1. Example. This paragraph contains an additional tolerance for 
a disclosed annual percentage rate that is incorrect but is closer 
to the actual annual percentage rate than the rate that would be 
considered accurate under the tolerance in Sec.  1026.22(a)(4). To 
illustrate: in an irregular transaction subject to a \1/4\ of 1 
percentage point tolerance, if the actual annual percentage rate is 
9.00 percent and a $75 omission from the finance charge corresponds 
to a rate of 8.50 percent that is considered accurate under Sec.  
1026.22(a)(4), a disclosed APR of 8.65 percent is within the 
tolerance in Sec.  1026.22(a)(5). In this example of an understated 
finance charge, a disclosed annual percentage rate below 8.50 or 
above 9.25 percent will not be considered accurate.

22(b) Computation Tools

Paragraph 22(b)(1)

    1. Bureau tables. Volumes I and II of the Bureau's Annual 
Percentage Rate Tables provide a means of calculating annual 
percentage rates for regular and irregular transactions, 
respectively. An annual percentage rate computed in accordance with 
the instructions in the tables is deemed to comply with the 
regulation, even where use of the tables produces a rate that falls 
outside the general standard of accuracy. To illustrate:Volume I may 
be used for single advance transactions with completely regular 
payment schedules or with payment schedules that are regular except 
for an odd first payment, odd first period or odd final payment. 
When used for a transaction with a large final balloon payment, 
Volume I may produce a rate that is considerably higher than the 
exact rate produced using a

[[Page 79995]]

computer program based directly on Appendix J. However, the Volume I 
rate--produced using certain adjustments in that volume--is 
considered to be in compliance.

Paragraph 22(b)(2)

    1. Other calculation tools. Creditors need not use the Bureau 
tables in calculating the annual percentage rates. Any computation 
tools may be used, so long as they produce annual percentage rates 
within \1/8\ or \1/4\ of 1 percentage point, as applicable, of the 
precise actuarial or U.S. Rule annual percentage rate.

22(c) Single Add-On Rate Transactions

    1. General rule. Creditors applying a single add-on rate to all 
transactions up to 60 months in length may disclose the same annual 
percentage rate for all those transactions, although the actual 
annual percentage rate varies according to the length of the 
transaction. Creditors utilizing this provision must show the 
highest of those rates. For example, an add-on rate of 10 percent 
converted to an annual percentage rate produces the following actual 
annual percentage rates at various maturities: At 3 months, 14.94 
percent; at 21 months, 18.18 percent; and at 60 months, 17.27 
percent. The creditor must disclose an annual percentage rate of 
18.18 percent (the highest annual percentage rate) for any 
transaction up to 5 years, even though that rate is precise only for 
a transaction of 21 months.

22(d) Certain Transactions Involving Ranges of Balances

    1. General rule. Creditors applying a fixed dollar finance 
charge to all balances within a specified range of balances may 
understate the annual percentage rate by up to 8 percent of that 
rate, by disclosing for all those balances the annual percentage 
rate computed on the median balance within that range. For example: 
If a finance charge of $9 applies to all balances between $91 and 
$100, an annual percentage rate of 10 percent (the rate on the 
median balance) may be disclosed as the annual percentage rate for 
all balances, even though a $9 finance charge applied to the lowest 
balance ($91) would actually produce an annual percentage rate of 
10.7 percent.

Section 1026.23--Right of Rescission

    1. Transactions not covered. Credit extensions that are not 
subject to the regulation are not covered by Sec.  1026.23 even if a 
customer's principal dwelling is the collateral securing the credit. 
For example, the right of rescission does not apply to a business 
purpose loan, even though the loan is secured by the customer's 
principal dwelling.

23(a) Consumer's Right to Rescind

Paragraph 23(a)(1)

    1. Security interest arising from transaction. i. In order for 
the right of rescission to apply, the security interest must be 
retained as part of the credit transaction. For example:
    A. A security interest that is acquired by a contractor who is 
also extending the credit in the transaction.
    B. A mechanic's or materialman's lien that is retained by a 
subcontractor or supplier of the contractor-creditor, even when the 
latter has waived its own security interest in the consumer's home.
    ii. The security interest is not part of the credit transaction 
and therefore the transaction is not subject to the right of 
rescission when, for example:
    A. A mechanic's or materialman's lien is obtained by a 
contractor who is not a party to the credit transaction but is 
merely paid with the proceeds of the consumer's unsecured bank loan.
    B. All security interests that may arise in connection with the 
credit transaction are validly waived.
    C. The creditor obtains a lien and completion bond that in 
effect satisfies all liens against the consumer's principal dwelling 
as a result of the credit transaction.
    iii. Although liens arising by operation of law are not 
considered security interests for purposes of disclosure under Sec.  
1026.2, that section specifically includes them in the definition 
for purposes of the right of rescission. Thus, even though an 
interest in the consumer's principal dwelling is not a required 
disclosure under Sec.  1026.18(m), it may still give rise to the 
right of rescission.
    2. Consumer. To be a consumer within the meaning of Sec.  
1026.2, that person must at least have an ownership interest in the 
dwelling that is encumbered by the creditor's security interest, 
although that person need not be a signatory to the credit 
agreement. For example, if only one spouse signs a credit contract, 
the other spouse is a consumer if the ownership interest of that 
spouse is subject to the security interest.
    3. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or 
other second home would not be a principal dwelling. A transaction 
secured by a second home (such as a vacation home) that is not 
currently being used as the consumer's principal dwelling is not 
rescindable, even if the consumer intends to reside there in the 
future. When a consumer buys or builds a new dwelling that will 
become the consumer's principal dwelling within one year or upon 
completion of construction, the new dwelling is considered the 
principal dwelling if it secures the acquisition or construction 
loan. In that case, the transaction secured by the new dwelling is a 
residential mortgage transaction and is not rescindable. For 
example, if a consumer whose principal dwelling is currently A 
builds B, to be occupied by the consumer upon completion of 
construction, a construction loan to finance B and secured by B is a 
residential mortgage transaction. Dwelling, as defined in Sec.  
1026.2, includes structures that are classified as personalty under 
state law. For example, a transaction secured by a mobile home, 
trailer, or houseboat used as the consumer's principal dwelling may 
be rescindable.
    4. Special rule for principal dwelling. Notwithstanding the 
general rule that consumers may have only one principal dwelling, 
when the consumer is acquiring or constructing a new principal 
dwelling, any loan subject to Regulation Z and secured by the equity 
in the consumer's current principal dwelling (for example, a bridge 
loan) is subject to the right of rescission regardless of the 
purpose of that loan. For example, if a consumer whose principal 
dwelling is currently A builds B, to be occupied by the consumer 
upon completion of construction, a construction loan to finance B 
and secured by A is subject to the right of rescission. A loan 
secured by both A and B is, likewise, rescindable.
    5. Addition of a security interest. Under Sec.  1026.23(a), the 
addition of a security interest in a consumer's principal dwelling 
to an existing obligation is rescindable even if the existing 
obligation is not satisfied and replaced by a new obligation, and 
even if the existing obligation was previously exempt under Sec.  
1026.3(b). The right of rescission applies only to the added 
security interest, however, and not to the original obligation. In 
those situations, only the Sec.  1026.23(b) notice need be 
delivered, not new material disclosures; the rescission period will 
begin to run from the delivery of the notice.

Paragraph 23(a)(2)

    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec.  1026.23(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.  
1026.23(d)(2) does not begin to run until the notification has been 
received. The creditor may designate an agent to receive the 
notification so long as the agent's name and address appear on the 
notice provided to the consumer under Sec.  1026.23(b). Where the 
creditor fails to provide the consumer with a designated address for 
sending the notification of rescission, delivering notification to 
the person or address to which the consumer has been directed to 
send, payments constitutes delivery to the creditor or assignee. 
State law determines whether delivery of the notification to a third 
party other than the person to whom payments are made is delivery to 
the creditor or assignee, in the case where the creditor fails to 
designate an address for sending the notification of rescission.

Paragraph 23(a)(3)

    1. Rescission period. i. The period within which the consumer 
may exercise the right to rescind runs for 3 business days from the 
last of 3 events:
    A. Consummation of the transaction.
    B. Delivery of all material disclosures.
    C. Delivery to the consumer of the required rescission notice.
    ii. For example:
    A. If a transaction is consummated on Friday, June 1, and the 
disclosures and notice of the right to rescind were given on 
Thursday, May 31, the rescission period will expire at midnight of 
the third business day after June 1--that is, Tuesday, June 5.
    B. If the disclosures are given and the transaction consummated 
on Friday, June 1, and the rescission notice is given on Monday, 
June 4, the rescission period expires at midnight of the third 
business day after June 4--that is, Thursday, June 7. The consumer 
must place the rescission notice in the mail, file it for 
telegraphic transmission, or deliver

[[Page 79996]]

it to the creditor's place of business within that period in order 
to exercise the right.
    2. Material disclosures. Section 1026.23(a)(3)(ii) sets forth 
the material disclosures that must be provided before the rescission 
period can begin to run. Failure to provide information regarding 
the annual percentage rate also includes failure to inform the 
consumer of the existence of a variable rate feature. Failure to 
give the other required disclosures does not prevent the running of 
the rescission period, although that failure may result in civil 
liability or administrative sanctions.
    3. Unexpired right of rescission. i. When the creditor has 
failed to take the action necessary to start the three-business day 
rescission period running, the right to rescind automatically lapses 
on the occurrence of the earliest of the following three events:
    A. The expiration of three years after consummation of the 
transaction.
    B. Transfer of all the consumer's interest in the property.
    C. Sale of the consumer's interest in the property, including a 
transaction in which the consumer sells the dwelling and takes back 
a purchase money note and mortgage or retains legal title through a 
device such as an installment sale contract.
    ii. Transfer of all the consumers' interest includes such 
transfers as bequests and gifts. A sale or transfer of the property 
need not be voluntary to terminate the right to rescind. For 
example, a foreclosure sale would terminate an unexpired right to 
rescind. As provided in Section 125 of the Act, the three-year limit 
may be extended by an administrative proceeding to enforce the 
provisions of this section. A partial transfer of the consumer's 
interest, such as a transfer bestowing co-ownership on a spouse, 
does not terminate the right of rescission.

Paragraph 23(a)(4)

    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any of them may exercise that right and 
cancel the transaction on behalf of all. For example, if both 
husband and wife have the right to rescind a transaction, either 
spouse acting alone may exercise the right and both are bound by the 
rescission.

Paragraph 23(b)

23(b)(1) Notice of Right To Rescind

    1. Who receives notice. Each consumer entitled to rescind must 
be given two copies of the rescission notice and the material 
disclosures. In a transaction involving joint owners, both of whom 
are entitled to rescind, both must receive the notice of the right 
to rescind and disclosures. For example, if both spouses are 
entitled to rescind a transaction, each must receive two copies of 
the rescission notice (one copy to each if the notice is provided in 
electronic form in accordance with the consumer consent and other 
applicable provisions of the E-Sign Act) and one copy of the 
disclosures.
    2. Format. The notice must be on a separate piece of paper, but 
may appear with other information such as the itemization of the 
amount financed. The material must be clear and conspicuous, but no 
minimum type size or other technical requirements are imposed. The 
notices in Appendix H provide models that creditors may use in 
giving the notice.
    3. Content. The notice must include all of the information 
outlined in Section 1026.23(b)(1)(i) through (v). The requirement in 
Sec.  1026.23(b) that the transaction be identified may be met by 
providing the date of the transaction. The creditor may provide a 
separate form that the consumer may use to exercise the right of 
rescission, or that form may be combined with the other rescission 
disclosures, as illustrated in Appendix H. The notice may include 
additional information related to the required information, such as:
    i. A description of the property subject to the security 
interest.
    ii. A statement that joint owners may have the right to rescind 
and that a rescission by one is effective for all.
    iii. The name and address of an agent of the creditor to receive 
notice of rescission.
    4. Time of providing notice. The notice required by Sec.  
1026.23(b) need not be given before consummation of the transaction. 
The creditor may deliver the notice after the transaction is 
consummated, but the rescission period will not begin to run until 
the notice is given. For example, if the creditor provides the 
notice on May 15, but disclosures were given and the transaction was 
consummated on May 10, the 3-business day rescission period will run 
from May 15.

23(c) Delay of Creditor's Performance

    1. General rule. Until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not 
rescinded, the creditor must not, either directly or through a third 
party:
    i. Disburse loan proceeds to the consumer.
    ii. Begin performing services for the consumer.
    iii. Deliver materials to the consumer.
    2. Escrow. The creditor may disburse loan proceeds during the 
rescission period in a valid escrow arrangement. The creditor may 
not, however, appoint the consumer as ``trustee'' or ``escrow 
agent'' and distribute funds to the consumer in that capacity during 
the delay period.
    3. Actions during the delay period. Section 1026.23(c) does not 
prevent the creditor from taking other steps during the delay, short 
of beginning actual performance. Unless otherwise prohibited, such 
as by state law, the creditor may, for example:
    i. Prepare the loan check.
    ii. Perfect the security interest.
    iii. Prepare to discount or assign the contract to a third 
party.
    iv. Accrue finance charges during the delay period.
    4. Delay beyond rescission period. i. The creditor must wait 
until it is reasonably satisfied that the consumer has not 
rescinded. For example, the creditor may satisfy itself by doing one 
of the following:
    A. Waiting a reasonable time after expiration of the rescission 
period to allow for delivery of a mailed notice.
    B. Obtaining a written statement from the consumer that the 
right has not been exercised.
    ii. When more than one consumer has the right to rescind, the 
creditor cannot reasonably rely on the assurance of only one 
consumer, because other consumers may exercise the right.

23(d) Effects of Rescission

Paragraph 23(d)(1)

    1. Termination of security interest. Any security interest 
giving rise to the right of rescission becomes void when the 
consumer exercises the right of rescission. The security interest is 
automatically negated regardless of its status and whether or not it 
was recorded or perfected. Under Sec.  1026.23(d)(2), however, the 
creditor must take any action necessary to reflect the fact that the 
security interest no longer exists.

Paragraph 23(d)(2)

    1. Refunds to consumer. The consumer cannot be required to pay 
any amount in the form of money or property either to the creditor 
or to a third party as part of the credit transaction. Any amounts 
of this nature already paid by the consumer must be refunded. ``Any 
amount'' includes finance charges already accrued, as well as other 
charges, such as broker fees, application and commitment fees, or 
fees for a title search or appraisal, whether paid to the creditor, 
paid directly to a third party, or passed on from the creditor to 
the third party. It is irrelevant that these amounts may not 
represent profit to the creditor.
    2. Amounts not refundable to consumer. Creditors need not return 
any money given by the consumer to a third party outside of the 
credit transaction, such as costs incurred for a building permit or 
for a zoning variance. Similarly, the term any amount does not apply 
to any money or property given by the creditor to the consumer; 
those amounts must be tendered by the consumer to the creditor under 
Sec.  1026.23(d)(3).
    3. Reflection of security interest termination. The creditor 
must take whatever steps are necessary to indicate that the security 
interest is terminated. Those steps include the cancellation of 
documents creating the security interest, and the filing of release 
or termination statements in the public record. In a transaction 
involving subcontractors or suppliers that also hold security 
interests related to the credit transaction, the creditor must 
insure that the termination of their security interests is also 
reflected. The 20-day period for the creditor's action refers to the 
time within which the creditor must begin the process. It does not 
require all necessary steps to have been completed within that time, 
but the creditor is responsible for seeing the process through to 
completion.

Paragraph 23(d)(3)

    1. Property exchange. Once the creditor has fulfilled its 
obligations under Sec.  1026.23(d)(2), the consumer must tender to 
the creditor any property or money the creditor has already 
delivered to the consumer. At the consumer's option, property may be 
tendered at the location of the property. For example, if lumber or 
fixtures have been delivered to the consumer's home, the consumer 
may tender them to the creditor by making them available for pick-up 
at the home, rather than

[[Page 79997]]

physically returning them to the creditor's premises. Money already 
given to the consumer must be tendered at the creditor's place of 
business.
    2. Reasonable value. If returning the property would be 
extremely burdensome to the consumer, the consumer may offer the 
creditor its reasonable value rather than returning the property 
itself. For example, if building materials have already been 
incorporated into the consumer's dwelling, the consumer may pay 
their reasonable value.

Paragraph 23(d)(4)

    1. Modifications. The procedures outlined in Sec.  1026.23(d)(2) 
and (3) may be modified by a court. For example, when a consumer is 
in bankruptcy proceedings and prohibited from returning anything to 
the creditor, or when the equities dictate, a modification might be 
made. The sequence of procedures under Sec.  1026.23(d)(2) and (3), 
or a court's modification of those procedures under Sec.  
1026.23(d)(4), does not affect a consumer's substantive right to 
rescind and to have the loan amount adjusted accordingly. Where the 
consumer's right to rescind is contested by the creditor, a court 
would normally determine whether the consumer has a right to rescind 
and determine the amounts owed before establishing the procedures 
for the parties to tender any money or property.

23(e) Consumer's Waiver of Right to Rescind

    1. Need for waiver. To waive the right to rescind, the consumer 
must have a bona fide personal financial emergency that must be met 
before the end of the rescission period. The existence of the 
consumer's waiver will not, of itself, automatically insulate the 
creditor from liability for failing to provide the right of 
rescission.
    2. Procedure. To waive or modify the right to rescind, the 
consumer must give a written statement that specifically waives or 
modifies the right, and also includes a brief description of the 
emergency. Each consumer entitled to rescind must sign the waiver 
statement. In a transaction involving multiple consumers, such as a 
husband and wife using their home as collateral, the waiver must 
bear the signatures of both spouses.

23(f) Exempt Transactions

    1. Residential mortgage transaction. Any transaction to 
construct or acquire a principal dwelling, whether considered real 
or personal property, is exempt. (See the commentary to Sec.  
1026.23(a).) For example, a credit transaction to acquire a mobile 
home or houseboat to be used as the consumer's principal dwelling 
would not be rescindable.
    2. Lien status. The lien status of the mortgage is irrelevant 
for purposes of the exemption in Sec.  1026.23(f)(1); the fact that 
a loan has junior lien status does not by itself preclude 
application of this exemption. For example, a home buyer may assume 
the existing first mortgage and create a second mortgage to finance 
the balance of the purchase price. Such a transaction would not be 
rescindable.
    3. Combined-purpose transaction. A loan to acquire a principal 
dwelling and make improvements to that dwelling is exempt if treated 
as one transaction. If, on the other hand, the loan for the 
acquisition of the principal dwelling and the subsequent advances 
for improvements are treated as more than one transaction, then only 
the transaction that finances the acquisition of that dwelling is 
exempt.
    4. New advances. The exemption in Sec.  1026.23(f)(2) applies 
only to refinancings (including consolidations) by the original 
creditor. The original creditor is the creditor to whom the written 
agreement was initially made payable. In a merger, consolidation or 
acquisition, the successor institution is considered the original 
creditor for purposes of the exemption in Sec.  1026.23(f)(2). If 
the refinancing involves a new advance of money, the amount of the 
new advance is rescindable. In determining whether there is a new 
advance, a creditor may rely on the amount financed, refinancing 
costs, and other figures stated in the latest Truth in Lending 
disclosures provided to the consumer and is not required to use, for 
example, more precise information that may only become available 
when the loan is closed. For purposes of the right of rescission, a 
new advance does not include amounts attributed solely to the costs 
of the refinancing. These amounts would include Sec.  1026.4(c)(7) 
charges (such as attorneys fees and title examination and insurance 
fees, if bona fide and reasonable in amount), as well as insurance 
premiums and other charges that are not finance charges. (Finance 
charges on the new transaction--points, for example--would not be 
considered in determining whether there is a new advance of money in 
a refinancing since finance charges are not part of the amount 
financed.) To illustrate, if the sum of the outstanding principal 
balance plus the earned unpaid finance charge is $50,000 and the new 
amount financed is $51,000, then the refinancing would be exempt if 
the extra $1,000 is attributed solely to costs financed in 
connection with the refinancing that are not finance charges. Of 
course, if new advances of money are made (for example, to pay for 
home improvements) and the consumer exercises the right of 
rescission, the consumer must be placed in the same position as he 
or she was in prior to entering into the new credit transaction. 
Thus, all amounts of money (which would include all the costs of the 
refinancing) already paid by the consumer to the creditor or to a 
third party as part of the refinancing would have to be refunded to 
the consumer. (See the commentary to Sec.  1026.23(d)(2) for a 
discussion of refunds to consumers.) A model rescission notice 
applicable to transactions involving new advances appears in 
Appendix H. The general rescission notice (model form H-8) is the 
appropriate form for use by creditors not considered original 
creditors in refinancing transactions.
    5. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempted from this section.
    6. Multiple advances. Just as new disclosures need not be made 
for subsequent advances when treated as one transaction, no new 
rescission rights arise so long as the appropriate notice and 
disclosures are given at the outset of the transaction. For example, 
the creditor extends credit for home improvements secured by the 
consumer's principal dwelling, with advances made as repairs 
progress. As permitted by Sec.  1026.17(c)(6), the creditor makes a 
single set of disclosures at the beginning of the construction 
period, rather than separate disclosures for each advance. The right 
of rescission does not arise with each advance. However, if the 
advances are treated as separate transactions, the right of 
rescission applies to each advance.
    7. Spreader clauses. When the creditor holds a mortgage or deed 
of trust on the consumer's principal dwelling and that mortgage or 
deed of trust contains a ``spreader clause,'' subsequent loans made 
are separate transactions and are subject to the right of 
rescission. Those loans are rescindable unless the creditor 
effectively waives its security interest under the spreader clause 
with respect to the subsequent transactions.
    8. Converting open-end to closed-end credit. Under certain state 
laws, consummation of a closed-end credit transaction may occur at 
the time a consumer enters into the initial open-end credit 
agreement. As provided in the commentary to Sec.  1026.17(b), 
closed-end credit disclosures may be delayed under these 
circumstances until the conversion of the open-end account to a 
closed-end transaction. In accounts secured by the consumer's 
principal dwelling, no new right of rescission arises at the time of 
conversion. Rescission rights under Sec.  1026.15 are unaffected.

23(g) Tolerances for Accuracy

23(g)(2) One Percent Tolerance

    1. New advance. The phrase ``new advance'' has the same meaning 
as in comment 23(f)-4.

23(h) Special Rules for Foreclosures

    1. Rescission. Section 1026.23(h) applies only to transactions 
that are subject to rescission under Sec.  1026.23(a)(1).

Paragraph 23(h)(1)(i)

    1. Mortgage broker fees. A consumer may rescind a loan in 
foreclosure if a mortgage broker fee that should have been included 
in the finance charge was omitted, without regard to the dollar 
amount involved. If the amount of the mortgage broker fee is 
included but misstated the rule in Sec.  1026.23(h)(2) applies.

23(h)(2) Tolerance for Disclosures

    1. General. This section is based on the accuracy of the total 
finance charge rather than its component charges.

Section 1026.24--Advertising

24(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. This provision 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,

[[Page 79998]]

or terms that will become available at a future date.

24(b) Clear and Conspicuous Standard

    1. Clear and conspicuous standard--general. This section is 
subject to the general ``clear and conspicuous'' standard for this 
subpart, see Sec.  1026.17(a)(1), but prescribes no specific rules 
for the format of the necessary disclosures, other than the format 
requirements related to the advertisement of rates and payments as 
described in comment 24(b)-2 below. The credit terms need not be 
printed in a certain type size nor need they appear in any 
particular place in the advertisement. For example, a merchandise 
tag that is an advertisement under the regulation complies with this 
section if the necessary credit terms are on both sides of the tag, 
so long as each side is accessible.
    2. Clear and conspicuous standard--rates and payments in 
advertisements for credit secured by a dwelling. For purposes of 
Sec.  1026.24(f), a clear and conspicuous disclosure means that the 
required information in Sec. Sec.  1026.24(f)(2)(i) and 
1026.24(f)(3)(i)(A) and (B) is disclosed with equal prominence and 
in close proximity to the advertised rates or payments triggering 
the required disclosures, and that the required information in Sec.  
1026.24(f)(3)(i)(C) is disclosed prominently and in close proximity 
to the advertised rates or payments triggering the required 
disclosures. If the required information in Sec. Sec.  
1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) and (B) is the same type 
size as the advertised rates or payments triggering the required 
disclosures, the disclosures are deemed to be equally prominent. The 
information in Sec.  1026.24(f)(3)(i)(C) must be disclosed 
prominently, but need not be disclosed with equal prominence or be 
the same type size as the payments triggering the required 
disclosures. If the required information in Sec. Sec.  
1026.24(f)(2)(i) and 1026.24(f)(3)(i) is located immediately next to 
or directly above or below the advertised rates or payments 
triggering the required disclosures, without any intervening text or 
graphical displays, the disclosures are deemed to be in close 
proximity. Notwithstanding the above, for electronic advertisements 
that disclose rates or payments, compliance with the requirements of 
Sec.  1026.24(e) is deemed to satisfy the clear and conspicuous 
standard.
    3. Clear and conspicuous standard--Internet advertisements for 
credit secured by a dwelling. For purposes of this section, a clear 
and conspicuous disclosure for visual text advertisements on the 
Internet for credit secured by a dwelling 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.  
1026.24. See also comment 24(e)-4.
    4. Clear and conspicuous standard--televised advertisements for 
credit secured by a dwelling. For purposes of this section, 
including alternative disclosures as provided for by Sec.  
1026.24(g), a clear and conspicuous disclosure in the context of 
visual text advertisements on television for credit secured by a 
dwelling 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 a consumer to read 
the information required to be disclosed, and comply with all other 
requirements for clear and conspicuous disclosures under Sec.  
1026.24. 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 
credit secured by a dwelling. For purposes of this section, 
including alternative disclosures as provided for by Sec.  
1026.24(g), a clear and conspicuous disclosure in the context of an 
oral advertisement for credit secured by a dwelling, whether by 
radio, television, 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.

24(c) Advertisement of Rate of Finance Charge

    1. Annual percentage rate. Advertised rates must be stated in 
terms of an annual percentage rate, as defined in Sec.  1026.22. 
Even though state or local law permits the use of add-on, discount, 
time-price differential, or other methods of stating rates, 
advertisements must state them as annual percentage rates. Unlike 
the transactional disclosure of an annual percentage rate under 
Sec.  1026.18(e), the advertised annual percentage rate need not 
include a descriptive explanation of the term and may be expressed 
using the abbreviation APR. The advertisement must state that the 
rate is subject to increase after consummation if that is the case, 
but the advertisement need not describe the rate increase, its 
limits, or how it would affect the payment schedule. As under Sec.  
1026.18(f), relating to disclosure of a variable rate, the rate 
increase disclosure requirement in this provision does not apply to 
any rate increase due to delinquency (including late payment), 
default, acceleration, assumption, or transfer of collateral.
    2. Simple or periodic rates. The advertisement may not 
simultaneously state any other rate, except that a simple annual 
rate or periodic rate applicable to an unpaid balance may appear 
along with (but not more conspicuously than) the annual percentage 
rate. An advertisement for credit secured by a dwelling may not 
state a periodic rate, other than a simple annual rate, that is 
applied to an unpaid balance. For example, in an advertisement for 
credit secured by a dwelling, a simple annual interest rate may be 
shown in the same type size as the annual percentage rate for the 
advertised credit, subject to the requirements of Sec.  1026.24(f). 
A simple annual rate or periodic rate that is applied to an unpaid 
balance is the rate at which interest is accruing; those terms do 
not include a rate lower than the rate at which interest is 
accruing, such as an effective rate, payment rate, or qualifying 
rate.
    3. Buydowns. When a third party (such as a seller) or a creditor 
wishes to promote the availability of reduced interest rates 
(consumer or seller buydowns), the advertised annual percentage rate 
must be determined in accordance with the commentary to Sec.  
1026.17(c) regarding the basis of transactional disclosures for 
buydowns. The seller or creditor may advertise the reduced simple 
interest rate, provided the advertisement shows the limited term to 
which the reduced rate applies and states the simple interest rate 
applicable to the balance of the term. The advertisement may also 
show the effect of the buydown agreement on the payment schedule for 
the buydown period, but this will trigger the additional disclosures 
under Sec.  1026.24(d)(2).
    4. Discounted variable-rate transactions. The advertised annual 
percentage rate for discounted variable-rate transactions must be 
determined in accordance with comment 17(c)(1)-10 regarding the 
basis of transactional disclosures for such financing.
    i. A creditor or seller may promote the availability of the 
initial rate reduction in such transactions by advertising the 
reduced simple annual rate, provided the advertisement shows with 
equal prominence and in close proximity the limited term to which 
the reduced rate applies and the annual percentage rate that will 
apply after the term of the initial rate reduction expires. See 
Sec.  1026.24(f).
    ii. Limits or caps on periodic rate or payment adjustments need 
not be stated. To illustrate using the second example in comment 
17(c)(1)-10, the fact that the rate is presumed to be 11 percent in 
the second year and 12 percent for the remaining 28 years need not 
be included in the advertisement.
    iii. The advertisement may also show the effect of the discount 
on the payment schedule for the discount period, but this will 
trigger the additional disclosures under Sec.  1026.24(d).

24(d) Advertisement of Terms That Require Additional Disclosures

    1. General rule. Under Sec.  1026.24(d)(1), whenever certain 
triggering terms appear in credit advertisements, the additional 
credit terms enumerated in Sec.  1026.24(d)(2) must also appear. 
These provisions apply even if the triggering term is not stated 
explicitly but may be readily determined from the advertisement. For 
example, an advertisement may state ``80 percent financing 
available,'' which is in fact indicating that a 20 percent 
downpayment is required.

24(d)(1) Triggering Terms

    1. Downpayment. i. The dollar amount of a downpayment or a 
statement of the downpayment as a percentage of the price requires 
further information. By virtue of the definition of downpayment in 
Sec.  1026.2, this triggering term is limited to credit sale 
transactions. It includes such statements as:
    A. Only 5% down.
    B. As low as $100 down.
    C. Total move-in costs of $800.
    ii. This provision applies only if a downpayment is actually 
required; statements such as no downpayment or no

[[Page 79999]]

trade-in required do not trigger the additional disclosures under 
this paragraph.
    2. Payment period. i. The number of payments required or the 
total period of repayment includes such statements as:
    A. 48-month payment terms.
    B. 30-year mortgage.
    C. Repayment in as many as 36 monthly installments.
    ii. But it does not include such statements as ``pay weekly,'' 
``monthly payment terms arranged,'' or ``take years to repay,'' 
since these statements do not indicate a time period over which a 
loan may be financed.
    3. Payment amount. i. The dollar amount of any payment includes 
statements such as:
    A. ``Payable in installments of $103.''
    B. ``$25 weekly.''
    C. ``$500,000 loan for just $1,650 per month.''
    D. ``$1,200 balance payable in 10 equal installments.''
    ii. In the last example, the amount of each payment is readily 
determinable, even though not explicitly stated. But statements such 
as ``monthly payments to suit your needs'' or ``regular monthly 
payments'' are not deemed to be statements of the amount of any 
payment.
    4. Finance charge. i. The dollar amount of the finance charge or 
any portion of it includes statements such as:
    A. ``$500 total cost of credit.''
    B. ``$2 monthly carrying charge.''
    C. ``$50,000 mortgages, 2 points to the borrower.''
    ii. In the last example, the $1,000 prepaid finance charge can 
be readily determined from the information given. Statements of the 
annual percentage rate or statements that there is no particular 
charge for credit (such as ``no closing costs'') are not triggering 
terms under this paragraph.

24(d)(2) Additional Terms

    1. Disclosure of downpayment. The total downpayment as a dollar 
amount or percentage must be shown, but the word ``downpayment'' 
need not be used in making this disclosure. For example, ``10% cash 
required from buyer'' or ``credit terms require minimum $100 trade-
in'' would suffice.
    2. Disclosure of repayment terms. The phrase ``terms of 
repayment'' generally has the same meaning as the ``payment 
schedule'' required to be disclosed under Sec.  1026.18(g). Section 
1026.24(d)(2)(ii) provides flexibility to creditors in making this 
disclosure for advertising purposes. Repayment terms may be 
expressed in a variety of ways in addition to an exact repayment 
schedule; this is particularly true for advertisements that do not 
contemplate a single specific transaction. Repayment terms, however, 
must reflect the consumer's repayment obligations over the full term 
of the loan, including any balloon payment, see comment 24(d)(2)-3, 
not just the repayment terms that will apply for a limited period of 
time. For example:
    i. A creditor may use a unit-cost approach in making the 
required disclosure, such as ``48 monthly payments of $27.83 per 
$1,000 borrowed.''
    ii. In an advertisement for credit secured by a dwelling, when 
any series of payments varies because of the inclusion of mortgage 
insurance premiums, a creditor may state the number and timing of 
payments, the fact that payments do not include amounts for mortgage 
insurance premiums, and that the actual payment obligation will be 
higher.
    iii. In an advertisement for credit secured by a dwelling, when 
one series of monthly payments will apply for a limited period of 
time followed by a series of higher monthly payments for the 
remaining term of the loan, the advertisement must state the number 
and time period of each series of payments, and the amounts of each 
of those payments. For this purpose, the creditor must assume that 
the consumer makes the lower series of payments for the maximum 
allowable period of time.
    3. Balloon payment; disclosure of repayment terms. In some 
transactions, a balloon payment will occur when the consumer only 
makes the minimum payments specified in an advertisement. A balloon 
payment results if paying the minimum payments does not fully 
amortize the outstanding balance by a specified date or time, 
usually the end of the term of the loan, and the consumer must repay 
the entire outstanding balance at such time. If a balloon payment 
will occur when the consumer only makes the minimum payments 
specified in an advertisement, the advertisement must state with 
equal prominence and in close proximity to the minimum payment 
statement 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. Annual percentage rate. The advertised annual percentage rate 
may be expressed using the abbreviation ``APR.'' The advertisement 
must also state, if applicable, that the annual percentage rate is 
subject to increase after consummation.
    5. Use of examples. A creditor may use illustrative credit 
transactions to make the necessary disclosures under Sec.  
1026.24(d)(2). That is, where a range of possible combinations of 
credit terms is offered, the advertisement may use examples of 
typical transactions, so long as each example contains all of the 
applicable terms required by Sec.  1026.24(d). The examples must be 
labeled as such and must reflect representative credit terms made 
available by the creditor to present and prospective customers.

24(e) Catalogs or Other Multiple-Page Advertisements; Electronic 
Advertisements

    1. Definition. The multiple-page advertisements to which this 
section 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.  1026.24(e).
    2. General. Section 1026.24(e) permits creditors to put credit 
information together in one place in a catalog or other multiple-
page advertisement or in 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.  1026.24(d)(1). A list of different annual 
percentage rates applicable to different balances, for example, does 
not trigger further disclosures under Sec.  1026.24(d)(2) and so is 
not covered by Sec.  1026.24(e).
    3. Representative examples. The table or schedule must state all 
the necessary information for a representative sampling of amounts 
of credit. This must reflect amounts of credit the creditor actually 
offers, up to and including the higher-priced items. This does not 
mean that the chart must make the disclosures for the single most 
expensive item the seller offers, but only that the chart cannot be 
limited to information about less expensive sales when the seller 
commonly offers a distinct level of more expensive goods or 
services. The range of transactions shown in the table or schedule 
in a particular catalog or multiple-page advertisement need not 
exceed the range of transactions actually offered in that 
advertisement.
    4. Electronic advertisement. If an electronic advertisement 
(such as an advertisement appearing on an Internet Web site) 
contains the table or schedule permitted under Sec.  1026.24(e)(1), 
any statement of terms set forth in Sec.  1026.24(d)(1) 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.

24(f) Disclosure of Rates and Payments in Advertisements for Credit 
Secured by a Dwelling

    1. Applicability. The requirements of Sec.  1026.24(f)(2) apply 
to advertisements for loans where more than one simple annual rate 
of interest will apply. The requirements of Sec.  
1026.24(f)(3)(i)(A) require a clear and conspicuous disclosure of 
each payment that will apply over the term of the loan. In 
determining whether a payment will apply when the consumer may 
choose to make a series of lower monthly payments that will apply 
for a limited period of time, the creditor must assume that the 
consumer makes the series of lower payments for the maximum 
allowable period of time. See comment 24(d)(2)-2.iii. However, for 
purposes of Sec.  1026.24(f), the creditor may, but need not, assume 
that specific events which trigger changes to the simple annual rate 
of interest or to the applicable payments will occur. For example:
    i. Fixed-rate conversion loans. If a loan program permits 
consumers to convert their variable-rate loans to fixed rate loans, 
the creditor need not assume that the fixed-rate conversion option, 
by itself, means that more than one simple annual rate of interest 
will apply to the loan under Sec.  1026.24(f)(2) and need not 
disclose as a separate payment under Sec.  1026.24(f)(3)(i)(A) the 
payment that would apply if the consumer exercised the fixed-rate 
conversion option.
    ii. Preferred-rate loans. Some loans 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 
or the consumer closing an existing deposit account with the 
creditor or the consumer revoking an election to make automated 
payments. A creditor need not

[[Page 80000]]

assume that the preferred-rate provision, by itself, means that more 
than one simple annual rate of interest will apply to the loan under 
Sec.  1026.24(f)(2) and the payments that would apply upon 
occurrence of the event that triggers the rate increase need not be 
disclosed as a separate payment under Sec.  1026.24(f)(3)(i)(A).
    iii. Rate reductions. Some loans contain a provision where the 
rate will decrease upon the occurrence of some event, such as if the 
consumer makes a series of payments on time. A creditor need not 
assume that the rate reduction provision, by itself, means that more 
than one simple annual rate of interest will apply to the loan under 
Sec.  1026.24(f)(2) and need not disclose the payments that would 
apply upon occurrence of the event that triggers the rate reduction 
as a separate payment under Sec.  1026.24(f)(3)(i)(A).
    2. Equal prominence, close proximity. Information required to be 
disclosed under Sec. Sec.  1026.24(f)(2)(i) and 1026.24(f)(3)(i) 
that is immediately next to or directly above or below the simple 
annual rate or payment amount (but not in a footnote) is deemed to 
be closely proximate to the listing. Information required to be 
disclosed under Sec. Sec.  1026.24(f)(2)(i) and 1026.24(f)(3)(i)(A) 
and (B) that is in the same type size as the simple annual rate or 
payment amount is deemed to be equally prominent.
    3. Clear and conspicuous standard. For more information about 
the applicable clear and conspicuous standard, see comment 24(b)-2.
    4. Comparisons in advertisements. When making any comparison in 
an advertisement between actual or hypothetical credit payments or 
rates and the payments or rates available under the advertised 
product, the advertisement must state all applicable payments or 
rates for the advertised product and the time periods for which 
those payments or rates will apply, as required by this section.
    5. Application to variable-rate transactions--disclosure of 
rates. In advertisements for variable-rate transactions, if a simple 
annual rate that applies at consummation is not based on the index 
and margin that will be used to make subsequent rate adjustments 
over the term of the loan, the requirements of Sec.  
1026.24(f)(2)(i) apply.
    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 
email 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.

24(f)(3) Disclosure of Payments

    1. Amounts and time periods of payments. Section 
1026.24(f)(3)(i) requires disclosure of the amounts and time periods 
of all payments that will apply over the term of the loan. This 
section may require disclosure of several payment amounts, including 
any balloon payment. For example, if an advertisement for credit 
secured by a dwelling offers $300,000 of credit with a 30-year loan 
term for a payment of $600 per month for the first six months, 
increasing to $1,500 per month after month six, followed by a 
balloon payment of $30,000 at the end of the loan term, the 
advertisement must disclose the amount and time periods 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 
each other. However, if the final scheduled payment of a fully 
amortizing loan is not greater than two times the amount of any 
other regularly scheduled payment, the final payment need not be 
disclosed.
    2. Application to variable-rate transactions--disclosure of 
payments. In advertisements for variable-rate transactions, if the 
payment that applies at consummation is not based on the index and 
margin that will be used to make subsequent payment adjustments over 
the term of the loan, the requirements of Sec.  1026.24(f)(3)(i) 
apply.

24(g) Alternative Disclosures--Television or Radio Advertisements

    1. Multi-purpose telephone number. When an advertised telephone 
number provides a recording, disclosures should 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 telephone 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.''

24(i) Prohibited Acts or Practices in Advertisements for Credit Secured 
by a Dwelling

    1. Comparisons in advertisements. The requirements of Sec.  
1026.24(i)(2) apply to all advertisements for credit secured by a 
dwelling, including radio and television advertisements. A 
comparison includes a claim about the amount a consumer may save 
under the advertised product. For example, a statement such as 
``save $300 per month on a $300,000 loan'' constitutes an implied 
comparison between the advertised product's payment and a consumer's 
current payment.
    2. Misrepresentations about government endorsement. A statement 
that the Federal Community Reinvestment Act entitles the consumer to 
refinance his or her mortgage at the low rate offered in the 
advertisement is prohibited because it conveys a misleading 
impression that the advertised product is endorsed or sponsored by 
the Federal government.
    3. Misleading claims of debt elimination. The prohibition 
against misleading claims of debt elimination or waiver or 
forgiveness does not apply to legitimate statements that the 
advertised product may reduce debt payments, consolidate debts, or 
shorten the term of the debt. Examples of misleading claims of debt 
elimination or waiver or forgiveness of loan terms with, or 
obligations to, another creditor of debt include: ``Wipe-Out 
Personal Debts!'', ``New DEBT-FREE Payment'', ``Set yourself free; 
get out of debt today'', ``Refinance today and wipe your debt 
clean!'', ``Get yourself out of debt * * * Forever!'', and ``Pre-
payment Penalty Waiver.''

Subpart D--Miscellaneous

Section 1026.25--Record Retention

25(a) General Rule

    1. Evidence of required actions. The creditor must retain 
evidence that it performed the required actions as well as made the 
required disclosures. This includes, for example, evidence that the 
creditor properly handled adverse credit reports in connection with 
amounts subject to a billing dispute under Sec.  1026.13, and 
properly handled the refunding of credit balances under Sec. Sec.  
1026.11 and 1026.21.
    2. Methods of retaining evidence. Adequate evidence of 
compliance does not necessarily mean actual paper copies of 
disclosure statements or other business records. The evidence may be 
retained on microfilm, microfiche, or by any other method that 
reproduces records accurately (including computer programs). The 
creditor need retain only enough information to reconstruct the 
required disclosures or other records. Thus, for example, the 
creditor need not retain each open-end periodic statement, so long 
as the specific information on each statement can be retrieved.
    3. Certain variable-rate transactions. In variable-rate 
transactions that are subject to the disclosure requirements of 
Sec.  1026.19(b), written procedures for compliance with those 
requirements as well as a sample disclosure form for each loan 
program represent adequate evidence of compliance. (See comment 
25(a)-2 pertaining to permissible methods of retaining the required 
disclosures.)
    4. Home equity plans. In home equity plans that are subject to 
the requirements of Sec.  1026.40, written procedures for compliance 
with those requirements as well as a sample disclosure form and 
contract for each home equity program represent adequate evidence of 
compliance. (See comment 25(a)-2 pertaining to permissible methods 
of retaining the required disclosures.)
    5. Prohibited payments to loan originators. For each transaction 
subject to the loan originator compensation provisions in Sec.  
1026.36(d)(1), a creditor should maintain records of the 
compensation it provided to the loan originator for the transaction 
as well as the compensation agreement in effect on the date the 
interest rate was set for the transaction. See Sec.  1026.35(a) and 
comment 35(a)(2)(iii)-3 for additional guidance on when a 
transaction's rate is set. For example, where a loan originator is a 
mortgage broker, a disclosure of compensation or other broker 
agreement required by applicable state law that complies with Sec.  
1026.25 would be presumed to be a record of the amount actually paid 
to the loan originator in connection with the transaction.

[[Page 80001]]

Section 1026.26--Use of Annual Percentage Rate in Oral Disclosures

    1. Application of rules. The restrictions of Sec.  1026.26 apply 
only if the creditor chooses to respond orally to the consumer's 
request for credit cost information. Nothing in the regulation 
requires the creditor to supply rate information orally. If the 
creditor volunteers information (including rate information) through 
oral solicitations directed generally to prospective customers, as 
through a telephone solicitation, those communications may be 
advertisements subject to the rules in Sec. Sec.  1026.16 and 
1026.24.

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.  1026.6(a)(1)(ii) 
and (b)(4)(i)(A) and 1026.7(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.

26(b) Closed-End Credit

    1. Information that may be given. The creditor may state other 
annual or periodic rates that are applied to an unpaid balance, 
along with the required annual percentage rate. This rule permits 
disclosure of a simple interest rate, for example, but not an add-
on, discount, or similar rate. If the creditor cannot give a precise 
annual percentage rate in its oral response because of variables in 
the transaction, it must give the annual percentage rate for a 
comparable sample transaction; in this case, other cost information 
may, but need not, be given. For example, the creditor may be unable 
to state a precise annual percentage rate for a mortgage loan 
without knowing the exact amount to be financed, the amount of loan 
fees or mortgage insurance premiums, or similar factors. In this 
situation, the creditor should state an annual percentage rate for a 
sample transaction; it may also provide information about the 
consumer's specific case, such as the contract interest rate, 
points, other finance charges, and other charges.

Section 1026.27--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 1026.28--Effect on State Laws

28(a) Inconsistent Disclosure Requirements

    1. General. There are 3 sets of preemption criteria: 1 applies 
to the general disclosure and advertising rules of the regulation, 
and 2 apply to the credit billing provisions. Section 1026.28 also 
provides for Bureau determinations of preemption.
    2. Rules for chapters 1, 2, and 3. The standard for judging 
whether state laws that cover the types of requirements in chapters 
1 (General provisions), 2 (Credit transactions), and 3 (Credit 
advertising) of the Act are inconsistent and therefore preempted, is 
contradiction of the Federal law. Examples of laws that would be 
preempted include:
    i. A state law that requires use of the term finance charge, but 
defines the term to include fees that the Federal law excludes, or 
to exclude fees the Federal law includes.
    ii. A state law that requires a label such as nominal annual 
interest rate to be used for what the Federal law calls the annual 
percentage rate.
    3. Laws not contradictory to chapters 1, 2, and 3. i. Generally, 
state law requirements that call for the disclosure of items of 
information not covered by the Federal law, or that require more 
detailed disclosures, do not contradict the Federal requirements. 
Examples of laws that are not preempted include:
    A. A state law that requires disclosure of the minimum periodic 
payment for open-end credit, even though not required by Sec.  
1026.7.
    B. A state law that requires contracts to contain warnings such 
as: ``Read this contract before you sign. Do not sign if any spaces 
are left blank. You are entitled to a copy of this contract.''
    ii. Similarly, a state law that requires itemization of the 
amount financed does not automatically contradict the permissive 
itemization under Sec.  1026.18(c). However, a state law requirement 
that the itemization appear with the disclosure of the amount 
financed in the segregated closed-end credit disclosures is 
inconsistent, and this location requirement would be preempted.
    4. Creditor's options. Before the Bureau makes a determination 
about a specific state law, the creditor has certain options.
    i. Since the prohibition against giving the state disclosures 
does not apply until the Bureau makes its determination, the 
creditor may choose to give state disclosures until the Bureau 
formally determines that the state law is inconsistent. (The Bureau 
will provide sufficient time for creditors to revise forms and 
procedures as necessary to conform to its determinations.) Under 
this first approach, as in all cases, the Federal disclosures must 
be clear and conspicuous, and the closed-end disclosures must be 
properly segregated in accordance with Sec.  1026.17(a)(1). This 
ability to give state disclosures relieves any uncertainty that the 
creditor might have prior to Bureau determinations of inconsistency.
    ii. As a second option, the creditor may apply the preemption 
standards to a state law, conclude that it is inconsistent, and 
choose not to give the state-required disclosures. However, nothing 
in Sec.  1026.28(a) provides the creditor with immunity for 
violations of state law if the creditor chooses not to make state 
disclosures and the Bureau later determines that the state law is 
not preempted.
    5. Rules for correction of billing errors and regulation of 
credit reports. The preemption criteria for the fair credit billing 
provisions set forth in Sec.  1026.28 have two parts. With respect 
to the rules on correction of billing errors and regulation of 
credit reports (which are in Sec.  1026.13), Sec.  1026.28(a)(2)(i) 
provides that a state law is inconsistent and preempted if its 
requirements are different from the Federal law. An exception is 
made, however, for state laws that allow the consumer to inquire 
about an account and require the creditor to respond to such 
inquiries beyond the time limits in the Federal law. Such a state 
law is not preempted with respect to the extra time period. For 
example, Sec.  1026.13 requires the consumer to submit a written 
notice of billing error within 60 days after transmittal of the 
periodic statement showing the alleged error. If a state law allows 
the consumer 90 days to submit a notice, the state law remains in 
effect to provide the extra 30 days. Any state law disclosures 
concerning this extended state time limit must reflect the 
qualifications and conform to the format specified in Sec.  
1026.28(a)(2)(i). Examples of laws that would be preempted include:
    i. A state law that has a narrower or broader definition of 
billing error.
    ii. A state law that requires the creditor to take different 
steps to resolve errors.
    iii. A state law that provides different timing rules for error 
resolution (subject to the exception discussed above).
    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.  
1026.4(c)(8), 1026.5(b)(2)(ii), 1026.6(a)(5) and (b)(5)(iii), 
1026.7(a)(9) and (b)(9), 1026.9(a), 1026.10, 1026.11, 1026.12(c) 
through (f), 1026.13, and 1026.21). Section 1026.28(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.  1026.12(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.  1026.12(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.
    7. Who may receive a chapter 4 determination. Only states 
(through their authorized officials) may request and receive 
determinations on inconsistency with respect to the fair credit 
billing provisions.
    8. Preemption determination--Arizona. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1983, the Board of Governors determined that 
the following provisions in the state law of Arizona are preempted 
by the Federal law:
    i. Section 44-287 B.5--Disclosure of final cash price balance. 
This provision is

[[Page 80002]]

preempted in those transactions in which the amount of the final 
cash price balance is the same as the Federal amount financed, since 
in such transactions the state law requires the use of a term 
different from the Federal term to represent the same amount.
    ii. Section 44-287 B.6--Disclosure of finance charge. This 
provision is preempted in those transactions in which the amount of 
the finance charge is different from the amount of the Federal 
finance charge, since in such transactions the state law requires 
the use of the same term as the Federal law to represent a different 
amount.
    iii. Section 44-287 B.7--Disclosure of the time balance. The 
time balance disclosure provision is preempted in those transactions 
in which the amount is the same as the amount of the Federal total 
of payments, since in such transactions the state law requires the 
use of a term different from the Federal term to represent the same 
amount.
    9. Preemption determination--Florida. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1983, the Board of Governors determined that 
the following provisions in the state law of Florida are preempted 
by the Federal law:
    i. Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of amount 
financed. This disclosure is preempted in those transactions in 
which the amount is different from the Federal amount financed, 
since in such transactions the state law requires the use of the 
same term as the Federal law to represent a different amount.
    ii. Sections 520.07(2)(g), 520.34(2)(g), and 520.35(2)(d)--
Disclosure of finance charge and a description of its components. 
The finance charge disclosure is preempted in those transactions in 
which the amount of the finance charge is different from the Federal 
amount, since in such transactions the state law requires the use of 
the same term as the Federal law to represent a different amount. 
The requirement to describe or itemize the components of the finance 
charge, which is also included in these provisions, is not 
preempted.
    iii. Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of total 
of payments. The total of payments disclosure is preempted in those 
transactions in which the amount differs from the amount of the 
Federal total of payments, since in such transactions the state law 
requires the use of the same term as the Federal law to represent a 
different amount than the Federal law.
    iv. Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of 
deferred payment price. This disclosure is preempted in those 
transactions in which the amount is the same as the Federal total 
sale price, since in such transactions the state law requires the 
use of a different term than the Federal law to represent the same 
amount as the Federal law.
    10. Preemption determination--Missouri. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1983, the Board of Governors determined that 
the following provisions in the state law of Missouri are preempted 
by the Federal law:
    i. Sections 365.070-6(9) and 408.260-5(6)--Disclosure of 
principal balance. This disclosure is preempted in those 
transactions in which the amount of the principal balance is the 
same as the Federal amount financed, since in such transactions the 
state law requires the use of a term different from the Federal term 
to represent the same amount.
    ii. Sections 365.070-6(10) and 408.260-5(7)--Disclosure of time 
price differential and time charge, respectively. These disclosures 
are preempted in those transactions in which the amount is the same 
as the Federal finance charge, since in such transactions the state 
law requires the use of a term different from the Federal law to 
represent the same amount.
    iii. Sections 365.070-2 and 408.260-2--Use of the terms time 
price differential and time charge in certain notices to the buyer. 
In those transactions in which the state disclosure of the time 
price differential or time charge is preempted, the use of the terms 
in this notice also is preempted. The notice itself is not 
preempted.
    iv. Sections 365.070-6(11) and 408.260-5(8)--Disclosure of time 
balance. The time balance disclosure is preempted in those 
transactions in which the amount is the same as the amount of the 
Federal total of payments, since in such transactions the state law 
requires the use of a different term than the Federal law to 
represent the same amount.
    v. Sections 365.070-6(12) and 408.260-5(9)--Disclosure of time 
sale price. This disclosure is preempted in those transactions in 
which the amount is the same as the Federal total sale price, since 
in such transactions the state law requires the use of a different 
term from the Federal law to represent the same amount.
    11. Preemption determination--Mississippi. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1984, the Board of Governors determined that 
the following provision in the state law of Mississippi is preempted 
by the Federal law:
    i. Section 63-19-31(2)(g)--Disclosure of finance charge. This 
disclosure is preempted in those cases in which the term finance 
charge would be used under state law to describe a different amount 
than the finance charge disclosed under Federal law.
    12. Preemption determination--South Carolina. The Bureau 
recognizes state law preemption determinations made by the Board of 
Governors of the Federal Reserve System prior to July 21, 2011, 
until and unless the Bureau makes and publishes any contrary 
determination. Effective October 1, 1984, the Board of Governors 
determined that the following provision in the state law of South 
Carolina is preempted by the Federal law.
    i. Section 37-10-102(c)--Disclosure of due-on-sale clause. This 
provision is preempted, but only to the extent that the creditor is 
required to include the disclosure with the segregated Federal 
disclosures. If the creditor may comply with the state law by 
placing the due-on-sale notice apart from the Federal disclosures, 
the state law is not preempted.
    13. Preemption determination--Arizona. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination.
    i. Effective October 1, 1986, the Board of Governors determined 
that the following provision in the state law of Arizona is 
preempted by the Federal law:
    A. Section 6-621A.2--Use of the term the total sum of $-------- 
in certain notices provided to borrowers. This term describes the 
same item that is disclosed under Federal law as the total of 
payments. Since the state law requires the use of a different term 
than Federal law to describe the same item, the state-required term 
is preempted. The notice itself is not preempted.
    ii. Note: The state disclosure notice that incorporated the 
above preempted term was amended on May 4, 1987, to provide that 
disclosures must now be made pursuant to the Federal disclosure 
provisions.
    14. Preemption determination--Indiana. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1988, the Board of Governors determined that 
the following provision in the state law of Indiana is preempted by 
the Federal law:
    i. Section 23-2-5-8--Inclusion of the loan broker's fees and 
charges in the calculation of, among other items, the finance charge 
and annual percentage rate disclosed to potential borrowers. This 
disclosure is inconsistent with section 106(a) and Sec.  1026.4(a) 
of the Federal statute and regulation, respectively, and is 
preempted in those instances where the use of the same term would 
disclose a different amount than that required to be disclosed under 
Federal law.
    15. Preemption determination--Wisconsin. The Bureau recognizes 
state law preemption determinations made by the Board of Governors 
of the Federal Reserve System prior to July 21, 2011, until and 
unless the Bureau makes and publishes any contrary determination. 
Effective October 1, 1991, the Board of Governors determined that 
the following provisions in the state law of Wisconsin are preempted 
by the Federal law:
    i. Section 422.308(1)--the disclosure of the annual percentage 
rate in cases where the amount of the annual percentage rate 
disclosed to consumers under the state law differs from the amount 
that would be disclosed under Federal law, since in those cases the 
state law requires the use of the same term as the Federal law to 
represent a different amount than the Federal law.
    ii. Section 766.565(5)--the provision permitting a creditor to 
include in an open-end home equity agreement authorization to 
declare the account balance due and payable

[[Page 80003]]

upon receiving notice of termination from a non-obligor spouse, 
since such provision is inconsistent with the purpose of the Federal 
law.

28(b) Equivalent Disclosure Requirements

    1. General. A state disclosure may be substituted for a Federal 
disclosure only after the Bureau has made a finding of substantial 
similarity. Thus, the creditor may not unilaterally choose to make a 
state disclosure in place of a Federal disclosure, even if it 
believes that the state disclosure is substantially similar. Since 
the rule stated in Sec.  1026.28(b) does not extend to any 
requirement relating to the finance charge or annual percentage 
rate, no state provision on computation, description, or disclosure 
of these terms may be substituted for the Federal provision.

28(d) Special Rule for Credit and Charge Cards

    1. General. The standard that applies to preemption of state 
laws as they affect transactions of the type subject to Sec. Sec.  
1026.60 and 1026.9(e) differs from the preemption standards 
generally applicable under the Truth in Lending Act. The Fair Credit 
and Charge Card Disclosure Act fully preempts state laws relating to 
the disclosure of credit information in consumer credit or charge 
card applications or solicitations. (For purposes of this section, a 
single credit or charge card application or solicitation that may be 
used to open either an account for consumer purposes or an account 
for business purposes is deemed to be a ``consumer credit or charge 
card application or solicitation.'') For example, a state law 
requiring disclosure of credit terms in direct mail solicitations 
for consumer credit card accounts is preempted. A state law 
requiring disclosures in telephone applications for consumer credit 
card accounts also is preempted, even if it applies to applications 
initiated by the consumer rather than the issuer, because the state 
law relates to the disclosure of credit information in applications 
or solicitations within the general field of preemption, that is, 
consumer credit and charge cards.
    2. Limitations on field of preemption. Preemption under the Fair 
Credit and Charge Card Disclosure Act does not extend to state laws 
applying to types of credit other than open-end consumer credit and 
charge card accounts. Thus, for example, a state law is not 
preempted as it applies to disclosures in credit and charge card 
applications and solicitations solely for business-purpose accounts. 
On the other hand, state credit disclosure laws will not apply to a 
single application or solicitation to open either an account for 
consumer purposes or an account for business purposes. Such ``dual 
purpose'' applications and solicitations are treated as ``consumer 
credit or charge card applications or solicitations'' under this 
section and state credit disclosure laws applicable to them are 
preempted. Preemption under this statute does not extend to state 
laws applicable to home equity plans; preemption determinations in 
this area are based on the Home Equity Loan Consumer Protection Act, 
as implemented in Sec.  1026.40 of the regulation.
    3. Laws not preempted. State laws relating to disclosures 
concerning credit and charge cards other than in applications, 
solicitations, or renewal notices are not preempted under Sec.  
1026.28(d). In addition, state laws regulating the terms of credit 
and charge card accounts are not preempted, nor are laws preempted 
that regulate the form or content of information unrelated to the 
information required to be disclosed under Sec. Sec.  1026.60 and 
1026.9(e). Finally, state laws concerning the enforcement of the 
requirements of Sec. Sec.  1026.60 and 1026.9(e) and state laws 
prohibiting unfair or deceptive acts or practices concerning credit 
and charge card applications, solicitations and renewals are not 
preempted. Examples of laws that are not preempted include:
    i. A state law that requires card issuers to offer a grace 
period or that prohibits certain fees in credit and charge card 
transactions.
    ii. A state retail installment sales law or a state plain 
language law, except to the extent that it regulates the disclosure 
of credit information in applications, solicitations and renewals of 
accounts of the type subject to Sec. Sec.  1026.60 and 1026.9(e).
    iii. A state law requiring notice of a consumer's rights under 
antidiscrimination or similar laws or a state law requiring notice 
about credit information available from state authorities.

Section 1026.29--State Exemptions

29(a) General Rule

    1. Classes eligible. The state determines the classes of 
transactions for which it will request an exemption, and makes its 
application for those classes. Classes might be, for example, all 
open-end credit transactions, all open-end and closed-end 
transactions, or all transactions in which the creditor is a bank.
    2. Substantial similarity. The ``substantially similar'' 
standard requires that state statutory or regulatory provisions and 
state interpretations of those provisions be generally the same as 
the Federal Act and Regulation Z. This includes the requirement that 
state provisions for reimbursement to consumers for overcharges be 
at least equivalent to those required in section 108 of the Act. A 
state will be eligible for an exemption even if its law covers 
classes of transactions not covered by the Federal law. For example, 
if a state's law covers agricultural credit, this will not prevent 
the Bureau from granting an exemption for consumer credit, even 
though agricultural credit is not covered by the Federal law.
    3. Adequate enforcement. The standard requiring adequate 
provision for enforcement generally means that appropriate state 
officials must be authorized to enforce the state law through 
procedures and sanctions comparable to those available to Federal 
enforcement agencies. Furthermore, state law must make adequate 
provision for enforcement of the reimbursement rules.
    4. Exemptions granted. The Bureau recognizes exemptions granted 
by the Board of Governors of the Federal Reserve System prior to 
July 21, 2011, until and unless the Bureau makes and publishes any 
contrary determination. Effective October 1, 1982, the Board of 
Governors granted the following exemptions from portions of the 
revised Truth in Lending Act:
    i. Maine. Credit or lease transactions subject to the Maine 
Consumer Credit Code and its implementing regulations are exempt 
from chapters 2, 4 and 5 of the Federal Act. (The exemption does not 
apply to transactions in which a federally chartered institution is 
a creditor or lessor.)
    ii. Connecticut. Credit transactions subject to the Connecticut 
Truth in Lending Act are exempt from chapters 2 and 4 of the Federal 
Act. (The exemption does not apply to transactions in which a 
federally chartered institution is a creditor.)
    iii. Massachusetts. Credit transactions subject to the 
Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 
of the Federal Act. (The exemption does not apply to transactions in 
which a federally chartered institution is a creditor.)
    iv. Oklahoma. Credit or lease transactions subject to the 
Oklahoma Consumer Credit Code are exempt from chapters 2 and 5 of 
the Federal Act. (The exemption does not apply to sections 132 
through 135 of the Federal Act, nor does it apply to transactions in 
which a federally chartered institution is a creditor or lessor.)
    v. Wyoming. Credit transactions subject to the Wyoming Consumer 
Credit Code are exempt from chapter 2 of the Federal Act. (The 
exemption does not apply to transactions in which a federally 
chartered institution is a creditor.)

29(b) Civil Liability

    1. Not eligible for exemption. The provision that an exemption 
may not extend to sections 130 and 131 of the Act assures that 
consumers retain access to both Federal and state courts in seeking 
damages or civil penalties for violations, while creditors retain 
the defenses specified in those sections.

Section 1026.30--Limitation on Rates

    1. Scope of coverage. i. The requirement of this section applies 
to consumer credit obligations secured by a dwelling (as dwelling is 
defined in Sec.  1026.2(a)(19)) in which the annual percentage rate 
may increase after consummation (or during the term of the plan, in 
the case of open-end credit) as a result of an increase in the 
interest rate component of the finance charge--whether those 
increases are tied to an index or formula or are within a creditor's 
discretion. The section applies to credit sales as well as loans. 
Examples of credit obligations subject to this section include:
    A. Dwelling-secured credit obligations that require variable-
rate disclosures under the regulation because the interest rate may 
increase during the term of the obligation.
    B. Dwelling-secured open-end credit plans entered into before 
November 7, 1989 (the effective date of the home equity rules) that 
are not considered variable-rate obligations for purposes of 
disclosure under the regulation but where the creditor reserves the 
contractual right to increase the interest rate--periodic rate and 
corresponding annual percentage rate--during the term of the plan.
    ii. In contrast, credit obligations in which there is no 
contractual right to increase the interest rate during the term of 
the obligation

[[Page 80004]]

are not subject to this section. Examples include:
    A. ``Shared-equity'' or ``shared-appreciation'' mortgage loans 
that have a fixed rate of interest and a shared-appreciation feature 
based on the consumer's equity in the mortgaged property. (The 
appreciation share is payable in a lump sum at a specified time.)
    B. Dwelling-secured fixed-rate closed-end balloon-payment 
mortgage loans and dwelling-secured fixed-rate open-end plans with a 
stated term that the creditor may renew at maturity. (Contrast with 
the renewable balloon-payment mortgage instrument described in 
comment 17(c)(1)-11.)
    C. Dwelling-secured fixed-rate closed-end multiple advance 
transactions in which each advance is disclosed as a separate 
transaction.
    D. ``Price level adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic 
adjustments to payments and the loan balance to reflect changes in 
an index measuring prices or inflation.
    iii. The requirement of this section does not apply to credit 
obligations entered into prior to December 9, 1987. Consequently, 
new advances under open-end credit plans existing prior to December 
9, 1987, are not subject to this section.
    2. Refinanced obligations. On or after December 9, 1987, when a 
credit obligation is refinanced, as defined in Sec.  1026.20(a), the 
new obligation is subject to this section if it is dwelling-secured 
and allows for increases in the interest rate.
    3. Assumptions. On or after December 9, 1987, when a credit 
obligation is assumed, as defined in Sec.  1026.20(b), the 
obligation becomes subject to this section if it is dwelling-secured 
and allows for increases in the interest rate.
    4. Modifications of obligations. The modification of an 
obligation, regardless of when the obligation was entered into, is 
generally not covered by this section. For example, increasing the 
credit limit on a dwelling-secured, open-end plan with a variable 
interest rate entered into before the effective date of the rule 
does not make the obligation subject to this section. If, however, a 
security interest in a dwelling is added on or after December 9, 
1987, to a credit obligation that allows for interest rate 
increases, the obligation becomes subject to this section. 
Similarly, if a variable interest rate feature is added to a 
dwelling-secured credit obligation, the obligation becomes subject 
to this section.
    5. Land trusts. In some states, a land trust is used in 
residential real estate transactions. (See discussion in comment 
3(a)-8.) If a consumer-purpose loan that allows for interest rate 
increases is secured by an assignment of a beneficial interest in a 
land trust that holds title to a consumer's dwelling, that loan is 
subject to this section.
    6. Relationship to other sections. Unless otherwise provided for 
in the commentary to this section, other provisions of the 
regulation such as definitions, exemptions, rules and 
interpretations also apply to this section where appropriate. To 
illustrate:
    i. An adjustable interest rate business-purpose loan is not 
subject to this section even if the loan is secured by a dwelling 
because such credit extensions are not subject to the regulation. 
(See generally Sec.  1026.3(a).)
    ii. Creditors subject to this section are only those that fall 
within the definition of a creditor in Sec.  1026.2(a)(17).
    7. Consumer credit contract. Creditors are required to specify a 
lifetime maximum interest rate in their credit contracts--the 
instrument that creates personal liability and generally contains 
the terms and conditions of the agreement (for example, a promissory 
note or home-equity line of credit agreement). In some states, the 
signing of a commitment letter may create a binding obligation, for 
example, constituting consummation as defined in Sec.  
1026.2(a)(13). The maximum interest rate must be included in the 
credit contract, but a creditor may include the rate ceiling in the 
commitment instrument as well.
    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.  1026.6(a)(1)(ii) and (b)(4)(i)(A).)
    9. Multiple interest rate ceilings. Creditors are not prohibited 
from setting multiple interest rate ceilings. For example, on loans 
with multiple variable-rate features, creditors may establish a 
maximum interest rate for each feature. To illustrate, in a 
variable-rate loan that has an option to convert to a fixed rate, a 
creditor may set one maximum interest rate for the initially imposed 
index-based variable-rate feature and another for the conversion 
option. Of course, a creditor may establish one maximum interest 
rate applicable to all features.
    10. Interest rate charged after default. State law may allow an 
interest rate after default higher than the contract rate in effect 
at the time of default; however, the interest rate after default is 
subject to a maximum interest rate set forth in a credit obligation 
that is otherwise subject to this section. This rule applies only in 
situations in which a post-default agreement is still considered 
part of the original obligation.
    11. Increasing the maximum interest rate--general rule. 
Generally, a creditor may not increase the maximum interest rate 
originally set on a credit obligation subject to this section unless 
the consumer and the creditor enter into a new obligation. 
Therefore, under an open-end plan, a creditor may not increase the 
rate ceiling imposed merely because there is an increase in the 
credit limit. If an open-end plan is closed and another opened, a 
new rate ceiling may be imposed. Furthermore, where an open-end plan 
has a fixed maturity and a creditor renews the plan at maturity, or 
enters into a closed-end credit transaction, a new maximum interest 
rate may be set at that time. If the open-end plan provides for a 
repayment phase, the maximum interest rate cannot be increased when 
the repayment phase begins unless the agreement provided for such an 
increase. For a closed-end credit transaction, a new maximum 
interest rate may be set only if the transaction is satisfied and 
replaced by a new obligation. (The exceptions in Sec.  
1026.20(a)(1)-(5) which limit what transactions are considered 
refinancings for purposes of disclosure do not apply with respect to 
increasing a rate ceiling that has been imposed; if a transaction is 
satisfied and replaced, the rate ceiling may be increased.)
    12. Increasing the maximum interest rate--assumption of an 
obligation. If an obligation subject to this section is assumed by a 
new obligor and the original obligor is released from liability, the 
maximum interest rate set on the obligation may be increased as part 
of the assumption agreement. (This rule applies whether or not the 
transaction constitutes an assumption as defined in Sec.  
1026.20(b).)

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 1026.31--General Rules

31(c) Timing of Disclosure

    1. Furnishing disclosures. Disclosures are considered furnished 
when received by the consumer.

31(c)(1) Disclosures for Certain Closed-End Home Mortgages

    1. Pre-consummation waiting period. A creditor must furnish 
Sec.  1026.32 disclosures at least three business days prior to 
consummation. Under Sec.  1026.32, ``business day'' has the same 
meaning as the rescission rule in comment 2(a)(6)-2--all calendar 
days except Sundays and the Federal legal holidays listed in 5 
U.S.C. 6103(a). However, while the disclosure rule under Sec. Sec.  
1026.15 and 1026.23 extends to midnight of the third business day, 
the rule under Sec.  1026.32 does not. For example, under Sec.  
1026.32, if disclosures were provided on a Friday, consummation 
could occur any time on Tuesday, the third business day following 
receipt of the disclosures. If the timing of the rescission rule 
were to be used,

[[Page 80005]]

consummation could not occur until after midnight on Tuesday.

31(c)(1)(i) Change in Terms

    1. Redisclosure required. Creditors must provide new disclosures 
when a change in terms makes disclosures previously provided under 
Sec.  1026.32(c) inaccurate, including disclosures based on and 
labeled as an estimate. A change in terms may result from a formal 
written agreement or otherwise.
    2. Sale of optional products at consummation. If the consumer 
finances the purchase of optional products such as credit insurance 
and as a result the monthly payment differs from what was previously 
disclosed under Sec.  1026.32, redisclosure is required and a new 
three-day waiting period applies. (See comment 32(c)(3)-1 on when 
optional items may be included in the regular payment disclosure.)

31(c)(1)(ii) Telephone Disclosures

    1. Telephone disclosures. Disclosures by telephone must be 
furnished at least three business days prior to consummation, 
calculated in accord with the timing rules under Sec.  
1026.31(c)(1).

31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation

    1. Modification or waiver. A consumer may modify or waive the 
right to the three-day waiting period only after receiving the 
disclosures required by Sec.  1026.32 and only if the circumstances 
meet the criteria for establishing a bona fide personal financial 
emergency under Sec.  1026.23(e). Whether these criteria are met is 
determined by the facts surrounding individual situations. The 
imminent sale of the consumer's home at foreclosure during the 
three-day period is one example of a bona fide personal financial 
emergency. Each consumer entitled to the three-day waiting period 
must sign the handwritten statement for the waiver to be effective.

31(c)(2) Disclosures for Reverse Mortgages

    1. Business days. For purposes of providing reverse mortgage 
disclosures, ``business day'' has the same meaning as in comment 
31(c)(1)-1--all calendar days except Sundays and the Federal legal 
holidays listed in 5 U.S.C. 6103(a). This means if disclosures are 
provided on a Friday, consummation could occur any time on Tuesday, 
the third business day following receipt of the disclosures.
    2. Open-end plans. Disclosures for open-end reverse mortgages 
must be provided at least three business days before the first 
transaction under the plan (see Sec.  1026.5(b)(1)).

31(d) Basis of Disclosures and Use of Estimates

    1. Redisclosure. Section 1026.31(d) allows the use of estimates 
when information necessary for an accurate disclosure is unknown to 
the creditor, provided that the disclosure is clearly identified as 
an estimate. For purposes of Subpart E, the rule in Sec.  
1026.31(c)(1)(i) requiring new disclosures when the creditor changes 
terms also applies to disclosures labeled as estimates.

31(d)(3) Per-Diem Interest

    1. Per-diem interest. This paragraph applies to the disclosure 
of any numerical amount (such as the finance charge, annual 
percentage rate, or payment amount) that is affected by the amount 
of the per-diem interest charge that will be collected at 
consummation. If the amount of per-diem interest used in preparing 
the disclosures for consummation is based on the information known 
to the creditor at the time the disclosure document is prepared, the 
disclosures are considered accurate under this rule, and affected 
disclosures are also considered accurate, even if the disclosures 
were not labeled as estimates. (See comment 17(c)(2)(ii)-1 
generally.)

Section 1026.32--Requirements for Certain Closed-End Home Mortgages

32(a) Coverage

Paragraph 32(a)(1)(i)

    1. Application date. An application is deemed received when it 
reaches the creditor in any of the ways applications are normally 
transmitted. (See Sec.  1026.19(a).) For example, if a borrower 
applies for a 10-year loan on September 30 and the creditor 
counteroffers with a 7-year loan on October 10, the application is 
deemed received in September and the creditor must measure the 
annual percentage rate against the appropriate Treasury security 
yield as of August 15. An application transmitted through an 
intermediary agent or broker is received when it reaches the 
creditor, rather than when it reaches the agent or broker. (See 
comment 19(b)-3 to determine whether a transaction involves an 
intermediary agent or broker.)
    2. When fifteenth is not a business day. If the 15th day of the 
month immediately preceding the application date is not a business 
day, the creditor must use the yield as of the business day 
immediately preceding the 15th.
    3. Calculating annual percentage rates for variable-rate loans 
and discount loans. Creditors must use the rules set out in the 
commentary to Sec.  1026.17(c)(1) in calculating the annual 
percentage rate for variable-rate loans (assume the rate in effect 
at the time of disclosure remains unchanged) and for discount, 
premium, and stepped-rate transactions (which must reflect composite 
annual percentage rates).
    4. Treasury securities. To determine the yield on comparable 
Treasury securities for the annual percentage rate test, creditors 
may use the yield on actively traded issues adjusted to constant 
maturities published in the Federal Reserve Board's ``Selected 
Interest Rates'' (statistical release H-15). Creditors must use the 
yield corresponding to the constant maturity that is closest to the 
loan's maturity. If the loan's maturity is exactly halfway between 
security maturities, the annual percentage rate on the loan should 
be compared with the yield for Treasury securities having the lower 
yield. In determining the loan's maturity, creditors may rely on the 
rules in Sec.  1026.17(c)(4) regarding irregular first payment 
periods. For example:
    i. If the H-15 contains a yield for Treasury securities with 
constant maturities of 7 years and 10 years and no maturity in 
between, the annual percentage rate for an 8-year mortgage loan is 
compared with the yield of securities having a 7-year maturity, and 
the annual percentage rate for a 9-year mortgage loan is compared 
with the yield of securities having a 10-year maturity.
    ii. If a mortgage loan has a term of 15 years, and the H-15 
contains a yield of 5.21 percent for constant maturities of 10 
years, and also contains a yield of 6.33 percent for constant 
maturities of 20 years, then the creditor compares the annual 
percentage rate for a 15-year mortgage loan with the yield for 
constant maturities of 10 years.
    iii. If a mortgage loan has a term of 30 years, and the H-15 
does not contain a yield for 30-year constant maturities, but 
contains a yield for 20-year constant maturities, and an average 
yield for securities with remaining terms to maturity of 25 years 
and over, then the annual percentage rate on the loan is compared 
with the yield for 20-year constant maturities.

Paragraph 32(a)(1)(ii)

    1. Total loan amount. For purposes of the ``points and fees'' 
test, the total loan amount is calculated by taking the amount 
financed, as determined according to Sec.  1026.18(b), and deducting 
any cost listed in Sec.  1026.32(b)(1)(iii) and Sec.  
1026.32(b)(1)(iv) that is both included as points and fees under 
Sec.  1026.32(b)(1) and financed by the creditor. Some examples 
follow, each using a $10,000 amount borrowed, a $300 appraisal fee, 
and $400 in points. A $500 premium for optional credit life 
insurance is used in one example.
    i. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and pays $400 in points at closing, the amount financed 
under Sec.  1026.18(b) is $9,900 ($10,000 plus the $300 appraisal 
fee that is paid to and financed by the creditor, less $400 in 
prepaid finance charges). The $300 appraisal fee paid to the 
creditor is added to other points and fees under Sec.  
1026.32(b)(1)(iii). It is deducted from the amount financed ($9,900) 
to derive a total loan amount of $9,600.
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, 
because the $300 is not financed by the creditor, the fee is not 
part of the amount financed under Sec.  1026.18(b). In this case, 
the amount financed is the same as the total loan amount: $9,600 
($10,000, less $400 in prepaid finance charges).
    iii. If the consumer finances a $300 fee for an appraisal 
conducted by someone other than the creditor or an affiliate, the 
$300 fee is not included with other points and fees under Sec.  
1026.32(b)(1)(iii). The amount financed under Sec.  1026.18(b) is 
$9,900 ($10,000 plus the $300 fee for an independently-conducted 
appraisal that is financed by the creditor, less the $400 paid in 
cash and deducted as prepaid finance charges).
    iv. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and a $500 single premium for optional credit life 
insurance, and pays $400 in points at closing, the amount financed 
under Sec.  1026.18(b) is $10,400 ($10,000, plus the $300 appraisal 
fee that is paid to and financed by the creditor,

[[Page 80006]]

plus the $500 insurance premium that is financed by the creditor, 
less $400 in prepaid finance charges). The $300 appraisal fee paid 
to the creditor is added to other points and fees under Sec.  
1026.32(b)(1)(iii), and the $500 insurance premium is added under 
1026.32(b)(1)(iv). The $300 and $500 costs are deducted from the 
amount financed ($10,400) to derive a total loan amount of $9,600.
    2. Annual adjustment of $400 amount. A mortgage loan is covered 
by Sec.  1026.32 if the total points and fees payable by the 
consumer at or before loan consummation exceed the greater of $400 
or 8 percent of the total loan amount. The $400 figure is adjusted 
annually on January 1 by the annual percentage change in the CPI 
that was in effect on the preceding June 1. The Bureau will publish 
adjustments after the June figures become available each year. The 
adjustment for the upcoming year will be included in any proposed 
commentary published in the fall, and incorporated into the 
commentary the following spring. The adjusted figures are:
    i. For 1996, $412, reflecting a 3.00 percent increase in the 
CPI-U from June 1994 to June 1995, rounded to the nearest whole 
dollar.
    ii. For 1997, $424, reflecting a 2.9 percent increase in the 
CPI-U from June 1995 to June 1996, rounded to the nearest whole 
dollar.
    iii. For 1998, $435, reflecting a 2.5 percent increase in the 
CPI-U from June 1996 to June 1997, rounded to the nearest whole 
dollar.
    iv. For 1999, $441, reflecting a 1.4 percent increase in the 
CPI-U from June 1997 to June 1998, rounded to the nearest whole 
dollar.
    v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-
U from June 1998 to June 1999, rounded to the nearest whole dollar.
    vi. For 2001, $465, reflecting a 3.1 percent increase in the 
CPI-U from June 1999 to June 2000, rounded to the nearest whole 
dollar.
    vii. For 2002, $480, reflecting a 3.27 percent increase in the 
CPI-U from June 2000 to June 2001, rounded to the nearest whole 
dollar.
    viii. For 2003, $488, reflecting a 1.64 percent increase in the 
CPI-U from June 2001 to June 2002, rounded to the nearest whole 
dollar.
    ix. For 2004, $499, reflecting a 2.22 percent increase in the 
CPI-U from June 2002 to June 2003, rounded to the nearest whole 
dollar.
    x. For 2005, $510, reflecting a 2.29 percent increase in the 
CPI-U from June 2003 to June 2004, rounded to the nearest whole 
dollar.
    xi. For 2006, $528, reflecting a 3.51 percent increase in the 
CPI-U from June 2004 to June 2005, rounded to the nearest whole 
dollar.
    xii. For 2007, $547, reflecting a 3.55 percent increase in the 
CPI-U from June 2005 to June 2006, rounded to the nearest whole 
dollar.
    xiii. For 2008, $561, reflecting a 2.56 percent increase in the 
CPI-U from June 2006 to June 2007, rounded to the nearest whole 
dollar.
    xiv. For 2009, $583, reflecting a 3.94 percent increase in the 
CPI-U from June 2007 to June 2008, rounded to the nearest whole 
dollar.
    xv. For 2010, $579, reflecting a 0.74 percent decrease in the 
CPI-U from June 2008 to June 2009, rounded to the nearest whole 
dollar.
    xvi. For 2011, $592, reflecting a 2.2 percent increase in the 
CPI-U from June 2009 to June 2010, rounded to the nearest whole 
dollar.
    xvii. For 2012, $611, reflecting a 3.2 percent increase in the 
CPI-U from June 2010 to June 2011, rounded to the nearest whole 
dollar.

Paragraph 32(a)(2)

    1. Exemption limited. Section 1026.32(a)(2) lists certain 
transactions exempt from the provisions of Sec.  1026.32. 
Nevertheless, those transactions may be subject to the provisions of 
Sec.  1026.35, including any provisions of Sec.  1026.32 to which 
Sec.  1026.35 refers. See Sec.  1026.35(a).

32(b) Definitions

Paragraph 32(b)(1)(i)

    1. General. Section 1026.32(b)(1)(i) includes in the total 
``points and fees'' items defined as finance charges under 
Sec. Sec.  1026.4(a) and 1026.(4)(b). Items excluded from the 
finance charge under other provisions of Sec.  1026.4 are not 
included in the total ``points and fees'' under paragraph 
32(b)(1)(i), but may be included in ``points and fees'' under 
paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). Interest, including per-
diem interest, is excluded from ``points and fees'' under Sec.  
1026.32(b)(1).

Paragraph 32(b)(1)(ii)

    1. Mortgage broker fees. In determining ``points and fees'' for 
purposes of this section, compensation paid by a consumer to a 
mortgage broker (directly or through the creditor for delivery to 
the broker) is included in the calculation whether or not the amount 
is disclosed as a finance charge. Mortgage broker fees that are not 
paid by the consumer are not included. Mortgage broker fees already 
included in the calculation as finance charges under Sec.  
1026.32(b)(1)(i) need not be counted again under Sec.  
1026.32(b)(1)(ii).
    2. Example. Section 1026.32(b)(1)(iii) defines ``points and 
fees'' to include all items listed in Sec.  1026.4(c)(7), other than 
amounts held for the future payment of taxes. An item listed in 
Sec.  1026.4(c)(7) may be excluded from the ``points and fees'' 
calculation, however, if the charge is reasonable, the creditor 
receives no direct or indirect compensation from the charge, and the 
charge is not paid to an affiliate of the creditor. For example, a 
reasonable fee paid by the consumer to an independent, third-party 
appraiser may be excluded from the ``points and fees'' calculation 
(assuming no compensation is paid to the creditor). A fee paid by 
the consumer for an appraisal performed by the creditor must be 
included in the calculation, even though the fee may be excluded 
from the finance charge if it is bona fide and reasonable in amount.

Paragraph 32(b)(1)(iv)

    1. Premium amount. In determining ``points and fees'' for 
purposes of this section, premiums paid at or before closing for 
credit insurance are included whether they are paid in cash or 
financed, and whether the amount represents the entire premium for 
the coverage or an initial payment.

32(c) Disclosures

    1. Format. The disclosures must be clear and conspicuous but 
need not be in any particular type size or typeface, nor presented 
in any particular manner. The disclosures need not be a part of the 
note or mortgage document.

32(c)(3) Regular Payment; Balloon Payment

    1. General. The regular payment is the amount due from the 
borrower at regular intervals, such as monthly, bimonthly, 
quarterly, or annually. There must be at least two payments, and the 
payments must be in an amount and at such intervals that they fully 
amortize the amount owed. In disclosing the regular payment, 
creditors may rely on the rules set forth in Sec.  1026.18(g); 
however, the amounts for voluntary items, such as credit life 
insurance, may be included in the regular payment disclosure only if 
the consumer has previously agreed to the amounts.
    i. If the loan has more than one payment level, the regular 
payment for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 
months, and $500 for the last 120 months, each payment amount must 
be disclosed, along with the length of time that the payment will be 
in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments 
are determined by an index or formula, the creditor must disclose 
both the initial payment based on the discount or premium and the 
payment that will be in effect thereafter. Additional explanatory 
material which does not detract from the required disclosures may 
accompany the disclosed amounts. For example, if a monthly payment 
is $250 for the first six months and then increases based on an 
index and margin, the creditor could use language such as the 
following: ``Your regular monthly payment will be $250 for six 
months. After six months your regular monthly payment will be based 
on an index and margin, which currently would make your payment 
$350. Your actual payment at that time may be higher or lower.''

32(c)(4) Variable-Rate

    1. Calculating ``worst-case'' payment example. Creditors may 
rely on instructions in Sec.  1026.19(b)(2)(viii)(B) for calculating 
the maximum possible increases in rates in the shortest possible 
timeframe, based on the face amount of the note (not the 
hypothetical loan amount of $10,000 required by Sec.  
1026.19(b)(2)(viii)(B)). The creditor must provide a maximum payment 
for each payment level, where a payment schedule provides for more 
than one payment level and more than one maximum payment amount is 
possible.

32(c)(5) Amount Borrowed

    1. Optional insurance; debt-cancellation coverage. This 
disclosure is required when the amount borrowed in a refinancing

[[Page 80007]]

includes premiums or other charges for credit life, accident, 
health, or loss-of-income insurance, or debt-cancellation coverage 
(whether or not the debt-cancellation coverage is insurance under 
applicable law) that provides for cancellation of all or part of the 
consumer's liability in the event of the loss of life, health, or 
income or in the case of accident. See comment 4(d)(3)-2 and comment 
app. G and H-2 regarding terminology for debt-cancellation coverage.

32(d) Limitations

    1. Additional prohibitions applicable under other sections. 
Section 1026.34 sets forth certain prohibitions in connection with 
mortgage credit subject to Sec.  1026.32, in addition to the 
limitations in Sec.  1026.32(d). Further, Sec.  1026.35(b) prohibits 
certain practices in connection with transactions that meet the 
coverage test in Sec.  1026.35(a). Because the coverage test in 
Sec.  1026.35(a) is generally broader than the coverage test in 
Sec.  1026.32(a), most Sec.  1026.32 mortgage loans are also subject 
to the prohibitions set forth in Sec.  1026.35(b) (such as escrows), 
in addition to the limitations in Sec.  1026.32(d).

32(d)(1)(i) Balloon Payment

    1. Regular periodic payments. The repayment schedule for a Sec.  
1026.32 mortgage loan with a term of less than five years must fully 
amortize the outstanding principal balance through ``regular 
periodic payments.'' A payment is a ``regular periodic payment'' if 
it is not more than twice the amount of other payments.

32(d)(2) Negative Amortization

    1. Negative amortization. The prohibition against negative 
amortization in a mortgage covered by Sec.  1026.32 does not 
preclude reasonable increases in the principal balance that result 
from events permitted by the legal obligation unrelated to the 
payment schedule. For example, when a consumer fails to obtain 
property insurance and the creditor purchases insurance, the 
creditor may add a reasonable premium to the consumer's principal 
balance, to the extent permitted by the legal obligation.

32(d)(4) Increased Interest Rate

    1. Variable-rate transactions. The limitation on interest rate 
increases does not apply to rate increases resulting from changes in 
accordance with the legal obligation in a variable-rate transaction, 
even if the increase occurs after default by the consumer.

32(d)(5) Rebates

    1. Calculation of refunds. The limitation applies only to 
refunds of precomputed (such as add-on) interest and not to any 
other charges that are considered finance charges under Sec.  1026.4 
(for example, points and fees paid at closing). The calculation of 
the refund of interest includes odd-days interest, whether paid at 
or after consummation.

32(d)(6) Prepayment Penalties

    1. State law. For purposes of computing a refund of unearned 
interest, if using the actuarial method defined by applicable state 
law results in a refund that is greater than the refund calculated 
by using the method described in section 933(d) of the Housing and 
Community Development Act of 1992, creditors should use the state 
law definition in determining if a refund is a prepayment penalty.

32(d)(7) Prepayment Penalty Exception

Paragraph 32(d)(7)(iii)

    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the 
loan proceeds that directly repay an existing debt. Creditors may 
consider combined debt-to-income ratios for transactions involving 
joint applicants. For more information about obligations and inflows 
that may constitute ``debt'' or ``income'' for purposes of Sec.  
1026.32(d)(7)(iii), see comment 34(a)(4)-6 and comment 
34(a)(4)(iii)(C)-1.
    2. Verification. Creditors shall verify income in the manner 
described in Sec.  1026.34(a)(4)(ii) and the related comments. 
Creditors may verify debt with a credit report. However, a credit 
report may not reflect certain obligations undertaken just before or 
at consummation of the transaction and secured by the same dwelling 
that secures the transaction. Section 1026.34(a)(4) may require 
creditors to consider such obligations; see comment 34(a)(4)-3 and 
comment 34(a)(4)(ii)(C)-1.
    3. Interaction with Regulation B. Section 1026.32(d)(7)(iii) 
does not require or permit the creditor to make inquiries or 
verifications that would be prohibited by Regulation B, 12 CFR part 
1002.

Paragraph 32(d)(7)(iv)

    1. Payment change. Section 1026.32(d)(7) sets forth the 
conditions under which a mortgage transaction subject to this 
section may have a prepayment penalty. Section 1026.32(d)(7)(iv) 
lists as a condition that the amount of the periodic payment of 
principal or interest or both may not change during the four-year 
period following consummation. The following examples show whether 
prepayment penalties are permitted or prohibited under Sec.  
1026.32(d)(7)(iv) in particular circumstances.
    i. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month. Under the loan agreement, 
the first possible date that a payment in a different amount may be 
due is January 1, 2014. A prepayment penalty is permitted with this 
mortgage transaction provided that the other Sec.  1026.32(d)(7) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, the penalty will not apply if the source of the 
prepayment funds is a refinancing by the creditor or its affiliate, 
and at consummation the consumer's total monthly debts do not exceed 
50 percent of the consumer's monthly gross income, as verified.
    ii. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month. Under the loan agreement, 
the first possible date that a payment in a different amount may be 
due is December 31, 2013. A prepayment penalty is prohibited with 
this mortgage transaction because the payment may change within the 
four-year period following consummation.
    iii. Initial payments for a graduated-payment transaction 
consummated on January 1, 2010 are $1,000 per month. Under the loan 
agreement, the first possible date that a payment in a different 
amount may be due is January 1, 2014. A prepayment penalty is 
permitted with this mortgage transaction provided that the other 
Sec.  1026.32(d)(7) conditions are met, that is: provided that the 
prepayment penalty is permitted by other applicable law, the penalty 
expires on or before December 31, 2011, the penalty will not apply 
if the source of the prepayment funds is a refinancing by the 
creditor or its affiliate, and at consummation the consumer's total 
monthly debts do not exceed 50 percent of the consumer's monthly 
gross income, as verified.
    iv. Initial payments for a step-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due 
is December 31, 2013. A prepayment penalty is prohibited with this 
mortgage transaction because the payment may change within the four-
year period following consummation.
    2. Payment changes excluded. Payment changes due to the 
following circumstances are not considered payment changes for 
purposes of this section:
    i. A change in the amount of a periodic payment that is 
allocated to principal or interest that does not change the total 
amount of the periodic payment.
    ii. The borrower's actual unanticipated late payment, 
delinquency, or default; and
    iii. The borrower's voluntary payment of additional amounts (for 
example when a consumer chooses to make a payment of interest and 
principal on a loan that only requires the consumer to pay 
interest).

32(d)(8) Due-on-Demand Clause

Paragraph 32(d)(8)(ii)

    1. Failure to meet repayment terms. A creditor may terminate a 
loan and accelerate the balance when the consumer fails to meet the 
repayment terms provided for in the agreement; a creditor may do so, 
however, only if the consumer actually fails to make payments. For 
example, a creditor may not terminate and accelerate if the 
consumer, in error, sends a payment to the wrong location, such as a 
branch rather than the main office of the creditor. If a consumer 
files for or is placed in bankruptcy, the creditor may terminate and 
accelerate under this provision if the consumer fails to meet the 
repayment terms of the agreement. Section 1026.32(d)(8)(ii) does not 
override any state or other law that requires a creditor to notify a 
borrower of a right to cure, or otherwise places a duty on the 
creditor before it can terminate a loan and accelerate the balance.

Paragraph 32(d)(8)(iii)

    1. Impairment of security. A creditor may terminate a loan and 
accelerate the balance if the consumer's action or inaction 
adversely affects the creditor's security for the loan, or any right 
of the creditor in that security. Action or inaction by third 
parties does not, in itself, permit the creditor to terminate and 
accelerate.
    2. Examples. i. A creditor may terminate and accelerate, for 
example, if:

[[Page 80008]]

    A. The consumer transfers title to the property or sells the 
property without the permission of the creditor.
    B. The consumer fails to maintain required insurance on the 
dwelling.
    C. The consumer fails to pay taxes on the property.
    D. The consumer permits the filing of a lien senior to that held 
by the creditor.
    E. The sole consumer obligated on the credit dies.
    F. The property is taken through eminent domain.
    G. A prior lienholder forecloses.
    ii. By contrast, the filing of a judgment against the consumer 
would permit termination and acceleration only if the amount of the 
judgment and collateral subject to the judgment is such that the 
creditor's security is adversely affected. If the consumer commits 
waste or otherwise destructively uses or fails to maintain the 
property such that the action adversely affects the security, the 
loan may be terminated and the balance accelerated. Illegal use of 
the property by the consumer would permit termination and 
acceleration if it subjects the property to seizure. If one of two 
consumers obligated on a loan dies, the creditor may terminate the 
loan and accelerate the balance if the security is adversely 
affected. If the consumer moves out of the dwelling that secures the 
loan and that action adversely affects the security, the creditor 
may terminate a loan and accelerate the balance.

Section 1026.33--Requirements for Reverse Mortgages

33(a) Definition

    1. Nonrecourse transaction. A nonrecourse reverse mortgage 
transaction limits the homeowner's liability to the proceeds of the 
sale of the home (or any lesser amount specified in the credit 
obligation). If a transaction structured as a closed-end reverse 
mortgage transaction allows recourse against the consumer, and the 
annual percentage rate or the points and fees exceed those specified 
under Sec.  1026.32(a)(1), the transaction is subject to all the 
requirements of Sec.  1026.32, including the limitations concerning 
balloon payments and negative amortization.

Paragraph 33(a)(2)

    1. Default. Default is not defined by the statute or regulation, 
but rather by the legal obligation between the parties and state or 
other law.
    2. Definite term or maturity date. To meet the definition of a 
reverse mortgage transaction, a creditor cannot require any 
principal, interest, or shared appreciation or equity to be due and 
payable (other than in the case of default) until after the 
consumer's death, transfer of the dwelling, or the consumer ceases 
to occupy the dwelling as a principal dwelling. Some state laws 
require legal obligations secured by a mortgage to specify a 
definite maturity date or term of repayment in the instrument. An 
obligation may state a definite maturity date or term of repayment 
and still meet the definition of a reverse-mortgage transaction if 
the maturity date or term of repayment used would not operate to 
cause maturity prior to the occurrence of any of the maturity events 
recognized in the regulation. For example, some reverse mortgage 
programs specify that the final maturity date is the borrower's 
150th birthday; other programs include a shorter term but provide 
that the term is automatically extended for consecutive periods if 
none of the other maturity events has yet occurred. These programs 
would be permissible.

33(c) Projected Total Cost of Credit

33(c)(1) Costs to Consumer

    1. Costs and charges to consumer--relation to finance charge. 
All costs and charges to the consumer that are incurred in a reverse 
mortgage transaction are included in the projected total cost of 
credit, and thus in the total annual loan cost rates, whether or not 
the cost or charge is a finance charge under Sec.  1026.4.
    2. Annuity costs. As part of the credit transaction, some 
creditors require or permit a consumer to purchase an annuity that 
immediately--or at some future time--supplements or replaces the 
creditor's payments. The amount paid by the consumer for the annuity 
is a cost to the consumer under this section, regardless of whether 
the annuity is purchased through the creditor or a third party, or 
whether the purchase is mandatory or voluntary. For example, this 
includes the costs of an annuity that a creditor offers, arranges, 
assists the consumer in purchasing, or that the creditor is aware 
the consumer is purchasing as a part of the transaction.
    3. Disposition costs excluded. Disposition costs incurred in 
connection with the sale or transfer of the property subject to the 
reverse mortgage are not included in the costs to the consumer under 
this paragraph. (However, see the definition of Valnin 
Appendix K to the regulation to determine the effect certain 
disposition costs may have on the total annual loan cost rates.)

Paragraph 33(c)(2) Payments to Consumer

    1. Payments upon a specified event. The projected total cost of 
credit should not reflect contingent payments in which a credit to 
the outstanding loan balance or a payment to the consumer's estate 
is made upon the occurrence of an event (for example, a ``death 
benefit'' payable if the consumer's death occurs within a certain 
period of time). Thus, the table of total annual loan cost rates 
required under Sec.  1026.33(b)(2) would not reflect such payments. 
At its option, however, a creditor may put an asterisk, footnote, or 
similar type of notation in the table next to the applicable total 
annual loan cost rate, and state in the body of the note, apart from 
the table, the assumption upon which the total annual loan cost is 
made and any different rate that would apply if the contingent 
benefit were paid.

33(c)(3) Additional Creditor Compensation

    1. Shared appreciation or equity. Any shared appreciation or 
equity that the creditor is entitled to receive pursuant to the 
legal obligation must be included in the total cost of a reverse 
mortgage loan. For example, if a creditor agrees to a reduced 
interest rate on the transaction in exchange for a portion of the 
appreciation or equity that may be realized when the dwelling is 
sold, that portion is included in the projected total cost of 
credit.

33(c)(4) Limitations on Consumer Liability

    1. In general. Creditors must include any limitation on the 
consumer's liability (such as a nonrecourse limit or an equity 
conservation agreement) in the projected total cost of credit. These 
limits and agreements protect a portion of the equity in the 
dwelling for the consumer or the consumer's estate. For example, the 
following are limitations on the consumer's liability that must be 
included in the projected total cost of credit:
    i. A limit on the consumer's liability to a certain percentage 
of the projected value of the home.
    ii. A limit on the consumer's liability to the net proceeds from 
the sale of the property subject to the reverse mortgage.
    2. Uniform assumption for ``net proceeds'' recourse limitations. 
If the legal obligation between the parties does not specify a 
percentage for the ``net proceeds'' liability of the consumer, for 
purposes of the disclosures required by Sec.  1026.33, a creditor 
must assume that the costs associated with selling the property will 
equal 7 percent of the projected sale price (see the definition of 
the Valn symbol under Appendix K(b)(6)).

Section 1026.34--Prohibited Acts or Practices in Connection With 
High-Cost Mortgages

34(a) Prohibited Acts or Practices for High-Cost Mortgages

34(a)(1) Home-Improvement Contracts

Paragraph 34(a)(1)(i)

    1. Joint payees. If a creditor pays a contractor with an 
instrument jointly payable to the contractor and the consumer, the 
instrument must name as payee each consumer who is primarily 
obligated on the note.

34(a)(2) Notice to Assignee

    1. Subsequent sellers or assignors. Any person, whether or not 
the original creditor, that sells or assigns a mortgage subject to 
Sec.  1026.32 must furnish the notice of potential liability to the 
purchaser or assignee.
    2. Format. While the notice of potential liability need not be 
in any particular format, the notice must be prominent. Placing it 
on the face of the note, such as with a stamp, is one means of 
satisfying the prominence requirement.
    3. Assignee liability. Pursuant to section 131(d) of the Act, 
the Act's general holder-in-due course protections do not apply to 
purchasers and assignees of loans covered by Sec.  1026.32. For such 
loans, a purchaser's or other assignee's liability for all claims 
and defenses that the consumer could assert against the creditor is 
not limited to violations of the Act.

34(a)(3) Refinancings Within One-Year Period

    1. In the borrower's interest. The determination of whether or 
not a refinancing covered by Sec.  1026.34(a)(3) is in the 
borrower's interest is based on the totality of the circumstances, 
at the time the credit is

[[Page 80009]]

extended. A written statement by the borrower that ``this loan is in 
my interest'' alone does not meet this standard.
    i. A refinancing would be in the borrower's interest if needed 
to meet the borrower's ``bona fide personal financial emergency'' 
(see generally Sec.  1026.23(e) and Sec.  1026.31(c)(1)(iii)).
    ii. In connection with a refinancing that provides additional 
funds to the borrower, in determining whether a loan is in the 
borrower's interest consideration should be given to whether the 
loan fees and charges are commensurate with the amount of new funds 
advanced, and whether the real estate-related charges are bona fide 
and reasonable in amount (see generally Sec.  1026.4(c)(7)).
    2. Application of the one-year refinancing prohibition to 
creditors and assignees. The prohibition in Sec.  1026.34(a)(3) 
applies where an extension of credit subject to Sec.  1026.32 is 
refinanced into another loan subject to Sec.  1026.32. The 
prohibition is illustrated by the following examples. Assume that 
Creditor A makes a loan subject to Sec.  1026.32 on January 15, 
2003, secured by a first lien; this loan is assigned to Creditor B 
on February 15, 2003:
    i. Creditor A is prohibited from refinancing the January 2003 
loan (or any other loan subject to Sec.  1026.32 to the same 
borrower) into a loan subject to Sec.  1026.32, until January 15, 
2004. Creditor B is restricted until January 15, 2004, or such date 
prior to January 15, 2004 that Creditor B ceases to hold or service 
the loan. During the prohibition period, Creditors A and B may make 
a subordinate lien loan that does not refinance a loan subject to 
Sec.  1026.32. Assume that on April 1, 2003, Creditor A makes but 
does not assign a second-lien loan subject to Sec.  1026.32. In that 
case, Creditor A would be prohibited from refinancing either the 
first-lien or second-lien loans (or any other loans to that borrower 
subject to Sec.  1026.32) into another loan subject to Sec.  1026.32 
until April 1, 2004.
    ii. The loan made by Creditor A on January 15, 2003 (and 
assigned to Creditor B) may be refinanced by Creditor C at any time. 
If Creditor C refinances this loan on March 1, 2003 into a new loan 
subject to Sec.  1026.32, Creditor A is prohibited from refinancing 
the loan made by Creditor C (or any other loan subject to Sec.  
1026.32 to the same borrower) into another loan subject to Sec.  
1026.32 until January 15, 2004. Creditor C is similarly prohibited 
from refinancing any loan subject to Sec.  1026.32 to that borrower 
into another until March 1, 2004. (The limitations of Sec.  
1026.34(a)(3) no longer apply to Creditor B after Creditor C 
refinanced the January 2003 loan and Creditor B ceased to hold or 
service the loan.)

34(a)(4) Repayment Ability

    1. Application of repayment ability rule. The Sec.  
1026.34(a)(4) prohibition against making loans without regard to 
consumers' repayment ability applies to mortgage loans described in 
Sec.  1026.32(a). In addition, the Sec.  1026.34(a)(4) prohibition 
applies to higher-priced mortgage loans described in Sec.  
1026.35(a). See Sec.  1026.35(b)(1).
    2. General prohibition. Section 1026.34(a)(4) prohibits a 
creditor from extending credit subject to Sec.  1026.32 to a 
consumer based on the value of the consumer's collateral without 
regard to the consumer's repayment ability as of consummation, 
including the consumer's current and reasonably expected income, 
employment, assets other than the collateral, current obligations, 
and property tax and insurance obligations. A creditor may base its 
determination of repayment ability on current or reasonably expected 
income from employment or other sources, on assets other than the 
collateral, or both.
    3. Other dwelling-secured obligations. For purposes of Sec.  
1026.34(a)(4), current obligations include another credit obligation 
of which the creditor has knowledge undertaken prior to or at 
consummation of the transaction and secured by the same dwelling 
that secures the transaction subject to Sec.  1026.32 or Sec.  
1026.35. For example, where a transaction subject to Sec.  1026.35 
is a first-lien transaction for the purchase of a home, a creditor 
must consider a ``piggyback'' second-lien transaction of which it 
has knowledge that is used to finance part of the down payment on 
the house.
    4. Discounted introductory rates and non-amortizing or 
negatively-amortizing payments. A credit agreement may determine a 
consumer's initial payments using a temporarily discounted interest 
rate or permit the consumer to make initial payments that are non-
amortizing or negatively amortizing. (Negative amortization is 
permissible for loans covered by Sec.  1026.35(a), but not Sec.  
1026.32). In such cases the creditor may determine repayment ability 
using the assumptions provided in Sec.  1026.34(a)(4)(iv).
    5. Repayment ability as of consummation. Section 1026.34(a)(4) 
prohibits a creditor from disregarding repayment ability based on 
the facts and circumstances known to the creditor as of 
consummation. In general, a creditor does not violate this provision 
if a consumer defaults because of a significant reduction in income 
(for example, a job loss) or a significant obligation (for example, 
an obligation arising from a major medical expense) that occurs 
after consummation. However, if a creditor has knowledge as of 
consummation of reductions in income, for example, if a consumer's 
written application states that the consumer plans to retire within 
twelve months without obtaining new employment, or states that the 
consumer will transition from full-time to part-time employment, the 
creditor must consider that information.
    6. Income, assets, and employment. Any current or reasonably 
expected assets or income may be considered by the creditor, except 
the collateral itself. For example, a creditor may use information 
about current or expected salary, wages, bonus pay, tips, and 
commissions. Employment may be full-time, part-time, seasonal, 
irregular, military, or self-employment. Other sources of income 
could include interest or dividends; retirement benefits; public 
assistance; and alimony, child support, or separate maintenance 
payments. A creditor may also take into account assets such as 
savings accounts or investments that the consumer can or will be 
able to use.
    7. Interaction with Regulation B. Section 1026.34(a)(4) does not 
require or permit the creditor to make inquiries or verifications 
that would be prohibited by Regulation B, 12 CFR part 1002.

34(a)(4)(i) Mortgage-Related Obligations

    1. Mortgage-related obligations. A creditor must include in its 
repayment ability analysis the expected property taxes and premiums 
for mortgage-related insurance required by the creditor as set forth 
in Sec.  1026.35(b)(3)(i), as well as similar mortgage-related 
expenses. Similar mortgage-related expenses include homeowners' 
association dues and condominium or cooperative fees.

34(a)(4)(ii) Verification of Repayment Ability

    1. Income and assets relied on. A creditor must verify the 
income and assets the creditor relies on to evaluate the consumer's 
repayment ability. For example, if a consumer earns a salary and 
also states that he or she is paid an annual bonus, but the creditor 
only relies on the applicant's salary to evaluate repayment ability, 
the creditor need only verify the salary.
    2. Income and assets--co-applicant. If two persons jointly apply 
for credit and both list income or assets on the application, the 
creditor must verify repayment ability with respect to both 
applicants unless the creditor relies only on the income or assets 
of one of the applicants in determining repayment ability.
    3. Expected income. If a creditor relies on expected income, the 
expectation must be reasonable and it must be verified with third-
party documents that provide reasonably reliable evidence of the 
consumer's expected income. For example, if the creditor relies on 
an expectation that a consumer will receive an annual bonus, the 
creditor may verify the basis for that expectation with documents 
that show the consumer's past annual bonuses and the expected bonus 
must bear a reasonable relationship to past bonuses. Similarly, if 
the creditor relies on a consumer's expected salary following the 
consumer's receipt of an educational degree, the creditor may verify 
that expectation with a written statement from an employer 
indicating that the consumer will be employed upon graduation at a 
specified salary.

Paragraph 34(a)(4)(ii)(A)

    1. Internal Revenue Service (IRS) Form W-2. A creditor may 
verify a consumer's income using a consumer's IRS Form W-2 (or any 
subsequent revisions or similar IRS Forms used for reporting wages 
and tax withholding). The creditor may also use an electronic 
retrieval service for obtaining the consumer's W-2 information.
    2. Tax returns. A creditor may verify a consumer's income or 
assets using the consumer's tax return. A creditor may also use IRS 
Form 4506 ``Request for Copy of Tax Return,'' Form 4506-T ``Request 
for Transcript of Tax Return,'' or Form 8821 ``Tax Information 
Authorization'' (or any subsequent revisions or similar IRS Forms 
appropriate for obtaining tax return information directly from the 
IRS) to verify the consumer's income or assets. The creditor may 
also use an electronic retrieval service for obtaining tax return 
information.

[[Page 80010]]

    3. Other third-party documents that provide reasonably reliable 
evidence of consumer's income or assets. Creditors may verify income 
and assets using documents produced by third parties. Creditors may 
not rely on information provided orally by third parties, but may 
rely on correspondence from the third party, such as by letter or 
email. The creditor may rely on any third-party document that 
provides reasonably reliable evidence of the consumer's income or 
assets. For example, creditors may verify the consumer's income 
using receipts from a check-cashing or remittance service, or by 
obtaining a written statement from the consumer's employer that 
states the consumer's income.
    4. Information specific to the consumer. Creditors must verify a 
consumer's income or assets using information that is specific to 
the individual consumer. Creditors may use third-party databases 
that contain individual-specific data about a consumer's income or 
assets, such as a third-party database service used by the 
consumer's employer for the purpose of centralizing income 
verification requests, so long as the information is reasonably 
current and accurate. Information about average incomes for the 
consumer's occupation in the consumer's geographic location or 
information about average incomes paid by the consumer's employer, 
however, would not be specific to the individual consumer.
    5. Duplicative collection of documentation. A creditor that has 
made a loan to a consumer and is refinancing or extending new credit 
to the same consumer need not collect from the consumer a document 
the creditor previously obtained if the creditor has no information 
that would reasonably lead the creditor to believe that document has 
changed since it was initially collected. For example, if the 
creditor has obtained the consumer's 2006 tax return to make a home 
purchase loan in May 2007, the creditor may rely on the 2006 tax 
return if the creditor makes a home equity loan to the same consumer 
in August 2007. Similarly, if the creditor has obtained the 
consumer's bank statement for May 2007 in making the first loan, the 
creditor may rely on that bank statement for that month in making 
the subsequent loan in August 2007.

Paragraph 34(a)(4)(ii)(B)

    1. No violation if income or assets relied on not materially 
greater than verifiable amounts. A creditor that does not verify 
income or assets used to determine repayment ability with reasonably 
reliable third-party documents does not violate Sec.  
1026.34(a)(4)(ii) if the creditor demonstrates that the income or 
assets it relied upon were not materially greater than the amounts 
that the creditor would have been able to verify pursuant to Sec.  
1026.34(a)(4)(ii). For example, if a creditor determines a 
consumer's repayment ability by relying on the consumer's annual 
income of $40,000 but fails to obtain documentation of that amount 
before extending the credit, the creditor will not have violated 
this section if the creditor later obtains evidence that would 
satisfy Sec.  1026.34(a)(4)(ii)(A), such as tax return information, 
showing that the creditor could have documented, at the time the 
loan was consummated, that the consumer had an annual income not 
materially less than $40,000.
    2. Materially greater than. Amounts of income or assets relied 
on are not materially greater than amounts that could have been 
verified at consummation if relying on the verifiable amounts would 
not have altered a reasonable creditor's decision to extend credit 
or the terms of the credit.

Paragraph 34(a)(4)(ii)(C)

    1. In general. A credit report may be used to verify current 
obligations. A credit report, however, might not reflect an 
obligation that a consumer has listed on an application. The 
creditor is responsible for considering such an obligation, but the 
creditor is not required to independently verify the obligation. 
Similarly, a creditor is responsible for considering certain 
obligations undertaken just before or at consummation of the 
transaction and secured by the same dwelling that secures the 
transaction (for example, a ``piggy back'' loan), of which the 
creditor knows, even if not reflected on a credit report. See 
comment 34(a)(4)-3.

34(a)(4)(iii) Presumption of Compliance

    1. In general. A creditor is presumed to have complied with 
Sec.  1026.34(a)(4) if the creditor follows the three underwriting 
procedures specified in paragraph 34(a)(4)(iii) for verifying 
repayment ability, determining the payment obligation, and measuring 
the relationship of obligations to income. The procedures for 
verifying repayment ability are required under paragraph 
34(a)(4)(ii); the other procedures are not required but, if followed 
along with the required procedures, create a presumption that the 
creditor has complied with Sec.  1026.34(a)(4). The consumer may 
rebut the presumption with evidence that the creditor nonetheless 
disregarded repayment ability despite following these procedures. 
For example, evidence of a very high debt-to-income ratio and a very 
limited residual income could be sufficient to rebut the 
presumption, depending on all of the facts and circumstances. If a 
creditor fails to follow one of the non-required procedures set 
forth in paragraph 34(a)(4)(iii), then the creditor's compliance is 
determined based on all of the facts and circumstances without there 
being a presumption of either compliance or violation.

Paragraph 34(a)(4)(iii)(B)

    1. Determination of payment schedule. To retain a presumption of 
compliance under Sec.  1026.34(a)(4)(iii), a creditor must determine 
the consumer's ability to pay the principal and interest obligation 
based on the maximum scheduled payment in the first seven years 
following consummation. In general, a creditor should determine a 
payment schedule for purposes of Sec.  1026.34(a)(4)(iii)(B) based 
on the guidance in the commentary to Sec.  1026.17(c)(1). Examples 
of how to determine the maximum scheduled payment in the first seven 
years are provided as follows (all payment amounts are rounded):
    i. Balloon-payment loan; fixed interest rate. A loan in an 
amount of $100,000 with a fixed interest rate of 8.0 percent (no 
points) has a 7-year term but is amortized over 30 years. The 
monthly payment scheduled for 7 years is $733 with a balloon payment 
of remaining principal due at the end of 7 years. The creditor will 
retain the presumption of compliance if it assesses repayment 
ability based on the payment of $733.
    ii. Fixed-rate loan with interest-only payment for five years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 
percent (no points) has a 30-year term. The monthly payment of $667 
scheduled for the first 5 years would cover only the interest due. 
After the fifth year, the scheduled payment would increase to $772, 
an amount that fully amortizes the principal balance over the 
remaining 25 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the payment of 
$772.
    iii. Fixed-rate loan with interest-only payment for seven years. 
A loan in an amount of $100,000 with a fixed interest rate of 8.0 
percent (no points) has a 30-year term. The monthly payment of $667 
scheduled for the first 7 years would cover only the interest due. 
After the seventh year, the scheduled payment would increase to 
$793, an amount that fully amortizes the principal balance over the 
remaining 23 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the interest-
only payment of $667.
    iv. Variable-rate loan with discount for five years. A loan in 
an amount of $100,000 has a 30-year term. The loan agreement 
provides for a fixed interest rate of 7.0 percent for an initial 
period of 5 years. Accordingly, the payment scheduled for the first 
5 years is $665. The agreement provides that, after 5 years, the 
interest rate will adjust each year based on a specified index and 
margin. As of consummation, the sum of the index value and margin 
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment 
scheduled for the remaining 25 years is $727. The creditor will 
retain the presumption of compliance if it assesses repayment 
ability based on the payment of $727.
    v. Variable-rate loan with discount for seven years. A loan in 
an amount of $100,000 has a 30-year term. The loan agreement 
provides for a fixed interest rate of 7.125 percent for an initial 
period of 7 years. Accordingly, the payment scheduled for the first 
7 years is $674. After 7 years, the agreement provides that the 
interest rate will adjust each year based on a specified index and 
margin. As of consummation, the sum of the index value and margin 
(the fully-indexed rate) is 8.0 percent. Accordingly, the payment 
scheduled for the remaining years is $725. The creditor will retain 
the presumption of compliance if it assesses repayment ability based 
on the payment of $674.
    vi. Step-rate loan. A loan in an amount of $100,000 has a 30-
year term. The agreement provides that the interest rate will be 5 
percent for two years, 6 percent for three years, and 7 percent 
thereafter. Accordingly, the payment amounts are $537 for two years, 
$597 for three years, and $654 thereafter. To retain the presumption 
of compliance, the creditor must assess repayment ability based on 
the payment of $654.

[[Page 80011]]

Paragraph 34(a)(4)(iii)(C)

    1. ``Income'' and ``debt''. To determine whether to classify 
particular inflows or obligations as ``income'' or ``debt,'' 
creditors may look to widely accepted governmental and non-
governmental underwriting standards, including, for example, those 
set forth in the Federal Housing Administration's handbook on 
Mortgage Credit Analysis for Mortgage Insurance.

34(a)(4)(iv) Exclusions From Presumption of Compliance

    1. In general. The exclusions from the presumption of compliance 
should be interpreted consistent with comments 32(d)(1)(i)-1 and 
32(d)(2)-1.
    2. Renewable balloon loan. If a creditor is unconditionally 
obligated to renew a balloon-payment loan at the consumer's option 
(or is obligated to renew subject to conditions within the 
consumer's control), the full term resulting from such renewal is 
the relevant term for purposes of the exclusion of certain balloon-
payment loans. See comment 17(c)(1)-11 for a discussion of 
conditions within a consumer's control in connection with renewable 
balloon-payment loans.

34(b) Prohibited Acts or Practices for Dwelling-Secured Loans; Open-End 
Credit

    1. Amount of credit extended. Where a loan is documented as 
open-end credit but the features and terms or other circumstances 
demonstrate that it does not meet the definition of open-end credit, 
the loan is subject to the rules for closed-end credit, including 
Sec.  1026.32 if the rate or fee trigger is met. In applying the 
triggers under Sec.  1026.32, the ``amount financed,'' including the 
``principal loan amount'' must be determined. In making the 
determination, the amount of credit that would have been extended if 
the loan had been documented as a closed-end loan is a factual 
determination to be made in each case. Factors to be considered 
include the amount of money the consumer originally requested, the 
amount of the first advance or the highest outstanding balance, or 
the amount of the credit line. The full amount of the credit line is 
considered only to the extent that it is reasonable to expect that 
the consumer might use the full amount of credit.

Section 1026.35--Prohibited Acts or Practices in Connection With 
Higher-Priced Mortgage Loans

35(a) Higher-Priced Mortgage Loans

Paragraph 35(a)(2)

    1. Average prime offer rate. Average prime offer rates are 
annual percentage rates derived from average interest rates, points, 
and other loan pricing terms currently offered to consumers by a 
representative sample of creditors for mortgage transactions that 
have low-risk pricing characteristics. Other pricing terms include 
commonly used indices, margins, and initial fixed-rate periods for 
variable-rate transactions. Relevant pricing characteristics include 
a consumer's credit history and transaction characteristics such as 
the loan-to-value ratio, owner-occupant status, and purpose of the 
transaction. To obtain average prime offer rates, the Bureau uses a 
survey of creditors that both meets the criteria of Sec.  
1026.35(a)(2) and provides pricing terms for at least two types of 
variable-rate transactions and at least two types of non-variable-
rate transactions. An example of such a survey is the Freddie Mac 
Primary Mortgage Market Survey[supreg].
    2. Comparable transaction. A higher-priced mortgage loan is a 
consumer credit transaction secured by the consumer's principal 
dwelling with an annual percentage rate that exceeds the average 
prime offer rate for a comparable transaction as of the date the 
interest rate is set by the specified margin. The table of average 
prime offer rates published by the Bureau indicates how to identify 
the comparable transaction.
    3. Rate set. A transaction's annual percentage rate is compared 
to the average prime offer rate as of the date the transaction's 
interest rate is set (or ``locked'') before consummation. Sometimes 
a creditor sets the interest rate initially and then re-sets it at a 
different level before consummation. The creditor should use the 
last date the interest rate is set before consummation.
    4. Bureau table. The Bureau publishes on the Internet, in table 
form, average prime offer rates for a wide variety of transaction 
types. The Bureau calculates an annual percentage rate, consistent 
with Regulation Z (see Sec.  1026.22 and Appendix J), for each 
transaction type for which pricing terms are available from a 
survey. The Bureau estimates annual percentage rates for other types 
of transactions for which direct survey data are not available based 
on the loan pricing terms available in the survey and other 
information. The Bureau publishes on the Internet the methodology it 
uses to arrive at these estimates.

35(b) Rules for Higher-Priced Mortgage Loans

    1. Effective date. For guidance on the applicability of the 
rules in Sec.  1026.35(b), see comment 1(d)(5)-1.

Paragraph 35(b)(2)(ii)(C)

    1. Payment change. Section 1026.35(b)(2) provides that a loan 
subject to this section may not have a penalty described by Sec.  
1026.32(d)(6) unless certain conditions are met. Section 
1026.35(b)(2)(ii)(C) lists as a condition that the amount of the 
periodic payment of principal or interest or both may not change 
during the four-year period following consummation. For examples 
showing whether a prepayment penalty is permitted or prohibited in 
connection with particular payment changes, see comment 
32(d)(7)(iv)-1. Those examples, however, include a condition that 
Sec.  1026.35(b)(2) does not include: the condition that, at 
consummation, the consumer's total monthly debt payments may not 
exceed 50 percent of the consumer's monthly gross income. For 
guidance about circumstances in which payment changes are not 
considered payment changes for purposes of this section, see comment 
32(d)(7)(iv)-2.
    2. Negative amortization. Section 1026.32(d)(2) provides that a 
loan described in Sec.  1026.32(a) may not have a payment schedule 
with regular periodic payments that cause the principal balance to 
increase. Therefore, the commentary to Sec.  1026.32(d)(7)(iv) does 
not include examples of payment changes in connection with negative 
amortization. The following examples show whether, under Sec.  
1026.35(b)(2), prepayment penalties are permitted or prohibited in 
connection with particular payment changes, when a loan agreement 
permits negative amortization:
    i. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month and the loan agreement 
permits negative amortization to occur. Under the loan agreement, 
the first date that a scheduled payment in a different amount may be 
due is January 1, 2014 and the creditor does not have the right to 
change scheduled payments prior to that date even if negative 
amortization occurs. A prepayment penalty is permitted with this 
mortgage transaction provided that the other Sec.  1026.35(b)(2) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, and the penalty will not apply if the source of 
the prepayment funds is a refinancing by the creditor or its 
affiliate.
    ii. Initial payments for a variable-rate transaction consummated 
on January 1, 2010 are $1,000 per month and the loan agreement 
permits negative amortization to occur. Under the loan agreement, 
the first date that a scheduled payment in a different amount may be 
due is January 1, 2014, but the creditor has the right to change 
scheduled payments prior to that date if negative amortization 
occurs. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year 
period following consummation.

35(b)(3) Escrows

35(b)(3)(i) Failure To Escrow for Property Taxes and Insurance

    1. Section 1026.35(b)(3) applies to principal dwellings, 
including structures that are classified as personal property under 
state law. For example, an escrow account must be established on a 
higher-priced mortgage loan secured by a first-lien on a mobile 
home, boat or a trailer used as the consumer's principal dwelling. 
See the commentary under Sec. Sec.  1026.2(a)(19), 1026.2(a)(24), 
1026.15 and 1026.23. Section 1026.35(b)(3) also applies to higher-
priced mortgage loans secured by a first lien on a condominium or a 
cooperative unit if it is in fact used as principal residence.
    2. Administration of escrow accounts. Section 1026.35(b)(3) 
requires creditors to establish before the consummation of a loan 
secured by a first lien on a principal dwelling an escrow account 
for payment of property taxes and premiums for mortgage-related 
insurance required by creditor. Section 6 of RESPA, 12 U.S.C. 2605, 
and Regulation X address how escrow accounts must be administered.
    3. Optional insurance items. Section 1026.35(b)(3) does not 
require that escrow accounts be established for premiums for 
mortgage-related insurance that the creditor does not require in 
connection with the credit transaction, such as an earthquake 
insurance or debt-protection insurance.

Paragraph 35(b)(3)(ii)(B)

    1. Limited exception. A creditor is required to escrow for 
payment of property taxes for

[[Page 80012]]

all first lien loans secured by condominium units regardless of 
whether the creditors escrows insurance premiums for condominium 
unit.

35(b)(3)(v) ``Jumbo'' Loans

    1. Special threshold for ``jumbo'' loans. For purposes of the 
escrow requirement in Sec.  1026.35(b)(3) only, the coverage 
threshold stated in Sec.  1026.35(a)(1) for first-lien loans (1.5 or 
more percentage points greater than the average prime offer rate) 
does not apply to a loan with a principal obligation that exceeds 
the limit in effect as of the date the loan's rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac 
(``jumbo'' loans). The Federal Housing Finance Agency (FHFA) 
establishes and adjusts the maximum principal obligation pursuant to 
12 U.S.C. 1454(a)(2) and other provisions of Federal law. 
Adjustments to the maximum principal obligation made by FHFA apply 
in determining whether a mortgage loan is a ``jumbo'' loan to which 
the separate coverage threshold in Sec.  1026.35(b)(3)(v) applies.
    2. Escrow requirements only. Under Sec.  1026.35(b)(3)(v), for 
``jumbo'' loans, the annual percentage rate threshold is 2.5 or more 
percentage points greater than the average prime offer rate. This 
threshold applies solely in determining whether a ``jumbo'' loan is 
subject to the escrow requirement of Sec.  1026.35(b)(3). The 
determination of whether ``jumbo'' first-lien loans are subject to 
the other protections in Sec.  1026.35, such as the ability to repay 
requirements under Sec.  1026.35(b)(1) and the restrictions on 
prepayment penalties under Sec.  1026.35(b)(2), is based on the 1.5 
percentage point threshold stated in Sec.  1026.35(a)(1).

Section 1026.36--Prohibited Acts or Practices in Connection With 
Credit Secured by a Dwelling

    1. Scope of coverage. Sections 1026.36(b) and (c) apply to 
closed-end consumer credit transactions secured by a consumer's 
principal dwelling. Sections 1026.36(d) and (e) apply to closed-end 
consumer credit transactions secured by a dwelling. Sections 
1026.36(d) and (e) apply to closed-end loans secured by first or 
subordinate liens, and reverse mortgages that are not home-equity 
lines of credit under Sec.  1026.40. See Sec.  1026.36(f) for 
additional restrictions on the scope of this section, and Sec. Sec.  
1026.1(c) and 1026.3(a) and corresponding commentary for further 
discussion of extensions of credit subject to Regulation Z.
    2. Mandatory compliance date for Sec. Sec.  1026.36(d) and (e). 
The final rules on loan originator compensation in Sec.  1026.36 
apply to transactions for which the creditor receives an application 
on or after the effective date. For example, assume a mortgage 
broker takes an application on March 10, 2011, which the creditor 
receives on March 25, 2011. This transaction is not covered. If, 
however, the creditor does not receive the application until April 
8, 2011, the transaction is covered.

36(a) Loan Originator and Mortgage Broker Defined

    1. Meaning of loan originator. i. General. Section 1026.36(a) 
provides that a loan originator is any person who for compensation 
or other monetary gain arranges, negotiates, or otherwise obtains an 
extension of consumer credit for another person. Thus, the term 
``loan originator'' includes employees of a creditor as well as 
employees of a mortgage broker that satisfy this definition. In 
addition, the definition of loan originator expressly includes any 
creditor that satisfies the definition of loan originator but makes 
use of ``table funding'' by a third party. See comment 36(a)-1.ii 
below discussing table funding. Although consumers may sometimes 
arrange, negotiate, or otherwise obtain extensions of consumer 
credit on their own behalf, in such cases they do not do so for 
another person or for compensation or other monetary gain, and 
therefore are not loan originators under this section. (Under Sec.  
1026.2(a)(22), the term ``person'' means a natural person or an 
organization.)
    ii. Table funding. Table funding occurs when the creditor does 
not provide the funds for the transaction at consummation out of the 
creditor's own resources, including drawing on a bona fide warehouse 
line of credit, or out of deposits held by the creditor. 
Accordingly, a table-funded transaction is consummated with the debt 
obligation initially payable by its terms to one person, but another 
person provides the funds for the transaction at consummation and 
receives an immediate assignment of the note, loan contract, or 
other evidence of the debt obligation. Although Sec.  
1026.2(a)(17)(i)(B) provides that a person to whom a debt obligation 
is initially payable on its face generally is a creditor, Sec.  
1026.36(a)(1) provides that, solely for the purposes of Sec.  
1026.36, such a person is also considered a loan originator. The 
creditor is not considered a loan originator unless table funding 
occurs. For example, if a person closes a loan in its own name but 
does not fund the loan from its own resources or deposits held by it 
because it assigns the loan at consummation, it is considered a 
creditor for purposes of Regulation Z and also a loan originator for 
purposes of Sec.  1026.36. However, if a person closes a loan in its 
own name and draws on a bona fide warehouse line of credit to make 
the loan at consummation, it is considered a creditor, not a loan 
originator, for purposes of Regulation Z, including Sec.  1026.36.
    iii. Servicing. The definition of ``loan originator'' does not 
apply to a loan servicer when the servicer modifies an existing loan 
on behalf of the current owner of the loan. The rule only applies to 
extensions of consumer credit and does not apply if a modification 
of an existing obligation's terms does not constitute a refinancing 
under Sec.  1026.20(a).
    2. Meaning of mortgage broker. For purposes of Sec.  1026.36, 
with respect to a particular transaction, the term ``mortgage 
broker'' refers to a loan originator who is not an employee of the 
creditor. Accordingly, the term ``mortgage broker'' includes 
companies that engage in the activities described in Sec.  
1026.36(a) and also includes employees of such companies that engage 
in these activities. Section 1026.36(d) prohibits certain payments 
to a loan originator. These prohibitions apply to payments made to 
all loan originators, including payments made to mortgage brokers, 
and payments made by a company acting as a mortgage broker to its 
employees who are loan originators.
    3. Meaning of creditor. For purposes of Sec.  1026.36(d) and 
(e), a creditor means a creditor that is not deemed to be a loan 
originator on the transaction under this section. Thus, a person 
that closes a loan in its own name (but another person provides the 
funds for the transaction at consummation and receives an immediate 
assignment of the note, loan contract, or other evidence of the debt 
obligation) is deemed a loan originator, not a creditor, for 
purposes of Sec.  1026.36. However, that person is still a creditor 
for all other purposes of Regulation Z.
    4. Managers and administrative staff. For purposes of Sec.  
1026.36, managers, administrative staff, and similar individuals who 
are employed by a creditor or loan originator but do not arrange, 
negotiate, or otherwise obtain an extension of credit for a 
consumer, or whose compensation is not based on whether any 
particular loan is originated, are not loan originators.

36(c) Servicing Practices

Paragraph 36(c)(1)(i)

    1. Crediting of payments. Under Sec.  1026.36(c)(1)(i), a 
mortgage servicer must credit a payment to a consumer's loan account 
as of the date of receipt. This does not require that a mortgage 
servicer post the payment to the consumer's loan account on a 
particular date; the servicer is only required to credit the payment 
as of the date of receipt. Accordingly, a servicer that receives a 
payment on or before its due date (or within any grace period), and 
does not enter the payment on its books or in its system until after 
the payment's due date (or expiration of any grace period), does not 
violate this rule as long as the entry does not result in the 
imposition of a late charge, additional interest, or similar penalty 
to the consumer, or in the reporting of negative information to a 
consumer reporting agency.
    2. Payments to be credited. Payments should be credited based on 
the legal obligation between the creditor and consumer. The legal 
obligation is determined by applicable state or other law.
    3. Date of receipt. The ``date of receipt'' is the date that the 
payment instrument or other means of payment reaches the mortgage 
servicer. For example, payment by check is received when the 
mortgage servicer receives it, not when the funds are collected. 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 
mortgage servicer receives the third-party payor's check or other 
transfer medium, such as an electronic fund transfer.

Paragraph 36(c)(1)(ii)

    1. Pyramiding of late fees. The prohibition on pyramiding of 
late fees in this subsection should be construed consistently with 
the ``credit practices rule'' of the Federal Trade Commission, 16 
CFR 444.4.

[[Page 80013]]

Paragraph 36(c)(1)(iii)

    1. Reasonable time. The payoff statement must be provided to the 
consumer, or person acting on behalf of the consumer, within a 
reasonable time after the request. For example, it would be 
reasonable under most circumstances to provide the statement within 
five business days of receipt of a consumer's request. This time 
frame might be longer, for example, when the servicer is 
experiencing an unusually high volume of refinancing requests.
    2. Person acting on behalf of the consumer. For purposes of 
Sec.  1026.36(c)(1)(iii), a person acting on behalf of the consumer 
may include the consumer's representative, such as an attorney 
representing the individual, a non-profit consumer counseling or 
similar organization, or a creditor with which the consumer is 
refinancing and which requires the payoff statement to complete the 
refinancing. A servicer may take reasonable measures to verify the 
identity of any person acting on behalf of the consumer and to 
obtain the consumer's authorization to release information to any 
such person before the ``reasonable time'' period begins to run.
    3. Payment requirements. The servicer may specify reasonable 
requirements for making payoff requests, such as requiring requests 
to be in writing and directed to a mailing address, email address or 
fax number specified by the servicer or orally to a telephone number 
specified by the servicer, or any other reasonable requirement or 
method. If the consumer does not follow these requirements, a longer 
time frame for responding to the request would be reasonable.
    4. Accuracy of payoff statements. Payoff statements must be 
accurate when issued.

Paragraph 36(c)(2)

    1. Payment requirements. The servicer may specify reasonable 
requirements for making payments in writing, such as requiring that 
payments be accompanied by the account number or payment coupon; 
setting a cut-off hour for payment to be received, or setting 
different hours for payment by mail and payments made in person; 
specifying that only checks or money orders should be sent by mail; 
specifying that payment is to be made in U.S. dollars; or specifying 
one particular address for receiving payments, such as a post office 
box. The servicer may be prohibited, however, from requiring payment 
solely by preauthorized electronic fund transfer. (See Section 913 
of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would be 
reasonable to require a cut-off time of 5 p.m. for receipt of a 
mailed check at the location specified by the servicer for receipt 
of such check.
    3. Implied guidelines for payments. In the absence of specified 
requirements for making payments, payments may be made at any 
location where the servicer conducts business; any time during the 
servicer's normal business hours; and by cash, money order, draft, 
or other similar instrument in properly negotiable form, or by 
electronic fund transfer if the servicer and consumer have so 
agreed.

36(d) Prohibited Payments to Loan Originators

    1. Persons covered. Section 1026.36(d) prohibits any person 
(including the creditor) from paying compensation to a loan 
originator in connection with a covered credit transaction, if the 
amount of the payment is based on any of the transaction's terms or 
conditions. For example, a person that purchases a loan from the 
creditor may not compensate the loan originator in a manner that 
violates Sec.  1026.36(d).
    2. Mortgage brokers. The payments made by a company acting as a 
mortgage broker to its employees who are loan originators are 
subject to the section's prohibitions. For example, a mortgage 
broker may not pay its employee more for a transaction with a 7 
percent interest rate than for a transaction with a 6 percent 
interest rate.

36(d)(1) Payments Based on Transaction Terms and Conditions

    1. Compensation. i. General. For purposes of Sec.  1026.36(d) 
and (e), the term ``compensation'' includes salaries, commissions, 
and any financial or similar incentive provided to a loan originator 
that is based on any of the terms or conditions of the loan 
originator's transactions. See comment 36(d)(1)-3 for examples of 
types of compensation that are not covered by Sec.  1026.36(d) and 
(e). For example, the term ``compensation'' includes:
    A. An annual or other periodic bonus; or
    B. Awards of merchandise, services, trips, or similar prizes.
    ii. Name of fee. Compensation includes amounts the loan 
originator retains and is not dependent on the label or name of any 
fee imposed in connection with the transaction. For example, if a 
loan originator imposes a ``processing fee'' in connection with the 
transaction and retains such fee, it is deemed compensation for 
purposes of Sec.  1026.36(d) and (e), whether the originator expends 
the time to process the consumer's application or uses the fee for 
other expenses, such as overhead.
    iii. Amounts for third-party charges. Compensation includes 
amounts the loan originator retains, but does not include amounts 
the originator receives as payment for bona fide and reasonable 
third-party charges, such as title insurance or appraisals. In some 
cases, amounts received for payment for third-party charges may 
exceed the actual charge because, for example, the originator cannot 
determine with accuracy what the actual charge will be before 
consummation. In such a case, the difference retained by the 
originator is not deemed compensation if the third-party charge 
imposed on the consumer was bona fide and reasonable, and also 
complies with state and other applicable law. On the other hand, if 
the originator marks up a third-party charge (a practice known as 
``upcharging''), and the originator retains the difference between 
the actual charge and the marked-up charge, the amount retained is 
compensation for purposes of Sec.  1026.36(d) and (e). For example:
    A. Assume a loan originator charges the consumer a $400 
application fee that includes $50 for a credit report and $350 for 
an appraisal. Assume that $50 is the amount the creditor pays for 
the credit report. At the time the loan originator imposes the 
application fee on the consumer, the loan originator is uncertain of 
the cost of the appraisal because the originator may choose from 
appraisers that charge between $300 to $350 for appraisals. Later, 
the cost for the appraisal is determined to be $300 for this 
consumer's transaction. In this case, the $50 difference between the 
$400 application fee imposed on the consumer and the actual $350 
cost for the credit report and appraisal is not deemed compensation 
for purposes of Sec.  1026.36(d) and (e), even though the $50 is 
retained by the loan originator.
    B. Using the same example in comment 36(d)(1)-1.iii.A above, the 
$50 difference would be compensation for purposes of Sec.  
1026.36(d) and (e) if the appraisers from whom the originator 
chooses charge fees between $250 and $300.
    2. Examples of compensation that is based on transaction terms 
or conditions. Section 1026.36(d)(1) prohibits loan originator 
compensation that is based on the terms or conditions of the loan 
originator's transactions. For example, the rule prohibits 
compensation to a loan originator for a transaction based on that 
transaction's interest rate, annual percentage rate, loan-to-value 
ratio, or the existence of a prepayment penalty. The rule also 
prohibits compensation based on a factor that is a proxy for a 
transaction's terms or conditions. For example, a consumer's credit 
score or similar representation of credit risk, such as the 
consumer's debt-to-income ratio, is not one of the transaction's 
terms or conditions. However, if a loan originator's compensation 
varies in whole or in part with a factor that serves as a proxy for 
loan terms or conditions, then the originator's compensation is 
based on a transaction's terms or conditions. To illustrate, assume 
that consumer A and consumer B receive loans from the same loan 
originator and the same creditor. Consumer A has a credit score of 
650, and consumer B has a credit score of 800. Consumer A's loan has 
a 7 percent interest rate, and consumer B's loan has a 6 \1/2\ 
percent interest rate because of the consumers' different credit 
scores. If the creditor pays the loan originator $1,500 in 
compensation for consumer A's loan and $1,000 in compensation for 
consumer B's loan because the creditor varies compensation payments 
in whole or in part with a consumer's credit score, the originator's 
compensation would be based on the transactions' terms or 
conditions.
    3. Examples of compensation not based on transaction terms or 
conditions. The following are only illustrative examples of 
compensation methods that are permissible (unless otherwise 
prohibited by applicable law), and not an exhaustive list. 
Compensation is not based on the transaction's terms or conditions 
if it is based on, for example:
    i. The loan originator's overall loan volume (i.e., total dollar 
amount of credit extended or total number of loans originated), 
delivered to the creditor.
    ii. The long-term performance of the originator's loans.

[[Page 80014]]

    iii. An hourly rate of pay to compensate the originator for the 
actual number of hours worked.
    iv. Whether the consumer is an existing customer of the creditor 
or a new customer.
    v. A payment that is fixed in advance for every loan the 
originator arranges for the creditor (e.g., $600 for every loan 
arranged for the creditor, or $1,000 for the first 1,000 loans 
arranged and $500 for each additional loan arranged).
    vi. The percentage of applications submitted by the loan 
originator to the creditor that result in consummated transactions.
    vii. The quality of the loan originator's loan files (e.g., 
accuracy and completeness of the loan documentation) submitted to 
the creditor.
    viii. A legitimate business expense, such as fixed overhead 
costs.
    ix. Compensation that is based on the amount of credit extended, 
as permitted by Sec.  1026.36(d)(1)(ii). See comment 36(d)(1)-9 
discussing compensation based on the amount of credit extended.
    4. Creditor's flexibility in setting loan terms. Section 
1026.36(d)(1) does not limit a creditor's ability to offer a higher 
interest rate in a transaction as a means for the consumer to 
finance the payment of the loan originator's compensation or other 
costs that the consumer would otherwise be required to pay directly 
(either in cash or out of the loan proceeds). Thus, a creditor may 
charge a higher interest rate to a consumer who will pay fewer of 
the costs of the transaction directly, or it may offer the consumer 
a lower rate if the consumer pays more of the costs directly. For 
example, if the consumer pays half of the transaction costs 
directly, a creditor may charge an interest rate of 6 percent but, 
if the consumer pays none of the transaction costs directly, the 
creditor may charge an interest rate of 6.5 percent. Section 
1026.36(d)(1) also does not limit a creditor from offering or 
providing different loan terms to the consumer based on the 
creditor's assessment of the credit and other transactional risks 
involved. A creditor could also offer different consumers varying 
interest rates that include a constant interest rate premium to 
recoup the loan originator's compensation through increased interest 
paid by the consumer (such as by adding a constant 0.25 percent to 
the interest rate on each loan).
    5. Effect of modification of loan terms. Under Sec.  
1026.36(d)(1), a loan originator's compensation may not vary based 
on any of a credit transaction's terms or conditions. Thus, a 
creditor and originator may not agree to set the originator's 
compensation at a certain level and then subsequently lower it in 
selective cases (such as where the consumer is able to obtain a 
lower rate from another creditor). When the creditor offers to 
extend a loan with specified terms and conditions (such as the rate 
and points), the amount of the originator's compensation for that 
transaction is not subject to change (increase or decrease) based on 
whether different loan terms are negotiated. For example, if the 
creditor agrees to lower the rate that was initially offered, the 
new offer may not be accompanied by a reduction in the loan 
originator's compensation.
    6. Periodic changes in loan originator compensation and 
transactions' terms and conditions. This section does not limit a 
creditor or other person from periodically revising the compensation 
it agrees to pay a loan originator. However, the revised 
compensation arrangement must result in payments to the loan 
originator that do not vary based on the terms or conditions of a 
credit transaction. A creditor or other person might periodically 
review factors such as loan performance, transaction volume, as well 
as current market conditions for originator compensation, and 
prospectively revise the compensation it agrees to pay to a loan 
originator. For example, assume that during the first 6 months of 
the year, a creditor pays $3,000 to a particular loan originator for 
each loan delivered, regardless of the loan terms or conditions. 
After considering the volume of business produced by that 
originator, the creditor could decide that as of July 1, it will pay 
$3,250 for each loan delivered by that particular originator, 
regardless of the loan terms or conditions. No violation occurs even 
if the loans made by the creditor after July 1 generally carry a 
higher interest rate than loans made before that date, to reflect 
the higher compensation.
    7. Compensation received directly from the consumer. The 
prohibition in Sec.  1026.36(d)(1) does not apply to transactions in 
which any loan originator receives compensation directly from the 
consumer, in which case no other person may provide any compensation 
to a loan originator, directly or indirectly, in connection with 
that particular transaction pursuant to Sec.  1026.36(d)(2). 
Payments to a loan originator made out of loan proceeds are 
considered compensation received directly from the consumer, while 
payments derived from an increased interest rate are not considered 
compensation received directly from the consumer. However, points 
paid on the loan by the consumer to the creditor are not considered 
payments received directly from the consumer whether they are paid 
in cash or out of the loan proceeds. That is, if the consumer pays 
origination points to the creditor and the creditor compensates the 
loan originator, the loan originator may not also receive 
compensation directly from the consumer. Compensation includes 
amounts retained by the loan originator, but does not include 
amounts the loan originator receives as payment for bona fide and 
reasonable third-party charges, such as title insurance or 
appraisals. See comment 36(d)(1)-1.
    8. Record retention. See comment 25(a)-5 for guidance on 
complying with the record retention requirements of Sec.  1026.25(a) 
as they apply to Sec.  1026.36(d)(1).
    9. Amount of credit extended. A loan originator's compensation 
may be based on the amount of credit extended, subject to certain 
conditions. Section 1026.36(d)(1) does not prohibit an arrangement 
under which a loan originator is paid compensation based on a 
percentage of the amount of credit extended, provided the percentage 
is fixed and does not vary with the amount of credit extended. 
However, compensation that is based on a fixed percentage of the 
amount of credit extended may be subject to a minimum and/or maximum 
dollar amount, as long as the minimum and maximum dollar amounts do 
not vary with each credit transaction. For example:
    i. A creditor may offer a loan originator 1 percent of the 
amount of credit extended for all loans the originator arranges for 
the creditor, but not less than $1,000 or greater than $5,000 for 
each loan.
    ii. A creditor may not offer a loan originator 1 percent of the 
amount of credit extended for loans of $300,000 or more, 2 percent 
of the amount of credit extended for loans between $200,000 and 
$300,000, and 3 percent of the amount of credit extended for loans 
of $200,000 or less.

36(d)(2) Payments by Persons Other Than Consumer

    1. Compensation in connection with a particular transaction. 
Under Sec.  1026.36(d)(2), if any loan originator receives 
compensation directly from a consumer in a transaction, no other 
person may provide any compensation to a loan originator, directly 
or indirectly, in connection with that particular credit 
transaction. See comment 36(d)(1)-7 discussing compensation received 
directly from the consumer. The restrictions imposed under Sec.  
1026.36(d)(2) relate only to payments, such as commissions, that are 
specific to, and paid solely in connection with, the transaction in 
which the consumer has paid compensation directly to a loan 
originator. Thus, payments by a mortgage broker company to an 
employee in the form of a salary or hourly wage, which is not tied 
to a specific transaction, do not violate Sec.  1026.36(d)(2) even 
if the consumer directly pays a loan originator a fee in connection 
with a specific credit transaction. However, if any loan originator 
receives compensation directly from the consumer in connection with 
a specific credit transaction, neither the mortgage broker company 
nor an employee of the mortgage broker company can receive 
compensation from the creditor in connection with that particular 
credit transaction.
    2. Compensation received directly from a consumer. Under 
Regulation X, which implements the Real Estate Settlement Procedures 
Act (RESPA), a yield spread premium paid by a creditor to the loan 
originator may be characterized on the RESPA disclosures as a 
``credit'' that will be applied to reduce the consumer's settlement 
charges, including origination fees. A yield spread premium 
disclosed in this manner is not considered to be received by the 
loan originator directly from the consumer for purposes of Sec.  
1026.36(d)(2).

36(d)(3) Affiliates

    1. For purposes of Sec.  1026.36(d), affiliates are treated as a 
single ``person.'' The term ``affiliate'' is defined in Sec.  
1026.32(b)(2). For example, assume a parent company has two mortgage 
lending subsidiaries. Under Sec.  1026.36(d)(1), subsidiary ``A'' 
could not pay a loan originator greater compensation for a loan with 
an interest rate of 8 percent than it would pay for a loan with an 
interest rate of 7 percent. If the loan originator may deliver loans 
to both subsidiaries, they must compensate the loan originator in 
the same manner. Accordingly, if the loan originator delivers the 
loan to subsidiary ``B'' and the interest rate is 8 percent, the 
originator must

[[Page 80015]]

receive the same compensation that would have been paid by 
subsidiary A for a loan with a rate of either 7 or 8 percent.

36(e) Prohibition on Steering

    1. Compensation. See comment 36(d)(1)-1 for guidance on 
compensation that is subject to Sec.  1026.36(e).

36(e)(1) General

    1. Steering. For purposes of Sec.  1026.36(e), directing or 
``steering'' a consumer to consummate a particular credit 
transaction means advising, counseling, or otherwise influencing a 
consumer to accept that transaction. For such actions to constitute 
steering, the consumer must actually consummate the transaction in 
question. Thus, Sec.  1026.36(e)(1) does not address the actions of 
a loan originator if the consumer does not actually obtain a loan 
through that loan originator.
    2. Prohibited conduct. Under Sec.  1026.36(e)(1), a loan 
originator may not direct or steer a consumer to consummate a 
transaction based on the fact that the loan originator would 
increase the amount of compensation that the loan originator would 
receive for that transaction compared to other transactions, unless 
the consummated transaction is in the consumer's interest.
    i. In determining whether a consummated transaction is in the 
consumer's interest, that transaction must be compared to other 
possible loan offers available through the originator, if any, and 
for which the consumer was likely to qualify, at the time that 
transaction was offered to the consumer. Possible loan offers are 
available through the loan originator if they could be obtained from 
a creditor with which the loan originator regularly does business. 
Section 1026.36(e)(1) does not require a loan originator to 
establish a business relationship with any creditor with which the 
loan originator does not already do business. To be considered a 
possible loan offer available through the loan originator, an offer 
need not be extended by the creditor; it need only be an offer that 
the creditor likely would extend upon receiving an application from 
the applicant, based on the creditor's current credit standards and 
its current rate sheets or other similar means of communicating its 
current credit terms to the loan originator. An originator need not 
inform the consumer about a potential transaction if the originator 
makes a good faith determination that the consumer is not likely to 
qualify for it.
    ii. Section 1026.36(e)(1) does not require a loan originator to 
direct a consumer to the transaction that will result in a creditor 
paying the least amount of compensation to the originator. However, 
if the loan originator reviews possible loan offers available from a 
significant number of the creditors with which the originator 
regularly does business, and the originator directs the consumer to 
the transaction that will result in the least amount of creditor-
paid compensation for the loan originator, the requirements of Sec.  
1026.36(e)(1) are deemed to be satisfied. In the case where a loan 
originator directs the consumer to the transaction that will result 
in a greater amount of creditor-paid compensation for the loan 
originator, Sec.  1026.36(e)(1) is not violated if the terms and 
conditions on that transaction compared to the other possible loan 
offers available through the originator, and for which the consumer 
likely qualifies, are the same. A loan originator who is an employee 
of the creditor on a transaction may not obtain compensation that is 
based on the transaction's terms or conditions pursuant to Sec.  
1026.36(d)(1), and compliance with that provision by such a loan 
originator also satisfies the requirements of Sec.  1026.36(e)(1) 
for that transaction with the creditor. However, if a creditor's 
employee acts as a broker by forwarding a consumer's application to 
a creditor other than the loan originator's employer, such as when 
the employer does not offer any loan products for which the consumer 
would qualify, the loan originator is not an employee of the 
creditor in that transaction and is subject to Sec.  1026.36(e)(1) 
if the originator is compensated for arranging the loan with the 
other creditor.
    iii. See the commentary under Sec.  1026.36(e)(3) for additional 
guidance on what constitutes a ``significant number of creditors 
with which a loan originator regularly does business'' and guidance 
on the determination about transactions for which ``the consumer 
likely qualifies.''
    3. Examples. Assume a loan originator determines that a consumer 
likely qualifies for a loan from Creditor A that has a fixed 
interest rate of 7 percent, but the loan originator directs the 
consumer to a loan from Creditor B having a rate of 7.5 percent. If 
the loan originator receives more in compensation from Creditor B 
than the amount that would have been paid by Creditor A, the 
prohibition in Sec.  1026.36(e) is violated unless the higher-rate 
loan is in the consumer's interest. For example, a higher-rate loan 
might be in the consumer's interest if the lower-rate loan has a 
prepayment penalty, or if the lower-rate loan requires the consumer 
to pay more in up-front charges that the consumer is unable or 
unwilling to pay or finance as part of the loan amount.

36(e)(2) Permissible Transactions

    1. Safe harbors. A loan originator that satisfies Sec.  
1026.36(e)(2) is deemed to comply with Sec.  1026.36(e)(1). A loan 
originator that does not satisfy Sec.  1026.36(e)(2) is not subject 
to any presumption regarding the originator's compliance or 
noncompliance with Sec.  1026.36(e)(1).
    2. Minimum number of loan options. To obtain the safe harbor, 
Sec.  1026.36(e)(2) requires that the loan originator present loan 
options that meet the criteria in Sec.  1026.36(e)(3)(i) for each 
type of transaction in which the consumer expressed an interest. As 
required by Sec.  1026.36(e)(3)(ii), the loan originator must have a 
good faith belief that the options presented are loans for which the 
consumer likely qualifies. If the loan originator is not able to 
form such a good faith belief for loan options that meet the 
criteria in Sec.  1026.36(e)(3)(i) for a given type of transaction, 
the loan originator may satisfy Sec.  1026.36(e)(2) by presenting 
all loans for which the consumer likely qualifies and that meet the 
other requirements in Sec.  1026.36(e)(3) for that given type of 
transaction. A loan originator may present to the consumer any 
number of loan options, but presenting a consumer more than four 
loan options for each type of transaction in which the consumer 
expressed an interest and for which the consumer likely qualifies 
would not likely help the consumer make a meaningful choice.

36(e)(3) Loan Options Presented

    1. Significant number of creditors. A significant number of the 
creditors with which a loan originator regularly does business is 
three or more of those creditors. If the loan originator regularly 
does business with fewer than three creditors, the originator is 
deemed to comply by obtaining loan options from all the creditors 
with which it regularly does business. Under Sec.  1026.36(e)(3)(i), 
the loan originator must obtain loan options from a significant 
number of creditors with which the loan originator regularly does 
business, but the loan originator need not present loan options from 
all such creditors to the consumer. For example, if three loans 
available from one of the creditors with which the loan originator 
regularly does business satisfy the criteria in Sec.  
1026.36(e)(3)(i), presenting those and no options from any other 
creditor satisfies that section.
    2. Creditors with which loan originator regularly does business. 
To qualify for the safe harbor in Sec.  1026.36(e)(2), the loan 
originator must obtain and review loan options from a significant 
number of the creditors with which the loan originator regularly 
does business. For this purpose, a loan originator regularly does 
business with a creditor if:
    i. There is a written agreement between the originator and the 
creditor governing the originator's submission of mortgage loan 
applications to the creditor;
    ii. The creditor has extended credit secured by a dwelling to 
one or more consumers during the current or previous calendar month 
based on an application submitted by the loan originator; or
    iii. The creditor has extended credit secured by a dwelling 
twenty-five or more times during the previous twelve calendar months 
based on applications submitted by the loan originator. For this 
purpose, the previous twelve calendar months begin with the calendar 
month that precedes the month in which the loan originator accepted 
the consumer's application.
    3. Lowest interest rate. To qualify under the safe harbor in 
Sec.  1026.36(e)(2), for each type of transaction in which the 
consumer has expressed an interest, the loan originator must present 
the consumer with loan options that meet the criteria in Sec.  
1026.36(e)(3)(i). The criteria are: The loan with the lowest 
interest rate; the loan with the lowest total dollar amount for 
discount points and origination points or fees; and a loan with the 
lowest interest rate without negative amortization, a prepayment 
penalty, a balloon payment in the first seven years of the loan 
term, shared equity, or shared appreciation, or, in the case of a 
reverse mortgage, a loan without a prepayment penalty, shared 
equity, or shared appreciation. To identify the loan with the lowest 
interest rate, for any loan that has an initial rate that is fixed 
for at least five years, the loan originator shall use the initial 
rate

[[Page 80016]]

that would be in effect at consummation. For a loan with an initial 
rate that is not fixed for at least five years:
    i. If the interest rate varies based on changes to an index, the 
originator shall use the fully-indexed rate that would be in effect 
at consummation without regard to any initial discount or premium.
    ii. For a step-rate loan, the originator shall use the highest 
rate that would apply during the first five years.
    4. Transactions for which the consumer likely qualifies. To 
qualify under the safe harbor in Sec.  1026.36(e)(2), the loan 
originator must have a good faith belief that the loan options 
presented to the consumer pursuant to Sec.  1026.36(e)(3) are 
transactions for which the consumer likely qualifies. The loan 
originator's belief that the consumer likely qualifies should be 
based on information reasonably available to the loan originator at 
the time the loan options are presented. In making this 
determination, the loan originator may rely on information provided 
by the consumer, even if it subsequently is determined to be 
inaccurate. For purposes of Sec.  1026.36(e)(3), a loan originator 
is not expected to know all aspects of each creditor's underwriting 
criteria. But pricing or other information that is routinely 
communicated by creditors to loan originators is considered to be 
reasonably available to the loan originator, for example, rate 
sheets showing creditors' current pricing and the required minimum 
credit score or other eligibility criteria.

Section 1026.39--Mortgage Transfer Disclosures

39(a) Scope

Paragraph 39(a)(1)

    1. Covered persons. The disclosure requirements of this section 
apply to any ``covered person'' that becomes the legal owner of an 
existing mortgage loan, whether through a purchase, or other 
transfer or assignment, regardless of whether the person also meets 
the definition of a ``creditor'' in Regulation Z. The fact that a 
person purchases or acquires mortgage loans and provides the 
disclosures under this section does not by itself make that person a 
``creditor'' as defined in the regulation.
    2. Acquisition of legal title. To become a ``covered person'' 
subject to this section, a person must become the owner of an 
existing mortgage loan by acquiring legal title to the debt 
obligation.
    i. Partial interest. A person may become a covered person by 
acquiring a partial interest in the mortgage loan. If the original 
creditor transfers a partial interest in the loan to one or more 
persons, all such transferees are covered persons under this 
section.
    ii. Joint acquisitions. All persons that jointly acquire legal 
title to the loan are covered persons under this section, and under 
Sec.  1026.39(b)(5), a single disclosure must be provided on behalf 
of all such covered persons. Multiple persons are deemed to jointly 
acquire legal title to the loan if each acquires a partial interest 
in the loan pursuant to the same agreement or by otherwise acting in 
concert. See comments 39(b)(5)-1 and 39(d)(1)(ii)-1 regarding the 
disclosure requirements for multiple persons that jointly acquire a 
loan.
    iii. Affiliates. An acquiring party that is a separate legal 
entity from the transferor must provide the disclosures required by 
this section even if the parties are affiliated entities.
    3. Exclusions. i. Beneficial interest. Section 1026.39 does not 
apply to a party that acquires only a beneficial interest or a 
security interest in the loan, or to a party that assumes the credit 
risk without acquiring legal title to the loan. For example, an 
investor that acquires mortgage-backed securities, pass-through 
certificates, or participation interests and does not acquire legal 
title in the underlying mortgage loans is not covered by this 
section.
    ii. Loan servicers. Pursuant to TILA Section 131(f)(2), the 
servicer of a mortgage loan is not the owner of the obligation for 
purposes of this section if the servicer holds title to the loan as 
a result of the assignment of the obligation to the servicer solely 
for the administrative convenience of the servicer in servicing the 
obligation.
    4. Mergers, corporate acquisitions, or reorganizations. 
Disclosures are required under this section when, as a result of a 
merger, corporate acquisition, or reorganization, the ownership of a 
mortgage loan is transferred to a different legal entity.

Paragraph 39(a)(2)

    1. Mortgage transactions covered. Section 1026.39 applies to 
closed-end or open-end consumer credit transactions secured by the 
principal dwelling of a consumer.

39(b) Disclosure Required

    1. Generally. A covered person must mail or deliver the 
disclosures required by this section on or before the 30th calendar 
day following the date of transfer, unless an exception in Sec.  
1026.39(c) applies. For example, if a covered person acquires a 
mortgage loan on March 15, the disclosure must be mailed or 
delivered on or before April 14.

39(b)(1) Form of Disclosures

    1. Combining disclosures. The disclosures under this section can 
be combined with other materials or disclosures, including the 
transfer of servicing notices required by the Real Estate Settlement 
Procedure Act (12 U.S.C. 2601 et seq.) so long as the combined 
disclosure satisfies the timing and other requirements of this 
section.

39(b)(4) Multiple Transfers

    1. Single disclosure for multiple transfers. A mortgage loan 
might be acquired by a covered person and subsequently transferred 
to another entity that is also a covered person required to provide 
the disclosures under this section. In such cases, a single 
disclosure may be provided on behalf of both covered persons instead 
of providing two separate disclosures if the disclosure satisfies 
the timing and content requirements applicable to each covered 
person. For example, if a covered person acquires a loan on March 15 
with the intent to assign the loan to another entity on April 30, 
the covered person could mail the disclosure on or before April 14 
to provide the required information for both entities and indicate 
when the subsequent transfer is expected to occur.
    2. Estimating the date. When a covered person provides the 
disclosure required by this section that also describes a subsequent 
transfer, the date of the subsequent transfer may be estimated when 
the exact date is unknown at the time the disclosure is made. 
Information is unknown if it is not reasonably available to the 
covered person at the time the disclosure is made. The ``reasonably 
available'' standard requires that the covered person, acting in 
good faith, exercise due diligence in obtaining information. The 
covered person normally may rely on the representations of other 
parties in obtaining information. The covered person might make the 
disclosure using an estimated date even though the covered person 
knows that more precise information will be available in the future. 
For example, a covered person may provide a disclosure on March 31 
stating that it acquired the loan on March 15 and that a transfer to 
another entity is expected to occur ``on or around'' April 30, even 
if more precise information will be available by April 14.
    3. Duty to comply. Even though one covered person provides the 
disclosures for another covered person, each has a duty to ensure 
that disclosures related to its acquisition are accurate and 
provided in a timely manner unless an exception in Sec.  1026.39(c) 
applies.

39(b)(5) Multiple Covered Person

    1. Single disclosure required. If multiple covered persons 
jointly acquire the loan, a single disclosure must be provided on 
behalf of all covered persons instead of providing separate 
disclosures. See comment 39(a)(1)-2.ii regarding a joint acquisition 
of legal title, and comment 39(d)(1)(ii)-1 regarding the disclosure 
requirements for multiple persons that jointly acquire a loan. If 
multiple covered persons jointly acquire the loan and complete the 
acquisition on separate dates, a single disclosure must be provided 
on behalf of all persons on or before the 30th day following the 
earliest acquisition date. For examples, if covered persons A and B 
enter into an agreement with the original creditor to jointly 
acquire the loan, and complete the acquisition on March 15 and March 
25, respectively, a single disclosure must be provided on behalf of 
both persons on or before April 14. If the two acquisition dates are 
more than 30 days apart, a single disclosure must be provided on 
behalf of both persons on or before the 30th day following the 
earlier acquisition date, even though one person has not completed 
its acquisition. See comment 39(b)(4)-2 regarding use of an 
estimated date of transfer.
    2. Single disclosure not required. If multiple covered persons 
each acquire a partial interest in the loan pursuant to separate and 
unrelated agreements and not jointly, each covered person has a duty 
to ensure that disclosures related to its acquisition are accurate 
and provided in a timely manner unless an exception in Sec.  
1026.39(c) applies. The parties may, but are not required to, 
provide a single disclosure that satisfies the timing and content 
requirements applicable to each covered person.

[[Page 80017]]

    3. Timing requirements. A single disclosure provided on behalf 
of multiple covered persons must satisfy the timing and content 
requirements applicable to each covered person unless an exception 
in Sec.  1026.39(c) applies.
    4. Duty to comply. Even though one covered person provides the 
disclosures for another covered person, each has a duty to ensure 
that disclosures related to its acquisition are accurate and 
provided in a timely manner unless an exception in Sec.  1026.39(c) 
applies. See comments 39(c)(1)-2, 39(c)(3)-1 and 39(c)(3)-2 
regarding transfers of a partial interest in the mortgage loan.

39(c) Exceptions

Paragraph 39(c)(1)

    1. Transfer of all interest. A covered person is not required to 
provide the disclosures required by this section if it sells, 
assigns or otherwise transfers all of its interest in the mortgage 
loan on or before the 30th calendar day following the date that it 
acquired the loan. For example, if covered person A acquires the 
loan on March 15 and subsequently transfers all of its interest in 
the loan to covered person B on April 1, person A is not required to 
provide the disclosures required by this section. Person B, however, 
must provide the disclosures required by this section unless an 
exception in Sec.  1026.39(c) applies.
    2. Transfer of partial interests. A covered person that 
subsequently transfers a partial interest in the loan is required to 
provide the disclosures required by this section if the covered 
person retains a partial interest in the loan on the 30th calendar 
day after it acquired the loan, unless an exception in Sec.  
1026.39(c) applies. For example, if covered person A acquires the 
loan on March 15 and subsequently transfers fifty percent of its 
interest in the loan to covered person B on April 1, person A is 
required to provide the disclosures under this section if it retains 
a partial interest in the loan on April 14. Person B in this example 
must also provide the disclosures required under this section unless 
an exception in Sec.  1026.39(c) applies. Either person A or person 
B could provide the disclosure on behalf of both of them if the 
disclosure satisfies the timing and content requirements applicable 
to each of them. In this example, a single disclosure for both 
covered persons would have to be provided on or before April 14 to 
satisfy the timing requirements for person A's acquisition of the 
loan on March 15. See comment 39(b)(4)-1 regarding a single 
disclosure for multiple transfers.

Paragraph 39(c)(2)

    1. Repurchase agreements. The original creditor or owner of the 
mortgage loan might sell, assign or otherwise transfer legal title 
to the loan to secure temporary business financing under an 
agreement that obligates the original creditor or owner to 
repurchase the loan. The covered person that acquires the loan in 
connection with such a repurchase agreement is not required to 
provide disclosures under this section. However, if the transferor 
does not repurchase the mortgage loan, the acquiring party must 
provide the disclosures required by this section within 30 days 
after the date that the transaction is recognized as an acquisition 
on its books and records.
    2. Intermediary parties. The exception in Sec.  1026.39(c)(2) 
applies regardless of whether the repurchase arrangement involves an 
intermediary party. For example, legal title to the loan may 
transfer from the original creditor to party A through party B as an 
intermediary. If the original creditor is obligated to repurchase 
the loan, neither party A nor party B is required to provide the 
disclosures under this section. However, if the original creditor 
does not repurchase the loan, party A must provide the disclosures 
required by this section within 30 days after the date that the 
transaction is recognized as an acquisition on its books and records 
unless another exception in Sec.  1026.39(c) applies.

Paragraph 39(c)(3)

    1. Acquisition of partial interests. This exception applies if 
the covered person acquires only a partial interest in the loan, and 
there is no change in the agent or person authorized to receive 
notice of the right to rescind and resolve issues concerning the 
consumer's payments. If, as a result of the transfer of a partial 
interest in the loan, a different agent or party is authorized to 
receive notice of the right to rescind and resolve issues concerning 
the consumer's payments, the disclosures under this section must be 
provided.
    2. Examples. i. A covered person is not required to provide the 
disclosures under this section if it acquires a partial interest in 
the loan from the original creditor who remains authorized to 
receive the notice of the right to rescind and resolve issues 
concerning the consumer's payments after the transfer.
    ii. The original creditor transfers fifty percent of its 
interest in the loan to covered person A. Person A does not provide 
the disclosures under this section because the exception in Sec.  
1026.39(c)(3) applies. The creditor then transfers the remaining 
fifty percent of its interest in the loan to covered person B and 
does not retain any interest in the loan. Person B must provide the 
disclosures under this section.
    iii. The original creditor transfers fifty percent of its 
interest in the loan to covered person A and also authorizes party X 
as its agent to receive notice of the right to rescind and resolve 
issues concerning the consumer's payments on the loan. Since there 
is a change in an agent or party authorized to receive notice of the 
right to rescind and resolve issues concerning the consumer's 
payments, person A is required to provide the disclosures under this 
section. Person A then transfers all of its interest in the loan to 
covered person B. Person B is not required to provide the 
disclosures under this section if the original creditor retains a 
partial interest in the loan and party X retains the same authority.
    iv. The original creditor transfers all of its interest in the 
loan to covered person A. Person A provides the disclosures under 
this section and notifies the consumer that party X is authorized to 
receive notice of the right to rescind and resolve issues concerning 
the consumer's payments on the loan. Person A then transfers fifty 
percent of its interest in the loan to covered person B. Person B is 
not required to provide the disclosures under this section if person 
A retains a partial interest in the loan and party X retains the 
same authority.

39(d) Content of Required Disclosures

    1. Identifying the loan. The disclosures required by this 
section must identify the loan that was acquired or transferred. The 
covered person has flexibility in determining what information to 
provide for this purpose and may use any information that would 
reasonably inform a consumer which loan was acquired or transferred. 
For example, the covered person may identify the loan by stating:
    i. The address of the mortgaged property along with the account 
number or loan number previously disclosed to the consumer, which 
may appear in a truncated format;
    ii. The account number alone, or other identifying number, if 
that number has been previously provided to the consumer, such as on 
a statement that the consumer receives monthly; or
    iii. The date on which the credit was extended and the original 
amount of the loan or credit line.

Paragraph 39(d)(1)

    1. Identification of covered person. Section 1026.39(d)(1) 
requires a covered person to provide its name, address, and 
telephone number. The party identified must be the covered person 
who owns the mortgage loan, regardless of whether another party 
services the loan or is the covered person's agent. In addition to 
providing its name, address and telephone number, the covered person 
may, at its option, provide an address for receiving electronic mail 
or an Internet Web site address, but is not required to do so.

Paragraph 39(d)(1)(i)

    1. Multiple transfers, single disclosure. If a mortgage loan is 
acquired by a covered person and subsequently transferred to another 
covered person, a single disclosure may be provided on behalf of 
both covered persons instead of providing two separate disclosures 
as long as the disclosure satisfies the timing and content 
requirements applicable to each covered person. See comment 
39(b)(4)-1 regarding multiple transfers. A single disclosure for 
multiple transfers must state the name, address, and telephone 
number of each covered person unless Sec.  1026.39(d)(1)(ii) 
applies.

Paragraph 39(d)(1)(ii)

    1. Multiple covered persons, single disclosure. If multiple 
covered persons jointly acquire the loan, a single disclosure must 
be provided on behalf of all covered persons instead of providing 
separate disclosures. The single disclosure must provide the name, 
address, and telephone number of each covered person unless Sec.  
1026.39(d)(1)(ii) applies and one of the covered persons has been 
authorized in accordance with Sec.  1026.39(d)(3) of this section to 
receive the consumer's notice of the right to rescind and resolve 
issues concerning the consumer's payments on the

[[Page 80018]]

loan. In such cases, the information required by Sec.  1026.39(d)(1) 
may be provided only for that covered person.
    2. Multiple covered persons, multiple disclosures. If multiple 
covered persons each acquire a partial interest in the loan in 
separate transactions and not jointly, each covered person must 
comply with the disclosure requirements of this section unless an 
exception in Sec.  1026.39(c) applies. See comment 39(a)(1)-2.ii 
regarding a joint acquisition of legal title, and comment 39(b)(5)-2 
regarding the disclosure requirements for multiple covered persons.

Paragraph 39(d)(3)

    1. Identifying agents. Under Sec.  1026.39(d)(3), the covered 
person must provide the name, address and telephone number for the 
agent or other party having authority to receive the notice of the 
right to rescind and resolve issues concerning the consumer's 
payments on the loan. If multiple persons are identified under this 
paragraph, the disclosure shall provide the name, address and 
telephone number for each and indicate the extent to which the 
authority of each person differs. Section 1026.39(d)(3) does not 
require that a covered person designate an agent or other party, but 
if the consumer cannot contact the covered person for these 
purposes, the disclosure must provide the name, address and 
telephone number for an agent or other party that can address these 
matters. If an agent or other party is authorized to receive the 
notice of the right to rescind and resolve issues concerning the 
consumer's payments on the loan, the disclosure can state that the 
consumer may contact that agent regarding any questions concerning 
the consumer's account without specifically mentioning rescission or 
payment issues. However, if multiple agents are listed on the 
disclosure, the disclosure shall state the extent to which the 
authority of each agent differs by indicating if only one of the 
agents is authorized to receive notice of the right to rescind, or 
only one of the agents is authorized to resolve issues concerning 
payments.
    2. Other contact information. The covered person may also 
provide an agent's electronic mail address or Internet Web site 
address, but is not required to do so.

Paragraph 39(d)(4)

    1. Where recorded. Section 1026.39(d)(4) requires the covered 
person to disclose where transfer of ownership of the debt to the 
covered person is recorded if it has been recorded in public 
records. Alternatively, the disclosure can state that the transfer 
of ownership of the debt has not been recorded in public records at 
the time the disclosure is provided, if that is the case, or the 
disclosure can state where the transfer may later be recorded. An 
exact address is not required and it would be sufficient, for 
example, to state that the transfer of ownership is recorded in the 
office of public land records or the recorder of deeds office for 
the county or local jurisdiction where the property is located.

39(e) Optional Disclosures

    1. Generally. Section 1026.39(e) provides that covered persons 
may, at their option, include additional information about the 
mortgage transaction that they consider relevant or helpful to 
consumers. For example, the covered person may choose to inform 
consumers that the location where they should send mortgage payments 
has not changed. See comment 39(b)(1)-1 regarding combined 
disclosures.

Section 1026.40--Requirements for Home-Equity Plans

    1. Coverage. This section applies to all open-end credit plans 
secured by the consumer's dwelling, as defined in Sec.  
1026.2(a)(19), and is not limited to plans secured by the consumer's 
principal dwelling. (See the commentary to Sec.  1026.3(a), which 
discusses whether transactions are consumer or business-purpose 
credit, for guidance on whether a home equity plan is subject to 
Regulation Z.)
    2. Changes to home equity plans entered into on or after 
November 7, 1989. Section 1026.9(c) applies if, by written agreement 
under Sec.  1026.40(f)(3)(iii), a creditor changes the terms of a 
home equity plan--entered into on or after November 7, 1989--at or 
before its scheduled expiration, for example, by renewing a plan on 
different terms. A new plan results, however, if the plan is renewed 
(with or without changes to the terms) after the scheduled 
expiration. The new plan is subject to all open-end credit rules, 
including Sec. Sec.  1026.6, 1026.15, and 1026.40.
    3. Transition rules and renewals of preexisting plans. The 
requirements of this section do not apply to home equity plans 
entered into before November 7, 1989. The requirements of this 
section also do not apply if the original consumer, on or after 
November 7, 1989, renews a plan entered into prior to that date 
(with or without changes to the terms). If, on or after November 7, 
1989, a security interest in the consumer's dwelling is added to a 
line of credit entered into before that date, the substantive 
restrictions of this section apply for the remainder of the plan, 
but no new disclosures are required under this section.
    4. Disclosure of repayment phase--applicability of requirements. 
Some plans provide in the initial agreement for a period during 
which no further draws may be taken and repayment of the amount 
borrowed is made. All of the applicable disclosures in this section 
must be given for the repayment phase. Thus, for example, a creditor 
must provide payment information about the repayment phase as well 
as about the draw period, as required by Sec.  1026.40(d)(5). If the 
rate that will apply during the repayment phase is fixed at a known 
amount, the creditor must provide an annual percentage rate under 
Sec.  1026.40(d)(6) for that phase. If, however, a creditor uses an 
index to determine the rate that will apply at the time of 
conversion to the repayment phase--even if the rate will thereafter 
be fixed--the creditor must provide the information in Sec.  
1026.40(d)(12), as applicable.
    5. Payment terms--applicability of closed-end provisions and 
substantive rules. All payment terms that are provided for in the 
initial agreement are subject to the requirements of subpart B and 
not subpart C of the regulation. Payment terms that are subsequently 
added to the agreement may be subject to subpart B or to subpart C, 
depending on the circumstances. The following examples apply these 
general rules to different situations:
    i. If the initial agreement provides for a repayment phase or 
for other payment terms such as options permitting conversion of 
part or all of the balance to a fixed rate during the draw period, 
these terms must be disclosed pursuant to Sec. Sec.  1026.6 and 
1026.40, and not under subpart C. Furthermore, the creditor must 
continue to provide periodic statements under Sec.  1026.7 and 
comply with other provisions of subpart B (such as the substantive 
requirements of Sec.  1026.40(f)) throughout the plan, including the 
repayment phase.
    ii. If the consumer and the creditor enter into an agreement 
during the draw period to repay all or part of the principal balance 
on different terms (for example, with a fixed rate of interest) and 
the amount of available credit will be replenished as the principal 
balance is repaid, the creditor must continue to comply with subpart 
B. For example, the creditor must continue to provide periodic 
statements and comply with the substantive requirements of Sec.  
1026.40(f) throughout the plan.
    iii. If the consumer and creditor enter into an agreement during 
the draw period to repay all or part of the principal balance and 
the amount of available credit will not be replenished as the 
principal balance is repaid, the creditor must give closed-end 
credit disclosures pursuant to subpart C for that new agreement. In 
such cases, subpart B, including the substantive rules, does not 
apply to the closed-end credit transaction, although it will 
continue to apply to any remaining open-end credit available under 
the plan.
    6. Spreader clause. When a creditor holds a mortgage or deed of 
trust on the consumer's dwelling and that mortgage or deed of trust 
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the 
opening of an open-end plan are subject to the rules applicable to 
home equity plans to the same degree as if a security interest were 
taken directly to secure the plan, unless the creditor effectively 
waives its security interest under the spreader clause with respect 
to the subsequent open-end credit extensions.
    7. Appraisals and other valuations. For consumer credit 
transactions subject to Sec.  1026.40 and secured by the consumer's 
principal dwelling, creditors and other persons must comply with the 
requirements for appraisals and other valuations under Sec.  
1026.42.

40(a) Form of Disclosures

40(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.  
1026.6(a)(3) for special rules when disclosures required under Sec.  
1026.40(d) are given in a retainable form.)
    2. Disclosure of annual percentage rate--more conspicuous 
requirement. As provided

[[Page 80019]]

in Sec.  1026.5(a)(2), when the term annual percentage rate is 
required to be disclosed with a number, it must be more conspicuous 
than other required disclosures.
    3. Segregation of disclosures. i. While most of the disclosures 
must be grouped together and segregated from all unrelated 
information, the creditor is permitted to include information that 
explains or expands on the required disclosures, including, for 
example:
    A. Any prepayment penalty.
    B. How a substitute index may be chosen.
    C. Actions the creditor may take short of terminating and 
accelerating an outstanding balance.
    D. Renewal terms.
    E. Rebate of fees.
    ii. An example of information that does not explain or expand on 
the required disclosures and thus cannot be included is the 
creditor's underwriting criteria, although the creditor could 
provide such information separately from the required disclosures.
    4. Method of providing disclosures. A creditor may provide a 
single disclosure form for all of its home equity plans, as long as 
the disclosure describes all aspects of the plans. For example, if 
the creditor offers several payment options, all such options must 
be disclosed. (See, however, the commentary to Sec.  
1026.40(d)(5)(iii) and (d)(12) (x) and (xi) for disclosure 
requirements relating to these provisions.) If any aspects of a plan 
are linked together, the creditor must disclose clearly the 
relationship of the terms to each other. For example, if the 
consumer can only obtain a particular payment option in conjunction 
with a certain variable-rate feature, this fact must be disclosed. A 
creditor has the option of providing separate disclosure forms for 
multiple options or variations in features. For example, a creditor 
that offers different payment options for the draw period may 
prepare separate disclosure forms for the two payment options. A 
creditor using this alternative, however, must include a statement 
on each disclosure form that the consumer should ask about the 
creditor's other home equity programs. (This disclosure is required 
only for those programs available generally to the public. Thus, if 
the only other programs available are employee preferred-rate plans, 
for example, the creditor would not have to provide this statement.) 
A creditor that receives a request for information about other 
available programs must provide the additional disclosures as soon 
as reasonably possible.
    5. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by 
this section (including the brochure) on or with a blank application 
that is made available to the consumer in electronic form, such as 
on a creditor's Internet Web site. Creditors have flexibility in 
satisfying this requirement. Methods creditors could use to satisfy 
the requirement include, but are not limited to, the following 
examples (whatever method is used, a creditor need not confirm that 
the consumer has read the disclosures):
    i. The disclosures could automatically appear on the screen when 
the application appears;
    ii. The disclosures could be located on the same Web page as the 
application (whether or not they appear on the initial screen), if 
the application 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;
    iii. Creditors could provide a link to the electronic 
disclosures on or with the application as long as consumers cannot 
bypass the disclosures before submitting the application. The link 
would take the consumer to the disclosures, but the consumer need 
not be required to scroll completely through the disclosures; or
    iv. The disclosures could be located on the same Web page as the 
application without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to 
submit the application.

40(a)(2) Precedence of Certain Disclosures

    1. Precedence rule. The list of conditions provided at the 
creditor's option under Sec.  1026.40(d)(4)(iii) need not precede 
the other disclosures.

Paragraph 40(a)(3)

    1. Form of disclosures. Whether disclosures must be in 
electronic form depends upon the following:
    i. If a consumer accesses a home equity credit line application 
electronically (other than as described under ii. below), such as 
online at a home computer, the creditor must provide the disclosures 
in electronic form (such as with the application form on its Web 
site) in order to meet the requirement to provide disclosures in a 
timely manner on or with the application. If the creditor instead 
mailed paper disclosures to the consumer, this requirement would not 
be met.
    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses a home equity credit line 
application 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 creditor to 
provide applications to consumers), the creditor may provide 
disclosures in either electronic or paper form, provided the 
creditor complies with the timing, delivery, and retainability 
requirements of the regulation.

40(b) Time of Disclosures

    1. Mail and telephone applications. If the creditor sends 
applications through the mail, the disclosures and a brochure must 
accompany the application. If an application is taken over the 
telephone, the disclosures and brochure may be delivered or mailed 
within three business days of taking the application. If an 
application is mailed to the consumer following a telephone request, 
however, the creditor also must send the disclosures and a brochure 
along with the application.
    2. General purpose applications. The disclosures and a brochure 
need not be provided when a general purpose application is given to 
a consumer unless (1) the application or materials accompanying it 
indicate that it can be used to apply for a home equity plan or (2) 
the application is provided in response to a consumer's specific 
inquiry about a home equity plan. On the other hand, if a general 
purpose application is provided in response to a consumer's specific 
inquiry only about credit other than a home equity plan, the 
disclosures and brochure need not be provided even if the 
application indicates it can be used for a home equity plan, unless 
it is accompanied by promotional information about home equity 
plans.
    3. Publicly-available applications. Some creditors make 
applications for home equity plans, such as take-ones, available 
without the need for a consumer to request them. These applications 
must be accompanied by the disclosures and a brochure, such as by 
attaching the disclosures and brochure to the application form.
    4. Response cards. A creditor may solicit consumers for its home 
equity plan by mailing a response card which the consumer returns to 
the creditor to indicate interest in the plan. If the only action 
taken by the creditor upon receipt of the response card is to send 
the consumer an application form or to telephone the consumer to 
discuss the plan, the creditor need not send the disclosures and 
brochure with the response card.
    5. Denial or withdrawal of application. In situations where 
Sec.  1026.40(b) permits the creditor a three-day delay in providing 
disclosures and the brochure, if the creditor determines within that 
period that an application will not be approved, the creditor need 
not provide the consumer with the disclosures or brochure. 
Similarly, if the consumer withdraws the application within this 
three-day period, the creditor need not provide the disclosures or 
brochure.
    6. Intermediary agent or broker. In determining whether or not 
an application involves an intermediary agent or broker as discussed 
in Sec.  1026.40(b), creditors should consult the provisions in 
comment 19(b)-3.

40(c) Duties of Third Parties

    1. Disclosure requirements. Although third parties who give 
applications to consumers for home equity plans must provide the 
brochure required under Sec.  1026.40(e) in all cases, such persons 
need provide the disclosures required under Sec.  1026.40(d) only in 
certain instances. A third party has no duty to obtain disclosures 
about a creditor's home equity plan or to create a set of 
disclosures based on what it knows about a creditor's plan. If, 
however, a creditor provides the third party with disclosures along 
with its application form, the third party must give the disclosures 
to the consumer with the application form. The duties under this 
section are those of the third party; the creditor is not 
responsible for ensuring that a third party complies with those 
obligations. If an intermediary agent or broker takes an application 
over the telephone or receives an application contained in a 
magazine or other publication, Sec.  1026.40(c) permits that person 
to mail the disclosures and brochure within three business days of 
receipt of the application. (See the commentary to Sec.  1026.40(h) 
about imposition of nonrefundable fees.)

40(d) Content of Disclosures

    1. Disclosures given as applicable. The disclosures required 
under this section need

[[Page 80020]]

be made only as applicable. Thus, for example, if negative 
amortization cannot occur in a home equity plan, a reference to it 
need not be made.
    2. Duty to respond to requests for information. If the consumer, 
prior to the opening of a plan, requests information as suggested in 
the disclosures (such as the current index value or margin), the 
creditor must provide this information as soon as reasonably 
possible after the request.

40(d)(1) Retention of Information

    1. When disclosure not required. The creditor need not disclose 
that the consumer should make or otherwise retain a copy of the 
disclosures if they are retainable--for example, if the disclosures 
are not part of an application that must be returned to the creditor 
to apply for the plan.

40(d)(2) Conditions for Disclosed Terms

Paragraph 40(d)(2)(i)

    1. Guaranteed terms. The requirement that the creditor disclose 
the time by which an application must be submitted to obtain the 
disclosed terms does not require the creditor to guarantee any 
terms. If a creditor chooses not to guarantee any terms, it must 
disclose that all of the terms are subject to change prior to 
opening the plan. The creditor also is permitted to guarantee some 
terms and not others, but must indicate which terms are subject to 
change.
    2. Date for obtaining disclosed terms. The creditor may disclose 
either a specific date or a time period for obtaining the disclosed 
terms. If the creditor discloses a time period, the consumer must be 
able to determine from the disclosure the specific date by which an 
application must be submitted to obtain any guaranteed terms. For 
example, the disclosure might read, ``To obtain the following terms, 
you must submit your application within 60 days after the date 
appearing on this disclosure,'' provided the disclosure form also 
shows the date.

Paragraph 40(d)(2)(ii)

    1. Relation to other provisions. Creditors should consult the 
rules in Sec.  1026.40(g) regarding refund of fees.

40(d)(4) Possible Actions by Creditor

Paragraph 40(d)(4)(i)

    1. Fees imposed upon termination. This disclosure applies only 
to fees (such as penalty or prepayment fees) that the creditor 
imposes if it terminates the plan prior to normal expiration. The 
disclosure does not apply to fees that are imposed either when the 
plan expires in accordance with the agreement or if the consumer 
terminates the plan prior to its scheduled maturity. In addition, 
the disclosure does not apply to fees associated with collection of 
the debt, such as attorneys fees and court costs, or to increases in 
the annual percentage rate linked to the consumer's failure to make 
payments. The actual amount of the fee need not be disclosed.
    2. Changes specified in the initial agreement. If changes may 
occur pursuant to Sec.  1026.40(f)(3)(i), a creditor must state that 
certain changes will be implemented as specified in the initial 
agreement.

Paragraph 40(d)(4)(iii)

    1. Disclosure of conditions. In making this disclosure, the 
creditor may provide a highlighted copy of the document that 
contains such information, such as the contract or security 
agreement. The relevant items must be distinguished from the other 
information contained in the document. For example, the creditor may 
provide a cover sheet that specifically points out which contract 
provisions contain the information, or may mark the relevant items 
on the document itself. As an alternative to disclosing the 
conditions in this manner, the creditor may simply describe the 
conditions using the language in Sec. Sec.  1026.40(f)(2)(i)-(iii), 
1026.40(f)(3)(i) (regarding freezing the line when the maximum 
annual percentage rate is reached), and 1026.40(f)(3)(vi) or 
language that is substantially similar. The condition contained in 
Sec.  1026.40(f)(2)(iv) need not be stated. In describing specified 
changes that may be implemented during the plan, the creditor may 
provide a disclosure such as ``Our agreement permits us to make 
certain changes to the terms of the line at specified times or upon 
the occurrence of specified events.''
    2. Form of disclosure. The list of conditions under Sec.  
1026.40(d)(4)(iii) may appear with the segregated disclosures or 
apart from them. If the creditor elects to provide the list of 
conditions with the segregated disclosures, the list need not comply 
with the precedence rule in Sec.  1026.40(a)(2).

40(d)(5) Payment Terms

Paragraph 40(d)(5)(i)

    1. Length of the plan. The combined length of the draw period 
and any repayment period need not be stated. If the length of the 
repayment phase cannot be determined because, for example, it 
depends on the balance outstanding at the beginning of the repayment 
period, the creditor must state that the length is determined by the 
size of the balance. If the length of the plan is indefinite (for 
example, because there is no time limit on the period during which 
the consumer can take advances), the creditor must state that fact.
    2. Renewal provisions. If, under the credit agreement, a 
creditor retains the right to review a line at the end of the 
specified draw period and determine whether to renew or extend the 
draw period of the plan, the possibility of renewal or extension--
regardless of its likelihood--should be ignored for purposes of the 
disclosures. For example, if an agreement provides that the draw 
period is five years and that the creditor may renew the draw period 
for an additional five years, the possibility of renewal should be 
ignored and the draw period should be considered five years. (See 
the commentary accompanying Sec.  1026.9(c)(1) dealing with change 
in terms requirements.)

Paragraph 40(d)(5)(ii)

    1. Determination of the minimum periodic payment. This 
disclosure must reflect how the minimum periodic payment is 
determined, but need only describe the principal and interest 
components of the payment. Other charges that may be part of the 
payment (as well as the balance computation method) may, but need 
not, be described under this provision.
    2. Fixed rate and term payment options during draw period. If 
the home equity plan permits the consumer to repay all or part of 
the balance during the draw period at a fixed rate (rather than a 
variable rate) and over a specified time period, this feature must 
be disclosed. To illustrate, a variable-rate plan may permit a 
consumer to elect during a ten-year draw period to repay all or a 
portion of the balance over a three-year period at a fixed rate. The 
creditor must disclose the rules relating to this feature including 
the period during which the option can be selected, the length of 
time over which repayment can occur, any fees imposed for such a 
feature, and the specific rate or a description of the index and 
margin that will apply upon exercise of this choice. For example, 
the index and margin disclosure might state: ``If you choose to 
convert any portion of your balance to a fixed rate, the rate will 
be the highest prime rate published in the `Wall Street Journal' 
that is in effect at the date of conversion plus a margin.'' If the 
fixed rate is to be determined according to an index, it must be one 
that is outside the creditor's control and is publicly available in 
accordance with Sec.  1026.40(f)(1). The effect of exercising the 
option should not be reflected elsewhere in the disclosures, such as 
in the historical example required in Sec.  1026.40(d)(12)(xi).
    3. Balloon payments. In programs where the occurrence of a 
balloon payment is possible, the creditor must disclose the 
possibility of a balloon payment even if such a payment is uncertain 
or unlikely. In such cases, the disclosure might read, ``Your 
minimum payments may not be sufficient to fully repay the principal 
that is outstanding on your line. If they are not, you will be 
required to pay the entire outstanding balance in a single 
payment.'' In programs where a balloon payment will occur, such as 
programs with interest-only payments during the draw period and no 
repayment period, the disclosures must state that fact. For example, 
the disclosure might read, ``Your minimum payments will not repay 
the principal that is outstanding on your line. You will be required 
to pay the entire outstanding balance in a single payment.'' In 
making this disclosure, the creditor is not required to use the term 
``balloon payment.'' The creditor also is not required to disclose 
the amount of the balloon payment. (See, however, the requirement 
under Sec.  1026.40(d)(5)(iii).) The balloon payment disclosure does 
not apply in cases where repayment of the entire outstanding balance 
would occur only as a result of termination and acceleration. The 
creditor also need not make a disclosure about balloon payments if 
the final payment could not be more than twice the amount of other 
minimum payments under the plan.

Paragraph 40(d)(5)(iii)

    1. Minimum periodic payment example. In disclosing the payment 
example, the creditor may assume that the credit limit as well as 
the outstanding balance is $10,000 if such an assumption is relevant 
to calculating payments. (If the creditor only offers lines of

[[Page 80021]]

credit for less than $10,000, the creditor may assume an outstanding 
balance of $5,000 instead of $10,000 in making this disclosure.) The 
example should reflect the payment comprised only of principal and 
interest. Creditors may provide an additional example reflecting 
other charges that may be included in the payment, such as credit 
insurance premiums. Creditors may assume that all months have an 
equal number of days, that payments are collected in whole cents, 
and that payments will fall on a business day even though they may 
be due on a non-business day. For variable-rate plans, the example 
must be based on the last rate in the historical example required in 
Sec.  1026.40(d)(12)(xi), or a more recent rate. In cases where the 
last rate shown in the historical example is different from the 
index value and margin (for example, due to a rate cap), creditors 
should calculate the rate by using the index value and margin. A 
discounted rate may not be considered a more recent rate in 
calculating this payment example for either variable- or fixed-rate 
plans.
    2. Representative examples. i. In plans with multiple payment 
options within the draw period or within any repayment period, the 
creditor may provide representative examples as an alternative to 
providing examples for each payment option. The creditor may elect 
to provide representative payment examples based on three categories 
of payment options. The first category consists of plans that permit 
minimum payment of only accrued finance charges (interest only 
plans). The second category includes plans in which a fixed 
percentage or a fixed fraction of the outstanding balance or credit 
limit (for example, 2% of the balance or 1/180th of the balance) is 
used to determine the minimum payment. The third category includes 
all other types of minimum payment options, such as a specified 
dollar amount plus any accrued finance charges. Creditors may 
classify their minimum payment arrangements within one of these 
three categories even if other features exist, such as varying 
lengths of a draw or repayment period, required payment of past due 
amounts, late charges, and minimum dollar amounts. The creditor may 
use a single example within each category to represent the payment 
options in that category. For example, if a creditor permits minimum 
payments of 1%, 2%, 3% or 4% of the outstanding balance, it may pick 
one of these four options and provide the example required under 
Sec.  1026.40(d)(5)(iii) for that option alone.
    ii. The example used to represent a category must be an option 
commonly chosen by consumers, or a typical or representative 
example. (See the commentary to Sec.  1026.40(d)(12)(x) and (xi) for 
a discussion of the use of representative examples for making those 
disclosures. Creditors using a representative example within each 
category must use the same example for purposes of the disclosures 
under Sec.  1026.40(d)(5)(iii) and (d)(12)(x) and (xi).) Creditors 
may use representative examples under Sec.  1026.40(d)(5) only with 
respect to the payment example required under paragraph (d)(5)(iii). 
Creditors must provide a full narrative description of all payment 
options under Sec.  1026.40(d)(5)(i) and (ii).
    3. Examples for draw and repayment periods. Separate examples 
must be given for the draw and repayment periods unless the payments 
are determined the same way during both periods. In setting forth 
payment examples for any repayment period under this section (and 
the historical example under Sec.  1026.40(d)(12)(xi)), creditors 
should assume a $10,000 advance is taken at the beginning of the 
draw period and is reduced according to the terms of the plan. 
Creditors should not assume an additional advance is taken at any 
time, including at the beginning of any repayment period.
    4. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, in addition to 
permitting the consumer to obtain advances, may involve the 
disbursement of monthly advances to the consumer for a fixed period 
or until the occurrence of an event such as the consumer's death. 
Repayment of the reverse mortgage (generally a single payment of 
principal and accrued interest) may be required to be made at the 
end of the disbursements or, for example, upon the death of the 
consumer. In disclosing these plans, creditors must apply the 
following rules, as applicable:
    i. If the reverse mortgage has a specified period for advances 
and disbursements but repayment is due only upon occurrence of a 
future event such as the death of the consumer, the creditor must 
assume that disbursements will be made until they are scheduled to 
end. The creditor must assume repayment will occur when 
disbursements end (or within a period following the final 
disbursement which is not longer than the regular interval between 
disbursements). This assumption should be used even though repayment 
may occur before or after the disbursements are scheduled to end. In 
such cases, the creditor may include a statement such as ``The 
disclosures assume that you will repay the line at the time the draw 
period and our payments to you end. As provided in your agreement, 
your repayment may be required at a different time.'' The single 
payment should be considered the ``minimum periodic payment'' and 
consequently would not be treated as a balloon payment. The example 
of the minimum payment under Sec.  1026.40(d)(5)(iii) should assume 
a single $10,000 draw.
    ii. If the reverse mortgage has neither a specified period for 
advances or disbursements nor a specified repayment date and these 
terms will be determined solely by reference to future events, 
including the consumer's death, the creditor may assume that the 
draws and disbursements will end upon the consumer's death 
(estimated by using actuarial tables, for example) and that 
repayment will be required at the same time (or within a period 
following the date of the final disbursement which is not longer 
than the regular interval for disbursements). Alternatively, the 
creditor may base the disclosures upon another future event it 
estimates will be most likely to occur first. (If terms will be 
determined by reference to future events which do not include the 
consumer's death, the creditor must base the disclosures upon the 
occurrence of the event estimated to be most likely to occur first.)
    iii. In making the disclosures, the creditor must assume that 
all draws and disbursements and accrued interest will be paid by the 
consumer. For example, if the note has a non-recourse provision 
providing that the consumer is not obligated for an amount greater 
than the value of the house, the creditor must nonetheless assume 
that the full amount to be drawn or disbursed will be repaid. In 
this case, however, the creditor may include a statement such as 
``The disclosures assume full repayment of the amount advanced plus 
accrued interest, although the amount you may be required to pay is 
limited by your agreement.''
    iv. Some reverse mortgages provide that some or all of the 
appreciation in the value of the property will be shared between the 
consumer and the creditor. The creditor must disclose the 
appreciation feature, including describing how the creditor's share 
will be determined, any limitations, and when the feature may be 
exercised.

40(d)(6) Annual Percentage Rate

    1. Preferred-rate plans. If a creditor offers a preferential 
fixed-rate plan in which the rate will increase a specified amount 
upon the occurrence of a specified event, the creditor must disclose 
the specific amount the rate will increase.

40(d)(7) Fees Imposed by Creditor

    1. Applicability. The fees referred to in Sec.  1026.40(d)(7) 
include items such as application fees, points, annual fees, 
transaction fees, fees to obtain checks to access the plan, and fees 
imposed for converting to a repayment phase that is provided for in 
the original agreement. This disclosure includes any fees that are 
imposed by the creditor to use or maintain the plan, whether the 
fees are kept by the creditor or a third party. For example, if a 
creditor requires an annual credit report on the consumer and 
requires the consumer to pay this fee to the creditor or directly to 
the third party, the fee must be specifically stated. Third party 
fees to open the plan that are initially paid by the consumer to the 
creditor may be included in this disclosure or in the disclosure 
under Sec.  1026.40(d)(8).
    2. Manner of describing fees. Charges may be stated as an 
estimated dollar amount for each fee, or as a percentage of a 
typical or representative amount of credit. The creditor may provide 
a stepped fee schedule in which a fee will increase a specified 
amount at a specified date. (See the discussion contained in the 
commentary to Sec.  1026.40(f)(3)(i).)
    3. Fees not required to be disclosed. Fees that are not imposed 
to open, use, or maintain a plan, such as fees for researching an 
account, photocopying, paying late, stopping payment, having a check 
returned, exceeding the credit limit, or closing out an account do 
not have to be disclosed under this section. Credit report and 
appraisal fees imposed to investigate whether a condition permitting 
a freeze continues to exist--as discussed in the commentary to Sec.  
1026.40(f)(3)(vi)--are not required to be disclosed under this 
section or Sec.  1026.40(d)(8).

[[Page 80022]]

    4. Rebates of closing costs. If closing costs are imposed they 
must be disclosed, regardless of whether such costs may be rebated 
later (for example, rebated to the extent of any interest paid 
during the first year of the plan).
    5. Terms used in disclosure. Creditors need not use the terms 
finance charge or other charge in describing the fees imposed by the 
creditor under this section or those imposed by third parties under 
Sec.  1026.40(d)(8).

40(d)(8) Fees Imposed by Third Parties to Open a Plan

    1. Applicability. Section 1026.40(d)(8) applies only to fees 
imposed by third parties to open the plan. Thus, for example, this 
section does not require disclosure of a fee imposed by a government 
agency at the end of a plan to release a security interest. Fees to 
be disclosed include appraisal, credit report, government agency, 
and attorneys fees. In cases where property insurance is required by 
the creditor, the creditor either may disclose the amount of the 
premium or may state that property insurance is required. For 
example, the disclosure might state, ``You must carry insurance on 
the property that secures this plan.''
    2. Itemization of third-party fees. In all cases creditors must 
state the total of third-party fees as a single dollar amount or a 
range except that the total need not include costs for property 
insurance if the creditor discloses that such insurance is required. 
A creditor has two options with regard to providing the more 
detailed information about third party fees. Creditors may provide a 
statement that the consumer may request more specific cost 
information about third party fees from the creditor. As an 
alternative to including this statement, creditors may provide an 
itemization of such fees (by type and amount) with the early 
disclosures. Any itemization provided upon the consumer's request 
need not include a disclosure about property insurance.
    3. Manner of describing fees. A good faith estimate of the 
amount of fees must be provided. Creditors may provide, based on a 
typical or representative amount of credit, a range for such fees or 
state the dollar amount of such fees. Fees may be expressed on a 
unit cost basis, for example, $5 per $1,000 of credit.
    4. Rebates of third party fees. Even if fees imposed by third 
parties may be rebated, they must be disclosed. (See the commentary 
to Sec.  1026.40(d)(7).)

40(d)(9) Negative Amortization

    1. Disclosure required. In transactions where the minimum 
payment will not or may not be sufficient to cover the interest that 
accrues on the outstanding balance, the creditor must disclose that 
negative amortization will or may occur. This disclosure is required 
whether or not the unpaid interest is added to the outstanding 
balance upon which interest is computed. A disclosure is not 
required merely because a loan calls for non-amortizing or partially 
amortizing payments.

40(d)(10) Transaction Requirements

    1. Applicability. A limitation on automated teller machine usage 
need not be disclosed under this paragraph unless that is the only 
means by which the consumer can obtain funds.

40(d)(12) Disclosures for Variable-Rate Plans

    1. Variable-rate provisions. Sample forms in Appendix G-14 
provide illustrative guidance on the variable-rate rules.

Paragraph 40(d)(12)(iv)

    1. Determination of annual percentage rate. If the creditor 
adjusts its index through the addition of a margin, the disclosure 
might read, ``Your annual percentage rate is based on the index plus 
a margin.'' The creditor is not required to disclose a specific 
value for the margin.

Paragraph 40(d)(12)(viii)

    1. Preferred-rate provisions. This paragraph requires disclosure 
of preferred-rate provisions, where the rate will increase upon the 
occurrence of some event, such as the borrower-employee leaving the 
creditor's employ or the consumer closing an existing deposit 
account with the creditor.
    2. Provisions on conversion to fixed rates. The commentary to 
Sec.  1026.40(d)(5)(ii) discusses the disclosure requirements for 
options permitting the consumer to convert from a variable rate to a 
fixed rate.

Paragraph 40(d)(12)(ix)

    1. Periodic limitations on increases in rates. The creditor must 
disclose any annual limitations on increases in the annual 
percentage rate. If the creditor bases its rate limitation on 12 
monthly billing cycles, such a limitation should be treated as an 
annual cap. Rate limitations imposed on less than an annual basis 
must be stated in terms of a specific amount of time. For example, 
if the creditor imposes rate limitations on only a semiannual basis, 
this must be expressed as a rate limitation for a six-month time 
period. If the creditor does not impose periodic limitations (annual 
or shorter) on rate increases, the fact that there are no annual 
rate limitations must be stated.
    2. Maximum limitations on increases in rates. The maximum annual 
percentage rate that may be imposed under each payment option over 
the term of the plan (including the draw period and any repayment 
period provided for in the initial agreement) must be provided. The 
creditor may disclose this rate as a specific number (for example, 
18%) or as a specific amount above the initial rate. For example, 
this disclosure might read, ``The maximum annual percentage rate 
that can apply to your line will be 5 percentage points above your 
initial rate.'' If the creditor states the maximum rate as a 
specific amount above the initial rate, the creditor must include a 
statement that the consumer should inquire about the rate 
limitations that are currently available. If an initial discount is 
not taken into account in applying maximum rate limitations, that 
fact must be disclosed. If separate overall limitations apply to 
rate increases resulting from events such as the exercise of a 
fixed-rate conversion option or leaving the creditor's employ, those 
limitations also must be stated. Limitations do not include legal 
limits in the nature of usury or rate ceilings under state or 
Federal statutes or regulations.
    3. Form of disclosures. The creditor need not disclose each 
periodic or maximum rate limitation that is currently available. 
Instead, the creditor may disclose the range of the lowest and 
highest periodic and maximum rate limitations that may be applicable 
to the creditor's home equity plans. Creditors using this 
alternative must include a statement that the consumer should 
inquire about the rate limitations that are currently available.

Paragraph 40(d)(12)(x)

    1. Maximum rate payment example. In calculating the payment 
creditors should assume the maximum rate is in effect. Any 
discounted or premium initial rates or periodic rate limitations 
should be ignored for purposes of this disclosure. If a range is 
used to disclose the maximum cap under Sec.  1026.40(d)(12)(ix), the 
highest rate in the range must be used for the disclosure under this 
paragraph. As an alternative to making disclosures based on each 
payment option, the creditor may choose a representative example 
within the three categories of payment options upon which to base 
this disclosure. (See the commentary to Sec.  1026.40(d)(5).) 
However, separate examples must be provided for the draw period and 
for any repayment period unless the payment is determined the same 
way in both periods. Creditors should calculate the example for the 
repayment period based on an assumed $10,000 balance. (See the 
commentary to Sec.  1026.40(d)(5) for a discussion of the 
circumstances in which a creditor may use a lower outstanding 
balance.)
    2. Time the maximum rate could be reached. In stating the date 
or time when the maximum rate could be reached, creditors should 
assume the rate increases as rapidly as possible under the plan. In 
calculating the date or time, creditors should factor in any 
discounted or premium initial rates and periodic rate limitations. 
This disclosure must be provided for the draw phase and any 
repayment phase. Creditors should assume the index and margin shown 
in the last year of the historical example (or a more recent rate) 
is in effect at the beginning of each phase.

Paragraph 40(d)(12)(xi)

    1. Index movement. Index values and annual percentage rates must 
be shown for the entire 15 years of the historical example and must 
be based on the most recent 15 years. The example must be updated 
annually to reflect the most recent 15 years of index values as soon 
as reasonably possible after the new index value becomes available. 
If the values for an index have not been available for 15 years, a 
creditor need only go back as far as the values have been available 
and may start the historical example at the year for which values 
are first available.
    2. Selection of index values. The historical example must 
reflect the method of choosing index values for the plan. For 
example, if an average of index values is used in the plan, averages 
must be used in the example, but if an index value as of a 
particular date is used, a single index value must be shown. The 
creditor is required to assume one date (or one period, if an 
average is used) within a year on which to base the history of index

[[Page 80023]]

values. The creditor may choose to use index values as of any date 
or period as long as the index value as of this date or period is 
used for each year in the example. Only one index value per year 
need be shown, even if the plan provides for adjustments to the 
annual percentage rate or payment more than once in a year. In such 
cases, the creditor can assume that the index rate remained constant 
for the full year for the purpose of calculating the annual 
percentage rate and payment.
    3. Selection of margin. A value for the margin must be assumed 
in order to prepare the example. A creditor may select a 
representative margin that it has used with the index during the six 
months preceding preparation of the disclosures and state that the 
margin is one that it has used recently. The margin selected may be 
used until the creditor annually updates the disclosure form to 
reflect the most recent 15 years of index values.
    4. Amount of discount or premium. In reflecting any discounted 
or premium initial rate, the creditor may select a discount or 
premium that it has used during the six months preceding preparation 
of the disclosures, and should disclose that the discount or premium 
is one that the creditor has used recently. The discount or premium 
should be reflected in the example for as long as it is in effect. 
The creditor may assume that a discount or premium that would have 
been in effect for any part of a year was in effect for the full 
year for purposes of reflecting it in the historical example.
    5. Rate limitations. Limitations on both periodic and maximum 
rates must be reflected in the historical example. If ranges of rate 
limitations are provided under Sec.  1026.40(d)(12)(ix), the highest 
rates provided in those ranges must be used in the example. Rate 
limitations that may apply more often than annually should be 
treated as if they were annual limitations. For example, if a 
creditor imposes a 1% cap every six months, this should be reflected 
in the example as if it were a 2% annual cap.
    6. Assumed advances. The creditor should assume that the $10,000 
balance is an advance taken at the beginning of the first billing 
cycle and is reduced according to the terms of the plan, and that 
the consumer takes no subsequent draws. As discussed in the 
commentary to Sec.  1026.40(d)(5), creditors should not assume an 
additional advance is taken at the beginning of any repayment 
period. If applicable, the creditor may assume the $10,000 is both 
the advance and the credit limit. (See the commentary to Sec.  
1026.40(d)(5) for a discussion of the circumstances in which a 
creditor may use a lower outstanding balance.)
    7. Representative payment options. The creditor need not provide 
an historical example for all of its various payment options, but 
may select a representative payment option within each of the three 
categories of payments upon which to base its disclosure. (See the 
commentary to Sec.  1026.40(d)(5).)
    8. Payment information. i. The payment figures in the historical 
example must reflect all significant program terms. For example, 
features such as rate and payment caps, a discounted initial rate, 
negative amortization, and rate carryover must be taken into account 
in calculating the payment figures if these would have applied to 
the plan. The historical example should include payments for as much 
of the length of the plan as would occur during a 15-year period. 
For example:
    A. If the draw period is 10 years and the repayment period is 15 
years, the example should illustrate the entire 10-year draw period 
and the first 5 years of the repayment period.
    B. If the length of the draw period is 15 years and there is a 
15-year repayment phase, the historical example must reflect the 
payments for the 15-year draw period and would not show any of the 
repayment period. No additional historical example would be required 
to reflect payments for the repayment period.
    C. If the length of the plan is less than 15 years, payments in 
the historical example need only be shown for the number of years in 
the term. In such cases, however, the creditor must show the index 
values, margin and annual percentage rates and continue to reflect 
all significant plan terms such as rate limitations for the entire 
15 years.
    ii. A creditor need show only a single payment per year in the 
example, even though payments may vary during a year. The 
calculations should be based on the actual payment computation 
formula, although the creditor may assume that all months have an 
equal number of days. The creditor may assume that payments are made 
on the last day of the billing cycle, the billing date or the 
payment due date, but must be consistent in the manner in which the 
period used to illustrate payment information is selected. 
Information about balloon payments and remaining balance may, but 
need not, be reflected in the example.
    9. Disclosures for repayment period. The historical example must 
reflect all features of the repayment period, including the 
appropriate index values, margin, rate limitations, length of the 
repayment period, and payments. For example, if different indices 
are used during the draw and repayment periods, the index values for 
that portion of the 15 years that reflect the repayment period must 
be the values for the appropriate index.
    10. Reverse mortgages. The historical example for reverse 
mortgages should reflect 15 years of index values and annual 
percentage rates, but the payment column should be blank until the 
year that the single payment will be made, assuming that payment is 
estimated to occur within 15 years. (See the commentary to Sec.  
1026.40(d)(5) for a discussion of reverse mortgages.)

40(e) Brochure

    1. Substitutes. A brochure is a suitable substitute for the home 
equity brochure, ``What You Should Know About Home Equity Lines of 
Credit,'' (available on the Bureau's Web site) if it is, at a 
minimum, comparable to that brochure in substance and 
comprehensiveness. Creditors are permitted to provide more detailed 
information than is contained in that brochure.
    2. Effect of third party delivery of brochure. If a creditor 
determines that a third party has provided a consumer with the 
required brochure pursuant to Sec.  1026.40(c), the creditor need 
not give the consumer a second brochure.

40(f) Limitations on Home Equity Plans

    1. Coverage. Section 1026.40(f) limits both actions that may be 
taken and language that may be included in contracts, and applies to 
any assignee or holder as well as to the original creditor. The 
limitations apply to the draw period and any repayment period, and 
to any renewal or modification of the original agreement.

Paragraph 40(f)(1)

    1. External index. A creditor may change the annual percentage 
rate for a plan only if the change is based on an index outside the 
creditor's control. Thus, a creditor may not make rate changes based 
on its own prime rate or cost of funds and may not reserve a 
contractual right to change rates at its discretion. A creditor is 
permitted, however, to use a published prime rate, such as that in 
the Wall Street Journal, even if the bank's own prime rate is one of 
several rates used to establish the published rate.
    2. Publicly available. The index must be available to the 
public. A publicly available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain 
(by telephone, for example) and use to verify rates imposed under 
the plan.
    3. Provisions not prohibited. This paragraph does not prohibit 
rate changes that are specifically set forth in the agreement. For 
example, stepped-rate plans, in which specified rates are imposed 
for specified periods, are permissible. In addition, preferred-rate 
provisions, in which the rate increases by a specified amount upon 
the occurrence of a specified event, also are permissible.

Paragraph 40(f)(2)

    1. Limitations on termination and acceleration. In general, 
creditors are prohibited from terminating and accelerating payment 
of the outstanding balance before the scheduled expiration of a 
plan. However, creditors may take these actions in the four 
circumstances specified in Sec.  1026.40(f)(2). Creditors are not 
permitted to specify in their contracts any other events that allow 
termination and acceleration beyond those permitted by the 
regulation. Thus, for example, an agreement may not provide that the 
balance is payable on demand nor may it provide that the account 
will be terminated and the balance accelerated if the rate cap is 
reached.
    2. Other actions permitted. If an event permitting termination 
and acceleration occurs, a creditor may instead take actions short 
of terminating and accelerating. For example, a creditor could 
temporarily or permanently suspend further advances, reduce the 
credit limit, change the payment terms, or require the consumer to 
pay a fee. A creditor also may provide in its agreement that a 
higher rate or higher fees will apply in circumstances under which 
it would otherwise be permitted to terminate the plan and accelerate 
the balance. A creditor that does not immediately terminate an 
account and accelerate payment or take another

[[Page 80024]]

permitted action may take such action at a later time, provided one 
of the conditions permitting termination and acceleration exists at 
that time.

Paragraph 40(f)(2)(i)

    1. Fraud or material misrepresentation. A creditor may terminate 
a plan and accelerate the balance if there has been fraud or 
material misrepresentation by the consumer in connection with the 
plan. This exception includes fraud or misrepresentation at any 
time, either during the application process or during the draw 
period and any repayment period. What constitutes fraud or 
misrepresentation is determined by applicable state law and may 
include acts of omission as well as overt acts, as long as any 
necessary intent on the part of the consumer exists.

Paragraph 40(f)(2)(ii)

    1. Failure to meet repayment terms. A creditor may terminate a 
plan and accelerate the balance when the consumer fails to meet the 
repayment terms provided for in the agreement. However, a creditor 
may terminate and accelerate under this provision only if the 
consumer actually fails to make payments. For example, a creditor 
may not terminate and accelerate if the consumer, in error, sends a 
payment to the wrong location, such as a branch rather than the main 
office of the creditor. If a consumer files for or is placed in 
bankruptcy, the creditor may terminate and accelerate under this 
provision if the consumer fails to meet the repayment terms of the 
agreement. This section does not override any state or other law 
that requires a right-to-cure notice, or otherwise places a duty on 
the creditor before it can terminate a plan and accelerate the 
balance.

Paragraph 40(f)(2)(iii)

    1. Impairment of security. A creditor may terminate a plan and 
accelerate the balance if the consumer's action or inaction 
adversely affects the creditor's security for the plan, or any right 
of the creditor in that security. Action or inaction by third 
parties does not, in itself, permit the creditor to terminate and 
accelerate.
    2. Examples. i. A creditor may terminate and accelerate, for 
example, if:
    A. The consumer transfers title to the property or sells the 
property without the permission of the creditor.
    B. The consumer fails to maintain required insurance on the 
dwelling.
    C. The consumer fails to pay taxes on the property.
    D. The consumer permits the filing of a lien senior to that held 
by the creditor.
    E. The sole consumer obligated on the plan dies.
    F. The property is taken through eminent domain.
    G. A prior lienholder forecloses.
    ii. By contrast, the filing of a judgment against the consumer 
would permit termination and acceleration only if the amount of the 
judgment and collateral subject to the judgment is such that the 
creditor's security is adversely affected. If the consumer commits 
waste or otherwise destructively uses or fails to maintain the 
property such that the action adversely affects the security, the 
plan may be terminated and the balance accelerated. Illegal use of 
the property by the consumer would permit termination and 
acceleration if it subjects the property to seizure. If one of two 
consumers obligated on a plan dies the creditor may terminate the 
plan and accelerate the balance if the security is adversely 
affected. If the consumer moves out of the dwelling that secures the 
plan and that action adversely affects the security, the creditor 
may terminate a plan and accelerate the balance.

Paragraph 40(f)(3)

    1. Scope of provision. In general, a creditor may not change the 
terms of a plan after it is opened. For example, a creditor may not 
increase any fee or impose a new fee once the plan has been opened, 
even if the fee is charged by a third party, such as a credit 
reporting agency, for a service. The change of terms prohibition 
applies to all features of a plan, not only those required to be 
disclosed under this section. For example, this provision applies to 
charges imposed for late payment, although this fee is not required 
to be disclosed under Sec.  1026.40(d)(7).
    2. Charges not covered. There are three charges not covered by 
this provision. A creditor may pass on increases in taxes since such 
charges are imposed by a governmental body and are beyond the 
control of the creditor. In addition, a creditor may pass on 
increases in premiums for property insurance that are excluded from 
the finance charge under Sec.  1026.4(d)(2), since such insurance 
provides a benefit to the consumer independent of the use of the 
line and is often maintained notwithstanding the line. A creditor 
also may pass on increases in premiums for credit insurance that are 
excluded from the finance charge under Sec.  1026.4(d)(1), since the 
insurance is voluntary and provides a benefit to the consumer.

Paragraph 40(f)(3)(i)

    1. Changes provided for in agreement. A creditor may provide in 
the initial agreement that further advances will be prohibited or 
the credit line reduced during any period in which the maximum 
annual percentage rate is reached. A creditor also may provide for 
other specific changes to take place upon the occurrence of specific 
events. Both the triggering event and the resulting modification 
must be stated with specificity. For example, in home equity plans 
for employees, the agreement could provide that a specified higher 
rate or margin will apply if the borrower's employment with the 
creditor ends. A contract could contain a stepped-rate or stepped-
fee schedule providing for specified changes in the rate or the fees 
on certain dates or after a specified period of time. A creditor 
also may provide in the initial agreement that it will be entitled 
to a share of the appreciation in the value of the property as long 
as the specific appreciation share and the specific circumstances 
which require the payment of it are set forth. A contract may permit 
a consumer to switch among minimum payment options during the plan.
    2. Prohibited provisions. A creditor may not include a general 
provision in its agreement permitting changes to any or all of the 
terms of the plan. For example, creditors may not include 
``boilerplate'' language in the agreement stating that they reserve 
the right to change the fees imposed under the plan. In addition, a 
creditor may not include any ``triggering events'' or responses that 
the regulation expressly addresses in a manner different from that 
provided in the regulation. For example, an agreement may not 
provide that the margin in a variable-rate plan will increase if 
there is a material change in the consumer's financial 
circumstances, because the regulation specifies that temporarily 
freezing the line or lowering the credit limit is the permissible 
response to a material change in the consumer's financial 
circumstances. Similarly a contract cannot contain a provision 
allowing the creditor to freeze a line due to an insignificant 
decline in property value since the regulation allows that response 
only for a significant decline.

Paragraph 40(f)(3)(ii)

    1. Substitution of index. A creditor may change the index and 
margin used under the plan if the original index becomes 
unavailable, as long as historical fluctuations in the original and 
replacement indices were substantially similar, and as long as the 
replacement index and margin will produce a rate similar to the rate 
that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it 
produces a rate substantially similar to the rate in effect when the 
original index became unavailable.

Paragraph 40(f)(3)(iii)

    1. Changes by written agreement. A creditor may change the terms 
of a plan if the consumer expressly agrees in writing to the change 
at the time it is made. For example, a consumer and a creditor could 
agree in writing to change the repayment terms from interest-only 
payments to payments that reduce the principal balance. The 
provisions of any such agreement are governed by the limitations in 
Sec.  1026.40(f). For example, a mutual agreement could not provide 
for future annual percentage rate changes based on the movement of 
an index controlled by the creditor or for termination and 
acceleration under circumstances other than those specified in the 
regulation. By contrast, a consumer could agree to a new credit 
limit for the plan, although the agreement could not permit the 
creditor to later change the credit limit except by a subsequent 
written agreement or in the circumstances described in Sec.  
1026.40(f)(3)(vi).
    2. Written agreement. The change must be agreed to in writing by 
the consumer. Creditors are not permitted to assume consent because 
the consumer uses an account, even if use of an account would 
otherwise constitute acceptance of a proposed change under state 
law.

Paragraph 40(f)(3)(iv)

    1. Beneficial changes. After a plan is opened, a creditor may 
make changes that unequivocally benefit the consumer. Under this 
provision, a creditor may offer more

[[Page 80025]]

options to consumers, as long as existing options remain. For 
example, a creditor may offer the consumer the option of making 
lower monthly payments or could increase the credit limit. 
Similarly, a creditor wishing to extend the length of the plan on 
the same terms may do so. Creditors are permitted to temporarily 
reduce the rate or fees charged during the plan (though a change in 
terms notice may be required under Sec.  1026.9(c) when the rate or 
fees are returned to their original level). Creditors also may offer 
an additional means of access to the line, even if fees are 
associated with using the device, provided the consumer retains the 
ability to use prior access devices on the original terms.

Paragraph 40(f)(3)(v)

    1. Insignificant changes. A creditor is permitted to make 
insignificant changes after a plan is opened. This rule accommodates 
operational and similar problems, such as changing the address of 
the creditor for purposes of sending payments. It does not permit a 
creditor to change a term such as a fee charged for late payments.
    2. Examples of insignificant changes. Creditors may make minor 
changes to features such as the billing cycle date, the payment due 
date (as long as the consumer does not have a diminished grace 
period if one is provided), and the day of the month on which index 
values are measured to determine changes to the rate for variable-
rate plans. A creditor also may change its rounding practice in 
accordance with the tolerance rules set forth in Sec.  1026.14 (for 
example, stating an exact APR of 14.3333 percent as 14.3 percent, 
even if it had previously been stated as 14.33 percent). A creditor 
may change the balance computation method it uses only if the change 
produces an insignificant difference in the finance charge paid by 
the consumer. For example, a creditor may switch from using the 
average daily balance method (including new transactions) to the 
daily balance method (including new transactions).

Paragraph 40(f)(3)(vi)

    1. Suspension of credit privileges or reduction of credit limit. 
A creditor may prohibit additional extensions of credit or reduce 
the credit limit in the circumstances specified in this section of 
the regulation. In addition, as discussed under Sec.  
1026.40(f)(3)(i), a creditor may contractually reserve the right to 
take such actions when the maximum annual percentage rate is 
reached. A creditor may not take these actions under other 
circumstances, unless the creditor would be permitted to terminate 
the line and accelerate the balance as described in Sec.  
1026.40(f)(2). The creditor's right to reduce the credit limit does 
not permit reducing the limit below the amount of the outstanding 
balance if this would require the consumer to make a higher payment.
    2. Temporary nature of suspension or reduction. Creditors are 
permitted to prohibit additional extensions of credit or reduce the 
credit limit only while one of the designated circumstances exists. 
When the circumstance justifying the creditor's action ceases to 
exist, credit privileges must be reinstated, assuming that no other 
circumstance permitting such action exists at that time.
    3. Imposition of fees. If not prohibited by state law, a 
creditor may collect only bona fide and reasonable appraisal and 
credit report fees if such fees are actually incurred in 
investigating whether the condition permitting the freeze continues 
to exist. A creditor may not, in any circumstances, impose a fee to 
reinstate a credit line once the condition has been determined not 
to exist.
    4. Reinstatement of credit privileges. Creditors are responsible 
for ensuring that credit privileges are restored as soon as 
reasonably possible after the condition that permitted the 
creditor's action ceases to exist. One way a creditor can meet this 
responsibility is to monitor the line on an ongoing basis to 
determine when the condition ceases to exist. The creditor must 
investigate the condition frequently enough to assure itself that 
the condition permitting the freeze continues to exist. The 
frequency with which the creditor must investigate to determine 
whether a condition continues to exist depends upon the specific 
condition permitting the freeze. As an alternative to such 
monitoring, the creditor may shift the duty to the consumer to 
request reinstatement of credit privileges by providing a notice in 
accordance with Sec.  1026.9(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.  
1026.9(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.
    5. Suspension of credit privileges following request by 
consumer. A creditor may honor a specific request by a consumer to 
suspend credit privileges. If the consumer later requests that the 
creditor reinstate credit privileges, the creditor must do so 
provided no other circumstance justifying a suspension exists at 
that time. If two or more consumers are obligated under a plan and 
each has the ability to take advances, the agreement may permit any 
of the consumers to direct the creditor not to make further 
advances. A creditor may require that all persons obligated under a 
plan request reinstatement.
    6. Significant decline defined. What constitutes a significant 
decline for purposes of Sec.  1026.40(f)(3)(vi)(A) will vary 
according to individual circumstances. In any event, if the value of 
the dwelling declines such that the initial difference between the 
credit limit and the available equity (based on the property's 
appraised value for purposes of the plan) is reduced by fifty 
percent, this constitutes a significant decline in the value of the 
dwelling for purposes of Sec.  1026.40(f)(3)(vi)(A). For example, 
assume that a house with a first mortgage of $50,000 is appraised at 
$100,000 and the credit limit is $30,000. The difference between the 
credit limit and the available equity is $20,000, half of which is 
$10,000. The creditor could prohibit further advances or reduce the 
credit limit if the value of the property declines from $100,000 to 
$90,000. This provision does not require a creditor to obtain an 
appraisal before suspending credit privileges although a significant 
decline must occur before suspension can occur.
    7. Material change in financial circumstances. Two conditions 
must be met for Sec.  1026.40(f)(3)(vi)(B) to apply. First, there 
must be a ``material change'' in the consumer's financial 
circumstances, such as a significant decrease in the consumer's 
income. Second, as a result of this change, the creditor must have a 
reasonable belief that the consumer will be unable to fulfill the 
payment obligations of the plan. A creditor may, but does not have 
to, rely on specific evidence (such as the failure to pay other 
debts) in concluding that the second part of the test has been met. 
A creditor may prohibit further advances or reduce the credit limit 
under this section if a consumer files for or is placed in 
bankruptcy.
    8. Default of a material obligation. Creditors may specify 
events that would qualify as a default of a material obligation 
under Sec.  1026.40(f)(3)(vi)(C). For example, a creditor may 
provide that default of a material obligation will exist if the 
consumer moves out of the dwelling or permits an intervening lien to 
be filed that would take priority over future advances made by the 
creditor.
    9. Government limits on the annual percentage rate. Under Sec.  
1026.40(f)(3)(vi)(D), a creditor may prohibit further advances or 
reduce the credit limit if, for example, a state usury law is 
enacted which prohibits a creditor from imposing the agreed-upon 
annual percentage rate.

40(g) Refund of Fees

    1. Refund of fees required. If any disclosed term, including any 
term provided upon request pursuant to Sec.  1026.40(d), changes 
between the time the early disclosures are provided to the consumer 
and the time the plan is opened, and the consumer as a result 
decides to not enter into the plan, a creditor must refund all fees 
paid by the consumer in connection with the application. All fees, 
including credit report fees and appraisal fees, must be refunded 
whether such fees are paid to the creditor or directly to third 
parties. A consumer is entitled to a refund of fees under these 
circumstances whether or not terms are guaranteed by the creditor 
under Sec.  1026.40(d)(2)(i).
    2. Variable-rate plans. The right to a refund of fees does not 
apply to changes in the annual percentage rate resulting from 
fluctuations in the index value in a variable-rate plan. Also, if 
the maximum annual percentage rate is expressed as an amount over 
the initial rate, the right to refund of fees would not apply to 
changes in the cap resulting from fluctuations in the index value.
    3. Changes in terms. If a term, such as the maximum rate, is 
stated as a range in the early disclosures, and the term ultimately 
applicable to the plan falls within that range, a change does not 
occur for purposes of this section. If, however, no range is used 
and the term is changed (for example, a rate cap of 6 rather than 5 
percentage points over the initial rate), the change would permit 
the

[[Page 80026]]

consumer to obtain a refund of fees. If a fee imposed by the 
creditor is stated in the early disclosures as an estimate and the 
fee changes, the consumer could elect to not enter into the 
agreement and would be entitled to a refund of fees. On the other 
hand, if fees imposed by third parties are disclosed as estimates 
and those fees change, the consumer is not entitled to a refund of 
fees paid in connection with the application. Creditors must, 
however, use the best information reasonably available in providing 
disclosures about such fees.
    4. Timing of refunds and relation to other provisions. The 
refund of fees must be made as soon as reasonably possible after the 
creditor is notified that the consumer is not entering into the plan 
because of the changed term, or that the consumer wants a refund of 
fees. The fact that an application fee may be refunded to some 
applicants under this provision does not render such fees finance 
charges under Sec.  1026.4(c)(1) of the regulation.

40(h) Imposition of Nonrefundable Fees

    1. Collection of fees after consumer receives disclosures. A fee 
may be collected after the consumer receives the disclosures and 
brochure and before the expiration of three days, although the fee 
must be refunded if, within three days of receiving the required 
information, the consumer decides to not enter into the agreement. 
In such a case, the consumer must be notified that the fee is 
refundable for three days. The notice must be clear and conspicuous 
and in writing, and may be included with the disclosures required 
under Sec.  1026.40(d) or as an attachment to them. If disclosures 
and brochure are mailed to the consumer, Sec.  1026.40(h) provides 
that a nonrefundable fee may not be imposed until six business days 
after the mailing.
    2. Collection of fees before consumer receives disclosures. An 
application fee may be collected before the consumer receives the 
disclosures and brochure (for example, when an application contained 
in a magazine is mailed in with an application fee) provided that it 
remains refundable until three business days after the consumer 
receives the Sec.  1026.40 disclosures. No other fees except a 
refundable membership fee may be collected until after the consumer 
receives the disclosures required under Sec.  1026.40.
    3. Relation to other provisions. A fee collected before 
disclosures are provided may become nonrefundable except that, under 
Sec.  1026.40(g), it must be refunded if the consumer elects to not 
enter into the plan because of a change in terms. (Of course, all 
fees must be refunded if the consumer later rescinds under Sec.  
1026.15.)

Section 1026.42--Valuation Independence

42(a) Scope

    1. Open- and closed-end credit. Section 1026.42 applies to both 
open-end and closed-end transactions secured by the consumer's 
principal dwelling.
    2. Consumer's principal dwelling. Section 1026.42 applies only 
if the dwelling that will secure a consumer credit transaction is 
the principal dwelling of the consumer who obtains credit.

42(b) Definitions

Paragraph 42(b)(1)

    1. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management 
companies, real estate agents, and other persons that provide 
``settlement services'' as defined under the Real Estate Settlement 
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3).
    2. Examples of persons not covered. The following persons are 
not ``covered persons'' (unless, of course, they are creditors with 
respect to a covered transaction or perform ``settlement services'' 
in connection with a covered transaction):
    i. The consumer who obtains credit through a covered 
transaction.
    ii. A person secondarily liable for a covered transaction, such 
as a guarantor.
    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered 
transaction, such as a non-obligor spouse.

Paragraph 42(b)(2)

    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  1026.42(b) as under Sec. Sec.  
1026.2(a)(24), 1026.15(a), and 1026.23(a). See comments 2(a)(24)-3, 
15(a)-5, and 23(a)-3.

Paragraph 42(b)(3)

    1. Valuation. A ``valuation'' is an estimate of value prepared 
by a natural person, such as an appraisal report prepared by an 
appraiser or an estimate of market value prepared by a real estate 
agent. The term includes photographic or other information included 
with a written estimate of value. A ``valuation'' includes an 
estimate provided or viewed electronically, such as an estimate 
transmitted via electronic mail or viewed using a computer.
    2. Automated model or system. A ``valuation'' does not include 
an estimate of value produced exclusively using an automated model 
or system. However, a ``valuation'' includes an estimate of value 
developed by a natural person based in part on an estimate of value 
produced using an automated model or system.
    3. Estimate. An estimate of the value of the consumer's 
principal dwelling includes an estimate of a range of values for the 
consumer's principal dwelling.

42(c) Valuation for consumer's principal dwelling

42(c)(1) Coercion

    1. State law. The terms ``coercion,'' ``extortion,'' 
``inducement,'' ``bribery,'' ``intimidation,'' ``compensation,'' 
``instruction,'' and ``collusion'' have the meanings given to them 
by applicable state law or contract. See Sec.  1026.2(b)(3).
    2. Purpose. A covered person does not violate Sec.  
1026.42(c)(1) if the person does not engage in an act or practice 
set forth in Sec.  1026.42(c)(1) for the purpose of causing the 
value assigned to the consumer's principal dwelling to be based on a 
factor other than the independent judgment of a person that prepares 
valuations. For example, requesting that a person that prepares a 
valuation take certain actions, such as consider additional, 
appropriate property information, does not violate Sec.  1026.42(c), 
because such request does not supplant the independent judgment of 
the person that prepares a valuation. See Sec.  1026.42(c)(3)(i). A 
covered person also may provide incentives, such as additional 
compensation, to a person that prepares valuations or performs 
valuation management functions under Sec.  1026.42(c)(1), as long as 
the covered person does not cause or attempt to cause the value 
assigned to the consumer's principal dwelling to be based on a 
factor other than the independent judgment of the person that 
prepares valuations.
    3. Person that prepares valuations. For purposes of Sec.  
1026.42, the term ``valuation'' includes an estimate of value 
regardless of whether it is an appraisal prepared by a state-
certified or -licensed appraiser. See comment 42(b)(3)-1. A person 
that prepares valuations may or may not be a state-licensed or 
state-certified appraiser. Thus a person violates Sec.  
1026.42(c)(1) by engaging in prohibited acts or practices directed 
towards any person that prepares or may prepare a valuation of the 
consumer's principal dwelling for a covered transaction. For 
example, a person violates Sec.  1026.42(c)(1) by seeking to coerce 
a real estate agent to assign a value to the consumer's principal 
dwelling based on a factor other than the independent judgment of 
the real estate agent, in connection with a covered transaction.
    4. Indirect acts or practices. Section 1026.42(c)(1) prohibits 
both direct and indirect attempts to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
independent judgment of the person that prepares the valuation, 
through coercion and certain other acts and practices. For example, 
a creditor violates Sec.  1026.42(c)(1) if the creditor attempts to 
cause the value an appraiser engaged by an appraisal management 
company assigns to the consumer's principal dwelling to be based on 
a factor other than the appraiser's independent judgment, by 
threatening to withhold future business from a title company 
affiliated with the appraisal management company unless the 
appraiser assigns a value to the dwelling that meets or exceeds a 
minimum threshold.

Paragraph 42(c)(1)(i)

    1. Applicability of examples. Section 1026.42(c)(1)(i) provides 
examples of coercion of a person that prepares valuations. However, 
Sec.  1026.42(c)(1)(i) also applies to coercion of a person that 
performs valuation management functions or its affiliate. See Sec.  
1026.42(c)(1); comment 42(c)(1) 4.
    2. Specific value or predetermined threshold. As used in the 
examples of actions prohibited under Sec.  1026.42(c)(1), a 
``specific value'' and a ``predetermined threshold'' include a 
predetermined minimum, maximum, or range of values. Further, 
although the examples assume a covered person's prohibited actions 
are designed to cause the value assigned to the consumer's principal 
dwelling to equal or exceed a certain amount, the rule applies 
equally to cases where a covered person's prohibited actions are 
designed to cause the value assigned to the dwelling to be below a 
certain amount.

[[Page 80027]]

42(c)(2) Mischaracterization of Value

42(c)(2)(i) Misrepresentation

    1. Opinion of value. Section 1026.42(c)(2)(i) prohibits a person 
that performs valuations from misrepresenting the value of the 
consumer's principal dwelling in a valuation. Such person 
misrepresents the value of the consumer's principal dwelling by 
assigning a value to such dwelling that does not reflect the 
person's opinion of the value of such dwelling. For example, an 
appraiser misrepresents the value of the consumer's principal 
dwelling if the appraiser estimates that the value of such dwelling 
is $250,000 applying the standards required by the Uniform Standards 
of Professional Appraisal Standards but assigns a value of $300,000 
to such dwelling in a Uniform Residential Appraisal Report.

42(c)(2)(iii) Inducement of Mischaracterization

    1. Inducement. A covered person may not induce a person to 
materially misrepresent the value of the consumer's principal 
dwelling in a valuation or to falsify or alter a valuation. For 
example, a loan originator may not coerce a loan underwriter to 
alter an appraisal report to increase the value assigned to the 
consumer's principal dwelling.

42(d) Prohibition on Conflicts of Interest

42(d)(1)(i) In General

    1. Prohibited interest in the property. A person preparing a 
valuation or performing valuation management functions for a covered 
transaction has a prohibited interest in the property under 
paragraph (d)(1)(i) if the person has any ownership or reasonably 
foreseeable ownership interest in the property. For example, a 
person who seeks a mortgage to purchase a home has a reasonably 
foreseeable ownership interest in the property securing the 
mortgage, and therefore is not permitted to prepare the valuation or 
perform valuation management functions for that mortgage transaction 
under paragraph (d)(1)(i).
    2. Prohibited interest in the transaction. A person preparing a 
valuation or performing valuation management functions has a 
prohibited interest in the transaction under paragraph (d)(1)(i) if 
that person or an affiliate of that person also serves as a loan 
officer of the creditor, mortgage broker, real estate broker, or 
other settlement service provider for the transaction and the 
conditions under paragraph (d)(4) are not satisfied. A person also 
has a prohibited interest in the transaction if the person is 
compensated or otherwise receives financial or other benefits based 
on whether the transaction is consummated. Under these 
circumstances, the person is not permitted to prepare the valuation 
or perform valuation management functions for that transaction under 
paragraph (d)(1)(i).

42(d)(1)(ii) Employees and Affiliates of Creditors; Providers of 
Multiple Settlement Services

    1. Employees and affiliates of creditors. In general, a creditor 
may use employees or affiliates to prepare a valuation or perform 
valuation management functions without violating paragraph 
(d)(1)(i). However, whether an employee or affiliate has a direct or 
indirect interest in the property or transaction that creates a 
prohibited conflict of interest under paragraph (d)(1)(i) depends on 
the facts and circumstances of a particular case, including the 
structure of the employment or affiliate relationship.
    2. Providers of multiple settlement services. In general, a 
person who prepares a valuation or perform valuation management 
functions for a covered transaction may perform another settlement 
service for the same transaction, or the person's affiliate may 
perform another settlement service, without violating paragraph 
(d)(1)(i). However, whether the person has a direct or indirect 
interest in the property or transaction that creates a prohibited 
conflict of interest under paragraph (d)(1)(i) depends on the facts 
and circumstances of a particular case.

42(d)(2) Employees and Affiliates of Creditors with Assets of More than 
$250 Million for Both of the Past two Calendar Years

    1. Safe harbor. A person who a prepares valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have an 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the 
conditions in paragraph (d)(2) are satisfied. Even if the conditions 
in paragraph (d)(2) are satisfied, however, the person may have a 
prohibited conflict of interest on other grounds, such as if the 
person performs a valuation for a purchase-money mortgage 
transaction in which the person is the buyer or seller of the 
subject property. Thus, in general, in any covered transaction in 
which the creditor had assets of more than $250 million for both of 
the past two years, the creditor may use its own employee or 
affiliate to prepare a valuation or perform valuation management 
functions for a particular transaction, as long as the conditions 
described in paragraph (d)(2) are satisfied. If the conditions in 
paragraph (d)(2) are not satisfied, whether a person preparing a 
valuation or performing valuation management functions has violated 
paragraph (d)(1)(i) depends on all of the facts and circumstances.

Paragraph 42(d)(2)(ii)

    1. Prohibition on reporting to a person who is part of the 
creditor's loan production function. To qualify for the safe harbor 
under paragraph (d)(2), the person preparing a valuation or 
performing valuation management functions may not report to a person 
who is part of the creditor's loan production function (as defined 
in paragraph (d)(5)(i) and comment 42(d)(5)(i)-1). For example, if a 
person preparing a valuation is directly supervised or managed by a 
loan officer or other person in the creditor's loan production 
function, or by a person who is directly supervised or managed by a 
loan officer, the condition under paragraph (d)(2)(ii) is not met.
    2. Prohibition on reporting to a person whose compensation is 
based on the transaction closing. To qualify for the safe harbor 
under paragraph (d)(2), the person preparing a valuation or 
performing valuation management functions may not report to a person 
whose compensation is based on the closing of the transaction to 
which the valuation relates. For example, assume an appraisal 
management company performs valuation management functions for a 
transaction in which the creditor is an affiliate of the appraisal 
management company. If the employee of the appraisal management 
company who is in charge of valuation management functions for that 
transaction is supervised by a person who earns a commission or 
bonus based on the percentage of closed transactions for which the 
appraisal management company provides valuation management 
functions, the condition under paragraph (d)(2)(ii) is not met.

Paragraph 42(d)(2)(iii)

    1. Direct or indirect involvement in selection of person who 
prepares a valuation. In any covered transaction, the safe harbor 
under paragraph (d)(2) is available if, among other things, no 
employee, officer or director in the creditor's loan production 
function (as defined in paragraph (d)(4)(ii) and comment 
42(d)(4)(ii)-1) is directly or indirectly involved in selecting, 
retaining, recommending or influencing the selection of the person 
to prepare a valuation or perform valuation management functions, or 
to be included in or excluded from a list or panel of approved 
persons who prepare valuations or perform valuation management 
functions. For example, if the person who selects the person to 
prepare the valuation for a covered transaction is supervised by an 
employee of the creditor who also supervises loan officers, the 
condition in paragraph (d)(2)(iii) is not met.

42(d)(3) Employees and Affiliates of Creditors With Assets of $250 
Million or Less for Either of the Past Two Calendar Years

    1. Safe harbor. A person who prepares a valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the 
conditions in paragraph (d)(3) are satisfied. Even if the conditions 
in paragraph (d)(3) are satisfied, however, the person may have a 
prohibited conflict of interest on other grounds, such as if the 
person performs a valuation for a purchase-money mortgage 
transaction in which the person is the buyer or seller of the 
subject property. Thus, in general, in any covered transaction in 
which the creditor had assets of $250 million or less for either of 
the past two calendar years, the creditor may use its own employee 
or affiliate to prepare a valuation or perform valuation management 
functions for a particular transaction, as long as the conditions 
described in paragraph (d)(3) are satisfied. If the conditions in 
paragraph (d)(3) are not satisfied, whether a person preparing 
valuations or performing valuation management functions has violated 
paragraph (d)(1)(i) depends on all of the facts and circumstances.

[[Page 80028]]

42(d)(4) Providers of Multiple Settlement Services

Paragraph 42(d)(4)(i)

    1. Safe harbor in transactions in which the creditor had assets 
of more than $250 million for both of the past two calendar years. A 
person preparing a valuation or performing valuation management 
functions in addition to performing another settlement service for 
the same transaction, or whose affiliate performs another settlement 
service for the transaction, will not be deemed to have interest 
prohibited under paragraph (d)(1)(i) as a result of the person or 
the person's affiliate performing another settlement service if the 
conditions in paragraph (d)(4)(i) are satisfied. Even if the 
conditions in paragraph (d)(4)(i) are satisfied, however, the person 
may have a prohibited conflict of interest on other grounds, such as 
if the person performs a valuation for a purchase-money mortgage 
transaction in which the person is the buyer or seller of the 
subject property. Thus, in general, in any covered transaction with 
a creditor that had assets of more than $250 million for the past 
two years, a person preparing a valuation or performing valuation 
management functions, or its affiliate, may provide another 
settlement service for the same transaction, as long as the 
conditions described in paragraph (d)(4)(i) are satisfied. If the 
conditions in paragraph (d)(4)(i) are not satisfied, whether a 
person preparing valuations or performing valuation management 
functions has violated paragraph (d)(1)(i) depends on all of the 
facts and circumstances.
    2. Reporting. The safe harbor under paragraph (d)(4)(i) is 
available if the condition specified in paragraph (d)(2)(ii), among 
others, is met. Paragraph (d)(2)(ii) prohibits a person preparing a 
valuation or performing valuation management functions from 
reporting to a person whose compensation is based on the closing of 
the transaction to which the valuation relates. For example, assume 
an appraisal management company performs both valuation management 
functions and title services, including providing title insurance, 
for the same covered transaction. If the appraisal management 
company employee in charge of valuation management functions for the 
transaction is supervised by the title insurance agent in the 
transaction, whose compensation depends in whole or in part on 
whether title insurance is sold at the loan closing, the condition 
in paragraph (d)(2)(ii) is not met.

Paragraph 42(d)(4)(ii)

    1. Safe harbor in transactions in which the creditor had assets 
of $250 million or less for either of the past two calendar years. A 
person preparing a valuation or performing valuation management 
functions in addition to performing another settlement service for 
the same transaction, or whose affiliate performs another settlement 
service for the transaction, will not be deemed to have an interest 
prohibited under paragraph (d)(1)(i) as a result of the person or 
the person's affiliate performing another settlement service if the 
conditions in paragraph (d)(4)(ii) are satisfied. Even if the 
conditions in paragraph (d)(4)(ii) are satisfied, however, the 
person may have a prohibited conflict of interest on other grounds, 
such as if the person performs a valuation for a purchase-money 
mortgage transaction in which the person is the buyer or seller of 
the subject property. Thus, in general, in any covered transaction 
in which the creditor had assets of $250 million or less for either 
of the past two years, a person preparing a valuation or performing 
valuation management functions, or its affiliate, may provide other 
settlement services for the same transaction, as long as the 
conditions described in paragraph (d)(4)(ii) are satisfied. If the 
conditions in paragraph (d)(4)(ii) are not satisfied, whether a 
person preparing valuations or performing valuation management 
functions has violated paragraph (d)(1)(i) depends on all of the 
facts and circumstances.

42(d)(5) Definitions

42(d)(5)(i) Loan Production Function

    1. Loan production function. One condition of the safe harbors 
under paragraphs (d)(2) and (d)(4)(i), involving transactions in 
which the creditor had assets of more than $250 million for both of 
the past two calendar years, is that the person who prepares a 
valuation or performs valuation management functions must report to 
a person who is not part of the creditor's ``loan production 
function.'' A creditor's ``loan production function'' includes 
retail sales staff, loan officers, and any other employee of the 
creditor with responsibility for taking a loan application, offering 
or negotiating loan terms or whose compensation is based on loan 
processing volume. A person is not considered part of a creditor's 
loan production function solely because part of the person's 
compensation includes a general bonus not tied to specific 
transactions or a specific percentage of transactions closing, or a 
profit sharing plan that benefits all employees. A person solely 
responsible for credit administration or risk management is also not 
considered part of a creditor's loan production function. Credit 
administration and risk management includes, for example, loan 
underwriting, loan closing functions (e.g., loan documentation), 
disbursing funds, collecting mortgage payments and otherwise 
servicing the loan (e.g., escrow management and payment of taxes), 
monitoring loan performance, and foreclosure processing.

42(e) When Extension of Credit Prohibited

    1. Reasonable diligence. A creditor will be deemed to have acted 
with reasonable diligence under Sec.  1026.42(e) if the creditor 
extends credit based on a valuation other than the valuation subject 
to the restriction in Sec.  1026.42(e). A creditor need not obtain a 
second valuation to document that the creditor has acted with 
reasonable diligence to determine that the valuation does not 
materially misstate or misrepresent the value of the consumer's 
principal dwelling, however. For example, assume an appraiser 
notifies a creditor before consummation that a loan originator 
attempted to cause the value assigned to the consumer's principal 
dwelling to be based on a factor other than the appraiser's 
independent judgment, through coercion. If the creditor reasonably 
determines and documents that the appraisal does not materially 
misstate or misrepresent the value of the consumer's principal 
dwelling, for purposes of Sec.  1026.42(e), the creditor may extend 
credit based on the appraisal.

42(f) Customary and Reasonable Compensation

42(f)(1) Requirement to Provide Customary and Reasonable Compensation 
to Fee Appraisers

    1. Agents of the creditor. Whether a person is an agent of the 
creditor is determined by applicable law; however, a ``fee 
appraiser'' as defined in paragraph (f)(4)(i) is not an agent of the 
creditor for purposes of paragraph (f), and therefore is not 
required to pay other fee appraisers customary and reasonable 
compensation under paragraph (f).
    2. Geographic market. For purposes of paragraph (f), the 
``geographic market of the property being appraised'' means the 
geographic market relevant to compensation levels for appraisal 
services. Depending on the facts and circumstances, the relevant 
geographic market may be a state, metropolitan statistical area 
(MSA), metropolitan division, area outside of an MSA, county, or 
other geographic area. For example, assume that fee appraisers who 
normally work only in County A generally accept $400 to appraise an 
attached single-family property in County A. Assume also that very 
few or no fee appraisers who work only in contiguous County B will 
accept a rate comparable to $400 to appraise an attached single-
family property in County A. The relevant geographic market for an 
attached single-family property in County A may reasonably be 
defined as County A. On the other hand, assume that fee appraisers 
who normally work only in County A generally accept $400 to appraise 
an attached single-family property in County A. Assume also that 
many fee appraisers who normally work only in contiguous County B 
will accept a rate comparable to $400 to appraise an attached 
single-family property in County A. The relevant geographic market 
for an attached single-family property in County A may reasonably be 
defined to include both County A and County B.
    3. Failure to perform contractual obligations. Paragraph (f)(1) 
does not prohibit a creditor or its agent from withholding 
compensation from a fee appraiser for failing to meet contractual 
obligations, such as failing to provide the appraisal report or 
violating state or Federal appraisal laws in performing the 
appraisal.
    4. Agreement that fee is ``customary and reasonable.'' A 
document signed by a fee appraiser indicating that the appraiser 
agrees that the fee paid to the appraiser is ``customary and 
reasonable'' does not by itself create a presumption of compliance 
with Sec.  1026.42(f) or otherwise satisfy the requirement to pay a 
fee appraiser at a customary and reasonable rate.
    5. Volume-based discounts. Section 1026.42(f)(1) does not 
prohibit a fee appraiser and a creditor (or its agent) from agreeing 
to compensation based on transaction volume, so long as the 
compensation is customary and reasonable. For example, assume that a

[[Page 80029]]

fee appraiser typically receives $300 for appraisals from creditors 
with whom it does business; the fee appraiser, however, agrees to 
reduce the fee to $280 for a particular creditor, in exchange for a 
minimum number of assignments from the creditor.

42(f)(2) Presumption of Compliance

    1. In general. A creditor and its agent are presumed to comply 
with paragraph (f)(1) if the creditor or its agent meets the 
conditions specified in paragraph (f)(2) in determining the 
compensation paid to a fee appraiser. These conditions are not 
requirements for compliance but, if met, create a presumption that 
the creditor or its agent has complied with Sec.  1026.42(f)(1). A 
person may rebut this presumption with evidence that the amount of 
compensation paid to a fee appraiser was not customary and 
reasonable for reasons unrelated to the conditions in paragraph 
(f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not meet 
one of the non-required conditions set forth in paragraph (f)(2), 
the creditor's and its agent's compliance with paragraph (f)(1) is 
determined based on all of the facts and circumstances without a 
presumption of either compliance or violation.

Paragraph 42(f)(2)(i)

    1. Two-step process for determining customary and reasonable 
rates. Paragraph (f)(2)(i) sets forth a two-step process for a 
creditor or its agent to determine the amount of compensation that 
is customary and reasonable in a given transaction. First, the 
creditor or its agent must identify recent rates paid for comparable 
appraisal services in the relevant geographic market. Second, once 
recent rates have been identified, the creditor or its agent must 
review the factors listed in paragraph (f)(2)(i)(A)-(F) and make any 
appropriate adjustments to the rates to ensure that the amount of 
compensation is reasonable.
    2. Identifying recent rates. Whether rates may reasonably be 
considered ``recent'' depends on the facts and circumstances. 
Generally, ``recent'' rates would include rates charged within one 
year of the creditor's or its agent's reliance on this information 
to qualify for the presumption of compliance under paragraph (f)(2). 
For purposes of the presumption of compliance under paragraph 
(f)(2), a creditor or its agent may gather information about recent 
rates by using a reasonable method that provides information about 
rates for appraisal services in the geographic market of the 
relevant property; a creditor or its agent may, but is not required 
to, use or perform a fee survey.
    3. Accounting for factors. Once recent rates in the relevant 
geographic market have been identified, the creditor or its agent 
must review the factors listed in paragraph (f)(2)(i)(A)-(F) to 
determine the appropriate rate for the current transaction. For 
example, if the recent rates identified by the creditor or its agent 
were solely for appraisal assignments in which the scope of work 
required consideration of two comparable properties, but the current 
transaction required an appraisal that considered three comparable 
properties, the creditor or its agent might reasonably adjust the 
rate by an amount that accounts for the increased scope of work, in 
addition to making any other appropriate adjustments based on the 
remaining factors.

Paragraph 42(f)(2)(i)(A)

    1. Type of property. The type of property may include, for 
example, detached or attached single-family property, condominium or 
cooperative unit, or manufactured home.

Paragraph 42(f)(2)(i)(B)

    1. Scope of work. The scope of work may include, for example, 
the type of inspection (such as exterior only or both interior and 
exterior) or number of comparables required for the appraisal.

Paragraph 42(f)(2)(i)(D)

    1. Fee appraiser qualifications. The fee appraiser 
qualifications may include, for example, a state license or 
certification in accordance with the minimum criteria issued by the 
Appraisal Qualifications Board of the Appraisal Foundation, or 
completion of continuing education courses on effective appraisal 
methods and related topics.
    2. Membership in professional appraisal organization. Paragraph 
42(f)(2)(i)(D) does not override state or Federal laws prohibiting 
the exclusion of an appraiser from consideration for an assignment 
solely by virtue of membership or lack of membership in any 
particular appraisal organization. See, e.g., 12 CFR 225.66(a).

Paragraph 42(f)(2)(i)(E)

    1. Fee appraiser experience and professional record. The fee 
appraiser's level of experience may include, for example, the fee 
appraiser's years of service as a state-licensed or state-certified 
appraiser, or years of service appraising properties in a particular 
geographical area or of a particular type. The fee appraiser's 
professional record may include, for example, whether the fee 
appraiser has a past record of suspensions, disqualifications, 
debarments, or judgments for waste, fraud, abuse or breach of legal 
or professional standards.

Paragraph 42(f)(2)(i)(F)

    1. Fee appraiser work quality. The fee appraiser's work quality 
may include, for example, the past quality of appraisals performed 
by the appraiser based on the written performance and review 
criteria of the creditor or agent of the creditor.

Paragraph 42(f)(2)(ii)

    1. Restraining trade. Under Sec.  1026.42(f)(2)(ii)(A), creditor 
or its agent would not qualify for the presumption of compliance 
under paragraph (f)(2) if it engaged in any acts to restrain trade 
such as entering into a price fixing or market allocation agreement 
that affect the compensation of fee appraisers. For example, if 
appraisal management company A and appraisal management company B 
agreed to compensate fee appraisers at no more than a specific rate 
or range of rates, neither appraisal management company would 
qualify for the presumption of compliance. Likewise, if appraisal 
management company A and appraisal management company B agreed that 
appraisal management company A would limit its business to a certain 
portion of the relevant geographic market and appraisal management 
company B would limit its business to a different portion of the 
relevant geographic market, and as a result each appraisal 
management company unilaterally set the fees paid to fee appraisers 
in their respective portions of the market, neither appraisal 
management company would qualify for the presumption of compliance 
under paragraph (f)(2).
    2. Acts of monopolization. Under Sec.  1026.42(f)(2)(ii)(B), a 
creditor or its agent would not qualify for the presumption of 
compliance under paragraph (f)(2) if it engaged in any act of 
monopolization such as restricting entry into the relevant 
geographic market or causing any person to leave the relevant 
geographic market, resulting in anticompetitive effects that affect 
the compensation paid to fee appraisers. For example, if only one 
appraisal management company exists or is predominant in a 
particular market area, that appraisal management company might not 
qualify for the presumption of compliance if it entered into 
exclusivity agreements with all creditors in the market or all fee 
appraisers in the market, such that other appraisal management 
companies had to leave or could not enter the market. Whether this 
behavior would be considered an anticompetitive act that affects the 
compensation paid to fee appraisers depends on all of the facts and 
circumstances, including applicable law.

42(f)(3) Alternative Presumption of Compliance

    1. In general. A creditor and its agent are presumed to comply 
with paragraph (f)(1) if the creditor or its agent determine the 
compensation paid to a fee appraiser based on information about 
customary and reasonable rates that satisfies the conditions in 
paragraph (f)(3) for that information. Reliance on information 
satisfying the conditions in paragraph (f)(3) is not a requirement 
for compliance with paragraph (f)(1), but creates a presumption that 
the creditor or its agent has complied. A person may rebut this 
presumption with evidence that the rate of compensation paid to a 
fee appraiser by the creditor or its agent is not customary and 
reasonable based on facts or information other than third-party 
information satisfying the conditions of this paragraph (f)(3). If a 
creditor or its agent does not rely on information that meets the 
conditions in paragraph (f)(3), the creditor's and its agent's 
compliance with paragraph (f)(1) is determined based on all of the 
facts and circumstances without a presumption of either compliance 
or violation.
    2. Geographic market. The meaning of ``geographic market'' for 
purposes of paragraph (f) is explained in comment (f)(1)-1.
    3. Recent rates. Whether rates may reasonably be considered 
``recent'' depends on the facts and circumstances. Generally, 
``recent'' rates would include rates charged within one year of the 
creditor's or its agent's reliance on this information to qualify 
for the presumption of compliance under paragraph (f)(3).

[[Page 80030]]

42(f)(4) Definitions

42(f)(4)(i) Fee Appraiser

    1. Organization. The term ``organization'' in paragraph 
42(f)(4)(i)(B) includes a corporation, partnership, proprietorship, 
association, cooperative, or other business entity and does not 
include a natural person.

42(g) Mandatory Reporting

42(g)(1) Reporting Required

    1. Reasonable basis. A person reasonably believes that an 
appraiser has materially failed to comply with the Uniform Standards 
of Professional Appraisal Practice (USPAP) established by the 
Appraisal Standards Board of the Appraisal Foundation (as defined in 
12 U.S.C. 3350(9)) or ethical or professional requirements for 
appraisers under applicable state or Federal statutes or regulations 
if the person possesses knowledge or information that would lead a 
reasonable person in the same circumstances to conclude that the 
appraiser has materially failed to comply with USPAP or such 
statutory or regulatory requirements.
    2. Material failure to comply. For purposes of Sec.  
1026.42(g)(1), a material failure to comply is one that is likely to 
affect the value assigned to the consumer's principal dwelling. The 
following are examples of a material failure to comply with USPAP or 
ethical or professional requirements:
    i. Mischaracterizing the value of the consumer's principal 
dwelling in violation of Sec.  1026.42(c)(2)(i).
    ii. Performing an assignment in a grossly negligent manner, in 
violation of a rule under USPAP.
    iii. Accepting an appraisal assignment on the condition that the 
appraiser will report a value equal to or greater than the purchase 
price for the consumer's principal dwelling, in violation of a rule 
under USPAP.
    3. Other matters. Section 1026.42(g)(1) does not require 
reporting of a matter that is not material under Sec.  
1026.42(g)(1), for example:
    i. An appraiser's disclosure of confidential information in 
violation of applicable state law.
    ii. An appraiser's failure to maintain errors and omissions 
insurance in violation of applicable state law.
    4. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management 
companies, real estate agents, and other persons that provide 
``settlement services'' as defined in section 3(3) of the Real 
Estate Settlement Procedures Act (12 U.S.C. 2602(3)) and the 
implementing regulation at 12 CFR 1024.2. See Sec.  1026.42(b)(1).
    5. Examples of persons not covered. The following persons are 
not ``covered persons'' (unless, of course, they are creditors with 
respect to a covered transaction or perform ``settlement services'' 
in connection with a covered transaction):
    i. The consumer who obtains credit through a covered 
transaction.
    ii. A person secondarily liable for a covered transaction, such 
as a guarantor.
    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered 
transaction, such as a non-obligor spouse.
    6. Appraiser. For purposes of Sec.  1026.42(g)(1), an 
``appraiser'' is a natural person who provides opinions of the value 
of dwellings and is required to be licensed or certified under the 
laws of the state in which the consumer's principal dwelling is 
located or otherwise is subject to the jurisdiction of the appraiser 
certifying and licensing agency for that state. See 12 U.S.C. 
3350(1).

Subpart F--Special Rules for Private Education Loans

Section 1026.46--Special Disclosure Requirements for Private 
Education Loans

46(a) Coverage

    1. Coverage. This subpart applies to all private education loans 
as defined in Sec.  1026.46(b)(5). Coverage under this subpart is 
optional for certain extensions of credit that do not meet the 
definition of ``private education loan'' because the credit is not 
extended, in whole or in part, for ``postsecondary educational 
expenses'' defined in Sec.  1026.46(b)(3). If a transaction is not 
covered and a creditor opts to comply with any section of this 
subpart, the creditor must comply with all applicable sections of 
this subpart. If a transaction is not covered and a creditor opts 
not to comply with this subpart, the creditor must comply with all 
applicable requirements under Sec. Sec.  1026.17 and 1026.18. 
Compliance with this subpart is optional for an extension of credit 
for expenses incurred after graduation from a law, medical, dental, 
veterinary, or other graduate school and related to relocation, 
study for a bar or other examination, participation in an internship 
or residency program, or similar purposes. However, if any part of 
such loan is used for postsecondary educational expenses as defined 
in Sec.  1026.46(b)(3), then compliance with Subpart F is mandatory 
not optional.

46(b) Definitions

46(b)(1) Covered Educational Institution

    1. General. A covered educational institution includes any 
educational institution that meets the definition of an institution 
of higher education in Sec.  1026.46(b)(2). An institution is also a 
covered educational institution if it otherwise meets the definition 
of an institution of higher education, except for its lack of 
accreditation. Such an institution may include, for example, a 
university or community college. It may also include an institution, 
whether accredited or unaccredited, offering instruction to prepare 
students for gainful employment in a recognized profession, such as 
flying, culinary arts, or dental assistance. A covered educational 
institution does not include elementary or secondary schools.
    2. Agent. For purposes of Sec.  1026.46(b)(1), the term agent 
means an institution-affiliated organization as defined by Section 
151 of the Higher Education Act of 1965 (20 U.S.C 1019) or an 
officer or employee of an institution-affiliated organization. Under 
Section 151 of the Higher Education Act, an institution-affiliated 
organization means any organization that is directly or indirectly 
related to a covered institution and is engaged in the practice of 
recommending, promoting, or endorsing education loans for students 
attending the covered institution or the families of such students. 
An institution-affiliated organization may include an alumni 
organization, athletic organization, foundation, or social, 
academic, or professional organization, of a covered institution, 
but does not include any creditor with respect to any private 
education loan made by that creditor.

46(b)(2) Institution of Higher Education

    1. General. An institution of higher education includes any 
institution that meets the definitions contained in sections 101 and 
102 of the Higher Education Act of 1965 (20 U.S.C. 1001-1002) and 
implementing Department of Education regulations (34 CFR 600). Such 
an institution may include, for example, a university or community 
college. It may also include an institution offering instruction to 
prepare students for gainful employment in a recognized profession, 
such as flying, culinary arts, or dental assistance. An institution 
of higher education does not include elementary or secondary 
schools.

46(b)(3) Postsecondary Educational Expenses

    1. General. The examples listed in Sec.  1026.46(b)(3) are 
illustrative only. The full list of postsecondary educational 
expenses is contained in section 472 of the Higher Education Act of 
1965 (20 U.S.C. 1087ll).

46(b)(4) Preferred Lender Arrangement

    1. General. The term ``preferred lender arrangement'' is defined 
in section 151 of the Higher Education Act of 1965 (20 U.S.C. 1019). 
The term refers to an arrangement or agreement between a creditor 
and a covered educational institution (or an institution-affiliated 
organization as defined by section 151 of the Higher Education Act 
of 1965 (20 U.S.C 1019)) under which a creditor provides private 
education loans to consumers for students attending the covered 
educational institution and the covered educational institution 
recommends, promotes, or endorses the private education loan 
products of the creditor. It does not include arrangements or 
agreements with respect to Federal Direct Stafford/Ford loans, or 
Federal PLUS loans made under the Federal PLUS auction pilot 
program.

46(b)(5) Private Education Loan

    1. Extended expressly for postsecondary educational expenses. A 
private education loan is one that is extended expressly for 
postsecondary educational expenses. The term includes loans extended 
for postsecondary educational expenses incurred while a student is 
enrolled in a covered educational institution as well as loans 
extended to consolidate a consumer's pre-existing private education 
loans.
    2. Multiple-purpose loans. i. Definition. A private education 
loan may include an extension of credit not excluded under Sec.  
1026.46(b)(5) that the consumer may use for multiple purposes 
including, but not limited to, postsecondary educational expenses. 
If the consumer expressly indicates that the proceeds of the loan 
will be used to pay for postsecondary educational expenses by 
indicating the loan's purpose on an application, the loan is a 
private education loan.

[[Page 80031]]

    ii. Coverage. A creditor generally will not know before an 
application is received whether the consumer intends to use the loan 
for postsecondary educational expenses. For this reason, the 
creditor need not provide the disclosures required by Sec.  
1026.47(a) on or with the application or solicitation for a loan 
that may be used for multiple purposes. See Sec.  1026.47(d)(1)(i). 
However, if the consumer expressly indicates that the proceeds of 
the loan will be used to pay for postsecondary educational expenses, 
the creditor must comply with Sec. Sec.  1026.47(b) and (c) and 
Sec.  1026.48. For purposes of the required disclosures, the 
creditor must calculate the disclosures based on the entire amount 
of the loan, even if only a part of the proceeds is intended for 
postsecondary educational expenses. The creditor may rely solely on 
a check-box, or a purpose line, on a loan application to determine 
whether or not the applicant intends to use loan proceeds for 
postsecondary educational expenses.
    iii. Examples. The creditor must comply only if the extension of 
credit also meets the other parts of the definition of private 
education loan. For example, if the creditor uses a single 
application form for both open-end and closed-end credit, and the 
consumer applies for open-end credit to be used for postsecondary 
educational expenses, the extension of credit is not covered. 
Similarly, if the consumer indicates the extension of credit will be 
used for educational expenses that are not postsecondary educational 
expenses, such as elementary or secondary educational expenses, the 
extension of credit is not covered. These examples are only 
illustrative, not exhaustive.
    3. Short-term loans. Some covered educational institutions offer 
loans to students with terms of 90 days or less to assist the 
student in paying for educational expenses, usually while the 
student waits for other funds to be disbursed. Under Sec.  
1026.46(b)(5)(iv)(A) such loans are not considered private education 
loans, even if interest is charged on the credit balance. (Because 
these loans charge interest, they are not covered by the exception 
under Sec.  1026.46(b)(5)(iv)(B).) However, these loans are 
extensions of credit subject to the requirements of Sec. Sec.  
1026.17 and 18. The legal agreement may provide that repayment is 
required when the consumer or the educational institution receives 
certain funds. If, under the terms of the legal obligation, 
repayment of the loan is required when the certain funds are 
received by the consumer or the educational institution (such as by 
deposit into the consumer's or educational institution's account), 
the disclosures should be based on the creditor's estimate of the 
time the funds will be delivered.
    4. Billing plans. Some covered educational institutions offer 
billing plans that permit a consumer to make payments in 
installments. Such plans are not considered private education loans, 
if an interest rate will not be applied to the credit balance and 
the term of the extension of credit is one year or less, even if the 
plan is payable in more than four installments. However, such plans 
may be extensions of credit subject to the requirements of 
Sec. Sec.  1026.17 and 1026.18.

46(c) Form of Disclosures

    1. Form of disclosures--relation to other sections. Creditors 
must make the disclosures required under this subpart in accordance 
with Sec.  1026.46(c). Section 1026.46(c)(2) requires that the 
disclosures be grouped together and segregated from everything else. 
In complying with this requirement, creditors may follow the rules 
in Sec.  1026.17, except where specifically provided otherwise. For 
example, although Sec.  1026.17(b) requires creditors to provide 
only one set of disclosures before consummation of the transaction, 
Sec. Sec.  1026.47(b) and (c) require that the creditor provide the 
disclosures under Sec.  1026.18 both upon approval and after the 
consumer accepts the loan.

46(c)(3) Electronic Disclosures

    1. Application and solicitation disclosures--electronic 
disclosures. If the disclosures required under Sec.  1026.47(a) are 
provided electronically, they must be provided on or with the 
application or solicitation reply form. Electronic disclosures are 
deemed to be on or with an application or solicitation if they meet 
one of the following conditions:
    i. They automatically appear on the screen when the application 
or solicitation reply form appears;
    ii. They are located on the same Web ``page'' as the application 
or solicitation reply form without necessarily appearing on the 
initial screen, if the application or reply form contains a clear 
and conspicuous reference to the location of the disclosures and 
indicates that the disclosures contain rate, fee, and other cost 
information, as applicable; or
    iii. They are posted on a Web site and the application or 
solicitation reply form is linked to the disclosures in a manner 
that prevents the consumer from by passing the disclosures before 
submitting the application or reply form.

46(d) Timing of Disclosures

    1. Receipt of disclosures. Under Sec.  1026.46(d)(4), if the 
creditor places the disclosures in the mail, the consumer is 
considered to have received them three business days after they are 
mailed. For purposes of Sec.  1026.46(d)(4), ``business day'' means 
all calendar days except Sundays and the legal public holidays 
referred to in Sec.  1026.2(a)(6). See comment 2(a)(6)-2. For 
example, if the creditor places the disclosures in the mail on 
Thursday, June 4, the disclosures are considered received on Monday, 
June 8.

46(d)(1) Application or Solicitation Disclosures

    1. Invitations to apply. A creditor may contact a consumer who 
has not been pre-selected for a private education loan about taking 
out a loan (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 
subpart, unless the contact itself includes the following:
    i. An application form in a direct mailing, electronic 
communication or a single application form as a ``take-one'' (in 
racks in public locations, for example);
    ii. An oral application in a telephone contact; or
    iii. An application in an in-person contact.

46(d)(2) Approval Disclosures

    1. Timing. The creditor must provide the disclosures required by 
Sec.  1026.47(b) at the time the creditor provides to the consumer 
any notice that the loan has been approved. However, nothing in this 
section prevents the creditor from communicating to the consumer 
that additional information is required from the consumer before 
approval may be granted. In such a case, a creditor is not required 
to provide the disclosures at that time. If the creditor 
communicates notice of approval to the consumer by mail, the 
disclosures must be mailed at the same time as the notice of 
approval. If the creditor communicates notice of approval by 
telephone, the creditor must place the disclosures in the mail 
within three business days of the telephone call. If the creditor 
communicates notice of approval in electronic form, the creditor may 
provide the disclosures in electronic form. If the creditor has 
complied 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 creditor may provide the 
disclosures solely in electronic form; otherwise, the creditor must 
place the disclosures in the mail within three business days of the 
communication.

46(g) Effect of Subsequent Events

    1. Approval disclosures. Inaccuracies in the disclosures 
required under Sec.  1026.47(b) are not violations if attributable 
to events occurring after disclosures are made, although creditors 
are restricted under Sec.  1026.48(c)(2) from making certain changes 
to the loan's rate or terms after the creditor provides an approval 
disclosure to a consumer. Since creditors are required provide the 
final disclosures under Sec.  1026.47(c), they need not make new 
approval disclosures in response to an event that occurs after the 
creditor delivers the required approval disclosures, except as 
specified under Sec.  1026.48(c)(4). For example, at the time the 
approval disclosures are provided, the creditor may not know the 
precise disbursement date of the loan funds and must provide 
estimated disclosures based on the best information reasonably 
available and labeled as an estimate. If, after the approval 
disclosures are provided, the creditor learns from the educational 
institution the precise disbursement date, new approval disclosures 
would not be required, unless specifically required under Sec.  
1026.48(c)(4) if other changes are made. Similarly, the creditor may 
not know the precise amounts of each loan to be consolidated in a 
consolidation loan transaction and information about the precise 
amounts would not require new approval disclosures, unless 
specifically required under Sec.  1026.48(c)(4) if other changes are 
made.
    2. Final disclosures. Inaccuracies in the disclosures required 
under Sec.  1026.47(c) are not violations if attributable to events 
occurring after disclosures are made. For example, if the consumer 
initially chooses to defer payment of principal and interest while

[[Page 80032]]

enrolled in a covered educational institution, but later chooses to 
make payments while enrolled, such a change does not make the 
original disclosures inaccurate.

Section 1026.47--Content of Disclosures

    1. As applicable. The disclosures required by this subpart need 
be made only as applicable, unless specifically required otherwise. 
The creditor need not provide any disclosure that is not applicable 
to a particular transaction. For example, in a transaction 
consolidating private education loans, or in transactions under 
Sec.  1026.46(a) for which compliance with this subpart is optional, 
the creditor need not disclose the information under Sec. Sec.  
1026.47(a)(6), and (b)(4), and any other information otherwise 
required to be disclosed under this subpart that is not applicable 
to the transaction. Similarly, creditors making loans to consumers 
where the student is not attending an institution of higher 
education, as defined in Sec.  1026.46(b)(2), need not provide the 
disclosures regarding the self-certification form in Sec.  
1026.47(a)(8).

47(a) Application or Solicitation Disclosures

Paragraph 47(a)(1)(i)

    1. Rates actually offered. The disclosure may state only those 
rates that the creditor is actually prepared to offer. For example, 
a creditor may not disclose a very low interest rate that will not 
in fact be offered at any time. For a loan with variable interest 
rates, the ranges of rates will be considered actually offered if:
    i. For disclosures in applications or solicitations sent by 
direct mail, the rates were in effect within 60 days before mailing;
    ii. For disclosures in applications or solicitations in 
electronic form, the rates were in effect within 30 days before the 
disclosures are sent to a consumer, or for disclosures made on an 
Internet Web site, within 30 days before being viewed by the public;
    iii. For disclosures in printed applications or solicitations 
made available to the general public, the rates were in effect 
within 30 days before printing; or
    iv. For disclosures provided orally in telephone applications or 
solicitations, the rates are currently available at the time the 
disclosures are provided.
    2. Creditworthiness and other factors. If the rate will depend, 
at least in part, on a later determination of the consumer's 
creditworthiness or other factors, the disclosure must include a 
statement that the rate for which the consumer may qualify at 
approval will depend on the consumer's creditworthiness and other 
factors. The creditor may, but is not required to, specify any 
additional factors that it will use to determine the interest rate. 
For example, if the creditor will determine the interest rate based 
on information in the consumer's or cosigner's credit report and the 
type of school the consumer attends, the creditor may state, ``Your 
interest rate will be based on your credit history and other factors 
(cosigner credit and school type).''
    3. Rates applicable to the loan. For a variable-rate private 
education loan, the disclosure of the interest rate or range of 
rates must reflect the rate or rates calculated based on the index 
and margin that will be used to make interest rate adjustments for 
the loan. The creditor may provide a description of the index and 
margin or range of margins used to make interest rate adjustments, 
including a reference to a source, such as a newspaper, where the 
consumer may look up the index.

Paragraph 47(a)(1)(iii)

    1. Coverage. The interest rate is considered variable if the 
terms of the legal obligation allow the creditor to increase the 
interest rate originally disclosed to the consumer and the 
requirements of Sec.  1026.47(a)(1)(iii) apply to all such 
transactions. The provisions do not apply to increases resulting 
from delinquency (including late payment), default, assumption, or 
acceleration.
    2. Limitations. The creditor must disclose how often the rate 
may change and any limit on the amount that the rate may increase at 
any one time. The creditor must also disclose any maximum rate over 
the life of the transaction. If the legal obligation between the 
parties does specify a maximum rate, the creditor must disclose any 
legal limits in the nature of usury or rate ceilings under state or 
Federal statutes or regulations. However, if the applicable maximum 
rate is in the form of a legal limit, such as a state's usury cap 
(rather than a maximum rate specified in the legal obligation 
between the parties), the creditor must disclose that the maximum 
rate is determined by applicable law. The creditor must also 
disclose that the consumer's actual rate may be higher or lower than 
the initial rates disclosed under Sec.  1026.47(a)(1)(i), if 
applicable.

Paragraph 47(a)(1)(iv)

    1. Cosigner or guarantor--changes in applicable interest rate. 
The creditor must state whether the interest rate typically will be 
higher if the loan is not co-signed or guaranteed by a third party. 
The creditor is required to provide a statement of the effect on the 
interest rate and is not required to provide a numerical estimate of 
the effect on the interest rate. For example, a creditor may state: 
``Rates are typically higher without a cosigner.''

47(a)(2) Fees and Default or Late Payment Costs

    1. Fees or range of fees. The creditor must itemize fees 
required to obtain the private education loan. The creditor must 
give a single dollar amount for each fee, unless the fee is based on 
a percentage, in which case a percentage must be stated. If the 
exact amount of the fee is not known at the time of disclosure, the 
creditor may disclose the dollar amount or percentage for each fee 
as an estimated range.
    2. Fees required to obtain the private education loan. The 
creditor must itemize the fees that the consumer must pay to obtain 
the private education loan. Fees disclosed include all finance 
charges under Sec.  1026.4, such as loan origination fees, credit 
report fees, and fees charged upon entering repayment, as well as 
fees not considered finance charges but required to obtain credit, 
such as application fees that are charged whether or not credit is 
extended. Fees disclosed include those paid by the consumer directly 
to the creditor and fees paid to third parties by the creditor on 
the consumer's behalf. Creditors are not required to disclose fees 
that apply if the consumer exercises an option under the loan 
agreement after consummation, such as fees for deferment, 
forbearance, or loan modification.

47(a)(3) Repayment Terms

    1. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest 
will be due on the loan.
    2. Payment deferral options--general. The creditor must describe 
the options that the consumer has under the loan agreement to defer 
payment on the loan. When there is no deferment option provided for 
the loan, the creditor must disclose that fact. Payment deferral 
options required to be disclosed include options for immediate 
deferral of payments, such as when the student is currently enrolled 
at a covered educational institution. The description may include of 
the length of the maximum initial in-school deferment period, the 
types of payments that may be deferred, and a description of any 
payments that are required during the deferment period. The creditor 
may, but need not, disclose any conditions applicable to the 
deferment option, such as that deferment is permitted only while the 
student is continuously enrolled in school. If payment deferral is 
not an option while the student is enrolled in school, the creditor 
may disclose that the consumer must begin repayment upon 
disbursement of the loan and that the consumer may not defer 
repayment while enrolled in school. If the creditor offers payment 
deferral options that may apply during the repayment period, such as 
an option to defer payments if the student returns to school to 
pursue an additional degree, the creditor must include a statement 
referring the consumer to the contract document or promissory note 
for more information.
    3. Payment deferral options--in school deferment. For each 
payment deferral option applicable while the student is enrolled at 
a covered educational institution the creditor must disclose whether 
interest will accrue while the student is enrolled at a covered 
educational institution and, if interest does accrue, whether 
payment of interest may be deferred and added to the principal 
balance.
    4. Combination with cost estimate disclosure. The disclosures of 
the loan term under Sec.  1026.47(a)(3)(i) and of the payment 
deferral options applicable while the student is enrolled at a 
covered educational institution under Sec. Sec.  1026.47(a)(3)(ii) 
and (iii) may be combined with the disclosure of cost estimates 
required in Sec.  1026.47(a)(4). For example, the creditor may 
describe each payment deferral option in the same chart or table 
that provides the cost estimates for each payment deferral option. 
See Appendix H-21.
    5. Bankruptcy limitations. The creditor may comply with Sec.  
1026.47(a)(3)(iv) by disclosing the following statement: ``If you 
file for bankruptcy you may still be required to pay back this 
loan.''

47(a)(4) Cost Estimates

    1. Total cost of the loan. For purposes of Sec.  1026.47(a)(4), 
the creditor must calculate

[[Page 80033]]

the example of the total cost of the loan in accordance with the 
rules in Sec.  1026.18(h) for calculating the loan's total of 
payments.
    2. Basis for estimates. i. The creditor must calculate the total 
cost estimate by determining all finance charges that would be 
applicable to loans with the highest rate of interest required to be 
disclosed under Sec.  1026.47(a)(1)(i). For example, if a creditor 
charges a range of origination fees from 0% to 3%, but the 3% 
origination fee would apply to loans with the highest initial rate, 
the lender must assume the 3% origination fee is charged. The 
creditor must base the total cost estimate on a total loan amount 
that includes all prepaid finance charges and results in a $10,000 
amount financed. For example, if the prepaid finance charges are 
$600, the creditor must base the estimate on a $10,600 total loan 
amount and an amount financed of $10,000. The example must reflect 
an amount provided of $10,000. If the creditor only offers a 
particular private education loan for less than $10,000, the 
creditor may assume a loan amount that results in a $5,000 amount 
financed for that loan.
    ii. If a prepaid finance charge is determined as a percentage of 
the amount financed, for purposes of the example, the creditor 
should assume that the fee is determined as a percentage of the 
total loan amount, even if this is not the creditor's usual 
practice. For example, suppose the consumer requires a disbursement 
of $10,000 and the creditor charges a 3% origination fee. In order 
to calculate the total cost example, the creditor must determine the 
loan amount that will result in a $10,000 amount financed after the 
3% fee is assessed. In this example, the resulting loan amount would 
be $10,309.28. Assessing the 3% origination fee on the loan amount 
of $10,309.28 results in an origination fee of $309.28, which is 
withheld from the loan funds disbursed to the consumer. The 
principal loan amount of $10,309.28 minus the prepaid finance charge 
of $309.28 results in an amount financed of $10,000.
    3. Calculated for each option to defer interest payments. The 
example must include an estimate of the total cost of the loan for 
each in-school deferral option disclosed in Sec.  
1026.47(a)(3)(iii). For example, if the creditor provides the 
consumer with the option to begin making principal and interest 
payments immediately, to defer principal payments but begin making 
interest-only payments immediately, or to defer all principal and 
interest payments while in school, the creditor is required to 
disclose three estimates of the total cost of the loan, one for each 
deferral option. If the creditor adds accrued interest to the loan 
balance (i.e., interest is capitalized), the estimate of the total 
loan cost should be based on the capitalization method that the 
creditor actually uses for the loan. For instance, for each deferred 
payment option where the creditor would capitalize interest on a 
quarterly basis, the total loan cost must be calculated assuming 
interest capitalizes on a quarterly basis.
    4. Deferment period assumptions. Creditors may use either of the 
following two methods for estimating the duration of in-school 
deferment periods:
    i. For loan programs intended for educational expenses of 
undergraduate students, the creditor may assume that the consumer 
defers payments for a four-year matriculation period, plus the 
loan's maximum applicable grace period, if any. For all other loans, 
the creditor may assume that the consumer defers for a two-year 
matriculation period, plus the maximum applicable grace period, if 
any, or the maximum time the consumer may defer payments under the 
loan program, whichever is shorter.
    ii. Alternatively, if the creditor knows that the student will 
be enrolled in a program with a standard duration, the creditor may 
assume that the consumer defers payments for the full duration of 
the program (plus any grace period). For example, if a creditor 
makes loans intended for students enrolled in a four-year medical 
school degree program, the creditor may assume that the consumer 
defers payments for four years plus the loan's maximum applicable 
grace period, if any. However, the creditor may not modify the 
disclosure to correspond to a particular student's situation. For 
example, even if the creditor knows that a student will be a second-
year medical school student, the creditor must assume a four-year 
deferral period.

Paragraph 47(a)(6)(ii)

    1. Terms of Federal student loans. The creditor must disclose 
the interest rates available under each program under Title IV of 
the Higher Education Act of 1965 and whether the rates are fixed or 
variable, as prescribed in the Higher Education Act of 1965 (20 
U.S.C. 1077a). Where the fixed interest rate for a loan varies by 
statute depending on the date of disbursement or receipt of 
application, the creditor must disclose only the interest rate as of 
the time the disclosure is provided.

Paragraph 47(a)(6)(iii)

    1. Web site address. The creditor must include with this 
disclosure an appropriate U.S. Department of Education Web site 
address such as ``federalstudentaid.ed.gov.''

47(b) Approval Disclosures

47(b)(1) Interest Rate

    1. Variable rate disclosures. The interest rate is considered 
variable if the terms of the legal obligation allow the creditor to 
increase the interest rate originally disclosed to the consumer. The 
provisions do not apply to increases resulting from delinquency 
(including late payment), default, assumption, or acceleration. In 
addition to disclosing the information required under Sec. Sec.  
1026.47(b)(ii) and (iii), the creditor must disclose the information 
required under Sec. Sec.  1026.18(f)(1)(i) and (iii)--the 
circumstances under which the rate may increase and the effect of an 
increase, respectively. The creditor is required to disclose the 
maximum monthly payment based on the maximum possible rate in Sec.  
1026.47(b)(3)(viii), and the creditor need not disclose a separate 
example of the payment terms that would result from an increase 
under Sec.  1026.18(f)(1)(iv).
    2. Limitations on rate adjustments. The creditor must disclose 
how often the rate may change and any limit on the amount that the 
rate may increase at any one time. The creditor must also disclose 
any maximum rate over the life of the transaction. If the legal 
obligation between the parties does provide a maximum rate, the 
creditor must disclose any legal limits in the nature of usury or 
rate ceilings under state or Federal statutes or regulations. 
However, if the applicable maximum rate is in the form of a legal 
limit, such as a state's usury cap (rather than a maximum rate 
specified in the legal obligation between the parties), the creditor 
must disclose that the maximum rate is determined by applicable law. 
Compliance with Sec.  1026.18(f)(1)(ii) (requiring disclosure of any 
limitations on the increase of the interest rate) does not 
necessarily constitute compliance with this section. Specifically, 
this section requires that if there are no limitations on interest 
rate increases, the creditor must disclose that fact. By contrast, 
comment 18(f)(1)(ii)-1 states that if there are no limitations the 
creditor need not disclose that fact. In addition, under this 
section, limitations on rate increases include, rather than exclude, 
legal limits in the nature of usury or rate ceilings under state or 
Federal statutes or regulations.
    3. Rates applicable to the loan. For a variable-rate loan, the 
disclosure of the interest rate must reflect the index and margin 
that will be used to make interest rate adjustments for the loan. 
The creditor may provide a description of the index and margin or 
range of margins used to make interest rate adjustments, including a 
reference to a source, such as a newspaper, where the consumer may 
look up the index.

47(b)(2) Fees and Default or Late Payment Costs

    1. Fees and default or late payment costs. Creditors may follow 
the commentary for Sec.  1026.47(a)(2) in complying with Sec.  
1026.47(b)(2). Creditors must disclose the late payment fees 
required to be disclosed under Sec.  1026.18(l) as part of the 
disclosure required under Sec.  1026.47(b)(2)(ii). If the creditor 
includes the itemization of the amount financed under Sec.  
1026.18(c)(1), any fees disclosed as part of the itemization need 
not be separately disclosed elsewhere.

47(b)(3) Repayment Terms

    1. Principal amount. The principal amount must equal what the 
face amount of the note would be as of the time of approval, and it 
must be labeled ``Total Loan Amount.'' See Appendix H-18. This 
amount may be different from the ``principal loan amount'' used to 
calculate the amount financed under comment 18(b)(3)-1, because the 
creditor has the option under that comment of using a ``principal 
loan amount'' that is different from the face amount of the note. If 
the creditor elects to provide an itemization of the amount financed 
under Sec.  1026.18(c)(1) the creditor need not disclose the amount 
financed elsewhere.
    2. Loan term. The term of the loan is the maximum period of time 
during which regularly scheduled payments of principal and interest 
are due on the loan.
    3. Payment deferral options applicable to the consumer. 
Creditors may follow the commentary for Sec.  1026.47(a)(3)(ii) in 
complying with Sec.  1026.47(b)(3)(iii).

[[Page 80034]]

    4. Payments required during enrollment. Required payments that 
must be disclosed include payments of interest and principal, 
interest only, or other payments that the consumer must make during 
the time that the student is enrolled. Compliance with Sec.  
1026.18(g) constitutes compliance with Sec.  1026.47(b)(3)(iv).
    5. Bankruptcy limitations. The creditor may comply with Sec.  
1026.47(b)(3)(vi) by disclosing the following statement: ``If you 
file for bankruptcy you may still be required to pay back this 
loan.''
    6. An estimate of the total amount for repayment. The creditor 
must disclose an estimate of the total amount for repayment at two 
interest rates:
    i. The interest rate in effect on the date of approval. 
Compliance with the total of payments disclosure requirement of 
Sec.  1026.18(h) constitutes compliance with this requirement.
    ii. The maximum possible rate of interest applicable to the loan 
or, if the maximum rate cannot be determined, a rate of 25%. If the 
legal obligation between the parties specifies a maximum rate of 
interest, the creditor must calculate the total amount for repayment 
based on that rate. If the legal obligation does not specify a 
maximum rate but a usury or rate ceiling under state or Federal 
statutes or regulations applies, the creditor must use that rate. If 
a there is no maximum rate in the legal obligation or under a usury 
or rate ceiling, the creditor must base the disclosure on a rate of 
25% and must disclose that there is no maximum rate and that the 
total amount for repayment disclosed under Sec.  
1026.47(b)(3)(vii)(B) is an estimate and will be higher if the 
applicable interest rate increases.
    iii. If terms of the legal obligation provide a limitation on 
the amount that the interest rate may increase at any one time, the 
creditor may reflect the effect of the interest rate limitation in 
calculating the total cost example. For example, if the legal 
obligation provides that the interest rate may not increase by more 
than three percentage points each year, the creditor may assume that 
the rate increases by three percentage points each year until it 
reaches that maximum possible rate, or if a maximum rate cannot be 
determined, an interest rate of 25%.
    7. The maximum monthly payment. The creditor must disclose the 
maximum payment that the consumer could be required to make under 
the loan agreement, calculated using the maximum rate of interest 
applicable to the loan, or if the maximum rate cannot be determined, 
a rate of 25%. The creditor must determine and disclose the maximum 
rate of interest in accordance with comments 47(b)(3)-6.ii and 
47(b)(3)-6.iii. In addition, if a maximum rate cannot be determined, 
the creditor must state that there is no maximum rate and that the 
monthly payment amounts disclosed under Sec.  1026.47(b)(3)(viii) 
are estimates and will be higher if the applicable interest rate 
increases.

47(b)(4) Alternatives to Private Education Loans

    1. General. Creditors may use the guidance provided in the 
commentary for Sec.  1026.47(a)(6) in complying with Sec.  
1026.47(b)(4).

47(b)(5) Rights of the Consumer

    1. Notice of acceptance period. The disclosure that the consumer 
may accept the terms of the loan until the acceptance period under 
Sec.  1026.48(c)(1) has expired must include the specific date on 
which the acceptance period expires and state that the consumer may 
accept the terms of the loan until that date. Under Sec.  
1026.48(c)(1), the date on which the acceptance period expires is 
based on when the consumer receives the disclosures. If the creditor 
mails the disclosures, the consumer is considered to have received 
them three business days after the creditor places the disclosures 
in the mail See Sec.  1026.46(d)(4). If the creditor provides an 
acceptance period longer than the minimum 30 calendar days, the 
disclosure must reflect the later date. The disclosure must also 
specify the method or methods by which the consumer may communicate 
acceptance.

47(c) Final Disclosures

    1. Notice of right to cancel. The disclosure of the right to 
cancel must include the specific date on which the three-day 
cancellation period expires and state that the consumer has a right 
to cancel by that date. See comments 48(d)-1 and -2. For example, if 
the disclosures were mailed to the consumer on Friday, June 1, and 
the consumer is deemed to receive them on Tuesday, June 5, the 
creditor could state: ``You have a right to cancel this transaction, 
without penalty, by midnight on June 8, 2009. No funds will be 
disbursed to you or to your school until after this time. You may 
cancel by calling us at 800-XXX-XXXX.'' If the creditor permits 
cancellation by mail, the statement must specify that the consumer's 
mailed request will be deemed timely if placed in the mail not later 
than the cancellation date specified on the disclosure. The 
disclosure must also specify the method or methods by which the 
consumer may cancel.
    2. More conspicuous. The statement of the right to cancel must 
be more conspicuous than any other disclosure required under this 
section except for the finance charge, the interest rate, and the 
creditor's identity. See Sec.  1026.46(c)(2)(iii). The statement 
will be deemed to be made more conspicuous if it is segregated from 
other disclosures, placed near or at the top of the disclosure 
document, and highlighted in relation to other required disclosures. 
For example, the statement may be outlined with a prominent, 
noticeable box; printed in contrasting color; printed in larger 
type, bold print, or different type face; underlined; or set off 
with asterisks.

Section 1026.48--Limitations on Private Education Loans

    1. Co-branding--definition of marketing. The prohibition on co-
branding in Sec. Sec.  1026.48(a) and (b) applies to the marketing 
of private education loans. The term marketing includes any 
advertisement under Sec.  1026.2(a)(2). In addition, the term 
marketing includes any document provided by the creditor to the 
consumer related to a specific transaction, such as an application 
or solicitation, a promissory note or a contract provided to the 
consumer. For example, prominently displaying the name of the 
educational institution at the top of the application form or 
promissory note without mentioning the name of the creditor, such as 
by naming the loan product the ``University of ABC Loan,'' would be 
prohibited.
    2. Implied endorsement. A suggestion that a private education 
loan is offered or made by the covered educational institution 
instead of by the creditor is included in the prohibition on 
implying that the covered educational institution endorses the 
private education loan under Sec.  1026.48(a)(1). For example, 
naming the loan the ``University of ABC Loan,'' suggests that the 
loan is offered by the educational institution. However, the use of 
a creditor's full name, even if that name includes the name of a 
covered educational institution, does not imply endorsement. For 
example, a credit union whose name includes the name of a covered 
educational institution is not prohibited from using its own name. 
In addition, the authorized use of a state seal by a state or an 
institution of higher education in the marketing of state education 
loan products does not imply endorsement.
    3. Disclosure. i. A creditor is considered to have complied with 
Sec.  1026.48(a)(2) if the creditor's marketing contains a clear and 
conspicuous statement, equally prominent and closely proximate to 
the reference to the covered educational institution, using the name 
of the creditor and the name of the covered educational institution 
that the covered educational institution does not endorse the 
creditor's loans and that the creditor is not affiliated with the 
covered educational institution. For example, ``[Name of creditor]'s 
loans are not endorsed by [name of school] and [name of creditor] is 
not affiliated with [name of school].'' The statement is considered 
to be equally prominent and closely proximate if it is the same type 
size and is located immediately next to or directly above or below 
the reference to the educational institution, without any 
intervening text or graphical displays.
    ii. A creditor is considered to have complied with Sec.  
1026.48(b) if the creditor's marketing contains a clear and 
conspicuous statement, equally prominent and closely proximate to 
the reference to the covered educational institution, using the name 
of the creditor's loan or loan program, the name of the covered 
educational institution, and the name of the creditor, that the 
creditor's loans are not offered or made by the covered educational 
institution, but are made by the creditor. For example, ``[Name of 
loan or loan program] is not being offered or made by [name of 
school], but by [name of creditor].'' The statement is considered to 
be equally prominent and closely proximate if it is the same type 
size and is located immediately next to or directly above or below 
the reference to the educational institution, without any 
intervening text or graphical displays.

48(c) Consumer's Right to Accept

    1. 30 day acceptance period. The creditor must provide the 
consumer with at least 30 calendar days from the date the consumer

[[Page 80035]]

receives the disclosures required under Sec.  1026.47(b) to accept 
the terms of the loan. The creditor may provide the consumer with a 
longer period of time. If the creditor places the disclosures in the 
mail, the consumer is considered to have received them three 
business days after they are mailed under Sec.  1026.46(d)(4). For 
purposes of determining when a consumer receives mailed disclosures, 
``business day'' means all calendar days except Sundays and the 
legal public holidays referred to in Sec.  1026.2(a)(6). See comment 
46(d)-1. The consumer may accept the loan at any time before the end 
of the 30-day period.
    2. Method of acceptance. The creditor must specify a method or 
methods by which the consumer can accept the loan at any time within 
the 30-day acceptance period. The creditor may require the consumer 
to communicate acceptance orally or in writing. Acceptance may also 
be communicated electronically, but electronic communication must 
not be the only means provided for the consumer to communicate 
acceptance unless the creditor has provided the approval disclosure 
electronically in 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.). If 
acceptance by mail is allowed, the consumer's communication of 
acceptance is considered timely if placed in the mail within the 30-
day period.
    3. Prohibition on changes to rates and terms. The prohibition on 
changes to the rates and terms of the loan applies to changes that 
affect those terms that are required to be disclosed under 
Sec. Sec.  1026.47(b) and (c). The creditor is permitted to make 
changes that do not affect any of the terms disclosed to the 
consumer under those sections.
    4. Permissible changes to rates and terms--re-disclosure not 
required. Creditors are not required to consummate a loan where the 
extension of credit would be prohibited by law or where the creditor 
has reason to believe that the consumer has committed fraud. A 
creditor may make changes to the rate based on adjustments to the 
index used for the loan and changes that will unequivocally benefit 
the consumer. For example, a creditor is permitted to reduce the 
interest rate or lower the amount of a fee. A creditor may also 
reduce the loan amount based on a certification or other information 
received from a covered educational institution or from the consumer 
indicating that the student's cost of attendance has decreased or 
the amount of other financial aid has increased. A creditor may also 
withdraw the loan approval based on a certification or other 
information received from a covered educational institution or from 
the consumer indicating that the student is not enrolled in the 
institution. For these changes permitted by Sec.  1026.48(c)(3), the 
creditor is not required to provide a new set of approval 
disclosures required under Sec.  1026.47(b) or provide the consumer 
with a new 30-day acceptance period under Sec.  1026.48(c)(1). The 
creditor must provide the final disclosures under Sec.  1026.47(c).
    5. Permissible changes to rates and terms--school certification. 
If the creditor reduces the loan amount based on information that 
the student's cost of attendance has decreased or the amount of 
other financial aid has increased, the creditor may make certain 
corresponding changes to the rate and terms. The creditor may change 
the rate or terms to those that the consumer would have received if 
the consumer had applied for the reduced loan amount. For example, 
assume a consumer applies for, and is approved for, a $10,000 loan 
at a 7% interest rate. However, after the consumer receives the 
approval disclosures, the consumer's school certifies that the 
consumer's financial need is only $8,000. The creditor may reduce 
the loan amount for which the consumer is approved to $8,000. The 
creditor may also, for example, increase the interest rate on the 
loan to 7.125%, but only if the consumer would have received a rate 
of 7.125% if the consumer had originally applied for an $8,000 loan.
    6. Permissible changes to rates and terms--re-disclosure 
required. A creditor may make changes to the interest rate or terms 
to accommodate a request from a consumer. For example, assume a 
consumer applies for a $10,000 loan and is approved for the $10,000 
amount at an interest rate of 6%. After the creditor has provided 
the approval disclosures, the consumer's financial need increases, 
and the consumer requests to a loan amount of $15,000. In this 
situation, the creditor is permitted to offer a $15,000 loan, and to 
make any other changes such as raising the interest rate to 7%, in 
response to the consumer's request. The creditor must provide a new 
set of disclosures under Sec.  1026.47(b) and provide the consumer 
with 30 days to accept the offer under Sec.  1026.48(c) for the 
$15,000 loan offered in response to the consumer's request. However, 
because the consumer may choose not to accept the offer for the 
$15,000 loan at the higher interest rate, the creditor may not 
withdraw or change the rate or terms of the offer for the $10,000 
loan, except as permitted under Sec.  1026.48(c)(3), unless the 
consumer accepts the $15,000 loan.

48(d) Consumer's Right to Cancel

    1. Right to cancel. If the creditor mails the disclosures, the 
disclosures are considered received by the consumer three business 
days after the disclosures were mailed. For purposes of determining 
when the consumer receives the disclosures, the term ``business 
day'' is defined as all calendar days except Sunday and the legal 
public holidays referred to in Sec.  1026.2(a)(6). See Sec.  
1026.46(d)(4). The consumer has three business days from the date on 
which the disclosures are deemed received to cancel the loan. For 
example, if the creditor places the disclosures in the mail on 
Thursday, June 4, the disclosures are considered received on Monday, 
June 8. The consumer may cancel any time before midnight Thursday, 
June 11. The creditor may provide the consumer with more time to 
cancel the loan than the minimum three business days required under 
this section. If the creditor provides the consumer with a longer 
period of time in which to cancel the loan, the creditor may 
disburse the funds three business days after the consumer has 
received the disclosures required under this section, but the 
creditor must honor the consumer's later timely cancellation 
request.
    2. Method of cancellation. The creditor must specify a method or 
methods by which the consumer may cancel. For example, the creditor 
may require the consumer to communicate cancellation orally or in 
writing. Cancellation may also be communicated electronically, but 
electronic communication must not be the only means by which the 
consumer may cancel unless the creditor provided the final 
disclosure electronically in 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.). If the creditor allows cancellation by mail, the creditor 
must specify an address or the name and address of an agent of the 
creditor to receive notice of cancellation. The creditor must wait 
to disburse funds until it is reasonably satisfied that the consumer 
has not canceled. For example, the creditor may satisfy itself by 
waiting a reasonable time after expiration of the cancellation 
period to allow for delivery of a mailed notice. The creditor may 
also satisfy itself by obtaining a written statement from the 
consumer, which must be provided to and signed by the consumer only 
at the end of the three-day period, that the right has not been 
exercised.
    3. Cancellation without penalty. The creditor may not charge the 
consumer a fee for exercising the right to cancel under Sec.  
1026.48(d). The prohibition extends only to fees charged 
specifically for canceling the loan. The creditor is not required to 
refund fees, such as an application fee, that are charged to all 
consumers whether or not the consumer cancels the loan.

48(e) Self-Certification Form

    1. General. Section 1026.48(e) requires that the creditor obtain 
the self-certification form, signed by the consumer, before 
consummating the private education loan. The rule applies only to 
private education loans that will be used for the postsecondary 
educational expenses of a student while that student is attending an 
institution of higher education as defined in Sec.  1026.46(b)(2). 
It does not apply to all covered educational institutions. The 
requirement applies even if the student is not currently attending 
an institution of higher education, but will use the loan proceeds 
for postsecondary educational expenses while attending such 
institution. For example, a creditor is required to obtain the form 
before consummating a private education loan provided to a high 
school senior for expenses to be incurred during the consumer's 
first year of college. This provision does not require that the 
creditor obtain the self-certification form in instances where the 
loan is not intended for a student attending an institution of 
higher education, such as when the consumer is consolidating loans 
after graduation. Section 155(a)(2) of the Higher Education Act of 
1965 provides that the form shall be made available to the consumer 
by the relevant institution of higher education. However, Sec.  
1026.48(e) provides flexibility to institutions of higher education 
and creditors as to how the completed self-certification form is 
provided to the lender. The creditor

[[Page 80036]]

may receive the form directly from the consumer, or the creditor may 
receive the form from the consumer through the institution of higher 
education. In addition, the creditor may provide the form, and the 
information the consumer will require to complete the form, directly 
to the consumer.
    2. Electronic signature. Under section 155(a)(2) of the Higher 
Education Act of 1965, the institution of higher education may 
provide the self-certification form to the consumer in written or 
electronic form. Under section 155(a)(5) of the Higher Education Act 
of 1965, the form may be signed electronically by the consumer. A 
creditor may accept the self-certification form from the consumer in 
electronic form. A consumer's electronic signature is considered 
valid if it meets the requirements issued by the Department of 
Education under section 155(a)(5) of the Higher Education Act of 
1965.

48(f) Provision of Information by Preferred Lenders

    1. General. Section 1026.48(f) does not specify the format in 
which creditors must provide the required information to the covered 
educational institution. Creditors may choose to provide only the 
required information or may provide copies of the form or forms the 
lender uses to comply with Sec.  1026.47(a). A creditor is only 
required to provide the required information if the creditor is 
aware that it is a party to a preferred lender arrangement. For 
example, if a creditor is placed on a covered educational 
institution's preferred lender list without the creditor's 
knowledge, the creditor is not required to comply with Sec.  
1026.48(f).

Subpart G--Special Rules Applicable to Credit Card Accounts and Open-
End Credit Offered to College Students

Section 1026.51 Ability To Pay

51(a) General Rule

51(a)(1)(i) Consideration of Ability to Pay

    1. Consideration of additional factors. Section 1026.51(a) 
requires a card issuer to consider a consumer's independent ability 
to make the required minimum periodic payments under the terms of an 
account based on the consumer's independent income or assets and 
current obligations. The card issuer may also consider consumer 
reports, credit scores, and other factors, consistent with 
Regulation B (12 CFR part 1002).
    2. Ability to pay as of application or consideration of 
increase. A card issuer complies with Sec.  1026.51(a) if it bases 
its determination regarding a consumer's independent ability to make 
the required minimum periodic payments on the facts and 
circumstances known to the card issuer at the time the consumer 
applies to open the credit card account or when the card issuer 
considers increasing the credit line on an existing account.
    3. Credit line increase. When a card issuer considers increasing 
the credit line on an existing account, Sec.  1026.51(a) applies 
whether the consideration is based upon a request of the consumer or 
is initiated by the card issuer.
    4. Income and assets. i. Sources of information. For purposes of 
Sec.  1026.51(a), a card issuer may consider the consumer's income 
and assets based on:
    A. Information provided by the consumer in connection with the 
credit card account under an open-end (not home-secured) consumer 
credit plan;
    B. Information provided by the consumer in connection with any 
other financial relationship the card issuer or its affiliates have 
with the consumer (subject to any applicable information-sharing 
rules);
    C. Information obtained through third parties (subject to any 
applicable information-sharing rules); and
    D. Information obtained through any empirically derived, 
demonstrably and statistically sound model that reasonably estimates 
a consumer's income and assets.
    ii. Income and assets of persons liable for debts incurred on 
account. For purposes of Sec.  1026.51(a), a card issuer may 
consider any current or reasonably expected income and assets of the 
consumer or consumers who are applying for a new account and will be 
liable for debts incurred on that account. Similarly, when a card 
issuer is considering whether to increase the credit limit on an 
existing account, the card issuer may consider any current or 
reasonably expected income and assets of the consumer or consumers 
who are accountholders and are liable for debts incurred on that 
account. A card issuer may also consider any current or reasonably 
expected income and assets of a cosigner or guarantor who is or will 
be liable for debts incurred on the account. However, a card issuer 
may not use the income and assets of an authorized user or other 
person who is not liable for debts incurred on the account to 
satisfy the requirements of Sec.  1026.51, unless a Federal or state 
statute or regulation grants a consumer who is liable for debts 
incurred on the account an ownership interest in such income and 
assets. Information about current or reasonably expected income and 
assets includes, for example, information about current or expected 
salary, wages, bonus pay, tips, and commissions. Employment may be 
full-time, part-time, seasonal, irregular, military, or self-
employment. Other sources of income could include interest or 
dividends, retirement benefits, public assistance, alimony, child 
support, or separate maintenance payments. A card issuer may also 
take into account assets such as savings accounts or investments.
    iii. Household income and assets. Consideration of information 
regarding a consumer's household income does not by itself satisfy 
the requirement in Sec.  1026.51(a) to consider the consumer's 
independent ability to pay. For example, if a card issuer requests 
on its application forms that applicants provide their ``household 
income,'' the card issuer may not rely solely on the information 
provided by applicants to satisfy the requirements of Sec.  
1026.51(a). Instead, the card issuer would need to obtain additional 
information about an applicant's independent income (such as by 
contacting the applicant). However, if a card issuer requests on its 
application forms that applicants provide their income without 
reference to household income (such as by requesting ``income'' or 
``salary''), the card issuer may rely on the information provided by 
applicants to satisfy the requirements of Sec.  1026.51(a).
    5. Current obligations. A card issuer may consider the 
consumer's current obligations based on information provided by the 
consumer or in a consumer report. In evaluating a consumer's current 
obligations, a card issuer need not assume that credit lines for 
other obligations are fully utilized.
    6. Joint applicants and joint accountholders. With respect to 
the opening of a joint account for two or more consumers or a credit 
line increase on such an account, the card issuer may consider the 
collective ability of all persons who are or will be liable for 
debts incurred on the account to make the required payments.

51(a)(2) Minimum Periodic Payments

    1. Applicable minimum payment formula. For purposes of 
estimating required minimum periodic payments under the safe harbor 
set forth in Sec.  1026.51(a)(2)(ii), if the account has or may have 
a promotional program, such as a deferred payment or similar 
program, where there is no applicable minimum payment formula during 
the promotional period, the issuer must estimate the required 
minimum periodic payment based on the minimum payment formula that 
will apply when the promotion ends.
    2. Interest rate for purchases. For purposes of estimating 
required minimum periodic payments under the safe harbor set forth 
in Sec.  1026.51(a)(2)(ii), if the interest rate for purchases is or 
may be a promotional rate, the issuer must use the post-promotional 
rate to estimate interest charges.
    3. Mandatory fees. For purposes of estimating required minimum 
periodic payments under the safe harbor set forth in Sec.  
1026.51(a)(2)(ii), mandatory fees that must be assumed to be charged 
include those fees the card issuer knows the consumer will be 
required to pay under the terms of the account if the account is 
opened, such as an annual fee. If a mandatory fee is a promotional 
fee (as defined in Sec.  1026.16(g)), the issuer must use the post-
promotional fee amount for purposes of Sec.  1026.51(a)(2)(ii).

51(b) Rules Affecting Young Consumers

    1. Age as of date of application or consideration of credit line 
increase. Sections 1026.51(b)(1) and (b)(2) apply only to a consumer 
who has not attained the age of 21 as of the date of submission of 
the application under Sec.  1026.51(b)(1) or the date the credit 
line increase is requested by the consumer (or if no request has 
been made, the date the credit line increase is considered by the 
card issuer) under Sec.  1026.51(b)(2).
    2. Liability of cosigner, guarantor, or joint accountholder. 
Sections 1026.51(b)(1)(ii) and (b)(2) require the signature or 
written consent of a cosigner, guarantor, or joint accountholder 
agreeing either to be secondarily liable for any debt on the account 
incurred by the consumer before the consumer has attained the age of 
21 or to be jointly liable with the consumer for any debt on the 
account. Sections 1026.51(b)(1)(ii) and (b)(2) do not prohibit a 
card issuer from also requiring the cosigner, guarantor, or joint 
accountholder to assume liability for debts

[[Page 80037]]

incurred after the consumer has attained the age of 21, consistent 
with any agreement made between the parties.
    3. Authorized users exempt. If a consumer who has not attained 
the age of 21 is being added to another person's account as an 
authorized user and has no liability for debts incurred on the 
account, Sec.  1026.51(b)(1) and (b)(2) do not apply.
    4. Electronic application. Consistent with Sec.  
1026.5(a)(1)(iii), an application may be provided to the consumer 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.) in the 
circumstances set forth in Sec.  1026.60. The electronic submission 
of an application from a consumer or a consent to a credit line 
increase from a cosigner, guarantor, or joint accountholder to a 
card issuer would constitute a written application or consent for 
purposes of Sec.  1026.51(b) and would not be considered a consumer 
disclosure for purposes of the E-Sign Act.

51(b)(1) Applications from young consumers

    1. Relation to Regulation B. In considering an application or 
credit line increase on the credit card account of a consumer who is 
less than 21 years old, creditors must comply with the applicable 
rules in Regulation B (12 CFR part 1002).
    2. Financial information. Information regarding income and 
assets that satisfies the requirements of Sec.  1026.51(a) also 
satisfies the requirements of Sec.  1026.51(b)(1). See comment 
51(a)(1)-4.

51(b)(2) Credit line increases for young consumers

    1. Credit line request by joint accountholder aged 21 or older. 
The requirement under Sec.  1026.51(b)(2) that a cosigner, 
guarantor, or joint accountholder for a credit card account opened 
pursuant to Sec.  1026.51(b)(1)(ii) must agree in writing to assume 
liability for the increase before a credit line is increased, does 
not apply if the cosigner, guarantor or joint accountholder who is 
at least 21 years old initiates the request for the increase.

Section 1026.52--Limitations on Fees

52(a) Limitations prior to account opening and during first year after 
account opening

52(a)(1) General rule

    1. Application. The 25 percent limit in Sec.  1026.52(a)(1) 
applies to fees that the card issuer charges to the account as well 
as to fees that the card issuer requires the consumer to pay with 
respect to the account through other means (such as through a 
payment from the consumer's asset account to the card issuer or from 
another credit account provided by the card issuer). For example:
    i. Assume that, under the terms of a credit card account, a 
consumer is required to pay $120 in fees for the issuance or 
availability of credit at account opening. The consumer is also 
required to pay a cash advance fee that is equal to five percent of 
the cash advance and a late payment fee of $15 if the required 
minimum periodic payment is not received by the payment due date 
(which is the twenty-fifth of the month). At account opening on 
January 1 of year one, the credit limit for the account is $500. 
Section 1026.52(a)(1) permits the card issuer to charge to the 
account the $120 in fees for the issuance or availability of credit 
at account opening. On February 1 of year one, the consumer uses the 
account for a $100 cash advance. Section 1026.52(a)(1) permits the 
card issuer to charge a $5 cash-advance fee to the account. On March 
26 of year one, the card issuer has not received the consumer's 
required minimum periodic payment. Section 1026.52(a)(2) permits the 
card issuer to charge a $15 late payment fee to the account. On July 
15 of year one, the consumer uses the account for a $50 cash 
advance. Section 1026.52(a)(1) does not permit the card issuer to 
charge a $2.50 cash advance fee to the account. Furthermore, Sec.  
1026.52(a)(1) prohibits the card issuer from collecting the $2.50 
cash advance fee from the consumer by other means.
    ii. Assume that, under the terms of a credit card account, a 
consumer is required to pay $125 in fees for the issuance or 
availability of credit during the first year after account opening. 
At account opening on January 1 of year one, the credit limit for 
the account is $500. Section 1026.52(a)(1) permits the card issuer 
to charge the $125 in fees to the account. However, Sec.  
1026.52(a)(1) prohibits the card issuer from requiring the consumer 
to make payments to the card issuer for additional non-exempt fees 
with respect to the account prior to account opening or during the 
first year after account opening. Section 1026.52(a)(1) also 
prohibits the card issuer from requiring the consumer to open a 
separate credit account with the card issuer to fund the payment of 
additional non-exempt fees prior to the opening of the credit card 
account or during the first year after the credit card account is 
opened.
    iii. Assume that, on January 1 of year one, a consumer is 
required to pay a $100 fee in order to apply for a credit card 
account. On January 5, the card issuer approves the consumer's 
application, assigns the account a credit limit of $1,000, and 
provides the consumer with account-opening disclosures consistent 
with Sec.  1026.6. The date on which the account may first be used 
by the consumer to engage in transactions is January 5. The consumer 
is required to pay $150 in fees for the issuance or availability of 
credit, which Sec.  1026.52(a)(1) permits the card issuer to charge 
to the account on January 5. However, because the $100 application 
fee is subject to the 25 percent limit in Sec.  1026.52(a)(1), the 
card issuer is prohibited from requiring the consumer to pay any 
additional non-exempt fees with respect to the account until January 
5 of year two.
    2. Fees that exceed 25 percent limit. A card issuer that charges 
a fee to a credit card account that exceeds the 25 percent limit 
complies with Sec.  1026.52(a)(1) if the card issuer waives or 
removes the fee and any associated interest charges or credits the 
account for an amount equal to the fee and any associated interest 
charges within a reasonable amount of time but no later than the end 
of the billing cycle following the billing cycle during which the 
fee was charged. For example, assuming the facts in the example in 
comment 52(a)(1)-1.i above, the card issuer complies with Sec.  
1026.52(a)(1) if the card issuer charged the $2.50 cash advance fee 
to the account on July 15 of year one but waived or removed the fee 
or credited the account for $2.50 (plus any interest charges on that 
$2.50) at the end of the billing cycle.
    3. Changes in credit limit during first year. i. Increases in 
credit limit. If a card issuer increases the credit limit during the 
first year after the account is opened, Sec.  1026.52(a)(1) does not 
permit the card issuer to require the consumer to pay additional 
fees that would otherwise be prohibited (such as a fee for 
increasing the credit limit). For example, assume that, at account 
opening on January 1, the credit limit for a credit card account is 
$400 and the consumer is required to pay $100 in fees for the 
issuance or availability of credit. On July 1, the card issuer 
increases the credit limit for the account to $600. Section 
1026.52(a)(1) does not permit the card issuer to require the 
consumer to pay additional fees based on the increased credit limit.
    ii. Decreases in credit limit. If a card issuer decreases the 
credit limit during the first year after the account is opened, 
Sec.  1026.52(a)(1) requires the card issuer to waive or remove any 
fees charged to the account that exceed 25 percent of the reduced 
credit limit or to credit the account for an amount equal to any 
fees the consumer was required to pay with respect to the account 
that exceed 25 percent of the reduced credit limit within a 
reasonable amount of time but no later than the end of the billing 
cycle following the billing cycle during which the credit limit was 
reduced. For example:
    A. Assume that, at account opening on January 1, the credit 
limit for a credit card account is $1,000 and the consumer is 
required to pay $250 in fees for the issuance or availability of 
credit. The billing cycles for the account begin on the first day of 
the month and end on the last day of the month. On July 30, the card 
issuer decreases the credit limit for the account to $500. Section 
1026.52(a)(1) requires the card issuer to waive or remove $175 in 
fees from the account or to credit the account for an amount equal 
to $175 within a reasonable amount of time but no later than August 
31.
    B. Assume that, on June 25 of year one, a consumer is required 
to pay a $75 fee in order to apply for a credit card account. At 
account opening on July 1 of year one, the credit limit for the 
account is $500 and the consumer is required to pay $50 in fees for 
the issuance or availability of credit. The billing cycles for the 
account begin on the first day of the month and end on the last day 
of the month. On February 15 of year two, the card issuer decreases 
the credit limit for the account to $250. Section 1026.52(a)(1) 
requires the card issuer to waive or remove fees from the account or 
to credit the account for an amount equal to $62.50 within a 
reasonable amount of time but no later than March 31 of year two.
    4. Date on which account may first be used by consumer to engage 
in transactions. i. Methods of compliance. For purposes of Sec.  
1026.52(a)(1), an account is considered open no earlier than the 
date on which the

[[Page 80038]]

account may first be used by the consumer to engage in transactions. 
A card issuer may consider an account open for purposes of Sec.  
1026.52(a)(1) on any of the following dates:
    A. The date the account is first used by the consumer for a 
transaction (such as when an account is established in connection 
with financing the purchase of goods or services).
    B. The date the consumer complies with any reasonable activation 
procedures imposed by the card issuer for preventing fraud or 
unauthorized use of a new account (such as requiring the consumer to 
provide information that verifies his or her identity), provided 
that the account may be used for transactions on that date.
    C. The date that is seven days after the card issuer mails or 
delivers to the consumer account-opening disclosures that comply 
with Sec.  1026.6, provided that the consumer may use the account 
for transactions after complying with any reasonable activation 
procedures imposed by the card issuer for preventing fraud or 
unauthorized use of the new account (such as requiring the consumer 
to provide information that verifies his or her identity). If a card 
issuer has reasonable procedures designed to ensure that account-
opening disclosures that comply with Sec.  1026.6 are mailed or 
delivered to consumers no later than a certain number of days after 
the card issuer establishes the account, the card issuer may add 
that number of days to the seven-day period for purposes of 
determining the date on which the account was opened.
    ii. Examples. A. Assume that, on July 1 of year one, a credit 
card account under an open-end (not home-secured) consumer credit 
plan is established in connection with financing the purchase of 
goods or services and a $500 transaction is charged to the account 
by the consumer. The card issuer may consider the account open on 
July 1 of year one for purposes of Sec.  1026.52(a)(1). Accordingly, 
Sec.  1026.52(a)(1) ceases to apply to the account on July 1 of year 
two.
    B. Assume that, on July 1 of year one, a card issuer approves a 
consumer's application for a credit card account under an open-end 
(not home-secured) consumer credit plan and establishes the account 
on its internal systems. On July 5, the card issuer mails or 
delivers to the consumer account-opening disclosures that comply 
with Sec.  1026.6. If the consumer may use the account for 
transactions on the date the consumer complies with any reasonable 
procedures imposed by the card issuer for preventing fraud or 
unauthorized use, the card issuer may consider the account open on 
July 12 of year one for purposes of Sec.  1026.52(a)(1). 
Accordingly, Sec.  1026.52(a)(1) ceases to apply to the account on 
July 12 of year two.
    C. Same facts as in paragraph B above except that the card 
issuer has adopted reasonable procedures designed to ensure that 
account-opening disclosures that comply with Sec.  1026.6 are mailed 
or delivered to consumers no later than three days after an account 
is established on its systems. If the consumer may use the account 
for transactions on the date the consumer complies with any 
reasonable procedures imposed by the card issuer for preventing 
fraud or unauthorized use, the card issuer may consider the account 
open on July 11 of year one for purposes of Sec.  1026.52(a)(1). 
Accordingly, Sec.  1026.52(a)(1) ceases to apply to the account on 
July 11 of year two. However, if the consumer uses the account for a 
transaction or complies with the card issuer's reasonable procedures 
for preventing fraud or unauthorized use on July 8 of year one, the 
card issuer may, at its option, consider the account open on that 
date for purposes of Sec.  1026.52(a)(1) and Sec.  1026.52(a)(1) 
therefore ceases to apply to the account on July 8 of year two.

52(a)(2) Fees Not Subject to Limitations

    1. Covered fees. Except as provided in Sec.  1026.52(a)(2), 
Sec.  1026.52(a) applies to any fees or other charges that a card 
issuer will or may require the consumer to pay with respect to a 
credit card account prior to account opening and during the first 
year after account opening, other than charges attributable to 
periodic interest rates. For example, Sec.  1026.52(a) applies to:
    i. Fees that the consumer is required to pay for the issuance or 
availability of credit described in Sec.  1026.60(b)(2), including 
any fee based on account activity or inactivity and any fee that a 
consumer is required to pay in order to receive a particular credit 
limit;
    ii. Fees for insurance described in Sec.  1026.4(b)(7) or debt 
cancellation or debt suspension coverage described in Sec.  
1026.4(b)(10) written in connection with a credit transaction, if 
the insurance or debt cancellation or debt suspension coverage is 
required by the terms of the account;
    iii. Fees that the consumer is required to pay in order to 
engage in transactions using the account (such as cash advance fees, 
balance transfer fees, foreign transaction fees, and fees for using 
the account for purchases);
    iv. Fees that the consumer is required to pay for violating the 
terms of the account (except to the extent specifically excluded by 
Sec.  1026.52(a)(2)(i));
    v. Fixed finance charges; and
    vi. Minimum charges imposed if a charge would otherwise have 
been determined by applying a periodic interest rate to a balance 
except for the fact that such charge is smaller than the minimum.
    2. Fees the consumer is not required to pay. Section 
1026.52(a)(2)(ii) provides that Sec.  1026.52(a) does not apply to 
fees that the consumer is not required to pay with respect to the 
account. For example, Sec.  1026.52(a) generally does not apply to 
fees for making an expedited payment (to the extent permitted by 
Sec.  1026.10(e)), fees for optional services (such as travel 
insurance), fees for reissuing a lost or stolen card, or statement 
reproduction fees.
    3. Security deposits. A security deposit that is charged to a 
credit card account is a fee for purposes of Sec.  1026.52(a). In 
contrast, however, a security deposit is not subject to the 25 
percent limit in Sec.  1026.52(a)(1) if it is not charged to the 
account. For example, Sec.  1026.52(a)(1) does not prohibit a card 
issuer from requiring a consumer to provide funds at account opening 
pledged as security for the account that exceed 25 percent of the 
credit limit at account opening so long as those funds are not 
obtained from the account.

52(a)(3) Rule of Construction

    1. Fees or charges otherwise prohibited by law. Section 
1026.52(a) does not authorize the imposition or payment of fees or 
charges otherwise prohibited by law. For example, see 16 CFR 
310.4(a)(4).

52(b) Limitations on Penalty Fees

    1. Fees for violating the account terms or other requirements. 
For purposes of Sec.  1026.52(b), a fee includes any charge imposed 
by a card issuer based on an act or omission that violates the terms 
of the account or any other requirements imposed by the card issuer 
with respect to the account, other than charges attributable to 
periodic interest rates. Accordingly, for purposes of Sec.  
1026.52(b), a fee does not include charges attributable to an 
increase in an annual percentage rate based on an act or omission 
that violates the terms or other requirements of an account.
    i. The following are examples of fees that are subject to the 
limitations in Sec.  1026.52(b) or are prohibited by Sec.  
1026.52(b):
    A. Late payment fees and any other fees imposed by a card issuer 
if an account becomes delinquent or if a payment is not received by 
a particular date.
    B. Returned payment fees and any other fees imposed by a card 
issuer if a payment received via check, automated clearing house, or 
other payment method is returned.
    C. Any fee or charge for an over-the-limit transaction as 
defined in Sec.  1026.56(a), to the extent the imposition of such a 
fee or charge is permitted by Sec.  1026.56.
    D. Any fee imposed by a card issuer if payment on a check that 
accesses a credit card account is declined.
    E. Any fee or charge for a transaction that the card issuer 
declines to authorize. See Sec.  1026.52(b)(2)(i)(B).
    F. Any fee imposed by a card issuer based on account inactivity 
(including the consumer's failure to use the account for a 
particular number or dollar amount of transactions or a particular 
type of transaction). See Sec.  1026.52(b)(2)(i)(B).
    G. Any fee imposed by a card issuer based on the closure or 
termination of an account. See Sec.  1026.52(b)(2)(i)(B).
    ii. The following are examples of fees to which Sec.  1026.52(b) 
does not apply:
    A. Balance transfer fees.
    B. Cash advance fees.
    C. Foreign transaction fees.
    D. Annual fees and other fees for the issuance or availability 
of credit described in Sec.  1026.60(b)(2), except to the extent 
that such fees are based on account inactivity. See Sec.  
1026.52(b)(2)(i)(B).
    E. Fees for insurance described in Sec.  1026.4(b)(7) or debt 
cancellation or debt suspension coverage described in Sec.  
1026.4(b)(10) written in connection with a credit transaction, 
provided that such fees are not imposed as a result of a violation 
of the account terms or other requirements of an account.
    F. Fees for making an expedited payment (to the extent permitted 
by Sec.  1026.10(e)).
    G. Fees for optional services (such as travel insurance).

[[Page 80039]]

    H. Fees for reissuing a lost or stolen card.
    2. Rounding to nearest whole dollar. A card issuer may round any 
fee that complies with Sec.  1026.52(b) to the nearest whole dollar. 
For example, if Sec.  1026.52(b) permits a card issuer to impose a 
late payment fee of $21.50, the card issuer may round that amount up 
to the nearest whole dollar and impose a late payment fee of $22. 
However, if the late payment fee permitted by Sec.  1026.52(b) were 
$21.49, the card issuer would not be permitted to round that amount 
up to $22, although the card issuer could round that amount down and 
impose a late payment fee of $21.

52(b)(1) General Rule

    1. Relationship between Sec.  1026.52(b)(1)(i), (b)(1)(ii), and 
(b)(2). i. Relationship between Sec.  1026.52(b)(1)(i) and 
(b)(1)(ii). A card issuer may impose a fee for violating the terms 
or other requirements of an account pursuant to either Sec.  
1026.52(b)(1)(i) or (b)(1)(ii).
    A. A card issuer that complies with the safe harbors in Sec.  
1026.52(b)(1)(ii) is not required to determine that its fees 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of a type of violation under Sec.  
1026.52(b)(1)(i).
    B. A card issuer may impose a fee for one type of violation 
pursuant to Sec.  1026.52(b)(1)(i) and may impose a fee for a 
different type of violation pursuant to Sec.  1026.52(b)(1)(ii). For 
example, a card issuer may impose a late payment fee of $30 based on 
a cost determination pursuant to Sec.  1026.52(b)(1)(i) but impose 
returned payment and over-the-limit fees of $25 or $35 pursuant to 
the safe harbors in Sec.  1026.52(b)(1)(ii).
    C. A card issuer that previously based the amount of a penalty 
fee for a particular type of violation on a cost determination 
pursuant to Sec.  1026.52(b)(1)(i) may begin to impose a penalty fee 
for that type of violation that is consistent with Sec.  
1026.52(b)(1)(ii) at any time (subject to the notice requirements in 
Sec.  1026.9), provided that the first fee imposed pursuant to Sec.  
1026.52(b)(1)(ii) is consistent with Sec.  1026.52(b)(1)(ii)(A). For 
example, assume that a late payment occurs on January 15 and that, 
based on a cost determination pursuant to Sec.  1026.52(b)(1)(i), 
the card issuer imposes a $30 late payment fee. Another late payment 
occurs on July 15. The card issuer may impose another $30 late 
payment fee pursuant to Sec.  1026.52(b)(1)(i) or may impose a $25 
late payment fee pursuant to Sec.  1026.52(b)(1)(ii)(A). However, 
the card issuer may not impose a $35 late payment fee pursuant to 
Sec.  1026.52(b)(1)(ii)(B). If the card issuer imposes a $25 fee 
pursuant to Sec.  1026.52(b)(1)(ii)(A) for the July 15 late payment 
and another late payment occurs on September 15, the card issuer may 
impose a $35 fee for the September 15 late payment pursuant to Sec.  
1026.52(b)(1)(ii)(B).
    ii. Relationship between Sec.  1026.52(b)(1) and (b)(2). Section 
1026.52(b)(1) does not permit a card issuer to impose a fee that is 
inconsistent with the prohibitions in Sec.  1026.52(b)(2). For 
example, if Sec.  1026.52(b)(2)(i) prohibits the card issuer from 
imposing a late payment fee that exceeds $15, Sec.  
1026.52(b)(1)(ii) does not permit the card issuer to impose a higher 
late payment fee.

52(b)(1)(i) Fees Based on Costs

    1. Costs incurred as a result of violations. Section 
1026.52(b)(1)(i) does not require a card issuer to base a fee on the 
costs incurred as a result of a specific violation of the terms or 
other requirements of an account. Instead, for purposes of Sec.  
1026.52(b)(1)(i), a card issuer must have determined that a fee for 
violating the terms or other requirements of an account represents a 
reasonable proportion of the costs incurred by the card issuer as a 
result of that type of violation. A card issuer may make a single 
determination for all of its credit card portfolios or may make 
separate determinations for each portfolio. The factors relevant to 
this determination include:
    i. The number of violations of a particular type experienced by 
the card issuer during a prior period of reasonable length (for 
example, a period of twelve months).
    ii. The costs incurred by the card issuer during that period as 
a result of those violations.
    iii. At the card issuer's option, the number of fees imposed by 
the card issuer as a result of those violations during that period 
that the card issuer reasonably estimates it will be unable to 
collect. See comment 52(b)(1)(i)-5.
    iv. At the card issuer's option, reasonable estimates for an 
upcoming period of changes in the number of violations of that type, 
the resulting costs, and the number of fees that the card issuer 
will be unable to collect. See illustrative examples in comments 
52(b)(1)(i)-6 through -9.
    2. Amounts excluded from cost analysis. The following amounts 
are not costs incurred by a card issuer as a result of violations of 
the terms or other requirements of an account for purposes of Sec.  
1026.52(b)(1)(i):
    i. Losses and associated costs (including the cost of holding 
reserves against potential losses and the cost of funding delinquent 
accounts).
    ii. Costs associated with evaluating whether consumers who have 
not violated the terms or other requirements of an account are 
likely to do so in the future (such as the costs associated with 
underwriting new accounts). However, once a violation of the terms 
or other requirements of an account has occurred, the costs 
associated with preventing additional violations for a reasonable 
period of time are costs incurred by a card issuer as a result of 
violations of the terms or other requirements of an account for 
purposes of Sec.  1026.52(b)(1)(i).
    3. Third party charges. As a general matter, amounts charged to 
the card issuer by a third party as a result of a violation of the 
terms or other requirements of an account are costs incurred by the 
card issuer for purposes of Sec.  1026.52(b)(1)(i). For example, if 
a card issuer is charged a specific amount by a third party for each 
returned payment, that amount is a cost incurred by the card issuer 
as a result of returned payments. However, if the amount is charged 
to the card issuer by an affiliate or subsidiary of the card issuer, 
the card issuer must have determined that the charge represents a 
reasonable proportion of the costs incurred by the affiliate or 
subsidiary as a result of the type of violation. For example, if an 
affiliate of a card issuer provides collection services to the card 
issuer on delinquent accounts, the card issuer must have determined 
that the amounts charged to the card issuer by the affiliate for 
such services represent a reasonable proportion of the costs 
incurred by the affiliate as a result of late payments.
    4. Amounts charged by other card issuers. The fact that a card 
issuer's fees for violating the terms or other requirements of an 
account are comparable to fees assessed by other card issuers does 
not satisfy the requirements of Sec.  1026.52(b)(1)(i).
    5. Uncollected fees. For purposes of Sec.  1026.52(b)(1)(i), a 
card issuer may consider fees that it is unable to collect when 
determining the appropriate fee amount. Fees that the card issuer is 
unable to collect include fees imposed on accounts that have been 
charged off by the card issuer, fees that have been discharged in 
bankruptcy, and fees that the card issuer is required to waive in 
order to comply with a legal requirement (such as a requirement 
imposed by 12 CFR Part 1026 or 50 U.S.C. app. 527). However, fees 
that the card issuer chooses not to impose or chooses not to collect 
(such as fees the card issuer chooses to waive at the request of the 
consumer or under a workout or temporary hardship arrangement) are 
not relevant for purposes of this determination. See illustrative 
examples in comments 52(b)(2)(i)-6 through -9.
    6. Late payment fees. i. Costs incurred as a result of late 
payments. For purposes of Sec.  1026.52(b)(1)(i), the costs incurred 
by a card issuer as a result of late payments include the costs 
associated with the collection of late payments, such as the costs 
associated with notifying consumers of delinquencies and resolving 
delinquencies (including the establishment of workout and temporary 
hardship arrangements).
    ii. Examples. A. Late payment fee based on past delinquencies 
and costs. Assume that, during year one, a card issuer experienced 1 
million delinquencies and incurred $26 million in costs as a result 
of those delinquencies. For purposes of Sec.  1026.52(b)(1)(i), a 
$26 late payment fee would represent a reasonable proportion of the 
total costs incurred by the card issuer as a result of late payments 
during year two.
    B. Adjustment based on fees card issuer is unable to collect. 
Same facts as above except that the card issuer imposed a late 
payment fee for each of the 1 million delinquencies experienced 
during year one but was unable to collect 25% of those fees (in 
other words, the card issuer was unable to collect 250,000 fees, 
leaving a total of 750,000 late payments for which the card issuer 
did collect or could have collected a fee). For purposes of Sec.  
1026.52(b)(2)(i), a late payment fee of $35 would represent a 
reasonable proportion of the total costs incurred by the card issuer 
as a result of late payments during year two.
    C. Adjustment based on reasonable estimate of future changes. 
Same facts as paragraphs A and B above except the card issuer 
reasonably estimates that--based on past delinquency rates and other 
factors relevant to potential delinquency rates for year two--it 
will experience a 2% decrease in delinquencies during year two (in 
other words, 20,000 fewer delinquencies for a total of 980,000). The 
card issuer also reasonably

[[Page 80040]]

estimates that it will be unable to collect the same percentage of 
fees (25%) during year two as during year one (in other words, the 
card issuer will be unable to collect 245,000 fees, leaving a total 
of 735,000 late payments for which the card issuer will be able to 
collect a fee). The card issuer also reasonably estimates that--
based on past changes in costs incurred as a result of delinquencies 
and other factors relevant to potential costs for year two--it will 
experience a 5% increase in costs during year two (in other words, 
$1.3 million in additional costs for a total of $27.3 million). For 
purposes of Sec.  1026.52(b)(1)(i), a $37 late payment fee would 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of late payments during year two.
    7. Returned payment fees. i. Costs incurred as a result of 
returned payments. For purposes of Sec.  1026.52(b)(1)(i), the costs 
incurred by a card issuer as a result of returned payments include:
    A. Costs associated with processing returned payments and 
reconciling the card issuer's systems and accounts to reflect 
returned payments;
    B. Costs associated with investigating potential fraud with 
respect to returned payments; and
    C. Costs associated with notifying the consumer of the returned 
payment and arranging for a new payment.
    ii. Examples. A. Returned payment fee based on past returns and 
costs. Assume that, during year one, a card issuer experienced 
150,000 returned payments and incurred $3.1 million in costs as a 
result of those returned payments. For purposes of Sec.  
1026.52(b)(1)(i), a $21 returned payment fee would represent a 
reasonable proportion of the total costs incurred by the card issuer 
as a result of returned payments during year two.
    B. Adjustment based on fees card issuer is unable to collect. 
Same facts as above except that the card issuer imposed a returned 
payment fee for each of the 150,000 returned payments experienced 
during year one but was unable to collect 15% of those fees (in 
other words, the card issuer was unable to collect 22,500 fees, 
leaving a total of 127,500 returned payments for which the card 
issuer did collect or could have collected a fee). For purposes of 
Sec.  1026.52(b)(2)(i), a returned payment fee of $24 would 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of returned payments during year two.
    C. Adjustment based on reasonable estimate of future changes. 
Same facts as paragraphs A and B above except the card issuer 
reasonably estimates that--based on past returned payment rates and 
other factors relevant to potential returned payment rates for year 
two--it will experience a 2% increase in returned payments during 
year two (in other words, 3,000 additional returned payments for a 
total of 153,000). The card issuer also reasonably estimates that it 
will be unable to collect 25% of returned payment fees during year 
two (in other words, the card issuer will be unable to collect 
38,250 fees, leaving a total of 114,750 returned payments for which 
the card issuer will be able to collect a fee). The card issuer also 
reasonably estimates that--based on past changes in costs incurred 
as a result of returned payments and other factors relevant to 
potential costs for year two--it will experience a 1% decrease in 
costs during year two (in other words, a $31,000 reduction in costs 
for a total of $3.069 million). For purposes of Sec.  
1026.52(b)(1)(i), a $27 returned payment fee would represent a 
reasonable proportion of the total costs incurred by the card issuer 
as a result of returned payments during year two.
    8. Over-the-limit fees. i. Costs incurred as a result of over-
the-limit transactions. For purposes of Sec.  1026.52(b)(1)(i), the 
costs incurred by a card issuer as a result of over-the-limit 
transactions include:
    A. Costs associated with determining whether to authorize over-
the-limit transactions; and
    B. Costs associated with notifying the consumer that the credit 
limit has been exceeded and arranging for payments to reduce the 
balance below the credit limit.
    ii. Costs not incurred as a result of over-the-limit 
transactions. For purposes of Sec.  1026.52(b)(1)(i), costs 
associated with obtaining the affirmative consent of consumers to 
the card issuer's payment of transactions that exceed the credit 
limit consistent with Sec.  1026.56 are not costs incurred by a card 
issuer as a result of over-the-limit transactions.
    iii. Examples. A. Over-the-limit fee based on past fees and 
costs. Assume that, during year one, a card issuer authorized 
600,000 over-the-limit transactions and incurred $4.5 million in 
costs as a result of those over-the-limit transactions. However, 
because of the affirmative consent requirements in Sec.  1026.56, 
the card issuer was only permitted to impose 200,000 over-the-limit 
fees during year one. For purposes of Sec.  1026.52(b)(1)(i), a $23 
over-the-limit fee would represent a reasonable proportion of the 
total costs incurred by the card issuer as a result of over-the-
limit transactions during year two.
    B. Adjustment based on fees card issuer is unable to collect. 
Same facts as above except that the card issuer was unable to 
collect 30% of the 200,000 over-the-limit fees imposed during year 
one (in other words, the card issuer was unable to collect 60,000 
fees, leaving a total of 140,000 over-the-limit transactions for 
which the card issuer did collect or could have collected a fee). 
For purposes of Sec.  1026.52(b)(2)(i), an over-the-limit fee of $32 
would represent a reasonable proportion of the total costs incurred 
by the card issuer as a result of over-the-limit transactions during 
year two.
    C. Adjustment based on reasonable estimate of future changes. 
Same facts as paragraphs A and B above except the card issuer 
reasonably estimates that--based on past over-the-limit transaction 
rates, the percentages of over-the-limit transactions that resulted 
in an over-the-limit fee in the past (consistent with Sec.  
1026.56), and factors relevant to potential changes in those rates 
and percentages for year two--it will authorize approximately the 
same number of over-the-limit transactions during year two (600,000) 
and impose approximately the same number of over-the-limit fees 
(200,000). The card issuer also reasonably estimates that it will be 
unable to collect the same percentage of fees (30%) during year two 
as during year one (in other words, the card issuer was unable to 
collect 60,000 fees, leaving a total of 140,000 over-the-limit 
transactions for which the card issuer will be able to collect a 
fee). The card issuer also reasonably estimates that--based on past 
changes in costs incurred as a result of over-the-limit transactions 
and other factors relevant to potential costs for year two--it will 
experience a 6% decrease in costs during year two (in other words, a 
$270,000 reduction in costs for a total of $4.23 million). For 
purposes of Sec.  1026.52(b)(1)(i), a $30 over-the-limit fee would 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of over-the-limit transactions during year 
two.
    9. Declined access check fees. i. Costs incurred as a result of 
declined access checks. For purposes of Sec.  1026.52(b)(1)(i), the 
costs incurred by a card issuer as a result of declining payment on 
a check that accesses a credit card account include:
    A. Costs associated with determining whether to decline payment 
on access checks;
    B. Costs associated with processing declined access checks and 
reconciling the card issuer's systems and accounts to reflect 
declined access checks;
    C. Costs associated with investigating potential fraud with 
respect to declined access checks; and
    D. Costs associated with notifying the consumer and the merchant 
or other party that accepted the access check that payment on the 
check has been declined.
    ii. Example. Assume that, during year one, a card issuer 
declined 100,000 access checks and incurred $2 million in costs as a 
result of those declined checks. The card issuer imposed a fee for 
each declined access check but was unable to collect 10% of those 
fees (in other words, the card issuer was unable to collect 10,000 
fees, leaving a total of 90,000 declined access checks for which the 
card issuer did collect or could have collected a fee). For purposes 
of Sec.  1026.52(b)(1)(i), a $22 declined access check fee would 
represent a reasonable proportion of the total costs incurred by the 
card issuer as a result of declined access checks during year two.

52(b)(1)(ii) Safe harbors

    1. Multiple violations of same type. i. Same billing cycle or 
next six billing cycles. A card issuer cannot impose a fee for a 
violation pursuant to Sec.  1026.52(b)(1)(ii)(B) unless a fee has 
previously been imposed for the same type of violation pursuant to 
Sec.  1026.52(b)(1)(ii)(A). Once a fee has been imposed for a 
violation pursuant to Sec.  1026.52(b)(1)(ii)(A), the card issuer 
may impose a fee pursuant to Sec.  1026.52(b)(1)(ii)(B) for any 
subsequent violation of the same type until that type of violation 
has not occurred for a period of six consecutive complete billing 
cycles. A fee has been imposed for purposes of Sec.  
1026.52(b)(1)(ii) even if the card issuer waives or rebates all or 
part of the fee.
    A. Late payments. For purposes of Sec.  1026.52(b)(1)(ii), a 
late payment occurs during the billing cycle in which the

[[Page 80041]]

payment may first be treated as late consistent with the 
requirements of this part and the terms or other requirements of the 
account.
    B. Returned payments. For purposes of Sec.  1026.52(b)(1)(ii), a 
returned payment occurs during the billing cycle in which the 
payment is returned to the card issuer.
    C. Transactions that exceed the credit limit. For purposes of 
Sec.  1026.52(b)(1)(ii), a transaction that exceeds the credit limit 
for an account occurs during the billing cycle in which the 
transaction occurs or is authorized by the card issuer.
    D. Declined access checks. For purposes of Sec.  
1026.52(b)(1)(ii), a check that accesses a credit card account is 
declined during the billing cycle in which the card issuer declines 
payment on the check.
    ii. Relationship to Sec. Sec.  1026.52(b)(2)(ii) and 
1026.56(j)(1). If multiple violations are based on the same event or 
transaction such that Sec.  1026.52(b)(2)(ii) prohibits the card 
issuer from imposing more than one fee, the event or transaction 
constitutes a single violation for purposes of Sec.  
1026.52(b)(1)(ii). Furthermore, consistent with Sec.  
1026.56(j)(1)(i), no more than one violation for exceeding an 
account's credit limit can occur during a single billing cycle for 
purposes of Sec.  1026.52(b)(1)(ii). However, Sec.  
1026.52(b)(2)(ii) does not prohibit a card issuer from imposing fees 
for exceeding the credit limit in consecutive billing cycles based 
on the same over-the-limit transaction to the extent permitted by 
Sec.  1026.56(j)(1). In these circumstances, the second and third 
over-the-limit fees permitted by Sec.  1026.56(j)(1) may be imposed 
pursuant to Sec.  1026.52(b)(1)(ii)(B). See comment 52(b)(2)(ii)-1.
    iii. Examples. The following examples illustrate the application 
of Sec.  1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) with respect to 
credit card accounts under an open-end (not home-secured) consumer 
credit plan that are not charge card accounts. For purposes of these 
examples, assume that the billing cycles for the account begin on 
the first day of the month and end on the last day of the month and 
that the payment due date for the account is the twenty-fifth day of 
the month.
    A. Violations of same type (late payments). A required minimum 
periodic payment of $50 is due on March 25. On March 26, a late 
payment has occurred because no payment has been received. 
Accordingly, consistent with Sec.  1026.52(b)(1)(ii)(A), the card 
issuer imposes a $25 late payment fee on March 26. In order for the 
card issuer to impose a $35 late payment fee pursuant to Sec.  
1026.52(b)(1)(ii)(B), a second late payment must occur during the 
April, May, June, July, August, or September billing cycles.
    1. The card issuer does not receive any payment during the March 
billing cycle. A required minimum periodic payment of $100 is due on 
April 25. On April 20, the card issuer receives a $50 payment. No 
further payment is received during the April billing cycle. 
Accordingly, consistent with Sec.  1026.52(b)(1)(ii)(B), the card 
issuer may impose a $35 late payment fee on April 26. Furthermore, 
the card issuer may impose a $35 late payment fee for any late 
payment that occurs during the May, June, July, August, September, 
or October billing cycles.
    2. Same facts as in paragraph A above. On March 30, the card 
issuer receives a $50 payment and the required minimum periodic 
payments for the April, May, June, July, August, and September 
billing cycles are received on or before the payment due date. A 
required minimum periodic payment of $60 is due on October 25. On 
October 26, a late payment has occurred because the required minimum 
periodic payment due on October 25 has not been received. However, 
because this late payment did not occur during the six billing 
cycles following the March billing cycle, Sec.  1026.52(b)(1)(ii) 
only permits the card issuer to impose a late payment fee of $25.
    B. Violations of different types (late payment and over the 
credit limit). The credit limit for an account is $1,000. Consistent 
with Sec.  1026.56, the consumer has affirmatively consented to the 
payment of transactions that exceed the credit limit. A required 
minimum periodic payment of $30 is due on August 25. On August 26, a 
late payment has occurred because no payment has been received. 
Accordingly, consistent with Sec.  1026.52(b)(1)(ii)(A), the card 
issuer imposes a $25 late payment fee on August 26. On August 30, 
the card issuer receives a $30 payment. On September 10, a 
transaction causes the account balance to increase to $1,150, which 
exceeds the account's $1,000 credit limit. On September 11, a second 
transaction increases the account balance to $1,350. On September 
23, the card issuer receives the $50 required minimum periodic 
payment due on September 25, which reduces the account balance to 
$1,300. On September 30, the card issuer imposes a $25 over-the-
limit fee, consistent with Sec.  1026.52(b)(1)(ii)(A). On October 
26, a late payment has occurred because the $60 required minimum 
periodic payment due on October 25 has not been received. 
Accordingly, consistent with Sec.  1026.52(b)(1)(ii)(B), the card 
issuer imposes a $35 late payment fee on October 26.
    C. Violations of different types (late payment and returned 
payment). A required minimum periodic payment of $50 is due on July 
25. On July 26, a late payment has occurred because no payment has 
been received. Accordingly, consistent with Sec.  
1026.52(b)(1)(ii)(A), the card issuer imposes a $25 late payment fee 
on July 26. On July 30, the card issuer receives a $50 payment. A 
required minimum periodic payment of $50 is due on August 25. On 
August 24, a $50 payment is received. On August 27, the $50 payment 
is returned to the card issuer for insufficient funds. In these 
circumstances, Sec.  1026.52(b)(2)(ii) permits the card issuer to 
impose either a late payment fee or a returned payment fee but not 
both because the late payment and the returned payment result from 
the same event or transaction. Accordingly, for purposes of Sec.  
1026.52(b)(1)(ii), the event or transaction constitutes a single 
violation. However, if the card issuer imposes a late payment fee, 
Sec.  1026.52(b)(1)(ii)(B) permits the issuer to impose a fee of $35 
because the late payment occurred during the six billing cycles 
following the July billing cycle. In contrast, if the card issuer 
imposes a returned payment fee, the amount of the fee may be no more 
than $25 pursuant to Sec.  1026.52(b)(1)(ii)(A).
    2. Adjustments based on Consumer Price Index. For purposes of 
Sec.  1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B), the Bureau shall 
calculate each year price level adjusted amounts using the Consumer 
Price Index in effect on 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 amounts in Sec.  
1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has risen by a whole dollar, 
those amounts will be increased by $1.00. Similarly, when the 
cumulative change in the adjusted minimum value derived from 
applying the annual Consumer Price level to the current amounts in 
Sec.  1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B) has decreased by a 
whole dollar, those amounts will be decreased by $1.00. The Bureau 
will publish adjustments to the amounts in Sec.  
1026.52(b)(1)(ii)(A) and (b)(1)(ii)(B).
    3. Delinquent balance for charge card accounts. Section 
1026.52(b)(1)(ii)(C) provides that, when a charge card issuer that 
requires payment of outstanding balances in full at the end of each 
billing cycle has not received the required payment for two or more 
consecutive billing cycles, the card issuer may impose a late 
payment fee that does not exceed three percent of the delinquent 
balance. For purposes of Sec.  1026.52(b)(1)(ii)(C), the delinquent 
balance is any previously billed amount that remains unpaid at the 
time the late payment fee is imposed pursuant to Sec.  
1026.52(b)(1)(ii)(C). Consistent with Sec.  1026.52(b)(2)(ii), a 
charge card issuer that imposes a fee pursuant to Sec.  
1026.52(b)(1)(ii)(C) with respect to a late payment may not impose a 
fee pursuant to Sec.  1026.52(b)(1)(ii)(B) with respect to the same 
late payment. The following examples illustrate the application of 
Sec.  1026.52(b)(1)(ii)(C):
    i. Assume that a charge card issuer requires payment of 
outstanding balances in full at the end of each billing cycle and 
that the billing cycles for the account begin on the first day of 
the month and end on the last day of the month. At the end of the 
June billing cycle, the account has a balance of $1,000. On July 5, 
the card issuer provides a periodic statement disclosing the $1,000 
balance consistent with Sec.  1026.7. During the July billing cycle, 
the account is used for $300 in transactions, increasing the balance 
to $1,300. At the end of the July billing cycle, no payment has been 
received and the card issuer imposes a $25 late payment fee 
consistent with Sec.  1026.52(b)(1)(ii)(A). On August 5, the card 
issuer provides a periodic statement disclosing the $1,325 balance 
consistent with Sec.  1026.7. During the August billing cycle, the 
account is used for $200 in transactions, increasing the balance to 
$1,525. At the end of the August billing cycle, no payment has been 
received. Consistent with Sec.  1026.52(b)(1)(ii)(C), the card 
issuer may impose a late payment fee of $40, which is 3% of the 
$1,325 balance that was due at the end of the August billing cycle. 
Section 1026.52(b)(1)(ii)(C) does not permit the card issuer to 
include the $200 in transactions that occurred during the August 
billing cycle.

[[Page 80042]]

    ii. Same facts as above except that, on August 25, a $100 
payment is received. Consistent with Sec.  1026.52(b)(1)(ii)(C), the 
card issuer may impose a late payment fee of $37, which is 3% of the 
unpaid portion of the $1,325 balance that was due at the end of the 
August billing cycle ($1,225).
    iii. Same facts as in paragraph A above except that, on August 
25, a $200 payment is received. Consistent with Sec.  
1026.52(b)(1)(ii)(C), the card issuer may impose a late payment fee 
of $34, which is 3% of the unpaid portion of the $1,325 balance that 
was due at the end of the August billing cycle ($1,125). In the 
alternative, the card issuer may impose a late payment fee of $35 
consistent with Sec.  1026.52(b)(1)(ii)(B). However, Sec.  
1026.52(b)(2)(ii) prohibits the card issuer from imposing both fees.

52(b)(2) Prohibited fees

    1. Relationship to Sec.  1026.52(b)(1). A card issuer does not 
comply with Sec.  1026.52(b) if it imposes a fee that is 
inconsistent with the prohibitions in Sec.  1026.52(b)(2). Thus, the 
prohibitions in Sec.  1026.52(b)(2) apply even if a fee is 
consistent with Sec.  1026.52(b)(1)(i) or (b)(1)(ii). For example, 
even if a card issuer has determined for purposes of Sec.  
1026.52(b)(1)(i) that a $27 fee represents a reasonable proportion 
of the total costs incurred by the card issuer as a result of a 
particular type of violation, Sec.  1026.52(b)(2)(i) prohibits the 
card issuer from imposing that fee if the dollar amount associated 
with the violation is less than $27. Similarly, even if Sec.  
1026.52(b)(1)(ii) permits a card issuer to impose a $25 fee, Sec.  
1026.52(b)(2)(i) prohibits the card issuer from imposing that fee if 
the dollar amount associated with the violation is less than $25.

52(b)(2)(i) Fees That Exceed Dollar Amount Associated With Violation

    1. Late payment fees. For purposes of Sec.  1026.52(b)(2)(i), 
the dollar amount associated with a late payment is the amount of 
the required minimum periodic payment due immediately prior to 
assessment of the late payment fee. Thus, Sec.  1026.52(b)(2)(i)(A) 
prohibits a card issuer from imposing a late payment fee that 
exceeds the amount of that required minimum periodic payment. For 
example:
    i. Assume that a $15 required minimum periodic payment is due on 
September 25. The card issuer does not receive any payment on or 
before September 25. On September 26, the card issuer imposes a late 
payment fee. For purposes of Sec.  1026.52(b)(2)(i), the dollar 
amount associated with the late payment is the amount of the 
required minimum periodic payment due on September 25 ($15). Thus, 
under Sec.  1026.52(b)(2)(i)(A), the amount of that fee cannot 
exceed $15 (even if a higher fee would be permitted under Sec.  
1026.52(b)(1)).
    ii. Same facts as above except that, on September 25, the card 
issuer receives a $10 payment. No further payments are received. On 
September 26, the card issuer imposes a late payment fee. For 
purposes of Sec.  1026.52(b)(2)(i), the dollar amount associated 
with the late payment is the full amount of the required minimum 
periodic payment due on September 25 ($15), rather than the unpaid 
portion of that payment ($5). Thus, under Sec.  1026.52(b)(2)(i)(A), 
the amount of the late payment fee cannot exceed $15 (even if a 
higher fee would be permitted under Sec.  1026.52(b)(1)).
    iii. Assume that a $15 required minimum periodic payment is due 
on October 28 and the billing cycle for the account closes on 
October 31. The card issuer does not receive any payment on or 
before November 3. On November 3, the card issuer determines that 
the required minimum periodic payment due on November 28 is $50. On 
November 5, the card issuer imposes a late payment fee. For purposes 
of Sec.  1026.52(b)(2)(i), the dollar amount associated with the 
late payment is the amount of the required minimum periodic payment 
due on October 28 ($15), rather than the amount of the required 
minimum periodic payment due on November 28 ($50). Thus, under Sec.  
1026.52(b)(2)(i)(A), the amount of that fee cannot exceed $15 (even 
if a higher fee would be permitted under Sec.  1026.52(b)(1)).
    2. Returned payment fees. For purposes of Sec.  
1026.52(b)(2)(i), the dollar amount associated with a returned 
payment is the amount of the required minimum periodic payment due 
immediately prior to the date on which the payment is returned to 
the card issuer. Thus, Sec.  1026.52(b)(2)(i)(A) prohibits a card 
issuer from imposing a returned payment fee that exceeds the amount 
of that required minimum periodic payment. However, if a payment has 
been returned and is submitted again for payment by the card issuer, 
there is no additional dollar amount associated with a subsequent 
return of that payment and Sec.  1026.52(b)(2)(i)(B) prohibits the 
card issuer from imposing an additional returned payment fee. For 
example:
    i. Assume that the billing cycles for an account begin on the 
first day of the month and end on the last day of the month and that 
the payment due date is the twenty-fifth day of the month. A minimum 
payment of $15 is due on March 25. The card issuer receives a check 
for $100 on March 23, which is returned to the card issuer for 
insufficient funds on March 26. For purposes of Sec.  
1026.52(b)(2)(i), the dollar amount associated with the returned 
payment is the amount of the required minimum periodic payment due 
on March 25 ($15). Thus, Sec.  1026.52(b)(2)(i)(A) prohibits the 
card issuer from imposing a returned payment fee that exceeds $15 
(even if a higher fee would be permitted under Sec.  1026.52(b)(1)). 
Furthermore, Sec.  1026.52(b)(2)(ii) prohibits the card issuer from 
assessing both a late payment fee and a returned payment fee in 
these circumstances. See comment 52(b)(2)(ii)-1.
    ii. Same facts as above except that the card issuer receives the 
$100 check on March 31 and the check is returned for insufficient 
funds on April 2. The minimum payment due on April 25 is $30. For 
purposes of Sec.  1026.52(b)(2)(i), the dollar amount associated 
with the returned payment is the amount of the required minimum 
periodic payment due on March 25 ($15), rather than the amount of 
the required minimum periodic payment due on April 25 ($30). Thus, 
Sec.  1026.52(b)(2)(i)(A) prohibits the card issuer from imposing a 
returned payment fee that exceeds $15 (even if a higher fee would be 
permitted under Sec.  1026.52(b)(1)). Furthermore, Sec.  
1026.52(b)(2)(ii) prohibits the card issuer from assessing both a 
late payment fee and a returned payment fee in these circumstances. 
See comment 52(b)(2)(ii)-1.
    iii. Same facts as paragraph i above except that, on March 28, 
the card issuer presents the $100 check for payment a second time. 
On April 1, the check is again returned for insufficient funds. 
Section 1026.52(b)(2)(i)(B) prohibits the card issuer from imposing 
a returned payment fee based on the return of the payment on April 
1.
    iv. Assume that the billing cycles for an account begin on the 
first day of the month and end on the last day of the month and that 
the payment due date is the twenty-fifth day of the month. A minimum 
payment of $15 is due on August 25. The card issuer receives a check 
for $15 on August 23, which is not returned. The card issuer 
receives a check for $50 on September 5, which is returned to the 
card issuer for insufficient funds on September 7. Section 
1026.52(b)(2)(i)(B) does not prohibit the card issuer from imposing 
a returned payment fee in these circumstances. Instead, for purposes 
of Sec.  1026.52(b)(2)(i), the dollar amount associated with the 
returned payment is the amount of the required minimum periodic 
payment due on August 25 ($15). Thus, Sec.  1026.52(b)(2)(i)(A) 
prohibits the card issuer from imposing a returned payment fee that 
exceeds $15 (even if a higher fee would be permitted under Sec.  
1026.52(b)(1)).
    3. Over-the-limit fees. For purposes of Sec.  1026.52(b)(2)(i), 
the dollar amount associated with extensions of credit in excess of 
the credit limit for an account is the total amount of credit 
extended by the card issuer in excess of the credit limit during the 
billing cycle in which the over-the-limit fee is imposed. Thus, 
Sec.  1026.52(b)(2)(i)(A) prohibits a card issuer from imposing an 
over-the-limit fee that exceeds that amount. Nothing in Sec.  
1026.52(b) permits a card issuer to impose an over-the-limit fee if 
imposition of the fee is inconsistent with Sec.  1026.56. The 
following examples illustrate the application of Sec.  
1026.52(b)(2)(i)(A) to over-the-limit fees:
    i. Assume that the billing cycles for a credit card account with 
a credit limit of $5,000 begin on the first day of the month and end 
on the last day of the month. Assume also that, consistent with 
Sec.  1026.56, the consumer has affirmatively consented to the 
payment of transactions that exceed the credit limit. On March 1, 
the account has a $4,950 balance. On March 6, a $60 transaction is 
charged to the account, increasing the balance to $5,010. On March 
25, a $5 transaction is charged to the account, increasing the 
balance to $5,015. On the last day of the billing cycle (March 31), 
the card issuer imposes an over-the-limit fee. For purposes of Sec.  
1026.52(b)(2)(i), the dollar amount associated with the extensions 
of credit in excess of the credit limit is the total amount of 
credit extended by the card issuer in excess of the credit limit 
during the March billing cycle ($15). Thus, Sec.  
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing an over-
the-limit fee that exceeds $15 (even if a higher fee would be 
permitted under Sec.  1026.52(b)(1)).
    ii. Same facts as above except that, on March 26, the card 
issuer receives a payment

[[Page 80043]]

of $20, reducing the balance below the credit limit to $4,995. 
Nevertheless, for purposes of Sec.  1026.52(b)(2)(i), the dollar 
amount associated with the extensions of credit in excess of the 
credit limit is the total amount of credit extended by the card 
issuer in excess of the credit limit during the March billing cycle 
($15). Thus, consistent with Sec.  1026.52(b)(2)(i)(A), the card 
issuer may impose an over-the-limit fee of $15.
    4. Declined access check fees. For purposes of Sec.  
1026.52(b)(2)(i), the dollar amount associated with declining 
payment on a check that accesses a credit card account is the amount 
of the check. Thus, when a check that accesses a credit card account 
is declined, Sec.  1026.52(b)(2)(i)(A) prohibits a card issuer from 
imposing a fee that exceeds the amount of that check. For example, 
assume that a check that accesses a credit card account is used as 
payment for a $50 transaction, but payment on the check is declined 
by the card issuer because the transaction would have exceeded the 
credit limit for the account. For purposes of Sec.  
1026.52(b)(2)(i), the dollar amount associated with the declined 
check is the amount of the check ($50). Thus, Sec.  
1026.52(b)(2)(i)(A) prohibits the card issuer from imposing a fee 
that exceeds $50. However, the amount of this fee must also comply 
with Sec.  1026.52(b)(1)(i) or (b)(1)(ii).
    5. Inactivity fees. Section 1026.52(b)(2)(i)(B)(2) prohibits a 
card issuer from imposing a fee with respect to a credit card 
account under an open-end (not home-secured) consumer credit plan 
based on inactivity on that account (including the consumer's 
failure to use the account for a particular number or dollar amount 
of transactions or a particular type of transaction). For example, 
Sec.  1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a 
$50 fee when a credit card account under an open-end (not home-
secured) consumer credit plan is not used for at least $2,000 in 
purchases over the course of a year. Similarly, Sec.  
1026.52(b)(2)(i)(B)(2) prohibits a card issuer from imposing a $50 
annual fee on all accounts of a particular type but waiving the fee 
on any account that is used for at least $2,000 in purchases over 
the course of a year if the card issuer promotes the waiver or 
rebate of the annual fee for purposes of Sec.  1026.55(e). However, 
if the card issuer does not promote the waiver or rebate of the 
annual fee for purposes of Sec.  1026.55(e), Sec.  
1026.52(b)(2)(i)(B)(2) does not prohibit a card issuer from 
considering account activity along with other factors when deciding 
whether to waive or rebate annual fees on individual accounts (such 
as in response to a consumer's request).
    6. Closed account fees. Section 1026.52(b)(2)(i)(B)(3) prohibits 
a card issuer from imposing a fee based on the closure or 
termination of an account. For example, Sec.  1026.52(b)(2)(i)(B)(3) 
prohibits a card issuer from:
    i. Imposing a one-time fee to consumers who close their 
accounts.
    ii. Imposing a periodic fee (such as an annual fee, a monthly 
maintenance fee, or a closed account fee) after an account is closed 
or terminated if that fee was not imposed prior to closure or 
termination. This prohibition applies even if the fee was disclosed 
prior to closure or termination. See also comment 55(d)-1.
    iii. Increasing a periodic fee (such as an annual fee or a 
monthly maintenance fee) after an account is closed or terminated. 
However, a card issuer is not prohibited from continuing to impose a 
periodic fee that was imposed before the account was closed or 
terminated.

52(b)(2)(ii) Multiple Fees Based on a Single Event or Transaction

    1. Single event or transaction. Section 1026.52(b)(2)(ii) 
prohibits a card issuer from imposing more than one fee for 
violating the terms or other requirements of an account based on a 
single event or transaction. If Sec.  1026.56(j)(1) permits a card 
issuer to impose fees for exceeding the credit limit in consecutive 
billing cycles based on the same over-the-limit transaction, those 
fees are not based on a single event or transaction for purposes of 
Sec.  1026.52(b)(2)(ii). The following examples illustrate the 
application of Sec.  1026.52(b)(2)(ii). Assume for purposes of these 
examples that the billing cycles for a credit card account begin on 
the first day of the month and end on the last day of the month and 
that the payment due date for the account is the twenty-fifth day of 
the month.
    i. Assume that the required minimum periodic payment due on 
March 25 is $20. On March 26, the card issuer has not received any 
payment and imposes a late payment fee. Consistent with Sec. Sec.  
1026.52(b)(1)(ii)(A) and (b)(2)(i), the card issuer may impose a $20 
late payment fee on March 26. However, Sec.  1026.52(b)(2)(ii) 
prohibits the card issuer from imposing an additional late payment 
fee if the $20 minimum payment has not been received by a subsequent 
date (such as March 31).
    A. On April 3, the card issuer provides a periodic statement 
disclosing that a $70 required minimum periodic payment is due on 
April 25. This minimum payment includes the $20 minimum payment due 
on March 25 and the $20 late payment fee imposed on March 26. On 
April 20, the card issuer receives a $20 payment. No additional 
payments are received during the April billing cycle. Section 
1026.52(b)(2)(ii) does not prohibit the card issuer from imposing a 
late payment fee based on the consumer's failure to make the $70 
required minimum periodic payment on or before April 25. 
Accordingly, consistent with Sec.  1026.52(b)(1)(ii)(B) and 
(b)(2)(i), the card issuer may impose a $35 late payment fee on 
April 26.
    B. On April 3, the card issuer provides a periodic statement 
disclosing that a $20 required minimum periodic payment is due on 
April 25. This minimum payment does not include the $20 minimum 
payment due on March 25 or the $20 late payment fee imposed on March 
26. On April 20, the card issuer receives a $20 payment. No 
additional payments are received during the April billing cycle. 
Because the card issuer has received the required minimum periodic 
payment due on April 25 and because Sec.  1026.52(b)(2)(ii) 
prohibits the card issuer from imposing a second late payment fee 
based on the consumer's failure to make the $20 minimum payment due 
on March 25, the card issuer cannot impose a late payment fee in 
these circumstances.
    ii. Assume that the required minimum periodic payment due on 
March 25 is $30.
    A. On March 25, the card issuer receives a check for $50, but 
the check is returned for insufficient funds on March 27. Consistent 
with Sec. Sec.  1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card 
issuer may impose a late payment fee of $25 or a returned payment 
fee of $25. However, Sec.  1026.52(b)(2)(ii) prohibits the card 
issuer from imposing both fees because those fees would be based on 
a single event or transaction.
    B. Same facts as paragraph ii.A above except that that card 
issuer receives the $50 check on March 27 and the check is returned 
for insufficient funds on March 29. Consistent with Sec. Sec.  
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a 
late payment fee of $25 or a returned payment fee of $25. However, 
Sec.  1026.52(b)(2)(ii) prohibits the card issuer from imposing both 
fees because those fees would be based on a single event or 
transaction. If no payment is received on or before the next payment 
due date (April 25), Sec.  1026.52(b)(2)(ii) does not prohibit the 
card issuer from imposing a late payment fee.
    iii. Assume that the required minimum periodic payment due on 
July 25 is $30. On July 10, the card issuer receives a $50 payment, 
which is not returned. On July 20, the card issuer receives a $100 
payment, which is returned for insufficient funds on July 24. 
Consistent with Sec.  1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the 
card issuer may impose a returned payment fee of $25. Nothing in 
Sec.  1026.52(b)(2)(ii) prohibits the imposition of this fee.
    iv. Assume that the credit limit for an account is $1,000 and 
that, consistent with Sec.  1026.56, the consumer has affirmatively 
consented to the payment of transactions that exceed the credit 
limit. On March 31, the balance on the account is $970 and the card 
issuer has not received the $35 required minimum periodic payment 
due on March 25. On that same date (March 31), a $70 transaction is 
charged to the account, which increases the balance to $1,040. 
Consistent with Sec.  1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the 
card issuer may impose a late payment fee of $25 and an over-the-
limit fee of $25. Section 1026.52(b)(2)(ii) does not prohibit the 
imposition of both fees because those fees are based on different 
events or transactions. No additional transactions are charged to 
the account during the March, April, or May billing cycles. If the 
account balance remains more than $35 above the credit limit on 
April 26, the card issuer may impose an over-the-limit fee of $35 
pursuant to Sec.  1026.52(b)(1)(ii)(B), to the extent consistent 
with Sec.  1026.56(j)(1). Furthermore, if the account balance 
remains more than $35 above the credit limit on May 26, the card 
issuer may again impose an over-the-limit fee of $35 pursuant to 
Sec.  1026.52(b)(1)(ii)(B), to the extent consistent with Sec.  
1026.56(j)(1). Thereafter, Sec.  1026.56(j)(1) does not permit the 
card issuer to impose additional over-the-limit fees unless another 
over-the-limit transaction occurs. However, if an over-the-limit 
transaction occurs during the six billing cycles following the May 
billing cycle, the

[[Page 80044]]

card issuer may impose an over-the-limit fee of $35 pursuant to 
Sec.  1026.52(b)(1)(ii)(B).
    v. Assume that the credit limit for an account is $5,000 and 
that, consistent with Sec.  1026.56, the consumer has affirmatively 
consented to the payment of transactions that exceed the credit 
limit. On July 23, the balance on the account is $4,950. On July 24, 
the card issuer receives the $100 required minimum periodic payment 
due on July 25, reducing the balance to $4,850. On July 26, a $75 
transaction is charged to the account, which increases the balance 
to $4,925. On July 27, the $100 payment is returned for insufficient 
funds, increasing the balance to $5,025. Consistent with Sec. Sec.  
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a 
returned payment fee of $25 or an over-the-limit fee of $25. 
However, Sec.  1026.52(b)(2)(ii) prohibits the card issuer from 
imposing both fees because those fees would be based on a single 
event or transaction.
    vi. Assume that the required minimum periodic payment due on 
March 25 is $50. On March 20, the card issuer receives a check for 
$50, but the check is returned for insufficient funds on March 22. 
Consistent with Sec. Sec.  1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), 
the card issuer may impose a returned payment fee of $25. On March 
25, the card issuer receives a second check for $50, but the check 
is returned for insufficient funds on March 27. Consistent with 
Sec. Sec.  1026.52(b)(1)(ii)(A), (b)(1)(ii)(B), and (b)(2)(i)(A), 
the card issuer may impose a late payment fee of $25 or a returned 
payment fee of $35. However, Sec.  1026.52(b)(2)(ii) prohibits the 
card issuer from imposing both fees because those fees would be 
based on a single event or transaction.
    vii. Assume that the required minimum periodic payment due on 
February 25 is $100. On February 25, the card issuer receives a 
check for $100. On March 3, the card issuer provides a periodic 
statement disclosing that a $120 required minimum periodic payment 
is due on March 25. On March 4, the $100 check is returned to the 
card issuer for insufficient funds. Consistent with Sec. Sec.  
1026.52(b)(1)(ii)(A) and (b)(2)(i)(A), the card issuer may impose a 
late payment fee of $25 or a returned payment fee of $25 with 
respect to the $100 payment. However, Sec.  1026.52(b)(2)(ii) 
prohibits the card issuer from imposing both fees because those fees 
would be based on a single event or transaction. On March 20, the 
card issuer receives a $120 check, which is not returned. No 
additional payments are received during the March billing cycle. 
Because the card issuer has received the required minimum periodic 
payment due on March 25 and because Sec.  1026.52(b)(2)(ii) 
prohibits the card issuer from imposing a second fee based on the 
$100 payment that was returned for insufficient funds, the card 
issuer cannot impose a late payment fee in these circumstances.

Section 1026.53--Allocation of Payments

    1. Required minimum periodic payment. Section 1026.53 addresses 
the allocation of amounts paid by the consumer in excess of the 
minimum periodic payment required by the card issuer. Section 
1026.53 does not limit or otherwise address the card issuer's 
ability to determine, consistent with applicable law and regulatory 
guidance, the amount of the required minimum periodic payment or how 
that payment is allocated. A card issuer may, but is not required 
to, allocate the required minimum periodic payment consistent with 
the requirements in Sec.  1026.53 to the extent consistent with 
other applicable law or regulatory guidance.
    2. Applicable rates and balances. Section 1026.53 permits a card 
issuer to allocate an amount paid by the consumer in excess of the 
required minimum periodic payment based on the annual percentage 
rates and balances on the day the preceding billing cycle ends, on 
the day the payment is credited to the account, or on any day in 
between those two dates. The day used by the card issuer to 
determine the applicable annual percentage rates and balances for 
purposes of Sec.  1026.53 generally must be consistent from billing 
cycle to billing cycle, although the card issuer may adjust this day 
from time to time. For example:
    i. Assume that the billing cycles for a credit card account 
start on the first day of the month and end on the last day of the 
month. On the date the March billing cycle ends (March 31), the 
account has a purchase balance of $500 at a promotional annual 
percentage rate of 5% and another purchase balance of $200 at a non-
promotional annual percentage rate of 15%. On April 5, a $100 
purchase to which the 15% rate applies is charged to the account. On 
April 15, the promotional rate expires and Sec.  1026.55(b)(1) 
permits the card issuer to increase the rate that applies to the 
$500 balance from 5% to 18%. On April 25, the card issuer credits to 
the account $400 paid by the consumer in excess of the required 
minimum periodic payment. If the card issuer's practice is to 
allocate payments based on the rates and balances on the last day of 
the prior billing cycle, the card issuer would allocate the $400 
payment to pay in full the $200 balance to which the 15% rate 
applied on March 31 and then allocate the remaining $200 to the $500 
balance to which the 5% rate applied on March 31. In the 
alternative, if the card issuer's practice is to allocate payments 
based on the rates and balances on the day a payment is credited to 
the account, the card issuer would allocate the $400 payment to the 
$500 balance to which the 18% rate applied on April 25.
    ii. Same facts as above except that, on April 25, the card 
issuer credits to the account $750 paid by the consumer in excess of 
the required minimum periodic payment. If the card issuer's practice 
is to allocate payments based on the rates and balances on the last 
day of the prior billing cycle, the card issuer would allocate the 
$750 payment to pay in full the $200 balance to which the 15% rate 
applied on March 31 and the $500 balance to which the 5% rate 
applied on March 31 and then allocate the remaining $50 to the $100 
purchase made on April 5. In the alternative, if the card issuer's 
practice is to allocate payments based on the rates and balances on 
the day a payment is credited to the account, the card issuer would 
allocate the $750 payment to pay in full the $500 balance to which 
the 18% rate applied on April 25 and then allocate the remaining 
$250 to the $300 balance to which the 15% rate applied on April 25.
    3. Claims or defenses under Sec.  1026.12(c) and billing error 
disputes under Sec.  1026.13. When a consumer has asserted a claim 
or defense against the card issuer pursuant to Sec.  1026.12(c) or 
alleged a billing error under Sec.  1026.13, the card issuer must 
apply the consumer's payment in a manner that avoids or minimizes 
any reduction in the amount subject to that claim, defense, or 
dispute. For example:
    i. Assume that a credit card account has a $500 cash advance 
balance at an annual percentage rate of 25% and a $1,000 purchase 
balance at an annual percentage rate of 17%. Assume also that $200 
of the cash advance balance is subject to a claim or defense under 
Sec.  1026.12(c) or a billing error dispute under Sec.  1026.13. If 
the consumer pays $900 in excess of the required minimum periodic 
payment, the card issuer must allocate $300 of the excess payment to 
pay in full the portion of the cash advance balance that is not 
subject to the claim, defense, or dispute and then allocate the 
remaining $600 to the $1,000 purchase balance.
    ii. Same facts as above except that the consumer pays $1,400 in 
excess of the required minimum periodic payment. The card issuer 
must allocate $1,300 of the excess payment to pay in full the $300 
cash advance balance that is not subject to the claim, defense, or 
dispute and the $1,000 purchase balance. If there are no new 
transactions or other amounts to which the remaining $100 can be 
allocated, the card issuer may apply that amount to the $200 cash 
advance balance that is subject to the claim, defense, or dispute. 
However, if the card issuer subsequently determines that a billing 
error occurred as asserted by the consumer, the card issuer must 
credit the account for the disputed amount and any related finance 
or other charges and send a correction notice consistent with Sec.  
1026.13(e).
    4. Balances with the same rate. When the same annual percentage 
rate applies to more than one balance on an account and a different 
annual percentage rate applies to at least one other balance on that 
account, Sec.  1026.53 generally does not require that any 
particular method be used when allocating among the balances with 
the same annual percentage rate. Under these circumstances, a card 
issuer may treat the balances with the same rate as a single balance 
or separate balances. See example in comment 53-5.iv. However, when 
a balance on a credit card account is subject to a deferred interest 
or similar program that provides that a consumer will not be 
obligated to pay interest that accrues on the balance if the balance 
is paid in full prior to the expiration of a specified period of 
time, that balance must be treated as a balance with an annual 
percentage rate of zero for purposes of Sec.  1026.53 during that 
period of time. For example, if an account has a $1,000 purchase 
balance and a $2,000 balance that is subject to a deferred interest 
program that expires on July 1 and a 15% annual percentage rate 
applies to both, the balances must be treated as balances with 
different rates for purposes

[[Page 80045]]

of Sec.  1026.53 until July 1. In addition, unless the card issuer 
allocates amounts paid by the consumer in excess of the required 
minimum periodic payment in the manner requested by the consumer 
pursuant to Sec.  1026.53(b)(1)(ii), Sec.  1026.53(b)(1)(i) requires 
the card issuer to apply any excess payments first to the $1,000 
purchase balance except during the last two billing cycles of the 
deferred interest period (when it must be applied first to any 
remaining portion of the $2,000 balance). See example in comment 53-
5.v.
    5. Examples. For purposes of the following examples, assume that 
none of the required minimum periodic payment is allocated to the 
balances discussed (unless otherwise stated).
    i. Assume that a credit card account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $800 in excess of the required minimum periodic payment. Under 
Sec.  1026.53(a), the card issuer must allocate $500 to pay off the 
cash advance balance and then allocate the remaining $300 to the 
purchase balance.
    ii. Assume that a credit card account has a cash advance balance 
of $500 at an annual percentage rate of 20% and a purchase balance 
of $1,500 at an annual percentage rate of 15% and that the consumer 
pays $400 in excess of the required minimum periodic payment. Under 
Sec.  1026.53(a), the card issuer must allocate the entire $400 to 
the cash advance balance.
    iii. Assume that a credit card account has a cash advance 
balance of $100 at an annual percentage rate of 20%, a purchase 
balance of $300 at an annual percentage rate of 18%, and a $600 
protected balance on which the 12% annual percentage rate cannot be 
increased pursuant to Sec.  1026.55. If the consumer pays $500 in 
excess of the required minimum periodic payment, Sec.  1026.53(a) 
requires the card issuer to allocate $100 to pay off the cash 
advance balance, $300 to pay off the purchase balance, and $100 to 
the protected balance.
    iv. Assume that a credit card account has a cash advance balance 
of $500 at an annual percentage rate of 20%, a purchase balance of 
$1,000 at an annual percentage rate of 15%, and a transferred 
balance of $2,000 that was previously at a discounted annual 
percentage rate of 5% but is now at an annual percentage rate of 
15%. Assume also that the consumer pays $800 in excess of the 
required minimum periodic payment. Under Sec.  1026.53(a), the card 
issuer must allocate $500 to pay off the cash advance balance and 
allocate the remaining $300 among the purchase balance and the 
transferred balance in the manner the card issuer deems appropriate.
    v. Assume that on January 1 a consumer uses a credit card 
account to make a $1,200 purchase subject to a deferred interest 
program under which interest accrues at an annual percentage rate of 
15% but the consumer will not be obligated to pay that interest if 
the balance is paid in full on or before June 30. The billing cycles 
for this account begin on the first day of the month and end on the 
last day of the month. Each month from January through June, the 
consumer uses the account to make $200 in purchases that are not 
subject to the deferred interest program but are subject to the 15% 
rate.
    A. Each month from February through June, the consumer pays $400 
in excess of the required minimum periodic payment on the payment 
due date, which is the twenty-fifth of the month. Any interest that 
accrues on the purchases not subject to the deferred interest 
program is paid by the required minimum periodic payment. The card 
issuer does not accept requests from consumers regarding the 
allocation of excess payments pursuant to Sec.  1026.53(b)(1)(ii). 
Thus, Sec.  1026.53(b)(1)(i) requires the card issuer to allocate 
the $400 excess payments received on February 25, March 25, and 
April 25 consistent with Sec.  1026.53(a). In other words, the card 
issuer must allocate those payments as follows: $200 to pay off the 
balance not subject to the deferred interest program (which is 
subject to the 15% rate) and the remaining $200 to the deferred 
interest balance (which is treated as a balance with a rate of 
zero). However, Sec.  1026.53(b)(1)(i) requires the card issuer to 
allocate the entire $400 excess payment received on May 25 to the 
deferred interest balance. Similarly, Sec.  1026.53(b)(1)(i) 
requires the card issuer to allocate the $400 excess payment 
received on June 25 as follows: $200 to the deferred interest 
balance (which pays that balance in full) and the remaining $200 to 
the balance not subject to the deferred interest program.
    B. Same facts as above, except that the card issuer does accept 
requests from consumers regarding the allocation of excess payments 
pursuant to Sec.  1026.53(b)(1)(ii). In addition, on April 25, the 
card issuer receives an excess payment of $800, which the consumer 
requests be allocated to pay off the $800 balance subject to the 
deferred interest program. Section 1026.53(b)(1)(ii) permits the 
card issuer to allocate the $800 excess payment in the manner 
requested by the consumer.

53(b) Special Rules

    1. Deferred interest and similar programs. Section 1026.53(b)(1) 
applies to deferred interest or similar programs under which the 
consumer is not obligated to pay interest that accrues on a balance 
if that balance is paid in full prior to the expiration of a 
specified period of time. For purposes of Sec.  1026.53(b)(1), 
``deferred interest'' has the same meaning as in Sec.  1026.16(h)(2) 
and associated commentary. Section 1026.53(b)(1) applies regardless 
of whether the consumer is required to make payments with respect to 
that balance during the specified period. However, a grace period 
during which any credit extended may be repaid without incurring a 
finance charge due to a periodic interest rate is not a deferred 
interest or similar program for purposes of Sec.  1026.53(b)(1). 
Similarly, a temporary annual percentage rate of zero percent that 
applies for a specified period of time consistent with Sec.  
1026.55(b)(1) is not a deferred interest or similar program for 
purposes of Sec.  1026.53(b)(1) unless the consumer may be obligated 
to pay interest that accrues during the period if a balance is not 
paid in full prior to expiration of the period.
    2. Expiration of deferred interest or similar program during 
billing cycle. For purposes of Sec.  1026.53(b)(1)(i), a billing 
cycle does not constitute one of the two billing cycles immediately 
preceding expiration of a deferred interest or similar program if 
the expiration date for the program precedes the payment due date in 
that billing cycle. For example, assume that a credit card account 
has a balance subject to a deferred interest program that expires on 
June 15. Assume also that the billing cycles for the account begin 
on the first day of the month and end on the last day of the month 
and that the required minimum periodic payment is due on the twenty-
fifth day of the month. The card issuer does not accept requests 
from consumers regarding the allocation of excess payments pursuant 
to Sec.  1026.53(b)(1)(ii). Because the expiration date for the 
deferred interest program (June 15) precedes the due date in the 
June billing cycle (June 25), Sec.  1026.53(b)(1)(i) requires the 
card issuer to allocate first to the deferred interest balance any 
amount paid by the consumer in excess of the required minimum 
periodic payment during the April and May billing cycles (as well as 
any amount paid by the consumer before June 15). However, if the 
deferred interest program expired on June 25 or on June 30 (or on 
any day in between), Sec.  1026.53(b)(1)(i) would apply only to the 
May and June billing cycles.
    3. Consumer requests. i. Generally. Section 1026.53(b) does not 
require a card issuer to allocate amounts paid by the consumer in 
excess of the required minimum periodic payment in the manner 
requested by the consumer, provided that the card issuer instead 
allocates such amounts consistent with Sec.  1026.53(a) or 
(b)(1)(i), as applicable. For example, a card issuer may decline 
consumer requests regarding payment allocation as a general matter 
or may decline such requests when a consumer does not comply with 
requirements set by the card issuer (such as submitting the request 
in writing or submitting the request prior to or contemporaneously 
with submission of the payment), provided that amounts paid by the 
consumer in excess of the required minimum periodic payment are 
allocated consistent with Sec.  1026.53(a) or (b)(1)(i), as 
applicable. Similarly, a card issuer that accepts requests pursuant 
to Sec.  1026.53(b)(1)(ii) or (b)(2) must allocate amounts paid by a 
consumer in excess of the required minimum periodic payment 
consistent with Sec.  1026.53(a) or (b)(1)(i), as applicable, if the 
consumer does not submit a request. Furthermore, a card issuer that 
accepts requests pursuant to Sec.  1026.53(b)(1)(ii) or (b)(2) must 
allocate consistent with Sec.  1026.53(a) or (b)(1)(i), as 
applicable, if the consumer submits a request with which the card 
issuer cannot comply (such as a request that contains a mathematical 
error), unless the consumer submits an additional request with which 
the card issuer can comply.
    ii. Examples of consumer requests that satisfy Sec.  
1026.53(b)(1)(ii) or (b)(2). A consumer has made a request for 
purposes of Sec.  1026.53(b)(1)(ii) or (b)(2) if:
    A. The consumer contacts the card issuer orally, electronically, 
or in writing and specifically requests that a payment or

[[Page 80046]]

payments be allocated in a particular manner during the period of 
time that the deferred interest or similar program applies to a 
balance on the account or the period of time that a balance on the 
account is secured.
    B. The consumer completes and submits to the card issuer a form 
or payment coupon provided by the card issuer for the purpose of 
requesting that a payment or payments be allocated in a particular 
manner during the period of time that the deferred interest or 
similar program applies to a balance on the account or the period of 
time that a balance on the account is secured.
    C. The consumer contacts the card issuer orally, electronically, 
or in writing and specifically requests that a payment that the card 
issuer has previously allocated consistent with Sec.  1026.53(a) or 
(b)(1)(i), as applicable, instead be allocated in a different 
manner.
    iii. Examples of consumer requests that do not satisfy Sec.  
1026.53(b)(1)(ii) or (b)(2). A consumer has not made a request for 
purposes of Sec.  1026.53(b)(1)(ii) or (b)(2) if:
    A. The terms and conditions of the account agreement contain 
preprinted language stating that by applying to open an account, by 
using that account for transactions subject to a deferred interest 
or similar program, or by using the account to purchase property in 
which the card issuer holds a security interest the consumer 
requests that payments be allocated in a particular manner.
    B. The card issuer's online application contains a preselected 
check box indicating that the consumer requests that payments be 
allocated in a particular manner and the consumer does not deselect 
the box.
    C. The payment coupon provided by the card issuer contains 
preprinted language or a preselected check box stating that by 
submitting a payment the consumer requests that the payment be 
allocated in a particular manner.
    D. The card issuer requires a consumer to accept a particular 
payment allocation method as a condition of using a deferred 
interest or similar program, purchasing property in which the card 
issuer holds a security interest, making a payment, or receiving 
account services or features.

Section 1026.54--Limitations on the Imposition of Finance Charges

54(a) Limitations on imposing finance charges as a result of the loss 
of a grace period

54(a)(1) General Rule

    1. Eligibility for grace period. Section 1026.54 prohibits the 
imposition of finance charges as a result of the loss of a grace 
period in certain specified circumstances. Section 1026.54 does not 
require the card issuer to provide a grace period. Furthermore, 
Sec.  1026.54 does not prohibit the card issuer from placing 
limitations and conditions on a grace period (such as limiting 
application of the grace period to certain types of transactions or 
conditioning eligibility for the grace period on certain 
transactions being paid in full by a particular date), provided that 
such limitations and conditions are consistent with Sec.  
1026.5(b)(2)(ii)(B) and Sec.  1026.54. Finally, Sec.  1026.54 does 
not limit the imposition of finance charges with respect to a 
transaction when the consumer is not eligible for a grace period on 
that transaction at the end of the billing cycle in which the 
transaction occurred. For example:
    i. Assume that the billing cycles for a credit card account 
begin on the first day of the month and end on the last day of the 
month and that the payment due date is the twenty-fifth day of the 
month. Assume also that, for purchases made during the current 
billing cycle (for purposes of this example, the June billing 
cycle), the grace period applies from the date of the purchase until 
the payment due date in the following billing cycle (July 25), 
subject to two conditions. First, the purchase balance at the end of 
the preceding billing cycle (the May billing cycle) must have been 
paid in full by the payment due date in the current billing cycle 
(June 25). Second, the purchase balance at the end of the current 
billing cycle (the June billing cycle) must be paid in full by the 
following payment due date (July 25). Finally, assume that the 
consumer was eligible for a grace period at the start of the June 
billing cycle (in other words, assume that the purchase balance for 
the April billing cycle was paid in full by May 25).
    A. If the consumer pays the purchase balance for the May billing 
cycle in full by June 25, then at the end of the June billing cycle 
the consumer is eligible for a grace period with respect to 
purchases made during that billing cycle. Therefore, Sec.  1026.54 
limits the imposition of finance charges with respect to purchases 
made during the June billing cycle if the consumer does not pay the 
purchase balance for the June billing cycle in full by July 25. 
Specifically, Sec.  1026.54(a)(1)(i) prohibits the card issuer from 
imposing finance charges based on the purchase balance at the end of 
the June billing cycle for days that precede the July billing cycle. 
Furthermore, Sec.  1026.54(a)(1)(ii) prohibits the card issuer from 
imposing finance charges based on any portion of the balance at the 
end of the June billing cycle that was paid on or before July 25.
    B. If the consumer does not pay the purchase balance for the May 
billing cycle in full by June 25, then the consumer is not eligible 
for a grace period with respect to purchases made during the June 
billing cycle at the end of that cycle. Therefore, Sec.  1026.54 
does not limit the imposition of finance charges with respect to 
purchases made during the June billing cycle regardless of whether 
the consumer pays the purchase balance for the June billing cycle in 
full by July 25.
    ii. Same facts as above except that the card issuer places only 
one condition on the provision of a grace period for purchases made 
during the current billing cycle (the June billing cycle): that the 
purchase balance at the end of the current billing cycle (the June 
billing cycle) be paid in full by the following payment due date 
(July 25). In these circumstances, Sec.  1026.54 applies to the same 
extent as discussed in paragraphs i.A and i.B above regardless of 
whether the purchase balance for the April billing cycle was paid in 
full by May 25.
    2. Definition of grace period. For purposes of Sec. Sec.  
1026.5(b)(2)(ii)(B) and 1026.54, a grace period is a period within 
which any credit extended may be repaid without incurring a finance 
charge due to a periodic interest rate. The following are not grace 
periods for purposes of Sec.  1026.54:
    i. Deferred interest and similar programs. A deferred interest 
or similar promotional program under which a consumer will not be 
obligated to pay interest that accrues on a balance if that balance 
is paid in full prior to the expiration of a specified period of 
time is not a grace period for purposes of Sec.  1026.54. Thus, 
Sec.  1026.54 does not prohibit the card issuer from charging 
accrued interest to an account upon expiration of a deferred 
interest or similar program if the balance was not paid in full 
prior to expiration (to the extent consistent with Sec.  1026.55 and 
other applicable law and regulatory guidance).
    ii. Waivers or rebates of interest. As a general matter, a card 
issuer has not provided a grace period with respect to transactions 
for purposes of Sec.  1026.54 if, on an individualized basis (such 
as in response to a consumer's request), the card issuer waives or 
rebates finance charges that have accrued on transactions. In 
addition, when a balance at the end of the preceding billing cycle 
is paid in full on or before the payment due date in the current 
billing cycle, a card issuer that waives or rebates trailing or 
residual interest accrued on that balance or any other transactions 
during the current billing cycle has not provided a grace period 
with respect to that balance or any other transactions for purposes 
of Sec.  1026.54. However, if the terms of the account provide that 
all interest accrued on transactions will be waived or rebated if 
the balance for those transactions at the end of the billing cycle 
during which the transactions occurred is paid in full by the 
following payment due date, the card issuer is providing a grace 
period with respect to those transactions for purposes of Sec.  
1026.54. For example:
    A. Assume that the billing cycles for a credit card account 
begin on the first day of the month and end on the last day of the 
month and that the payment due date is the twenty-fifth day of the 
month. On March 31, the balance on the account is $1,000 and the 
consumer is not eligible for a grace period with respect to that 
balance because the balance at the end of the prior billing cycle 
was not paid in full on March 25. On April 15, the consumer uses the 
account for a $500 purchase. On April 25, the card issuer receives a 
payment of $1,000. On May 3, the card issuer mails or delivers a 
periodic statement reflecting trailing or residual interest that 
accrued on the $1,000 balance from April 1 through April 24 as well 
as interest that accrued on the $500 purchase from April 15 through 
April 30. On May 10, the consumer requests that the trailing or 
residual interest charges be waived and the card issuer complies. By 
waiving these interest charges, the card issuer has not provided a 
grace period with respect to the $1,000 balance or the $500 
purchase.
    B. Same facts as in paragraph ii.A above except that the terms 
of the account state that trailing or residual interest will be 
waived in these circumstances or it is the card issuer's practice to 
waive trailing or residual interest in these circumstances. By 
waiving these

[[Page 80047]]

interest charges, the card issuer has not provided a grace period 
with respect to the $1,000 balance or the $500 purchase.
    C. Assume that the billing cycles for a credit card account 
begin on the first day of the month and end on the last day of the 
month and that the payment due date is the twenty-fifth day of the 
month. Assume also that, for purchases made during the current 
billing cycle (for purposes of this example, the June billing 
cycle), the terms of the account provide that interest accrued on 
those purchases from the date of the purchase until the payment due 
date in the following billing cycle (July 25) will be waived or 
rebated, subject to two conditions. First, the purchase balance at 
the end of the preceding billing cycle (the May billing cycle) must 
have been paid in full by the payment due date in the current 
billing cycle (June 25). Second, the purchase balance at the end of 
the current billing cycle (the June billing cycle) must be paid in 
full by the following payment due date (July 25). Under these 
circumstances, the card issuer is providing a grace period on 
purchases for purposes of Sec.  1026.54. Therefore, assuming that 
the consumer was eligible for this grace period at the start of the 
June billing cycle (in other words, assuming that the purchase 
balance for the April billing cycle was paid in full by May 25) and 
assuming that the consumer pays the purchase balance for the May 
billing cycle in full by June 25, Sec.  1026.54 applies to the 
imposition of finance charges with respect to purchases made during 
the June billing cycle. Specifically, Sec.  1026.54(a)(1)(i) 
prohibits the card issuer from imposing finance charges based on the 
purchase balance at the end of the June billing cycle for days that 
precede the July billing cycle. Furthermore, Sec.  1026.54(a)(1)(ii) 
prohibits the card issuer from imposing finance charges based on any 
portion of the balance at the end of the June billing cycle that was 
paid on or before July 25.
    3. Relationship to payment allocation requirements in Sec.  
1026.53. Card issuers must comply with the payment allocation 
requirements in Sec.  1026.53 even if doing so will result in the 
loss of a grace period.
    4. Prohibition on two-cycle balance computation method. When a 
consumer ceases to be eligible for a grace period, Sec.  
1026.54(a)(1)(i) prohibits the card issuer from computing the 
finance charge using the two-cycle average daily balance computation 
method. This method calculates the finance charge using a balance 
that is the sum of the average daily balances for two billing 
cycles. The first balance is for the current billing cycle, and is 
calculated by adding the total balance (including or 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.
    5. Prohibition on imposing finance charges on amounts paid 
within grace period. When a balance on a credit card account is 
eligible for a grace period and the card issuer receives payment for 
some but not all of that balance prior to the expiration of the 
grace period, Sec.  1026.54(a)(1)(ii) prohibits the card issuer from 
imposing finance charges on the portion of the balance paid. Card 
issuers are not required to use a particular method to comply with 
Sec.  1026.54(a)(1)(ii). However, when Sec.  1026.54(a)(1)(ii) 
applies, a card issuer is in compliance if, for example, it applies 
the consumer's payment to the balance subject to the grace period at 
the end of the preceding billing cycle (in a manner consistent with 
the payment allocation requirements in Sec.  1026.53) and then 
calculates interest charges based on the amount of the balance that 
remains unpaid.
    6. Examples. Assume that the annual percentage rate for 
purchases on a credit card account is 15%. The billing cycle starts 
on the first day of the month and ends on the last day of the month. 
The payment due date for the account is the twenty-fifth day of the 
month. For purchases made during the current billing cycle, the card 
issuer provides a grace period from the date of the purchase until 
the payment due date in the following billing cycle, provided that 
the purchase balance at the end of the current billing cycle is paid 
in full by the following payment due date. For purposes of this 
example, assume that none of the required minimum periodic payment 
is allocated to the balances discussed. During the March billing 
cycle, the following transactions are charged to the account: A $100 
purchase on March 10, a $200 purchase on March 15, and a $300 
purchase on March 20. On March 25, the purchase balance for the 
February billing cycle is paid in full. Thus, for purposes of Sec.  
1026.54, the consumer is eligible for a grace period on the March 
purchases. At the end of the March billing cycle (March 31), the 
consumer's total purchase balance is $600 and the consumer will not 
be charged interest on that balance if it is paid in full by the 
following due date (April 25).
    i. On April 10, a $150 purchase is charged to the account. On 
April 25, the card issuer receives $500 in excess of the required 
minimum periodic payment. Section 1026.54(a)(1)(i) prohibits the 
card issuer from reaching back and charging interest on any of the 
March transactions from the date of the transaction through the end 
of the March billing cycle (March 31). In these circumstances, the 
card issuer may comply with Sec.  1026.54(a)(1)(ii) by applying the 
$500 excess payment to the $600 purchase balance and then charging 
interest only on the portion of the $600 purchase balance that 
remains unpaid ($100) from the start of the April billing cycle 
(April 1) through the end of the April billing cycle (April 30). In 
addition, the card issuer may charge interest on the $150 purchase 
from the date of the transaction (April 10) through the end of the 
April billing cycle (April 31).
    ii. Same facts as in paragraph 6 above except that, on March 18, 
a $250 cash advance is charged to the account at an annual 
percentage rate of 25%. The card issuer's grace period does not 
apply to cash advances, but the card issuer does provide a grace 
period on the March purchases because the purchase balance for the 
February billing cycle is paid in full on March 25. On April 25, the 
card issuer receives $600 in excess of the required minimum periodic 
payment. As required by Sec.  1026.53, the card issuer allocates the 
$600 excess payment first to the balance with the highest annual 
percentage rate (the $250 cash advance balance). Although Sec.  
1026.54(a)(1)(i) prohibits the card issuer from charging interest on 
the March purchases based on days in the March billing cycle, the 
card issuer may charge interest on the $250 cash advance from the 
date of the transaction (March 18) through April 24. In these 
circumstances, the card issuer may comply with Sec.  
1026.54(a)(1)(ii) by applying the remainder of the excess payment 
($350) to the $600 purchase balance and then charging interest only 
on the portion of the $600 purchase balance that remains unpaid 
($250) from the start of the April billing cycle (April 1) through 
the end of the April billing cycle (April 30).
    iii. Same facts as in paragraph 6 above except that the consumer 
does not pay the balance for the February billing cycle in full on 
March 25 and therefore is not eligible for a grace period on the 
March purchases. Under these circumstances, Sec.  1026.54 does not 
apply and the card issuer may charge interest from the date of each 
transaction through April 24 and interest on the remaining $100 from 
April 25 through the end of the April billing cycle (April 25).

Section 1026.55--Limitations on Increasing Annual Percentage Rates, 
Fees, and Charges

55(a) General Rule

    1. Increase in rate, fee, or charge. Section 1026.55(a) 
prohibits card issuers from increasing an annual percentage rate or 
any fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) on a credit card 
account unless specifically permitted by one of the exceptions in 
Sec.  1026.55(b). Except as specifically provided in Sec.  
1026.55(b), this prohibition applies even if the circumstances under 
which an increase will occur are disclosed in advance. The following 
examples illustrate the general application of Sec.  1026.55(a) and 
(b). Additional examples illustrating specific aspects of the 
exceptions in Sec.  1026.55(b) are provided in the commentary to 
those exceptions.
    i. Account-opening disclosure of non-variable rate for six 
months, then variable rate. Assume that, at account opening on 
January 1 of year one, a card issuer discloses that the annual 
percentage rate for purchases is a non-variable rate of 15% and will 
apply for six months. The card 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 card issuer's control. Furthermore, the card issuer 
discloses that the annual percentage rate for cash advances is the 
same variable rate that will apply to purchases after six months. 
Finally, the card issuer discloses that, to the extent consistent 
with Sec.  1026.55 and other applicable law, a non-variable penalty 
rate of 30% may apply if the consumer makes a late payment. 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.

[[Page 80048]]

    A. Change-in-terms rate increase for new transactions after 
first year. On January 15 of year one, 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 card issuer may adjust the variable rate that applies to the 
$500 cash advance consistent with changes in the index (pursuant to 
Sec.  1026.55(b)(2)). 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 creditor on May 
28. At this time, the card issuer is prohibited by Sec.  1026.55 
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 card issuer may begin to accrue 
interest on the $2,000 purchase at the previously-disclosed variable 
rate determined using an 8-point margin (pursuant to Sec.  
1026.55(b)(1)). Because no other increases in rate were disclosed at 
account opening, the card issuer may not subsequently increase the 
variable rate that applies to the $2,000 purchase and the $500 cash 
advance (except due to increases in the index pursuant to Sec.  
1026.55(b)(2)). On November 16, the card issuer provides a notice 
pursuant to Sec.  1026.9(c) informing the consumer of a new variable 
rate that will apply on January 1 of year two (calculated using the 
same index and an increased margin of 12 percentage points). On 
December 15, the consumer makes a $100 purchase. On January 1 of 
year two, the card issuer may increase the margin used to determine 
the variable rate that applies to new purchases to 12 percentage 
points (pursuant to Sec.  1026.55(b)(3)). However, Sec.  
1026.55(b)(3)(ii) does not permit the card issuer to apply the 
variable rate determined using the 12-point margin to the $2,000 
purchase balance. Furthermore, although the $100 purchase occurred 
more than 14 days after provision of the Sec.  1026.9(c) notice, 
Sec.  1026.55(b)(3)(iii) does not permit the card issuer to apply 
the variable rate determined using the 12-point margin to that 
purchase because it occurred during the first year after account 
opening. On January 15 of year two, the consumer makes a $300 
purchase. The card issuer may apply the variable rate determined 
using the 12-point margin to the $300 purchase.
    B. Account becomes more than 60 days delinquent during first 
year. Same facts as above except that the required minimum periodic 
payment due on May 25 of year one is not received by the card issuer 
until July 30 of year one. Because the card issuer received the 
required minimum periodic payment more than 60 days after the 
payment due date, Sec.  1026.55(b)(4) permits the card issuer to 
increase the annual percentage rate applicable to the $2,000 
purchase, the $500 cash advance, and future purchases and cash 
advances. However, Sec.  1026.55(b)(4)(i) requires the card issuer 
to first comply with the notice requirements in Sec.  1026.9(g). 
Thus, if the card issuer provided a Sec.  1026.9(g) notice on July 
25 stating that all rates on the account would be increased to the 
30% penalty rate, the card issuer could apply that rate beginning on 
September 8 to all balances and to future transactions.
    ii. Account-opening disclosure of non-variable rate for six 
months, then increased non-variable rate for six months, then 
variable rate; change-in-terms rate increase for new transactions 
after first year. Assume that, at account opening on January 1 of 
year one, a card issuer discloses 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 an additional six 
months; and thereafter a variable rate that is currently 15% and 
will be adjusted monthly by adding a margin of 5 percentage points 
to a publicly-available index not under the card 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 of year one, the consumer uses the account to make a 
$1,500 purchase. Six months after account opening (July 1), the card 
issuer may begin to accrue interest on the $1,500 purchase at the 
previously-disclosed 10% non-variable rate (pursuant to Sec.  
1026.55(b)(1)). On September 15, the consumer uses the account for a 
$700 purchase. On November 16, the card issuer provides a notice 
pursuant to Sec.  1026.9(c) informing the consumer of a new variable 
rate that will apply on January 1 of year two (calculated using the 
same index and an increased margin of 8 percentage points). One year 
after account opening (January 1 of year two), the card issuer may 
begin accruing interest on the $2,200 purchase balance at the 
previously-disclosed variable rate determined using a 5-point margin 
(pursuant to Sec.  1026.55(b)(1)). Section 1026.55 does not permit 
the card issuer to apply the variable rate determined using the 8-
point margin to the $2,200 purchase balance. Furthermore, Sec.  
1026.55 does not permit the card issuer to subsequently increase the 
variable rate determined using the 5-point margin that applies to 
the $2,200 purchase balance (except due to increases in the index 
pursuant to Sec.  1026.55(b)(2)). The card issuer may, however, 
apply the variable rate determined using the 8-point margin to 
purchases made on or after January 1 of year two (pursuant to Sec.  
1026.55(b)(3)).
    iii. Change-in-terms rate increase for new transactions after 
first year; penalty rate increase after first year. Assume that, at 
account opening on January 1 of year one, a card issuer discloses 
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 card issuer's control. The card 
issuer also discloses that, to the extent consistent with Sec.  
1026.55 and other applicable law, a non-variable penalty rate of 28% 
may apply if the consumer makes a late payment. The due date for the 
account is the fifteenth of the month. On May 30 of year two, the 
account has a purchase balance of $1,000. On May 31, the card issuer 
provides a notice pursuant to Sec.  1026.9(c) informing the consumer 
of a new variable rate that will apply on July 16 for all purchases 
made on or after June 15 (calculated by using the same index and an 
increased margin of 8 percentage points). On June 14, the consumer 
makes a $500 purchase. On June 15, the consumer makes a $200 
purchase. On July 1, the card issuer has not received the payment 
due on June 15 and provides the consumer with a notice pursuant to 
Sec.  1026.9(g) stating that the 28% penalty rate will apply as of 
August 15 to all transactions made on or after July 16 and that, if 
the consumer becomes more than 60 days late, the penalty rate will 
apply to all balances on the account. On July 17, the consumer makes 
a $300 purchase.
    A. Account does not become more than 60 days delinquent. The 
payment due on June 15 of year two is received on July 2. On July 
16, Sec.  1026.55(b)(3)(ii) permits the card issuer to apply the 
variable rate determined using the 8-point margin disclosed in the 
Sec.  1026.9(c) notice to the $200 purchase made on June 15 but does 
not permit the card issuer to apply this rate to the $1,500 purchase 
balance. On August 15, Sec.  1026.55(b)(3)(ii) permits the card 
issuer to apply the 28% penalty rate disclosed at account opening 
and in the Sec.  1026.9(g) notice to the $300 purchase made on July 
17 but does not permit the card 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. Account becomes more than 60 days delinquent after provision 
of Sec.  1026.9(g) notice. Same facts as above except the payment 
due on June 15 of year two has not been received by August 15. 
Section 1026.55(b)(4) permits the card issuer to apply the 28% 
penalty rate to the $1,500 purchase balance and the $200 purchase 
because it has not received the June 15 payment within 60 days after 
the due date. However, in order to do so, Sec.  1026.55(b)(4)(i) 
requires the card issuer to first provide an additional notice 
pursuant to Sec.  1026.9(g). This notice must be sent no earlier 
than August 15, which is the first day the account became more than 
60 days' delinquent. If the notice is sent on August 15, the card 
issuer may begin accruing interest on the $1,500 purchase balance 
and the $200 purchase at the 28% penalty rate beginning on September 
29.
    2. Relationship to grace period. Nothing in Sec.  1026.55 
prohibits a card issuer from assessing interest due to the loss of a 
grace period to the extent consistent with Sec.  1026.5(b)(2)(ii)(B) 
and Sec.  1026.54. In addition, a card issuer has not reduced an 
annual percentage rate on a credit card account for purposes of 
Sec.  1026.55 if the card issuer does not charge interest on a 
balance or a portion thereof based on a payment received prior to 
the expiration of a grace period. For example, if the annual 
percentage rate for purchases on an account is 15% but the card 
issuer does not charge any interest on a $500 purchase balance 
because that balance was paid in full prior to the expiration of the 
grace period, the card issuer has not reduced the 15% purchase rate 
to 0% for purposes of Sec.  1026.55.

55(b) Exceptions

    1. Exceptions not mutually exclusive. A card issuer generally 
may increase an annual percentage rate or a fee or charge required 
to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or 
(b)(2)(xii) pursuant to an exception set forth in Sec.  1026.55(b) 
even if

[[Page 80049]]

that increase would not be permitted under a different exception. 
For example, although a card issuer cannot increase an annual 
percentage rate pursuant to Sec.  1026.55(b)(1) unless that rate is 
provided for a specified period of at least six months, the card 
issuer may increase an annual percentage rate during a specified 
period due to an increase in an index consistent with Sec.  
1026.55(b)(2). Similarly, although Sec.  1026.55(b)(3) does not 
permit a card issuer to increase an annual percentage rate during 
the first year after account opening, the card issuer may increase 
the rate during the first year after account opening pursuant to 
Sec.  1026.55(b)(4) if the required minimum periodic payment is not 
received within 60 days after the due date. However, if Sec.  
1026.55(b)(4)(ii) requires a card issuer to decrease the rate, fee, 
or charge that applies to a balance while the account is subject to 
a workout or temporary hardship arrangement or subject to 50 U.S.C. 
app. 527 or a similar Federal or state statute or regulation, the 
card issuer may not impose a higher rate, fee, or charge on that 
balance pursuant to Sec.  1026.55(b)(5) or (b)(6) upon completion or 
failure of the arrangement or once 50 U.S.C. app. 527 or the similar 
Federal or state statute or regulation no longer applies. For 
example, assume that, on January 1, the annual percentage rate that 
applies to a $1,000 balance is increased from 12% to 30% pursuant to 
Sec.  1026.55(b)(4). On February 1, the rate on that balance is 
decreased from 30% to 15% consistent with Sec.  1026.55(b)(5) as a 
part of a workout or temporary hardship arrangement. On July 1, 
Sec.  1026.55(b)(4)(ii) requires the card issuer to reduce the rate 
that applies to any remaining portion of the $1,000 balance from 15% 
to 12%. If the consumer subsequently completes or fails to comply 
with the terms of the workout or temporary hardship arrangement, the 
card issuer may not increase the 12% rate that applies to any 
remaining portion of the $1,000 balance pursuant to Sec.  
1026.55(b)(5).
    2. Relationship between exceptions in Sec.  1026.55(b) and 
notice requirements in Sec.  1026.9. Nothing in Sec.  1026.55 alters 
the requirements in Sec.  1026.9(c) and (g) that creditors provide 
written notice at least 45 days prior to the effective date of 
certain increases in annual percentage rates, fees, and charges.
    i. 14-day rule in Sec.  1026.55(b)(3)(ii). Although Sec.  
1026.55(b)(3)(ii) permits a card issuer that discloses an increased 
rate pursuant to Sec.  1026.9(c) or (g) to apply that rate to 
transactions that occur more than 14 days after provision of the 
notice, the card issuer cannot begin to accrue interest at the 
increased rate until that increase goes into effect, consistent with 
Sec.  1026.9(c) or (g). For example, if on May 1 a card issuer 
provides a notice pursuant to Sec.  1026.9(c) stating that a rate 
will increase from 15% to 18% on June 15, Sec.  1026.55(b)(3)(ii) 
permits the card issuer to apply the 18% rate to transactions that 
occur on or after May 16. However, neither Sec.  1026.55 nor Sec.  
1026.9(c) permits the card issuer to begin accruing interest at the 
18% rate on those transactions until June 15. See additional 
examples in comment 55(b)(3)-4.
    ii. Mid-cycle increases; application of balance computation 
methods. Once an increased rate has gone into effect, the card 
issuer cannot calculate interest charges based on that increased 
rate for days prior to the effective date. Assume that, in the 
example in paragraph i above, the billing cycles for the account 
begin on the first day of the month and end on the last day of the 
month. If, for example, the card issuer uses the average daily 
balance computation method, it cannot apply the 18% rate to the 
average daily balance for the entire June billing cycle because that 
rate did not become effective until June 15. However, the card 
issuer could apply the 15% rate to the average daily balance from 
June 1 through June 14 and the 18% rate to the average daily balance 
from June 15 through June 30. Similarly, if the card issuer that 
uses the daily balance computation method, it could apply the 15% 
rate to the daily balance for each day from June 1 through June 14 
and the 18% rate to the daily balance for each day from June 15 
through June 30.
    iii. Mid-cycle increases; delayed implementation of increase. If 
Sec.  1026.55(b) and Sec.  1026.9(b), (c), or (g) permit a card 
issuer to apply an increased annual percentage rate, fee, or charge 
on a date that is not the first day of a billing cycle, the card 
issuer may delay application of the increased rate, fee, or charge 
until the first day of the following billing cycle without 
relinquishing the ability to apply that rate, fee, or charge. Thus, 
in the example in paragraphs i and ii above, the card issuer could 
delay application of the 18% rate until the start of the next 
billing cycle (April 1) without relinquishing its ability to apply 
that rate under Sec.  1026.55(b)(3). Similarly, assume that, at 
account opening on January 1, a card issuer discloses that a non-
variable annual percentage rate of 10% will apply to purchases for 
six months and a non-variable rate of 15% will apply thereafter. The 
first day of each billing cycle for the account is the fifteenth of 
the month. If the six-month period expires on July 1, the card 
issuer may delay application of the 15% rate until the start of the 
next billing cycle (July 15) without relinquishing its ability to 
apply that rate under Sec.  1026.55(b)(1).
    3. Application of a lower rate, fee, or charge. Nothing in Sec.  
1026.55 prohibits a card issuer from lowering an annual percentage 
rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, a card 
issuer that does so cannot subsequently increase the rate, fee, or 
charge unless permitted by one of the exceptions in Sec.  
1026.55(b). The following examples illustrate the application of the 
rule:
    i. Application of lower rate during first year. Assume that a 
card issuer discloses at account opening on January 1 of year one 
that a non-variable annual percentage rate of 15% will apply to 
purchases. The card issuer also discloses that, to the extent 
consistent with Sec.  1026.55 and other applicable law, a non-
variable penalty rate of 30% may apply if the consumer's required 
minimum periodic payment is received after the payment due date, 
which is the tenth of the month. The required minimum periodic 
payments are applied to accrued interest and fees but do not reduce 
the purchase balance.
    A. Temporary rate returns to standard rate at expiration. On 
September 30 of year one, the account has a purchase balance of 
$1,400 at the 15% rate. On October 1, the card issuer provides a 
notice pursuant to Sec.  1026.9(c) informing the consumer that the 
rate for new purchases will decrease to a non-variable rate of 5% 
for six months (from October 1 through March 31 of year two) and 
that, beginning on April 1 of year two, the rate for purchases will 
increase to the 15% non-variable rate disclosed at account opening. 
The card issuer does not apply the 5% rate to the $1,400 purchase 
balance. On October 14 of year one, the consumer makes a $300 
purchase at the 5% rate. On January 15 of year two, the consumer 
makes a $150 purchase at the 5% rate. On April 1 of year two, the 
card issuer may begin accruing interest on the $300 purchase and the 
$150 purchase at 15% as disclosed in the Sec.  1026.9(c) notice 
(pursuant to Sec.  1026.55(b)(1)).
    B. Penalty rate increase. Same facts as above except that the 
required minimum periodic payment due on November 10 of year one is 
not received until November 15. Section 1026.55 does not permit the 
card issuer to increase any annual percentage rate on the account at 
this time. The card issuer may apply the 30% penalty rate to new 
transactions beginning on April 1 of year two pursuant to Sec.  
1026.55(b)(3) by providing a Sec.  1026.9(g) notice informing the 
consumer of this increase no later than February 14 of year two. The 
card issuer may not, however, apply the 30% penalty rate to the 
$1,400 purchase balance as of September 30 of year one, the $300 
purchase on October 15 of year one, or the $150 purchase on January 
15 of year two.
    ii. Application of lower rate at end of first year. Assume that, 
at account opening on January 1 of year one, a card issuer discloses 
that a non-variable annual percentage rate of 15% will apply to 
purchases for one year and discloses that, after the first year, the 
card issuer will apply a variable rate that is currently 20% and is 
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control. On December 31 
of year one, the account has a purchase balance of $3,000.
    A. Notice of extension of existing temporary rate provided 
consistent with Sec.  1026.55(b)(1)(i). On December 15 of year one, 
the card issuer provides a notice pursuant to Sec.  1026.9(c) 
informing the consumer that the existing 15% rate will continue to 
apply until July 1 of year two. The notice further states that, on 
July 1 of year two, the variable rate disclosed at account opening 
will apply. On July 1 of year two, Sec.  1026.55(b)(1) permits the 
card issuer to apply that variable rate to any remaining portion of 
the $3,000 balance and to new transactions.
    B. Notice of new temporary rate provided consistent with Sec.  
1026.55(b)(1)(i). On December 15 of year one, the card issuer 
provides a notice pursuant to Sec.  1026.9(c) informing the consumer 
of a new variable rate that will apply on January 1 of year two that 
is lower than the variable rate disclosed at account opening. The 
new variable rate is calculated using the same index and a reduced 
margin of 8 percentage points. The

[[Page 80050]]

notice further states that, on July 1 of year two, the margin will 
increase to the margin disclosed at account opening (10 percentage 
points). On July 1 of year two, Sec.  1026.55(b)(1) permits the card 
issuer to increase the margin used to determine the variable rate 
that applies to new purchases to 10 percentage points and to apply 
that rate to any remaining portion of the $3,000 purchase balance.
    C. No notice provided. Same facts as in paragraph ii.B above 
except that the card issuer does not send a notice on December 15 of 
year one. Instead, on January 1 of year two, the card issuer lowers 
the margin used to determine the variable rate to 8 percentage 
points and applies that rate to the $3,000 purchase balance and to 
new purchases. Section 1026.9 does not require advance notice in 
these circumstances. However, unless the account becomes more than 
60 days' delinquent, Sec.  1026.55 does not permit the card issuer 
to subsequently increase the rate that applies to the $3,000 
purchase balance except due to increases in the index (pursuant to 
Sec.  1026.55(b)(2)).
    iii. Application of lower rate after first year. Assume that a 
card issuer discloses at account opening on January 1 of year one 
that a non-variable annual percentage rate of 10% will apply to 
purchases for one year, after which that rate will increase to a 
non-variable rate of 15%. The card issuer also discloses that, to 
the extent consistent with Sec.  1026.55 and other applicable law, a 
non-variable penalty rate of 30% may apply if the consumer's 
required minimum periodic payment is received after the payment due 
date, which is the tenth of the month. The required minimum periodic 
payments are applied to accrued interest and fees but do not reduce 
the purchase balance.
    A. Effect of 14-day period. On June 30 of year two, the account 
has a purchase balance of $1,000 at the 15% rate. On July 1, the 
card issuer provides a notice pursuant to Sec.  1026.9(c) informing 
the consumer that the rate for new purchases will decrease to a non-
variable rate of 5% for six months (from July 1 through December 31 
of year two) and that, beginning on January 1 of year three, the 
rate for purchases will increase to a non-variable rate of 17%. On 
July 15 of year two, the consumer makes a $200 purchase. On July 16, 
the consumer makes a $100 purchase. On January 1 of year three, the 
card issuer may begin accruing interest on the $100 purchase at 17% 
(pursuant to Sec.  1026.55(b)(1)). However, Sec.  
1026.55(b)(1)(ii)(B) does not permit the card issuer to apply the 
17% rate to the $200 purchase because that transaction occurred 
within 14 days after provision of the Sec.  1026.9(c) notice. 
Instead, the card issuer may apply the 15% rate that applied to 
purchases prior to provision of the Sec.  1026.9(c) notice. In 
addition, if the card issuer applied the 5% rate to the $1,000 
purchase balance, Sec.  1026.55(b)(ii)(A) would not permit the card 
issuer to increase the rate that applies to that balance on January 
1 of year three to a rate that is higher than 15% that previously 
applied to the balance.
    B. Penalty rate increase. Same facts as above except that the 
required minimum periodic payment due on August 25 is received on 
August 30. At this time, Sec.  1026.55 does not permit the card 
issuer to increase the annual percentage rates that apply to the 
$1,000 purchase balance, the $200 purchase, or the $100 purchase. 
Instead, those rates can only be increased as discussed in paragraph 
iii.A above. However, if the card issuer provides a notice pursuant 
to Sec.  1026.9(c) or (g) on September 1, Sec.  1026.55(b)(3) 
permits the card issuer to apply an increased rate (such as the 17% 
purchase rate or the 30% penalty rate) to transactions that occur on 
or after September 16 beginning on October 16.
    C. Application of lower temporary rate during specified period. 
Same facts as in paragraph iii above. On June 30 of year two, the 
account has a purchase balance of $1,000 at the 15% non-variable 
rate. On July 1, the card issuer provides a notice pursuant to Sec.  
1026.9(c) informing the consumer that the rate for the $1,000 
balance and new purchases will decrease to a non-variable rate of 
12% for six months (from July 1 through December 31 of year two) and 
that, beginning on January 1 of year three, the rate for purchases 
will increase to a variable rate that is currently 20% and is 
determined by adding a margin of 10 percentage points to a publicly-
available index not under the card issuer's control. On August 15 of 
year two, the consumer makes a $500 purchase. On October 1, the card 
issuer provides another notice pursuant to Sec.  1026.9(c) informing 
the consumer that the rate for the $1,000 balance, the $500 
purchase, and new purchases will decrease to a non-variable rate of 
5% for six months (from October 1 of year two through March 31 of 
year three) and that, beginning on April 1 of year three, the rate 
for purchases will increase to a variable rate that is currently 23% 
and is determined by adding a margin of 13 percentage points to the 
previously-disclosed index. On November 15 of year two, the consumer 
makes a $300 purchase. On April 1 of year three, Sec.  1026.55 
permits the card issuer to begin accruing interest using the 
following rates for any remaining portion of the following balances: 
The 15% non-variable rate for the $1,000 balance; the variable rate 
determined using the 10-point margin for the $500 purchase; and the 
variable rate determined using the 13-point margin for the $300 
purchase.
    4. Date on which transaction occurred. When a transaction 
occurred for purposes of Sec.  1026.55 is generally determined by 
the date of the transaction. However, if a transaction that occurred 
within 14 days after provision of a Sec.  1026.9(c) or (g) notice is 
not charged to the account prior to the effective date of the change 
or increase, the card issuer may treat the transaction as occurring 
more than 14 days after provision of the notice for purposes of 
Sec.  1026.55. See example in comment 55(b)(3)-4.iii.B. In addition, 
when a merchant places a ``hold'' on the available credit on an 
account for an estimated transaction amount because the actual 
transaction amount will not be known until a later date, the date of 
the transaction for purposes of Sec.  1026.55 is the date on which 
the card issuer receives the actual transaction amount from the 
merchant. See example in comment 55(b)(3)-4.iii.A.
    5. Category of transactions. For purposes of Sec.  1026.55, a 
``category of transactions'' is a type or group of transactions to 
which an annual percentage rate applies that is different than the 
annual percentage rate that applies to other transactions. 
Similarly, a type or group of transactions is a ``category of 
transactions'' for purposes of Sec.  1026.55 if a fee or charge 
required to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), 
or (b)(2)(xii) applies to those transactions that is different than 
the fee or charge that applies to other transactions. For example, 
purchase transactions, cash advance transactions, and balance 
transfer transactions are separate categories of transactions for 
purposes of Sec.  1026.55 if a card issuer applies different annual 
percentage rates to each. Furthermore, if, for example, the card 
issuer applies different annual percentage rates to different types 
of purchase transactions (such as one rate for purchases of gasoline 
or purchases over $100 and a different rate for all other 
purchases), each type constitutes a separate category of 
transactions for purposes of Sec.  1026.55.

55(b)(1) Temporary rate, fee, or charge exception

    1. Relationship to Sec.  1026.9(c)(2)(v)(B). A card issuer that 
has complied with the disclosure requirements in Sec.  
1026.9(c)(2)(v)(B) has also complied with the disclosure 
requirements in Sec.  1026.55(b)(1)(i).
    2. Period of six months or longer. A temporary annual percentage 
rate, fee, or charge must apply for a specified period of six months 
or longer before a card issuer can increase that rate, fee, or 
charge pursuant to Sec.  1026.55(b)(1). The specified period must 
expire no less than six months after the date on which the card 
issuer provides the consumer with the disclosures required by Sec.  
1026.55(b)(1)(i) or, if later, the date on which the account can be 
used for transactions to which the temporary rate, fee, or charge 
applies. Section 1026.55(b)(1) does not prohibit a card issuer from 
limiting the application of a temporary annual percentage rate, fee, 
or charge to a particular category of transactions (such as to 
balance transfers or to purchases over $100). However, in 
circumstances where the card issuer limits application of the 
temporary rate, fee, or charge to a single transaction, the 
specified period must expire no less than six months after the date 
on which that transaction occurred. The following examples 
illustrate the application of Sec.  1026.55(b)(1):
    i. Assume that on January 1 a card issuer offers a consumer a 5% 
annual percentage rate on purchases made during the months of 
January through June. A 15% rate will apply thereafter. On February 
15, a $500 purchase is charged to the account. On June 15, a $200 
purchase is charged to the account. On July 1, the card issuer may 
begin accruing interest at the 15% rate on the $500 purchase and the 
$200 purchase (pursuant to Sec.  1026.55(b)(1)).
    ii. Same facts as above except that on January 1 the card issuer 
offered the 5% rate on purchases beginning in the month of February. 
Section 1026.55(b)(1) would not permit the card issuer to begin 
accruing interest at the 15% rate on the $500 purchase and the $200 
purchase until August 1.

[[Page 80051]]

    iii. Assume that on October 31 of year one the annual percentage 
rate for purchases is 17%. On November 1, the card issuer offers the 
consumer a 0% rate for six months on purchases made during the 
months of November and December. The 17% rate will apply thereafter. 
On November 15, a $500 purchase is charged to the account. On 
December 15, a $300 purchase is charged to the account. On January 
15 of year two, a $150 purchase is charged to the account. Section 
1026.55(b)(1) would not permit the card issuer to begin accruing 
interest at the 17% rate on the $500 purchase and the $300 purchase 
until May 1 of year two. However, the card issuer may accrue 
interest at the 17% rate on the $150 purchase beginning on January 
15 of year two.
    iv. Assume that on June 1 of year one a card issuer offers a 
consumer a 0% annual percentage rate for six months on the purchase 
of an appliance. An 18% rate will apply thereafter. On September 1, 
a $5,000 transaction is charged to the account for the purchase of 
an appliance. Section 1026.55(b)(1) would not permit the card issuer 
to begin accruing interest at the 18% rate on the $5,000 transaction 
until March 1 of year two.
    v. Assume that on May 31 of year one the annual percentage rate 
for purchases is 15%. On June 1, the card issuer offers the consumer 
a 5% rate for six months on a balance transfer of at least $1,000. 
The 15% rate will apply thereafter. On June 15, a $3,000 balance is 
transferred to the account. On July 15, a $200 purchase is charged 
to the account. Section 1026.55(b)(1) would not permit the card 
issuer to begin accruing interest at the 15% rate on the $3,000 
transferred balance until December 15. However, the card issuer may 
accrue interest at the 15% rate on the $200 purchase beginning on 
July 15.
    vi. Same facts as in paragraph v above except that the card 
issuer offers the 5% rate for six months on all balance transfers of 
at least $1,000 during the month of June and a $2,000 balance is 
transferred to the account on June 30 (in addition to the $3,000 
balance transfer on June 15). Because the 5% rate is not limited to 
a particular transaction, Sec.  1026.55(b)(1) permits the card 
issuer to begin accruing interest on the $3,000 and $2,000 
transferred balances on December 1.
    vii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for the account is $0 
until January 1 of year two, when the fee will increase to $50. On 
January 1 of year two, the card issuer may impose the $50 annual 
fee. However, the issuer must also comply with the notice 
requirements in Sec.  1026.9(e).
    viii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the monthly maintenance fee for the 
account is $0 until July 1 of year one, when the fee will increase 
to $10. Beginning on July 1 of year one, the card issuer may impose 
the $10 monthly maintenance fee (to the extent consistent with Sec.  
1026.52(a)).
    3. Deferred interest and similar promotional programs. i. 
Application of Sec.  1026.55. The general prohibition in Sec.  
1026.55(a) applies to the imposition of accrued interest upon the 
expiration of a deferred interest or similar promotional program 
under which the consumer is not obligated to pay interest that 
accrues on a balance if that balance is paid in full prior to the 
expiration of a specified period of time. However, the exception in 
Sec.  1026.55(b)(1) also applies to these programs, provided that 
the specified period is six months or longer and that, prior to the 
commencement of the period, the card issuer discloses the length of 
the period and the rate at which interest will accrue on the balance 
subject to the deferred interest or similar program if that balance 
is not paid in full prior to expiration of the period. See comment 
9(c)(2)(v)-9. For purposes of Sec.  1026.55, ``deferred interest'' 
has the same meaning as in Sec.  1026.16(h)(2) and associated 
commentary.
    ii. Examples. A. Deferred interest offer at account opening. 
Assume that, at account opening on January 1 of year one, the card 
issuer discloses the following with respect to a deferred interest 
program: ``No interest on purchases made in January of year one if 
paid in full by December 31 of year one. If the balance is not paid 
in full by that date, interest will be imposed from the transaction 
date at a rate of 20%.'' On January 15 of year one, the consumer 
makes a purchase of $2,000. No other transactions are made on the 
account. The terms of the deferred interest program require the 
consumer to make minimum periodic payments with respect to the 
deferred interest balance, and the payment due on April 1 is not 
received until April 10. Section 1026.55 does not permit the card 
issuer to charge to the account interest that has accrued on the 
$2,000 purchase at this time. Furthermore, if the consumer pays the 
$2,000 purchase in full on or before December 31 of year one, Sec.  
1026.55 does not permit the card issuer to charge to the account any 
interest that has accrued on that purchase. If, however, the $2,000 
purchase has not been paid in full by January 1 of year two, Sec.  
1026.55(b)(1) permits the card issuer to charge to the account the 
interest accrued on that purchase at the 20% rate during year one 
(to the extent consistent with other applicable law).
    B. Deferred interest offer after account opening. Assume that a 
card issuer discloses at account opening on January 1 of year one 
that the rate that applies to purchases is a variable annual 
percentage 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 card issuer's control. The card issuer also 
discloses that, to the extent consistent with Sec.  1026.55 and 
other applicable law, a non-variable penalty rate of 30% may apply 
if the consumer's required minimum periodic payment is received 
after the payment due date, which is the first of the month. On June 
30 of year two, the consumer uses the account for a $1,000 purchase 
in response to an offer of a deferred interest program. Under the 
terms of this program, interest on the purchase will accrue at the 
variable rate for purchases but the consumer will not be obligated 
to pay that interest if the purchase is paid in full by December 31 
of year three. The terms of the deferred interest program require 
the consumer to make minimum periodic payments with respect to the 
deferred interest balance, and the payment due on September 1 of 
year two is not received until September 6. Section 1026.55 does not 
permit the card issuer to charge to the account interest that has 
accrued on the $1,000 purchase at this time. Furthermore, if the 
consumer pays the $1,000 purchase in full on or before December 31 
of year three, Sec.  1026.55 does not permit the card issuer to 
charge to the account any interest that has accrued on that 
purchase. On December 31 of year three, the $1,000 purchase has been 
paid in full. Under these circumstances, the card issuer may not 
charge any interest accrued on the $1,000 purchase.
    C. Application of Sec.  1026.55(b)(4) to deferred interest 
programs. Same facts as in paragraph ii.B above except that, on 
November 2 of year two, the card issuer has not received the 
required minimum periodic payments due on September 1, October 1, or 
November 1 of year two and sends a Sec.  1026.9(c) or (g) notice 
stating that interest accrued on the $1,000 purchase since June 30 
of year two will be charged to the account on December 17 of year 
two and thereafter interest will be charged on the $1,000 purchase 
consistent with the variable rate for purchases. On December 17 of 
year two, Sec.  1026.55(b)(4) permits the card issuer to charge to 
the account interest accrued on the $1,000 purchase since June 30 of 
year two and Sec.  1026.55(b)(3) permits the card issuer to begin 
charging interest on the $1,000 purchase consistent with the 
variable rate for purchases. However, if the card issuer receives 
the required minimum periodic payments due on January 1, February 1, 
March 1, April 1, May 1, and June 1 of year three, Sec.  
1026.55(b)(4)(ii) requires the card issuer to cease charging the 
account for interest on the $1,000 purchase no later than the first 
day of the next billing cycle. See comment 55(b)(4)-3.iii. However, 
Sec.  1026.55(b)(4)(ii) does not require the card issuer to waive or 
credit the account for interest accrued on the $1,000 purchase since 
June 30 of year two. If the $1,000 purchase is paid in full on 
December 31 of year three, the card issuer is not permitted to 
charge to the account interest accrued on the $1,000 purchase after 
June 1 of year three.
    4. Contingent or discretionary increases. Section 1026.55(b)(1) 
permits a card issuer to increase a temporary annual percentage 
rate, fee, or charge upon the expiration of a specified period of 
time. However, Sec.  1026.55(b)(1) does not permit a card issuer to 
apply an increased rate, fee, or charge that is contingent on a 
particular event or occurrence or that may be applied at the card 
issuer's discretion. The following examples illustrate rate 
increases that are not permitted by Sec.  1026.55:
    i. Assume that a card issuer discloses at account opening on 
January 1 of year one that a non-variable annual percentage rate of 
15% applies to purchases but that all rates on an account may be 
increased to a non-variable penalty rate of 30% if a consumer's 
required minimum periodic payment is received after the payment due 
date, which is the fifteenth of the month. On March 1, the account 
has a $2,000 purchase balance. The payment due on March 15 is not 
received

[[Page 80052]]

until March 20. Section 1026.55 does not permit the card issuer to 
apply the 30% penalty rate to the $2,000 purchase balance. However, 
pursuant to Sec.  1026.55(b)(3), the card issuer could provide a 
Sec.  1026.9(c) or (g) notice on or before November 16 informing the 
consumer that, on January 1 of year two, the 30% rate (or a 
different rate) will apply to new transactions.
    ii. Assume that a card issuer discloses at account opening on 
January 1 of year one that a non-variable annual percentage rate of 
5% applies to transferred balances but that this rate will increase 
to a non-variable rate of 18% if the consumer does not use the 
account for at least $200 in purchases each billing cycle. On July 
1, the consumer transfers a balance of $4,000 to the account. During 
the October billing cycle, the consumer uses the account for $150 in 
purchases. Section 1026.55 does not permit the card issuer to apply 
the 18% rate to the $4,000 transferred balance or the $150 in 
purchases. However, pursuant to Sec.  1026.55(b)(3), the card issuer 
could provide a Sec.  1026.9(c) or (g) notice on or before November 
16 informing the consumer that, on January 1 of year two, the 18% 
rate (or a different rate) will apply to new transactions.
    iii. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for the account is $10 but 
may be increased to $50 if a consumer's required minimum periodic 
payment is received after the payment due date, which is the 
fifteenth of the month. The payment due on July 15 is not received 
until July 23. Section 1026.55 does not permit the card issuer to 
impose the $50 annual fee at this time. Furthermore, Sec.  
1026.55(b)(3) does not permit the card issuer to increase the $10 
annual fee during the first year after account opening. However, 
Sec.  1026.55(b)(3) does permit the card issuer to impose the $50 
fee (or a different fee) on January 1 of year two if, on or before 
November 16 of year one, the issuer informs the consumer of the 
increased fee consistent with Sec.  1026.9(c) and the consumer does 
not reject that increase pursuant to Sec.  1026.9(h).
    iv. Assume that a card issuer discloses at account opening on 
January 1 of year one that the annual fee for a credit card account 
under an open-end (not home-secured) consumer credit plan is $0 but 
may be increased to $100 if the consumer's balance in a deposit 
account provided by the card issuer or its affiliate or subsidiary 
falls below $5,000. On June 1 of year one, the balance on the 
deposit account is $4,500. Section 1026.55 does not permit the card 
issuer to impose the $100 annual fee at this time. Furthermore, 
Sec.  1026.55(b)(3) does not permit the card issuer to increase the 
$0 annual fee during the first year after account opening. However, 
Sec.  1026.55(b)(3) does permit the card issuer to impose the $100 
fee (or a different fee) on January 1 of year two if, on or before 
November 16 of year one, the issuer informs the consumer of the 
increased fee consistent with Sec.  1026.9(c) and the consumer does 
not reject that increase pursuant to Sec.  1026.9(h).
    5. Application of increased fees and charges. Section 
1026.55(b)(1)(ii) limits the ability of a card issuer to apply an 
increased fee or charge to certain transactions. However, to the 
extent consistent with Sec.  1026.55(b)(3), (c), and (d), a card 
issuer generally is not prohibited from increasing a fee or charge 
that applies to the account as a whole. See comments 55(c)(1)-3 and 
55(d)-1.

55(b)(2) Variable rate exception

    1. Increases due to increase in index. Section 1026.55(b)(2) 
provides that an annual percentage rate that varies according to an 
index that is not under the card issuer's control and is available 
to the general public may be increased due to an increase in the 
index. This section does not permit a card issuer to increase the 
rate by changing the method used to determine a rate that varies 
with an index (such as by increasing the margin), even if that 
change will not result in an immediate increase. However, from time 
to time, a card issuer may change the day on which index values are 
measured to determine changes to the rate.
    2. Index not under card issuer's control. A card issuer may 
increase a variable annual percentage rate pursuant to Sec.  
1026.55(b)(2) only if the increase is based on an index or indices 
outside the card issuer's control. For purposes of Sec.  
1026.55(b)(2), an index is under the card issuer's control if:
    i. The index is the card issuer's own prime rate or cost of 
funds. A card issuer is permitted, however, to use a published prime 
rate, such as that in the Wall Street Journal, even if the card 
issuer's own prime rate is one of several rates used to establish 
the published rate.
    ii. The variable rate is subject to a fixed minimum rate or 
similar requirement that does not permit the variable rate to 
decrease consistent with reductions in the index. A card issuer is 
permitted, however, to establish a fixed maximum rate that does not 
permit the variable rate to increase consistent with increases in an 
index. For example, assume that, under the terms of an account, a 
variable rate will be adjusted monthly by adding a margin of 5 
percentage points to a publicly-available index. When the account is 
opened, the index is 10% and therefore the variable rate is 15%. If 
the terms of the account provide that the variable rate will not 
decrease below 15% even if the index decreases below 10%, the card 
issuer cannot increase that rate pursuant to Sec.  1026.55(b)(2). 
However, Sec.  1026.55(b)(2) does not prohibit the card issuer from 
providing in the terms of the account that the variable rate will 
not increase above a certain amount (such as 20%).
    iii. The variable rate can be calculated based on any index 
value during a period of time (such as the 90 days preceding the 
last day of a billing cycle). A card issuer is permitted, however, 
to provide in the terms of the account that the variable rate will 
be calculated based on the average index value during a specified 
period. In the alternative, the card issuer is permitted to provide 
in the terms of the account that the variable rate will be 
calculated based on the index value on a specific day (such as the 
last day of a billing cycle). For example, assume that the terms of 
an account provide that a variable rate will be adjusted at the 
beginning of each quarter by adding a margin of 7 percentage points 
to a publicly-available index. At account opening at the beginning 
of the first quarter, the variable rate is 17% (based on an index 
value of 10%). During the first quarter, the index varies between 
9.8% and 10.5% with an average value of 10.1%. On the last day of 
the first quarter, the index value is 10.2%. At the beginning of the 
second quarter, Sec.  1026.55(b)(2) does not permit the card issuer 
to increase the variable rate to 17.5% based on the first quarter's 
maximum index value of 10.5%. However, if the terms of the account 
provide that the variable rate will be calculated based on the 
average index value during the prior quarter, Sec.  1026.55(b)(2) 
permits the card issuer to increase the variable rate to 17.1% 
(based on the average index value of 10.1% during the first 
quarter). In the alternative, if the terms of the account provide 
that the variable rate will be calculated based on the index value 
on the last day of the prior quarter, Sec.  1026.55(b)(2) permits 
the card issuer to increase the variable rate to 17.2% (based on the 
index value of 10.2% on the last day of the first quarter).
    3. Publicly available. The index or indices must be available to 
the public. A publicly-available index need not be published in a 
newspaper, but it must be one the consumer can independently obtain 
(by telephone, for example) and use to verify the annual percentage 
rate applied to the account.
    4. Changing a non-variable rate to a variable rate. Section 
1026.55 generally prohibits a card issuer from changing a non-
variable annual percentage rate to a variable annual percentage rate 
because such a change can result in an increase. However, a card 
issuer may change a non-variable rate to a variable rate to the 
extent permitted by one of the exceptions in Sec.  1026.55(b). For 
example, Sec.  1026.55(b)(1) permits a card issuer to change a non-
variable rate to a variable rate upon expiration of a specified 
period of time. Similarly, following the first year after the 
account is opened, Sec.  1026.55(b)(3) permits a card issuer to 
change a non-variable rate to a variable rate with respect to new 
transactions (after complying with the notice requirements in Sec.  
1026.9(b), (c) or (g)).
    5. Changing a variable rate to a non-variable rate. Nothing in 
Sec.  1026.55 prohibits a card issuer from changing a variable 
annual percentage rate to an equal or lower non-variable rate. 
Whether the non-variable rate is equal to or lower than the variable 
rate is determined at the time the card issuer provides the notice 
required by Sec.  1026.9(c). For example, assume that on March 1 a 
variable annual percentage rate that is currently 15% applies to a 
balance of $2,000 and the card issuer sends a notice pursuant to 
Sec.  1026.9(c) informing the consumer that the variable rate will 
be converted to a non-variable rate of 14% effective April 15. On 
April 15, the card issuer may apply the 14% non-variable rate to the 
$2,000 balance and to new transactions even if the variable rate on 
March 2 or a later date was less than 14%.
    6. Substitution of index. A card issuer may change the index and 
margin used to determine the annual percentage rate under Sec.  
1026.55(b)(2) if the original index becomes

[[Page 80053]]

unavailable, as long as historical fluctuations in the original and 
replacement indices were substantially similar, and as long as the 
replacement index and margin will produce a rate similar to the rate 
that was in effect at the time the original index became 
unavailable. If the replacement index is newly established and 
therefore does not have any rate history, it may be used if it 
produces a rate substantially similar to the rate in effect when the 
original index became unavailable.

55(b)(3) Advance notice exception

    1. Relationship to Sec.  1026.9(h). A card issuer may not 
increase a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) pursuant to Sec.  
1026.55(b)(3) if the consumer has rejected the increased fee or 
charge pursuant to Sec.  1026.9(h).
    2. Notice provided pursuant to Sec.  1026.9(b) and (c). If an 
increased annual percentage rate, fee, or charge is disclosed 
pursuant to both Sec.  1026.9(b) and (c), that rate, fee, or charge 
may only be applied to transactions that occur more than 14 days 
after provision of the Sec.  1026.9(c) notice as provided in Sec.  
1026.55(b)(3)(ii).
    3. Account opening. i. Multiple accounts with same card issuer. 
When a consumer has a credit card account with a card issuer and the 
consumer opens a new credit card account with the same card issuer 
(or its affiliate or subsidiary), the opening of the new account 
constitutes the opening of a credit card account for purposes of 
Sec.  1026.55(b)(3)(iii) if, more than 30 days after the new account 
is opened, the consumer has the option to obtain additional 
extensions of credit on each account. For example, assume that, on 
January 1 of year one, a consumer opens a credit card account with a 
card issuer. On July 1 of year one, the consumer opens a second 
credit card account with that card issuer. On July 15, a $1,000 
balance is transferred from the first account to the second account. 
The opening of the second account constitutes the opening of a 
credit card account for purposes of Sec.  1026.55(b)(3)(iii) so long 
as, on August 1, the consumer has the option to engage in 
transactions using either account. Under these circumstances, the 
card issuer could not increase an annual percentage rate or a fee or 
charge required to be disclosed under Sec.  1026.6(b)(2)(ii), 
(b)(2)(iii), or (b)(2)(xii) on the second account pursuant to Sec.  
1026.55(b)(3) until July 1 of year two (which is one year after the 
second account was opened).
    ii. Substitution, replacement or consolidation. A. Generally. A 
credit card account has not been opened for purposes of Sec.  
1026.55(b)(3)(iii) when a credit card account issued by a card 
issuer is substituted, replaced, or consolidated with another credit 
card account issued by the same card issuer (or its affiliate or 
subsidiary). Circumstances in which a credit card account has not 
been opened for purposes of Sec.  1026.55(b)(3)(iii) include when:
    1. A retail credit card account is replaced with a cobranded 
general purpose credit card account that can be used at a wider 
number of merchants;
    2. A credit card account is replaced with another credit card 
account offering different features;
    3. A credit card account is consolidated or combined with one or 
more other credit card accounts into a single credit card account; 
or
    4. A credit card account acquired through merger or acquisition 
is replaced with a credit card account issued by the acquiring card 
issuer.
    B. Limitation. A card issuer that replaces or consolidates a 
credit card account with another credit card account issued by the 
card issuer (or its affiliate or subsidiary) may not increase an 
annual percentage rate or a fee or charge required to be disclosed 
under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) in a 
manner otherwise prohibited by Sec.  1026.55. For example, assume 
that, on January 1 of year one, a consumer opens a credit card 
account with an annual percentage rate of 15% for purchases. On July 
1 of year one, the account is replaced with a credit card account 
that offers different features (such as rewards on purchases). Under 
these circumstances, Sec.  1026.55(b)(3)(iii) prohibits the card 
issuer from increasing the annual percentage rate for new purchases 
to a rate that is higher than 15% pursuant to Sec.  1026.55(b)(3) 
until January 1 of year two (which is one year after the first 
account was opened).
    4. Examples. i. Change-in-terms rate increase; temporary rate 
increase; 14-day period. Assume that an account is opened on January 
1 of year one. On March 14 of year two, the account has a purchase 
balance of $2,000 at a non-variable annual percentage rate of 15%. 
On March 15, the card issuer provides a notice pursuant to Sec.  
1026.9(c) informing the consumer that the rate for new purchases 
will increase to a non-variable rate of 18% on May 1. The notice 
further states that the 18% rate will apply for six months (until 
November 1) and that thereafter the card issuer will apply a 
variable rate that is currently 22% and is determined by adding a 
margin of 12 percentage points to a publicly-available index that is 
not under the card issuer's control. The fourteenth day after 
provision of the notice is March 29 and, on that date, the consumer 
makes a $200 purchase. On March 30, the consumer makes a $1,000 
purchase. On May 1, the card issuer may begin accruing interest at 
18% on the $1,000 purchase made on March 30 (pursuant to Sec.  
1026.55(b)(3)). Section 1026.55(b)(3)(ii) does not permit the card 
issuer to apply the 18% rate to the $2,200 purchase balance as of 
March 29 because that balance reflects transactions that occurred 
prior to or within 14 days after the provision of the Sec.  
1026.9(c) notice. After six months (November 2), the card issuer may 
begin accruing interest on any remaining portion of the $1,000 
purchase at the previously-disclosed variable rate determined using 
the 12-point margin (pursuant to Sec.  1026.55(b)(1) and (b)(3)).
    ii. Checks that access an account. Assume that a card issuer 
discloses at account opening on January 1 of year one that the 
annual percentage rate that applies to cash advances is a variable 
rate that is currently 24% and will be adjusted quarterly by adding 
a margin of 14 percentage points to a publicly available index not 
under the card issuer's control. On July 1 of year two, the card 
issuer provides checks that access the account and, pursuant to 
Sec.  1026.9(b)(3)(i)(A), discloses that a promotional rate of 15% 
will apply to credit extended by use of the checks until January 1 
of year three, after which the cash advance rate determined using 
the 14-point margin will apply. On July 9 of year two, the consumer 
uses one of the checks to pay for a $500 transaction. Beginning on 
January 1 of year three, the card issuer may apply the cash advance 
rate determined using the 14-point margin to any remaining portion 
of the $500 transaction (pursuant to Sec.  1026.55(b)(1) and 
(b)(3)).
    iii. Hold on available credit; 14-day period. Assume that an 
account is opened on January 1 of year one. On September 14 of year 
two, the account has a purchase balance of $2,000 at a non-variable 
annual percentage rate of 17%. On September 15, the card issuer 
provides a notice pursuant to Sec.  1026.9(c) informing the consumer 
that the rate for new purchases will increase to a non-variable rate 
of 20% on October 30. The fourteenth day after provision of the 
notice is September 29. On September 28, the consumer uses the 
credit card to check into a hotel and the hotel obtains 
authorization for a $1,000 hold on the account to ensure there is 
adequate available credit to cover the anticipated cost of the stay.
    A. The consumer checks out of the hotel on October 2. The actual 
cost of the stay is $1,100 because of additional incidental costs. 
On October 2, the hotel charges the $1,100 transaction to the 
account. For purposes of Sec.  1026.55(b)(3), the transaction 
occurred on October 2. Therefore, on October 30, Sec.  1026.55(b)(3) 
permits the card issuer to apply the 20% rate to new purchases and 
to the $1,100 transaction. However, Sec.  1026.55(b)(3)(ii) does not 
permit the card issuer to apply the 20% rate to any remaining 
portion of the $2,000 purchase balance.
    B. Same facts as above except that the consumer checks out of 
the hotel on September 29. The actual cost of the stay is $250, but 
the hotel does not charge this amount to the account until November 
1. For purposes of Sec.  1026.55(b)(3), the card issuer may treat 
the transaction as occurring more than 14 days after provision of 
the Sec.  1026.9(c) notice (i.e., after September 29). Accordingly, 
the card issuer may apply the 20% rate to the $250 transaction.
    5. Application of increased fees and charges. See comment 
55(c)(1)-3.
    6. Delayed implementation of increase. Section 
1026.55(b)(3)(iii) does not prohibit a card issuer from notifying a 
consumer of an increase in an annual percentage rate, fee, or charge 
consistent with Sec.  1026.9(b), (c), or (g). However, Sec.  
1026.55(b)(3)(iii) does prohibit application of an increased rate, 
fee, or charge during the first year after the account is opened, 
while the account is closed, or while the card issuer does not 
permit the consumer to use the account for new transactions. If 
Sec.  1026.9(b), (c), or (g) permits a card issuer to apply an 
increased rate, fee, or charge on a particular date and the account 
is closed on that date or the card issuer does not permit the 
consumer to use the account for new transactions on that date,

[[Page 80054]]

the card issuer may delay application of the increased rate, fee, or 
charge until the first day of the following billing cycle without 
relinquishing the ability to apply that rate, fee, or charge 
(assuming the increase is otherwise consistent with Sec.  1026.55). 
See examples in comment 55(b)-2.iii. However, if the account is 
closed or the card issuer does not permit the consumer to use the 
account for new transactions on the first day of the following 
billing cycle, then the card issuer must provide a new notice of the 
increased rate, fee, or charge consistent with Sec.  1026.9(b), (c), 
or (g).
    7. Date on which account may first be used by consumer to engage 
in transactions. For purposes of Sec.  1026.55(b)(3)(iii), an 
account is considered open no earlier than the date on which the 
account may first be used by the consumer to engage in transactions. 
An account is considered open for purposes of Sec.  
1026.55(b)(3)(iii) on any date that the card issuer may consider the 
account open for purposes of Sec.  1026.52(a)(1). See comment 
52(a)(1)-4.

55(b)(4) Delinquency exception

    1. Receipt of required minimum periodic payment within 60 days 
of due date. Section 1026.55(b)(4) applies when a card issuer has 
not received the consumer's required minimum periodic payment within 
60 days after the due date for that payment. In order to satisfy 
this condition, a card issuer that requires monthly minimum payments 
generally must not have received two consecutive required minimum 
periodic payments. Whether a required minimum periodic payment has 
been received for purposes of Sec.  1026.55(b)(4) depends on whether 
the amount received is equal to or more than the first outstanding 
required minimum periodic payment. For example, assume that the 
required minimum periodic payments for a credit card account are due 
on the fifteenth day of the month. On May 13, the card issuer has 
not received the $50 required minimum periodic payment due on March 
15 or the $150 required minimum periodic payment due on April 15. 
The sixtieth day after the March 15 payment due date is May 14. If 
the card issuer receives a $50 payment on May 14, Sec.  
1026.55(b)(4) does not apply because the payment is equal to the 
required minimum periodic payment due on March 15 and therefore the 
account is not more than 60 days delinquent. However, if the card 
issuer instead received a $40 payment on May 14, Sec.  1026.55(b)(4) 
would apply beginning on May 15 because the payment is less than the 
required minimum periodic payment due on March 15. Furthermore, if 
the card issuer received the $50 payment on May 15, Sec.  
1026.55(b)(4) would apply because the card issuer did not receive 
the required minimum periodic payment due on March 15 within 60 days 
after the due date for that payment.
    2. Relationship to Sec.  1026.9(g)(3)(i)(B). A card issuer that 
has complied with the disclosure requirements in Sec.  
1026.9(g)(3)(i)(B) has also complied with the disclosure 
requirements in Sec.  1026.55(b)(4)(i).
    3. Reduction in rate pursuant to Sec.  1026.55(b)(4)(ii). 
Section 1026.55(b)(4)(ii) provides that, if the card issuer receives 
six consecutive required minimum periodic payments on or before the 
payment due date beginning with the first payment due following the 
effective date of the increase, the card issuer must reduce any 
annual percentage rate, fee, or charge increased pursuant to Sec.  
1026.55(b)(4) to the annual percentage rate, fee, or charge that 
applied prior to the increase with respect to transactions that 
occurred prior to or within 14 days after provision of the Sec.  
1026.9(c) or (g) notice.
    i. Six consecutive payments immediately following effective date 
of increase. Section 1026.55(b)(4)(ii) does not apply if the card 
issuer does not receive six consecutive required minimum periodic 
payments on or before the payment due date beginning with the 
payment due immediately following the effective date of the 
increase, even if, at some later point in time, the card issuer 
receives six consecutive required minimum periodic payments on or 
before the payment due date.
    ii. Rate, fee, or charge that does not exceed rate, fee, or 
charge that applied before increase. Although Sec.  
1026.55(b)(4)(ii) requires the card issuer to reduce an annual 
percentage rate, fee, or charge increased pursuant to Sec.  
1026.55(b)(4) to the annual percentage rate, fee, or charge that 
applied prior to the increase, this provision does not prohibit the 
card issuer from applying an increased annual percentage rate, fee, 
or charge consistent with any of the other exceptions in Sec.  
1026.55(b). For example, if a temporary rate applied prior to the 
Sec.  1026.55(b)(4) increase and the temporary rate expired before a 
reduction in rate pursuant to Sec.  1026.55(b)(4)(ii), the card 
issuer may apply an increased rate to the extent consistent with 
Sec.  1026.55(b)(1). Similarly, if a variable rate applied prior to 
the Sec.  1026.55(b)(4) increase, the card issuer may apply any 
increase in that variable rate to the extent consistent with Sec.  
1026.55(b)(2).
    iii. Delayed implementation of reduction. If Sec.  
1026.55(b)(4)(ii) requires a card issuer to reduce an annual 
percentage rate, fee, or charge on a date that is not the first day 
of a billing cycle, the card issuer may delay application of the 
reduced rate, fee, or charge until the first day of the following 
billing cycle.
    iv. Examples. The following examples illustrate the application 
of Sec.  1026.55(b)(4)(ii):
    A. Assume that the billing cycles for an account begin on the 
first day of the month and end on the last day of the month and that 
the required minimum periodic payments are due on the fifteenth day 
of the month. Assume also that the account has a $5,000 purchase 
balance to which a non-variable annual percentage rate of 15% 
applies. On May 16 of year one, the card issuer has not received the 
required minimum periodic payments due on the fifteenth day of 
March, April, or May and sends a Sec.  1026.9(c) or (g) notice 
stating that the annual percentage rate applicable to the $5,000 
balance and to new transactions will increase to 28% effective July 
1. On July 1, Sec.  1026.55(b)(4) permits the card issuer to apply 
the 28% rate to the $5,000 balance and to new transactions. The card 
issuer receives the required minimum periodic payments due on the 
fifteenth day of July, August, September, October, November, and 
December. On January 1 of year two, Sec.  1026.55(b)(4)(ii) requires 
the card issuer to reduce the rate that applies to any remaining 
portion of the $5,000 balance to 15%. The card issuer is not 
required to reduce the rate that applies to any transactions that 
occurred on or after May 31 (which is the fifteenth day after 
provision of the Sec.  1026.9(c) or (g) notice).
    B. Same facts as paragraph iv.A above except that the 15% rate 
that applied to the $5,000 balance prior to the Sec.  1026.55(b)(4) 
increase was scheduled to increase to 20% on August 1 of year one 
(pursuant to Sec.  1026.55(b)(1)). On January 1 of year two, Sec.  
1026.55(b)(4)(ii) requires the card issuer to reduce the rate that 
applies to any remaining portion of the $5,000 balance to 20%.
    C. Same facts as paragraph iv.A above except that the 15% rate 
that applied to the $5,000 balance prior to the Sec.  1026.55(b)(4) 
increase was scheduled to increase to 20% on March 1 of year two 
(pursuant to Sec.  1026.55(b)(1)). On January 1 of year two, Sec.  
1026.55(b)(4)(ii) requires the card issuer to reduce the rate that 
applies to any remaining portion of the $5,000 balance to 15%.
    D. Same facts as paragraph iv.A above except that the 15% rate 
that applied to the $5,000 balance prior to the Sec.  1026.55(b)(4) 
increase was a variable rate that was determined by adding a margin 
of 10 percentage points to a publicly-available index not under the 
card issuer's control (consistent with Sec.  1026.55(b)(2)). On 
January 1 of year two, Sec.  1026.55(b)(4)(ii) requires the card 
issuer to reduce the rate that applies to any remaining portion of 
the $5,000 balance to the variable rate determined using the 10-
point margin.
    E. For an example of the application of Sec.  1026.55(b)(4)(ii) 
to deferred interest or similar programs, see comment 55(b)(1)-
3.ii.C.

55(b)(5) Workout and temporary hardship arrangement exception

    1. Scope of exception. Nothing in Sec.  1026.55(b)(5) permits a 
card issuer to alter the requirements of Sec.  1026.55 pursuant to a 
workout or temporary hardship arrangement. For example, a card 
issuer cannot increase an annual percentage rate or a fee or charge 
required to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), 
or (b)(2)(xii) pursuant to a workout or temporary hardship 
arrangement unless otherwise permitted by Sec.  1026.55. In 
addition, a card issuer cannot require the consumer to make payments 
with respect to a protected balance that exceed the payments 
permitted under Sec.  1026.55(c).
    2. Relationship to Sec.  1026.9(c)(2)(v)(D). A card issuer that 
has complied with the disclosure requirements in Sec.  
1026.9(c)(2)(v)(D) has also complied with the disclosure 
requirements in Sec.  1026.55(b)(5)(i). See comment 9(c)(2)(v)-10. 
Thus, although the disclosures required by Sec.  1026.55(b)(5)(i) 
must generally be provided in writing prior to commencement of the 
arrangement, a card issuer may comply with Sec.  1026.55(b)(5)(i) by 
complying with Sec.  1026.9(c)(2)(v)(D), which states that the 
disclosure of the terms of the arrangement may be made orally by 
telephone, provided that the card issuer mails or delivers a

[[Page 80055]]

written disclosure of the terms of the arrangement to the consumer 
as soon as reasonably practicable after the oral disclosure is 
provided.
    3. Rate, fee, or charge that does not exceed rate, fee, or 
charge that applied before workout or temporary hardship 
arrangement. Upon the completion or failure of a workout or 
temporary hardship arrangement, Sec.  1026.55(b)(5)(ii) prohibits 
the card issuer from applying to any transactions that occurred 
prior to commencement of the arrangement an annual percentage rate, 
fee, or charge that exceeds the annual percentage rate, fee, or 
charge that applied to those transactions prior to commencement of 
the arrangement. However, this provision does not prohibit the card 
issuer from applying an increased annual percentage rate, fee, or 
charge upon completion or failure of the arrangement, to the extent 
consistent with any of the other exceptions in Sec.  1026.55(b). For 
example, if a temporary rate applied prior to the arrangement and 
that rate expired during the arrangement, the card issuer may apply 
an increased rate upon completion or failure of the arrangement to 
the extent consistent with Sec.  1026.55(b)(1). Similarly, if a 
variable rate applied prior to the arrangement, the card issuer may 
apply any increase in that variable rate upon completion or failure 
of the arrangement to the extent consistent with Sec.  
1026.55(b)(2).
    4. Examples. i. Assume that an account is subject to a $50 
annual fee and that, consistent with Sec.  1026.55(b)(4), the margin 
used to determine a variable annual percentage rate that applies to 
a $5,000 balance is increased from 5 percentage points to 15 
percentage points. Assume also that the card issuer and the consumer 
subsequently agree to a workout arrangement that reduces the annual 
fee to $0 and reduces the margin back to 5 points on the condition 
that the consumer pay a specified amount by the payment due date 
each month. If the consumer does not pay the agreed-upon amount by 
the payment due date, Sec.  1026.55(b)(5) permits the card issuer to 
increase the annual fee to $50 and increase the margin for the 
variable rate that applies to the $5,000 balance up to 15 percentage 
points.
    ii. Assume that a consumer fails to make four consecutive 
monthly minimum payments totaling $480 on a consumer credit card 
account with a balance of $6,000 and that, consistent with Sec.  
1026.55(b)(4), the annual percentage rate that applies to that 
balance is increased from a non-variable rate of 15% to a non-
variable penalty rate of 30%. Assume also that the card issuer and 
the consumer subsequently agree to a temporary hardship arrangement 
that reduces all rates on the account to 0% on the condition that 
the consumer pay an amount by the payment due date each month that 
is sufficient to cure the $480 delinquency within six months. If the 
consumer pays the agreed-upon amount by the payment due date during 
the six-month period and cures the delinquency, Sec.  1026.55(b)(5) 
permits the card issuer to increase the rate that applies to any 
remaining portion of the $6,000 balance to 15% or any other rate up 
to the 30% penalty rate.

55(b)(6) Servicemembers Civil Relief Act exception

    1. Rate, fee, or charge that does not exceed rate, fee, or 
charge that applied before decrease. When a rate or a fee or charge 
subject to Sec.  1026.55 has been decreased pursuant to 50 U.S.C. 
app. 527 or a similar Federal or state statute or regulation, Sec.  
1026.55(b)(6) permits the card issuer to increase the rate, fee, or 
charge once 50 U.S.C. app. 527 or the similar statute or regulation 
no longer applies. However, Sec.  1026.55(b)(6) prohibits the card 
issuer from applying to any transactions that occurred prior to the 
decrease a rate, fee, or charge that exceeds the rate, fee, or 
charge that applied to those transactions prior to the decrease 
(except to the extent permitted by one of the other exceptions in 
Sec.  1026.55(b)). For example, if a temporary rate applied prior to 
a decrease in rate pursuant to 50 U.S.C. app. 527 and the temporary 
rate expired during the period that 50 U.S.C. app. 527 applied to 
the account, the card issuer may apply an increased rate once 50 
U.S.C. app. 527 no longer applies to the extent consistent with 
Sec.  1026.55(b)(1). Similarly, if a variable rate applied prior to 
a decrease in rate pursuant to 50 U.S.C. app. 527, the card issuer 
may apply any increase in that variable rate once 50 U.S.C. app. 527 
no longer applies to the extent consistent with Sec.  1026.55(b)(2).
    2. Decreases in rates, fees, and charges to amounts consistent 
with 50 U.S.C. app. 527 or similar statute or regulation. If a card 
issuer deceases an annual percentage rate or a fee or charge subject 
to Sec.  1026.55 pursuant to 50 U.S.C. app. 527 or a similar Federal 
or state statute or regulation and if the card issuer also decreases 
other rates, fees, or charges (such as the rate that applies to new 
transactions) to amounts that are consistent with 50 U.S.C. app. 527 
or a similar Federal or state statute or regulation, the card issuer 
may increase those rates, fees, and charges consistent with Sec.  
1026.55(b)(6).
    3. Example. Assume that on December 31 of year one the annual 
percentage rate that applies to a $5,000 balance on a credit card 
account is a variable rate that is determined by adding a margin of 
10 percentage points to a publicly-available index that is not under 
the card issuer's control. The account is also subject to a monthly 
maintenance fee of $10. On January 1 of year two, the card issuer 
reduces the rate that applies to the $5,000 balance to a non-
variable rate of 6% and ceases to impose the $10 monthly maintenance 
fee and other fees (including late payment fees) pursuant to 50 
U.S.C. app. 527. The card issuer also decreases the rate that 
applies to new transactions to 6%. During year two, the consumer 
uses the account for $1,000 in new transactions. On January 1 of 
year three, 50 U.S.C. app. 527 ceases to apply and the card issuer 
provides a notice pursuant to Sec.  1026.9(c) informing the consumer 
that on February 15 of year three the variable rate determined using 
the 10-point margin will apply to any remaining portion of the 
$5,000 balance and to any remaining portion of the $1,000 balance. 
The notice also states that the $10 monthly maintenance fee and 
other fees (including late payment fees) will resume on February 15 
of year three. Consistent with Sec.  1026.9(c)(2)(iv)(B), the card 
issuer is not required to provide a right to reject in these 
circumstances. On February 15 of year three, Sec.  1026.55(b)(6) 
permits the card issuer to begin accruing interest on any remaining 
portion of the $5,000 and $1,000 balances at the variable rate 
determined using the 10-point margin and to resume imposing the $10 
monthly maintenance fee and other fees (including late payment 
fees).

55(c) Treatment of protected balances

55(c)(1) Definition of protected balance

    1. Example of protected balance. Assume that, on March 15 of 
year two, an account has a purchase balance of $1,000 at a non-
variable annual percentage rate of 12% and that, on March 16, the 
card issuer sends a notice pursuant to Sec.  1026.9(c) informing the 
consumer that the annual percentage rate for new purchases will 
increase to a non-variable rate of 15% on May 1. The fourteenth day 
after provision of the notice is March 29. On March 29, the consumer 
makes a $100 purchase. On March 30, the consumer makes a $150 
purchase. On May 1, Sec.  1026.55(b)(3)(ii) permits the card issuer 
to begin accruing interest at 15% on the $150 purchase made on March 
30 but does not permit the card issuer to apply that 15% rate to the 
$1,100 purchase balance as of March 29. Accordingly, the protected 
balance for purposes of Sec.  1026.55(c) is the $1,100 purchase 
balance as of March 29. The $150 purchase made on March 30 is not 
part of the protected balance.
    2. First year after account opening. Section 1026.55(c) applies 
to amounts owed for a category of transactions to which an increased 
annual percentage rate or an increased fee or charge cannot be 
applied after the rate, fee, or charge for that category of 
transactions has been increased pursuant to Sec.  1026.55(b)(3). 
Because Sec.  1026.55(b)(3)(iii) does not permit a card issuer to 
increase an annual percentage rate or a fee or charge required to be 
disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) 
during the first year after account opening, Sec.  1026.55(c) does 
not apply to balances during the first year after account opening.
    3. Increased fees and charges. Except as provided in Sec.  
1026.55(b)(3)(iii), Sec.  1026.55(b)(3) permits a card issuer to 
increase a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii) after complying with 
the applicable notice requirements in Sec.  1026.9(b) or (c), 
provided that the increased fee or charge is not applied to a 
protected balance. To the extent consistent with Sec.  
1026.55(b)(3)(iii), a card issuer is not prohibited from increasing 
a fee or charge that applies to the account as a whole or to 
balances other than the protected balance. For example, after the 
first year following account opening, a card issuer generally may 
add or increase an annual or a monthly maintenance fee for an 
account after complying with the notice requirements in Sec.  
1026.9(c), including notifying the consumer of the right to reject 
the new or increased fee under Sec.  1026.9(h). However, except as 
otherwise provided in Sec.  1026.55(b), an increased fee or charge 
cannot be applied to an account while the account is closed or

[[Page 80056]]

while the card issuer does not permit the consumer to use the 
account for new transactions. See Sec.  1026.55(b)(3)(iii); see also 
Sec. Sec.  1026.52(b)(2)(i)(B)(3) and 1026.55(d)(1). Furthermore, if 
the consumer rejects an increase in a fee or charge pursuant to 
Sec.  1026.9(h), the card issuer is prohibited from applying the 
increased fee or charge to the account and from imposing any other 
fee or charge solely as a result of the rejection. See Sec.  
1026.9(h)(2)(i) and (ii); comment 9(h)(2)(ii)-2.
    4. Changing balance computation method. Nothing in Sec.  1026.55 
prohibits a card issuer from changing the balance computation method 
that applies to new transactions as well as protected balances.

55(c)(2) Repayment of protected balance

    1. No less beneficial to the consumer. A card issuer may provide 
a method of repaying the protected balance that is different from 
the methods listed in Sec.  1026.55(c)(2) so long as the method used 
is no less beneficial to the consumer than one of the listed 
methods. A method is no less beneficial to the consumer if the 
method results in a required minimum periodic payment that is equal 
to or less than a minimum payment calculated using the method for 
the account before the effective date of the increase. Similarly, a 
method is no less beneficial to the consumer if the method amortizes 
the balance in five years or longer or if the method results in a 
required minimum periodic payment that is equal to or less than a 
minimum payment calculated consistent with Sec.  1026.55(c)(2)(iii). 
For example:
    i. If at account opening the cardholder agreement stated that 
the required minimum periodic payment would be either the total of 
fees and interest charges plus 1% of the total amount owed or $20 
(whichever is greater), the card issuer may require the consumer to 
make a minimum payment of $20 even if doing so would pay off the 
balance in less than five years or constitute more than 2% of the 
balance plus fees and interest charges.
    ii. A card issuer could increase the percentage of the balance 
included in the required minimum periodic payment from 2% to 5% so 
long as doing so would not result in amortization of the balance in 
less than five years.
    iii. A card issuer could require the consumer to make a required 
minimum periodic payment that amortizes the balance in four years so 
long as doing so would not more than double the percentage of the 
balance included in the minimum payment prior to the date on which 
the increased annual percentage rate, fee, or charge became 
effective.

Paragraph 55(c)(2)(ii)

    1. Amortization period starting from effective date of increase. 
Section 1026.55(c)(2)(ii) provides for an amortization period for 
the protected balance of no less than five years, starting from the 
date on which the increased annual percentage rate or fee or charge 
required to be disclosed under Sec.  1026.6(b)(2)(ii), (b)(2)(iii), 
or (b)(2)(xii) became effective. A card issuer is not required to 
recalculate the required minimum periodic payment for the protected 
balance if, during the amortization period, that balance is reduced 
as a result of the allocation of payments by the consumer in excess 
of that minimum payment consistent with Sec.  1026.53 or any other 
practice permitted by these rules and other applicable law.
    2. Amortization when applicable rate is variable. If the annual 
percentage rate that applies to the protected balance varies with an 
index, the card issuer may adjust the interest charges included in 
the required minimum periodic payment for that balance accordingly 
in order to ensure that the balance is amortized in five years. For 
example, assume that a variable rate that is currently 15% applies 
to a protected balance and that, in order to amortize that balance 
in five years, the required minimum periodic payment must include a 
specific amount of principal plus all accrued interest charges. If 
the 15% variable rate increases due to an increase in the index, the 
creditor may increase the required minimum periodic payment to 
include the additional interest charges.

Paragraph 55(c)(2)(iii)

    1. Portion of required minimum periodic payment on other 
balances. Section 1026.55(c)(2)(iii) addresses the portion of the 
required minimum periodic payment based on the protected balance. 
Section 1026.55(c)(2)(iii) does not limit or otherwise address the 
card issuer's ability to determine the portion of the required 
minimum periodic payment based on other balances on the account or 
the card issuer's ability to apply that portion of the minimum 
payment to the balances on the account.
    2. Example. Assume that the method used by a card issuer to 
calculate the required minimum periodic payment for a credit card 
account requires the consumer to pay either the total of fees and 
accrued interest charges plus 2% of the total amount owed or $50, 
whichever is greater. Assume also that the account has a purchase 
balance of $2,000 at an annual percentage rate of 15% and a cash 
advance balance of $500 at an annual percentage rate of 20% and that 
the card issuer increases the rate for purchases to 18% but does not 
increase the rate for cash advances. Under Sec.  1026.55(c)(2)(iii), 
the card issuer may require the consumer to pay fees and interest 
plus 4% of the $2,000 purchase balance. Section 1026.55(c)(2)(iii) 
does not limit the card issuer's ability to increase the portion of 
the required minimum periodic payment that is based on the cash 
advance balance.

55(d) Continuing application

    1. Closed accounts. If a credit card account under an open-end 
(not home-secured) consumer credit plan with a balance is closed, 
Sec.  1026.55 continues to apply to that balance. For example, if a 
card issuer or a consumer closes a credit card account with a 
balance, Sec.  1026.55(d)(1) prohibits the card issuer from 
increasing the annual percentage rate that applies to that balance 
or imposing a periodic fee based solely on that balance that was not 
charged before the account was closed (such as a closed account fee) 
unless permitted by one of the exceptions in Sec.  1026.55(b).
    2. Acquired accounts. If, through merger or acquisition (for 
example), a card issuer acquires a credit card account under an 
open-end (not home-secured) consumer credit plan with a balance, 
Sec.  1026.55 continues to apply to that balance. For example, if a 
credit card account has a $1,000 purchase balance with an annual 
percentage rate of 15% and the card issuer that acquires that 
account applies an 18% rate to purchases, Sec.  1026.55(d)(1) 
prohibits the card issuer from applying the 18% rate to the $1,000 
balance unless permitted by one of the exceptions in Sec.  
1026.55(b).
    3. Balance transfers. i. Between accounts issued by the same 
creditor. If a balance is transferred from a credit card account 
under an open-end (not home-secured) consumer credit plan issued by 
a creditor to another credit account issued by the same creditor or 
its affiliate or subsidiary, Sec.  1026.55 continues to apply to 
that balance. For example, if a credit card account has a $2,000 
purchase balance with an annual percentage rate of 15% and that 
balance is transferred to another credit card account issued by the 
same creditor that applies an 18% rate to purchases, Sec.  
1026.55(d)(2) prohibits the creditor from applying the 18% rate to 
the $2,000 balance unless permitted by one of the exceptions in 
Sec.  1026.55(b). However, the creditor would not generally be 
prohibited from charging a new periodic fee (such as an annual fee) 
on the second account so long as the fee is not based solely on the 
$2,000 balance and the creditor has notified the consumer of the fee 
either by providing written notice 45 days before imposing the fee 
pursuant to Sec.  1026.9(c) or by providing account-opening 
disclosures pursuant to Sec.  1026.6(b). See also Sec.  
1026.55(b)(3)(iii); comment 55(b)(3)-3; comment 5(b)(1)(i)-6. 
Additional circumstances in which a balance is considered 
transferred for purposes of Sec.  1026.55(d)(2) include when:
    A. A retail credit card account with a balance is replaced or 
substituted with a cobranded general purpose credit card account 
that can be used with a broader merchant base;
    B. A credit card account with a balance is replaced or 
substituted with another credit card account offering different 
features;
    C. A credit card account with a balance is consolidated or 
combined with one or more other credit card accounts into a single 
credit card account; and
    D. A credit card account is replaced or substituted with a line 
of credit that can be accessed solely by an account number.
    ii. Between accounts issued by different creditors. If a balance 
is transferred to a credit card account under an open-end (not home-
secured) consumer credit plan issued by a creditor from a credit 
card account issued by a different creditor or an institution that 
is not an affiliate or subsidiary of the creditor that issued the 
account to which the balance is transferred, Sec.  1026.55(d)(2) 
does not prohibit the creditor to which the balance is transferred 
from applying its account terms to that balance, provided that those 
terms comply with this part. For example, if a credit card account 
issued by creditor A has a $1,000 purchase balance at an annual 
percentage rate of 15% and the consumer

[[Page 80057]]

transfers that balance to a credit card account with a purchase rate 
of 17% issued by creditor B, creditor B may apply the 17% rate to 
the $1,000 balance. However, creditor B may not subsequently 
increase the rate on that balance unless permitted by one of the 
exceptions in Sec.  1026.55(b).

55(e) Promotional waivers or rebates of interest, fees, and other 
charges

    1. Generally. Nothing in Sec.  1026.55 prohibits a card issuer 
from waiving or rebating finance charges due to a periodic interest 
rate or a fee or charge required to be disclosed under Sec.  
1026.6(b)(2)(ii), (b)(2)(iii), or (b)(2)(xii). However, if a card 
issuer promotes and applies the waiver or rebate to an account, the 
card issuer cannot temporarily or permanently cease or terminate any 
portion of the waiver or rebate on that account unless permitted by 
one of the exceptions in Sec.  1026.55(b). For example:
    i. A card issuer applies an annual percentage rate of 15% to 
balance transfers but promotes a program under which all of the 
interest accrued on transferred balances will be waived or rebated 
for one year. If, prior to the commencement of the one-year period, 
the card issuer discloses the length of the period and the annual 
percentage rate that will apply to transferred balances after 
expiration of that period consistent with Sec.  1026.55(b)(1)(i), 
Sec.  1026.55(b)(1) permits the card issuer to begin imposing 
interest charges on transferred balances after one year. 
Furthermore, if, during the one-year period, a required minimum 
periodic payment is not received within 60 days of the payment due 
date, Sec.  1026.55(b)(4) permits the card issuer to begin imposing 
interest charges on transferred balances (after providing a notice 
consistent with Sec.  1026.9(g) and Sec.  1026.55(b)(4)(i)). 
However, if a required minimum periodic payment is not more than 60 
days delinquent or if the consumer otherwise violates the terms or 
other requirements of the account, Sec.  1026.55 does not permit the 
card issuer to begin imposing interest charges on transferred 
balances until the expiration of the one-year period.
    ii. A card issuer imposes a monthly maintenance fee of $10 but 
promotes a program under which the fee will be waived or rebated for 
the six months following account opening. If, prior to account 
opening, the card issuer discloses the length of the period and the 
monthly maintenance fee that will be imposed after expiration of 
that period consistent with Sec.  1026.55(b)(1)(i), Sec.  
1026.55(b)(1) permits the card issuer to begin imposing the monthly 
maintenance fee six months after account opening. Furthermore, if, 
during the six-month period, a required minimum periodic payment is 
not received within 60 days of the payment due date, Sec.  
1026.55(b)(4) permits the card issuer to begin imposing the monthly 
maintenance fee (after providing a notice consistent with Sec.  
1026.9(c) and Sec.  1026.55(b)(4)(i)). However, if a required 
minimum periodic payment is not more than 60 days delinquent or if 
the consumer otherwise violates the terms or other requirements of 
the account, Sec.  1026.55 does not permit the card issuer to begin 
imposing the monthly maintenance fee until the expiration of the 
six-month period.
    2. Promotion of waiver or rebate. For purposes of Sec.  
1026.55(e), a card issuer generally promotes a waiver or rebate if 
the card issuer discloses the waiver or rebate in an advertisement 
(as defined in Sec.  1026.2(a)(2)). See comment 2(a)(2)-1. In 
addition, a card issuer generally promotes a waiver or rebate for 
purposes of Sec.  1026.55(e) if the card issuer discloses the waiver 
or rebate in communications regarding existing accounts (such as 
communications regarding a promotion that encourages additional or 
different uses of an existing account). However, a card issuer does 
not promote a waiver or rebate for purposes of Sec.  1026.55(e) if 
the advertisement or communication relates to an inquiry or dispute 
about a specific charge or to interest, fees, or charges that have 
already been waived or rebated.
    i. Examples of promotional communications. The following are 
examples of circumstances in which a card issuer is promoting a 
waiver or rebate for purposes of Sec.  1026.55(e):
    A. A card issuer discloses the waiver or rebate in a newspaper, 
magazine, leaflet, promotional flyer, catalog, sign, or point-of-
sale display, unless the disclosure relates to interest, fees, or 
charges that have already been waived.
    B. A card issuer discloses the waiver or rebate on radio or 
television or through electronic advertisements (such as on the 
Internet), unless the disclosure relates to interest, fees, or 
charges that have already been waived or rebated.
    C. A card issuer discloses a waiver or rebate to individual 
consumers, such as by telephone, letter, or electronic 
communication, through direct mail literature, or on or with account 
statements, unless the disclosure relates to an inquiry or dispute 
about a specific charge or to interest, fees, or charges that have 
already been waived or rebated.
    ii. Examples of non-promotional communications. The following 
are examples of circumstances in which a card issuer is not 
promoting a waiver or rebate for purposes of Sec.  1026.55(e):
    A. After a card issuer has waived or rebated interest, fees, or 
other charges subject to Sec.  1026.55 with respect to an account, 
the issuer discloses the waiver or rebate to the accountholder on 
the periodic statement or by telephone, letter, or electronic 
communication. However, if the card issuer also discloses 
prospective waivers or rebates in the same communication, the issuer 
is promoting a waiver or rebate for purposes of Sec.  1026.55(e).
    B. A card issuer communicates with a consumer about a waiver or 
rebate of interest, fees, or other charges subject to Sec.  1026.55 
in relation to an inquiry or dispute about a specific charge, 
including a dispute under Sec. Sec.  1026.12 or 1026.13.
    C. A card issuer waives or rebates interest, fees, or other 
charges subject to Sec.  1026.55 in order to comply with a legal 
requirement (such as the limitations in Sec.  1026.52(a)).
    D. A card issuer discloses a grace period, as defined in Sec.  
1026.5(b)(2)(ii)(3).
    E. A card issuer provides a period after the payment due date 
during which interest, fees, or other charges subject to Sec.  
1026.55 are waived or rebated even if a payment has not been 
received.
    F. A card issuer provides benefits (such as rewards points or 
cash back on purchases or finance charges) that can be applied to 
the account as credits, provided that the benefits are not promoted 
as reducing interest, fees, or other charges subject to Sec.  
1026.55.
    3. Relationship of Sec.  1026.55(e) to grace period. Section 
1026.55(e) does not apply to the waiver of finance charges due to a 
periodic rate consistent with a grace period, as defined in Sec.  
1026.5(b)(2)(ii)(3).

Section 1026.56--Requirements for Over-the-Limit Transactions

56(b) Opt-in requirement.

    1. Policy and practice of declining over-the-limit transactions. 
Section 1026.56(b)(1)(i)-(v), including the requirements to provide 
notice and obtain consumer consent, do not apply to any card issuer 
that has a policy and practice of declining to pay any over-the-
limit transactions for the consumer's credit card account when the 
card issuer has a reasonable belief that completing a transaction 
will cause the consumer to exceed the consumer's credit limit for 
that account. For example, if a card issuer only authorizes those 
transactions which, at the time of authorization, would not cause 
the consumer to exceed a credit limit, it is not subject to the 
requirement to provide consumers notice and an opportunity to 
affirmatively consent to the card issuer's payment of over-the-limit 
transactions. However, if an over-the-limit transaction is paid 
without the consumer providing affirmative consent, the card issuer 
may not charge a fee for paying the transaction.
    2. Over-the-limit transactions not required to be authorized or 
paid. Section 1026.56 does not require a card issuer to authorize or 
pay an over-the-limit transaction even if the consumer has 
affirmatively consented to the card issuer's over-the-limit service.
    3. Examples of reasonable opportunity to provide affirmative 
consent. A card issuer provides a reasonable opportunity for the 
consumer to provide affirmative consent to the card issuer's payment 
of over-the-limit transactions when, among other things, it provides 
reasonable methods by which the consumer may affirmatively consent. 
A card issuer provides such reasonable methods if:
    i. On the application. The card issuer provides the notice on 
the application form that the consumer can fill out to request the 
service as part of the application;
    ii. By mail. The card issuer provides a form with the account-
opening disclosures or the periodic statement for the consumer to 
fill out and mail to affirmatively request the service;
    iii. By telephone. The card issuer provides a readily available 
telephone line that consumers may call to provide affirmative 
consent.
    iv. By electronic means. The card issuer provides an electronic 
means for the consumer to affirmatively consent. For example, a card 
issuer could provide a form that can be accessed and processed at 
its Web site, where the consumer can check a box to opt in and 
confirm that choice by clicking on a button that affirms the 
consumer's consent.

[[Page 80058]]

    4. Separate consent required. A consumer's affirmative consent, 
or opt-in, to a card issuer's payment of over-the-limit transactions 
must be obtained separately from other consents or acknowledgments 
obtained by the card issuer. For example, a consumer's signature on 
a credit application to request a credit card would not by itself 
sufficiently evidence the consumer's consent to the card issuer's 
payment of over-the-limit transactions. However, a card issuer may 
obtain a consumer's affirmative consent by providing a blank 
signature line or a check box on the application that the consumer 
can sign or select to request the over-the-limit service, provided 
that the signature line or check box is used solely for purposes of 
evidencing the choice and not for any other purpose, such as to also 
obtain consumer consents for other account services or features or 
to receive disclosures electronically.
    5. Written confirmation. A card issuer may comply with the 
requirement in Sec.  1026.56(b)(1)(iv) to provide written 
confirmation of the consumer's decision to affirmatively consent, or 
opt in, to the card issuer's payment of over-the-limit transactions 
by providing the consumer a copy of the consumer's completed opt-in 
form or by sending a letter or notice to the consumer acknowledging 
that the consumer has elected to opt into the card issuer's service. 
A card issuer may also satisfy the written confirmation requirement 
by providing the confirmation on the first periodic statement sent 
after the consumer has opted in. For example, a card issuer could 
provide a written notice consistent with Sec.  1026.56(e)(2) on the 
periodic statement. A card issuer may not, however, assess any over-
the-limit fees or charges on the consumer's credit card account 
unless and until the card issuer has sent the written confirmation. 
Thus, if a card issuer elects to provide written confirmation on the 
first periodic statement after the consumer has opted in, it would 
not be permitted to assess any over-the-limit fees or charges until 
the next statement cycle.

56(b)(2) Completion of over-the-limit transactions without consumer 
consent

    1. Examples of over-the-limit transactions paid without consumer 
consent. Section 1026.56(b)(2) provides that a card issuer may pay 
an over-the-limit transaction even if the consumer has not provided 
affirmative consent, so long as the card issuer does not impose a 
fee or charge for paying the transaction. The prohibition on 
imposing fees for paying an over-the-limit transaction applies even 
in circumstances where the card issuer is unable to avoid paying a 
transaction that exceeds the consumer's credit limit.
    i. Transactions not submitted for authorization. A consumer has 
not affirmatively consented to a card issuer's payment of over-the-
limit transactions. The consumer purchases a $3 cup of coffee using 
his credit card. Because of the small dollar amount of the 
transaction, the merchant does not submit the transaction to the 
card issuer for authorization. The transaction causes the consumer 
to exceed the credit limit. Under these circumstances, the card 
issuer is prohibited from imposing a fee or charge on the consumer's 
credit card account for paying the over-the-limit transaction 
because the consumer has not opted in to the card issuer's over-the-
limit service.
    ii. Settlement amount exceeds authorization amount. A consumer 
has not affirmatively consented to a card issuer's payment of over-
the-limit transactions. The consumer uses his credit card at a pay-
at-the-pump fuel dispenser to purchase $50 of fuel. Before 
permitting the consumer to use the fuel pump, the merchant verifies 
the validity of the card by requesting an authorization hold of $1. 
The subsequent $50 transaction amount causes the consumer to exceed 
his credit limit. Under these circumstances, the card issuer is 
prohibited from imposing a fee or charge on the consumer's credit 
card account for paying the over-the-limit transaction because the 
consumer has not opted in to the card issuer's over-the-limit 
service.
    iii. Intervening charges. A consumer has not affirmatively 
consented to a card issuer's payment of over-the-limit transactions. 
The consumer makes a $50 purchase using his credit card. However, 
before the $50 transaction is charged to the consumer's account, a 
separate recurring charge is posted to the account. The $50 purchase 
then causes the consumer to exceed his credit limit. Under these 
circumstances, the card issuer is prohibited from imposing a fee or 
charge on the consumer's credit card account for paying the over-
the-limit transaction because the consumer has not opted in to the 
card issuer's over-the-limit service.
    2. Permissible fees or charges when a consumer has not 
consented. Section 1026.56(b)(2) does not preclude a card issuer 
from assessing fees or charges other than over-the-limit fees when 
an over-the-limit transaction is completed. For example, if a 
consumer has not opted in, the card issuer may assess a balance 
transfer fee in connection with a balance transfer, provided such a 
fee is assessed whether or not the transfer exceeds the credit 
limit. Section 1026.56(b)(2) does not limit the card issuer's 
ability to debit the consumer's account for the amount of the over-
the-limit transaction if the card issuer is permitted to do so under 
applicable law. The card issuer may also assess interest charges in 
connection with the over-the-limit transaction.

56(c) Method of election

    1. Card issuer-determined methods. A card issuer may determine 
the means available to consumers to affirmatively consent, or opt 
in, to the card issuer's payment of over-the-limit transactions. For 
example, a card issuer may decide to obtain consents in writing, 
electronically, or orally, or through some combination of these 
methods. Section 1026.56(c) further requires, however, that such 
methods must be made equally available for consumers to revoke a 
prior consent. Thus, for example, if a card issuer allows a consumer 
to consent in writing or electronically, it must also allow the 
consumer to revoke that consent in writing or electronically.
    2. Electronic requests. A consumer consent or revocation request 
submitted electronically is not considered a consumer disclosure for 
purposes of the E-Sign Act.

56(d) Timing and placement of notices

    1. Contemporaneous notice for oral or electronic consent. Under 
Sec.  1026.56(d)(1)(ii), if a card issuer seeks to obtain consent 
from the consumer orally or by electronic means, the card issuer 
must provide a notice containing the disclosures in Sec.  
1026.56(e)(1) prior to and as part of the process of obtaining the 
consumer's consent.

56(e) Content

    1. Amount of over-the-limit fee. See Model Forms G-25(A) and G-
25(B) for guidance on how to disclose the amount of the over-the-
limit fee.
    2. Notice content. In describing the consumer's right to 
affirmatively consent to a card issuer's payment of over-the-limit 
transactions, the card issuer may explain that any transactions that 
exceed the consumer's credit limit will be declined if the consumer 
does not consent to the service. In addition, the card issuer should 
explain that even if a consumer consents, the payment of over-the-
limit transactions is at the discretion of the card issuer. For 
example, the card issuer may indicate that it may decline a 
transaction for any reason, such as if the consumer is past due or 
significantly over the limit. The card issuer may also disclose the 
consumer's right to revoke consent.

56(f) Joint relationships

    1. Authorized users. Section 1026.56(f) does not permit a card 
issuer to treat a request to opt in to or to revoke a prior request 
for the card issuer's payment of over-the-limit transactions from an 
authorized user that is not jointly liable on a credit card account 
as a consent or revocation request for that account.

56(g) Continuing right to opt in or revoke opt-in

    1. Fees or charges for over-the-limit transactions incurred 
prior to revocation. Section 1026.56(g) provides that a consumer may 
revoke his or her prior consent at any time. If a consumer does so, 
this provision does not require the card issuer to waive or reverse 
any over-the-limit fees or charges assessed to the consumer's 
account for transactions that occurred prior to the card issuer's 
implementation of the consumer's revocation request. Nor does this 
requirement prevent the card issuer from assessing over-the-limit 
fees in subsequent cycles if the consumer's account balance 
continues to exceed the credit limit after the payment due date as a 
result of an over-the-limit transaction that occurred prior to the 
consumer's revocation of consent.

56(h) Duration of opt-in

    1. Card issuer ability to stop paying over-the-limit 
transactions after consumer consent. A card issuer may cease paying 
over-the-limit transactions for consumers that have previously opted 
in at any time and for any reason. For example, a card issuer may 
stop paying over-the-limit transactions for a consumer to respond to 
changes in the credit risk presented by the consumer.

56(j) Prohibited practices

    1. Periodic fees or charges. A card issuer may charge an over-
the-limit fee or charge only if the consumer has exceeded the credit

[[Page 80059]]

limit during the billing cycle. Thus, a card issuer may not impose 
any recurring or periodic fees for paying over-the-limit 
transactions (for example, a monthly ``over-the-limit protection'' 
service fee), even if the consumer has affirmatively consented to or 
opted in to the service, unless the consumer has in fact exceeded 
the credit limit during that cycle.
    2. Examples of limits on fees or charges imposed per billing 
cycle. Section 1026.56(j)(1) generally prohibits a card issuer from 
assessing a fee or charge due to the same over-the-limit transaction 
for more than three billing cycles. The following examples 
illustrate the prohibition.
    i. Assume that a consumer has opted into a card issuer's payment 
of over-the-limit transactions. The consumer exceeds the credit 
limit during the December billing cycle and does not make sufficient 
payment to bring the account balance back under the limit for four 
consecutive cycles. The consumer does not engage in any additional 
transactions during this period. In this case, Sec.  1026.56(j)(1) 
would permit the card issuer to charge a maximum of three over-the-
limit fees for the December over-the-limit transaction.
    ii. Assume the same facts as above except that the consumer 
makes sufficient payment to reduce his account balance by the 
payment due date during the February billing cycle. The card issuer 
may charge over-the-limit fees for the December and January billing 
cycles. However, because the consumer's account balance was below 
the credit limit by the payment due date for the February billing 
cycle, the card issuer may not charge an over-the-limit fee for the 
February billing cycle.
    iii. Assume the same facts as in paragraph i, except that the 
consumer engages in another over-the-limit transaction during the 
February billing cycle. Because the consumer has obtained an 
additional extension of credit which causes the consumer to exceed 
his credit limit, the card issuer may charge over-the-limit fees for 
the December transaction on the January, February and March billing 
statements, and additional over-the-limit fees for the February 
transaction on the April and May billing statements. The card issuer 
may not charge an over-the-limit fee for each of the December and 
the February transactions on the March billing statement because it 
is prohibited from imposing more than one over-the-limit fee during 
a billing cycle.
    3. Replenishment of credit line. Section 1026.56(j)(2) does not 
prevent a card issuer from delaying replenishment of a consumer's 
available credit where appropriate, for example, where the card 
issuer may suspect fraud on the credit card account. However, a card 
issuer may not assess an over-the-limit fee or charge if the over-
the-limit transaction is caused by the card issuer's decision not to 
promptly replenish the available credit after the consumer's payment 
is credited to the consumer's account.
    4. Examples of conditioning. Section 1026.56(j)(3) prohibits a 
card issuer from conditioning or otherwise tying the amount of a 
consumer's credit limit on the consumer affirmatively consenting to 
the card issuer's payment of over-the-limit transactions where the 
card issuer assesses an over-the-limit fee for the transaction. The 
following examples illustrate the prohibition.
    i. Amount of credit limit. Assume that a card issuer offers a 
credit card with a credit limit of $1,000. The consumer is informed 
that if the consumer opts in to the payment of the card issuer's 
payment of over-the-limit transactions, the initial credit limit 
would be increased to $1,300. If the card issuer would have offered 
the credit card with the $1,300 credit limit but for the fact that 
the consumer did not consent to the card issuer's payment of over-
the-limit transactions, the card issuer would not be in compliance 
with Sec.  1026.56(j)(3). Section 1026.56(j)(3) prohibits the card 
issuer from tying the consumer's opt-in to the card issuer's payment 
of over-the-limit transactions as a condition of obtaining the 
credit card with the $1,300 credit limit.
    ii. Access to credit. Assume the same facts as above, except 
that the card issuer declines the consumer's application altogether 
because the consumer has not affirmatively consented or opted in to 
the card issuer's payment of over-the-limit transactions. The card 
issuer is not in compliance with Sec.  1026.56(j)(3) because the 
card issuer has required the consumer's consent as a condition of 
obtaining credit.
    5. Over-the-limit fees caused by accrued fees or interest. 
Section 1026.56(j)(4) prohibits a card issuer from imposing any 
over-the-limit fees or charges on a consumer's account if the 
consumer has exceeded the credit limit solely because charges 
imposed as part of the plan as described in Sec.  1026.6(b)(3) were 
charged to the consumer's account during the billing cycle. For 
example, a card issuer may not assess an over-the-limit fee or 
charge even if the credit limit was exceeded due to fees for 
services requested by the consumer if such fees would constitute 
charges imposed as part of the plan (such as fees for voluntary debt 
cancellation or suspension coverage). Section 1026.56(j)(4) does 
not, however, restrict card issuers from assessing over-the-limit 
fees or charges due to accrued finance charges or fees from prior 
cycles that have subsequently been added to the account balance. The 
following examples illustrate the prohibition.
    i. Assume that a consumer has opted in to a card issuer's 
payment of over-the-limit transactions. The consumer's account has a 
credit limit of $500. The billing cycles for the account begin on 
the first day of the month and end on the last day of the month. The 
account is not eligible for a grace period as defined in Sec.  
1026.5(b)(2)(ii)(B)(3). On December 31, the only balance on the 
account is a purchase balance of $475. On that same date, $50 in 
fees charged as part of the plan under Sec.  1026.6(b)(3)(i) and 
interest charges are imposed on the account, increasing the total 
balance at the end of the December billing cycle to $525. Although 
the total balance exceeds the $500 credit limit, Sec.  1026.56(j)(4) 
prohibits the card issuer from imposing an over-the-limit fee or 
charge for the December billing cycle in these circumstances because 
the consumer's credit limit was exceeded solely because of the 
imposition of fees and interest charges during that cycle.
    ii. Same facts as above except that, on December 31, the only 
balance on the account is a purchase balance of $400. On that same 
date, $50 in fees imposed as part of the plan under Sec.  
1026.6(b)(3)(i), including interest charges, are imposed on the 
account, increasing the total balance at the end of the December 
billing cycle to $450. The consumer makes a $25 payment by the 
January payment due date and the remaining $25 in fees imposed as 
part of the plan in December is added to the outstanding balance. On 
January 25, an $80 purchase is charged to the account. At the close 
of the cycle on January 31, an additional $20 in fees imposed as 
part of the plan are imposed on the account, increasing the total 
balance to $525. Because Sec.  1026.56(j)(4) does not require the 
issuer to consider fees imposed as part of the plan for the prior 
cycle in determining whether an over-the-limit fee may be properly 
assessed for the current cycle, the issuer need not take into 
account the remaining $25 in fees and interest charges from the 
December cycle in determining whether fees imposed as part of the 
plan caused the consumer to exceed the credit limit during the 
January cycle. Thus, under these circumstances, Sec.  1026.56(j)(4) 
does not prohibit the card issuer from imposing an over-the-limit 
fee or charge for the January billing cycle because the $20 in fees 
imposed as part of the plan for the January billing cycle did not 
cause the consumer to exceed the credit limit during that cycle.
    6. Additional restrictions on over-the-limit fees. See Sec.  
1026.52(b).

Section 1026.57--Reporting and Marketing Rules for College Student 
Open-End Credit

57(a) Definitions

57(a)(1) College student credit card

    1. Definition. The definition of college student credit card 
excludes home-equity lines of credit accessed by credit cards and 
overdraft lines of credit accessed by debit cards. A college student 
credit card includes a college affinity card within the meaning of 
TILA section 127(r)(1)(A). In addition, a card may fall within the 
scope of the definition regardless of the fact that it is not 
intentionally targeted at or marketed to college students. For 
example, an agreement between a college and a card issuer may 
provide for marketing of credit cards to alumni, faculty, staff, and 
other non-student consumers who have a relationship with the 
college, but also contain provisions that contemplate the issuance 
of cards to students. A credit card issued to a student at the 
college in connection with such an agreement qualifies as a college 
student credit card.

57(a)(5) College credit card agreement

    1. Definition. Section 1026.57(a)(5) defines ``college credit 
card agreement'' to include any business, marketing or promotional 
agreement between a card issuer and a college or university (or an 
affiliated organization, such as an alumni club or a foundation) if 
the agreement provides for the issuance of credit cards to full-time 
or part-time students. Business, marketing or

[[Page 80060]]

promotional agreements may include a broad range of arrangements 
between a card issuer and an institution of higher education or 
affiliated organization, including arrangements that do not meet the 
criteria to be considered college affinity card agreements as 
discussed in TILA section 127(r)(1)(A). For example, TILA section 
127(r)(1)(A) specifies that under a college affinity card agreement, 
the card issuer has agreed to make a donation to the institution or 
affiliated organization, the card issuer has agreed to offer 
discounted terms to the consumer, or the credit card will display 
pictures, symbols, or words identified with the institution or 
affiliated organization; even if these conditions are not met, an 
agreement may qualify as a college credit card agreement, if the 
agreement is a business, marketing or promotional agreement that 
contemplates the issuance of college student credit cards to college 
students currently enrolled (either full-time or part-time) at the 
institution. An agreement may qualify as a college credit card 
agreement even if marketing of cards under the agreement is targeted 
at alumni, faculty, staff, and other non-student consumers, as long 
as cards may also be issued to students in connection with the 
agreement.

57(b) Public disclosure of agreements

    1. Public disclosure. Section 1026.57(b) requires an institution 
of higher education to publicly disclose any contract or other 
agreement made with a card issuer or creditor for the purpose of 
marketing a credit card. Examples of publicly disclosing such 
contracts or agreements include, but are not limited to, posting 
such contracts or agreements on the institution's Web site or making 
such contracts or agreements available upon request, provided the 
procedures for requesting the documents are reasonable and free of 
cost to the requestor, and the requested contracts or agreements are 
provided within a reasonable time frame.
    2. Redaction prohibited. An institution of higher education must 
publicly disclose any contract or other agreement made with a card 
issuer for the purpose of marketing a credit card in its entirety 
and may not redact any portion of such contract or agreement. Any 
clause existing in such contracts or agreements, providing for the 
confidentiality of any portion of the contract or agreement, would 
be invalid to the extent it restricts the ability of the institution 
of higher education to publicly disclose the contract or agreement 
in its entirety.

57(c) Prohibited inducements

    1. Tangible item clarified. A tangible item includes any 
physical item, such as a gift card, a t-shirt, or a magazine 
subscription, that a card issuer or creditor offers to induce a 
college student to apply for or open an open-end consumer credit 
plan offered by such card issuer or creditor. Tangible items do not 
include non-physical inducements such as discounts, rewards points, 
or promotional credit terms.
    2. Inducement clarified. If a tangible item is offered to a 
person whether or not that person applies for or opens an open-end 
consumer credit plan, the tangible item has not been offered to 
induce the person to apply for or open the plan. For example, 
refreshments offered to a college student on campus that are not 
conditioned on whether the student has applied for or agreed to open 
an open-end consumer credit plan would not violate Sec.  1026.57(c).
    3. Near campus clarified. A location that is within 1,000 feet 
of the border of the campus of an institution of higher education, 
as defined by the institution of higher education, is considered 
near the campus of an institution of higher education.
    4. Mailings included. The prohibition in Sec.  1026.57(c) on 
offering a tangible item to a college student to induce such student 
to apply for or open an open-end consumer credit plan offered by 
such card issuer or creditor applies to any solicitation or 
application mailed to a college student at an address on or near the 
campus of an institution of higher education.
    5. Related event clarified. An event is related to an 
institution of higher education if the marketing of such event uses 
the name, emblem, mascot, or logo of an institution of higher 
education, or other words, pictures, symbols identified with an 
institution of higher education in a way that implies that the 
institution of higher education endorses or otherwise sponsors the 
event.
    6. Reasonable procedures for determining if applicant is a 
student. Section 1026.57(c) applies solely to offering a tangible 
item to a college student. Therefore, a card issuer or creditor may 
offer any person who is not a college student a tangible item to 
induce such person to apply for or open an open-end consumer credit 
plan offered by such card issuer or creditor, on campus, near 
campus, or at an event sponsored by or related to an institution of 
higher education. The card issuer or creditor must have reasonable 
procedures for determining whether an applicant is a college student 
before giving the applicant the tangible item. For example, a card 
issuer or creditor may ask whether the applicant is a college 
student as part of the application process. The card issuer or 
creditor may rely on the representations made by the applicant.

57(d) Annual report to the Bureau

57(d)(2) Contents of report

    1. Memorandum of understanding. Section 1026.57(d)(2) requires 
that the report to the Bureau include, among other items, a copy of 
any memorandum of understanding between the card issuer and the 
institution (or affiliated organization) that ``directly or 
indirectly relates to the college credit card agreement or that 
controls or directs any obligations or distribution of benefits 
between any such entities.'' Such a memorandum of understanding 
includes any document that amends the college credit card agreement, 
or that constitutes a further agreement between the parties as to 
the interpretation or administration of the agreement. For example, 
a memorandum of understanding required to be included in the report 
would include a document that provides details on the dollar amounts 
of payments from the card issuer to the university, to supplement 
the original agreement which only provided for payments in general 
terms (e.g., as a percentage). A memorandum of understanding for 
these purposes would not include email (or other) messages that 
merely discuss matters such as the addresses to which payments 
should be sent or the names of contact persons for carrying out the 
agreement.

Section 1026.58--Internet Posting of Credit Card Agreements

58(b) Definitions

58(b)(1) Agreement

    1. Inclusion of pricing information. For purposes of this 
section, a credit card agreement is deemed to include certain 
information, such as annual percentage rates and fees, even if the 
issuer does not otherwise include this information in the basic 
credit contract. This information is listed under the defined term 
``pricing information'' in Sec.  1026.58(b)(7). For example, the 
basic credit contract may not specify rates, fees and other 
information that constitutes pricing information as defined in Sec.  
1026.58(b)(7); instead, such information may be provided to the 
cardholder in a separate document sent along with the card. However, 
this information nevertheless constitutes part of the agreement for 
purposes of Sec.  1026.58.
    2. Provisions contained in separate documents included. A credit 
card agreement is defined as the written document or documents 
evidencing the terms of the legal obligation, or the prospective 
legal obligation, between a card issuer and a consumer for a credit 
card account under an open-end (not home-secured) consumer credit 
plan. An agreement therefore may consist of several documents that, 
taken together, define the legal obligation between the issuer and 
consumer. For example, provisions that mandate arbitration or allow 
an issuer to unilaterally alter the terms of the card issuer's or 
consumer's obligation are part of the agreement even if they are 
provided to the consumer in a document separate from the basic 
credit contract.

58(b)(2) Amends

    1. Substantive changes. A change to an agreement is substantive, 
and therefore is deemed an amendment of the agreement, if it alters 
the rights or obligations of the parties. Section 1026.58(b)(2) 
provides that any change in the pricing information, as defined in 
Sec.  1026.58(b)(7), is deemed to be substantive. Examples of other 
changes that generally would be considered substantive include:
    i. Addition or deletion of a provision giving the issuer or 
consumer a right under the agreement, such as a clause that allows 
an issuer to unilaterally change the terms of an agreement.
    ii. Addition or deletion of a provision giving the issuer or 
consumer an obligation under the agreement, such as a clause 
requiring the consumer to pay an additional fee.
    iii. Changes that may affect the cost of credit to the consumer, 
such as changes in a provision describing how the minimum payment 
will be calculated.
    iv. Changes that may affect how the terms of the agreement are 
construed or applied, such as changes in a choice-of-law provision.

[[Page 80061]]

    v. Changes that may affect the parties to whom the agreement may 
apply, such as provisions regarding authorized users or assignment 
of the agreement.
    2. Non-substantive changes. Changes that generally would not be 
considered substantive include, for example:
    i. Correction of typographical errors that do not affect the 
meaning of any terms of the agreement.
    ii. Changes to the card issuer's corporate name, logo, or 
tagline.
    iii. Changes to the format of the agreement, such as conversion 
to a booklet from a full-sheet format, changes in font, or changes 
in margins.
    iv. Changes to the name of the credit card to which the program 
applies.
    v. Reordering sections of the agreement without affecting the 
meaning of any terms of the agreement.
    vi. Adding, removing, or modifying a table of contents or index.
    vii. Changes to titles, headings, section numbers, or captions.

58(b)(4) Card issuer

    1. Card issuer clarified. Section 1026.58(b)(4) provides that, 
for purposes of Sec.  1026.58, card issuer or issuer means the 
entity to which a consumer is legally obligated, or would be legally 
obligated, under the terms of a credit card agreement. For example, 
Bank X and Bank Y work together to issue credit cards. A consumer 
that obtains a credit card issued pursuant to this arrangement 
between Bank X and Bank Y is subject to an agreement that states 
``This is an agreement between you, the consumer, and Bank X that 
governs the terms of your Bank Y Credit Card.'' The card issuer in 
this example is Bank X, because the agreement creates a legally 
enforceable obligation between the consumer and Bank X. Bank X is 
the issuer even if the consumer applied for the card through a link 
on Bank Y's Web site and the cards prominently feature the Bank Y 
logo on the front of the card.
    2. Use of third-party service providers. An institution that is 
the card issuer as defined in Sec.  1026.58(b)(4) has a legal 
obligation to comply with the requirements of Sec.  1026.58. 
However, a card issuer generally may use a third-party service 
provider to satisfy its obligations under Sec.  1026.58, provided 
that the issuer acts in accordance with regulatory guidance 
regarding use of third-party service providers and other applicable 
regulatory guidance. In some cases, an issuer may wish to arrange 
for the institution with which it partners to issue credit cards to 
fulfill the requirements of Sec.  1026.58 on the issuer's behalf. 
For example, Retailer and Bank work together to issue credit cards. 
Under the Sec.  1026.58(b)(4) definition, Bank is the issuer of 
these credit cards for purposes of Sec.  1026.58. However, Retailer 
services the credit card accounts, including mailing account opening 
materials and periodic statements to cardholders. While Bank is 
responsible for ensuring compliance with Sec.  1026.58, Bank may 
arrange for Retailer (or another appropriate third-party service 
provider) to submit credit card agreements to the Bureau under Sec.  
1026.58 on Bank's behalf. Bank must comply with regulatory guidance 
regarding use of third-party service providers and other applicable 
regulatory guidance.
    3. Partner institution Web sites. i. As explained in comments 
58(d)-2 and 58(e)-3, if an issuer provides cardholders with access 
to specific information about their individual accounts, such as 
balance information or copies of statements, through a third-party 
Web site, the issuer is deemed to maintain that Web site for 
purposes of Sec.  1026.58. Such a Web site is deemed to be 
maintained by the issuer for purposes of Sec.  1026.58 even where, 
for example, an unaffiliated entity designs the Web site and owns 
and maintains the information technology infrastructure that 
supports the Web site, cardholders with credit cards from multiple 
issuers can access individual account information through the same 
Web site, and the Web site is not labeled, branded, or otherwise 
held out to the public as belonging to the issuer. A partner 
institution's Web site is an example of a third-party Web site that 
may be deemed to be maintained by the issuer for purposes of Sec.  
1026.58. For example, Retailer and Bank work together to issue 
credit cards. Under the Sec.  1026.58(b)(4) definition, Bank is the 
issuer of these credit cards for purposes of Sec.  1026.58. Bank 
does not have a Web site. However, cardholders can access 
information about their individual accounts, such as balance 
information and copies of statements, through a Web site maintained 
by Retailer. Retailer designs the Web site and owns and maintains 
the information technology infrastructure that supports the Web 
site. The Web site is branded and held out to the public as 
belonging to Retailer. Because cardholders can access information 
about their individual accounts through this Web site, the Web site 
is deemed to be maintained by Bank for purposes of Sec.  1026.58. 
Bank therefore may comply with Sec.  1026.58(d) by ensuring that 
agreements offered to the public are posted on Retailer's Web site 
in accordance with Sec.  1026.58(d). Bank may comply with Sec.  
1026.58(e) by ensuring that cardholders can request copies of their 
individual agreements through Retailer's Web site in accordance with 
Sec.  1026.58(e)(1). Bank need not create and maintain a Web site 
branded and held out to the public as belonging to Bank in order to 
comply with Sec. Sec.  1026.58(d) and (e) as long as Bank ensures 
that Retailer's Web site complies with these sections.
    ii. In addition, Sec.  1026.58(d)(1) provides that, with respect 
to an agreement offered solely for accounts under one or more 
private label credit card plans, an issuer may comply with Sec.  
1026.58(d) by posting the agreement on the publicly available Web 
site of at least one of the merchants at which credit cards issued 
under each private label credit card plan with 10,000 or more open 
accounts may be used. This rule is not conditioned on cardholders' 
ability to access account-specific information through the 
merchant's Web site.

58(b)(5) Offers

    1. Cards offered to limited groups. A card issuer is deemed to 
offer a credit card agreement to the public even if the issuer 
solicits, or accepts applications from, only a limited group of 
persons. For example, a card issuer may market affinity cards to 
students and alumni of a particular educational institution, or may 
solicit only high-net-worth individuals for a particular card; in 
these cases, the agreement would be considered to be offered to the 
public. Similarly, agreements for credit cards issued by a credit 
union are considered to be offered to the public even though such 
cards are available only to credit union members.
    2. Individualized agreements. A card issuer is deemed to offer a 
credit card agreement to the public even if the terms of the 
agreement are changed immediately upon opening of an account to 
terms not offered to the public.

58(b)(6) Open account

    1. Open account clarified. The definition of open account 
includes a credit card account under an open-end (not home-secured) 
consumer credit plan if either (i) the cardholder can obtain 
extensions of credit on the account; or (ii) there is an outstanding 
balance on the account that has not been charged off. Under this 
definition, an account that meets either of these criteria is 
considered to be open even if the account is inactive. Similarly, if 
an account has been closed for new activity (for example, due to 
default by the cardholder), but the cardholder is still making 
payments to pay off the outstanding balance, the account is 
considered open.

58(b)(8) Private Label Credit Card Account and Private Label Credit 
Card Plan

    1. Private label credit card account. The term private label 
credit card account means a credit card account under an open-end 
(not home-secured) consumer credit plan with a credit card that can 
be used to make purchases only at a single merchant or an affiliated 
group of merchants. This term applies to any such credit card 
account, regardless of whether it is issued by the merchant or its 
affiliate or by an unaffiliated third party.
    2. Co-branded credit cards. The term private label credit card 
account does not include accounts with so-called co-branded credit 
cards. Credit cards that display the name, mark, or logo of a 
merchant or affiliated group of merchants as well as the mark, logo, 
or brand of payment network are generally referred to as co-branded 
cards. While these credit cards may display the brand of the 
merchant or affiliated group of merchants as the dominant brand on 
the card, such credit cards are usable at any merchant that 
participates in the payment network. Because these credit cards can 
be used at multiple unaffiliated merchants, accounts with such 
credit cards are not considered private label credit card accounts 
under Sec.  1026.58(b)(8).
    3. Affiliated group of merchants. The term ``affiliated group of 
merchants'' means two or more affiliated merchants or other persons 
that are related by common ownership or common corporate control. 
For example, the term would include franchisees that are subject to 
a common set of corporate policies or practices under the terms of 
their franchise licenses. The term also applies to two or more 
merchants or other persons that agree among each other, by contract 
or otherwise, to accept a credit card bearing the same name, mark, 
or logo (other than the mark,

[[Page 80062]]

logo, or brand of a payment network), for the purchase of goods or 
services solely at such merchants or persons. For example, several 
local clothing retailers jointly agree to issue credit cards called 
the ``Main Street Fashion Card'' that can be used to make purchases 
only at those retailers. For purposes of this section, these 
retailers would be considered an affiliated group of merchants.
    4. Private label credit card plan. i. Which credit card accounts 
issued by a particular issuer constitute a private label credit card 
plan is determined by where the credit cards can be used. All of the 
private label credit card accounts issued by a particular card 
issuer with credit cards usable at the same merchant or affiliated 
group of merchants constitute a single private label credit card 
plan, regardless of whether the rates, fees, or other terms 
applicable to the individual credit card accounts differ. For 
example, a card issuer has 3,000 open private label credit card 
accounts with credit cards usable only at Merchant A and 5,000 open 
private label credit card accounts with credit cards usable only at 
Merchant B and its affiliates. The card issuer has two separate 
private label credit card plans, as defined by Sec.  1026.58(b)(8)--
one plan consisting of 3,000 open accounts with credit cards usable 
only at Merchant A and another plan consisting of 5,000 open 
accounts with credit cards usable only at Merchant B and its 
affiliates.
    ii. The example above remains the same regardless of whether (or 
the extent to which) the terms applicable to the individual open 
accounts differ. For example, assume that, with respect to the card 
issuer's 3,000 open accounts with credit cards usable only at 
Merchant A in the example above, 1,000 of the open accounts have a 
purchase APR of 12 percent, 1,000 of the open accounts have a 
purchase APR of 15 percent, and 1,000 of the open accounts have a 
purchase APR of 18 percent. All of the 5,000 open accounts with 
credit cards usable only at Merchant B and Merchant B's affiliates 
have the same 15 percent purchase APR. The card issuer still has 
only two separate private label credit card plans, as defined by 
Sec.  1026.58(b)(8). The open accounts with credit cards usable only 
at Merchant A do not constitute three separate private label credit 
card plans under Sec.  1026.58(b)(8), even though the accounts are 
subject to different terms.

58(c) Submission of Agreements to Bureau

58(c)(1) Quarterly Submissions

    1. Quarterly submission requirement. Section 1026.58(c)(1) 
requires card issuers to send quarterly submissions to the Bureau no 
later than the first business day on or after January 31, April 30, 
July 31, and October 31 of each year. For example, a card issuer has 
already submitted three credit card agreements to the Bureau. On 
October 15, the card issuer stops offering agreement A. On November 
20, the card issuer amends agreement B. On December 1, the issuer 
starts offering a new agreement D. The card issuer must submit to 
the Bureau no later than the first business day on or after January 
31 (i) notification that the card issuer is withdrawing agreement A, 
because it is no longer offered to the public; (ii) the amended 
version of agreement B; and (iii) agreement D.
    2. No quarterly submission required. i. Under Sec.  
1026.58(c)(1), a card issuer is not required to make any submission 
to the Bureau at a particular quarterly submission deadline if, 
during the previous calendar quarter, the card issuer did not take 
any of the following actions:
    A. Offering a new credit card agreement that was not submitted 
to the Bureau previously.
    B. Amending an agreement previously submitted to the Bureau.
    C. Ceasing to offer an agreement previously submitted to the 
Bureau.
    ii. For example, a card issuer offers five agreements to the 
public as of September 30 and submits these to the Bureau by October 
31, as required by Sec.  1026.58(c)(1). Between September 30 and 
December 31, the card issuer continues to offer all five of these 
agreements to the public without amending them and does not begin 
offering any new agreements. The card issuer is not required to make 
any submission to the Bureau by the following January 31.
    3. Quarterly submission of complete set of updated agreements. 
Section 1026.58(c)(1) permits a card issuer to submit to the Bureau 
on a quarterly basis a complete, updated set of the credit card 
agreements the card issuer offers to the public. For example, a card 
issuer offers agreements A, B, and C to the public as of March 31. 
The card issuer submits each of these agreements to the Bureau by 
April 30 as required by Sec.  1026.58(c)(1). On May 15, the card 
issuer amends agreement A, but does not make any changes to 
agreements B or C. As of June 30, the card issuer continues to offer 
amended agreement A and agreements B and C to the public. At the 
next quarterly submission deadline, July 31, the card issuer must 
submit the entire amended agreement A and is not required to make 
any submission with respect to agreements B and C. The card issuer 
may either: (i) Submit the entire amended agreement A and make no 
submission with respect to agreements B and C; or (ii) submit the 
entire amended agreement A and also resubmit agreements B and C. A 
card issuer may choose to resubmit to the Bureau all of the 
agreements it offered to the public as of a particular quarterly 
submission deadline even if the card issuer has not introduced any 
new agreements or amended any agreements since its last submission 
and continues to offer all previously submitted agreements.

58(c)(3) Amended Agreements

    1. No requirement to resubmit agreements not amended. Under 
Sec.  1026.58(c)(3), if a credit card agreement has been submitted 
to the Bureau, the agreement has not been amended, and the card 
issuer continues to offer the agreement to the public, no additional 
submission regarding that agreement is required. For example, a 
credit card issuer begins offering an agreement in October and 
submits the agreement to the Bureau the following January 31, as 
required by Sec.  1026.58(c)(1). As of March 31, the card issuer has 
not amended the agreement and is still offering the agreement to the 
public. The card issuer is not required to submit anything to the 
Bureau regarding that agreement by April 30.
    2. Submission of amended agreements. If a card issuer amends a 
credit card agreement previously submitted to the Bureau, Sec.  
1026.58(c)(3) requires the card issuer to submit the entire amended 
agreement to the Bureau. The issuer must submit the amended 
agreement to the Bureau by the first quarterly submission deadline 
after the last day of the calendar quarter in which the change 
became effective. However, the issuer is required to submit the 
amended agreement to the Bureau only if the issuer offered the 
amended agreement to the public as of the last business day of the 
calendar quarter in which the change became effective. For example, 
a card issuer submits an agreement to the Bureau on October 31. On 
November 15, the issuer changes the balance computation method used 
under the agreement. Because an element of the pricing information 
has changed, the agreement has been amended for purposes of Sec.  
1026.58(c)(3). On December 31, the last business day of the calendar 
quarter in which the change in the balance computation method became 
effective, the issuer still offers the agreement to the public as 
amended on November 15. The issuer must submit the entire amended 
agreement to the Bureau no later than January 31.
    3. Agreements amended but no longer offered to the public. A 
card issuer should submit an amended agreement to the Bureau under 
Sec.  1026.58(c)(3) only if the issuer offered the amended agreement 
to the public as of the last business day of the calendar quarter in 
which the amendment became effective. Agreements that are not 
offered to the public as of the last day of the calendar quarter 
should not be submitted to the Bureau. For example, on December 31 a 
card issuer offers two agreements, Agreement A and Agreement B. The 
issuer submits these agreements to the Bureau by January 31 as 
required by Sec.  1026.58. On February 15, the issuer amends both 
Agreement A and Agreement B. On February 28, the issuer stops 
offering Agreement A to the public. On March 15, the issuer amends 
Agreement B a second time. As a result, on March 31, the last 
business day of the calendar quarter, the issuer offers to the 
public one agreement--Agreement B as amended on March 15. By the 
April 30 quarterly submission deadline, the issuer must (i) notify 
the Bureau that it is withdrawing Agreement A because Agreement A is 
no longer offered to the public; and (ii) submit to the Bureau 
Agreement B as amended on March 15. The issuer should not submit to 
the Bureau either Agreement A as amended on February 15 or the 
earlier version of Agreement B (as amended on February 15), as 
neither was offered to the public on March 31, the last business day 
of the calendar quarter.
    4. Change-in-terms notices not permissible. Section 
1026.58(c)(3) requires that if an agreement previously submitted to 
the Bureau is amended, the card issuer must submit the entire 
revised agreement to the Bureau. A card issuer may not fulfill this 
requirement by submitting a change-in-terms or similar notice 
covering only the terms that have changed. In addition, amendments 
must be integrated into the text of the agreement (or the addenda 
described in Sec.  1026.58(c)(8)), not provided as separate riders. 
For example,

[[Page 80063]]

a card issuer changes the purchase APR associated with an agreement 
the issuer has previously submitted to the Bureau. The purchase APR 
for that agreement was included in the addendum of pricing 
information, as required by Sec.  1026.58(c)(8). The card issuer may 
not submit a change-in-terms or similar notice reflecting the change 
in APR, either alone or accompanied by the original text of the 
agreement and original pricing information addendum. Instead, the 
card issuer must revise the pricing information addendum to reflect 
the change in APR and submit to the Bureau the entire text of the 
agreement and the entire revised addendum, even though no changes 
have been made to the provisions of the agreement and only one item 
on the pricing information addendum has changed.

58(c)(4) Withdrawal of Agreements

    1. Notice of withdrawal of agreement. Section 1026.58(c)(4) 
requires a card issuer to notify the Bureau if any agreement 
previously submitted to the Bureau by that issuer is no longer 
offered to the public by the first quarterly submission deadline 
after the last day of the calendar quarter in which the card issuer 
ceased to offer the agreement. For example, on January 5 a card 
issuer stops offering to the public an agreement it previously 
submitted to the Bureau. The card issuer must notify the Bureau that 
the agreement is being withdrawn by April 30, the first quarterly 
submission deadline after March 31, the last day of the calendar 
quarter in which the card issuer stopped offering the agreement.

58(c)(5) De Minimis Exception

    1. Relationship to other exceptions. The de minimis exception is 
distinct from the private label credit card exception under Sec.  
1026.58(c)(6) and the product testing exception under Sec.  
1026.58(c)(7). The de minimis exception provides that a card issuer 
with fewer than 10,000 open credit card accounts is not required to 
submit any agreements to the Bureau, regardless of whether those 
agreements qualify for the private label credit card exception or 
the product testing exception. In contrast, the private label credit 
card exception and the product testing exception provide that a card 
issuer is not required to submit to the Bureau agreements offered 
solely in connection with certain types of credit card plans with 
fewer than 10,000 open accounts, regardless of the card issuer's 
total number of open accounts.
    2. De minimis exception. Under Sec.  1026.58(c)(5), a card 
issuer is not required to submit any credit card agreements to the 
Bureau under Sec.  1026.58(c)(1) if the card issuer has fewer than 
10,000 open credit card accounts as of the last business day of the 
calendar quarter. For example, a card issuer offers five credit card 
agreements to the public as of September 30. However, the card 
issuer has only 2,000 open credit card accounts as of September 30. 
The card issuer is not required to submit any agreements to the 
Bureau by October 31 because the issuer qualifies for the de minimis 
exception.
    3. Date for determining whether card issuer qualifies clarified. 
Whether a card issuer qualifies for the de minimis exception is 
determined as of the last business day of each calendar quarter. For 
example, as of December 31, a card issuer offers three agreements to 
the public and has 9,500 open credit card accounts. As of January 
30, the card issuer still offers three agreements, but has 10,100 
open accounts. As of March 31, the card issuer still offers three 
agreements, but has only 9,700 open accounts. Even though the card 
issuer had 10,100 open accounts at one time during the calendar 
quarter, the card issuer qualifies for the de minimis exception 
because the number of open accounts was less than 10,000 as of March 
31. The card issuer therefore is not required to submit any 
agreements to the Bureau under Sec.  1026.58(c)(1) by April 30.
    4. Date for determining whether card issuer ceases to qualify 
clarified. Whether a card issuer has ceased to qualify for the de 
minimis exception under Sec.  1026.58(c)(5) is determined as of the 
last business day of the calendar quarter, For example, as of June 
30, a card issuer offers three agreements to the public and has 
9,500 open credit card accounts. The card issuer is not required to 
submit any agreements to the Bureau under Sec.  1026.58(c)(1) 
because the card issuer qualifies for the de minimis exception. As 
of July 15, the card issuer still offers the same three agreements, 
but now has 10,000 open accounts. The card issuer is not required to 
take any action at this time, because whether a card issuer 
qualifies for the de minimis exception under Sec.  1026.58(c)(5) is 
determined as of the last business day of the calendar quarter. As 
of September 30, the card issuer still offers the same three 
agreements and still has 10,000 open accounts. Because the card 
issuer had 10,000 open accounts as of September 30, the card issuer 
ceased to qualify for the de minimis exception and must submit the 
three agreements it offers to the Bureau by October 31, the next 
quarterly submission deadline.
    5. Option to withdraw agreements clarified. Section 
1026.58(c)(5) provides that if a card issuer that did not previously 
qualify for the de minimis exception qualifies for the de minimis 
exception, the card issuer must continue to make quarterly 
submissions to the Bureau as required by Sec.  1026.58(c)(1) until 
the card issuer notifies the Bureau that the issuer is withdrawing 
all agreements it previously submitted to the Bureau. For example, a 
card issuer has 10,001 open accounts and offers three agreements to 
the public as of December 31. The card issuer has submitted each of 
the three agreements to the Bureau as required under Sec.  
1026.58(c)(1). As of March 31, the card issuer has only 9,999 open 
accounts. The card issuer has two options. First, the card issuer 
may notify the Bureau that the card issuer is withdrawing each of 
the three agreements it previously submitted. Once the card issuer 
has notified the Bureau, the card issuer is no longer required to 
make quarterly submissions to the Bureau under Sec.  1026.58(c)(1). 
Alternatively, the card issuer may choose not to notify the Bureau 
that it is withdrawing its agreements. In this case, the card issuer 
must continue making quarterly submissions to the Bureau as required 
by Sec.  1026.58(c)(1). The card issuer might choose not to withdraw 
its agreements if, for example, the card issuer believes that it 
likely will cease to qualify for the de minimis exception again in 
the near future.

58(c)(6) Private Label Credit Card Exception

    1. Private label credit card exception. i. Under Sec.  
1026.58(c)(6)(i), a card issuer is not required to submit to the 
Bureau a credit card agreement if, as of the last business day of 
the calendar quarter, the agreement (A) is offered for accounts 
under one or more private label credit card plans each of which has 
fewer than 10,000 open accounts; and (B) is not offered to the 
public other than for accounts under such a plan. For example, a 
card issuer offers to the public a credit card agreement offered 
solely for private label credit card accounts with credit cards that 
can be used only at Merchant A. The card issuer has 8,000 open 
accounts with such credit cards usable only at Merchant A. The card 
issuer is not required to submit this agreement to the Bureau under 
Sec.  1026.58(c)(1) because the agreement is offered for a private 
label credit card plan with fewer than 10,000 open accounts, and the 
credit card agreement is not offered to the public other than for 
accounts under that private label credit card plan.
    ii. In contrast, assume the same card issuer also offers to the 
public a different credit card agreement that is offered solely for 
private label credit card accounts with credit cards usable only at 
Merchant B. The card issuer has 12,000 open accounts with such 
credit cards usable only at Merchant B. The private label credit 
card exception does not apply. Although this agreement is offered 
for a private label credit card plan (i.e., the 12,000 private label 
credit card accounts with credit cards usable only at Merchant B), 
and the agreement is not offered to the public other than for 
accounts under that private label credit card plan, the private 
label credit card plan has more than 10,000 open accounts. (The card 
issuer still is not required to submit to the Bureau the agreement 
offered in connection with credit cards usable only at Merchant A, 
as each agreement is evaluated separately under the private label 
credit card exception.)
    2. Card issuers with small private label and other credit card 
plans. Whether the private label credit card exception applies is 
determined on an agreement-by-agreement basis. Therefore, some 
agreements offered by a card issuer may qualify for the private 
label credit card exception even though the card issuer also offers 
other agreements that do not qualify, such as agreements offered for 
accounts with cards usable at multiple unaffiliated merchants or 
agreements offered for accounts under private label plans with 
10,000 or more open accounts.
    3. De minimis exception distinguished. The private label credit 
card exception under Sec.  1026.58(c)(6) is distinct from the de 
minimis exception under Sec.  1026.58(c)(5). The private label 
credit card exception exempts card issuers from submitting certain 
agreements to the Bureau regardless of the card issuer's overall 
size as measured by total number of open accounts. In contrast, the 
de minimis exception exempts a particular card issuer from 
submitting any credit card agreements to the Bureau if the card 
issuer has fewer than 10,000 total open accounts. For example, a 
card issuer offers to the public

[[Page 80064]]

two credit card agreements. Agreement A is offered solely for 
private label credit card accounts with credit cards usable only at 
Merchant A. The card issuer has 5,000 open credit card accounts with 
such credit cards usable only at Merchant A. Agreement B is offered 
solely for credit card accounts with cards usable at multiple 
unaffiliated merchants that participate in a major payment network. 
The card issuer has 40,000 open credit card accounts with such 
payment network cards. The card issuer is not required to submit 
agreement A to the Bureau under Sec.  1026.58(c)(1) because 
agreement A qualifies for the private label credit card exception 
under Sec.  1026.58(c)(6). Agreement A is offered for accounts under 
a private label credit card plan with fewer than 10,000 open 
accounts (i.e., the 5,000 accounts with credit cards usable only at 
Merchant A) and is not otherwise offered to the public. The card 
issuer is required to submit agreement B to the Bureau under Sec.  
1026.58(c)(1). The card issuer does not qualify for the de minimis 
exception under Sec.  1026.58(c)(5) because it has more than 10,000 
open accounts, and agreement B does not qualify for the private 
label credit card exception under Sec.  1026.58(c)(6) because it is 
not offered solely for accounts under a private label credit card 
plan with fewer than 10,000 open accounts.
    4. Agreement otherwise offered to the public. i. An agreement 
qualifies for the private label exception only if it is offered for 
accounts under one or more private label credit card plans with 
fewer than 10,000 open accounts and is not offered to the public 
other than for accounts under such a plan. For example, a card 
issuer offers a single agreement to the public. The agreement is 
offered for private label credit card accounts with credit cards 
usable only at Merchant A. The card issuer has 9,000 such open 
accounts with credit cards usable only at Merchant A. The agreement 
also is offered for credit card accounts with credit cards usable at 
multiple unaffiliated merchants that participate in a major payment 
network. The agreement does not qualify for the private label credit 
card exception. The agreement is offered for accounts under a 
private label credit card plan with fewer than 10,000 open accounts. 
However, the agreement also is offered to the public for accounts 
that are not part of a private label credit card plan and therefore 
does not qualify for the private label credit card exception.
    ii. Similarly, an agreement does not qualify for the private 
label credit card exception if it is offered in connection with one 
private label credit card plan with fewer than 10,000 open accounts 
and one private label credit card plan with 10,000 or more open 
accounts. For example, a card issuer offers a single credit card 
agreement to the public. The agreement is offered for two types of 
accounts. The first type of account is a private label credit card 
account with a credit card usable only at Merchant A. The second 
type of account is a private label credit card account with a credit 
card usable only at Merchant B. The card issuer has 10,000 such open 
accounts with credit cards usable only at Merchant A and 5,000 such 
open accounts with credit cards usable only at Merchant B. The 
agreement does not qualify for the private label credit card 
exception. While the agreement is offered for accounts under a 
private label credit card plan with fewer than 10,000 open accounts 
(i.e., the 5,000 open accounts with credit cards usable only at 
Merchant B), the agreement is also offered for accounts not under 
such a plan (i.e., the 10,000 open accounts with credit cards usable 
only at Merchant A).
    5. Agreement used for multiple small private label plans. The 
private label exception applies even if the same agreement is used 
for more than one private label credit card plan with fewer than 
10,000 open accounts. For example, a card issuer has 15,000 total 
open private label credit card accounts. Of these, 7,000 accounts 
have credit cards usable only at Merchant A, 5,000 accounts have 
credit cards usable only at Merchant B, and 3,000 accounts have 
credit cards usable only at Merchant C. The card issuer offers to 
the public a single credit card agreement that is offered for all 
three types of accounts and is not offered for any other type of 
account. The card issuer is not required to submit the agreement to 
the Bureau under Sec.  1026.58(c)(1). The agreement is used for 
three different private label credit card plans (i.e., the accounts 
with credit cards usable at Merchant A, the accounts with credit 
cards usable at Merchant B, and the accounts with credit cards 
usable at Merchant C), each of which has fewer than 10,000 open 
accounts, and the card issuer does not offer the agreement for any 
other type of account. The agreement therefore qualifies for the 
private label credit card exception under Sec.  1026.58(c)(6).
    6. Multiple agreements used for one private label credit card 
plan. The private label credit card exception applies even if a card 
issuer offers more than one agreement in connection with a 
particular private label credit card plan. For example, a card 
issuer has 5,000 open private label credit card accounts with credit 
cards usable only at Merchant A. The card issuer offers to the 
public three different agreements each of which may be used in 
connection with private label credit card accounts with credit cards 
usable only at Merchant A. The agreements are not offered for any 
other type of credit card account. The card issuer is not required 
to submit any of the three agreements to the Bureau under Sec.  
1026.58(c)(1) because each of the agreements is used for a private 
label credit card plan which has fewer than 10,000 open accounts and 
none of the three is offered to the public other than for accounts 
under such a plan.

58(c)(8) Form and content of agreements submitted to the Bureau

    1. ``As of'' date clarified. Agreements submitted to the Bureau 
must contain the provisions of the agreement and pricing information 
in effect as of the last business day of the preceding calendar 
quarter. For example, on June 1, a card issuer decides to decrease 
the purchase APR associated with one of the agreements it offers to 
the public. The change in the APR will become effective on August 1. 
If the card issuer submits the agreement to the Bureau on July 31 
(for example, because the agreement has been otherwise amended), the 
agreement submitted should not include the new lower APR because 
that APR was not in effect on June 30, the last business day of the 
preceding calendar quarter.
    2. Pricing agreement addendum. Pricing information must be set 
forth in the separate addendum described in Sec.  
1026.58(c)(8)(ii)(A) even if it is also stated elsewhere in the 
agreement.
    3. Pricing agreement variations do not constitute separate 
agreements. Pricing information that may vary from one cardholder to 
another depending on the cardholder's creditworthiness or state of 
residence or other factors must be disclosed by setting forth all 
the possible variations or by providing a range of possible 
variations. Two agreements that differ only with respect to 
variations in the pricing information do not constitute separate 
agreements for purposes of this section. For example, a card issuer 
offers two types of credit card accounts that differ only with 
respect to the purchase APR. The purchase APR for one type of 
account is 15 percent, while the purchase APR for the other type of 
account is 18 percent. The provisions of the agreement and pricing 
information for the two types of accounts are otherwise identical. 
The card issuer should not submit to the Bureau one agreement with a 
pricing information addendum listing a 15 percent purchase APR and 
another agreement with a pricing information addendum listing an 18 
percent purchase APR. Instead, the card issuer should submit to the 
Bureau one agreement with a pricing information addendum listing 
possible purchase APRs of 15 or 18 percent.
    4. Optional variable terms addendum. Examples of provisions that 
might be included in the variable terms addendum include a clause 
that is required by law to be included in credit card agreements in 
a particular state but not in other states (unless, for example, a 
clause is included in the agreement used for all cardholders under a 
heading such as ``For State X Residents''), the name of the credit 
card plan to which the agreement applies (if this information is 
included in the agreement), or the name of a charitable organization 
to which donations will be made in connection with a particular card 
(if this information is included in the agreement).
    5. Integrated agreement requirement. Card issuers may not 
provide provisions of the agreement or pricing information in the 
form of change-in-terms notices or riders. The only two addenda that 
may be submitted as part of an agreement are the pricing information 
addendum and optional variable terms addendum described in Sec.  
1026.58(c)(8). Changes in provisions or pricing information must be 
integrated into the body of the agreement, pricing information 
addendum, or optional variable terms addendum described in Sec.  
1026.58(c)(8). For example, it would be impermissible for a card 
issuer to submit to the Bureau an agreement in the form of a terms 
and conditions document dated January 1, 2005, four subsequent 
change in terms notices, and 2 addenda showing variations in pricing 
information. Instead, the card issuer must submit a document that 
integrates the changes made by each of the

[[Page 80065]]

change in terms notices into the body of the original terms and 
conditions document and a single addendum displaying variations in 
pricing information.

58(d) Posting of Agreements Offered to the Public

    1. Requirement applies only to agreements submitted to the 
Bureau. Card issuers are only required to post and maintain on their 
publicly available Web site the credit card agreements that the card 
issuer must submit to the Bureau under Sec.  1026.58(c). If, for 
example, a card issuer is not required to submit any agreements to 
the Bureau because the card issuer qualifies for the de minimis 
exception under Sec.  1026.58(c)(5), the card issuer is not required 
to post and maintain any agreements on its Web site under Sec.  
1026.58(d). Similarly, if a card issuer is not required to submit a 
specific agreement to the Bureau, such as an agreement that 
qualifies for the private label exception under Sec.  1026.58(c)(6), 
the card issuer is not required to post and maintain that agreement 
under Sec.  1026.58(d) (either on the card issuer's publicly 
available Web site or on the publicly available Web sites of 
merchants at which private label credit cards can be used). (The 
card issuer in both of these cases is still required to provide each 
individual cardholder with access to his or her specific credit card 
agreement under Sec.  1026.58(e) by posting and maintaining the 
agreement on the card issuer's Web site or by providing a copy of 
the agreement upon the cardholder's request.)
    2. Card issuers that do not otherwise maintain Web sites. Unlike 
Sec.  1026.58(e), Sec.  1026.58(d) does not include a special rule 
for card issuers that do not otherwise maintain a Web site. If a 
card issuer is required to submit one or more agreements to the 
Bureau under Sec.  1026.58(c), that card issuer must post those 
agreements on a publicly available Web site it maintains (or, with 
respect to an agreement for a private label credit card, on the 
publicly available Web site of at least one of the merchants at 
which the card may be used, as provided in Sec.  1026.58(d)(1)). If 
an issuer provides cardholders with access to specific information 
about their individual accounts, such as balance information or 
copies of statements, through a third-party Web site, the issuer is 
considered to maintain that Web site for purposes of Sec.  1026.58. 
Such a third-party Web site is deemed to be maintained by the issuer 
for purposes of Sec.  1026.58(d) even where, for example, an 
unaffiliated entity designs the Web site and owns and maintains the 
information technology infrastructure that supports the Web site, 
cardholders with credit cards from multiple issuers can access 
individual account information through the same Web site, and the 
Web site is not labeled, branded, or otherwise held out to the 
public as belonging to the issuer. Therefore, issuers that provide 
cardholders with access to account-specific information through a 
third-party Web site can comply with Sec.  1026.58(d) by ensuring 
that the agreements the issuer submits to the Bureau are posted on 
the third-party Web site in accordance with Sec.  1026.58(d). (In 
contrast, the Sec.  1026.58(d)(1) rule regarding agreements for 
private label credit cards is not conditioned on cardholders' 
ability to access account-specific information through the 
merchant's Web site.)
    3. Private label credit card plans. i. Section 1026.58(d) 
provides that, with respect to an agreement offered solely for 
accounts under one or more private label credit card plans, a card 
issuer may comply by posting and maintaining the agreement on the 
Web site of at least one of the merchants at which the cards issued 
under each private label credit card plan with 10,000 or more open 
accounts may be used. For example, a card issuer has 100,000 open 
private label credit card accounts. Of these, 75,000 open accounts 
have credit cards usable only at Merchant A and 25,000 open accounts 
have credit cards usable only at Merchant B and Merchant B's 
affiliates, Merchants C and D. The card issuer offers to the public 
a single credit card agreement that is offered for both of these 
types of accounts and is not offered for any other type of account.
    ii. The card issuer is required to submit the agreement to the 
Bureau under Sec.  1026.58(c)(1). (The card issuer has more than 
10,000 open accounts, so the Sec.  1026.58(c)(5) de minimis 
exception does not apply. The agreement is offered solely for two 
different private label credit card plans (i.e., one plan consisting 
of the accounts with credit cards usable at Merchant A and one plan 
consisting of the accounts with credit cards usable at Merchant B 
and its affiliates, Merchants C and D), but both of these plans have 
more than 10,000 open accounts, so the Sec.  1026.58(c)(6) private 
label credit card exception does not apply. Finally, the agreement 
is not offered solely in connection with a product test by the card 
issuer, so the Sec.  1026.58(c)(7) product test exception does not 
apply.)
    iii. Because the card issuer is required to submit the agreement 
to the Bureau under Sec.  1026.58(c)(1), the card issuer is required 
to post and maintain the agreement on the card issuer's publicly 
available Web site under Sec.  1026.58(d). However, because the 
agreement is offered solely for accounts under one or more private 
label credit card plans, the card issuer may comply with Sec.  
1026.58(d) in either of two ways. First, the card issuer may comply 
by posting and maintaining the agreement on the card issuer's own 
publicly available Web site. Alternatively, the card issuer may 
comply by posting and maintaining the agreement on the publicly 
available Web site of Merchant A and the publicly available Web site 
of at least one of Merchants B, C and D. It would not be sufficient 
for the card issuer to post the agreement on Merchant A's Web site 
alone because Sec.  1026.58(d) requires the card issuer to post the 
agreement on the publicly available Web site of ``at least one of 
the merchants at which cards issued under each private label credit 
card plan may be used'' (emphasis added).
    iv. In contrast, assume that a card issuer has 100,000 open 
private label credit card accounts. Of these, 5,000 open accounts 
have credit cards usable only at Merchant A and 95,000 open accounts 
have credit cards usable only at Merchant B and Merchant B's 
affiliates, Merchants C and D. The card issuer offers to the public 
a single credit card agreement that is offered for both of these 
types of accounts and is not offered for any other type of account.
    v. The card issuer is required to submit the agreement to the 
Bureau under Sec.  1026.58(c)(1). (The card issuer has more than 
10,000 open accounts, so the Sec.  1026.58(c)(5) de minimis 
exception does not apply. The agreement is offered solely for two 
different private label credit card plans (i.e., one plan consisting 
of the accounts with credit cards usable at Merchant A and one plan 
consisting of the accounts with credit cards usable at Merchant B 
and its affiliates, Merchants C and D), but one of these plans has 
more than 10,000 open accounts, so the Sec.  1026.58(c)(6) private 
label credit card exception does not apply. Finally, the agreement 
is not offered solely in connection with a product test by the card 
issuer, so the Sec.  1026.58(c)(7) product test exception does not 
apply.)
    vi. Because the card issuer is required to submit the agreement 
to the Bureau under Sec.  1026.58(c)(1), the card issuer is required 
to post and maintain the agreement on the card issuer's publicly 
available Web site under Sec.  1026.58(d). However, because the 
agreement is offered solely for accounts under one or more private 
label credit card plans, the card issuer may comply with Sec.  
1026.58(d) in either of two ways. First, the card issuer may comply 
by posting and maintaining the agreement on the card issuer's own 
publicly available Web site. Alternatively, the card issuer may 
comply by posting and maintaining the agreement on the publicly 
available Web site of at least one of Merchants B, C and D. The card 
issuer is not required to post and maintain the agreement on the 
publicly available Web site of Merchant A because the card issuer's 
private label credit card plan consisting of accounts with cards 
usable only at Merchant A has fewer than 10,000 open accounts.

58(e) Agreements for All Open Accounts

    1. Requirement applies to all open accounts. The requirement to 
provide access to credit card agreements under Sec.  1026.58(e) 
applies to all open credit card accounts, regardless of whether such 
agreements are required to be submitted to the Bureau pursuant to 
Sec.  1026.58(c) (or posted on the card issuer's Web site pursuant 
to Sec.  1026.58(d)). For example, a card issuer that is not 
required to submit agreements to the Bureau because it qualifies for 
the de minimis exception under Sec.  1026.58(c)(5)) would still be 
required to provide cardholders with access to their specific 
agreements under Sec.  1026.58(e). Similarly, an agreement that is 
no longer offered to the public would not be required to be 
submitted to the Bureau under Sec.  1026.58(c), but would still need 
to be provided to the cardholder to whom it applies under Sec.  
1026.58(e).
    2. Readily available telephone line. Section 1026.58(e) provides 
that card issuers that provide copies of cardholder agreements upon 
request must provide the cardholder with the ability to request a 
copy of their agreement by calling a readily available telephone 
line. To satisfy the readily available standard, the financial 
institution must provide enough telephone lines so that consumers 
get a reasonably prompt response.

[[Page 80066]]

The institution need only provide telephone service during normal 
business hours. Within its primary service area, an institution must 
provide a local or toll-free telephone number. It need not provide a 
toll-free number or accept collect long-distance calls from outside 
the area where it normally conducts business.
    3. Issuers without interactive Web sites. Section 1026.58(e)(2) 
provides that a card issuer that does not maintain a Web site from 
which cardholders can access specific information about their 
individual accounts is not required to provide a cardholder with the 
ability to request a copy of the agreement by using the card 
issuer's Web site. A card issuer without a Web site of any kind 
could comply by disclosing the telephone number on each periodic 
statement; a card issuer with a non-interactive Web site could 
comply in the same way, or alternatively could comply by displaying 
the telephone number on the card issuer's Web site. An issuer is 
considered to maintain an interactive Web site for purposes of the 
Sec.  1026.58(e)(2) special rule if the issuer provide cardholders 
with access to specific information about their individual accounts, 
such as balance information or copies of statements, through a 
third-party interactive Web site. Such a Web site is deemed to be 
maintained by the issuer for purposes of Sec.  1026.58(e)(2) even 
where, for example, an unaffiliated entity designs the Web site and 
owns and maintains the information technology infrastructure that 
supports the Web site, cardholders with credit cards from multiple 
issuers can access individual account information through the same 
Web site, and the Web site is not labeled, branded, or otherwise 
held out to the public as belonging to the issuer. An issuer that 
provides cardholders with access to specific information about their 
individual accounts through such a Web site is not permitted to 
comply with the special rule in Sec.  1026.58(e)(2). Instead, such 
an issuer must comply with Sec.  1026.58(e)(1).
    4. Deadline for providing requested agreements clarified. 
Sections 1026.58(e)(1)(ii) and (e)(2) require that credit card 
agreements provided upon request must be sent to the cardholder or 
otherwise made available to the cardholder in electronic or paper 
form no later than 30 days after the cardholder's request is 
received. For example, if a card issuer chooses to respond to a 
cardholder's request by mailing a paper copy of the cardholder's 
agreement, the card issuer must mail the agreement no later than 30 
days after receipt of the cardholder's request. Alternatively, if a 
card issuer chooses to respond to a cardholder's request by posting 
the cardholder's agreement on the card issuer's Web site, the card 
issuer must post the agreement on its Web site no later than 30 days 
after receipt of the cardholder's request. Section 1026.58(e)(3)(v) 
provides that a card issuer may provide cardholder agreements in 
either electronic or paper form regardless of the form of the 
cardholder's request.

Section 1026.59--Reevaluation of Rate Increases

59(a) General Rule

59(a)(1) Evaluation of Increased Rate

    1. Types of rate increases covered. Section 1026.59(a) applies 
both to increases in annual percentage rates imposed on a consumer's 
account based on that consumer's credit risk or other circumstances 
specific to that consumer and to increases in annual percentage 
rates imposed based on factors that are not specific to the 
consumer, such as changes in market conditions or the issuer's cost 
of funds.
    2. Rate increases actually imposed. Under Sec.  1026.59(a), a 
card issuer must review changes in factors only if the increased 
rate is actually imposed on the consumer's account. For example, if 
a card issuer increases the penalty rate for a credit card account 
under an open-end (not home-secured) consumer credit plan and the 
consumer's account has no balances that are currently subject to the 
penalty rate, the card issuer is required to provide a notice 
pursuant to Sec.  1026.9(c) of the change in terms, but the 
requirements of Sec.  1026.59 do not apply. However, if the 
consumer's account later becomes subject to the penalty rate, the 
card issuer is required to provide a notice pursuant to Sec.  
1026.9(g) and the requirements of Sec.  1026.59 begin to apply upon 
imposition of the penalty rate. Similarly, if a card issuer raises 
the cash advance rate applicable to a consumer's account but the 
consumer engages in no cash advance transactions to which that 
increased rate is applied, the card issuer is required to provide a 
notice pursuant to Sec.  1026.9(c) of the change in terms, but the 
requirements of Sec.  1026.59 do not apply. If the consumer 
subsequently engages in a cash advance transaction, the requirements 
of Sec.  1026.59 begin to apply at that time.
    3. Change in type of rate. i. Generally. A change from a 
variable rate to a non-variable rate or from a non-variable rate to 
a variable rate is not a rate increase for purposes of Sec.  
1026.59, if the rate in effect immediately prior to the change in 
type of rate is equal to or greater than the rate in effect 
immediately after the change. For example, a change from a variable 
rate of 15.99% to a non-variable rate of 15.99% is not a rate 
increase for purposes of Sec.  1026.59 at the time of the change. 
See Sec.  1026.55 for limitations on the permissibility of changing 
from a non-variable rate to a variable rate.
    ii. Change from non-variable rate to variable rate. A change 
from a non-variable to a variable rate constitutes a rate increase 
for purposes of Sec.  1026.59 if the variable rate exceeds the non-
variable rate that would have applied if the change in type of rate 
had not occurred. For example, assume a new credit card account 
under an open-end (not home-secured) consumer credit plan is opened 
on January 1 of year 1 and that a non-variable annual percentage 
rate of 12% applies to all transactions on the account. On January 1 
of year 2, upon 45 days' advance notice pursuant to Sec.  
1026.9(c)(2), the rate on all new transactions is changed to a 
variable rate that is currently 12% and is determined by adding a 
margin of 10 percentage points to a publicly-available index not 
under the card issuer's control. The change from the 12% non-
variable rate to the 12% variable rate on January 1 of year 2 is not 
a rate increase for purposes of Sec.  1026.59(a). On April 1 of year 
2, the value of the variable rate increases to 12.5%. The increase 
in the rate from 12% to 12.5% is a rate increase for purposes of 
Sec.  1026.59, and the card issuer must begin periodically 
conducting reviews of the account pursuant to Sec.  1026.59. The 
increase that must be evaluated for purposes of Sec.  1026.59 is the 
increase from a non-variable rate of 12% to a variable rate of 
12.5%.
    iii. Change from variable rate to non-variable rate. A change 
from a variable to a non-variable rate constitutes a rate increase 
for purposes of Sec.  1026.59 if the non-variable rate exceeds the 
variable rate that would have applied if the change in type of rate 
had not occurred. For example, assume a new credit card account 
under an open-end (not home-secured) consumer credit plan is opened 
on January 1 of year 1 and that a variable annual percentage rate 
that is currently 15% and is determined by adding a margin of 10 
percentage points to a publicly-available index not under the card 
issuer's control applies to all transactions on the account. On 
January 1 of year 2, upon 45 days' advance notice pursuant to Sec.  
1026.9(c)(2), the rate on all existing balances and new transactions 
is changed to a non-variable rate that is currently 15%. The change 
from the 15% variable rate to the 15% non-variable rate on January 1 
of year 2 is not a rate increase for purposes of Sec.  1026.59(a). 
On April 1 of year 2, the value of the variable rate that would have 
applied to the account decreases to 12.5%. Accordingly, on April 1 
of year 2, the non-variable rate of 15% exceeds the 12.5% variable 
rate that would have applied but for the change in type of rate. At 
this time, the change to the non-variable rate of 15% constitutes a 
rate increase for purposes of Sec.  1026.59, and the card issuer 
must begin periodically conducting reviews of the account pursuant 
to Sec.  1026.59. The increase that must be evaluated for purposes 
of Sec.  1026.59 is the increase from a variable rate of 12.5% to a 
non-variable rate of 15%.
    4. Rate increases prior to effective date of rule. For increases 
in annual percentage rates made on or after January 1, 2009, and 
prior to August 22, 2010, Sec.  1026.59(a) requires the card issuer 
to review the factors described in Sec.  1026.59(d) and reduce the 
rate, as appropriate, if the rate increase is of a type for which 45 
days' advance notice would currently be required under Sec.  
1026.9(c)(2) or (g). For example, 45 days' notice is not required 
under Sec.  1026.9(c)(2) if the rate increase results from the 
increase in the index by which a properly-disclosed variable rate is 
determined in accordance with Sec.  1026.9(c)(2)(v)(C) or if the 
increase occurs upon expiration of a specified period of time and 
disclosures complying with Sec.  1026.9(c)(2)(v)(B) have been 
provided. The requirements of Sec.  1026.59 do not apply to such 
rate increases.
    5. Amount of rate decrease. i. General. Even in circumstances 
where a rate reduction is required, Sec.  1026.59 does not require 
that a card issuer decrease the rate that applies to

[[Page 80067]]

a credit card account to the rate that was in effect prior to the 
rate increase subject to Sec.  1026.59(a). The amount of the rate 
decrease that is required must be determined based upon the card 
issuer's reasonable policies and procedures under Sec.  1026.59(b) 
for consideration of factors described in Sec.  1026.59(a) and (d). 
For example, assume a consumer's rate on new purchases is increased 
from a variable rate of 15.99% to a variable rate of 23.99% based on 
the consumer's making a required minimum periodic payment five days 
late. The consumer makes all of the payments required on the account 
on time for the six months following the rate increase. Assume that 
the card issuer evaluates the account by reviewing the factors on 
which the increase in an annual percentage rate was originally 
based, in accordance with Sec.  1026.59(d)(1)(i). The card issuer is 
not required to decrease the consumer's rate to the 15.99% that 
applied prior to the rate increase. However, the card issuer's 
policies and procedures for performing the review required by Sec.  
1026.59(a) must be reasonable, as required by Sec.  1026.59(b), and 
must take into account any reduction in the consumer's credit risk 
based upon the consumer's timely payments.
    ii. Change in type of rate. If the rate increase subject to 
Sec.  1026.59 involves a change from a variable rate to a non-
variable rate or from a non-variable rate to a variable rate, Sec.  
1026.59 does not require that the issuer reinstate the same type of 
rate that applied prior to the change. However, the amount of any 
rate decrease that is required must be determined based upon the 
card issuer's reasonable policies and procedures under Sec.  
1026.59(b) for consideration of factors described in Sec.  
1026.59(a) and (d).

59(a)(2) Rate Reductions

59(a)(2)(ii) Applicability of Rate Reduction

    1. Applicability of reduced rate to new transactions. Section 
1026.59(a)(2)(ii) requires, in part, that any reduction in rate 
required pursuant to Sec.  1026.59(a)(1) must apply to new 
transactions that occur after the effective date of the rate 
reduction, if those transactions would otherwise have been subject 
to the increased rate described in Sec.  1026.59(a)(1). A credit 
card account may have multiple types of balances, for example, 
purchases, cash advances, and balance transfers, to which different 
rates apply. For example, assume a new credit card account opened on 
January 1 of year one has a rate applicable to purchases of 15% and 
a rate applicable to cash advances and balance transfers of 20%. 
Effective March 1 of year two, consistent with the limitations in 
Sec.  1026.55 and upon giving notice required by Sec.  1026.9(c)(2), 
the card issuer raises the rate applicable to new purchases to 18% 
based on market conditions. The only transaction in which the 
consumer engages in year two is a $1,000 purchase made on July 1. 
The rate for cash advances and balance transfers remains at 20%. 
Based on a subsequent review required by Sec.  1026.59(a)(1), the 
card issuer determines that the rate on purchases must be reduced to 
16%. Section 1026.59(a)(2)(ii) requires that the 16% rate be applied 
to the $1,000 purchase made on July 1 and to all new purchases. The 
rate for new cash advances and balance transfers may remain at 20%, 
because there was no rate increase applicable to those types of 
transactions and, therefore, the requirements of Sec.  1026.59(a) do 
not apply.

59(c) Timing

    1. In general. The issuer may review all of its accounts subject 
to Sec.  1026.59(a) at the same time once every six months, may 
review each account once each six months on a rolling basis based on 
the date on which the rate was increased for that account, or may 
otherwise review each account not less frequently than once every 
six months.
    2. Example. A card issuer increases the rates applicable to one 
half of its credit card accounts on June 1, 2011. The card issuer 
increases the rates applicable to the other half of its credit card 
accounts on September 1, 2011. The card issuer may review the rate 
increases for all of its credit card accounts on or before December 
1, 2011, and at least every six months thereafter. In the 
alternative, the card issuer may first review the rate increases for 
the accounts that were repriced on June 1, 2011 on or before 
December 1, 2011, and may first review the rate increases for the 
accounts that were repriced on September 1, 2011 on or before March 
1, 2012.
    3. Rate increases prior to effective date of rule. For increases 
in annual percentage rates applicable to a credit card account under 
an open-end (not home-secured) consumer credit plan on or after 
January 1, 2009 and prior to August 22, 2010, Sec.  1026.59(c) 
requires that the first review for such rate increases be conducted 
prior to February 22, 2011.

59(d) Factors

    1. Change in factors. A creditor that complies with Sec.  
1026.59(a) by reviewing the factors it currently considers in 
determining the annual percentage rates applicable to similar new 
credit card accounts may change those factors from time to time. 
When a creditor changes the factors it considers in determining the 
annual percentage rates applicable to similar new credit card 
accounts from time to time, it may comply with Sec.  1026.59(a) by 
reviewing the set of factors it considered immediately prior to the 
change in factors for a brief transition period, or may consider the 
new factors. For example, a creditor changes the factors it uses to 
determine the rates applicable to similar new credit card accounts 
on January 1, 2012. The creditor reviews the rates applicable to its 
existing accounts that have been subject to a rate increase pursuant 
to Sec.  1026.59(a) on January 25, 2012. The creditor complies with 
Sec.  1026.59(a) by reviewing, at its option, either the factors 
that it considered on December 31, 2011 when determining the rates 
applicable to similar new credit card accounts or the factors that 
it considers as of January 25, 2012. For purposes of compliance with 
Sec.  1026.59(d), a transition period of 60 days from the change of 
factors constitutes a brief transition period.
    2. Comparison of existing account to factors used for similar 
new accounts. Under Sec.  1026.59(a), if a creditor evaluates an 
existing account using the same factors that it considers in 
determining the rates applicable to similar new accounts, the review 
of factors need not result in existing accounts being subject to 
exactly the same rates and rate structure as a creditor imposes on 
similar new accounts. For example, a creditor may offer variable 
rates on similar new accounts that are computed by adding a margin 
that depends on various factors to the value of the LIBOR index. The 
account that the creditor is required to review pursuant to Sec.  
1026.59(a) may have variable rates that were determined by adding a 
different margin, depending on different factors, to a published 
prime rate. In performing the review required by Sec.  1026.59(a), 
the creditor may review the factors it uses to determine the rates 
applicable to similar new accounts. If a rate reduction is required, 
however, the creditor need not base the variable rate for the 
existing account on the LIBOR index but may continue to use the 
published prime rate. Section 1026.59(a) requires, however, that the 
rate on the existing account after the reduction, as determined by 
adding the published prime rate and margin, be comparable to the 
rate, as determined by adding the margin and LIBOR, charged on a new 
account for which the factors are comparable.
    3. Similar new credit card accounts. A card issuer complying 
with Sec.  1026.59(d)(1)(ii) is required to consider the factors 
that the card issuer currently considers when determining the annual 
percentage rates applicable to similar new credit card accounts 
under an open-end (not home-secured) consumer credit plan. For 
example, a card issuer may review different factors in determining 
the annual percentage rate that applies to credit card plans for 
which the consumer pays an annual fee and receives rewards points 
than it reviews in determining the rates for credit card plans with 
no annual fee and no rewards points. Similarly, a card issuer may 
review different factors in determining the annual percentage rate 
that applies to private label credit cards than it reviews in 
determining the rates applicable to credit cards that can be used at 
a wider variety of merchants. In addition, a card issuer may review 
different factors in determining the annual percentage rate that 
applies to private label credit cards usable only at Merchant A than 
it may review for private label credit cards usable only at Merchant 
B. However, Sec.  1026.59(d)(1)(ii) requires a card issuer to review 
the factors it considers when determining the rates for new credit 
card accounts with similar features that are offered for similar 
purposes.
    4. No similar new credit card accounts. In some circumstances, a 
card issuer that complies with Sec.  1026.59(a) by reviewing the 
factors that it currently considers in determining the annual 
percentage rates applicable to similar new accounts may not be able 
to identify a class of new accounts that are similar to the existing 
accounts on which a rate increase has been imposed. For example, 
consumers may have existing credit card accounts under an open-end 
(not home-secured) consumer credit plan but the card issuer may no 
longer offer a product to new consumers with similar 
characteristics, such as the availability of rewards, size of credit

[[Page 80068]]

line, or other features. Similarly, some consumers' accounts may 
have been closed and therefore cannot be used for new transactions, 
while all new accounts can be used for new transactions. In those 
circumstances, Sec.  1026.59 requires that the card issuer 
nonetheless perform a review of the rate increase on the existing 
customers' accounts. A card issuer does not comply with Sec.  
1026.59 by maintaining an increased rate without performing such an 
evaluation. In such circumstances, Sec.  1026.59(d)(1)(ii) requires 
that the card issuer compare the existing accounts to the most 
closely comparable new accounts that it offers.
    5. Consideration of consumer's conduct on existing account. A 
card issuer that complies with Sec.  1026.59(a) by reviewing the 
factors that it currently considers in determining the annual 
percentage rates applicable to similar new accounts may consider the 
consumer's payment or other account behavior on the existing account 
only to the same extent and in the same manner that the issuer 
considers such information when one of its current cardholders 
applies for a new account with the card issuer. For example, a card 
issuer might obtain consumer reports for all of its applicants. The 
consumer reports contain certain information regarding the 
applicant's past performance on existing credit card accounts. 
However, the card issuer may have additional information about an 
existing cardholder's payment history or account usage that does not 
appear in the consumer report and that, accordingly, it would not 
generally have for all new applicants. For example, a consumer may 
have made a payment that is five days late on his or her account 
with the card issuer, but this information does not appear on the 
consumer report. The card issuer may consider this additional 
information in performing its review under Sec.  1026.59(a), but 
only to the extent and in the manner that it considers such 
information if a current cardholder applies for a new account with 
the issuer.
    6. Multiple rate increases between January 1, 2009 and February 
21, 2010. i. General. Section 1026.59(d)(2) applies if an issuer 
increased the rate applicable to a credit card account under an 
open-end (not home-secured) consumer credit plan between January 1, 
2009 and February 21, 2010, and the increase was not based solely 
upon factors specific to the consumer. In some cases, a credit card 
account may have been subject to multiple rate increases during the 
period from January 1, 2009 to February 21, 2010. Some such rate 
increases may have been based solely upon factors specific to the 
consumer, while others may have been based on factors not specific 
to the consumer, such as the issuer's cost of funds or market 
conditions. In such circumstances, when conducting the first two 
reviews required under Sec.  1026.59, the card issuer may separately 
review: (i) Rate increases imposed based on factors not specific to 
the consumer, using the factors described in Sec.  1026.59(d)(1)(ii) 
(as required by Sec.  1026.59(d)(2)); and (ii) rate increases 
imposed based on consumer-specific factors, using the factors 
described in Sec.  1026.59(d)(1)(i). If the review of factors 
described in Sec.  1026.59(d)(1)(i) indicates that it is appropriate 
to continue to apply a penalty or other increased rate to the 
account as a result of the consumer's payment history or other 
factors specific to the consumer, Sec.  1026.59 permits the card 
issuer to continue to impose the penalty or other increased rate, 
even if the review of the factors described in Sec.  
1026.59(d)(1)(ii) would otherwise require a rate decrease.
    ii. Example. Assume a credit card account was subject to a rate 
of 15% on all transactions as of January 1, 2009. On May 1, 2009, 
the issuer increased the rate on existing balances and new 
transactions to 18%, based upon market conditions or other factors 
not specific to the consumer or the consumer's account. 
Subsequently, on September 1, 2009, based on a payment that was 
received five days after the due date, the issuer increased the 
applicable rate on existing balances and new transactions from 18% 
to a penalty rate of 25%. When conducting the first review required 
under Sec.  1026.59, the card issuer reviews the rate increase from 
15% to 18% using the factors described in Sec.  1026.59(d)(1)(ii) 
(as required by Sec.  1026.59(d)(2)), and separately but 
concurrently reviews the rate increase from 18% to 25% using the 
factors described in paragraph Sec.  1026.59(d)(1)(i). The review of 
the rate increase from 15% to 18% based upon the factors described 
in Sec.  1026.59(d)(1)(ii) indicates that a similarly situated new 
consumer would receive a rate of 17%. The review of the rate 
increase from 18% to 25% based upon the factors described in Sec.  
1026.59(d)(1)(i) indicates that it is appropriate to continue to 
apply the 25% penalty rate based upon the consumer's late payment. 
Section 1026.59 permits the rate on the account to remain at 25%.

59(f) Termination of Obligation to Review Factors

    1. Revocation of temporary rates. i. In general. If an annual 
percentage rate is increased due to revocation of a temporary rate, 
Sec.  1026.59(a) requires that the card issuer periodically review 
the increased rate. In contrast, if the rate increase results from 
the expiration of a temporary rate previously disclosed in 
accordance with Sec.  1026.9(c)(2)(v)(B), the review requirements in 
Sec.  1026.59(a) do not apply. If a temporary rate is revoked such 
that the requirements of Sec.  1026.59(a) apply, Sec.  1026.59(f) 
permits an issuer to terminate the review of the rate increase if 
and when the applicable rate is the same as the rate that would have 
applied if the increase had not occurred.
    ii. Examples. Assume that on January 1, 2011, a consumer opens a 
new credit card account under an open-end (not home-secured) 
consumer credit plan. The annual percentage rate applicable to 
purchases is 15%. The card issuer offers the consumer a 10% rate on 
purchases made between February 1, 2012 and August 1, 2013 and 
discloses pursuant to Sec.  1026.9(c)(2)(v)(B) that on August 1, 
2013 the rate on purchases will revert to the original 15% rate. The 
consumer makes a payment that is five days late in July 2012.
    A. Upon providing 45 days' advance notice and to the extent 
permitted under Sec.  1026.55, the card issuer increases the rate 
applicable to new purchases to 15%, effective on September 1, 2012. 
The card issuer must review that rate increase under Sec.  
1026.59(a) at least once each six months during the period from 
September 1, 2012 to August 1, 2013, unless and until the card 
issuer reduces the rate to 10%. The card issuer performs reviews of 
the rate increase on January 1, 2013 and July 1, 2013. Based on 
those reviews, the rate applicable to purchases remains at 15%. 
Beginning on August 1, 2013, the card issuer is not required to 
continue periodically reviewing the rate increase, because if the 
temporary rate had expired in accordance with its previously 
disclosed terms, the 15% rate would have applied to purchase 
balances as of August 1, 2013 even if the rate increase had not 
occurred on September 1, 2012.
    B. Same facts as above except that the review conducted on July 
1, 2013 indicates that a reduction to the original temporary rate of 
10% is appropriate. Section 1026.59(a)(2)(i) requires that the rate 
be reduced no later than 45 days after completion of the review, or 
no later than August 15, 2013. Because the temporary rate would have 
expired prior to the date on which the rate decrease is required to 
take effect, the card issuer may, at its option, reduce the rate to 
10% for any portion of the period from July 1, 2013, to August 1, 
2013, or may continue to impose the 15% rate for that entire period. 
The card issuer is not required to conduct further reviews of the 
15% rate on purchases.
    C. Same facts as above except that on September 1, 2012 the card 
issuer increases the rate applicable to new purchases to the penalty 
rate on the consumer's account, which is 25%. The card issuer 
conducts reviews of the increased rate in accordance with Sec.  
1026.59 on January 1, 2013 and July 1, 2013. Based on those reviews, 
the rate applicable to purchases remains at 25%. The card issuer's 
obligation to review the rate increase continues to apply after 
August 1, 2013, because the 25% penalty rate exceeds the 15% rate 
that would have applied if the temporary rate expired in accordance 
with its previously disclosed terms. The card issuer's obligation to 
review the rate terminates if and when the annual percentage rate 
applicable to purchases is reduced to the 15% rate.
    2. Example--relationship to Sec.  1026.59(a). Assume that on 
January 1, 2011, a consumer opens a new credit card account under an 
open-end (not home-secured) consumer credit plan. The annual 
percentage rate applicable to purchases is 15%. Upon providing 45 
days' advance notice and to the extent permitted under Sec.  
1026.55, the card issuer increases the rate applicable to new 
purchases to 18%, effective on September 1, 2012. The card issuer 
conducts reviews of the increased rate in accordance with Sec.  
1026.59 on January 1, 2013 and July 1, 2013, based on the factors 
described in Sec.  1026.59(d)(1)(ii). Based on the January 1, 2013 
review, the rate applicable to purchases remains at 18%. In the 
review conducted on July 1, 2013, the card issuer determines that, 
based on the relevant factors, the rate it would offer on a 
comparable new account would be 14%. Consistent with Sec.  
1026.59(f), Sec.  1026.59(a) requires that the card issuer reduce 
the rate on the existing account to the 15% rate that

[[Page 80069]]

was in effect prior to the September 1, 2012 rate increase.

59(g) Acquired Accounts

59(g)(1) General

    1. Relationship to Sec.  1026.59(d)(2) for rate increases 
imposed between January 1, 2009 and February 21, 2010. Section 
1026.59(d)(2) applies to acquired accounts. Accordingly, if a card 
issuer acquires accounts on which a rate increase was imposed 
between January 1, 2009 and February 21, 2010 that was not based 
solely upon consumer-specific factors, that acquiring card issuer 
must consider the factors that it currently considers when 
determining the annual percentage rates applicable to similar new 
credit card accounts, if it conducts either or both of the first two 
reviews of such accounts that are required after August 22, 2010 
under Sec.  1026.59(a).

59(g)(2) Review of Acquired Portfolio

    1. Example--general. A card issuer acquires a portfolio of 
accounts that currently are subject to annual percentage rates of 
12%, 15%, and 18%. Not later than six months after the acquisition 
of such accounts, the card issuer reviews all of these accounts in 
accordance with the factors that it currently uses in determining 
the rates applicable to similar new credit card accounts. As a 
result of that review, the card issuer decreases the rate on the 
accounts that are currently subject to a 12% annual percentage rate 
to 10%, leaves the rate applicable to the accounts currently subject 
to a 15% annual percentage rate at 15%, and increases the rate 
applicable to the accounts currently subject to a rate of 18% to 
20%. Section 1026.59(g)(2) requires the card issuer to review, no 
less frequently than once every six months, the accounts for which 
the rate has been increased to 20%. The card issuer is not required 
to review the accounts subject to 10% and 15% rates pursuant to 
Sec.  1026.59(a), unless and until the card issuer makes a 
subsequent rate increase applicable to those accounts.
    2. Example--penalty rates. A card issuer acquires a portfolio of 
accounts that currently are subject to standard annual percentage 
rates of 12% and 15%. In addition, several acquired accounts are 
subject to a penalty rate of 24%. Not later than six months after 
the acquisition of such accounts, the card issuer reviews all of 
these accounts in accordance with the factors that it currently uses 
in determining the rates applicable to similar new credit card 
accounts. As a result of that review, the card issuer leaves the 
standard rates applicable to the accounts at 12% and 15%, 
respectively. The card issuer decreases the rate applicable to the 
accounts currently at 24% to its penalty rate of 23%. Section 
1026.59(g)(2) requires the card issuer to review, no less frequently 
than once every six months, the accounts that are subject to a 
penalty rate of 23%. The card issuer is not required to review the 
accounts subject to 12% and 15% rates pursuant to Sec.  1026.59(a), 
unless and until the card issuer makes a subsequent rate increase 
applicable to those accounts.

Section 1026.60--Credit and Charge Card Applications and 
Solicitations

    1. General. Section 1026.60 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.  1026.60(a)(5) and (e)(2) for exceptions; see Sec.  
1026.60(a)(1) and accompanying commentary for the definition of 
solicitation; see also Sec.  1026.2(a)(15) and accompanying 
commentary for the definition of charge card.)
    2. Substitution of account-opening summary table for the 
disclosures required by Sec.  1026.60. In complying with Sec.  
1026.60(c), (e)(1) or (f), a card issuer may provide the account-
opening summary table described in Sec.  1026.6(b)(1) in lieu of the 
disclosures required by Sec.  1026.60, if the issuer provides the 
disclosures required by Sec.  1026.6 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.  1026.60 
disclosures.

60(a) General Rules

60(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.

60(a)(2) Form of Disclosures; Tabular Format

    1. Location of table. i. General. Except for disclosures given 
electronically, disclosures in Sec.  1026.60(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 (whatever method is used, a card issuer need not 
confirm that the consumer has read the disclosures):
    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.
    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.  1026.60(b), (d), 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.  1026.60(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.  1026.60(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 1026.60(a)(2)(iv) provides 
that any maximum limits on fee amounts must be disclosed in bold 
text. For example, assume that, consistent with Sec.  
1026.52(b)(1)(ii), a card issuer's late payment fee will not exceed 
$35. The maximum limit of $35 for the late payment fee must be 
highlighted in bold. Similarly, 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 be highlighted 
in bold.
    iii. Periodic fees. Section 1026.60(a)(2)(iv) provides that any 
periodic fee disclosed

[[Page 80070]]

pursuant to Sec.  1026.60(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 online 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 1026.60(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 1026; but see Sec.  1026.5(a)(2) for 
terminology requirements applicable to Sec.  1026.60 disclosures.

60(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.

60(a)(5) Exceptions

    1. Noncoverage of consumer-initiated requests. Applications 
provided to a consumer upon request are not covered by Sec.  
1026.60, 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.  1026.60. Similarly, if the card 
issuer invites consumers to call and make an oral application on the 
telephone, Sec.  1026.60 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.  1026.60, specifically Sec.  
1026.60(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.  1026.60, specifically Sec.  1026.60(f).

60(b) Required Disclosures

    1. Tabular format. Provisions in Sec.  1026.60(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.  1026.60(b) disclosures given pursuant to Sec.  1026.60(c), 
(d)(2), (e)(1) and (f). The tabular format does not apply to oral 
disclosures given pursuant to Sec.  1026.60(d)(1). (See Sec.  
1026.60(a)(2).)
    2. Accuracy. Rules concerning accuracy of the disclosures 
required by Sec.  1026.60(b), including variable rate disclosures, 
are stated in Sec.  1026.60(c)(2), (d)(3), and (e)(4), as 
applicable.

60(b)(1) Annual Percentage Rate

    1. Variable-rate accounts--definition. For purposes of Sec.  
1026.60(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.  1026.6(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.  1026.16(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.  1026.9(c) and the 
limitations in Sec.  1026.55, 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.  
1026.9(c), the 12.99% is not an introductory rate.
    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.  
1026.9(c) and the limitations in Sec.  1026.55 (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)(v)-3 and 9(c)(2)(v)-4 
for guidance on the notice requirements under Sec.  1026.9(c).
    5. Increased penalty rates. i. In general. For rates that are 
not introductory rates or employee preferential 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 60 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

[[Page 80071]]

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 to any 
balances indefinitely, to the extent permitted by Sec. Sec.  
1026.55(b)(4) and 1026.59, the issuer should disclose that the 
penalty rate may apply indefinitely. The card issuer may not 
disclose in the table any limitations imposed by Sec. Sec.  
1026.55(b)(4) and 1026.59 on the duration of increased rates. For 
example, if the issuer generally provides that the increased rate 
will apply until the consumer makes twelve timely consecutive 
required minimum periodic payments, except to the extent that 
Sec. Sec.  1026.55(b)(4) and 1026.59 apply, the issuer should 
disclose that the penalty rate will apply until the consumer makes 
twelve consecutive timely minimum payments. (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.  
1026.60(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 required to 
disclose directly beneath the table the circumstances under which an 
introductory rate, as that term is defined in Sec.  
1026.16(g)(2)(ii), may be revoked, and the rate that will apply 
after the revocation. 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.  1026.60(c)(2) or (e)(4). 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 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 60 days late, the issuer should describe this circumstance 
directly beneath 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.  1026.60(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.  1026.60(b)(1)(iv)(B) if the issuer 
uses the format shown in Sample G-10(C) to disclose this 
information.
    iii. Introductory rates--limitations on revocation. Issuers that 
are disclosing an introductory rate are prohibited by Sec.  1026.55 
from increasing or revoking the introductory rate before it expires 
unless the consumer fails to make a required minimum periodic 
payment within 60 days after the due date for the payment. In making 
the required disclosure pursuant to Sec.  1026.60(b)(1)(iv)(B), 
issuers should describe this circumstance directly beneath the table 
as ``make a late payment.''
    iv. Employee preferential rates. An issuer is required to 
disclose directly beneath the table the circumstances under which an 
employee preferential rate may be revoked, and the rate that will 
apply after the revocation. In describing the rate that will apply 
after revocation of the employee preferential rate, if the rate that 
will apply after revocation of the employee preferential 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 employee preferential 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 employee 
preferential rate. The description of the circumstances in which an 
employee preferential rate could be revoked should be brief. For 
example, if an issuer may increase an employee preferential rate 
based upon termination of the employee's employment relationship 
with the issuer or a third party, issuers may describe this 
circumstance as ``if your employment with [issuer or third party] 
ends.''
    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.  1026.60(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 1026.60(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.  1026.60(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.  
1026.60(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.  
1026.60(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

[[Page 80072]]

percentage points to the purchase rate. (See Sec.  1026.60(b)(1)(i) 
and comment 60(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.  1026.14(b). 
Periodic rates shall not be disclosed in the table.
    9. Deferred interest or similar transactions. An issuer offering 
a deferred interest or similar plan, such as a promotional program 
that provides that a consumer will not be obligated to pay interest 
that accrues on a balance if that balance is paid in full prior to 
the expiration of a specified period of time, may not disclose a 0% 
rate as the rate applicable to deferred interest or similar 
transactions if there are any circumstances under which the consumer 
will be obligated for interest on such transactions for the deferred 
interest or similar period.

60(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.  1026.60(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.  1026.60(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.  1026.4(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 disclosed 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 in accordance with the 
requirements of Sec. Sec.  1026.9(c)(2)(v)(B) and 1026.55(b)(1).
    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.)

60(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.  
1026.60(b)(3), the Bureau will publish adjustments to the $1.00 
threshold amount, as appropriate.

60(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.  1026.9(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 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.

60(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, however, may not disclose under Sec.  1026.60(b)(5) the 
limitations on the imposition of finance charges as a result of a 
loss of a grace period in Sec.  1026.54, or the impact of payment 
allocation on whether interest is charged on purchases as a result 
of a loss of a grace period. Some issuers may offer a grace period 
on all purchases under which interest will not be charged on 
purchases if the consumer pays the outstanding balance shown on a 
periodic statement in full by the due date shown on that statement 
for one or more billing cycles. In these circumstances, Sec.  
1026.60(b)(5) requires that the issuer disclose the grace period and 
the conditions for its applicability using the following language, 
or substantially similar language, as applicable: ``Your due date is 
[at least] ---- days after the close of each billing cycle. We will 
not charge you any interest on purchases if you pay your entire 
balance by the due date each month.'' However, other issuers may 
offer a grace period on all purchases under which interest may be 
charged on purchases even if the consumer pays the outstanding 
balance shown on a periodic statement in full by the due date shown 
on that statement each billing cycle. In these circumstances, Sec.  
1026.60(b)(5) requires the issuer to amend the above disclosure 
language to describe accurately the conditions on the applicability 
of the grace period.
    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 
60(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.

60(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 Sec.  
1026.60(g), 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 Sec.  
1026.60(g), 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.  1026.60(g). The explanation need not be as detailed 
as that required for the disclosures under Sec.  1026.6(b)(4)(i)(D).
    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 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. The card 
issuer must not assume the existence of a purchase balance, however, 
in making other disclosures under Sec.  1026.60(b).

60(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.''

60(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.  1026.60(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.

[[Page 80073]]

(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.  1026.60(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.

60(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.  
1026.4(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.)

60(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.)

60(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.  1026.60(b)(13).

60(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.  1026.60(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.  1026.60(b)(14) clearly and 
conspicuously.

60(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 Bureau and 
a statement that consumers may obtain on the Web site information 
about shopping for and using credit card accounts.

60(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.  1026.60(e), rather than the direct mail 
requirements of Sec.  1026.60(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.  1026.60(c) even when 
the form is used as a take-one--that is, by presenting the required 
Sec.  1026.60 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.  1026.60(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.  1026.60(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.)

60(d) Telephone Applications and Solicitations

    1. Coverage. i. This paragraph applies if:
    A. A telephone conversation between a card issuer and consumer 
may result in the issuance of a card as a consequence of an issuer-
initiated offer to open an account for which the issuer does not 
require any application (that is, a prescreened telephone 
solicitation).
    B. The card issuer initiates the contact and at the same time 
takes application information over the telephone.
    ii. This paragraph does not apply to:
    A. Telephone applications initiated by the consumer.
    B. Situations where no card will be issued--because, for 
example, the consumer indicates that he or she does not want the 
card, or the card issuer decides either during the telephone 
conversation or later not to issue the card.
    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.  1026.5(b)(1)(iv). If an issuer substitutes 
the account-opening summary table described in Sec.  1026.6(b)(1) in 
lieu of the disclosures specified in Sec.  1026.60(d)(2)(ii), the 
disclosure specified in Sec.  1026.60(d)(2)(ii)(B) must appear in 
the table, if the issuer is required to do so pursuant to Sec.  
1026.6(b)(2)(xiii). Otherwise, the disclosure specified in Sec.  
1026.60(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.  1026.6(b)(1) in lieu of the disclosures 
specified in Sec.  1026.60(d)(2)(ii).

60(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.  1026.60(f), not Sec.  1026.60(e). (See Sec.  
1026.60(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.  1026.60(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.

60(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.  
1026.60(e)(1)(ii) and (e)(1)(iii) may appear either in or outside 
the table containing the required credit disclosures.

60(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.  1026.60(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.

[[Page 80074]]

60(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.  1026.60(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.  1026.60(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.  1026.60(e)(1). Information provided in 
writing need not be in a tabular format.

60(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.

Appendix A--Effect on State Laws

    1. Who may make requests. Appendix A sets forth the procedures 
for preemption determinations. As discussed in Sec.  1026.28, which 
contains the standards for preemption, a request for a determination 
of whether a state law is inconsistent with the requirements of 
chapters 1, 2, or 3 may be made by creditors, states, or any 
interested party. However, only states may request and receive 
determinations in connection with the fair credit billing provisions 
of chapter 4.

Appendix B--State Exemptions

    1. General. Appendix B sets forth the procedures for exemption 
applications. The exemption standards are found in Sec.  1026.29 and 
are discussed in the commentary to that section.

Appendix C--Issuance of Official Interpretations

    1. General. This commentary is the vehicle for providing 
official interpretations. Individual interpretations generally will 
not be issued separately from the commentary.

Appendix D--Multiple-Advance Construction Loans

    1. General rule. Appendix D provides a special procedure that 
creditors may use, at their option, to estimate and disclose the 
terms of multiple-advance construction loans when the amounts or 
timing of advances is unknown at consummation of the transaction. 
This appendix reflects the approach taken in Sec.  
1026.17(c)(6)(ii), which permits creditors to provide separate or 
combined disclosures for the construction period and for the 
permanent financing, if any; i.e., the construction phase and the 
permanent phase may be treated as one transaction or more than one 
transaction. Appendix D may also be used in multiple-advance 
transactions other than construction loans, when the amounts or 
timing of advances is unknown at consummation.
    2. Variable-rate multiple-advance loans. The hypothetical 
disclosure required in variable-rate transactions by Sec.  
1026.18(f)(1)(iv) is not required for multiple-advance loans 
disclosed pursuant to Appendix D, part I.
    3. Calculation of the total of payments. When disclosures are 
made pursuant to Appendix D, the total of payments may reflect 
either the sum of the payments or the sum of the amount financed and 
the finance charge.
    4. Annual percentage rate. Appendix D does not require the use 
of Volume I of the Bureau's Annual Percentage Rate Tables for 
calculation of the annual percentage rate. Creditors utilizing 
Appendix D in making calculations and disclosures may use other 
computation tools to determine the estimated annual percentage rate, 
based on the finance charge and payment schedule obtained by use of 
the appendix.
    5. Interest reserves. In a multiple-advance construction loan, a 
creditor may establish an ``interest reserve'' to ensure that 
interest is paid as it accrues by designating a portion of the loan 
to be used for paying the interest that accrues on the loan. An 
interest reserve is not treated as a prepaid finance charge, whether 
the interest reserve is the same as or different from the estimated 
interest figure calculated under Appendix D.
    i. If a creditor permits a consumer to make interest payments as 
they become due, the interest reserve should be disregarded in the 
disclosures and calculations under Appendix D.
    ii. If a creditor requires the establishment of an interest 
reserve and automatically deducts interest payments from the reserve 
amount rather than allow the consumer to make interest payments as 
they become due, the fact that interest will accrue on those 
interest payments as well as the other loan proceeds must be 
reflected in the calculations and disclosures. To reflect the 
effects of such compounding, a creditor should first calculate 
interest on the commitment amount (exclusive of the interest 
reserve) and then add the figure obtained by assuming that one-half 
of that interest is outstanding at the contract interest rate for 
the entire construction period. For example, using the example shown 
under paragraph A, part I of Appendix D, the estimated interest 
would be $1,117.68 ($1093.75 plus an additional $23.93 calculated by 
assuming half of $1093.75 is outstanding at the contract interest 
rate for the entire construction period), and the estimated annual 
percentage rate would be 21.18%.
    6. Relation to Sec.  1026.18(s). A creditor must disclose an 
interest rate and payment summary table for transactions secured by 
real property or a dwelling, pursuant to Sec.  1026.18(s), instead 
of the general payment schedule required by Sec.  1026.18(g). 
Accordingly, home construction loans that are secured by real 
property or a dwelling are subject to Sec.  1026.18(s) and not Sec.  
1026.18(g). Under Sec.  1026.176(c)(6)(ii), when a multiple-advance 
construction loan may be permanently financed by the same creditor, 
the construction phase and the permanent phase may be treated as 
either one transaction or more than one transaction.
    i. If a creditor uses Appendix D and elects pursuant to Sec.  
1026.17(c)(6)(ii) to disclose the construction and permanent phases 
as separate transactions, the construction phase must be disclosed 
according to the rules in Sec.  1026.18(s). Under Sec.  1026.18(s), 
the creditor must disclose the applicable interest rates and 
corresponding periodic payments during the construction phase in an 
interest rate and payment summary table. The provision in Appendix 
D, Part I.A.3, which allows the creditor to omit the number and 
amounts of any interest payments ``in disclosing the payment 
schedule under Sec.  1026.18(g)'' does not apply because the 
transaction is governed by Sec.  1026.18(s) rather than Sec.  
1026.18(g). Also, because the construction phase is being disclosed 
as a separate transaction and its terms do not repay all principal, 
the creditor must disclose a balloon payment, pursuant to Sec.  
1026.18(s)(5).
    ii. On the other hand, if the creditor elects to disclose the 
construction and permanent phases as a single transaction, the 
construction phase must be disclosed pursuant to Appendix D, Part 
II.C, which provides that the creditor shall disclose the repayment 
schedule without reflecting the number or amounts of payments of 
interest only that are made during the construction phase. Appendix 
D also provides, however,

[[Page 80075]]

that creditors must disclose (outside of the table) the fact that 
interest payments must be made and the timing of such payments. The 
rate and payment summary table disclosed under Sec.  1026.18(s) must 
reflect only the permanent phase of the transaction. Therefore, in 
determining the rates and payments that must be disclosed in the 
columns of the table, creditors should apply the requirements of 
Sec.  1026.18(s) to the permanent phase only. For example, under 
Sec.  1026.18(s)(2)(i)(A) or Sec.  1026.18(s)(2)(i)(B)(1), as 
applicable, the creditor should disclose the interest rate 
corresponding to the first installment due under the permanent phase 
and not any rate applicable during the construction phase.

Appendix F--Optional Annual Percentage Rate Computations for Creditors 
Offering Open-End Credit Plans Secured by a Consumer's Dwelling

    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 H-18, H-19, H-20, H-21, H-22, H-23, 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.  1026.7(b)(2)), G-18(B)-(C), G-19, G-20, 
and G-21, or to the model clauses in H-4(E), H-4(F), H-4(G), and H-
4(H). Creditors may modify the heading of the second column shown in 
Model Clause H-4(H) to read ``first adjustment'' or ``first 
increase,'' as applicable, pursuant to Sec.  1026.18(s)(2)(i)(C). 
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 part does not authorize 
creditors to characterize debt-cancellation fees as insurance 
premiums for purposes of this part. 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.

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.  1026.6 and the periodic 
disclosures under Sec.  1026.7. As is clear from the models given, 
``shorthand'' descriptions of the balance computation methods are 
not sufficient, except where Sec.  1026.7(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.  1026.7(a)(5) and (b)(5).) For open-end plans 
subject to the requirements of Sec.  1026.40, 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.  1026.40, 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.  1026.40, 
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.  1026.40, 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 are not subject to the requirements of 
Sec.  1026.40, 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.
    4. Models G-5 through G-9. These models set out notices of the 
right to rescind that would be used at different times in an open-
end plan. The last paragraph of each of the rescission model forms 
contains a blank for the date by which the consumer's notice of 
cancellation must be sent or delivered. A parenthetical is included 
to address the situation in which the consumer's right to rescind 
the transaction exists beyond 3 business days following the date of 
the transaction, for example, when the notice or material 
disclosures are delivered late or when the date of the transaction 
in paragraph 1 of the notice is an estimate. The language of the 
parenthetical is not optional. See the commentary to Sec.  
1026.2(a)(25) regarding the specificity of the security interest 
disclosure for model form G-7.
    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.  1026.60 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

[[Page 80076]]

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.  1026.6(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.  1026.60(b)(5) and 
1026.6(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.  1026.60 for applications and 
solicitations for credit cards other than charge cards, and the 
disclosures required under Sec.  1026.6(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.  
1026.60(b)(3) and 1026.6(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.  
1026.60(b)(2) or Sec.  1026.6(b)(2)(ii). If the only fee for 
issuance or availability of credit disclosed under Sec.  
1026.60(b)(2) or Sec.  1026.6(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.  
1026.60(b)(2) or Sec.  1026.6(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.  1026.60 or 1026.6(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.
    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 Bureau 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 Bureau 
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.
    viii. Models G-10(A) and G-17(A) contain rows in the table with 
the prescribed language, ``For Credit Card Tips from the Consumer 
Financial Protection Bureau'' and calling for a ``[Reference to the 
Bureau's Web site]'' next to that language. Until January 1, 2013, 
creditors may substitute ``For Credit Card Tips from the Federal 
Reserve Board'' for these two model forms' prescribed language and 
may provide a reference to the Federal Reserve Board's Web site 
rather than the Bureau's Web site.
    6. Model G-11. Model G-11 contains clauses that illustrate the 
general disclosures required under Sec.  1026.60(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.  1026.9(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.  1026.9(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.  1026.9(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.  1026.9(f)(2) when 
the insurance provider is changed.
    8. Samples G-18(A)-(D). For home-equity plans subject to the 
requirements of Sec.  1026.40, if a creditor chooses to comply with 
the requirements in Sec.  1026.7(b), the creditor may use Samples G-
18(A) through G-18(D) to comply with these requirements, as 
applicable.
    9. Samples G-18(D). Sample G-18(D) illustrates how credit card 
issuers 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.  1026.7. 
The samples contain information that is not required by Regulation 
Z. The samples also

[[Page 80077]]

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.  1026.7 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 Sample G-18(D) that illustrates 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.  1026.9(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.
    12. Sample G-24. Sample G-24 includes two model clauses for use 
in complying with Sec.  1026.16(h)(4). Model clause (a) is for use 
in connection with credit card accounts under an open-end (not home-
secured) consumer credit plan. Model clause (b) is for use in 
connection with other open-end credit plans.

Appendix H--Closed-End Model Forms and Clauses

    1. Models H-1 and H-2. i. Creditors may make several types of 
changes to closed-end model forms H-1 (credit sale) and H-2 (loan) 
and still be deemed to be in compliance with the regulation, 
provided that the required disclosures are made clearly and 
conspicuously. Permissible changes include the addition of the 
information permitted by Sec.  1026.17(a)(1) and ``directly 
related'' information as set forth in the commentary to Sec.  
1026.17(a).
    ii. The creditor may also delete or, on multi-purpose forms, 
indicate inapplicable disclosures, such as:
    A. The itemization of the amount financed option. (See Samples 
H-12 through H-15.)
    B. The credit life and disability insurance disclosures. (See 
Samples H-11 and H-12.)
    C. The property insurance disclosures. (See Samples H-10 through 
H-12, and H-14.)
    D. The ``filing fees'' and ``non-filing insurance'' disclosures. 
(See Samples H-11 and H-12.)
    E. The prepayment penalty or rebate disclosures. (See Samples H-
12 and H-14.)
    F. The total sale price. (See Samples H-11 through H-15.)
    iii. Other permissible changes include:
    A. Adding the creditor's address or telephone number. (See the 
commentary to Sec.  1026.18(a).)
    B. Combining required terms where several numerical disclosures 
are the same, for instance, if the ``total of payments'' equals the 
``total sale price.'' (See the commentary to Sec.  1026.18.)
    C. Rearranging the sequence or location of the disclosures--for 
instance, by placing the descriptive phrases outside the boxes 
containing the corresponding disclosures, or by grouping the 
descriptors together as a glossary of terms in a separate section of 
the segregated disclosures; by placing the payment schedule at the 
top of the form; or by changing the order of the disclosures in the 
boxes, including the annual percentage rate and finance charge 
boxes.
    D. Using brackets, instead of checkboxes, to indicate 
inapplicable disclosures.
    E. Using a line for the consumer to initial, rather than a 
checkbox, to indicate an election to receive an itemization of the 
amount financed.
    F. Deleting captions for disclosures.
    G. Using a symbol, such as an asterisk, for estimated 
disclosures, instead of an ``e.''
    H. Adding a signature line to the insurance disclosures to 
reflect joint policies.
    I. Separately itemizing the filing fees.
    J. Revising the late charge disclosure in accordance with the 
commentary to Sec.  1026.18(l).
    2. Model H-3. Creditors have considerable flexibility in filling 
out Model H-3 (itemization of the amount financed). Appropriate 
revisions, such as those set out in the commentary to Sec.  
1026.18(c), may be made to this form without loss of protection from 
civil liability for proper use of the model forms.
    3. Models H-4 through H-7. The model clauses are not included in 
the model forms although they are mandatory for certain 
transactions. Creditors using the model clauses when applicable to a 
transaction are deemed to be in compliance with the regulation with 
regard to that disclosure.
    4. Model H-4(A). This model contains the variable rate model 
clauses applicable to transactions subject to Sec.  1026.18(f)(1) 
and is intended to give creditors considerable flexibility in 
structuring variable rate disclosures to fit individual plans. The 
information about circumstances, limitations, and effects of an 
increase may be given in terms of the contract interest rate or the 
annual percentage rate. Clauses are shown for hypothetical examples 
based on the specific amount of the transaction and based on a 
representative amount. Creditors may preprint the variable rate 
disclosures based on a representative amount for similar types of 
transactions, instead of constructing an individualized example for 
each transaction. In both representative examples and transaction-
specific examples, creditors may refer either to the incremental 
change in rate, payment amount, or number of payments, or to the 
resulting rate, payment amount, or number of payments. For example, 
creditors may state that the rate will increase by 2%, with a 
corresponding $150 increase in the payment, or creditors may state 
that the rate will increase to 16%, with a corresponding payment of 
$850.
    5. Model H-4(B). This model clause illustrates the variable-rate 
disclosure required under Sec.  1026.18(f)(2), which would alert 
consumers to the fact that the transaction contains a variable-rate 
feature and that disclosures were provided earlier.
    6. Model H-4(C). This model clause illustrates the early 
disclosures required generally under Sec.  1026.19(b). It includes 
information on how the consumer's interest rate is determined and 
how it can change over the term of the loan, and explains changes 
that may occur in the borrower's monthly payment. It contains an 
example of how to disclose historical changes in the index or 
formula values used to compute interest rates for the preceding 15 
years. The model clause also illustrates the disclosure of the 
initial and maximum interest rates and payments based on an initial 
interest rate (index value plus margin, adjusted by the amount of 
any discount or premium) in effect as of an identified month and 
year for the loan program disclosure and illustrates how to provide 
consumers with a method for calculating the monthly payment for the 
loan amount to be borrowed.
    7. Models H-4(D) through H-4(J). These model clauses illustrate 
certain notices, statements, and other disclosures required as 
follows:
    i. Model H-4(D) illustrates the adjustment notice required under 
Sec.  1026.20(c), and provides examples of payment change notices 
and annual notices of interest rate changes.
    ii. Model H-4(E) illustrates the interest rate and payment 
summary table required under Sec.  1026.18(s) for a fixed-rate 
mortgage transaction.
    iii. Model H-4(F) illustrates the interest rate and payment 
summary table required under Sec.  1026.18(s) for an adjustable-rate 
or a step-rate mortgage transaction.
    iv. Model H-4(G) illustrates the interest rate and payment 
summary table required under Sec.  1026.18(s) for a mortgage 
transaction with negative amortization.
    v. Model H-4(H) illustrates the interest rate and payment 
summary table required under Sec.  1026.18(s) for a fixed-rate, 
interest-only mortgage transaction.
    vi. Model H-4(I) illustrates the introductory rate disclosure 
required by Sec.  1026.18(s)(2)(iii) for an adjustable-rate mortgage 
transaction with an introductory rate.

[[Page 80078]]

    vii. Model H-4(J) illustrates the balloon payment disclosure 
required by Sec.  1026.18(s)(5) for a mortgage transaction with a 
balloon payment term.
    viii. Model H-4(K) illustrates the no-guarantee-to-refinance 
statement required by Sec.  1026.18(t) for a mortgage transaction.
    8. Model H-5. This contains the demand feature clause.
    9. Model H-6. This contains the assumption clause.
    10. Model H-7. This contains the required deposit clause.
    11. Models H-8 and H-9. These models contain the rescission 
notices for a typical closed-end transaction and a refinancing, 
respectively. The last paragraph of each model form contains a blank 
for the date by which the consumer's notice of cancellation must be 
sent or delivered. A parenthetical is included to address the 
situation in which the consumer's right to rescind the transaction 
exists beyond 3 business days following the date of the transaction, 
for example, where the notice or material disclosures are delivered 
late or where the date of the transaction in paragraph 1 of the 
notice is an estimate. The language of the parenthetical is not 
optional. See the commentary to Sec.  1026.2(a)(25) regarding the 
specificity of the security interest disclosure for model form H-9. 
The prior version of model form H-9 is substantially similar to the 
current version and creditors may continue to use it, as 
appropriate. Creditors are encouraged, however, to use the current 
version when reordering or reprinting forms.
    12. Sample forms. The sample forms (H-10 through H-15) serve a 
different purpose than the model forms. The samples illustrate 
various ways of adapting the model forms to the individual 
transactions described in the commentary to Appendix H. The 
deletions and rearrangements shown relate only to the specific 
transactions described. As a result, the samples do not provide the 
general protection from civil liability provided by the model forms 
and clauses.
    13. Sample H-10. This sample illustrates an automobile credit 
sale. The cash price is $7,500 with a downpayment of $1,500. There 
is an 8% add-on interest rate and a term of 3 years, with 36 equal 
monthly payments. The credit life insurance premium and the filing 
fees are financed by the creditor. There is a $25 credit report fee 
paid by the consumer before consummation, which is a prepaid finance 
charge.
    14. Sample H-11. This sample illustrates an installment loan. 
The amount of the loan is $5,000. There is a 12% simple interest 
rate and a term of 2 years. The date of the transaction is expected 
to be April 15, 1981, with the first payment due on June 1, 1981. 
The first payment amount is labeled as an estimate since the 
transaction date is uncertain. The odd days' interest ($26.67) is 
collected with the first payment. The remaining 23 monthly payments 
are equal.
    15. Sample H-12. This sample illustrates a refinancing and 
consolidation loan. The amount of the loan is $5,000. There is a 15% 
simple interest rate and a term of 3 years. The date of the 
transaction is April 1, 1981, with the first payment due on May 1, 
1981. The first 35 monthly payments are equal, with an odd final 
payment. The credit disability insurance premium is financed. In 
calculating the annual percentage rate, the U.S. Rule has been used. 
Since an itemization of the amount financed is included with the 
disclosures, the statement regarding the consumer's option to 
receive an itemization is deleted.
    16. Samples H-13 through H-15. These samples illustrate various 
mortgage transactions. They assume that the mortgages are subject to 
the Real Estate Settlement Procedures Act (RESPA). As a result, no 
option regarding the itemization of the amount financed has been 
included in the samples, because providing the good faith estimates 
of settlement costs required by RESPA satisfies Truth in Lending's 
amount financed itemization requirement. (See Sec.  1026.18(c).)
    17. Sample H-13. This sample illustrates a mortgage with a 
demand feature. The loan amount is $44,900, payable in 360 monthly 
installments at a simple interest rate of 14.75%. The 15 days of 
interim interest ($294.34) is collected as a prepaid finance charge 
at the time of consummation of the loan (April 15, 1981). In 
calculating the disclosure amounts, the minor irregularities 
provision in Sec.  1026.17(c)(4) has been used. The property 
insurance premiums are not included in the payment schedule. This 
disclosure statement could be used for notes with the 7-year call 
option required by the Federal National Mortgage Association (FNMA) 
in states where due-on-sale clauses are prohibited.
    18. Sample H-14. This sample disclosure form illustrates the 
disclosures under Sec.  1026.19(b) for a variable-rate transaction 
secured by the consumer's principal dwelling with a term greater 
than one year. The sample form shows a creditor how to adapt the 
model clauses in Appendix H-4(C) to the creditor's own particular 
variable-rate program. The sample disclosure form describes the 
features of a specific variable-rate mortgage program and alerts the 
consumer to the fact that information on the creditor's other 
closed-end variable-rate programs is available upon request. It 
includes information on how the interest rate is determined and how 
it can change over time. Section 1026.19(b)(2)(viii) permits 
creditors the option to provide either a historical example or an 
initial and maximum interest rates and payments disclosure; both are 
illustrated in the sample disclosure. The historical example 
explains how the monthly payment can change based on a $10,000 loan 
amount, payable in 360 monthly installments, based on historical 
changes in the values for the weekly average yield on U.S. Treasury 
Securities adjusted to a constant maturity of one year. Index values 
are measured for 15 years, as of the first week ending in July. This 
reflects the requirement that the index history be based on values 
for the same date or period each year in the example. The sample 
disclosure also illustrates the alternative disclosure under Sec.  
1026.19(b)(2)(viii)(B) that the initial and the maximum interest 
rates and payments be shown for a $10,000 loan originated at an 
initial interest rate of 12.41 percent (which was in effect July 
1996) and to have 2 percentage point annual (and 5 percentage point 
overall) interest rate limitations or caps. Thus, the maximum amount 
that the interest rate could rise under this program is 5 percentage 
points higher than the 12.41 percent initial rate to 17.41 percent, 
and the monthly payment could rise from $106.03 to a maximum of 
$145.34. The loan would not reach the maximum interest rate until 
its fourth year because of the 2 percentage point annual rate 
limitations, and the maximum payment disclosed reflects the 
amortization of the loan during that period. The sample form also 
illustrates how to provide consumers with a method for calculating 
their actual monthly payment for a loan amount other than $10,000.
    19. Sample H-15. This sample illustrates a graduated payment 
mortgage with a 5-year graduation period and a 7\1/2\ percent yearly 
increase in payments. The loan amount is $44,900, payable in 360 
monthly installments at a simple interest rate of 14.75%. Two points 
($898), as well as an initial mortgage guarantee insurance premium 
of $225.00, are included in the prepaid finance charge. The mortgage 
guarantee insurance premiums are calculated on the basis of \1/4\ of 
1% of the outstanding principal balance under an annual reduction 
plan. The abbreviated disclosure permitted under Sec.  1026.18(g)(2) 
is used for the payment schedule for years 6 through 30. The 
prepayment disclosure refers to both penalties and rebates because 
information about penalties is required for the simple interest 
portion of the obligation and information about rebates is required 
for the mortgage insurance portion of the obligation.
    20. Sample H-16. This sample illustrates the disclosures 
required under Sec.  1026.32(c). The sample illustrates the amount 
borrowed and the disclosures about optional insurance that are 
required for mortgage refinancings under Sec.  1026.32(c)(5). 
Creditors may, at their option, include these disclosures for all 
loans subject to Sec.  1026.32. The sample also includes disclosures 
required under Sec.  1026.32(c)(3) when the legal obligation 
includes a balloon payment.
    21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved for use for loans made prior to the mandatory compliance 
date of the disclosures required under Subpart F. The form was 
approved for all Health Education Assistance Loans (HEAL) with a 
variable interest rate that were considered interim student credit 
extensions as defined in Regulation Z.
    22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved for use for loans made prior to the mandatory compliance 
date of the disclosures required under Subpart F. The form was 
approved for all HEAL loans with a fixed interest rate that were 
considered interim student credit extensions as defined in 
Regulation Z.
    23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-1 9-82 issued by the U.S.

[[Page 80079]]

Department of Health and Human Services for certain student loans 
has been approved for use for loans made prior to the mandatory 
compliance date of the disclosures required under Subpart F. The 
form was approved for all HEAL loans with a variable interest rate 
in which the borrower has reached repayment status and is making 
payments of both interest and principal.
    24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been 
approved for use for loans made prior to the mandatory compliance 
date of the disclosures required under Subpart F. The form was 
approved for all HEAL loans with a fixed interest rate in which the 
borrower has reached repayment status and is making payments of both 
interest and principal.
    25. Models H-18, H-19, H-20. i. These model forms illustrate 
disclosures required under Sec.  1026.47 on or with an application 
or solicitation, at approval, and after acceptance of a private 
education loan. Although use of the model forms is not required, 
creditors using them properly will be deemed to be in compliance 
with the regulation with regard to private education loan 
disclosures. Creditors may make certain types of changes to private 
education loan model forms H-18 (application and solicitation), H-19 
(approval), and H-20 (final) and still be deemed to be in compliance 
with the regulation, provided that the required disclosures are made 
clearly and conspicuously. The model forms aggregate disclosures 
into groups under specific headings. Changes may not include 
rearranging the sequence of disclosures, for instance, by 
rearranging which disclosures are provided under each heading or by 
rearranging the sequence of the headings and grouping of 
disclosures. Changes to the model forms may not be so extensive as 
to affect the substance or clarity of the forms. Creditors making 
revisions with that effect will lose their protection from civil 
liability.
    ii. The creditor may delete inapplicable disclosures, such as:
    A. The Federal student financial assistance alternatives 
disclosures.
    B. The self-certification disclosure.
    iii. Other permissible changes include, for example:
    A. Adding the creditor's address, telephone number, or Web site.
    B. Adding loan identification information, such as a loan 
identification number.
    C. Adding the date on which the form was printed or produced.
    D. Placing the notice of the right to cancel in the top left or 
top right of the disclosure to accommodate a window envelope.
    E. Combining required terms where several numerical disclosures 
are the same. For instance, if the itemization of the amount 
financed is provided, the amount financed need not be separately 
disclosed.
    F. Combining the disclosure of loan term and payment deferral 
options required in Sec.  1026.47(a)(3) with the disclosure of cost 
estimates required in Sec.  1026.47(a)(4) in the same chart or table 
(See comment 47(a)(3)-4.)
    G. Using the first person, instead of the second person, in 
referring to the borrower.
    H. Using ``borrower'' and ``creditor'' instead of pronouns.
    I. Incorporating certain state ``plain English'' requirements.
    J. 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.
    iv. Although creditors are not required to use a certain paper 
size in disclosing the Sec. Sec.  1026.47(a), (b) and (c) 
disclosures, samples H-21, H-22, and H-23 are designed to be printed 
on two 8\1/2\ x 11 inch sheets of paper. A creditor may use a larger 
sheet of paper, such as 8\1/2\ x 14 inch sheets of paper, or may use 
multiple pages. If the disclosures are provided on two sides of a 
single sheet of paper, the creditor must include a reference or 
references, such as ``SEE BACK OF PAGE'' at the bottom of each page 
indicating that the disclosures continue onto the back of the page. 
If the disclosures are on two or more pages, a creditor may not 
include any intervening information between portions of the 
disclosure. 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 Helvetica font 
style for body text).
    B. Sufficient spacing between lines of the text.
    C. Standard spacing between words and characters. In other 
words, the body text was not compressed to appear smaller than the 
10-point type size.
    D. 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.
    E. Sufficient contrast between the text and the background. 
Generally, black text was used on white paper.
    v. While the Bureau is not requiring issuers to use the above 
formatting techniques in presenting information in the disclosure, 
the Bureau encourages issuers to consider these techniques when 
deciding how to disclose information in the disclosure to ensure 
that the information is presented in a readable format.
    vi. Creditors are allowed to use color, shading and similar 
graphic techniques in the disclosures, so long as the disclosures 
remain substantially similar to the model and sample forms in 
Appendix H.
    26. Sample H-21. This sample illustrates a disclosure required 
under Sec.  1026.47(a). The sample assumes a range of interest rates 
between 7.375% and 17.375%. The sample assumes a variable interest 
rate that will never exceed 25% over the life of the loan. The term 
of the sample loan is 20 years for an amount up to $20,000 and 30 
years for an amount more than $20,000. The repayment options and 
sample costs have been combined into a single table, as permitted in 
the commentary to Sec.  1026.47(a)(3). It demonstrates the loan 
amount, interest rate, and total paid when a consumer makes loan 
payments while in school, pays only interest while in school, and 
defers all payments while in school.
    27. Sample H-22. This sample illustrates a disclosure required 
under Sec.  1026.47(b). The sample assumes the consumer financed 
$10,000 at an 8.23% annual percentage rate. The sample assumes a 
variable interest rate that will never exceed 25% over the life of 
the loan. The payment schedule and terms assumes a 20-year loan term 
and that the consumer elected to defer payments while enrolled in 
school. This includes a sample disclosure of a total loan amount of 
$10,600 and prepaid finance charges totaling $600, for a total 
amount financed of $10,000.
    28. Sample H-22. This sample illustrates a disclosure required 
under Sec.  1026.47(c). The sample assumes the consumer financed 
$10,000 at an 8.23% annual percentage rate. The sample assumes a 
variable annual percentage rate in an instance where there is no 
maximum interest rate. The sample demonstrates disclosure of an 
assumed maximum rate, and the statement that the consumer's actual 
maximum rate and payment amount could be higher. The payment 
schedule and terms assumes a 20-year loan term, the assumed maximum 
interest rate, and that the consumer elected to defer payments while 
enrolled in school. This includes a sample disclosure of a total 
loan amount of $10,600 and prepaid finance charges totaling $600, 
for a total amount financed of $10,000.

Appendix J--Annual Percentage Rate Computations for Closed-End Credit 
Transactions

    1. Use of Appendix J. Appendix J sets forth the actuarial 
equations and instructions for calculating the annual percentage 
rate in closed-end credit transactions. While the formulas contained 
in this appendix may be directly applied to calculate the annual 
percentage rate for an individual transaction, they may also be 
utilized to program calculators and computers to perform the 
calculations.
    2. Relation to Bureau tables. The Bureau's Annual Percentage 
Rate Tables also provide creditors with a calculation tool that 
applies the technical information in Appendix J. An annual 
percentage rate computed in accordance with the instructions in the 
tables is deemed to comply with the regulation. Volume I of the 
tables may be used for credit transactions involving equal payment 
amounts and periods, as well as for transactions involving any of 
the following irregularities: odd first period, odd first payment 
and odd last payment. Volume II of the tables may be used for 
transactions that involve any type of irregularities. These tables 
may be obtained from the Bureau, 1700 G Street, NW., Washington, DC 
20006, upon request.

Appendix K--Total Annual Loan Cost Rate Computations for Reverse 
Mortgage Transactions

    1. General. The calculation of total annual loan cost rates 
under Appendix K is based on the principles set forth and the 
estimation or ``iteration'' procedure used to compute annual 
percentage rates under Appendix J. Rather than restate this 
iteration process in full, the regulation cross-references the

[[Page 80080]]

procedures found in Appendix J. In other aspects the appendix 
reflects the special nature of reverse mortgage transactions. 
Special definitions and instructions are included where appropriate.

(b) Instructions and equations for the total annual loan cost rate

(b)(5) Number of unit-periods between two given dates

    1. Assumption as to when transaction begins. The computation of 
the total annual loan cost rate is based on the assumption that the 
reverse mortgage transaction begins on the first day of the month in 
which consummation is estimated to occur. Therefore, fractional 
unit-periods (used under Appendix J for calculating annual 
percentage rates) are not used.

(b)(9) Assumption for discretionary cash advances

    1. Amount of credit. Creditors should compute the total annual 
loan cost rates for transactions involving discretionary cash 
advances by assuming that 50 percent of the initial amount of the 
credit available under the transaction is advanced at closing or, in 
an open-end transaction, when the consumer becomes obligated under 
the plan. (For the purposes of this assumption, the initial amount 
of the credit is the principal loan amount less any costs to the 
consumer under Sec.  1026.33(c)(1).)

(b)(10) Assumption for variable-rate reverse mortgage transactions

    1. Initial discount or premium rate. Where a variable-rate 
reverse mortgage transaction includes an initial discount or premium 
rate, the creditor should apply the same rules for calculating the 
total annual loan cost rate as are applied when calculating the 
annual percentage rate for a loan with an initial discount or 
premium rate (see the commentary to Sec.  1026.17(c)).

(d) Reverse mortgage model form and sample form

(d)(2) Sample form

    1. General. The ``clear and conspicuous'' standard for reverse 
mortgage disclosures does not require disclosures to be printed in 
any particular type size. Disclosures may be made on more than one 
page, and use both the front and the reverse sides, as long as the 
pages constitute an integrated document and the table disclosing the 
total annual loan cost rates is on a single page.

Appendix L--Assumed Loan Periods for Computations of Total Annual Loan 
Cost Rates

    1. General. The life expectancy figures used in Appendix L are 
those found in the U.S. Decennial Life Tables for women, as rounded 
to the nearest whole year and as published by the U.S. Department of 
Health and Human Services. The figures contained in Appendix L must 
be used by creditors for all consumers (men and women). Appendix L 
will be revised periodically by the Bureau to incorporate revisions 
to the figures made in the Decennial Tables.

    Dated: November 29, 2011.
Alastair M. Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the 
Treasury.
[FR Doc. 2011-31715 Filed 12-21-11; 8:45 am]
BILLING CODE 4810-AM-P