concerning the disclosure of multiple periodic rates and their corresponding annual percentage rates in connection with open end credit plans offered by certain credit unions. In your letter, you indicated that credit unions operate open end credit plans under which customers may receive extensions of credit from time to time. According to the terms of the plan described in your letter, each new extension of credit must be secured by some form of collateral and the annual percentage rate that will be applicable to a given loan depends on the type of collateral offered as security. In your letter you asked whether the following disclosure of the various periodic rates and their corresponding annual percentage rates would suffice for the purposes of § 226.7(a)(4): I promise to pay at your address, all sums advanced from time to time on loan accounts under this open end secured loan agreement plus Finance Charge (interest) at the periodic rate at a corresponding Annual Percentage of -% per which is Rate of -% for -loans, except that the Finance Charge (interest) at the periodic rate of sponding Annual -% per -%, for odic rate of -% for which is at a correPercentage rate of loans; and the periwhich is at a corresponding Annual Percentage rate of per loans. Staff feels that it should be noted that it has a policy of not reviewing forms and that § 226.1(d)(3) specifies that the staff has no authority to issue official staff interpretations approving creditors' forms. The question you have raised, however, concerns the sufficiency of a specific disclosure, and staff feels that it is proper within its authority to provide an official comment on the sufficiency of the disclosure. Staff is of the opinion that the disclosure quoted above gives all the necessary information required under § 226.7(a)(4) but that there are both form and grammatical problems involved in this disclosure making it likely that a consumer might be confused as to its meaning. Staff suggests that the disclosure of the periodic and annual percentage rates for purposes of § 226.7(a)(4) might be revised and clarified to read as follows: For loans secured by the periodic rate of per cent per which corresponds to an Annual Percentage Rate of per cent. For loans secured by the periodic rate is per cent per which corresponds to an Annual Percentage Rate of per cent. Staff believes that this disclosure, while not providing any information not supplied In closing, I would also like to add that this letter is in no way intended to express any opinion on any other aspect of the plan which you have established. Our opinion is based on the assumption that the plan is a valid open end credit plan, that all other disclosures are made as required by the Act, and that the terms of the plan are as you have disclosed in your letter. This is an official staff interpretation of Regulation Z issued in accordance with § 226.1(d)(3) of the Regulation. I trust that it is responsive to your inquiry. Sincerely, JERAULD C. KLUCKMAN, Assistant Director. [41 FR 54478, Dec. 14, 1976] [FC-0015] § 226.6(j) Increase in periodic rate to prior level following previously disclosed reduction for leap year must be treated as change in terms subject to § 7(f), but disclosure of prior reduction was not required pursuant to § 6(j). § 226.7(f) Increase in periodic rate to prior level following previously disclosed reduction for leap year must be treated as change in terms subject to § 7(f), but disclosure of prior reduction was not required pursuant to § 6(j). OCTOBER 12, 1976. * * This is in response to your letter of in which you requested an official staff interpretation regarding the necessity to disclose a change in the terms of an open end credit plan where the change in terms involved rate changes caused by leap year. In your letter you indicated that your client operates an open end credit plan. The initial § 226.7(a) disclosure statement used in 1975 in connection with this plan disclosed a daily periodic rate of .03150 per cent and an annual percentage rate of 11.5 per cent. During leap year 1976 the bank reduced this daily periodic rate to 0.3142 per cent to take account of the extra day in the year and disclosed this reduced rate on the § 226.7(b) periodic monthly statements. You have indicated that for 1977 the bank intends to increase the daily periodic rate back to the 1975 rate, and you have questioned whether the bank is required under § 226.7(f) to notify customers of the increase of the daily periodic rate back to the amount originally disclosed on the § 226.7(a) initial disclosure statement. Staff is of the opinion that, in view of the fact that the lower leap year periodic rate has been disclosed to consumers, the subsequent rise in the daily periodic rate to the 1975 level constitutes a change in terms and must be disclosed in accordance with § 226.7(f). Staff feels that it should be noted that § 226.6(j) provides that variances in disclosures which occur by reason of the additional day in leap year may be disregarded and the term may be disclosed or stated without regard to the variance. In our telephone conversation, you indicated that your client disclosed the lower daily periodic rate because that rate had to be reduced to remain in compliance with the usury laws. Staff is of the opinion that the meaning of § 226.6(j) is that your client could have internally reduced the daily periodic rate to .03142 per cent in order to remain in compliance with the usury laws but could have continued to disclose the higher daily periodic rate without notifying consumers of the internal change. However, due to the fact that the lower rate was disclosed to your client's customers, the return to the 1975 daily periodic rate constitutes a change in the disclosed terms, and the customers must be notified of this change in accordance with § 226.7(f). This is an official staff interpretation issued in accordance with § 226.1(d)(3) of Regulation Z and is limited to the facts as stated above. I trust that it is responsive to your inquiry. Sincerely, JERAULD C. KLUCKMAN, Assistant Director. [41 FR 54478, Dec. 14, 1976] [FC-0016] § 226.7(k) Transactions with corporate subsidiaries of the card issuer when those subsidiaries operate under completely different names from the card issuer and billing is only in the name of the card issuer, may be described in three party, and not two party manner. The companies would not be considered the same or related person for billing purposes. § 226.13(h) State law controls as to whether a card issuer and business card holder must renegotiate a contract setting liability limits higher than $50, entered into prior to effective date of § 135 of the Act. § 226.13(h) This section may apply for its own reasons, a business act provides less than 10 cards to less 10 of its employees. However, a situat in which the section is invoked and the business clearly is not in a position provide 10 or more cards to 10 or m employees may be an attempt to circ vent or evade the law. NOVEMBER 9, 1976 This is in response to your letters of *** and *** raising several questions unde Regulation Z. To the extent possible, I w. attempt to answer the questions in the order presented in the September 2 letter 1. Your first question is whether a car issuer and a business who, prior to the effer tive date of § 135 of the Act, entered into a special agreement limiting the liability the business in the event of unauthori use of any of its credit cards are compe..es by 135 of the Act and § 226.13(h) of the Regulation to enter into a new contract to avoid the liability limits of § 226.13(b) A: we understand it, the facts underlying your question can be exemplified as follows: On a date prior to October 28, 1974, Cart Issuer entered into a contract with Busines for issuance of 10 or more cards to Busines employees to be used, at least in part, fr business purposes. This contract limited B siness's liability for unauthorized use of ar of the cards so issued to $100, rather that $50 as specified by § 133 of the Act and § 226.13(b) of Regulation Z. It is staff's view that, until the Act wa amended by the addition of § 135, this cor tract was unenforceable as a matter of Fec eral law. We assume you agree. Your question is whether, now that the law permits such an agreement by virtue the addition of § 135 of the Act and § 226.13(h) of Regulation Z, a new contract must be entered into in order to avoid the $50 limit and use the $100 liability limit its place. It is staff's opinion that such a contract is presently unobjectionable from the standpoint of the Federal Act and Rega lation Z, so long as all the criteria or § 226.13(h) are met. However, this situation may raise a ser ous question under local law, such as wheth er such a contract is void ab initio, because it contravened prevailing law when entered into and, thus, could be viewed as forever of no force and effect. Staff ventures no opin ion with respect to local law in your jurisdic tion. 2. Your second question concerns the ap plicability of § 226.13(h) to situations in which a card issuer may issue 10 or more credit cards to a business which, for its own reasons, issues all or some of the cards to fewer than 10 employees. Your concern is that § 135 of the Act, in your view, appears permit differing contractual liability only nen the cards are actually provided to 10 more employees. It is this staff's view at § 226.13(h) was written on the general sumption that the 10 or more cards issued a business will, indeed, be provided to 10 more employees of that business. Howev, the Regulation takes into account the ct that there may be instances in which e business may, for its own reasons, have wer than 10 employees holding the cards. or example, an employee may terminate nployment and surrender his or her card, us bringing the number of employees olding the cards to fewer than 10. It is aff's opinion that in such cases it was not tended by Congress or the Board that the ntract setting special liability limits beveen the card issuer and the business 1ould be abrogated. However, staff is of the opinion that were card issuer to issue 10 cards to a business ith fewer than 10 employees likely to hold he card and no plans to increase the size of s staff (for example, when the business onsists of only 3 employees), any attempt o invoke the provisions of § 226.13(h) could e viewed as an attempt to circumvent or vade the Act and Regulations. 3. Your final question is with respect to he identification of transactions requirenents of § 226.7(k). The card issuer, an airine company, has a hotel chain and a resaurant chain as wholly owned subsidiaries. The credit card, issued in the name of the irline company, may be used to purchase goods and services at the hotels and restauants of these subsidiaries. The names of Che airline, hotel, and restaurant companies are all different from each other. You ask whether transactions with these hotels and restaurants may be identified by the name and address of the establishment providing the goods and services or whether they should be identified with reference to the particular goods or services purchased. In staff's view, the situation you describe does not result in the hotels and restaurants being "the same person or related persons" in relation to the airline company who issued the credit card as was contemplated by § 226.7(k)(2)(i). The basic purpose of these recent amendments is to require identification of transactions in a manner which will assist the customer in recalling a charge made. One of the prime factors underlying development of these regulations was a concern for how the customer views the transaction. In situations such as yours, where the card issuer and the corporate subsidiary operate under entirely different names and the periodic statement is sent in the name of the card issuer alone, staff views it as highly unlikely that any but the most sophisticated of customers would know of the corporate connection between the card issuer and the subsidiary. In such situations staff views it as most beneficial and, therefore, permissible to identify such transactions by providing the amount and date of each transaction and the seller's name and city-state address. This is an official staff interpretation of Regulation Z issued under § 226.1(d)(3) and limited to the facts enumerated above. I trust it responsive to your inquiry. Sincerely, JERAULD C. KLUCKMAN, [41 FR 54478, Dec. 14, 1976] [FC-0017] § 226.7(k) Credit union drafts which are debitted to a line of credit may be identified by describing them as Rite on Line drafts. Description must include amount and date of transaction or date placed on the draft, if signed by the customer. NOVEMBER 9, 1976. This is in reply to your letter of raising questions under Regulation Z regarding a personal line of credit program offered by your credit union. You indicate that the customer is issued a book of drafts which may be written for cash, for deposit to the customer's checking account, or to a third party. The drafts, which are guaranteed by the credit union, are payable through a special account in the credit union's bank. Upon payment by the credit union's bank, the draft is returned to the credit union and debited to the customer's credit account. You state that the periodic statements sent to the customers identify such transactions as Rite-on-Line drafts and show the amount of the draft and the date the amount is debited to the customer's account. You ask whether this procedure is in compliance with Regulation Z. Staff believes that the description you provide, insofar as it characterizes the transaction as a Rite-on-Line draft and provides the amount of the transaction, is in compliance with the regulation. However, § 226.7(k)(3) of the recently adopted amendments to Regulation Z (copy enclosed) will ultimately require after October 28, 1977, that you disclose either the date of the transaction, or the date which appears on the draft, if the draft is signed by the customer. A transition period has been provided to enable creditors to adjust their systems, if necessary, to meet these requirements. The transition period provision permits the use of the debiting date until October 28, 1976. Between October 28, 1976, and October 28, 1977, the debiting date may be substituted for the date otherwise required if, because of operational limitations, the creditor cannot disclose the primarily required date. After October 28, 1977, the reg ulation contemplates that creditors will have procedures in place to procure the primarily required date. It, therefore, permits use of the debiting date only if those procedures do not procure the primarily required date in a particular instance. I trust this is responsive to your inquiry. This is an official staff interpretation of Regulation Z issued under § 226.1(d)(3) and is limited to the facts outlined herein. Sincerely, JERAULD C. KLUCKMAN, Assistant Director. [41 FR 51390, Nov. 22, 1976; 42 FR 7948, Feb. 8, 1977] [FC-0018] § 226.6(g) Requiring additional security in the form of a third party security agreement after customer experiences difficulty in meeting obligation is "subsequent occurrence" which does not require new disclosures when all terms of the original transaction remain unchanged. NOVEMBER 11, 1976. This is in response to your letter of in which you inquire whether a creditor must make the disclosures required by the Truth in Lending Act to a guarantor who executes a surety agreement subsequent to the original extension of credit. The agreement was executed after the customer experienced difficulty in meeting the obligation. In your letter you stated that all terms of the original transaction remained in force after execution of the surety agreement. It is staff's opinion that no disclosures are required under Regulation Z (which implements the Truth in Lending Act) when additional security, such as the surety agreement by a third party which you describe, is required subsequent to consummation of the transaction, if there are no other changes in the terms of the obligation. While the definition of "customer" in Regulation Z (§ 226.2(u)) includes "a comaker, endorser, guarantor, or surety . . . who is or may be obligated to repay the extension of consumer credit," the Regulation states in § 226.6(e) that disclosures must be given only to one customer who is primarily liable unless the transaction is rescindable under § 226.9. Furthermore, in this instance the taking of additional security subsequent to consummation of the transaction would be considered a "subsequent occurrence" under § 226.6(g) of the Regulation. That paragraph provides that no new disclosures are required when an agreement executed subsequent to the delivery of the required disclosures results in an inaccuracy in the information disclosed. Footnote 6 to § 226.6(g) states that such "agreement include the failure of the customer to perform his e gations under the contract and such act.c by the creditor as may be proper to prote his interest in such circumstances." I am enclosing a copy of the Regulation 2 pamphlet which includes the statute and the relevant sections of the Regulation This is an official staff interpretation Regulation Z, issued in accordance with § 226.1(d)(3) and relates solely to the ques tions presented. I trust this has been re sponsive to your inquiry. Sincerely, JERAULD C. KLUCKMAN, [41 FR 51391, Nov. 22, 1976] [FC-0019] §§ 226.2(n), 226.4(a), and 226.8(c) Cost of optional service contract sold with automobile is not part of finance charge : may be disclosed as part of cash price or as another charge. NOVEMBER 12, 1976. This is in response to your letter of *** inquiring as to the proper method of disc.o sure under Truth in Lending and Regua tion Z of a service contract sold by an auto mobile dealer at the time of the sale of a automobile. The service or maintenare "package" may take the form of a book of coupons for certain service privileges or ma consist of a certificate entitling the buyer to a discount on all service work done by that dealer on that vehicle for a stated period. These "packages" are sold for a considera tion over and above the vehicle's cash price and are optional with the vehicle buyer. You ask whether the existence and cost of such a service contract must be disclosed order to exclude such cost from the finance charge revealed on the credit sale disclosure statement. Since the cost of the service con tract is not "imposed directly or indirectly by the creditor as an incident to or as a condition of the extension of credit," it is not a finance charge within the meaning of § 226.4 of Regulation Z. It therefore need not be itemized or described in order to be excluded from the finance charge. You ask further whether the cost of the service contract should be disclosed as a part of the "cash price" under § 226.8(c! or whether it should be disclosed as ar "other charge" under § 226.8(c)(4). "Cash price" is defined in § 226.2(n) to mean the price at which a creditor offers to sell for cash the property or services which are the subject of the consumer credit transaction and may include the cash price of accessories or services related to the sale. Since the service contract can be viewed as a service related to the sale, it appears to staff that inclusion of the cost in the cash price is per sible under Regulation Z. You will note, wever, that § 226.2(n) says that the cash ce "may include the cash price of accessos or services" (emphasis added) and does require that such cost be included in the h price. Thus, it appears that these costs y also be treated as "other charges" der § 226.8(c)(4), since they are included the amount financed but are not part of finance charge. 'his letter is an official staff interpretan of Regulation Z, issued in accordance h § 226.1(d)(3) of the regulation, and I ist that it is responsive to your inquiry. Sincerely, I FR 51391, Nov. 22, 1976] [FC-0020] JANET HART, Director. ar 26.2(p) A prejudgement workout rangement, which is in writing and involves either a finance charge or more than four installments constitutes an extension of consumer credit subject to the disclosure requirements of § 226.8 (b) and (d) regardless of whether the original transaction was classified as "open end credit" or "credit other than open end". 226.7(f) Creditor need not disclose a change in credit terms of an open end credit account under § 226.7(f) to those creditors' cardholders who are not affected by the change in terms. NOVEMBER 3, 1976. This is in response to your letter of * equesting an official staff interpretation with regard to the effect of Regulation Z on an open end credit plan collection program which your bank may implement. You indicate in your letter that the collection program proposed would involve an existing open end credit plan in which the customers had lost their privileges as credit cardholders at a predetermined time due to non-payment, with no further advances being made until the account has been paid to the bank's satisfaction. The bank wishes to offer delinquent customers the opportunity to repay their debts in terms differing from the original open end credit plan. For example, the bank may allow repayment of the indebtedness with the monthly principal payments reduced (e.g., 5 percent of the principal each month as opposed to 10 percent of principal) and with the finance charges either reduced (e.g., 6 percent annual percentage rate as compared to the normal 18 percent open end credit annual percentage rate) or eliminated. You question whether the collection program described would: (1) Render the credit plan other than open end, thereby requiring disclosures under § 226.8 of Regulation Z; (2) Require the making of new open end disclosure under § 226.7(a) when the debtor has paid the account to the bank's satisfaction in order for the customer to receive new advances or revolving credit privileges and (3) Constitute a charge in "credit terms" which would require an initial disclosure to all credit cardholders if the collection program is adopted on a general non-objective basis. Staff is of the opinion that the issue of whether a prejudgment workout arrangement is subject to the other than open end credit disclosures of § 226.8 is dependent upon whether such a workout arrangement is informal (e.g., by telephone) or written. A prejudgment workout arrangement, which is in writing and involves either a finance charge or more than four instalments, constitutes an extension of consumer credit subject to the disclosure requirements of § 226.8 (b) and (d) regardless of whether the original transaction was classified as "open end credit" or "credit other than open end." Therefore, if your collection program involves a formal written prejudgment workout arrangement, then the bank would be required to make other than open end credit disclosures in accordance with § 226.8. Furthermore, should the bank decide to extend open end credit to the debtor after satisfaction of the delinquent account, the debtor should be provided once again with the initial open end disclosures to prevent confusion. If the bank adopts such a collection program, staff believes that such a program would not require the bank to disclose a change in "credit terms" under § 226.7(f) to all of the bank's credit cardholders. Staff views the requirements of § 226.7(f) as requiring a creditor to disclose a change in terms in an open end credit plan only to those customers who would be affected by such change, since disclosure to unaffected customers could cause confusion as to the status of their accounts. This letter is an official staff interpretation of Regulation Z issued in accordance with § 226.1(d)(3) of the regulation. I trust it is responsive to your inquiry. Sincerely, JERAULD C. KLUCKMAN, [41 FR 52980, Dec. 3, 1976] |