[Federal Register Volume 63, Number 57 (Wednesday, March 25, 1998)]
[Proposed Rules]
[Pages 14548-14552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6991]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1005]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is publishing for comment a proposed rule amending
Regulation Z, which implements the Truth in Lending Act. The proposal
would permit creditors to use electronic communication (for example,
communication via personal computer and modem) to provide disclosures
required by the act and regulation, if the consumer agrees to such
delivery.
DATES: Comments must be received by May 15, 1998.
ADDRESSES: Comments should refer to Docket No. R-1005, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, DC 20551. Comments also may be delivered to Room B-2222 of
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the
guard station in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.12 of the Board's
Rules Regarding Availability of Information.
FOR FURTHER INFORMATION CONTACT: Michael Hentrel, Obrea Poindexter, or
Pamela Morris Blumenthal, Staff Attorneys, Division of Consumer and
Community Affairs, at (202) 452-3667 or (202) 452-2412. For the hearing
impaired only, Telecommunications Device for the Deaf (TDD), contact
Diane Jenkins, at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (TILA), 15 U.S.C. 1601 et
seq., is to promote the informed use of consumer credit by requiring
disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as a dollar amount (the finance charge) and
as an annual percentage rate (the APR). Uniformity in creditors'
disclosures is intended to assist consumers in comparison shopping. The
TILA requires additional disclosures for loans secured by consumers'
homes and permits consumers to rescind certain transactions that
involve their principal dwellings. The act is implemented by the
Board's Regulation Z (12 CFR Part 226).
As part of the Regulatory Planning and Review Program and its
review of regulations under section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4803),
the Board determined that the use of electronic communication for
delivery of information to consumers that is required by federal
consumer financial services and fair lending laws could effectively
reduce regulatory compliance burden without adversely affecting
consumer protections. Thus, the Board has been considering the issue
and closely following the development of electronic communication. For
example in May 1996, the Board proposed to amend Regulation E
(Electronic Fund Transfers) to permit disclosures to be provided
electronically. In March 1997, the Board issued an amendment to the
staff commentary to Regulation CC (Availability of Funds and Collection
of Checks) that allowed financial institutions to send notices
electronically. (62 FR 13801, March 18, 1997.)
Having considered the comments received on the Regulation E
proposal and other rulemakings, the Board now proposes to amend
Regulation Z to allow creditors to provide Regulation Z disclosures
electronically; such disclosures would remain subject to any applicable
timing, format, and other requirements of the act and the regulation.
Concurrently, the Board is issuing similar proposed revisions to
address electronic communication under Regulations DD (Truth in
Savings), B (Equal Credit Opportunity), and M (Consumer Leasing),
published elsewhere in today's Federal Register. In addition, the Board
has issued an interim rule under Regulation E, also published elsewhere
in today's Federal Register so that financial institutions can
implement systems to provide Electronic Fund Transfer Act disclosures
electronically.
II. Proposed Regulatory Revisions
The TILA and Regulation Z require several disclosures to be
provided to consumers in writing. The requirement that disclosures be
in writing has been presumed to require that creditors provide paper
documents. However, under many laws that call for information to be in
writing, information in electronic form is considered to be
``written.'' Information produced, stored, or communicated by computer
is also generally considered to
[[Page 14549]]
be a writing at least where visual text is involved.
Therefore, pursuant to its authority under section 105 of the TILA,
the Board proposes to amend Regulation Z to permit creditors to use
electronic communication where the regulation calls for information to
be provided in writing. The term ``electronic communication'' is
limited to a communication that can be displayed as visual text. An
example is an electronic visual text message that is displayed on a
screen (such as the consumer's computer monitor). Communications by
telephone voicemail systems do not meet the definition of ``electronic
communication'' for purposes of this regulation because they do not
have the feature generally associated with a writing--visual text.
Section 226.2(a)(27) would be revised to include the definition of
electronic communication for purposes of Regulation Z. Under the
definition, electronic communication is a visual text message
electronically transmitted between a creditor and a consumer's home
computer or other electronic device used by a consumer. Sections 226.5,
226.17 and 226.31 would be revised to address electronic communication.
These sections contain general disclosure requirements for open-end
credit, closed-end credit, and certain home secured loans referred to
as ``HOEPA loans.''
Agreements Between Creditors and Consumers
Sections 226.5(a)(5), 226.17(a)(3), and 226.31(b)(2) would permit
creditors to send electronic disclosures if the consumer agrees. There
may be various ways that a creditor and a consumer could agree to the
electronic delivery of disclosures and other information. Whether such
an agreement exists between the parties would be determined by
applicable state law. The regulation would not preclude a creditor and
a consumer from entering into an agreement electronically, nor does it
prescribe a formal mechanism for doing so. The Board does believe,
however, that consumers should be clearly informed when they are
consenting to the delivery of TILA disclosures and other information
electronically.
Delivery Requirements for Electronic Communication
Regulation Z provides that an institution ``furnish,'' ``provide,''
``send,'' ``deliver,'' or ``mail'' information to a consumer.
Generally, the delivery requirement anticipates that a creditor will
deliver the information--typically by mail--to an address designated by
the consumer. For a paper communication, a creditor would not satisfy
that requirement by making disclosures ``available'' to consumers, for
example, at a creditor's office or other location. The Board believes
that consumers receiving disclosures by electronic communication should
have protections regarding delivery similar to those afforded consumers
receiving disclosures in paper form. Simply posting information on an
Internet site without some appropriate notice and instructions about
how the consumer may obtain the required information would not satisfy
the requirement.
The requirement to send disclosures to a consumer would be
satisfied when the institution ensures that the disclosures will be
displayed in a timely manner. For example, under Regulation Z, open-end
credit initial disclosures generally must be provided before the first
transaction under the plan. Assume that a consumer uses a personal
computer to apply for a plan and consents to the electronic delivery of
the initial disclosures. If the disclosures automatically appear on the
computer screen before the consumer commits to the plan (in accordance
with the format, timing rules and any other requirements of the act and
regulation), the creditor would satisfy the requirement to provide
(deliver or transmit) disclosures to the consumer.
As a practical matter, there may be little distinction between
sending or delivering electronic disclosures and making them
``available.'' Creditors have flexibility in how they may deliver
electronic disclosures to consumers, including, but not limited to, the
following examples. They may send disclosures to a consumer-designated
electronic mail address or they may designate a location on a website
where the consumer enters a personal identification number or other
identifier to access required information. In the scenario described
above, assume that the consumer applies for a credit plan, receives the
initial disclosures at that time, and agrees to receive all Regulation
Z disclosures electronically. Subsequent disclosures sent to the
designated address or placed at a designated location (for example,
periodic statements or change-in-terms notices) would satisfy the
delivery requirements of the regulation.
Electronic communication would remain subject to any timing or
other applicable requirements under Regulation Z. For example, an
electronic change in terms notice required by Sec. 226.9(c) of
Regulation Z must still be provided at least fifteen days in advance of
the change. The Board solicits comment on whether further guidance is
needed on how to comply wth the timing requirements when a notice is
posted on an Internet website.
Section 226.5a--Credit and Charge Card Applications and
Solicitations
The act and regulation require credit and charge card issuers to
provide credit disclosures in certain applications and solicitations to
open credit and charge card accounts. Format and content requirements
differ for applications or solicitations sent in direct mail campaigns
and for those made available to the general public such as in ``take-
ones'' and catalogs or magazines. Disclosures accompanying direct mail
applications and solicitations must be presented in a tabular format.
Disclosures in a take-one also may be presented in a table with the
same content as for direct mail, but the act and regulation permit
alternatives as to format and content. The APR disclosed in a direct
mail solicitation must be accurate within 60 days of mailing; in a
take-one, within 30 days of printing.
Consumers could obtain an electronically sent credit or charge card
application in much the same way as either opening a direct-mail piece
or browsing through a magazine. Under the proposal, if a card issuer
sends an application or solicitation to a consumer by electronic means
that alert the consumer that the application or solicitation has
arrived, such as electronic mail, the card issuer would follow the
direct-mail rules under Sec. 226.5a. If an issuer merely makes an
application or solicitation publicly available, such as by posting it
on an Internet site, the issuer would follow the ``take-one'' rules.
The Board believes that in the context of electronic communications,
``printing'' is the equivalent of updating a site on the Internet, for
example. Thus, where the ``take-one'' rules apply, consumers would view
APRs that are accurate within 30 days of the card issuer's most recent
update of the Internet site. Where the direct-mail rules apply, the
APRs disclosed would be accurate within 60 days of the sending of the
electronic application or solicitation. The Board requests comment on
any compliance difficulties this approach may pose, and possible
suggestions for their resolution.
Section 226.17(g)--Mail or Telephone Orders--Delay in Disclosures
Section 226.17(g) allows credit to be offered via mail, telephone,
or other electronic means and full TILA disclosures to be deferred as
long as a certain number of disclosures are ``made
[[Page 14550]]
available in written form.'' The rationale underlying the deferral is
that, in some instances, the creditor cannot provide disclosures in the
form required by the regulation because of the lack of face to face or
direct interaction with the consumer. Because loan products offered by
electronic communication (for example, those offered on the Internet)
do not appear to pose the same difficulty, the Board believes that this
deferral should not apply to electronic disclosures. The Board believes
that permitting a deferral would not effectuate the purpose of the TILA
to provide consumers with information about credit terms prior to being
obligated. Thus, the proposed rule provides that specific disclosures
must be provided before consummation of the transaction.
Requirement That Information Be ``Clear and Conspicuous''
The act and Regulation Z require creditors to present required
information ``clearly and conspicuously.'' Under the proposed rule, the
``clear and conspicuous'' requirement applies to electronic
communication. The Board does not intend to discourage or encourage
specific types of technologies. Regardless of technology, however, the
disclosures provided by electronic communication must meet the ``clear
and conspicuous'' standard. While a creditor is generally not required
to ensure that the consumer has the equipment to read the disclosures,
in some circumstances a creditor would have the responsibility of
making sure the proper equipment is in place. For example, to use
electronic disclosures for credit offered through terminals in a
creditor's lobby, or through kiosks located in public or other places,
the creditor must ensure that the equipment meets the clear and
conspicuous standard for TILA disclosures that are being provided
electronically.
Consumer Ability to Retain Disclosures
Regulation Z requires that many of its written disclosures be in a
form that the consumer may keep. This requirement would apply to
disclosures provided by electronic communication. Creditors would
satisfy the retention requirement if, for example, disclosures can be
printed or downloaded by the consumer. The requirements for electronic
delivery should be similar to the current paper requirements, where
creditors generally must mail or deliver the information to the
consumer but need not ensure that the consumer reads or retains it.
Thus, creditors would not be required to monitor an individual
consumer's ability to retain the information, nor to take steps to find
out whether the consumer has in fact retained it. The Board anticipates
that, where appropriate, a creditor would provide special technical
specifications for receiving or retaining information before or at the
time a consumer agrees to receive information electronically.
As in the case of the ``clear and conspicuous'' standard discussed
above, in circumstances where the creditor (or a network of which the
creditor is a member) controls the equipment to be used for the
service--such as terminals in institution lobbies or kiosks in shopping
centers--the creditor would have the responsibility of ensuring
retainability. Provided that the delivery requirements (discussed
above) are satisfied, methods for fulfilling this requirement could
include, for example, printers incorporated into terminals or a screen
message offering to transmit the disclosure to the consumer's
electronic mail or post office address.
Signature Requirements Under Regulation Z
There are two signature requirements under Regulation Z. Under
Sec. 226.4(d) consumers may elect to accept credit life insurance by
signing or initialing an affirmative written request after receiving
disclosure about the insurance. Under Sec. 226.23 (and the
corresponding model forms and official staff commentary) consumers may
cancel certain home-secured loans or waive this right by providing a
written signed notice to the creditor. The Board indicated in the May
1996 Regulation E proposal that any electronic authentication method
should provide the same assurance as a signature in a paper-based
system, and cited security codes and digital signatures as examples of
authentication devices that might meet the requirements. The Board is
interested in learning about other ways in which authentication in an
electronic environment might take the place of the consumer's
signature.
Current Need for Safeguards Concerning the Electronic Delivery of
Disclosures
Today, most consumers receive federal disclosures in paper form. As
electronic commerce and electronic banking increase and technological
advances take place, obtaining disclosures by electronic communication
will likely become more commonplace. Currently, however, the use of
electronic communication in the delivery of financial services is still
evolving. Thus, it is difficult to fully predict the extent to which
additional safeguards, if any, may be needed to ensure that consumers
receive the same protections that exist for disclosures in paper form.
The Board expects that creditors subject to the TILA and Regulation Z
will provide sufficient details about the delivery of disclosures. The
Board plans to closely monitor the development of electronic delivery
of TILA disclosures and other information, and will address compliance
or other issues that may arise as appropriate.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-1005 and, when
possible, should use a standard typeface with a type size of 10 or 12
characters per inch. This will enable the Board to convert the text to
machine-readable form through electronic scanning, and will facilitate
automated retrieval of comments for review. Also, if accompanied by an
original document in paper form, comments may be submitted on 3\1/2\
inch or 5\1/4\ inch computer diskettes in any IBM-compatible DOS-based
format.
IV. Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act,
the Board's Office of the Secretary has reviewed the proposed
amendments to Regulation Z. Overall, the proposed amendments are not
expected to have any significant impact on small entities. The proposed
rule would relieve compliance burden by giving creditors flexibility in
providing disclosures. A final regulatory flexibility analysis will be
conducted after consideration of comments received during the public
comment period.
V. Paperwork Reduction Act
In accordance with section 3506 of the Paperwork Reduction Act of
1995 (44 U.S.C. Ch. 35; 5 CFR Part 1320 Appendix A.1), the Board
reviewed the proposed revisions under the authority delegated to the
Board by the Office of Management and Budget.
The Federal Reserve has no data with which to estimate the burden
the proposed revised requirements would impose on state member banks.
Creditors would be able to use electronic communication to provide
disclosures and other information required by this regulation rather
than having to print and mail the information in paper form. The use of
electronic communication in home banking and financial services may
reduce the paperwork burden on creditors and financial institutions or
merely may reduce the dollar cost.
The Federal Reserve requests comments from creditors, especially
[[Page 14551]]
state member banks, that will help to estimate the number and burden of
the various disclosures that would be made in the first year this rule
is effective. Comments are invited on: (a) Whether the proposed revised
collection of information is necessary for the proper performance of
the Federal Reserve's functions, including whether the information has
practical utility; (b) the accuracy of the Federal Reserve's estimate
of the burden of the proposed revised information collection, including
the cost of compliance; (c) ways to enhance the quality, utility, and
clarity of the information to be collected; and (d) ways to minimize
the burden of information collection on respondents, including through
the use of automated collection techniques or other forms of
information technology. Comments on the collection of information
should be sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0199), Washington, DC 20503, with copies of
such comments to be sent to Mary M. McLaughlin, Chief, Financial
Reports Section, Division of Research and Statistics, Mail Stop 97,
Board of Governors of the Federal Reserve System, Washington, DC 20551.
The collection of information requirements in this proposed revised
regulation are found throughout 12 CFR Part 226 and in Appendices F, G,
H, J, K, and L. This information is mandatory (15 U.S.C. 1604(a)) to
ensure the disclosure of certain credit costs and terms to consumers,
at or before the time consumers enter into a consumer credit
transaction and when the availability of consumer credit on particular
terms is advertised. The purpose of the disclosures is to encourage
competition among various credit sources through informed comparison-
shopping by consumers. The respondents/recordkeepers are for-profit
financial institutions, including small businesses. Creditors are also
required to retain records as evidence of compliance for twenty-four
months.
The Board also proposes to extend the Recordkeeping and Disclosure
Requirements in Connection with Regulation Z (OMB No. 7100-0199) for
three years. The current estimated total annual burden for this
information collection is 1,878,846 hours, as shown in the table below.
These amounts reflect the burden estimate of the Federal Reserve System
for the 996 state member banks under its supervision. This regulation
applies to all types of creditors, not just state member banks.
However, under Paperwork Reduction Act regulations, the Federal Reserve
accounts for the burden of the paperwork associated with the regulation
only for state member banks. Other agencies account for the paperwork
burden for the institutions they supervise.
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Estimated
Number of Estimated annual
respondents annual Estimated response time burden
frequency hours
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Open-end credit:
Initial terms....................... 996 1,150 2.5 minutes 47,725
Change in terms..................... 996 2,500 1.0 minute 41,500
Periodic Statements..................... 996 86,250 45.0 seconds 1,073,813
Error resolution........................ 996 8 15.0 minutes 1,992
Credit and charge card accounts:
Advance disclosures................. 996 29,750 10.0 seconds 82,308
Renewal notice...................... 996 10,700 5.0 seconds 14,802
Insurance notice.................... 996 60 15.0 seconds 249
Home equity plans:
Advance disclosure.................. 996 120 2.0 minutes 3,984
Change in terms..................... 996 3 2.0 minutes 100
Closed-end credit disclosures........... 996 5,750 6.4 minutes 610,880
Advertising............................. 996 3 30.0 minutes 1,493
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Total............................... ........... ........... ............................... 1,878,846
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[[Page 14552]]
General disclosures of credit terms that appear in advertisements
or take-one applications are available to the public. Since the Federal
Reserve does not collect any information, no issue of confidentiality
normally arises. However, the information may be protected from
disclosure under the exemptions (b)(4), (6), and (8) of the Freedom of
Information Act (5 U.S.C. 522(b)). Transaction- or account-specific
disclosures and billing error allegations are not publicly available
and are confidential between the creditor and the consumer. An agency
may not conduct or sponsor, and an organization is not required to
respond to, an information collection unless it displays a currently
valid OMB control number. The OMB control number for the Recordkeeping
and Disclosure Requirements in Connection with Regulation Z is 7100-
0199.
List of Subjects in 12 CFR Part 226
Advertising, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements, Truth in lending.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
changes to Regulation Z. New language is shown inside bold-faced
arrows, while language that would be removed is set off with brackets.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 226 as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
2. Section 226.2 would be amended by adding a new paragraph (a)(27)
to read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. * * *
(27) Electronic communication means a message transmitted
electronically between a consumer and a creditor in a format that
allows visual text to be displayed on equipment such as a personal
computer monitor.
* * * * *
3. Section 226.5 would be amended by adding a new
paragraph (a)(5) as follows:
Sec. 226.5 General disclosure requirements.
(a) Form of disclosures. * * *
(5) Electronic communication. A creditor and a consumer
may agree to send by electronic communication, as that term is defined
in Sec. 226.2(a)(27), any information required by this subpart to be
provided in writing. Information sent by electronic communication to a
consumer must comply with paragraph (a)(1) of this section and any
applicable timing requirements contained in this subpart.
4. Section 226.17 would be amended as follows:
a. By adding a new paragraph (a)(3); and
b. By revising paragraph (g) introductory text.
The revision and addition would read as follows:
Sec. 226.17 General disclosure requirements.
(a) Form of disclosures. * * *
(3) Electronic communication. A creditor and a consumer
may agree to send by electronic communication, as that term is defined
in Sec. 226.2(a)(27), any information required by this subpart to be
provided in writing. Information sent by electronic communication to a
consumer must comply with paragraph (a)(1) of this section and any
applicable timing requirements contained in this subpart.
* * * * *
(g) Mail or telephone orders--delay in disclosures. If a creditor
receives a purchase order or a request for an extension of credit by
mail, telephone, or any other written [or electric] communication,
excluding electronic communication as discussed in paragraph
(a)(3) of this section, 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 to the consumer or to the public before the actual purchase order
or request:
* * * * *
5. Section 226.31 would be amended by redesignating paragraph (b)
as paragraph (b)(1) and adding a new paragraph (b)(2) as to read as
follows:
Sec. 226.31 General rules.
* * * * *
(b)(1) Form of disclosures. * * *
(2) Electronic communication. A creditor and a consumer
may agree to send by electronic communication, as that term is defined
in Sec. 226.2(a)(27), any information required by this subpart to be
provided in writing. Information sent by electronic communication to a
consumer must comply with this paragraph (b) and any applicable timing
requirements contained in this subpart.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, March 12, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6991 Filed 3-24-98; 8:45 am]
BILLING CODE 6210-01-P
