[Federal Register Volume 64, Number 65 (Tuesday, April 6, 1999)]
[Rules and Regulations]
[Pages 16614-16617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8413]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1029]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is publishing revisions to the official staff
commentary to Regulation Z (Truth in Lending). The commentary applies
and interprets the requirements of the regulation. The update addresses
the prohibition against the issuance of unsolicited credit cards. It
provides guidance on calculating payment schedules involving private
mortgage insurance. In addition, the update discusses credit sale
transactions where downpayments include cash and property used as a
trade-in, and adopts several technical amendments.
DATES: This rule is effective March 31, 1999. Compliance is optional
until March 31, 2000.
FOR FURTHER INFORMATION CONTACT: James H. Mann or Obrea O. Poindexter
(open-end credit), or Michael E. Hentrel or Kathleen C. Ryan (closed-
end credit), Staff Attorneys; Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, at (202)
452-3667 or 452-2412; for users of Telecommunications Device for the
Deaf (TDD) only, 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 providing
for disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as a dollar amount (the finance charge) and
as an annual percentage rate (APR). Uniformity in creditors'
disclosures is intended to assist consumers in comparison shopping.
TILA requires additional disclosures for loans secured by a consumer's
home and permits consumers to rescind certain transactions that involve
their principal dwelling. In addition, the act regulates certain
practices of creditors. The act is implemented by the Board's
Regulation Z (12 CFR Part 226). The Board's official staff commentary
(12 CFR Part 226 (Supp. I)) interprets the regulation, and provides
guidance to creditors in applying the regulation to specific
transactions. The commentary is a substitute for individual staff
interpretations; it is updated periodically to address significant
questions that arise.
In December, the Board published proposed amendments to the
commentary to Regulation Z (63 FR 67436, December 7, 1998). The Board
received about 50 comments. Most of the comments were from financial
institutions and other creditors; state attorneys general and consumer
representatives also submitted comments. Overall, commenters generally
supported the proposed amendments. Views were mixed on comments
concerning multifunction cards that are or may be used as credit cards
and credit sale transactions where downpayments involve cash payments
and property used as a trade-in.
Except as discussed below, the commentary is being adopted as
proposed; some technical suggestions or concerns raised by commenters
are addressed. In response to concerns about the uncertainty of
computer readiness for the Year 2000 date change, the effective date
for mandatory compliance with the commentary update is March 31, 2000.
II. Commentary Revisions
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(15) Credit Card
Section 226.2(a)(15) defines a credit card to include any card or
credit device that may be used from time to time to obtain credit.
Comment 2(a)(15)-2 provides examples of cards and devices that are and
are not credit cards. The comment is revised to include a new example
of cards or devices that are credit cards, addressing recent programs
where cards are marketed from the outset with both credit and non-
credit features. (Two additional examples were proposed. Some
commenters suggested technical changes to ensure consistency in the new
examples; the changes were made by merging them.)
2(a)(18) Downpayment
Comment 2(a)(18)-3 provides guidance on how a creditor discloses
the downpayment if a trade-in is
[[Page 16615]]
involved in a credit sale transaction and if the amount of an existing
lien exceeds the value of the trade-in. Under Regulation Z, the term
``downpayment'' refers to an amount, including the value of any
property used as a trade-in, paid to a seller to reduce the ``cash
price.'' If the amount of an existing lien exceeds the value of the
property being used as a trade-in and no cash payment is involved,
creditors must disclose zero as the downpayment and not a negative
number. The proposed comment also added an example where the consumer
makes a cash payment. In that example, creditors would apply the cash
payment to the excess lien amount rather than reduce the price of the
purchased item. In response to commenters' concerns, the comment has
been revised to provide flexibility. At their option, creditors may
first apply the cash payment to reduce the price of the purchased item.
Many commenters opposed the proposal. Some believed that applying
the cash payment to the excess lien amount would be confusing to
consumers because the creditor's treatment of the cash payments might
not be readily apparent. They argued that the comment should comport
with consumers' general expectations--that cash payments would be
disclosed as downpayments that reduce the cash price.
Moreover, commenters stated that, where cash payments are made in
credit sales involving a trade-in and a lien on the property that
exceeds the value of the trade-in, many creditors currently apply the
cash payment to any excess lien amount. These creditors disclose the
cash payment as a downpayment. Many of these creditors, along with
consumer advocates and state Attorneys General commenting on the issue,
believe disclosing a downpayment equal to the cash payment is more
helpful to consumers. They express concern about the potential for
confusion under the proposal when, for example, a cash payment of $500
is applied to an excess lien amount of $2,000 and the downpayment is
disclosed as $0, even if the cash payment is disclosed elsewhere in the
itemization of the amount financed. (See Sec. 226.18(c).) Some
commenters also believed the proposal potentially conflicts with some
state laws regarding the disclosure of downpayments.
In response to comments received and upon further analysis, the
proposed example has been revised. In disclosing a downpayment where
cash payments are made in credit sales involving a trade-in and a lien
on the property that exceeds the value of the trade-in, creditors may,
but need not, apply the cash payment first to any excess lien amount.
Subpart B--Open-end Credit
Section 226.12--Special Credit Card Provisions
12(a) Issuance of Credit Cards
12(a)(1)
Section 226.12(a) prohibits creditors from issuing credit cards
except in response to a consumer's request or application for the card
or as a renewal of, or substitute for, a previously accepted credit
card. The prohibition, which parallels the statute, addresses various
concerns including the potential for theft and fraud and the consumer
inconvenience of refuting claims of liability. The law does not
prohibit creditors from issuing unsolicited cards that have a non-
credit purpose--such as check-guarantee or purchase-price discount
cards--so long as they cannot also be used to obtain credit. Consumers
may later be able to convert these cards to credit cards if the issuer
makes a credit feature available and the consumer requests the credit.
Comment 12(a)(1)-7 provides guidance regarding a card that is
issued to and accepted by the consumer as a non-credit device and that
subsequently is converted for use as a credit device at the consumer's
request. The revisions clarify the comment's applicability to recent
programs where unsolicited cards are marketed from the outset as both
stored-value cards and credit cards. The Board proposed revisions to
the comment to reflect more clearly its intended purpose.
Views were mixed on the proposal. Commenters that opposed the
revisions cited a variety of reasons for their position. Some believed
the concerns associated with the prohibition--theft, fraud, and the
inconvenience of refuting claims of liability--were outdated, due to
advances in technology and industry practice regarding fraud
prevention, and TILA's $50 maximum potential loss for consumers. Others
believed the proposal would inappropriately deter the development of
multifunction cards. They discussed the convenience of such cards and
urged that any rule be crafted narrowly so as to not affect the
continuing development of multifunction cards. The prohibition is,
however statutory.
Comment 12(a)(1)-7 is revised in accord with the proposal, with
some changes to address commenters' concerns. The fundamental import of
the comment remains unchanged: Multifunction cards connected with
credit plans when they are issued are credit cards, and they may not be
sent without the consumer's prior request or application. New examples
have been added to provide further guidance. The comment makes clear
that card issuers do not violate the prohibition merely by sending a
card imprinted with information that identifies the consumer, so long
as the issuer does not propose to connect the card to a credit plan at
the time the card is issued.
To the extent that the interpretation of the TILA rule previously
may have been unclear, the Board believes that liability should not
attach to a card issuer's prior reliance on comment 12(a)(1)-7 in
issuing multifunction cards that included a credit feature.
Section 226.14--Determination of Annual Percentage Rate
14(c) Annual Percentage Rate for Periodic Statements
Comment 14(c)-10 addresses finance charges that are imposed during
the current billing cycle but that relate to account activity that
occurred during a prior billing cycle. The comment is revised to refer
expressly to current-cycle or prior-cycle debits and current-cycle or
prior-cycle credits.
Subpart C--Closed-end Credit
Section 226.18--Content of Disclosures
18(g) Payment Schedule
The Homeowners Protection Act of 1998 limits the amount of private
mortgage insurance (PMI) consumers can be required to purchase.
Borrowers may request cancellation of PMI under some circumstances and
lenders must terminate PMI automatically when certain conditions are
met.
Comment 18(g)-5 is added in response to creditors' requests for
guidance on how the new statutory requirements affect TILA disclosures.
PMI premiums are finance charges and are figured into disclosures such
as the APR and payment schedule. TILA disclosures are based on the
legal obligation between the parties, and the comment provides that the
payment schedule disclosure should reflect all components of the
finance charge, including PMI for the time period there is a legal
obligation to maintain the insurance.
Commenters generally supported the proposed guidance, although a
few believed the guidance was unnecessary and others believed the
guidance was not detailed enough. In response to comments received, the
comment is revised to clarify that creditors may rely on assumptions
used for variable-rate transactions and discounted and
[[Page 16616]]
premium variable-rate transactions in calculating payment schedules
that involve PMI.
18(j) Total Sale Price
Comment 18(j)-2 provides the formula for calculating the total sale
price in a credit sale transaction; it is the sum of the cash price,
certain other amounts financed, and the finance charge. In response to
requests for guidance, the commentary is revised to address how the
total sale price may be affected by downpayments involving both cash
and property used as a trade-in with a lien exceeding the value of the
trade-in. This guidance is provided in a new comment 18(j)-3.
Under the proposal, creditors were to calculate the downpayment by
applying cash payments first to reduce excess lien amounts. In response
to commenters' concerns about the Board's proposed approach to
disclosing the downpayment, the guidance has been revised. See comment
2(a)(18)-3.
The flexibility provided to creditors in disclosing a downpayment
may result in disclosures of a total sale price that may differ among
creditors. However, key disclosures such as the amount financed,
finance charge, and APR remain uniform and will not be affected by the
creditor's approach in disclosing the downpayment and total sale price.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.32--Requirements for Certain Closed-end Home Mortgages
32(a) Coverage
32(a)(1)(ii)
Creditors must follow the rules in Sec. 226.32 if the total points
and fees payable by the consumer at or before loan closing exceed the
greater of $400 or 8 percent of the total loan amount. The Board is
required to adjust the $400 amount each year. The adjusted amount for
1999 ($441), published on December 8, 1998 (63 FR 67575) is added to
comment 32(a)(1)(ii)-2.
List of Subjects in 12 CFR Part 226
Advertising, Banks, banking, Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting and recordkeeping requirements,
Truth in lending.
For the reasons set forth in the preamble, the Board amends 12 CFR
part 226 as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
2. In Supplement I to Part 226, under Section 226.2--Definitions
and Rules of Construction, the following amendments are made:
a. Under Paragraph 2(a)(15) Credit card., paragraph 2. is revised;
and
b. Under Paragraph 2(a)(18) Downpayment., paragraph 3. is revised.
The revisions read as follows:
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
2(a) Definitions.
* * * * *
2(a)(15) Credit card.
* * * * *
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, a 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.
* * * * *
2(a)(18) Downpayment.
* * * * *
3. Effect of existing liens. i. No cash payment. In a credit sale,
the ``downpayment'' may only be used to reduce the cash price. For
example, when a trade-in is used as the downpayment and the existing
lien on an automobile to be traded in exceeds the value of the
automobile, creditors must disclose a zero on the downpayment line
rather than a negative number. To illustrate, assume a consumer owes
$10,000 on an existing automobile loan and that the trade-in value of
the automobile is only $8,000, leaving a $2,000 deficit. The creditor
should disclose a downpayment of $0, not -$2,000.
ii. Cash payment. If the consumer makes a cash payment, creditors
may, at their option, disclose the entire cash payment as the
downpayment, or apply the cash payment first to any excess lien amount
and disclose any remaining cash as the downpayment. In the above
example:
A. If the downpayment disclosed is equal to the cash payment, the
$2,000 deficit must be reflected as an additional amount financed under
Sec. 226.18(b)(2).
B. If the consumer provides $1,500 in cash (which does not
extinguish the $2,000 deficit), the creditor may disclose a downpayment
of $1,500 or of $0.
C. If the consumer provides $3,000 in cash, the creditor may
disclose a downpayment of $3,000 or of $1,000.
* * * * *
3. In Supplement I to Part 226, under Section 226.12--Special
Credit Card Provisions, under Paragraph 12(a)(1), paragraph 7. is
revised to read as follows:
* * * * *
Subpart B--Open-end Credit
* * * * *
Section 226.12--Special Credit Card Provisions
* * * * *
12(a) Issuance of credit cards.
Paragraph 12(a)(1)
* * * * *
7. Issuance of non-credit cards. i. General. Under
Sec. 226.12(a)(1), a credit card cannot be issued except in response to
a request or an application. (See comment 2(a)(15)-2 for examples of
cards or devices that are and are not credit cards.) A non-credit card
may be sent on an unsolicited basis by an issuer that does not propose
to connect the card to any credit plan; a credit feature
[[Page 16617]]
may be added to a previously issued non-credit card only upon the
consumer's specific request.
ii. Examples. A purchase-price discount card may be sent on an
unsolicited basis by an issuer that does not propose to connect the
card to any credit plan. An issuer demonstrates that it proposes to
connect the card to a credit plan by, for example, including
promotional materials about credit features or account agreements and
disclosures required by Sec. 226.6. The issuer will violate the rule
against unsolicited issuance if, for example, at the time the card is
sent a credit plan can be accessed by the card or the recipient of the
unsolicited card has been preapproved for credit that the recipient can
access by contacting the issuer and activating the card.
* * * * *
4. In Supplement I to Part 226, Section 226.14--Determination of
Annual Percentage Rate, under Paragraph 14(c) Annual percentage rate
for periodic statements., paragraph 10.ii. is republished and paragraph
10.ii.B. is revised to read as follows:
* * * * *
Section 226.14--Determination of Annual Percentage Rate
* * * * *
14(c) Annual percentage rate for periodic statements.
* * * * *
10. Prior-cycle adjustments.
* * * * *
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
* * * * *
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 accord with ii.A. of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.
* * * * *
5. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, the following amendments are made:
a. Under 18(g) Payment schedule., a new paragraph 5. is added; and
b. Under 18(j) Total sale price., a new paragraph 3. is added.
The additions read as follows:
* * * * *
Subpart C--Closed-end Credit
* * * * *
Section 226.18--Content of Disclosures
* * * * *
18(g) Payment schedule.
* * * * *
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. (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.)
* * * * *
18(j) Total sale price.
* * * * *
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. 226.18(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. 226.18(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.
* * * * *
6. In Supplement I to Part 226, Section 226.32--Requirements for
Certain Closed-end Home Mortgages, under Paragraph 32(a)(1)(ii),
paragraph 2.iv. is added to read as follows:
* * * * *
Subpart E--Special Rules For Certain Home Mortgage Transactions
* * * * *
Section 226.32--Requirements for Certain Closed-end Home Mortgages
* * * * *
32(a) Coverage.
* * * * *
Paragraph 32(a)(1)(ii).
* * * * *
2. Annual adjustment of $400 amount.
* * * * *
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.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, March 31, 1999.
Robert deV. Frierson,
Associate Secretary of the Board.
[FR Doc. 99-8413 Filed 4-5-99; 8:45 am]
BILLING CODE 6210-01-P
