[Federal Register Volume 72, Number 114 (Thursday, June 14, 2007)]
[Proposed Rules]
[Pages 32948-33145]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-2656]



[[Page 32947]]

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Part II





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Proposed Rule

Federal Register / Vol. 72, No. 114 / Thursday, June 14, 2007 / 
Proposed Rules

[[Page 32948]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1286]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the staff commentary to the 
regulation, following a comprehensive review of TILA's rules for open-
end (revolving) credit that is not home-secured. The proposed revisions 
take into consideration comments from the public on an initial advance 
notice of proposed rulemaking (ANPR) published in December 2004 on a 
variety of issues relating to the format and content of open-end credit 
disclosures and the substantive protections provided under the 
regulation. The proposal also considers comments received on a second 
ANPR published in October 2005 that addressed several amendments to 
TILA's open-end credit rules contained in the Bankruptcy Abuse 
Prevention and Consumer Protection Act of 2005. Consumer testing was 
conducted as a part of the review.
    Except as otherwise noted, the proposed changes apply solely to 
open-end credit. Disclosures accompanying credit card applications and 
solicitations would highlight fees and reasons penalty rates might be 
applied, such as for paying late. Creditors would be required to 
summarize key terms at account opening and when terms are changed. The 
proposal would identify specific fees that must be disclosed to 
consumers in writing before an account is opened, and give creditors 
flexibility regarding how and when to disclose other fees imposed as 
part of the open-end plan. Periodic statements would break out costs 
for interest and fees. Two alternatives are proposed dealing with the 
``effective'' or ``historical'' annual percentage rate disclosed on 
periodic statements.
    Rules of general applicability such as the definition of open-end 
credit and dispute resolution procedures would apply to all open-end 
plans, including home-equity lines of credit. Rules regarding the 
disclosure of debt cancellation and debt suspension agreements would be 
revised for both closed-end and open-end credit transactions. Loans 
taken against employer-sponsored retirement plans would be exempt from 
TILA coverage.

DATES: Comments must be received on or before October 12, 2007.

ADDRESSES: You may submit comments, identified by Docket No. R-1286, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Amy Burke or Vivian Wong, Attorneys, 
Krista Ayoub, Dan Sokolov, Ky Tran-Trong, or John Wood, Counsels, or 
Jane Ahrens, Senior Counsel, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, at (202) 
452-3667 or 452-2412; for users of Telecommunications Device for the 
Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background on TILA and Regulation Z

    Congress enacted the Truth in Lending Act (TILA) based on findings 
that economic stability would be enhanced and competition among 
consumer credit providers would be strengthened by the informed use of 
credit resulting from consumers' awareness of the cost of credit. The 
purposes of TILA are (1) to provide a meaningful disclosure of credit 
terms to enable consumers to compare credit terms available in the 
marketplace more readily and avoid the uninformed use of credit; and 
(2) to protect consumers against inaccurate and unfair credit billing 
and credit card practices.
    TILA's disclosures differ depending on whether consumer credit is 
an open-end (revolving) plan or a closed-end (installment) loan. TILA 
also contains procedural and substantive protections for consumers. 
TILA is implemented by the Board's Regulation Z. An Official Staff 
Commentary interprets the requirements of Regulation Z. By statute, 
creditors that follow in good faith Board or official staff 
interpretations are insulated from civil liability, criminal penalties, 
or administrative sanction.

II. Summary of Major Proposed Changes

    The goal of the proposed amendments to Regulation Z is to improve 
the effectiveness of the disclosures that creditors provide to 
consumers at application and throughout the life of an open-end (not 
home-secured) account. The proposed changes are the result of the 
Board's review of the provisions that apply to open-end (not home-
secured) credit. The Board's last comprehensive review of Regulation Z 
was in 1981. The Board is proposing changes to format, timing, and 
content requirements for the five main types of open-end credit 
disclosures governed by Regulation Z: (1) Credit and charge card 
application and solicitation disclosures; (2) account-opening 
disclosures; (3) periodic statement disclosures; (4) change-in-terms 
notices; and (5) advertising provisions.
    Applications and solicitations. The proposal contains changes to 
the format and content to make the credit and charge card application 
and solicitation disclosures more meaningful and easier for consumers 
to use. The proposed changes include:
     Adopting new format requirements for the summary table, 
including rules regarding: Type size and use of boldface type for 
certain key terms, placement of information, and the use of cross-
references.
     Revising content, including: A requirement that creditors 
disclose the duration that penalty rates may be in effect, a shorter 
disclosure about variable rates, new disclosures highlighting the 
effect of creditors' payment allocation practices, and a reference to 
consumer education materials on the Board's Web site.
    Account-opening disclosures. The proposal also contains revisions 
to the cost disclosures provided at account opening to make the 
information more conspicuous and easier to read. The proposed changes 
include:

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     Disclosing certain key terms in a summary table at account 
opening, which would be substantially similar to the table required for 
credit and charge card applications and solicitations, in order to 
summarize for consumers key information that is most important to 
informed decision-making.
     Adopting a different approach to disclosing fees, to 
provide greater clarity for identifying fees that must be disclosed. In 
addition, creditors would have flexibility to disclose charges (other 
than those in the summary table) in writing or orally.
    Periodic statement disclosures. The proposal also contains 
revisions to make disclosures on periodic statements more 
understandable, primarily by making changes to the format requirements, 
such as by grouping fees, interest charges, and transactions together. 
The proposed changes include:
     Itemizing interest charges for different types of 
transactions, such as purchases and cash advances, and providing 
separate totals of fees and interest for the month and year-to-date.
     Modifying the provisions for disclosing the ``effective 
APR,'' including format and terminology requirements to make it more 
understandable. Because of concerns about the disclosure's 
effectiveness, however, the Board is also soliciting comment on whether 
this rate should be required to be disclosed.
     Requiring disclosure of the effect of making only the 
minimum required payment on repayment of balances (changes required by 
the Bankruptcy Act).
    Changes in consumer's interest rate and other account terms. The 
proposal would expand the circumstances under which consumers receive 
written notice of changes in the terms (e.g., an increase in the 
interest rate) applicable to their accounts, and increase the amount of 
time these notices must be sent before the change becomes effective. 
The proposed changes include:
     Generally increasing advance notice before a changed term 
can be imposed from 15 to 45 days, to better allow consumers to obtain 
alternative financing or change their account usage.
     Requiring creditors to provide 45 days' prior notice 
before the creditor increases a rate due to the consumer's delinquency 
or default.
     When a change-in-terms notice accompanies a periodic 
statement, requiring a tabular disclosure on the front of the periodic 
statement of the key terms being changed.
    Advertising provisions. The proposal would revise the rules 
governing advertising of open-end credit to help ensure consumers 
better understand the credit terms offered. These proposed revisions 
include:
     Requiring advertisements that state a minimum monthly 
payment on a plan offered to finance the purchase of goods or services 
to state, in equal prominence to the minimum payment, the time period 
required to pay the balance and the total of payments if only minimum 
payments are made.
     Permitting advertisements to refer to a rate as ``fixed'' 
only if the advertisement specifies a time period for which the rate is 
fixed and the rate will not increase for any reason during that time, 
or if a time period is not specified, if the rate will not increase for 
any reason while the plan is open.

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

A. December 2004 Advance Notice of Proposed Rulemaking

    The Board began a review of Regulation Z in December 2004.\1\ The 
Board initiated its review of Regulation Z by issuing an advance notice 
of proposed rulemaking (December 2004 ANPR). 69 FR 70925; December 8, 
2004. At that time, the Board announced its intent to conduct its 
review of Regulation Z in stages, focusing first on the rules for open-
end (revolving) credit accounts that are not home-secured, chiefly 
general-purpose credit cards and retailer credit card plans. The 
December 2004 ANPR sought public comment on a variety of specific 
issues relating to three broad categories: the format of open-end 
credit disclosures, the content of those disclosures, and the 
substantive protections provided for open-end credit under the 
regulation. The December 2004 ANPR solicited comment on the scope of 
the Board's review, and also requested commenters to identify other 
issues that the Board should address in the review. The comment period 
closed on March 28, 2005.
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    \1\ The review was initiated pursuant to requirements of section 
303 of the Riegle Community Development and Regulatory Improvement 
Act of 1994, section 610(c) of the Regulatory Flexibility Act of 
1980, and section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996.
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    The Board received over 200 comment letters in response to the 
December 2004 ANPR. More than half of the comments were from individual 
consumers. About 60 comments were received from the industry or 
industry representatives, and about 20 comments were received from 
consumer advocates and community development groups. The Office of the 
Comptroller of the Currency, one state agency, and one member of 
Congress also submitted comments.
    Scope. Commenters' views on a staged review of Regulation Z were 
divided. Some believe reviewing the regulation in stages makes the 
process manageable and focuses discussion and analysis. Others 
supported an independent focus on open-end credit rules because they 
believe open-end credit by its nature is distinct from other credit 
products covered by TILA and Regulation Z.
    Some commenters supported the Board's approach generally, but 
voiced concern that looking at the regulation in a piecemeal fashion 
may lead to decisions in the early stages of the review that may need 
to be revisited later. If the review is staged, these commenters want 
all changes implemented at the same time, to ensure consistency between 
the open-end and closed-end rules.
    Some commenters urged the Board to include open-end rules affecting 
home-equity lines of credit (HELOCs) in the initial stage of the 
review. If the Board chooses not to expand its review of open-end 
credit rules to cover home-secured credit, these commenters urged the 
Board to avoid making any revisions that would be inconsistent with 
existing HELOC requirements.
    A few commenters concurred with the Board's approach of reviewing 
Regulation Z in stages, but they preferred that the Board start with 
rules of general applicability, such as definitions. These commenters 
generally urged the Board to provide additional clarity on the 
definition of ``finance charge,'' TILA's dollar cost of credit.
    Finally, a few commenters stated the Board needs to review the 
entire regulation at the same time. They suggested a staged approach is 
not workable, and cited concerns about duplicating efforts, creating 
inconsistencies, and revisiting changes made in earlier stages of a 
lengthy review.
    Format. In general, commenters representing both consumers and 
industry stated that the tabular format requirements for TILA's direct-
mail credit card application and solicitation disclosures have proven 
useful to consumers, although a variety of suggestions were made to add 
or delete specific disclosures. Many, however, noted that typical 
account-opening disclosures are lengthy and complex, and suggested that 
the effectiveness of account-opening disclosures could be improved if 
key terms were summarized in a standardized format, perhaps in the same 
format as TILA's direct-mail credit card application and solicitation

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disclosures. These suggestions were consistent with the views of some 
members of the Board's Consumer Advisory Council. Industry commenters 
supported the Board's plan to use focus groups or other consumer 
research tools to test the effectiveness of any proposed revisions.
    To combat ``information overload,'' many commenters asked the Board 
to emphasize only the most important information that consumers need at 
the time the disclosure is given. They asked the Board to avoid rules 
that require the repetitive delivery of complex information, not all of 
which is essential to comparison shopping, such as a lengthy 
explanation of the creditor's method of calculating balances now 
required at account opening and on periodic statements. Commenters 
suggested that the Board would most effectively promote comparison 
shopping by focusing on essential terms in a simplified way. They 
believe some information could also be provided to consumers through 
nonregulatory, educational methods. Taken together, these approaches 
could lead to simpler disclosures that consumers might be more inclined 
to read and understand.
    Content. In general, commenters provided a variety of views on how 
to simplify TILA's cost disclosures. For example, some suggested that 
creditors should disclose only interest as the ``finance charge'' and 
simply identify all other fees and charges. Others suggested all fees 
associated with an open-end plan should be disclosed as the ``finance 
charge.'' Creditors sought, above all, clear rules.
    Comments were divided on the usefulness of open-end APRs. TILA 
requires creditors to disclose an ``interest rate'' APR for shopping 
disclosures (such as in advertisements and solicitations) and at 
account opening, and an ``effective'' APR on periodic statements that 
reflects interest and fees, such as transaction charges assessed during 
the billing period. In general, consumer groups suggested that the 
Board mandate for shopping disclosures an ``average'' or ``typical'' 
effective APR based on an historical average cost to consumers with 
similar accounts. An average APR, consumer representatives stated, 
would give consumers a more accurate picture of what consumers' actual 
cost might be. Regarding the effective APR on periodic statements, 
consumer advocates stated that it is a key disclosure that is helpful, 
and can provide ``shock value'' to consumers when fees cause the APR to 
spike for the billing cycle. Commenters representing industry argued 
that an effective APR is not meaningful, confuses consumers, and is 
difficult to explain. Some commenters suggested that a disclosure on 
the periodic statement that provides context by explaining what costs 
are included in the effective APR might improve its usefulness.
    Regarding advance notice of changes to rates and fees, comments 
were sharply divided. Creditors generally believe the current notice 
requirements are adequate, although for rate (and other) changes not 
involving a consumer's default, a number of creditors supported 
increasing the advance notice requirement from 15 to 30 days. Consumers 
and consumer representatives generally believe that when terms change, 
consumers should have the right under TILA to opt out of the new terms, 
or be allowed a much longer time period to find alternative credit 
products. They suggested a two-billing cycle advance notice or as long 
as 90 days. More fundamentally, these commenters believe card issuers 
should be held to the initial terms of the credit contract, at least 
until the credit card expires.
    Where triggering events are set forth in the account agreement such 
as events that might trigger penalty pricing, creditors believe there 
is no need to provide additional notice when the event occurs; they are 
not changing a term, they stated, but merely implementing the 
agreement. Some suggest that instead of providing a notice when penalty 
pricing is triggered, penalty pricing and the triggers should be better 
emphasized in the application and account-opening disclosures. 
Consumers and consumer representatives agree that creditors' policies 
about when terms may change should be more prominently displayed, 
including in the credit card application disclosures. They further 
believe the Board should provide new substantive protections to 
consumers, such as prohibiting the practice of increasing rates merely 
because the consumer paid late on another credit account.

B. The Bankruptcy Act's Amendments to TILA and October 2005 Advance 
Notice of Proposed Rulemaking

    The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
(the ``Bankruptcy Act'') primarily amended the federal bankruptcy code, 
but also contained several provisions amending TILA. Public Law 109-8, 
119 Stat. 23. The Bankruptcy Act's TILA amendments principally deal 
with open-end credit accounts and require new disclosures on periodic 
statements, on credit card applications and solicitations, and in 
advertisements.
    In October 2005, the Board published a second ANPR to solicit 
comment on implementing the Bankruptcy Act amendments (October 2005 
ANPR). 70 FR 60235; October 17, 2005. In the October 2005 ANPR, the 
Board stated its intent to implement the Bankruptcy Act amendments as 
part of the Board's ongoing review of Regulation Z's open-end credit 
rules. The comment period for the October 2005 ANPR closed on December 
16, 2005.
    The Board received approximately 50 comment letters in response to 
the October 2005 ANPR. Forty-five letters were submitted by financial 
institutions and their trade groups. Five letters were submitted by 
consumer groups.
    Minimum payment warnings. Under the Bankruptcy Act, creditors that 
offer open-end accounts must provide standardized disclosures on each 
periodic statement about the effects of making only minimum payments, 
including an example of how long it would take to pay off a specified 
balance, along with a toll-free telephone number that consumers can use 
to obtain an estimate of how long it will take to pay off their own 
balance if only minimum payments are made. The Board must develop a 
table that creditors can use in responding to consumers requesting such 
estimates.
    Industry commenters generally favored limiting the minimum payment 
disclosure to credit card accounts (thus, excluding HELOCs and 
overdraft lines of credit) and to those consumers who regularly make 
only minimum payments. Consumer groups generally favored broadly 
applying the rule to all types of open-end credit and to all open-end 
accountholders.
    Industry commenters supported having an option to provide 
customized information (reflecting a consumer's actual account status) 
on the periodic statement or in response to a consumer's telephone 
call, but also wanted the option to use a standardized formula 
developed by the Board. Consumer group commenters asked the Board to 
require creditors to provide more customized estimates of payoff 
periods through the toll-free telephone number and to not allow 
creditors to use a standardized formula, and supported disclosure of an 
``actual'' repayment time on the periodic statement.
    Late-payment fees. Under the Bankruptcy Act, creditors offering 
open-end accounts must disclose on each periodic statement the earliest 
date on which a late payment fee may be charged, as well as the amount 
of the fee.
    Industry commenters urged the Board to base the disclosure 
requirement on

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the contractual payment due date and to disregard any ``courtesy'' 
period that creditors informally recognize following the contractual 
payment due date. Although the industry provided mixed comments on any 
format requirements, most opposed a proximity requirement for 
disclosing the amount of the fee and the date. Comments were mixed on 
adding information about penalty APRs and ``cut-off times'' to the late 
payment disclosures. While supporters (a mix of industry and consumer 
commenters) believe the additional information is useful, others were 
concerned about the complexity of such a disclosure, and opposed the 
approach for that reason. Consumer commenters suggested substantive 
protections to ensure consumers' payments are timely credited, such as 
considering the postmark date to be the date of receipt.
    Internet solicitations. The Bankruptcy Act provides that credit 
card issuers offering cards on the Internet must include the same 
tabular summary of key terms that is currently required for 
applications or solicitations sent by direct mail.
    Although the Bankruptcy Act refers only to solicitations (where no 
application is required), most commenters (both industry and consumer 
groups) agreed that Internet applications should be treated the same as 
solicitations. Many industry commenters stated that the Board's interim 
final rule on electronic disclosures, issued in 2001, would be 
appropriate to implement the Bankruptcy Act. Regarding accuracy 
standards, the majority of industry commenters addressing this issue 
indicated that issuers should be required to update Internet 
disclosures every 30 days, while consumer groups suggested that the 
disclosures should be updated in a ``timely fashion,'' with 30 days 
being too long in some instances.
    Introductory rate offers. Under the Bankruptcy Act, credit card 
issuers offering discounted introductory rates must clearly and 
conspicuously disclose in marketing materials the expiration date of 
the offer, the rate that will apply after that date, and an explanation 
of how the introductory rate may be revoked (for example, if the 
consumer makes a late payment).
    In general, industry commenters asked for flexibility in complying 
with the new requirements. Consumer groups supported stricter 
standards, such as requiring an equivalent typeface for the word 
``introductory'' in immediate proximity to the temporary rate and 
requiring the expiration date and subsequent rate to appear either 
side-by-side with, or immediately under or above, the most prominent 
statement of the temporary rate.
    Account termination. Under the Bankruptcy Act, creditors are 
prohibited from terminating an open-end account before its expiration 
date solely because the consumer has not incurred finance charges on 
the account. Creditors are permitted, however, to terminate an account 
for inactivity.
    Regarding guidance on what should be considered an ``expiration 
date,'' several industry commenters suggested using card expiration 
dates as the account expiration date. Others cautioned against using 
such an approach, because accounts do not terminate upon a card 
expiration date. Regarding what constitutes ``inactivity,'' many 
industry commenters stated no further guidance is necessary. Among 
those suggesting additional guidance, most suggested ``activity'' 
should be measured only by consumers' actions (charges and payments) as 
opposed to card issuer activity (for example, refunding fees, billing 
inactivity fees, or waiving unpaid balances).
    High loan-to-value mortgage credit. For home-secured credit that 
may exceed the dwelling's fair-market value, the Bankruptcy Act 
amendments require creditors to provide additional disclosures at the 
time of application and in advertisements (for both open-end and 
closed-end credit). The disclosures would warn consumers that interest 
on the portion of the loan that exceeds the home's fair-market value is 
not tax deductible and encourage consumers to consult a tax advisor. 
Because these amendments deal with home-secured credit, the Board is 
not proposing revisions to Regulation Z to implement these provisions 
at this time. The Board anticipates implementing these provisions in 
connection with the upcoming review of Regulation Z's rules for 
mortgage transactions. Nevertheless, the following is a summary of the 
comments received.
    In general, creditors asked for flexibility in providing the 
disclosure, either by permitting the notice to be provided to all 
mortgage applicants, or to be provided later in the approval process 
after creditors have determined the disclosure is triggered. Similarly, 
a number of industry commenters advocated limiting the advertising rule 
to creditors that specifically market high loan-to-value mortgage 
loans. Creditor commenters asked for guidance on loan-to-value 
calculations and safe harbors for how creditors determine property 
values. Consumer advocates favored triggering the disclosure when the 
possibility of negative amortization could occur.

C. Consumer Testing

    A principal goal for the Regulation Z review is to produce revised 
and improved credit card disclosures that consumers will be more likely 
to pay attention to, understand, and use in their decisions, while at 
the same time not creating undue burdens for creditors. In April 2006, 
the Board retained a research and consulting firm (Macro International) 
that specializes in designing and testing documents to conduct consumer 
testing to help the Board review Regulation Z's credit card rules. 
Specifically, the Board used consumer testing to develop proposed model 
forms for the following credit card disclosures required by Regulation 
Z:
     Summary table disclosures provided in direct-mail 
solicitations and applications;
     Disclosures provided at account opening;
     Periodic statement disclosures; and
     Subsequent disclosures, such as notices provided when key 
account terms are changed, and notices on checks provided to access 
credit card accounts.
    Working closely with the Board, Macro International conducted 
several tests. Each round of testing was conducted in a different city, 
throughout the United States. In addition, the consumer testing groups 
contained participants with a range of ethnicities, ages, educational 
levels, credit card behavior, and whether a consumer likely has a prime 
or subprime credit card.
    Exploratory focus groups. In May and June 2006, the Board worked 
with Macro International to conduct two sets of focus groups with 
credit card consumers, in part, to learn more about what information 
consumers currently use in making decisions about their credit card 
accounts. Each focus group consisted of between eight and thirteen 
people that discussed issues identified by the Board and raised by a 
moderator from Macro International. Through these focus groups, the 
Board gathered information on what credit terms consumers usually 
consider when shopping for a credit card, what information they find 
useful when they receive a new credit card in the mail, and what 
information they find useful on periodic statements.
    Cognitive interviews on existing disclosures. In August 2006, the 
Board worked with Macro International to conduct nine cognitive 
interviews with credit card customers. These cognitive interviews 
consisted of one-on-one discussions with consumers, during

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which consumers were asked to view existing sample credit card 
disclosures. The goals of these interviews were: (1) To learn more 
about what information consumers read when they receive current credit 
card disclosures; (2) to research how easily consumers can find various 
pieces of information in these disclosures; and (3) to test consumers' 
understanding of certain credit card-related words and phrases.
    1. Initial design of disclosures for testing. In the fall of 2006, 
the Board worked with Macro International to develop sample credit card 
disclosures to be used in the later rounds of testing, taking into 
account information learned through the focus groups and the cognitive 
interviews.
    2. Additional cognitive interviews and revisions to disclosures. In 
late 2006 and early 2007, the Board worked with Macro International to 
conduct four rounds of cognitive interviews (between seven and nine 
participants per round), where consumers were asked to view new sample 
credit card disclosures developed by the Board and Macro International. 
The rounds of interviews were conducted sequentially to allow for 
revisions to the testing materials based on what was learned from the 
testing during each previous round.
    Results of testing. Several of the model forms were developed 
through the testing. A report summarizing the results of the testing is 
available on the Board's public Web site: http://
www.federalreserve.gov.
    Testing participants generally read the summary table provided in 
direct-mail credit card solicitations and applications and ignored 
information presented outside of the table. Thus, the proposal requires 
that information about events that trigger penalty rates and about 
important fees (late-payment fees, over-the-credit-limit fees, balance 
transfer fees, and cash advance fees) be placed in the table. 
Currently, this information may be placed outside the table.
    With respect to the account-opening disclosures, consumer testing 
indicates that consumers commonly do not review their account 
agreements, which are often in small print and dense prose. The 
proposal would require creditors to include a table summarizing the key 
terms applicable to the account, similar to the table required for 
credit card applications and solicitations. Setting apart the most 
important terms in this way will better ensure that consumers are 
apprised of those terms.
    With respect to periodic statement disclosures, testing 
participants found it beneficial to have the different types of 
transactions grouped together by type. Thus, the proposal requires 
creditors to group transactions together by type, such as purchases, 
cash advances, and balance transfers. In addition, many consumers more 
easily noticed the number and amount of fees when the fees were 
itemized and grouped together with interest charges. Consumers also 
noticed fees and interest charges more readily when they were located 
near the disclosure of the transactions on the account. Thus, under the 
proposal, creditors would be required to group all fees together and 
describe them in a manner consistent with consumers' general 
understanding of costs (``interest charge'' or ``fee''), without regard 
to whether the fees would be considered ``finance charges,'' ``other 
charges'' or neither under the regulation.
    With respect to change-in-terms notices, consumer testing indicates 
that much like the account-opening disclosures, consumers may not 
typically read such notices, because they are often in small print and 
dense prose. To enhance the effectiveness of change-in-terms notices, 
when a creditor is changing terms which were required to be disclosed 
in the summary table provided at account opening, the proposed rules 
would require the creditor to include a table summarizing any such 
changed terms. Creditors commonly provide notices about changes to 
terms or rates in the same envelope with periodic statements. Consumer 
testing indicates that consumers may not typically look at the notices 
if they are provided as separate inserts given with periodic 
statements. Thus, in such cases, a table summarizing the change would 
have to appear on the periodic statement directly above the transaction 
list, where consumers are more likely to notice the changes.
    Additional testing after comment period. After receiving comments 
from the public on the proposal and the revised disclosure forms, the 
Board will work with Macro International to revise the model 
disclosures. Macro International then will conduct additional rounds of 
cognitive interviews to test the revised disclosures. After the 
cognitive interviews, quantitative testing will be conducted. The goal 
of the quantitative testing is to measure consumers' comprehension and 
the usability of the newly-developed disclosures relative to existing 
disclosures and formats.

D. Other Outreach and Research

    The Board also solicited input from members of the Board's Consumer 
Advisory Council on various issues presented by the review of 
Regulation Z's open-end credit rules. During 2005 and 2006, for 
example, the Council discussed the feasibility and advisability of 
reviewing Regulation Z in stages, ways to improve the summary table 
provided on or with credit card applications and solicitations, issues 
related to TILA's substantive protections (including dispute resolution 
procedures), and issues related to the Bankruptcy Act amendments. In 
addition, the Board met or conducted conference calls with various 
industry and consumer group representatives throughout the review 
process leading to this proposal. The Board also reviewed disclosures 
currently provided by creditors, consumer complaints received by the 
federal banking agencies, and surveys on credit card usage to help 
inform the proposal.\2\
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    \2\ Surveys reviewed include: Thomas A. Durkin, Credit Cards: 
Use and Consumer Attitudes, 1970-2000, Federal Reserve Bulletin, 
(September 2000); Thomas A. Durkin, Consumers and Credit 
Disclosures: Credit Cards and Credit Insurance, Federal Reserve 
Bulletin (April 2002).
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E. Reviewing Regulation Z in Stages

    Based on the comments received and upon its own analysis, the Board 
is proceeding with a review of Regulation Z in stages. This proposal 
largely contains revisions to rules affecting open-end plans other than 
HELOCs subject to Sec.  226.5b. These open-end (not home-secured) plans 
are distinct from other TILA-covered products, and conducting a review 
in stages allows for a manageable process. Possible revisions to rules 
affecting HELOCs will be considered in the Board's review of home-
secured credit, currently underway. To minimize compliance burden for 
creditors offering HELOCs as well as other open-end credit, many of the 
open-end rules would be reorganized to delineate clearly the 
requirements for HELOCs and other forms of open-end credit. Although 
this reorganization would increase the size of the regulation and 
commentary, the Board believes a clear delineation of rules for HELOCs 
and other forms of open-end credit pending the review of HELOC rules 
provides a clear compliance benefit to creditors. Creditors that 
generate a single periodic statement for all open-end products would be 
given the option to retain the existing periodic statement disclosure 
scheme for HELOCs, or to disclose information on periodic statements 
under the revised rules for other open-end plans.

F. Implementation Period

    The Board contemplates providing creditors sufficient time to 
implement

[[Page 32953]]

any revisions that may be adopted. The Board seeks comment on an 
appropriate implementation period.

IV. The Board's Rulemaking Authority

    TILA mandates that the Board prescribe regulations to carry out the 
purposes of the act. TILA also specifically authorizes the Board, among 
other things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in the 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
     Add or modify information required to be disclosed with 
credit and charge card applications or solicitations if the Board 
determines the action is necessary to carry out the purposes of, or 
prevent evasions of, the application and solicitation disclosure rules. 
15 U.S.C. 1637(c)(5).
     Require disclosures in advertisements of open-end plans. 
15 U.S.C. 1663.
    In the course of developing the proposal, the Board has considered 
the information collected from comment letters submitted in response to 
its ANPRs, its experience in implementing and enforcing Regulation Z, 
and the results obtained from testing various disclosure options in 
controlled consumer tests. For the reasons discussed in this notice, 
the Board believes this proposal is appropriate to effectuate the 
purposes of TILA, to prevent the circumvention or evasion of TILA, and 
to facilitate compliance with the act.
    Also as explained in this notice, the Board believes that the 
specific exemptions proposed are appropriate because the existing 
requirements do not provide a meaningful benefit to consumers in the 
form of useful information or protection. In reaching this conclusion, 
the Board considered (1) the amount of the loan and whether the 
disclosure provides a benefit to consumers who are parties to the 
transaction involving a loan of such amount; (2) the extent to which 
the requirement complicates, hinders, or makes more expensive the 
credit process; (3) the status of the borrower, including any related 
financial arrangements of the borrower, the financial sophistication of 
the borrower relative to the type of transaction, and the importance to 
the borrower of the credit, related supporting property, and coverage 
under TILA; (4) whether the loan is secured by the principal residence 
of the borrower; and (5) whether the exemption would undermine the goal 
of consumer protection. The rationales for these proposed exemptions 
are explained below.

V. Discussion of Major Proposed Revisions

    The goal of the proposed revisions is to improve the effectiveness 
of the Regulation Z disclosures that must be provided to consumers for 
open-end accounts. A summary of the key account terms must accompany 
applications and solicitations for credit card accounts. For all open-
end credit plans, creditors must disclose costs and terms at account 
opening, generally before the first transaction. Consumers must receive 
periodic statements of account activity, and creditors must provide 
notice before certain changes in the account terms may become 
effective.
    To shop for and understand the cost of credit, consumers must be 
able to identify and understand the key terms of open-end accounts. But 
the terms and conditions affecting credit card account pricing can be 
complex. The proposed revisions to Regulation Z are intended to provide 
the most essential information to consumers when the information would 
be most useful to them, with content and formats that are clear and 
conspicuous. The proposed revisions are expected to improve consumers' 
ability to make informed credit decisions and enhance competition among 
credit card issuers. Many of the changes are based on the consumer 
testing that was conducted in connection with the review of Regulation 
Z.
    In considering the proposed revisions, the Board has also sought to 
balance the potential benefits for consumers with the compliance 
burdens imposed on creditors. For example, the proposed revisions seek 
to provide greater certainty to creditors in identifying what costs 
must be disclosed for open-end plans, and when those costs must be 
disclosed. More effective disclosures may also reduce customer 
confusion and misunderstanding, which may also ease creditors' costs 
relating to consumer complaints and inquiries.

A. Credit Card Applications and Solicitations

    Under Regulation Z, credit and charge card issuers are required to 
provide information about key costs and terms with their applications 
and solicitations.\3\ This information is abbreviated, to help 
consumers focus on only the most important terms and decide whether to 
apply for the credit card account. If consumers respond to the offer 
and are issued a credit card, creditors must provide more detailed 
disclosures at account opening, before the first transaction occurs.
---------------------------------------------------------------------------

    \3\ Charge cards are a type of credit card for which full 
payment is typically expected upon receipt of the billing statement. 
To ease discussion, this notice will refer simply to ``credit 
cards.''
---------------------------------------------------------------------------

    The application and solicitation disclosures are considered among 
the most effective TILA disclosures principally because they must be 
presented in a standardized table with headings, content, and format 
substantially similar to the model forms published by the Board. In 
2001, the Board revised Regulation Z to enhance the application and 
solicitation disclosures by adding rules and guidance concerning the 
minimum type size and requiring additional fee disclosures.
    Penalty pricing. The proposal would make several revisions that 
seek to improve consumers' understanding of default or penalty pricing. 
Currently, credit card issuers must disclose inside the table the APR 
that will apply in the event of the consumer's ``default.'' Some 
creditors define a ``default'' as making one late payment or exceeding 
the credit limit once. The actions that may trigger the penalty APR are 
currently required to be disclosed outside the table.
    Consumer testing indicated that many consumers did not notice the 
information about penalty pricing when it was disclosed outside the 
table. Under the proposal, card issuers would be required to include in 
the table the specific actions that trigger penalty APRs (such as a 
late payment), the rate that will apply, the balances to which the 
penalty rate will apply, and the circumstances under which the penalty 
rate will expire or, if true, the fact that the penalty rate could 
apply indefinitely. The regulation would require card issuers to use 
the term ``penalty APR'' because the testing demonstrated that some 
consumers are confused by the term ``default rate.''
    Similarly, the proposal requires card issuers to disclose inside 
(rather than outside) the table the fees for paying late, exceeding a 
credit limit, or making a payment that is returned, along with

[[Page 32954]]

a cross-reference to the penalty rate if, for example, paying late 
could also trigger the penalty rate. Cash advance fees and balance 
transfer fees would also be disclosed inside the table. This proposed 
change is also based on consumer testing results; fees disclosed 
outside the table were often not noticed. Requiring card issuers to 
disclose returned-payment fees would be a new disclosure.
    Variable-rate information. Currently, applications and 
solicitations offering variable APRs must disclose inside the table the 
index or formula used to make adjustments and the amount of any margin 
that is added. Additional details, such as how often the rate may 
change, must be disclosed outside the table. Under the proposal, 
information about variable APRs would be reduced to a single phrase 
indicating the APR varies ``with the market,'' along with a reference 
to the type of index, such as ``Prime.'' Consumer testing indicated 
that few consumers use the variable-rate information when shopping for 
a card. Moreover, participants were distracted or confused by details 
about margin values, how often the rate may change, and where an index 
can be found.
    Payment allocation. The proposal would add a new disclosure to the 
table about the effect on credit costs of creditors' payment allocation 
methods when payments are applied entirely to transferred balances at 
low introductory APRs. If, as is common, a creditor allocates payments 
to low-rate balances first, consumers who make purchases on the account 
will not be able to take advantage of any ``grace period'' on 
purchases, without paying off the entire balance, including the low-
rate balance transfer. Consumer testing indicated that consumers are 
often confused about this aspect of balance transfer offers. The new 
disclosure would alert consumers that they will pay interest on their 
purchases until the transferred balance is paid in full.
    Web site reference. The proposal would also require card issuers to 
include a reference to the Board's Web site, where additional 
information is available about how to compare credit cards and what 
factors to consider. This responds to commenters who suggested that the 
Board consider nonregulatory approaches to provide opportunities for 
consumers to learn about credit products.
    Subprime accounts. The proposal also addresses a concern that has 
been raised about subprime credit cards, which are generally offered to 
consumers with low credit scores or credit problems. Subprime credit 
cards often have substantial fees associated with opening the account. 
Typically, fees for the issuance or availability of credit are billed 
to consumers on the first periodic statement, and can substantially 
reduce the amount of credit available to the consumer. For example, the 
initial fees on an account with a $250 credit limit may reduce the 
available credit to less than $100. Consumer complaints received by the 
federal banking agencies state that consumers were unaware when they 
applied for cards of how little credit would be available after all the 
fees were assessed at account opening.
    To address this concern, the proposal would require additional 
disclosures if the card issuer requires fees or a security deposit to 
issue the card that are 25 percent or more of the minimum credit limit 
offered for the account. In such cases, the card issuer would be 
required to include an example in the table of the amount of available 
credit the consumer would have after paying the fees or security 
deposit, assuming the consumer receives the minimum credit limit.
    Balance computation methods. TILA requires creditors to identify 
their balance computation method by name, and Regulation Z requires 
that the disclosure be inside the table. However, consumer testing 
suggests that these names, such as the ``two-cycle average daily 
balance method,'' hold little meaning for consumers, and that consumers 
do not consider such information when shopping for accounts. 
Accordingly, the proposed rule requires creditors to place the name of 
the balance computation method outside the table, so that the 
disclosure does not detract from information that is more important to 
consumers.

B. Account-Opening Disclosures

    Regulation Z requires creditors to disclose costs and terms before 
the first transaction is made on the account. The disclosures must 
specify the circumstances under which a ``finance charge'' may be 
imposed and how it will be determined. A ``finance charge'' is any 
charge that may be imposed as a condition of or an incident to the 
extension of credit, and includes, for example, interest, transaction 
charges, and minimum charges. The finance charge disclosures include a 
disclosure of each periodic rate of interest that may be applied to an 
outstanding balance (e.g., purchases, cash advances) as well as the 
corresponding annual percentage rate (APR). Creditors must also explain 
any grace period for making a payment without incurring a finance 
charge. They must also disclose the amount of any charge other than a 
finance charge that may be imposed as part of the credit plan (``other 
charges''), such as a late-payment charge. Consumers'' rights and 
responsibilities in the case of unauthorized use or billing disputes 
must also be explained. Currently, there are few format requirements 
for these account-opening disclosures, which are typically interspersed 
among other contractual terms in the creditor's account agreement.
    Account-opening summary table. Account-opening disclosures have 
often been criticized because the key terms TILA requires to be 
disclosed are often interspersed within the credit agreements, and such 
agreements are long and complex. The proposal to require creditors to 
include a table summarizing the key terms addresses that concern by 
making the information more conspicuous. Creditors may continue, 
however, to provide other account-opening disclosures, aside from the 
fees and terms specified in the table, with other terms in their 
account agreements.
    The new table provided at account opening would be substantially 
similar to the table provided with direct-mail credit card applications 
and solicitations. Consumer testing and surveys indicate that consumers 
generally are aware of the table on applications and solicitations. 
Consumer testing also indicates that consumers may not typically read 
their account agreements, which are often in small print and dense 
prose. Thus, setting apart the most important terms in a summary table 
will better ensure that consumers are aware of those terms.
    The table required at account opening would include more 
information than the table required at application. For example, it 
would include a disclosure of any fee for transactions in a foreign 
currency or that take place in a foreign country. However, to reduce 
compliance burden for creditors that provide account-opening 
disclosures at application, the proposal would allow creditors to 
provide the more specific and inclusive account-opening table at 
application in lieu of the table otherwise required at application.
    How charges are disclosed. Under the current rules, a creditor must 
disclose any ``finance charge'' or ``other charge'' in the written 
account-opening disclosures. A subsequent written notice is required if 
one of the fees disclosed at account opening increases or if certain 
fees are newly introduced during the life of the plan. The terms 
``finance charge'' and ``other charge'' are given broad and flexible 
meanings in the regulation and commentary. This ensures that TILA 
adapts to changing

[[Page 32955]]

conditions, but it also creates uncertainty. The distinctions among 
finance charges, other charges, and charges that do not fall into 
either category are not always clear. As creditors develop new kinds of 
services, some find it difficult to determine if associated charges for 
the new services meet the standard for a ``finance charge'' or ``other 
charge'' or are not covered by TILA at all. This uncertainty can pose 
legal risks for creditors that act in good faith to comply with the 
law. Examples of included or excluded charges are in the regulation and 
commentary, but these examples cannot provide definitive guidance in 
all cases. Creditors are subject to civil liability and administrative 
enforcement for underdisclosing the finance charge or otherwise making 
erroneous disclosures, so the consequences of an error can be 
significant. Furthermore, overdisclosure of rates and finance charges 
is not permitted by Regulation Z for open-end credit.
    The fee disclosure rules also have been criticized as being 
outdated. These rules require creditors to provide fee disclosures at 
account opening, which may be months, and possibly years, before a 
particular disclosure is relevant to the consumer, such as when the 
consumer calls the creditor to request a service for which a fee is 
imposed. In addition, an account-related transaction may occur by 
telephone, when a written disclosure is not feasible.
    The proposed rule is intended to respond to these criticisms while 
still giving full effect to TILA's requirement to disclose credit 
charges before they are imposed. Accordingly, under the proposal, the 
rules would be revised to (1) specify precisely the charges that 
creditors must disclose in writing at account opening (interest, 
minimum charges, transaction fees, annual fees, and penalty fees such 
as for paying late), which would be listed in the summary table, and; 
(2) permit creditors to disclose other less critical charges orally or 
in writing before the consumer agrees to or becomes obligated to pay 
the charge. Although the proposal would permit creditors to disclose 
certain costs orally for purposes of TILA, the Board anticipates that 
creditors will continue to identify fees in the account agreement for 
contract or other reasons.
    Under the proposal, some charges would be covered by TILA that the 
current regulation, as interpreted by the staff commentary, excludes 
from TILA coverage, such as fees for expedited payment and expedited 
delivery. It may not have been useful to consumers to cover such 
charges under TILA when such coverage would have meant only that the 
charges were disclosed long before they became relevant to the 
consumer. The Board believes it would be useful to consumers to cover 
such charges under TILA as part of a rule that permits their disclosure 
at a relevant time. Further, as new services (and associated charges) 
are developed, the proposal minimizes risk of civil liability 
associated with the determination as to whether a fee is a finance 
charge or an other charge, or is not covered by TILA at all.

C. Periodic Statements

    Creditors are required to provide periodic statements reflecting 
the account activity for the billing cycle (typically, about one 
month). In addition to identifying each transaction on the account, 
creditors must identify each ``finance charge'' using that term, and 
each ``other charge'' assessed against the account during the statement 
period. When a periodic interest rate is applied to an outstanding 
balance to compute the finance charge, creditors must disclose the 
periodic rate and its corresponding APR. Creditors must also disclose 
an ``effective'' or ``historical'' APR for the billing cycle, which, 
unlike the corresponding APR, includes not just interest but also 
finance charges imposed in the form of fees (such as cash advance fees 
or balance transfer fees). Periodic statements must also state the time 
period a consumer has to pay an outstanding balance to avoid additional 
finance charges (the ``grace period''), if applicable.
    Fees and interest costs. The proposal contains a number of 
revisions to the periodic statement to improve consumers' understanding 
of fees and interest costs. Currently, creditors must identify on 
periodic statements any ``finance charges'' that have been added to the 
account during the billing cycle, and creditors typically list these 
charges with other transactions, such as purchases, chronologically on 
the statement. The finance charges must be itemized by type. Thus, 
interest charges might be described as ``finance charges due to 
periodic rates.'' Charges such as late payment fees, which are not 
``finance charges,'' are typically disclosed individually and are 
interspersed among other transactions.
    Consumer testing indicated that consumers generally understand that 
``interest'' is the cost that results from applying a rate to a balance 
over time and distinguish ``interest'' from other fees, such as a cash 
advance fee or a late payment fee. Consumer testing also indicated that 
many consumers more easily determine the number and amount of fees when 
the fees are itemized and grouped together.
    Thus, under the proposal, creditors would be required to group all 
charges together and describe them in a manner consistent with 
consumers' general understanding of costs (``interest charge'' or 
``fee''), without regard to whether the charges would be considered 
``finance charges,'' ``other charges,'' or neither. Interest charges 
would be identified by type (for example, interest on purchases or 
interest on balance transfers) as would fees (for example, cash advance 
fee or late-payment fee).
    Consumer testing also indicated that many consumers more quickly 
and accurately determined the total dollar cost of credit for the 
billing cycle when a total dollar amount of fees for the cycle was 
disclosed. Thus, the proposal would require creditors to disclose the 
(1) total fees and (2) total interest imposed for the cycle. The 
proposal would also require disclosure of year-to-date totals for 
interest charges and fees. For many consumers, costs disclosed in 
dollars are more readily understood than costs disclosed as percentage 
rates. The year-to-date figures are intended to assist consumers in 
better understanding the overall cost of their credit account and would 
be an important disclosure and an effective aid in understanding 
annualized costs, especially if the Board were to eliminate the 
requirement to disclose the effective APR on periodic statements, as 
discussed below.
    The effective APR. The ``effective'' APR disclosed on periodic 
statements reflects the cost of interest and certain other finance 
charges imposed during the statement period. For example, for a cash 
advance, the effective APR reflects both interest and any flat or 
proportional fee assessed for the advance.
    For the reasons discussed below, the Board is proposing two 
alternative approaches to address the effective APR. The first approach 
would try to improve consumer understanding of this rate and reduce 
creditor uncertainty about its calculation. The second approach would 
eliminate the requirement to disclose the effective APR.
    Creditors believe the effective APR should be eliminated. They 
believe consumers do not understand the effective APR, including how it 
differs from the corresponding (interest rate) APR, why it is often 
``high,'' and which fees the effective APR reflects. Creditors say they 
find it difficult, if not impossible, to explain the effective APR to 
consumers who call them with questions or concerns. They note that

[[Page 32956]]

callers sometimes believe, erroneously, that the effective APR signals 
a prospective increase in their interest rate, and they may make 
uninformed decisions as a result. And, creditors say, even if the 
consumer does understand the effective APR, the disclosure does not 
provide any more information than a disclosure of the total dollar 
costs for the billing cycle. Moreover, creditors say the effective APR 
is arbitrary and inherently inaccurate, principally because it 
amortizes the cost for credit over only one month (billing cycle) even 
though the consumer may take several months (or longer) to repay the 
debt.
    Consumer groups acknowledge that the effective APR is not well 
understood, but argue that it nonetheless serves a useful purpose by 
showing the higher cost of some credit transactions. They contend the 
effective APR helps consumers decide each month whether to continue 
using the account, to shop for another credit product, or to use an 
alternative means of payment such as a debit card. Consumer groups also 
contend that reflecting costs, such as cash advance fees and balance 
transfer fees, in the effective APR creates a ``sticker shock'' and 
alerts consumers that the overall cost of a transaction for the cycle 
is high and exceeds the advertised corresponding APR. This shock, they 
say, may persuade some consumers not to use certain features on the 
account, such as cash advances, in the future. In their view, the 
utility of the effective APR would be maximized if it reflected all 
costs imposed during the cycle (rather than only some costs as is 
currently the case).
    As part of the consumer testing, mock periodic statements were 
developed in an attempt to improve consumers' understanding of the 
effective APR. A written explanation and varying terminology were 
tested. In most rounds participants showed little understanding of the 
effective APR, but the form was adjusted between rounds as to 
terminology and format, and in the last round a number of participants 
showed more understanding of the effective APR.
    Thus, the draft proposal includes a number of revisions to the 
presentation of the effective APR intended to help consumers understand 
the figure. In addition, the proposal seeks to improve consumer 
understanding and reduce creditor uncertainty by specifying more 
clearly which fees are to be included in the effective APR.\4\ As 
mentioned, however, the Board is also seeking comment on an alternative 
proposal to eliminate the disclosure on the basis that it may not 
provide consumers a meaningful benefit.
---------------------------------------------------------------------------

    \4\ The proposal also would reverse a staff commentary provision 
that excludes ATM fees from the finance charge and effective APR; 
and it would address for the first time foreign transaction fees, 
which it would clarify are to be included in the finance charge and 
effective APR.
---------------------------------------------------------------------------

    Transactions. Currently, there are no format requirements for 
disclosing different types of transactions, such as purchases, cash 
advances, and balance transfers on periodic statements. Often, 
transactions are presented together in chronological order. Consumer 
testing indicated that participants found it helpful to have similar 
types of transactions grouped together on the statement. Consumers also 
found it helpful, within the broad grouping of fees and transactions, 
when transactions were segregated by type (e.g., listing all purchases 
together, separate from cash advances or balance transfers). Further, 
consumers noticed fees and interest charges more readily when they were 
located near the transactions. For these reasons, the proposal requires 
creditors to: (1) Group similar transactions together by type, such as 
purchases, cash advances, and balance transfers, and (2) group fees and 
interest charges together, itemized by type, with the list of 
transactions.
    Late payments. Currently, creditors must disclose the date by which 
consumers must pay a balance to avoid finance charges. Creditors must 
also disclose any cut-off time for receiving payments on the payment 
due date; this is usually disclosed on the reverse side of periodic 
statements. The Bankruptcy Act amendments expressly require creditors 
to disclose the payment due date (or if different, the date after which 
a late-payment fee may be imposed) along with the amount of the late-
payment fee.
    Under the proposal, creditors would be required to disclose the 
payment due date on the front side of the periodic statement and, 
closely proximate to the date, any cut-off time if it is before 5 p.m. 
Consumer testing indicates that many consumers believe cut-off times 
are the close of the business day and more readily notice the cut-off 
time when it is located near the due date.
    Creditors would also be required to disclose, in close proximity to 
the due date, the amount of the late-payment fee and the penalty APR 
that could be triggered by a late payment. Applying the penalty APR to 
outstanding balances can significantly increase costs. Thus, it is 
important for consumers to be alerted to the consequence of paying 
late.
    Minimum payments. The Bankruptcy Act requires creditors offering 
open-end plans to provide a warning about the effects of making only 
minimum payments. The proposal would implement this requirement solely 
for credit card issuers. Under the proposal, card issuers must provide 
(1) a ``warning'' statement indicating that making only the minimum 
payment will increase the interest the consumer pays and the time it 
takes to repay the consumer's balance; (2) a hypothetical example of 
how long it would take to pay a specified balance in full if only 
minimum payments are made; and (3) a toll-free telephone number that 
consumers may call to obtain an estimate of the time it would take to 
repay their actual account balance using minimum payments. Most card 
issuers must establish and maintain their own toll-free telephone 
numbers to provide the repayment estimates. However, the Board is 
required to establish and maintain, for two years, a toll-free 
telephone number for creditors that are depository institutions having 
assets of $250 million or less. This number is for the customers of 
those institutions to call to get answers to questions about how long 
it will take to pay their account in full making only the minimum 
payment. The Federal Trade Commission (FTC) must maintain a similar 
toll-free telephone number for use by customers of creditors that are 
not depository institutions. In order to standardize the information 
provided to consumers through the toll-free telephone numbers, the 
Bankruptcy Act amendments direct the Board to prepare a ``table'' 
illustrating the approximate number of months it would take to repay an 
outstanding balance if the consumer pays only the required minimum 
monthly payments and if no other advances are made (``generic repayment 
estimate'').
    Pursuant to the Bankruptcy Act amendments, the proposal also allows 
a card issuer to establish a toll-free telephone number to provide 
customers with the actual number of months that it will take consumers 
to repay their outstanding balance (``actual repayment disclosure'') 
instead of providing an estimate based on the Board-created table. A 
card issuer that does so need not include a hypothetical example on its 
periodic statements, but must disclose the warning statement and the 
toll-free telephone number.
    The proposal also allows card issuers to provide the actual 
repayment disclosure on their periodic statements. Card issuers would 
be encouraged to use this approach. Participants in consumer testing 
who typically carry

[[Page 32957]]

credit card balances (revolvers) found an estimated repayment period 
based on terms that apply to their own account more useful than a 
hypothetical example. To encourage card issuers to provide the actual 
repayment disclosure on their periodic statements, the proposal 
provides that if card issuers do so, they need not disclose the 
warning, the hypothetical example and a toll-free telephone number on 
the periodic statement, nor need they maintain a toll-free telephone 
number to provide the actual repayment disclosure.
    As described above, the Bankruptcy Act also requires the Board to 
develop a ``table'' that creditors, the Board and the FTC must use to 
create generic repayment estimates. Instead of creating a table, the 
proposal contains guidance for how to calculate generic repayment 
estimates. Consumers that call the toll-free telephone number could be 
prompted to input information about their outstanding balance and the 
APR applicable to their account. Although issuers have the ability to 
program their systems to obtain consumers' account information from 
their account management systems, for the reasons discussed in the 
section-by-section analysis to Appendix M-1, the proposal does not 
require issuers to do so.

D. Changes in Consumer's Interest Rate and Other Account Terms

    Regulation Z requires creditors to provide advance written notice 
of some changes to the terms of an open-end plan. The proposal includes 
several revisions to Regulation Z's requirements for notifying 
consumers about such changes.
    Currently, Regulation Z requires creditors to send, in most cases, 
notices 15 days before the effective date of certain changes in the 
account terms. However, creditors need not inform consumers in advance 
if the rate applicable to their account increases due to default or 
delinquency. Thus, consumers may not realize until they receive their 
monthly statement for a billing cycle that their late payment triggered 
application of the higher penalty rate, effective the first day of the 
month's statement.
    Timing. Currently, Regulation Z generally requires creditors to 
mail a change-in-terms notice 15 days before a change takes effect. 
Consumer groups and others have criticized the 15-day period as 
providing too little time after the notice is sent for the consumer to 
receive the notice, shop for alternative credit and possibly pay off 
the existing credit card account. Under the proposal, notice must be 
sent at least 45 days before the effective date of the change, which 
would give consumers about a month to pursue their options.
    Penalty rates. Currently, creditors must inform consumers about 
rates that are increased due to default or delinquency, but not in 
advance of implementation of the increase. Contractual thresholds for 
default are sometimes very low, and penalty pricing commonly applies to 
all existing balances, including low-rate promotional balances. An 
event triggering the default may occur a year or more after the account 
is opened. For example, a consumer may open an account, and a year or 
more later may take advantage of a low promotional rate to transfer 
balances from another account. That consumer reasonably may not recall 
reading in the account-opening disclosure that a single transaction 
exceeding the credit limit could cause the interest rates on existing 
balances, including on the promotional transfer, to increase. Thus, the 
proposal would expand the events triggering advance notice to include 
increases triggered by default or delinquency. Advance notice of a 
potentially significant increase in the cost of credit is intended to 
allow consumers to consider alternatives before the increase is 
imposed, such as making other financial arrangements or choosing not to 
engage in additional transactions that will increase the balances on 
their account. Comment is solicited on whether a shorter time period 
than 45 days' advance notice would be adequate. Actions creditors may 
engage in to mitigate risk, such as by lowering credit limits or 
suspending credit privileges, are not affected by the proposal.
    Format. Currently, there are few format requirements for change-in-
terms disclosures. As with account-opening disclosures, creditors 
commonly intersperse change-in-terms notices with other amendments to 
the account agreement, and both are provided in pamphlets in small 
print and dense prose. Consumer testing indicates many consumers set 
aside and do not read densely-worded pamphlets.
    Under the proposal, creditors may continue to notify consumers 
about changes to terms required to be disclosed by Regulation Z, along 
with other changes to the account agreement. However, if a changed term 
is one that must be provided in the account-opening summary table, 
creditors must provide that change in a summary table to enhance the 
effectiveness of the change-in-terms notice.
    Creditors commonly enclose notices about changes to terms or rates 
with periodic statements. Under the proposal, if a notice enclosed with 
a periodic statement discusses a change to a term that must be 
disclosed in the account-opening summary table, or announces that a 
penalty rate will be imposed on the account, a table summarizing the 
impending change must appear on the periodic statement. The table would 
have to appear directly above the transaction list, in light of testing 
that shows many consumers tend to focus on the list of transactions. 
Consumers who participated in testing set aside change-in-terms 
pamphlets that accompanied periodic statements. Participants uniformly 
looked at the front side of periodic statements and reviewed at least 
the transactions.

E. Advertisements

    Advertising minimum payments. Consumers commonly are offered the 
option to finance the purchase of goods or services (such as appliances 
or furniture) by establishing an open-end credit plan. The monthly 
minimum payments associated with the purchase are often advertised as 
part of the offer. Under current rules, advertisements for open-end 
credit plans are not required to include information about the time it 
will take to pay for a purchase or the total cost if only minimum 
payments are made; if the transaction were a closed-end installment 
loan, the number of payments and the total cost would be disclosed. 
Under the proposal, advertisements stating a minimum monthly payment 
for an open-end credit plan that would be established to finance the 
purchase of goods or services must state, in equal prominence to the 
minimum payment, the time period required to pay the balance and the 
total of payments if only minimum payments are made.
    Advertising ``fixed'' rates. Creditors sometimes advertise the APR 
for open-end accounts as a ``fixed'' rate even though the creditor 
reserves the right to change the rate at any time for any reason. 
Consumer testing indicated that many consumers believe that a ``fixed 
rate'' will not change, and do not understand that creditors may use 
the term ``fixed'' as a shorthand reference for rates that do not vary 
based on changes in an index or formula. Under the proposal, an 
advertisement may refer to a rate as ``fixed'' if the advertisement 
specifies a time period the rate will be fixed and the rate will not 
increase during that period. If a time period is not specified, the 
advertisement may refer to a rate as ``fixed'' only if the rate will 
not increase while the plan is open.

[[Page 32958]]

F. Other Disclosures and Protections

    ``Open-end'' plans comprised of closed-end features. Some creditors 
give open-end credit disclosures on credit plans that include closed-
end features, that is, separate loans with fixed repayment periods. 
These creditors treat these loans as advances on a revolving credit 
line for purposes of Regulation Z even though the consumer's credit 
information is separately evaluated and he or she may have to complete 
a separate application for each ``advance,'' and the consumer's 
payments on the ``advance'' do not replenish the ``line.'' Provisions 
in the commentary lend support to this approach. The proposal would 
revise these provisions to indicate closed-end disclosures rather than 
open-end disclosures are appropriate when the credit being extended is 
individual loans that are individually approved and underwritten.
    Checks that access a credit card account. Many credit card issuers 
provide accountholders with checks that can be used to obtain cash, pay 
the outstanding balance on another account, or purchase goods and 
services directly from merchants. The solicitation letter accompanying 
the checks may offer a low introductory APR for transactions that use 
the checks. The proposed revisions would require the checks mailed by 
card issuers to be accompanied by cost disclosures.
    Currently, creditors need not disclose costs associated with using 
the checks if the finance charges that would apply (that is, the 
interest rate and transaction fees) have been previously disclosed, 
such as in the account agreement. If the check is sent 30 days or more 
after the account is opened, creditors must refer consumers to their 
account agreements for more information about how the rate and fees are 
determined.
    Consumers may receive these checks throughout the life of the 
credit card account. Thus, significant time may elapse between the time 
account-opening disclosures are provided and the time a consumer 
considers using the check. In addition, consumer testing indicates that 
consumers may not notice references to other documents such as the 
account-opening disclosures or periodic statements for rate information 
because they tend to look for percentages and dollar figures when 
looking for the costs of using the checks. Under the proposed 
revisions, checks that can access credit card accounts must be 
accompanied by information about the rates and fees that will apply if 
the checks are used, and about whether a grace period exists. To ensure 
the disclosures are conspicuous, creditors would be required to provide 
the information in a table, on the front side of the page containing 
the checks.
    Credit insurance, debt cancellation, and debt suspension coverage. 
Under Regulation Z, premiums for credit life, accident, health, or 
loss-of-income insurance are considered finance charges if the 
insurance is written in connection with a credit transaction. However, 
these costs may be excluded from the finance charge and APR (for both 
open-end and closed-end credit transactions), if creditors disclose the 
cost and the fact that the coverage is not required to obtain credit, 
and the consumer signs or initials an affirmative written request for 
the insurance. Since 1996, the same rules have applied to creditors' 
``debt cancellation'' agreements, in which a creditor agrees to cancel 
the debt, or part of it, on the occurrence of specified events.
    Under the proposal, the existing rules for debt cancellation 
coverage would also be applied to ``debt suspension'' coverage (for 
both open-end credit and closed-end transactions). ``Debt suspension'' 
products are related to, but different from, debt cancellation. Debt 
suspension products merely defer consumers' obligation to make the 
minimum payment for some period after the occurrence of a specified 
event. During the suspension period, interest may continue to accrue, 
or it may be suspended as well. Under the proposal, to exclude the cost 
of debt suspension coverage from the finance charge and APR, creditors 
must inform consumers that the coverage suspends, but does not cancel, 
the debt.
    Under the current rules, charges for credit insurance and debt 
cancellation coverage are deemed not to be finance charges if a 
consumer requests coverage after an open-end credit account is opened 
or after a closed-end credit transaction is consummated (the coverage 
is deemed not to be ``written in connection'' with the credit 
transaction). Because in such cases the charges are defined as non-
finance charges, Regulation Z does not require a disclosure or written 
evidence of consent to exclude them from the finance charge. The 
proposed revisions to Regulation Z would implement a broader 
interpretation of ``written in connection'' with a credit transaction 
and require creditors to provide disclosures, and obtain evidence of 
consent, on sales of credit insurance or debt cancellation or 
suspension coverage during the life of an open-end account. If a 
consumer requests the coverage by telephone, creditors may provide the 
disclosures orally, but in that case they must mail written disclosures 
within three days of the call.\5\
---------------------------------------------------------------------------

    \5\ The proposed revisions to Regulation Z requiring disclosures 
to be mailed within three days of a telephone request for these 
products are consistent with the rules of the federal banking 
agencies governing insured depository institutions' sales of 
insurance and with guidance published by the Office of the 
Comptroller of the Currency (OCC) concerning national banks' sales 
of debt cancellation and debt suspension products.
---------------------------------------------------------------------------

VI. Section-by-Section Analysis

    In reviewing the rules affecting open-end credit, the Board has 
reorganized some provisions to make the regulation easier to use. Rules 
affecting home-equity lines of credit (HELOCs) subject to Sec.  226.5b 
are separately delineated in Sec.  226.6 (account-opening disclosures), 
Sec.  226.7 (periodic statements), and Sec.  226.9 (subsequent 
disclosures) Footnotes have been moved to the text of the regulation or 
commentary, as appropriate. These proposed revisions are identified in 
a table below.

See IX. Redesignation Table.

Introduction

    The official staff commentary to Regulation Z begins with an 
Introduction. Comment I-6 discusses reference materials published at 
the end of each section of the commentary adopted in 1981. 46 FR 
50,288; October 9, 1981. The references were intended as a compliance 
aid during the transition to the 1981 revisions to Regulation Z. The 
Board would delete these references and comment I-6, as obsolete. 
Comment I-3, I-4(b), and I-7, which address 1981 rules of transition, 
also would be deleted as obsolete.

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, 
and Liability

    Section 226.1(c) generally outlines the persons and transactions 
covered by Regulation Z. Comment 1(c)-1 provides, in part, that the 
regulation applies to consumer credit extended to residents (including 
resident aliens) of a state. Technical revisions are proposed for 
clarity. Comment is requested if further guidance on the scope of 
coverage would be helpful.
    Section 226.1(d)(2), which summarizes the organization of the 
regulation's open-end credit rules (Subpart B), would be amended to 
reinsert text inadvertently deleted in a previous rulemaking. See 54 FR 
24670; June 9, 1989. Section 226.1(d)(4), which summarizes 
miscellaneous provisions in the regulation (Subpart D), would be 
updated to describe amendments made in 2001 to Subpart D relating to

[[Page 32959]]

disclosures made in languages other than English. See 66 FR 17339; 
March 30, 2001. The substance of Footnote 1 would be deleted as 
unnecessary.

Section 226.2 Definitions and Rules of Construction

2(a) Definitions
2(a)(2) Advertisement
    For clarity, the Board proposes technical revisions to the 
commentary to Sec.  226.2(a)(2), with no intended change in substance 
or meaning. No changes are proposed for the text of Sec.  226.2(a)(2).
2(a)(4) Billing Cycle
    TILA Section 127(b) provides that, for an open-end credit plan, the 
creditor shall send the consumer a periodic statement for each billing 
cycle at the end of which there is an outstanding balance or with 
respect to which a finance charge is imposed. 15 U.S.C. 1637(b). 
``Billing cycle'' is not defined in the statute, but is defined in 
Sec.  226.2(a)(4) of Regulation Z as ``the interval between the days or 
dates of regular periodic statements.'' In addition, Sec.  226.2(a)(4) 
requires that billing cycles be equal and no longer than a quarter of a 
year, and allows a variance of up to four days from the regular day or 
date of the statement. Comment 2(a)(4)-3 provides an exception to the 
requirement for equal cycles: the ``transitional billing cycle that can 
occur when the creditor occasionally changes its billing cycles so as 
to establish a new statement day or date.'' Under the proposal, the 
Board would clarify that creditors may also vary the length of the 
first cycle on an open-end account in certain situations.
    Questions have sometimes arisen about the first cycle that occurs 
when a consumer opens an open-end credit account, and specifically, 
about whether the first cycle may vary by more than four days from the 
regular cycle interval without violating the equal-cycle requirement. 
For example, in order to establish the consumer's account on the 
creditor's billing system, the first cycle may need to be longer or 
shorter than a monthly period by more than four days, depending upon 
the date the account is opened. The Board believes that such a variance 
for a first cycle, within reason, would not harm consumers and would 
facilitate compliance. Comment 2(a)(4)-3 would be revised to clarify 
this point.
2(a)(15) Credit Card
    TILA defines ``credit card'' as ``any card, plate, coupon book or 
other credit device existing for the purpose of obtaining money, 
property, labor, or services on credit.'' TILA Section 103(k); 15 
U.S.C. 1602(k). In addition, Regulation Z provides that a credit card 
is a ``single credit device that may be usable from time to time to 
obtain credit.'' See Sec.  226.2(a)(15). The definition of ``credit 
card'' in the regulation would remain largely unchanged; however, the 
current reference to a ``coupon book'' in the definition would be 
deleted as obsolete.
    Checks that access credit card accounts. Credit card issuers 
sometimes provide cardholders with checks that access a credit card 
account, which can be used to obtain cash, purchase goods or services, 
or pay the outstanding balance on another account. These checks are 
often mailed to consumers unsolicited, sometimes with consumers' 
monthly statements. When a consumer uses such a check, the amount of 
the check will be billed to the cardholder's account.
    Historically, checks that access credit card accounts have not been 
treated as ``credit cards'' under TILA because each check can be used 
only once and not ``from time to time.'' See comment 2(a)(15)-1. As a 
result, TILA's protections involving merchant disputes, unauthorized 
use of the account, and the prohibition against unsolicited issuance, 
which apply only to ``credit cards,'' do not apply to these checks. See 
Sec.  226.12. However, other protections do apply to such checks. See 
Sec.  226.13. In the December 2004 ANPR, the Board solicited comment as 
to whether it should extend TILA's protections for credit cards to 
other extensions on credit card accounts, in particular checks that 
access credit card accounts. Q45. The Board also asked whether the 
industry is developing open-end credit plans that would allow consumers 
to conduct transactions using only account numbers and that do not 
involve the issuance of physical devices traditionally considered to be 
credit cards. Q44.
    In response to the December 2004 ANPR, several consumer commenters 
urged the Board to expand the definition of ``credit card'' to include 
checks that access a credit card account, in particular to address the 
risk of increased fraud and heightened identity theft stemming from the 
unrestricted issuance of such checks. Specifically, these commenters 
cited concerns that these checks could be sent to a consumer at any 
time without the consumer's request. Alternatively, some consumer 
commenters suggested that if these checks continued to be issued on an 
unsolicited basis, consumers should at least be able to opt out from 
receiving them. In addition, one consumer group commented that the 
Board could address non-physical credit cards by clarifying that the 
term ``device'' as it appears in the definition of ``credit card'' can 
include any physical object or a method or process.
    Industry commenters opposed expanding the definition of ``credit 
card'' to cover checks that access credit card accounts, for various 
reasons. In general, industry commenters stated that they were aware of 
few complaints regarding such checks, and that in their experience, 
most consumers find the checks useful and convenient, as demonstrated 
by their frequent use. In addressing unsolicited issuance concerns 
specifically, industry commenters noted that upon a consumer's request, 
most issuers will discontinue sending checks that access a credit card 
account.
    Industry commenters also stated that it was unnecessary to extend 
the unauthorized use protections to convenience checks because 
convenience check transactions are generally subject to the Uniform 
Commercial Code (UCC) provisions governing checks, and thus a consumer 
generally would not have any liability for a forged check, provided the 
consumer complies with certain timing requirements. Industry commenters 
also opposed applying the merchant dispute provisions (in Sec.  226.12) 
to checks that access a credit card account, stating that these checks 
are not processed through the payment card associations' networks. 
Because card issuers may have no connection to or relationship with 
merchants that accept these checks, industry commenters stated that 
issuers do not have the ability to charge back to that merchant 
transactions conducted with these checks. Accordingly, industry 
commenters believed that the consumer was in the best position to 
contact the merchant in the event of a dispute involving a transaction 
using one of these checks.
    In the proposal, the definition of ``credit card'' would remain 
unchanged. The Board believes it may be unnecessary to address 
unauthorized use concerns by treating checks that access credit card 
accounts as credit cards, to the extent existing law or agreements 
provide protections to these transactions. Moreover, under Regulation 
Z, a consumer is currently able to assert billing error claims for 
transactions involving checks that access a credit card account because 
the billing error provisions in Sec.  226.13 apply to any extension of 
credit under an open-end plan, and are not limited to credit cards. The 
Board also does not

[[Page 32960]]

believe that it is necessary to require issuers to provide consumers 
with the ability to opt out of receiving checks that access credit card 
accounts. The Board understands that in many instances, issuers will 
honor consumer requests to opt out of receiving such checks, and the 
Board encourages creditors to continue the practice. In addition, as 
noted above, consumers would be able to assert a billing error claim 
with respect to any unauthorized transactions involving such checks and 
is not liable for unauthorized transactions, as provided for under 
Sec.  226.13.
    Plans in which no physical device is issued. The proposal does not 
address circumstances where a consumer may conduct a transaction on an 
open-end plan that does not have a physical device. The Board had 
solicited comment on such plans because it has received anecdotal 
information about limited cases in which consumers obtained credit by 
providing an account number (for example, to obtain food and services 
at a resort) and where a physical device was not issued to the 
consumer. Industry commenters stated that, in general, they were 
unaware of any plans to provide open-end accounts that did not involve 
the issuance of a card or other physical device. In particular, 
industry commenters noted that creditors will continue to issue 
physical devices because transactions where a card or other physical 
device is present are generally far more secure and less likely to 
involve fraud compared to those in which only the account number, along 
with other information, is used to verify the identity of the user. 
Moreover, industry commenters noted that consumers still need a 
tangible device bearing account information that they can easily carry 
with them. As a result, industry commenters generally believed that 
issuers would be unlikely to abandon the issuance of a physical card or 
device.
    The Board believes that it is not necessary at this time to address 
this issue, but it will continue to monitor developments in the 
marketplace. Of course, to the extent a creditor has issued a device 
that meets the definition of a ``credit card'' for an account, 
transactions on that account are subject to the provisions that apply 
to transactions involving the use of a ``credit card,'' even if the 
particular transaction itself is not conducted using the device (for 
example, in the case of phone or Internet transactions).
    Coupon books. As noted above, the definition of ``credit card'' 
under both TILA and Regulation Z includes a reference to a ``coupon 
book.'' Neither the statute nor the regulation provides any guidance on 
the types of devices that would constitute a ``coupon book'' so as to 
qualify as a ``credit card'' under the definition. Comment 2(a)(15)-1, 
as discussed above, states that checks and similar instruments that can 
be used only once to obtain a single credit extension are not ``credit 
cards,'' and, logically such instruments, even if issued in a separate 
booklet or in conjunction with a periodic statement, also would not be 
considered to be coupon books. Thus, as the Board is not aware of 
devices existing today that would qualify as a coupon book under the 
statute and regulation, the Board is proposing to delete the reference 
to such devices in the definition of ``credit card'' as obsolete. 
Comment is requested as to whether removal of the reference to ``coupon 
book'' in Sec.  226.2(a)(15) would help clarify the definition of 
``credit card'' without inadvertently limiting the availability of 
Regulation Z protections.
    Charge cards. Comment 2(a)(15)-3 discusses charge cards and 
identifies provisions in Regulation Z in which a charge card is 
distinguished from a credit card. As discussed in detail in the 
section-by-section analysis to Sec.  226.7(b)(11) and Sec.  
226.7(b)(12), the new late payment and minimum payment disclosure 
requirements contained in the Bankruptcy Act do not apply to charge 
card issuers. Thus, comment 2(a)(15)-3 is updated to reflect those 
changes.
2(a)(17) Creditor
    For reasons explained in the section-by-section analysis to Sec.  
226.3, the Board is proposing to exempt from TILA coverage credit 
extended under employee-sponsored retirement plans. Comment 
2(a)(17)(i)-8, which provides guidance on whether such a plan is a 
creditor for purposes of TILA, would be deleted. The guidance would no 
longer be necessary because loans granted under such plans would be 
exempt from TILA and, as such, the definition of ``creditor'' would not 
need to be clarified.
    In addition, the substance of footnote 3 would be moved to a new 
Sec.  226.2(a)(17)(v), and references revised, accordingly. The dates 
used to illustrate numerical tests for determining whether a creditor 
``regularly'' extends consumer credit are updated in comments 2(a)(17)-
3 through -6.
2(a)(20) Open-End Credit
    Under TILA Section 103(i), as implemented by Sec.  226.2(a)(20) of 
Regulation Z, ``open-end credit'' is consumer credit extended by a 
creditor under a plan in which (1) the creditor reasonably contemplates 
repeated transactions, (2) the creditor may impose a finance charge 
from time to time on an outstanding unpaid balance, and (3) the amount 
of credit that may be extended to the consumer during the term of the 
plan, up to any limit set by the creditor, generally is made available 
to the extent that any outstanding balance is repaid. Comment 2(a)(20)-
1 reiterates that consumer credit must meet all three of these criteria 
to be open-end credit. Comment 2(a)(20)-5 currently states, with 
respect to replenishment of the credit line, that a creditor need not 
establish a specific credit limit for the line of credit and that the 
line need not always be replenished to its original amount.
    ``Spurious'' open-end credit. The Board has received comments from 
time to time from state attorneys general and consumer groups voicing 
concern that the definition of open-end credit permits creditors to 
treat as open-end plans certain credit transactions that would be more 
properly characterized as closed-end credit. These commenters note that 
as a practical matter, such ``spurious'' open-end credit is unlikely to 
be used for repeated transactions and the credit line does not 
replenish to the extent that the consumer pays down his or her balance. 
Furthermore, these open-end plans may be established primarily to 
finance an infrequently purchased product or service, the credit limits 
for many of the creditor's customers may be close to the cost of that 
product or service, and the creditor may have no reasonable grounds for 
expecting that there will be repeated transactions by many of its 
customers. When open-end disclosures are given for such products, the 
concern voiced by state attorneys general and consumer groups is that 
those disclosures fail to adequately disclose the period of time that 
it will take to repay the balance, the total of the payments that a 
consumer will be required to make (assuming in both cases that the 
consumer makes only the minimum required payments).
    In an effort to address these concerns, in 1997 the Board proposed 
adding two sets of factors to the commentary, one set that creditors 
should consider when determining whether they ``reasonably contemplate 
repeated transactions,'' and another set to provide guidance on whether 
a credit line is ``reusable.'' \6\

[[Page 32961]]

The Board received many comments from industry in response to this 
proposal, most of which criticized the factors on the grounds that they 
would result in excluding from the definition of ``open-end credit'' 
legitimate open-end credit products. In particular, commenters were 
concerned about the status of private label credit cards that offer an 
incentive to the consumer to make a large initial purchase. In response 
to these concerns, the two sets of factors were not adopted in the 
final commentary revisions.
---------------------------------------------------------------------------

    \6\ The factors that were proposed regarding the ``repeated 
transactions'' portion of the definition were: (1) Whether the 
product is something that consumers would most likely not purchase 
in multiples, (2) whether the line of credit is established for the 
purpose of purchasing a designated item, (3) the amount of the 
initial purchase relative to the credit limit, (4) the extent to 
which the creditor reasonably solicits customers to make additional 
purchases, and (5) whether the creditor has information on consumers 
with the credit line showing that they have made repeat purchases. 
The proposed revisions also would have provided that a line of 
credit generally is not self-replenishing if the initial line of 
credit is less than, or not much more than, the amount of the item 
purchased to open the credit line (or the minimum monthly payments 
are so low that the credit line is not reusable for an extended 
period of time). See 62 FR 64,769, December 9, 1997.
---------------------------------------------------------------------------

    As discussed further in the section-by-section analysis to Sec.  
226.16, the Board proposes to address potential ``spurious'' open-end 
credit transactions through improved advertising disclosures. The Board 
believes this to be a more targeted and effective approach than 
revising the definition of open-end credit. One of the major problems 
with ``spurious'' open-end credit highlighted by commenters is that 
creditors advertise a low minimum monthly payment which can mislead 
consumers, who may not be aware of the total amount of payments they 
would be required to make, or the term over which they would be 
obligated to make those payments. As discussed below in the section-by-
section analysis to Sec.  226.16(b), the proposed rule would require a 
creditor that states a minimum monthly payment in an advertisement also 
to state the term that it will take to repay the debt at that minimum 
payment level, as well as the total amount of the payments. The 
proposed rule would require that disclosure of the term and total 
amount of payments be equally prominent to the advertisement of the 
minimum payment. The Board believes that disclosure of the term and 
total of payments in advertisements will help to improve consumer 
understanding about the cost of credit products for which a low monthly 
payment is advertised, addressing one of the major concerns regarding 
``spurious'' open-end credit.
    ``Open-end'' plans comprised of closed-end features. The Board also 
is concerned that, under current guidance in the commentary, some 
credit products are treated as open-end plans, with open-end 
disclosures given to consumers, when such products would more 
appropriately be treated as closed-end transactions. Closed-end 
disclosures are more appropriate than open-end disclosures when the 
credit being extended is individual loans that are individually 
approved and underwritten. The Board is particularly concerned about 
certain credit plans, where each individual credit transaction is 
separately evaluated.
    For example, under certain so-called multifeatured open-end plans, 
creditors may offer loans to be used for the purchase of an automobile. 
These automobile loan transactions are approved and underwritten 
separately from other credit made available on the plan. (In addition, 
the consumer typically has no right to borrow additional amounts on the 
automobile loan ``feature'' as the loan is repaid.) If the consumer 
repays the entire automobile loan, he or she may have no right to take 
further advances on that ``feature,'' and must separately reapply if he 
or she wishes to obtain another automobile loan, or use that aspect of 
the plan for similar purchases. Typically, while the consumer may be 
able to obtain additional advances under the plan as a whole, the 
creditor separately evaluates each request.
    Currently, some creditors may be treating such plans as open-end 
credit, in light of several sections in the current commentary. Current 
comment 2(a)(20)-2 provides that if a program as a whole meets the 
definition of open-end credit, such a program may be considered a 
single multifeatured plan, notwithstanding the fact that certain 
features might be used infrequently. In addition, current comment 
2(a)(20)-3 indicates that, for a multifeatured open-end plan, a 
creditor need not believe a consumer will reuse a particular feature of 
the plan. Also, current comment 2(a)(20)-5 indicates that a creditor 
may verify credit information such as a consumer's continued income and 
employment status or information for security purposes.
    The Board believes that in certain circumstances treating such 
credit as open-end is inappropriate under Regulation Z, and accordingly 
proposes a number of revisions to Sec.  226.2(a)(20) and the 
accompanying commentary. Closed-end disclosures are more appropriate 
than open-end disclosures unless the consumer's credit line generally 
replenishes to the extent that he or she repays outstanding balances so 
that the consumer may continue to borrow and take advances under the 
plan without having to obtain separate approval for each subsequent 
advance. Replenishment of the amount of credit available to a consumer 
in good standing without the need for separate underwriting or approval 
of each advance distinguishes open-end credit from a series of advances 
made pursuant to separate closed-end loan commitments, such as the 
automobile loan described above. For example, if a consumer makes two 
payments of $500 that reduce the outstanding principal balance on the 
line of credit, the consumer generally should be able to obtain an 
additional $1,000 of credit under the open-end plan without having a 
creditor separately underwriting or evaluating whether the consumer can 
borrow the $1,000.
    The Board proposes to revise comment 2(a)(20)-2 to clarify that 
while a consumer's account may contain different sub-accounts, each 
with different minimum payment or other payment options, each sub-
account must meet the self-replenishing criterion. In particular, 
proposed comment 2(a)(20)-2 would provide that repayments of an advance 
for any sub-account must generally replenish a single credit line for 
that sub-account so that the consumer may continue to borrow and take 
advances under the plan to the extent that he or she repays outstanding 
balances without having to obtain separate approval for each subsequent 
advance.
    Due to the concerns noted above regarding closed-end automobile 
loans being characterized as features of so-called open-end plans, the 
Board proposes to delete comment 2(a)(20)-3.ii. While there may be 
circumstances under which it would be more reasonable for a financial 
institution to make advances from an open-end line of credit for the 
purchase of an automobile than for an automobile dealer to sell a car 
under an open-end plan, the Board believes that the current example 
places inappropriate emphasis on the identity of the creditor rather 
than the type of credit being extended by that creditor.
    TILA Section 103(i) provides that a plan can be an open-end credit 
plan even if the creditor verifies credit information from time to 
time. 15 U.S.C. 1602(i). The Board believes this provision is not 
intended to permit a creditor to separately underwrite each advance 
made to a consumer under an open-end plan or account. Such a process 
could result in closed-end credit being deemed open-end credit. The 
Board proposes to clarify in comment 2(a)(20)-5 that in general, a 
credit line is self-replenishing if a consumer can obtain further 
advances or funds without being required to separately

[[Page 32962]]

apply for those additional advances, and without undergoing a separate 
review by the creditor of that consumer's credit information, in order 
to obtain approval for each such additional advance.
    Notwithstanding this proposed change, a creditor could verify 
credit information to ensure that the consumer's creditworthiness has 
not deteriorated (and could revise the consumer's credit limit or 
account terms accordingly). However, to perform such an inquiry for 
each specific credit request would go beyond verification and would 
more closely resemble underwriting of closed-end credit. The Board 
recognizes that a creditor may need to review, and as appropriate, 
decrease the amount of credit available to a consumer from time to time 
to address safety and soundness and other concerns. Such a review would 
not be affected by the proposed changes, as explained in proposed 
comment 2(a)(20)-5.
    These revisions are not intended to impact home-equity lines of 
credit (HELOCs), which may have a fixed draw period (during which time 
a consumer may continue to take advances to the extent that he or she 
repays the outstanding balance) followed by a repayment period where 
the consumer may no longer draw against the line, as closed-end credit. 
The Board seeks comment regarding the proposed rule's impact on HELOCs.
    Comment 2(a)(20)-5.ii. currently notes that a creditor may reduce a 
credit limit or refuse to extend new credit due to changes in the 
economy, the creditor's financial condition, or the consumer's 
creditworthiness. The Board's proposal would delete the reference to 
changes in the economy to simplify this provision.
    The Board also proposes a technical update to comment 2(a)(20)-4 to 
delete a reference to ``china club plans,'' which may no longer be very 
common. No substantive change is intended.
2(a)(24) Residential Mortgage Transaction
    Comment 2(a)(24)-1, which identifies key provisions affected by the 
term ``residential mortgage transaction,'' is revised to include a 
reference to Sec.  226.32, correcting an inadvertent omission.

Section 226.3 Exempt Transactions

    Section 226.3 implements TILA Section 104 and provides exemptions 
for certain classes of transactions specified in the statute. 15 U.S.C. 
1603.
    The Board proposes a number of substantive and technical revisions 
to Sec.  226.3 as described below. The substance of footnote 4 is moved 
to the commentary. See comment 3-1.
3(a) Business, Commercial, Agricultural, or Organizational Credit
    Section 226.3(a) provides, in part, that the regulation does not 
apply to extensions of credit primarily for business, commercial or 
agricultural purposes. The Board received no comments regarding this 
exemption in regard to the December 2004 ANPR. Questions have arisen 
from time to time, however, regarding whether transactions made for 
business purposes on a consumer purpose credit card are exempt from 
TILA. The Board seeks to provide clarification regarding this question. 
The determination as to whether a credit card account is primarily for 
consumer purposes or business purposes is best made when the account is 
opened, rather than on a transaction-by-transaction basis, and thus the 
Board is proposing to add a new comment 3(a)-2 to clarify that 
transactions made for business purposes on a consumer-purpose credit 
card are covered by TILA (and, conversely, that purchases made for 
consumer purposes on a business-purpose credit card are exempt from 
TILA). Other sections of the commentary regarding Sec.  226.3(a) would 
be renumbered accordingly. A new comment 3(a)-7 would provide guidance 
on card renewals, consistent with proposed comment 3(a)-2.
3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling
    Section 226.3(b) exempts from Regulation Z extensions of credit not 
secured by real property or a dwelling, in which the amount financed 
exceeds $25,000 or in which there is an express written commitment to 
extend credit in excess of $25,000. The $25,000 threshold in Sec.  
226.3(b) is the same as the statutory threshold set in TILA Section 
104(3). 15 U.S.C. 1603(3).
    In the December 2004 ANPR, the Board solicited comment as to 
whether the rules implementing TILA Section 104 needed to be updated. 
Q58. The Board received several comments regarding the $25,000 
threshold. One consumer group noted that the $25,000 figure is outdated 
due to inflation and should be increased. One bank noted that the 
threshold remains appropriate for unsecured credit but suggested that 
the Board might consider at a later stage of the Regulation Z review 
whether the $25,000 figure should be raised for secured credit, such as 
automobile loans. The Board agrees that the Sec.  226.3(b) threshold 
would be more appropriately considered in connection with its planned 
review of the closed-end credit provisions of Regulation Z and is not 
proposing to take any action at the present time. In delaying 
consideration of the $25,000 threshold to the closed-end Regulation Z 
review, the Board expresses no view on whether the $25,000 threshold is 
appropriate for open-end (not home-secured) credit. Rather, the Board 
proposes to review the threshold for all credit covered by TILA at the 
same time.
3(c) Public Utility Credit
    Section 226.3(c) exempts from Regulation Z extensions of credit 
involving public utility services provided through pipe, wire, other 
connected facilities, or radio or similar transmission, if the charges 
for service, delayed payment, or any discounts for prompt payment are 
filed with or regulated by any government unit. 15 U.S.C. 1603(4).
    The Board received no comments on the December 2004 ANPR regarding 
the applicability and scope of Sec.  226.3(c). However, the Board has 
received inquiries from time to time regarding the applicability of 
Regulation Z to service plans for cellular telephones. In addition, in 
light of the deregulation in recent years by some states of utilities 
such as gas and electric services, the Board believes that it may be 
appropriate to reconsider the scope of the public utility credit 
exemption more generally. The Board also notes that due to 
technological advances, there may be additional types of services, such 
as certain Internet services, for which exemption from Regulation Z may 
be appropriate. The Board is not proposing to take any action at the 
present time, however, because these issues would be better considered 
in the context of the Board's upcoming rulemaking regarding the closed-
end credit provisions of Regulation Z.
3(g) Employer-Sponsored Retirement Plans
    The Board has received questions from time to time regarding the 
applicability of TILA to loans taken against employer-sponsored 
retirement plans. Pursuant to TILA Section 104(5), the Board has the 
authority to exempt transactions for which it determines that coverage 
is not necessary in order to carry out the purposes of TILA. 15 U.S.C. 
1603(5). The Board also has the authority pursuant to TILA Section 
105(a) to provide adjustments and exceptions for any class of 
transactions, as in the judgment of the Board are necessary or proper 
to effectuate the purposes of TILA. 15 U.S.C. 1604(a). The Board 
proposes to add to the regulation a new Sec.  226.3(g), which

[[Page 32963]]

would exempt loans taken by employees against their employer-sponsored 
retirement plans qualified under Section 401(a) of the Internal Revenue 
Code and tax-sheltered annuities under Section 403(b) of the Internal 
Revenue Code, provided that the extension of credit is comprised of 
fully-vested funds from such participant's account and is made in 
compliance with the Internal Revenue Code. 26 U.S.C. 1 et seq.; 26 
U.S.C. 401(a); 26 U.S.C. 403(b).
    The Board believes that an exemption for loans taken against funds 
invested in such types of employer-sponsored retirement plans is 
appropriate for the following reasons. The consumer's interest and 
principal payments on such a loan are reinvested in the consumer's own 
account, and there is no third-party creditor imposing finance charges 
on the consumer. Also, TILA disclosures would be of very limited, if 
any, value. The costs of a loan taken against assets invested in a 
401(k) plan, for example, are not comparable to the costs of a third 
party loan product, because a consumer pays the interest on a 401(k) 
loan to himself or herself rather than to a third party. Moreover, plan 
administration fees must be disclosed under Department of Labor 
regulations. See 29 CFR 2520.1023(1).
Family Trusts
    The Board also has from time to time received inquiries regarding 
TILA coverage of family trusts created for estate planning purposes. 
Because most of these questions pertain to real-estate secured loans, 
the applicability of the exemptions in Sec.  226.3 to these types of 
estate planning arrangements would be better considered in the context 
of the Board's upcoming closed-end Regulation Z review.

Section 226.4 Finance Charge

    Various provisions of TILA and Regulation Z specify how and when 
the cost of consumer credit as a dollar amount, the ``finance charge,'' 
is to be disclosed. The rules for determining which charges make up the 
finance charge are set forth in TILA Section 106 and Regulation Z Sec.  
226.4. 15 U.S.C. 1605. Some rules apply only to open-end credit and 
others apply only to closed-end credit, while some apply to both. With 
limited exceptions discussed below, the Board is not proposing to 
change Sec.  226.4 for either closed-end credit or open-end credit.
    The Board is aware of longstanding criticisms that the definition 
of the ``finance charge'' in Sec.  226.4, as interpreted in the 
regulation and the related commentary, is too narrow, too broad, or too 
vague. In a 1998 report to Congress, the Board discussed these 
concerns, and proposed solutions, in the context of closed-end mortgage 
loans.\7\ In this proposal, the Board addresses concerns about the 
definition of the ``finance charge'' in the context of open-end (not 
home-secured) plans through changes to Sec.  226.5, Sec.  226.6, and 
Sec.  226.7 to simplify disclosure of charges on such plans. The Board 
is not proposing to address these concerns through changes to Sec.  
226.4, with limited exceptions. The Board proposes to revise Sec.  
226.4 and related commentary to address (1) transaction charges imposed 
by credit card issuers, such as charges for obtaining cash advances 
from ATMs and for making purchases in foreign currencies, and (2) 
charges for credit insurance, debt cancellation coverage, and debt 
suspension coverage.
---------------------------------------------------------------------------

    \7\ Board of Governors of the Federal Reserve System and 
Department of Housing and Urban Development, Joint Report to the 
Congress Concerning Reform to the Truth in Lending Act and the Real 
Estate Settlement Procedures Act, July 1998.
---------------------------------------------------------------------------

4(a) Definition
    Under the definition of ``finance charge'' in TILA Section 106 and 
Regulation Z Sec.  226.4(a), a charge specific to a credit transaction 
is ordinarily a finance charge. 15 U.S.C. 1605. See also Sec.  
226.4(b)(2). However, also under Section 106 and Sec.  226.4(a), the 
finance charge does not include any charge of a type payable in a 
``comparable cash transaction.'' Under the staff commentary to Sec.  
226.4(a), in determining whether a charge associated with a credit 
transaction is a finance charge, the creditor should compare the credit 
transaction in question with a ``similar'' cash transaction, if one 
exists. See comment 4(a)-1. The commentary states a general principle 
for applying this rule in the case of credit that finances the sale of 
property or services: the creditor should compare charges with those 
that would be payable if the services or property were purchased using 
cash rather than a loan. Thus, for example, if an escrow agent charges 
the same fee regardless of whether real estate is bought in cash or 
with a mortgage loan, then the agent's fee is not a finance charge.
    In other cases, however, particularly in cases involving credit 
cards, determining which, if any, transaction is a ``similar'' or 
``comparable'' cash transaction for purposes of Sec.  226.4(a) can be 
difficult. For example, when consumers became able to take cash 
advances on credit card accounts using ATMs, a question arose as to 
whether a fee charged by a card issuer for the transaction was a 
finance charge if the issuer charged the same fee for using a debit 
card to withdraw cash from an asset account. The Board solicited 
comment on this question in 1983 and adopted staff comment 4(a)-4 in 
1984. 48 FR 54,642; December 6, 1983 and 49 FR 40,560; October 17, 
1984. That comment indicates that the fee is not a finance charge to 
the extent that it does not exceed the charge imposed by the card 
issuer on its cardholders for using the ATM to withdraw cash from a 
consumer asset account, such as a checking or savings account. Another 
comment indicates that the fee is an ``other charge.'' See current 
comment 6(b)-1(vi). Accordingly, the fee must be disclosed at account 
opening and on the periodic statement, but it is not labeled as a 
``finance charge'' nor included in the effective APR.
    Since comment 4(a)-4 was adopted, questions have been raised about 
its scope and application. For example, the comment does not address 
whether it applies when an affiliate of the card issuer, but not the 
card issuer itself, issues a debit card. Even in the seemingly simple 
case where the credit card issuer itself issues a debit card, a variety 
of complexities arise. The issuer may assess an ATM fee for one kind of 
deposit account (for example, an account with a low minimum balance) 
but not for another. The comment does not indicate which account is the 
proper basis for comparison.
    Questions have also been raised about whether disclosure of the 
charge pursuant to comments 4(a)-4 and 6(b)-1.iv. is meaningful to 
consumers. Under the comment, the disclosure a consumer receives after 
incurring a fee for taking a cash advance through an ATM depends on the 
structure of the institution that issued the credit card. If the credit 
card issuer does not provide asset accounts and is not affiliated with 
an institution that does, then it must disclose the charge as a finance 
charge. If the credit card issuer provides asset accounts and offers 
debit cards on those accounts, then, depending on the circumstances, 
the issuer must not disclose the charge as a finance charge. It is not 
clear that the distinction is meaningful to consumers.
    Recently, a question has arisen about the proper disclosure of 
another kind of transaction fee imposed on credit cards. The question 
is whether fees that credit cardholders are assessed for making 
purchases in a foreign currency or outside the United States--for 
example, when the cardholder travels abroad-- are finance charges. The 
question has arisen in litigation between consumers

[[Page 32964]]

and major card issuers.\8\ Some card issuers have argued by analogy to 
comment 4(a)-4 that a foreign transaction fee is not a finance charge 
if the fee does not exceed the issuer's fee for using a debit card for 
the same purchase. Some card issuers disclose the foreign transaction 
fee as a finance charge and include it in the effective APR, but others 
do not.
---------------------------------------------------------------------------

    \8\ See Third Consolidated Amended Class Action Complaint at 47-
48, In re Currency Conversion Fee Antitrust Litigation, MDL Docket 
No. 1409 (S.D.N.Y.). The court approved a settlement on a 
preliminary basis on November 8, 2006.
---------------------------------------------------------------------------

    The uncertainty about proper disclosure of charges for foreign 
transactions and for cash advances from ATMs reflects the inherent 
complexity of seeking to distinguish transactions that are ``comparable 
cash transactions'' to credit card transactions from transactions that 
are not. The Board believes that clearer guidance may result from a new 
and simpler approach that treats as a finance charge any fee charged by 
credit card issuers for transactions on their credit card plans. This 
guidance may be helpful to creditors in determining which charges must 
be included in the computation of the effective APR, if the Board 
retains the effective APR. See section-by-section analysis to Sec.  
226.7(b)(7). Such an approach would also provide more meaningful 
disclosures to consumers by assuring a consistent approach to the 
disclosure of transaction fees.
    The current approach of providing guidance on a case-by-case (fee-
by-fee) basis, such as for ATM fees, has not provided sufficient 
certainty for many creditors about how to disclose transaction charges 
on credit cards. Moreover, to the extent creditors have adopted 
different disclosure practices in the face of regulatory uncertainty, 
consumers may have had difficulty understanding the disclosures, since, 
for example, one creditor might disclose an ATM fee as a finance charge 
while another creditor may disclose the fee as an ``other'' charge. 
Thus, while the Board could adopt guidance specific to fees as they 
arise, such as the Board did in 1984 for the ATM fee and could do for 
the foreign transaction fee, it is not clear that fee-by-fee guidance 
is sufficient to both facilitate compliance by credit card issuers and 
promote understanding by consumers.
    It is also not clear that an attempt to adopt general rules for 
distinguishing comparable transactions from non-comparable 
transactions, in the case of credit cards, would adequately facilitate 
compliance by credit card issuers and promote understanding by 
cardholders. One major difficulty in formulating such rules would be 
deciding whether to adopt the perspective of the card issuer or that of 
the cardholder. For example, a transaction on an asset account with a 
card issuer may be comparable to a credit card transaction from the 
perspective of the card issuer, but not from the perspective of a 
cardholder who does not have an asset account with the issuer. A rule 
based on the issuer's perspective may confuse consumers; it may not be 
reasonable to expect a consumer to understand that one transaction fee 
is a finance charge and the other is not because one card issuer issues 
a debit card and the other does not. Yet a rule based on the 
cardholder's perspective may not be practicable for the issuer to 
implement; the issuer may not be able to determine whether a particular 
consumer has an asset account with another institution and, if so, the 
amount of the fee charged on the account. As explained above in the 
context of the fee for cash advances from ATMs, even when a rule is 
based on the card issuer's perspective, the card issuer may have 
difficulty determining which asset account, precisely, is the relevant 
basis for comparison. The difficulty of determining which perspective 
to adopt increases in a case such as a fee for a purchase conducted in 
a foreign currency. From the perspective of the consumer, the debit 
card is not the only alternative to the credit card; the consumer may 
also pay in cash.
    Thus, having considered alternative approaches, the Board is 
proposing to adopt a simple interpretive rule that any transaction fee 
on a credit card plan is a finance charge, regardless of whether the 
issuer in its capacity as a depository institution imposes the same or 
lesser charge on withdrawals of funds from an asset account such as a 
checking or savings account. This proposal would be implemented by 
removing staff comment 4(a)-4 and replacing it with a new comment of 
the same number reflecting this rule. The comment would give as 
examples of such finance charges a fee imposed by the issuer for 
foreign transactions and a fee imposed by the issuer for taking a cash 
advance at an ATM.\9\ Such guidance would be consistent with TILA 
Section 106, 15 U.S.C. 1605, which gives the Board discretion to 
determine whether a given credit transaction has a comparable cash 
transaction within the meaning of the statute. This guidance would also 
facilitate compliance and promote consumer understanding. See TILA 
Section 105(a), 15 U.S.C. 1604(a).
---------------------------------------------------------------------------

    \9\ The proposed change to comment 4(a)-4 would not affect 
disclosure of ATM fees assessed by institutions other than the 
credit card issuer. See proposed Sec.  226.6(b)(1)(ii)(A).
---------------------------------------------------------------------------

    The Board seeks comment on whether this new approach would 
facilitate compliance and improve consumer understanding without 
causing unintended consequences.
    Comment 4(a)-1 provides examples of charges in comparable cash 
transactions that are not finance charges. Among the examples are 
discounts available to a particular group of consumers because they 
meet certain criteria, such as being members of an organization or 
having accounts at a particular institution. The Board solicits comment 
on whether the example is still useful, or should be deleted as 
unnecessary or obsolete.
4(b) Examples of Finance Charges
    Charges for credit insurance or debt cancellation or suspension 
coverage. Premiums or other charges for credit life, accident, health, 
or loss-of-income insurance are finance charges if the insurance or 
coverage is ``written in connection with'' a credit transaction. 15 
U.S.C. 1605(b); Sec.  226.4(b)(7). Creditors may exclude from the 
finance charge premiums for credit insurance if they disclose the cost 
of the insurance and the fact that the insurance is not required to 
obtain credit. In addition, the statute requires creditors to obtain an 
affirmative written indication of the consumer's desire to obtain the 
insurance, which, as implemented in Sec.  226.4(d)(1)(iii), requires 
creditors to obtain the consumer's initials or signature. 15 U.S.C. 
1605(b). In 1996, the Board expanded the scope of the rule to include 
plans involving charges or premiums for debt cancellation coverage. See 
Sec.  226.4(b)(10), Sec.  226.4(d)(3). See also 61 FR 49,237; September 
19, 1996. Currently, however, insurance or coverage sold after 
consummation of a closed-end credit transaction or after the opening of 
an open-end plan and upon a consumer's request is considered not to be 
``written in connection with the credit transaction,'' and, therefore, 
a charge for such insurance or coverage is not a finance charge. See 
comment 4(b)(7) and (8)-2.
    The Board is proposing a number of revisions to these rules:
    (1) The same rules that apply to debt cancellation coverage would 
be applied explicitly to debt suspension coverage. However, to exclude 
the cost of debt suspension coverage from the finance charge, creditors 
would be required to inform consumers, as applicable, that the 
obligation to pay loan principal and interest is only suspended, and 
that interest will continue to accrue during the period of suspension. 
These

[[Page 32965]]

proposed revisions would apply to all open-end plans and closed-end 
credit transactions.
    (2) Creditors could exclude from the finance charge the cost of 
debt cancellation and suspension coverage for events beyond those 
permitted today, namely, life, accident, health, or loss-of-income. 
This proposed revision would also apply to all open-end plans and 
closed-end credit transactions.
    (3) The meaning of insurance or coverage ``written in connection 
with'' an open-end plan would be expanded to cover sales made 
throughout the life of an open-end (not home-secured) plans. Under the 
proposal, for example, consumers solicited for the purchase of optional 
insurance or debt cancellation or suspension coverage for existing 
credit card accounts would receive disclosures about the cost and 
optional nature of the product at the time of the consumer's request to 
purchase the insurance or coverage. Home-equity lines of credit 
(HELOCs) subject to Sec.  226.5b and closed-end transactions would not 
be affected by this proposed revision.
    (4) For telephone sales, creditors offering open-end (not home-
secured) plans would be provided with flexibility in evidencing 
consumers' requests for optional insurance or debt cancellation or 
suspension coverage, consistent with rules published by federal banking 
agencies to implement Section 305 of the Gramm-Leach-Bliley Act 
regarding the sale of insurance products by depository institutions and 
guidance published by the Office of the Comptroller of the Currency 
(OCC) regarding the sale of debt cancellation and suspension products. 
See 12 CFR part 208.81 et seq. regarding insurance sales; 12 CFR part 
37 regarding debt cancellation and debt suspension products. For 
telephone sales, creditors could provide disclosures orally, and 
consumers could request the insurance or coverage orally, if the 
creditor maintains evidence of compliance with the requirements, and 
mails written information within 3 days after the sale. HELOCs subject 
to Sec.  226.5b and closed-end transactions would not be affected by 
this proposed revision.
    All of these products serve similar functions but some are 
considered insurance under state law and others are not. Taken 
together, the proposed revisions would provide consistency in how 
creditors deliver, and consumers receive, information about the cost 
and optional nature of similar products.
4(b)(7) and (8) Insurance Written in Connection With Credit Transaction
    Premiums or other charges for insurance for credit life, accident, 
health, or loss-of-income, loss of or damage to property or against 
liability arising out of the ownership or use of property are finance 
charges if the insurance or coverage is written in connection with a 
credit transaction. 15 U.S.C. 1605(b) and (c); Sec.  226.4(b)(7) and 
(8). Comment 4(b)(7) and (8)-2 provides that insurance is not written 
in connection with a credit transaction if the insurance is sold after 
consummation on a closed-end transaction or after an open-end plan is 
opened and the consumer requests the insurance. The Board believes this 
approach remains sound for closed-end transactions, which typically 
consist of a single transaction with a single advance of funds. 
Consumers with open-end plans, however, retain the ability to obtain 
advances of funds long after account opening, so long as they pay down 
the principal balance. That is, a consumer can engage in credit 
transactions throughout the life of a plan.
    Accordingly, under proposed revisions to comment 4(b)(7) and (8)-2, 
insurance purchased after an open-end (not home-secured) plan was 
opened would be considered to be written ``in connection with a credit 
transaction.'' Proposed new comment 4(b)(10)-2 would give the same 
treatment to purchases of debt cancellation or suspension coverage. As 
proposed, therefore, purchases of voluntary insurance or coverage after 
account opening would trigger disclosure and consent requirements. For 
purchases by telephone, creditors would be permitted to provide 
disclosures and obtain consent orally, so long as they meet 
requirements intended to ensure the purchase is voluntary. See proposed 
Sec.  226.4(d)(4).
4(b)(9) Discounts
    Comment 4(b)(9)-2, which addresses cash discounts to induce 
consumers to use cash or other payment means instead of credit cards or 
open-end plans is revised for clarity. No substantive change is 
intended.
4(b)(10) Debt Cancellation and Debt Suspension Fees
    As discussed above, premiums or other charges for credit life, 
accident, health, or loss-of-income insurance are finance charges if 
the insurance or coverage is written in connection with a credit 
transaction. In 1996, the Board amended Sec.  226.4 to make clear that 
the term ``finance charge'' includes charges or premiums paid for debt 
cancellation coverage. See Sec.  226.4(b)(10). Although debt 
cancellation fees meet the definition of ``finance charge,'' they may 
be excluded from the finance charge on the same conditions as credit 
insurance premiums. See Sec.  226.4(d)(3).
    Recent years have seen two developments in the market for coverage 
of this type. First, creditors have been selling a related, but 
different, product called debt suspension. Debt suspension is 
essentially the creditor's agreement to suspend, on the occurrence of a 
specified event, the consumer's obligation to make the minimum 
payment(s) that would otherwise be due. During the suspension period, 
interest may continue to accrue or it may be suspended as well, 
depending on the plan. The borrower may be prohibited from using the 
credit plan during the suspension period. In a second development, 
creditors have been selling debt suspension coverage for events other 
than loss of life, health, or income, such as a wedding, a divorce, the 
birth of child, a medical emergency, and military deployment.
    The Board is proposing to revise Sec.  226.4(b)(10) to make it 
explicit that charges for debt suspension coverage are finance charges. 
In the proposed commentary, debt suspension coverage would be defined 
as coverage that suspends the consumer's obligation to make one or more 
payments on the date(s) otherwise required by the credit agreement, 
when a specified event occurs. The commentary would clarify that the 
term debt suspension coverage as used in Sec.  226.4(b)(10) does not 
include ``skip payment'' arrangements in which the triggering event is 
the borrower's unilateral election to defer repayment, or the bank's 
unilateral decision to allow a deferral of payment. (A skip payment 
fee, although a finance charge, would not be factored into the 
effective APR under the proposal. See proposed Sec.  226.14(e).) These 
revisions would apply to closed-end as well as open-end credit 
transactions. It appears appropriate to consider charges for debt 
suspension products to be finance charges, because these products 
operate in a similar manner to debt cancellation, and re-allocate the 
risk of non-payment between the borrower and the creditor. The 
conditions under which debt cancellation and debt suspension charges 
may be excluded from the finance charge are discussed under Sec.  
226.4(d)(3), below.

[[Page 32966]]

4(c) Charges Excluded From the Finance Charge
4(c)(1)
    Section 226.4(c)(1) excludes from the finance charge application 
fees charged to all applicants for credit, whether or not credit is 
actually extended. Application fees are charged for both closed-end and 
open-end credit transactions, and represent an additional cost to 
consumers who obtain credit. Because application fees are more 
prevalent for home-secured credit, the Board will consider whether to 
revise Sec.  226.4(c)(1) in its upcoming review of rules for home-
secured credit.
    As discussed below in the section-by-section analysis to Sec.  
226.6, the Board proposes to require for open-end (not home-secured) 
plans, the disclosure of charges imposed as part of the plan, which 
include fees that must be paid to receive access to the plan, without 
regard to whether the fees are or are not finance charges. Application 
fees charged to all applicants for credit, whether or not credit is 
actually extended, would be considered charges imposed as part of the 
plan, and would be included in the account-summary table given at 
account opening. See proposed Sec.  226.6(b)(1)(i). This would provide 
useful information to consumers about the total cost of obtaining 
credit. The fee, if financed, would also be included among the fees 
required to be grouped on periodic statements. See proposed Sec.  
226.7(b)(6).
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation or Debt Suspension Fees
    As explained under Sec.  226.4(b)(10), debt cancellation fees and, 
as clarified in this proposal, debt suspension fees meet the definition 
of ``finance charge.'' Under current Sec.  226.4(d)(3), debt 
cancellation fees may be excluded from the finance charge on the same 
conditions as credit insurance premiums. These conditions are: The 
coverage is not required and this fact is disclosed in writing, and the 
consumer affirmatively indicates in writing a desire to obtain the 
coverage after written disclosure to the consumer of the cost. Debt 
cancellation coverage that may be excluded from the finance charge is 
limited to coverage that provides for cancellation of all or part of a 
debtor's liability (1) in case of accident or loss of life, health, or 
income; or (2) for amounts exceeding the value of collateral securing 
the debt (commonly referred to as ``gap'' coverage, frequently sold in 
connection with motor vehicle loans). See current Sec.  
226.4(d)(3)(ii).
    To address the development of debt cancellation and debt suspension 
coverage discussed earlier, the OCC adopted, for national banks, 
substantive limitations and procedures for disclosure and affirmative 
election on the sale of such coverage. See 12 CFR part 37. Some states 
have also adopted regulations that address these products, or 
incorporate the OCC regulations under parity laws.
    The Board solicited comment in 2003 on whether and how to address 
disclosure of these kinds of coverage under TILA. 68 FR 68,793; 
December 10, 2003. About 30 commenters responded, the vast majority of 
them creditors or vendors. Several creditors and vendors urged the 
Board to expressly permit creditors to exclude from the finance charge 
fees for products that cover any event to which a creditor and borrower 
agree, not just the events listed in the regulation, and fees for 
agreements that suspend, rather than cancel, debt repayment. Some 
commenters disagreed. A major consumer group urged the Board to include 
even voluntary credit insurance premiums and debt cancellation fees in 
the finance charge. The Board deferred a decision on these issues until 
this review.
    The December 2004 ANPR did not specifically seek comment again on 
these issues. Nonetheless, a coalition of companies that issue or 
administer debt cancellation and debt suspension agreements submitted 
two comments in response to the December 2004 ANPR reiterating the 2003 
request by industry commenters that the Board modify Sec.  226.4(d)(3) 
to cover any triggering event and explicitly recognize that debt 
suspension agreements are also covered by that provision. These 
companies also requested that the Board revise Sec.  226.4(d)(3) to 
provide that the disclosures and consumer affirmative request required 
as conditions to excluding the fee from the finance charge may be 
provided orally.
    Debt cancellation coverage and debt suspension coverage are 
fundamentally similar to the extent they offer a consumer the ability 
to pay in advance for the right to reduce the consumer's obligations 
under the plan on the occurrence of specified events that could impair 
the consumer's ability to satisfy those obligations. The two types of 
coverage are, however, different in a key respect. One cancels debt, at 
least up to a certain agreed limit, while the other merely suspends the 
payment obligation while the debt remains constant or increases, 
depending on coverage terms.
    The Board proposes to revise Sec.  226.4(d)(3) to expressly permit 
creditors to exclude charges for voluntary debt suspension coverage 
from the finance charge when, after receiving certain disclosures, the 
consumer affirmatively requests such a product. The Board also proposes 
to add a disclosure, to be provided as applicable, that the obligation 
to pay loan principal and interest is only suspended, and that interest 
will continue to accrue during the period of suspension. These 
revisions would apply to closed-end as well as open-end credit 
transactions. Model Clauses and Samples are proposed at Appendix G-
16(A) and G-16(B) and H-17(A) and H-17(B).
    The same industry coalition has also requested that charges for 
debt cancellation or debt suspension coverage be excludable from the 
finance charge when the coverage applies to events other than the 
events covered by the product lines identified in current Sec.  
226.4(d)(3)(ii), namely, accident or loss of life, health, or income. 
The identification of those events in Sec.  226.4(d)(3)(ii) is based on 
TILA Section 106(b), which addresses credit insurance for accident or 
loss of life or health. 15 U.S.C. 1605(b). That statutory provision 
reflects the regulation of credit insurance by the states, which may 
limit the types of insurance that insurers may sell. Many states, 
however, do not restrict debt cancellation or debt suspension coverage 
to a select few events, and regulations of the OCC expressly permit 
national banks to sell debt cancellation and debt suspension coverage 
for any event.
    The Board proposes to continue to limit the exclusion permitted by 
Sec.  226.4(d)(3) to charges for coverage for accident or loss of life, 
health, or income. The Board also proposes, however, to add comment 
4(d)(3)-3 to clarify that, if debt cancellation or debt suspension 
coverage for two or more events is sold at a single charge, the entire 
charge may be excluded from the finance charge if at least one of the 
events is accident or loss of life, health, or income. This approach 
would recognize that debt cancellation and suspension coverage often 
are not limited by applicable law to the events allowed for insurance 
and it also would be consistent with the purpose of Section 106(b). 15 
U.S.C. 1605(b).
    The regulation provides guidance on how to disclose the cost of 
debt cancellation coverage. See proposed Sec.  226.4(d)(3)(ii). The 
Board seeks comment on whether additional

[[Page 32967]]

guidance is needed for debt suspension coverage, particularly for 
closed-end loans.
    For the reasons discussed below, Sec.  226.4(d)(4) would be added 
to provide flexibility in telephone sales to obtain consumers' requests 
for voluntary debt cancellation and debt suspension coverage on open-
end (not home-secured) plans.
    In a technical revision, the substance of footnotes 5 and 6 would 
be moved to the text.
4(d)(4) Telephone Purchases
    As discussed above, TILA Section 106(b), 15 U.S.C. 1605(b), permits 
creditors to exclude from the finance charge premiums for credit 
insurance if, among other conditions, the creditor obtains a specific 
written indication of the consumer's desire to obtain the insurance. 
This requirement is implemented in Sec.  226.4(d)(1) by requiring 
written initials or a signature. The Board expanded in 1996 the types 
of products covered by the exclusion to include debt cancellation 
agreements, and now proposes to extend the exclusion to debt suspension 
products. As mentioned, an industry coalition has requested that the 
Board permit the disclosures and affirmative consumer request, which 
are conditions to this exclusion, to be provided orally.
    Congress has recognized the practice of telephone sales for the 
purchase of insurance products. 12 U.S.C. 1831x(c)(1)(E). Similarly, 
the OCC has issued telephone sales guidelines for national banks that 
sell debt cancellation and debt suspension coverage. 12 CFR parts 
37.6(c)(3), 37.7(b). Accordingly, the Board is proposing an exception 
to the requirement to obtain a written signature or initials for 
telephone purchases of credit insurance or debt cancellation and debt 
suspension coverage on an open-end (not home-secured) plan. Under new 
Sec.  226.4(d)(4), for telephone purchases the creditor may make the 
disclosures orally and the consumer may affirmatively request the 
insurance or coverage orally, provided that the creditor (1) maintains 
reasonable procedures to provide the consumer with the oral disclosures 
and maintains evidence that demonstrates the consumer then 
affirmatively elected to purchase the insurance or coverage; and (2) 
mails the disclosures under Sec.  226.4(d)(1) or Sec.  226.4(d)(3) 
within three business days after the telephone purchase. Comment 
4(d)(4)-1 would provide that a creditor does not satisfy the 
requirement to obtain an affirmative request if the creditor uses a 
script with leading questions or negative consent.
    Requiring a consumer's written signature or initials is intended to 
evidence that the consumer is purchasing the product voluntarily; the 
proposal contains safeguards intended to insure that oral purchases are 
voluntary. Under the proposal, creditors must maintain tapes or other 
evidence that the consumer received required disclosures orally and 
affirmatively requested the product. Comment 4(d)(4)-1 indicates that a 
creditor does not satisfy the requirement to obtain an affirmative 
request if the creditor uses a script with leading questions or 
negative consent. In addition to oral disclosures, under the proposal 
consumers will receive written disclosures shortly after the 
transaction. The fee will also appear on the first monthly periodic 
statement after the purchase, and, as applicable, thereafter. Consumer 
testing conducted for the Board suggests that consumers review the 
transactions on their statements carefully. Moreover, the Board 
proposes to better highlight fees, including insurance and coverage 
fees, on statements. Consumers who are billed for insurance or coverage 
they did not purchase may dispute the charge as a billing error. These 
safeguards are expected to ensure that purchases of credit insurance or 
debt cancellation or suspension coverage by telephone are voluntary.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes it is appropriate to exempt, for open-end (not 
home-secured) plans, telephone sales of credit insurance or debt 
cancellation or debt suspension plans from the requirement to obtain a 
written signature or initials from the consumer. As noted above, the 
consumer would continue to be protected by a variety of safeguards to 
assure that the purchase is voluntary, including a requirement that the 
creditor maintain tapes or other evidence of the transaction, the 
receipt of written disclosures shortly after the transaction, and 
inclusion of fees on periodic statements, for which consumers may 
dispute billing errors. At the same time, the proposal should 
facilitate the convenience to both consumers and creditors of 
conducting transactions by telephone. The proposal, therefore, has the 
potential to better inform consumers and further the goals of consumer 
protection and the informed use of credit for open-end (not home-
secured) credit. The Board welcomes comment on this matter.

Section 226.5 General Disclosure Requirements

    Section 226.5 contains format and timing requirements for open-end 
credit disclosures. Under the current rules, a creditor must disclose a 
charge that is a ``finance charge'' or ``other charge'' before the 
account is opened, before the charge is added to the plan after account 
opening and before the charge is increased. These disclosures must be 
in writing. As discussed below, the proposal seeks to reform the rules 
governing disclosure of charges before they are imposed. Under the 
proposal: (1) All charges imposed as part of the plan would be 
disclosed before they are imposed; (2) specified charges would continue 
to be disclosed in writing at account opening, and before being 
increased or newly introduced; and (3) other charges imposed as part of 
the plan could be disclosed orally at any relevant time before the 
consumer becomes obligated to pay the charge. The proposed reform is 
intended to assure that all charges imposed as part of the plan are 
disclosed before they are imposed, simplify the rules for identifying 
such charges, and better

[[Page 32968]]

match the timing and method of disclosure with reasonable industry 
practices and consumer expectations. The proposal responds to comments 
received on the December 2004 ANPR that criticize current rules (1) as 
unduly vague and inconsistent in identifying charges covered by TILA, 
and (2) as failing to recognize that some transactions on the plan 
between the consumer and the creditor are appropriately, or even 
necessarily, conducted by telephone.
5(a) Form of Disclosures
    The Board is proposing substantive changes to Sec.  226.5(a) and 
the associated commentary regarding the standard to provide ``clear and 
conspicuous'' disclosures. In addition, creditors would be required to 
use consistent terminology in all open-end TILA-required disclosures. 
In technical revisions, the Board proposes to rearrange certain 
provisions in Sec.  226.5(a) for clarity.
5(a)(1) General
    Clear and conspicuous standard. TILA Section 122(a) mandates that 
all TILA-required disclosures be made clearly and conspicuously. 15 
U.S.C. 1632(a). The Board has implemented this requirement for open-end 
credit plans in Sec.  226.5(a)(1). Under current comment 5(a)(1)-1, the 
Board has interpreted clear and conspicuous to mean that the disclosure 
must be in a reasonably understandable form. In most cases, this 
standard does not require that disclosures be segregated from other 
material or located in any particular place on the disclosure 
statement, nor that numerical amounts or percentages be in any 
particular type size.
    However, the Board has previously determined that certain 
disclosures in Subpart B of Regulation Z are subject to a higher 
standard in meeting the clear and conspicuous requirement due to the 
importance of the disclosures and the context in which they are given. 
Specifically, disclosures in credit and charge card applications and 
solicitations subject to Sec.  226.5a must be both in a reasonably 
understandable form and readily noticeable to the consumer. See current 
comment 5a(a)(2)-1, which the Board is proposing to amend as discussed 
below.
    1. Readily noticeable standard. The Board is proposing to highlight 
certain information in a tabular format in the account-opening 
disclosures pursuant to Sec.  226.6(b)(4); on checks that access a 
credit card account pursuant to Sec.  226.9(b)(3); in change-in-terms 
notices pursuant to Sec.  226.9(c)(2)(iii)(B); and in disclosures when 
a rate is increased due to delinquency, default or as a penalty 
pursuant to Sec.  226.9(g)(3)(ii). As discussed in further detail in 
the section-by-section analysis to Sec. Sec.  226.6(b), 226.9(b), 
226.9(c), and 226.9(g), consumer testing conducted for the Board 
suggests that highlighting important information in a tabular format 
helps consumers locate the information disclosed in these tables much 
more easily. Because these disclosures would be highlighted in a 
tabular format similar to the table required with respect to credit 
card applications and solicitations under Sec.  226.5a, the Board is 
proposing that these disclosures also be in a reasonably understandable 
form and readily noticeable to the consumer. The Board is proposing to 
amend comment 5(a)(1)-1 accordingly. The Board also is proposing to 
move the guidance on the meaning of ``reasonably understandable form'' 
to comment 5(a)(1)-2. Current comment 5(a)(1)-2, which provides 
guidance on what constitutes an ``integrated document,'' is moved to 
comment 5(a)(1)-4.
    The Board also proposes to add comment 5(a)(1)-3 to provide 
guidance on the meaning of the readily noticeable standard. 
Specifically, new comment 5(a)(1)-3 provides that to meet the readily 
noticeable standard, disclosures for credit card applications and 
solicitations under Sec.  226.5a, highlighted account-opening 
disclosures under Sec.  226.6(b)(4), highlighted disclosures on checks 
that access a credit card account under Sec.  226.9(b)(3); highlighted 
change-in-terms disclosures under Sec.  226.9(c)(2)(iii)(B), and 
highlighted disclosures when a rate is increased due to delinquency, 
default or as a penalty under Sec.  226.9(g)(3)(ii) must be given in a 
minimum of 10-point font. The Board believes that with respect to these 
disclosures, special formatting requirements, such as a tabular format 
and font size requirements, are needed to highlight for consumers the 
importance and significance of the disclosures. The Board notes that 
this approach of requiring a minimum of 10-point font for certain 
disclosures is consistent with the approach taken recently by eight 
federal agencies (including the Board) in issuing a proposed model form 
that financial institutions may use to comply with the privacy notice 
requirements under Section 503 of the Gramm-Leach-Bliley Act. 15 U.S.C. 
6803(e); 72 FR 14,940; Mar. 29, 2007. In the privacy proposal, the 
eight federal agencies indicate that financial institutions that use 
the privacy model form must use an easily readable type font; easily 
readable type font includes a minimum of 10-point font and sufficient 
spacing between the lines of type.
    2. Disclosures subject to the clear and conspicuous standard. The 
Board has received questions on the types of communications that are 
subject to the clear and conspicuous standard. Thus, the Board proposes 
comment 5(a)(1)-5 to make clear that all required disclosures and other 
communications under Subpart B of Regulation Z are considered 
disclosures required to be clear and conspicuous. This would include, 
for example, the disclosure by a person other than the creditor of a 
finance charge imposed at the time of honoring a consumer's credit card 
under Sec.  226.9(d) and the correction notice required to be sent to 
the consumer under Sec.  226.13(e).
    Oral disclosure. In order to give guidance about the meaning of 
clear and conspicuous for oral disclosures, the Board proposes to amend 
the guidance on what constitutes a ``reasonably understandable form,'' 
in proposed comment 5(a)(1)-2. This amendment is based in part on the 
Federal Trade Commission's (FTC) guidance on oral disclosure in its 
publication Complying with the Telemarketing Sales Rule (available at 
the FTC's Web site). Oral disclosures would be considered to be in a 
reasonably understandable form when they are given at a volume and 
speed sufficient for a consumer to hear and comprehend the disclosures.
5(a)(1)(ii)
    Section 226.5(a)(1)(ii) provides that in general, disclosures for 
open-end plans must be provided in writing and in a retainable form.
    Oral disclosures. The Board is proposing that certain charges may 
be disclosed after account opening. See proposed Sec.  226.5(b)(1)(ii). 
The goal of this proposal is to better ensure that consumers receive 
disclosures at relevant times; some charges may not be relevant to a 
consumer at account opening but may become relevant later. The Board is 
also proposing to permit creditors to make the form of disclosure more 
relevant to consumers. A written form of disclosure has obvious merit 
at account opening, when a consumer must assimilate a lot of 
information that may influence major decisions by the consumer about 
how, or even whether, to use the account. During the life of the 
account, in contrast, a consumer will sometimes need to decide whether 
to purchase a single service from the creditor, a service that may not 
be central to the consumer's use of the account (for example, the 
service of

[[Page 32969]]

providing documentary evidence of transactions). Moreover, during the 
life of the account, the consumer may become accustomed to purchasing 
such services by telephone. The consumer and the creditor may find it 
convenient to conduct the transaction by telephone, and will, 
accordingly, expect to receive a disclosure of the charge for the 
service during the same telephone call. For these reasons, the Board is 
proposing to permit creditors to disclose orally charges not 
specifically identified by the proposed regulation in Sec.  226.6(b)(4) 
as critical to disclose in writing at account opening. Further, the 
Board proposes that creditors be provided with the same flexibility 
when the cost of such a charge changes or is newly introduced, as 
discussed in the section-by-section analysis to Sec.  226.9(c). The 
proposal, set forth inSec.  226.5(a)(1)(ii)(A), is intended to be 
consistent with consumers' expectations and with the business practices 
of card issuers.
    Under the proposal, creditors may continue to comply with TILA by 
providing written disclosures at account-opening for all fees. In 
proposing to permit creditors to disclose certain costs orally for 
purposes of TILA, the Board anticipates that creditors will continue to 
identify fees in the account agreement for contract and other reasons, 
although the proposal would not require creditors to do so. For 
example, some creditors identify the types of fees that could be 
assessed on the account in the account agreement. The Board anticipates 
that such practices will continue.
    Creditors are permitted to provide in electronic form any TILA 
disclosure that is required to be provided or made available to 
consumers in writing if the consumer affirmatively consents to receipt 
of electronic disclosures in a prescribed manner. Electronic Signatures 
in Global and National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et 
seq. The Board requests comment on whether there are circumstances in 
which creditors should be permitted to provide cost disclosures in 
electronic form to consumers who have not affirmatively consented to 
receive electronic disclosures for the account, such as when a consumer 
seeks to make a payment online, and the creditor imposes a fee for the 
service.
    In technical revisions, the Board proposes to move to proposed 
Sec.  226.5(a)(1)(ii)(A) the current exemption that disclosures 
required by Sec.  226.9(d) need not be in writing. (This exemption 
currently is in footnote 7 under Sec.  226.5(a)(1).) Section 226.9(d) 
requires disclosure when a finance charge is imposed by a person other 
than the card issuer at the time of a transaction.
    In another technical revision, the substance of footnote 8, 
regarding disclosures that do not need to be in a retainable form the 
consumer may keep, is moved to proposed Sec.  226.5(a)(1)(ii)(B).
    Electronic communication. In April 2007, the Board issued for 
public comment a proposal on electronic communication which would 
withdraw portions of the interim final rules issued in 2001 and to 
implement certain provisions of the Bankruptcy Act (``2007 Electronic 
Disclosure Proposal''). See 72 FR 21,141; April 30, 2007. Proposed 
Sec.  226.5(a)(1)(iii) and the proposal to delete current Sec.  
226.5(a)(5) is also proposed in the 2007 Electronic Disclosure 
Proposal. The language in proposed Sec.  226.5(a)(1)(iii) clarifies 
that creditors may provide open-end disclosures to consumers in 
electronic form, subject to compliance with the consumer consent and 
other applicable provisions of the E-Sign Act. 15 U.S.C. 1001, et seq. 
The language also provides that the open-end disclosures required by 
Sec. Sec.  226.5a, 226.5b, and 226.16 may be provided to the consumer 
in electronic form, under the circumstances set forth in those 
sections, without regard to the consumer consent or other provisions in 
the E-Sign Act.
5(a)(2) Terminology
    Consistent terminology. Currently, disclosures given pursuant to 
Sec. Sec.  226.5a(b), 226.6, and 226.7 must use consistent terminology. 
See current Sec.  226.5a(a)(2)(iv), comment 5a(a)(2)-6, and comment 6-
1. The Board proposes to expand this requirement more generally in new 
Sec.  226.5(a)(2)(i) to include other disclosures required by the open-
end provisions of the regulation (Subpart B), such as subsequent 
disclosures under Sec.  226.9. A new comment 5(a)(2)-4 would clarify 
that terms do not need to be identical but must be close enough in 
meaning to enable the consumer to relate the disclosures to one 
another, which is consistent with current guidance in current comment 
5a(a)(2)-6 and current comment 6-1. The Board believes that the use of 
consistent terminology should be applied to all open-end TILA-required 
disclosures to allow consumers to better identify the terms across all 
disclosures.
    As discussed above, the Board is proposing to highlight certain 
information in a tabular format in the account-opening disclosures 
pursuant to Sec.  226.6(b)(4); on checks that access a credit card 
account pursuant to Sec.  226.9(b)(3); in change-in-terms notices 
pursuant to Sec.  226.9(c)(2)(iii)(B); and in disclosures when a rate 
is increased due to delinquency, default or as a penalty pursuant to 
Sec.  226.9(g)(3)(ii). These disclosures are meant to be highlighted in 
a tabular format similar to the table currently required with respect 
to credit card applications and solicitations under Sec.  226.5a.
    Currently, disclosures required for credit card applications and 
solicitation under Sec.  226.5a must use the term ``grace period'' to 
describe the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. The Board proposes in new Sec.  226.5(a)(2)(iii) to extend this 
requirement to use the term ``grace period'' to all references to such 
a term for the disclosures required to be in the form of a table as 
discussed above. In addition, proposed Sec.  226.5(a)(2)(iii) provides 
that if disclosures are required to be presented in a tabular format, 
the term ``penalty APR'' shall be used to describe an increased rate 
that may result because of the occurrence of one or more specific 
events specified in the account agreement, such as a late payment or an 
extension of credit that exceeds the credit limit. For example, 
creditors would be required to provide information about penalty rates 
in the table given with credit card applications and solicitations 
under Sec.  226.5a; in the summary table given at account opening under 
Sec.  226.6(b)(4); if the penalty rate is changing, in the summary 
table given on or with the change-in-terms notice under Sec.  
226.9(c)(2)(iii)(B), or if a penalty rate is triggered, in the table 
given under Sec.  226.9(g)(3)(ii).
    Requiring card issuers to use a uniform term to describe the grace 
period and disallowing variants like ``free-ride period'' may improve 
consumers' understanding of the concept. Similarly, requiring card 
issuers to use a uniform term to describe the increased rate may 
improve consumers' understanding of the rate and when it applies. In 
the consumer testing conducted for the Board, many participants 
believed the term ``Penalty APR'' as opposed to ``Default APR'' or 
``Highest Possible APR'' more clearly conveyed the increased rate. In 
testing the term ``Default APR,'' some participants said that the word 
``default'' indicated to them that it would only apply when the account 
was closed due to delinquent payments. Some other participants said 
that the word ``default'' seemed like the ``normal'' rate, not 
something that occurs because a cardholder does something wrong. Some 
participants

[[Page 32970]]

also were confused by the term ``Highest Possible APR;'' one 
participant, for example, assumed that this was the highest point to 
which variable rates could increase.
    Moreover, if credit insurance or debt cancellation or debt 
suspension coverage is required as part of the plan and information 
about that coverage is required to be disclosed in a tabular format, 
proposed Sec.  226.5(a)(2)(iii) requires that in describing the 
coverage, the term ``required'' shall be used and the program shall be 
identified by its name. For example, creditors would be required to 
provide information about the required coverage in the table given with 
credit card applications and solicitations under Sec.  226.5a, in the 
summary table given at account opening under Sec.  226.6(b)(4), and if 
certain information about the coverage is changing, in the summary 
table given in change-in-terms notice under Sec.  226.9(c)(2)(iii)(B). 
In consumer testing conducted for the Board, the Board tested 
disclosing information about the required debt suspension coverage in 
the disclosure table given with a mock credit card solicitation. The 
Board found that describing the coverage by its name allowed 
participants to link disclosures that were provided in the table to 
other information about the coverage that was provided elsewhere in the 
solicitation materials given to the participants.
    Furthermore, the Board proposes in Sec.  226.5(a)(2)(iii) that if 
required to be disclosed in a tabular format, APRs may be described as 
``fixed'' or any similar term only if that rate will remain in effect 
unconditionally until the expiration of a specified time period. If no 
time period is specified, then the term ``fixed'' or any similar term 
may not be used unless the rate remains in effect unconditionally until 
the plan is closed. As further discussed in the section-by-section 
analysis to proposed Sec.  226.16(g) below, the Board is proposing 
these rules in order to avoid consumer confusion and the uninformed use 
of credit.
    Terms required to be more conspicuous than others. TILA Section 
122(a) requires that the terms ``annual percentage rate'' and ``finance 
charge'' be disclosed more conspicuously than other terms, data, or 
information. 15 U.S.C. 1632(a). The Board has implemented this 
provision in current Sec.  226.5(a)(2)(iii) by requiring that the terms 
``finance charge'' and ``annual percentage rate,'' when disclosed with 
a corresponding amount or percentage rate, be disclosed more 
conspicuously than any other required disclosure. Under current 
footnote 9, however, the terms do not need to be more conspicuous when 
used under Sec. Sec.  226.5a, 226.7(d), 226.9(e), and 226.16.
    In September 2006, the United States Government Accountability 
Office (GAO) issued a report that analyzed current credit card 
disclosures and recommended improvements to these disclosures (GAO 
Report on Credit Card Rates and Fees).\10\ The GAO criticized credit 
card disclosure documents that ``unnecessarily emphasized specific 
terms.'' GAO Report on Credit Card Rates and Fees, p. 43. As an 
illustration of this point, the GAO reprinted a paragraph of text from 
a creditor's credit card disclosure documents where the phrase 
``periodic finance charge'' was singled out for emphasis each time the 
phrase was used, even when such term was not disclosed with a 
corresponding amount or percentage rate. The usability consultant used 
by the GAO commented that this type of emphasis potentially required 
readers to work harder to understand the passage's message.
---------------------------------------------------------------------------

    \10\ United States Government Accountability Office, Credit 
Cards: Increased Complexity in Rates and Fees Heightens Need for 
More Effective Disclosures to Consumers, 06-929 (September 2006).
---------------------------------------------------------------------------

    The Board agrees that overemphasis of these terms may make 
disclosures more difficult for consumers to read. In order to address 
this problem, the Board considered a proposal to prohibit the terms 
``finance charge'' and ``annual percentage rate'' from being disclosed 
more conspicuously than other required disclosures except when the 
regulation so requires. However, this proposal could produce unintended 
consequences. For example, in a change-in-terms notice, the term 
``annual percentage rate'' may appear as a heading, and thus be 
disclosed more conspicuously than other disclosures in the notice even 
though the term is not disclosed with a rate figure. It appears, 
therefore, that a rule prohibiting more conspicuous terms in certain 
cases would need to include detailed safe harbors or exceptions, which 
might make it unworkable. Therefore, the Board seeks comment on how to 
address this issue.
    Furthermore, the Board is proposing to amend the regulation to 
expand the list of disclosures where the terms ``finance charge'' and 
``annual percentage rate'' need not be more conspicuous to include the 
account-opening disclosures that would be highlighted under proposed 
Sec.  226.6(b)(4), the disclosure of the effective APR under proposed 
Sec.  226.7(b)(7), disclosures on checks that access a credit card 
account under proposed Sec.  226.9(b)(3), the information on change-in-
terms notices that would be highlighted under proposed Sec.  
226.9(c)(2)(iii)(B), the disclosures given when a rate is increased due 
to delinquency, default or as a penalty under proposed Sec.  
226.9(g)(3)(ii). Currently, the requirement that the terms ``finance 
charge'' and ``annual percentage rate'' be more conspicuous than other 
disclosures does not apply to disclosures highlighted in the tabular 
format used for credit card application and solicitations under Sec.  
226.5a. All of the disclosures discussed above must be highlighted in a 
tabular format similar to the table required for credit card 
applications and solicitations under Sec.  226.5a. The Board believes 
the rule should be consistent across these disclosures. Moreover, the 
Board believes that the tabular format sufficiently highlights the 
disclosures, so that the ``more conspicuous'' rule is not needed. 
Finally, for organizational purposes, the Board proposes to consolidate 
current Sec.  226.5(a)(2) and current footnote 9 into Sec.  
226.5(a)(2)(ii).
5(a)(3) Specific Formats
    There are special rules regarding the specific format for 
disclosures under Sec.  226.5a for credit and charge card applications 
and solicitations and Sec.  226.5b for home-equity plans, as noted in 
current Sec.  226.5(a)(3) and current Sec.  226.5(a)(4), respectively. 
These rules would be consolidated in proposed Sec.  226.5(a)(3), for 
clarity. In addition, as discussed below, the Board is proposing that 
certain account-opening disclosures, periodic statement disclosures and 
subsequent disclosures, such as change-in-terms disclosures, must be 
provided in specific formats under proposed Sec.  226.6(b)(4); 
Sec. Sec.  226.7(b)(6), (b)(7) and (b)(13); and Sec. Sec.  226.9(b), 
(c) and (g) and these special format rules are noted in proposed Sec.  
226.5(a)(3).
5(b) Time of Disclosures
5(b)(1) Account-opening Disclosures
    TILA Section 127(a) requires creditors to provide disclosures 
``before opening any account.'' 15 U.S.C. 1637(a). Section 226.5(b)(1) 
requires these disclosures (identified in Sec.  226.6) to be furnished 
``before the first transaction is made under the plan,'' which is 
interpreted as ``before the consumer becomes obligated on the plan.'' 
Comment 5(b)(1)-1. Also under the existing commentary, creditors may 
provide the disclosures required by Sec.  226.6 after the first 
transaction only in limited circumstances. This guidance would be moved 
from the commentary to the

[[Page 32971]]

regulation. See proposed Sec.  226.5(b)(1)(iii)-(v). In addition, the 
Board is proposing revisions to the timing rules for disclosing certain 
costs imposed on an open-end (not home-secured) plan, and in connection 
with certain transactions conducted by telephone, as discussed below. 
Additional guidance is proposed on providing timely disclosures when 
the first transaction is a balance transfer. Technical revisions would 
change references from ``initial'' disclosures required by Sec.  226.6 
to ``account-opening'' disclosures, without any intended substantive 
change. In today's marketplace, there are few open-end products for 
which consumers receive the disclosures required under Sec.  226.6 as 
their ``initial'' Truth in Lending disclosure. See Sec. Sec.  226.5a, 
226.5b, which require creditors to provide disclosures before consumers 
apply for a credit or charge card, or for a HELOC.
5(b)(1)(i) General Rule
    Section 226.5(b)(1)(i), as renumbered, would state the general 
timing rule for furnishing account-opening disclosures. Specifically, 
creditors generally must provide the account-opening disclosures before 
the first transaction is made under the plan.
    Balance transfers. Creditors commonly extend credit to consumers 
for the purpose of paying off consumers' existing credit balances with 
other creditors. Requests for these ``balance transfers'' are often 
part of an offer to open a credit card account, and consumers may 
request transfers as part of the application for the new account. 
Comment 5(b)(1)(i)-5, as renumbered, provides that creditors must 
provide account-opening disclosures before the balance transfer occurs.
    The Board proposes to update this comment to reflect current 
business practices. Some creditors provide account-opening disclosures, 
including APRs, along with the balance transfer offer and account 
application, and these creditors would not be affected by the proposal. 
Other creditors offer balance transfers for which the APRs that may 
apply are disclosed as a range, depending on the consumer's 
creditworthiness. Consumers who respond to such an offer and apply for 
the transfer later receive account-opening disclosures, including the 
APR that will apply to the transferred balance. The proposed change 
would clarify that the creditor must provide disclosures sufficiently 
in advance of the transfer to allow the consumer to respond to the 
terms that will apply to the transfer, including to contact the 
creditor before the balance is transferred and decline the transfer.
    Guidance in current comment 5(b)(1)-1 regarding account-opening 
disclosures provided with cash advance checks would be deleted as 
unnecessary.
    Assessing fees on an account as acceptance of the account. Comment 
5(b)(1)(i)-1(i), as renumbered, currently provides that if after 
receiving the account-opening disclosures, the consumer uses the 
account, pays a fee or negotiates a cash advance check, the creditor 
may consider the account not rejected. The comment would be amended to 
clarify that if the only activity on account is the creditors' 
assessment of fees (such as start-up fees), the consumer is not 
considered to have accepted the account until the consumer is provided 
with a billing statement and makes a payment. The clarification 
addresses concerns about some subprime card accounts that assess a 
large number of fees at account opening. Consumers who have not made 
purchases or otherwise obtained credit on the account would have an 
opportunity to review their account-opening disclosures and decide 
whether to reject the account and decline to pay the fees.
5(b)(1)(ii) Charges Imposed as Part of an Open-End (Not Home-Secured) 
Plan
    Currently, charges imposed on an open-end plan that are a ``finance 
charge'' or an ``other charge'' must be disclosed before the first 
transaction. 15 U.S.C. 1637(a); current Sec.  226.5(b)(1) and Sec.  
226.6(a) and (b). When a new service (and associated charge) is 
introduced or an existing charge is increased, creditors must provide a 
change-in-terms notice to update account-opening disclosures for all 
accountholders if the new charge is a finance charge or an other 
charge. See current Sec.  226.9(c).
    For the reasons discussed in the section-by-section analysis to 
Sec.  226.6, the Board is proposing revisions to the rules identifying 
charges required to be disclosed under open-end (not home-secured) 
plans. The current rule requiring the disclosure of costs before the 
first transaction (in writing and in a retainable form) would continue 
to apply to specified costs. See proposed Sec.  226.6(b)(4)(iii) for 
the charges, and Sec.  226.9(c)(2) where such charges are changing or 
newly introduced. These costs are fees of which consumers should be 
aware before using the account such as annual or late payment fees, or 
fees that the creditor would not otherwise have an opportunity to 
disclose before the fee is triggered, such as a fee for using a cash 
advance check during the first billing cycle. The Board proposes to 
except charges imposed as part of an open-end (not home-secured) plan, 
other than those specified in proposed Sec.  226.6(b)(4)(iii), from the 
requirement to disclose charges before the first transaction. Creditors 
would be permitted, at their option, to disclose those charges either 
before the first transaction or later, though before the cost is 
imposed. Examples of these charges would be fees to obtain documentary 
evidence or to expedite payments or delivery of a credit card. 
Creditors may, of course, continue to disclose any charge imposed as 
part of an open-end (not home-secured) plan at account opening (or when 
increased or newly introduced under Sec.  226.9(c)(2)).
    The charges covered by the proposed exception are triggered by 
events or transactions that may take place months, or even years, into 
the life of the account, when the consumer may not reasonably be 
expected to recall the amount of the charge from the account-opening 
disclosure, nor readily to find or obtain a copy of the account-opening 
disclosure or most recent change-in-term notice. Requiring such charges 
to be disclosed before account opening may not provide a meaningful 
benefit to consumers in the form of useful information or protection. 
Consumers would benefit, however, from a rule that permits creditors to 
disclose charges when consumers reasonably expect to receive the 
disclosures, and, thus, are most likely to notice and use the 
disclosures. The proposal assures that consumers continue to receive 
disclosure of charges imposed as part of the plan before they become 
obligated to pay them.
    Examples of the charges to which the proposed exception would apply 
are fees to expedite payments or delivery of a card. Fees to expedite 
payments or card delivery are now excluded from TILA coverage. In a 
2003 rulemaking concerning those two charges, the Board determined that 
neither was required to be disclosed under TILA. 68 FR 16,185; April 3, 
2003. In the supplementary information accompanying the final rule, the 
Board noted some commenters' views that requiring a written disclosure 
of a charge for a service long before the consumer might consider 
purchasing the service did not provide the consumer material benefit. 
The Board also noted creditors' practice of disclosing the charge when 
the service is requested, and encouraged them to continue that 
practice. The Board believes that flexible disclosure of such charges 
may better serve TILA's purposes than the present exclusion of the 
charges from TILA's coverage altogether.

[[Page 32972]]

    The Board also believes the proposed exception may facilitate 
compliance by creditors. As stated earlier, it can be challenging under 
the current rule to determine whether charges are a finance charge or 
an other charge or not covered by TILA, and thus whether advance notice 
is required if a charge is increased or newly introduced. The proposal 
reduces these uncertainties and risks. Under the proposal, the creditor 
could disclose a new or increased charge only to those consumers for 
whom it is relevant because they are considering at the time of 
disclosure whether to take the action that would trigger the charge. 
Moreover, the creditor would not have to determine whether a charge was 
a finance charge or other charge or not covered by TILA so long as the 
creditor disclosed the charge, orally or in writing, before the 
consumer became obligated to pay it, which creditors, in general, 
already do for business and other legal reasons.
    The proposal would allow flexibility in the timing of certain cost 
disclosures. In proposing to permit creditors to disclose certain 
charges--orally or in writing--before the fee is imposed, the Board 
would require creditors to disclose a charge at a time consumers would 
likely notice the charge when the consumer decides whether to take the 
action that would trigger the charge, such as purchasing a service. 
Proposed comment 5(b)(1)(ii)-1 would provide an example that 
illustrates the standard.
    The limited exception to TILA's requirement to disclose charges 
imposed as part of the plan before the first transaction is proposed 
pursuant to TILA Section 105(a). Specifically, the Board has authority 
under TILA Section 105(a) to adopt ``such adjustments and exceptions 
for any class of transactions, as in the judgment of the Board are 
necessary or proper to effectuate the purposes of the title, to prevent 
circumvention or evasion thereof, or to facilitate compliance 
therewith.'' 15 U.S.C. 1604(a). The class of transactions that would be 
affected is transactions on open-end plans not secured by a dwelling, 
though only with respect to certain charges. On the basis of the 
information currently available to the Board, a narrow adjustment and 
exception appears necessary and proper to effectuate TILA's purpose to 
assure meaningful disclosure and informed credit use, and to facilitate 
compliance.
5(b)(1)(iii) Telephone Purchases
    Consumers who call a retailer to order goods by telephone commonly 
use an existing credit card account to finance the purchase. Some 
retailers, however, offer discounted purchase prices or promotional 
payment plans to consumers who finance the purchase by establishing a 
new open-end credit plan with the retailer. Under the current timing 
rule, retailers must provide TILA account-opening disclosures before 
the first transaction. This means retailers must delay the shipment of 
goods until a consumer has received the disclosures. Consumers who want 
goods shipped immediately may use another credit card to finance the 
purchase but they lose any discount or promotion that may be associated 
with opening a new plan. The Board proposes to provide additional 
flexibility to retailers and consumers for such transactions.
    Under proposed Sec.  226.5(b)(1)(iii), retailers that establish an 
open-end plan in connection with a telephone purchase of goods or 
services initiated by the consumer may provide account-opening 
disclosures as soon as reasonably practicable after the first 
transaction if the retailer (1) permits consumers to return any goods 
financed under the plan at the time the plan is opened and provides the 
consumer sufficient time to reject the plan and return the items free 
of cost after receiving the written disclosures required by Sec.  
226.6, and (2) informs the consumer about the return policy as a part 
of the offer to finance the purchase. Alternatively, the retailer may 
delay shipping the goods until after the account disclosures have been 
provided.
    Proposed commentary provisions would clarify that creditors may 
provide disclosures with the goods, or for creditors that have separate 
distribution systems for credit documents and for goods, by 
establishing procedures reasonably designed to have the disclosures 
sent within the same time period after the purchase as when the goods 
will be sent. A return policy would be of sufficient duration if the 
consumer is likely to receive the disclosures and have sufficient time 
to decide about the financing plan. A return policy would include 
returns via the United States Postal Service for goods delivered by 
private couriers. The commentary would also clarify that retailers' 
policies regarding the return of merchandise need not provide a right 
to return goods if the consumer consumes or damages the goods. The 
proposal does not affect merchandise purchased after the plan was 
initially established, or purchased by other means such as a credit 
card issued by another creditor. See proposed comments 5(b)(1)(iii)-1.
5(b)(2) Periodic Statements
    TILA Sections 127(b) and 163 provide the timing requirements for 
providing periodic statements for open-end credit accounts. 15 U.S.C. 
1637(b) and 15 U.S.C. 1666b. The Board proposes to retain the existing 
regulation and commentary, with a few changes discussed below.
5(b)(2)(i)
    TILA Section 127(b) establishes that creditors generally must send 
periodic statements at the end of billing cycles in which there is an 
outstanding balance or a finance charge is imposed. Section 
226.5(b)(2)(i) provides for a number of exceptions to a creditor's duty 
to send periodic statements.
    De minimis amounts. Creditors need not send periodic statements if 
an account balance (debit or credit) is $1 or less (and no finance 
charge is imposed). In the December 2004 ANPR, the Board requested 
comment on whether the de minimis amount should be adjusted. Q53. Few 
commented on this issue; there was little support for an adjustment. 
One major credit card issuer stated that the cost to reprogram systems 
would exceed the benefit. Thus, the Board proposes to retain the $1 
threshold.
    Uncollectible accounts. Creditors are not required to send periodic 
statements on accounts the creditor has deemed ``uncollectible.'' That 
term is not defined. The Board understands that creditors typically 
send statements on past-due accounts until the account is charged-off 
for purposes of loan-loss provisions, which is typically after 180 days 
of nonpayment. The Board is not proposing regulatory or commentary 
provisions on when an account is deemed ``uncollectible'' but seeks 
comment on whether additional guidance would be helpful.
    Instituting collection proceedings. Creditors need not send 
statements if ``delinquency collection proceedings have been 
instituted.'' Over the years, the Board's staff has been asked for 
guidance on what actions a creditor must take to be covered by the 
exception. The Board proposes to add comment 5(b)(2)(i)-3 to clarify 
that a collection proceeding entails a filing of a court action or 
other adjudicatory process with a third party, and not merely assigning 
the debt to a debt collector.
    Workout arrangements. Comment 5(b)(2)(i)-2 provides that creditors 
must continue to comply with all the rules for open-end credit, 
including sending a periodic statement, when credit privileges end, 
such as when a consumer stops taking draws and pays off the outstanding 
balance over time. Another comment provides that ``if an open-end 
credit account is converted to

[[Page 32973]]

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 comment 17(b)-2.
    Over the years, the Board's staff has received requests for 
guidance on the effect of certain work-out arrangements for past-due 
open-end accounts. For example, a borrower with a delinquent credit 
card account may agree by telephone to a workout plan to reduce or 
extinguish the debt and the conversation is later memorialized in a 
writing. The Board proposes to clarify that creditors entering into 
workout agreements for delinquent open-end plans without converting the 
debt to a closed-end transaction comply with the regulation if 
creditors continue to follow the regulations and procedures under 
Subpart B during the work-out period. The Board's proposal is intended 
to provide flexibility and reduce burden and uncertainty. The Board 
seeks comment on whether further guidance would be helpful, such as by 
establishing a safe harbor for when an open-end plan is deemed to be 
satisfied and replaced by a new closed-end obligation.
5(b)(2)(ii)
    Credit card issuers commonly offer consumers a ``grace period'' or 
``free-ride period'' during which consumers can avoid finance charges 
on purchases by paying the balance in full. TILA does not require 
creditors to provide a grace period, but if creditors provide one, TILA 
Section 163(a) requires them to send statements at least 14 days before 
the grace period ends. 15 U.S.C. 1666c(a). The rule is a ``mailbox'' 
rule; that is, the 14-day period runs from the date creditors mail 
their statements, not from the end of the statement period nor from the 
date consumers receive their statements.
    The Board is aware of anecdotal evidence of consumers receiving 
statements relatively close to the payment due date, with little time 
remaining before the payment must be mailed to meet the due date. This 
may be due to the fact that at the end of a billing cycle, it may take 
several days for a consumer to receive a statement. In addition, for 
consumers who mail their payments, they may need to mail their payments 
several days before the due date to ensure that the payment is receive 
by the creditor by the due date. Although the Board notes that using 
the Internet to make payments is increasingly common, the Board 
requests comment on (1) whether it should recommend to Congress that 
the 14-day period be increased to a longer time period, so that 
consumer will have additional time to receive their statements and mail 
their payments to ensure that payments will be received by the due 
date, and (2) if so, what time period the Board should recommend to 
Congress.
5(b)(2)(iii)
    In a technical revision, the substance of footnote 10 is moved to 
the regulatory text.
5(c) Through 5(e)
    Sections 226.5(c), (d), and (e) address, respectively: The basis of 
disclosures and the use of estimates; multiple creditors and multiple 
consumers; and the effect of subsequent events. The Board does not 
propose any changes to these provisions, except that the Board proposes 
to add new comment 5(d)-3, referencing the statutory provisions 
pertaining to charge cards with plans that allow access to an open-end 
credit plan maintained by a person other than the charge card issuer. 
TILA 127(c)(4)(D); 15 U.S.C. 1637(c)(4)(D). (See the section-by-section 
analysis to Sec.  226.5a(f).)

Section 226.5a Credit and Charge Card Applications and Solicitations

    TILA Section 127(c), implemented by Sec.  226.5a, requires card 
issuers to provide certain cost disclosures on or with an application 
or solicitation to open a credit or charge card account.\11\ 15 U.S.C. 
1637(c). The format and content requirements differ for cost 
disclosures in card applications or solicitations, depending on whether 
the applications or solicitations are given through direct mail, 
provided electronically, provided orally, or made available to the 
general public such as in ``take-one'' applications and in catalogs or 
magazines. Disclosures in applications and solicitations provided by 
direct mail or electronically must be presented in a table. For oral 
applications and solicitations, certain cost disclosures must be 
provided orally, except that issuers in some cases are allowed to 
provide the disclosures later in a written form. Applications and 
solicitations made available to the general public, such as in a take-
one application, must contain one of the following: (1) The same 
disclosures as for direct mail presented in a table; (2) a narrative 
description of how finance charges and other charges are assessed, or 
(3) a statement that costs are involved, along with a toll-free 
telephone number to call for further information.
---------------------------------------------------------------------------

    \11\ Charge cards are a type of credit card for which full 
payment is typically expected upon receipt of the billing statement. 
To ease discussion, this memorandum will refer simply to ``credit 
cards.''
---------------------------------------------------------------------------

    The Board proposes a number of substantive and technical revisions 
to Sec.  226.5a and the accompanying commentary, as described in more 
detail below. For example, the proposal contains a number of revisions 
to the format and content of application and solicitation disclosures, 
to make the disclosures more meaningful and easier to understand. 
Format changes would affect type size, placement of information within 
the table, use of cross-references to related information, and use of 
boldface type for certain key terms. Information concerning penalty 
APRs and the reasons they may be triggered would be more noticeable, 
and information would be added about how long penalty APRs may apply. 
The existing disclosures about how variable rates are determined would 
be shortened and simplified. Creditors that allocate payments to 
transferred balances that carry low rates would be required to disclose 
to consumers that they will pay interest on their (higher rate) 
purchases until (lower rate) transferred balances are paid in full. 
Creditors also would be required to include a reference to the Board's 
Web site where additional information about shopping for credit cards 
is available.
    To address concerns about subprime credit cards programs that have 
high fees with low credit limits, additional disclosures would be 
required if the fees or security deposits required to receive the card 
are 25 percent or more of the minimum credit limit that the consumer 
may receive. For example, the initial fees on an account with a $250 
credit limit may reduce the available credit to less than $100.
    Under the proposal, the disclosure of the balance computation 
method, which now appears in the table, would be required to be outside 
the table so that the table emphasizes information that is more useful 
to consumers when they are shopping for a card.
    With respect to take-one applications and solicitations, under the 
proposal, card issuers that provide cost disclosures in take-one 
applications and solicitations would be required to provide the 
disclosures in the form of a table, and would no longer be allowed to 
meet the requirements of Sec.  226.5a by providing a narrative 
description of account-opening disclosures. This proposed revision is 
consistent with other revisions contained in the proposal that would 
require certain account-opening information (such as information about 
key rates and fees) to be given in the form of a table. See

[[Page 32974]]

section-by-section analysis to Sec.  226.6(b)(4).
5a(a) General Rules
    Combining disclosures. Currently, comment 5a-2 states that account-
opening disclosures required by Sec.  226.6 do not substitute for the 
disclosures required by Sec.  226.5a; however, a card issuer may 
establish procedures so that a single disclosure document meets the 
requirements of both sections. The Board proposes to retain this 
comment, but to revise it to account for proposed revisions to Sec.  
226.6. Specifically, the Board is proposing to require that certain 
information given at account opening must be disclosed in the form of a 
table. See proposed Sec.  226.6(b)(4). The account-opening table would 
be substantially similar to the table required by Sec.  226.5a, but the 
content required would not be identical. The account-opening table 
would require information that would not be required in the Sec.  
226.5a table, such as a reference to billing error rights. The Board 
proposes to revise comment 5a-2 to provide that a card issuer may 
satisfy Sec.  226.5a by providing the account-opening summary table on 
or with a card application or solicitation, in lieu of the Sec.  226.5a 
table. For various reasons, card issuers may want to provide the 
account-opening disclosures with the card application or solicitation. 
When issuers do so, this comment allows them to provide the account-
opening summary table in lieu of the table containing the Sec.  226.5a 
disclosures.
    Clear and conspicuous standard. Section 226.5(a) requires that 
disclosures made under subpart B (including disclosures required by 
Sec.  226.5a) must be clear and conspicuous. Currently, comment 
5a(a)(2)-1 provides guidance on the clear and conspicuous standard as 
applied to the Sec.  226.5a disclosures. The Board proposes to provide 
guidance on applying the clear and conspicuous standard to the Sec.  
226.5a disclosures in comment 5(a)(1)-1. Thus, guidance currently in 
comment 5a(a)(2)-1 would be deleted as unnecessary. The Board proposed 
to add comment 5a-3 to cross reference the clear and conspicuous 
guidance in comment 5a(a)(1)-1.
5a(a)(1) Definition of Solicitation
    Firm offers of credit. The term ``solicitation'' is defined in 
Sec.  226.5a(a)(1) of Regulation Z to mean ``an offer by the card 
issuer to open a credit card account that does not require the consumer 
to complete an application.'' 15 U.S.C. 1637(c). Board staff has 
received questions about whether card issuers making ``firm offers of 
credit'' as defined in the Fair Credit Reporting Act (FCRA) are 
considered to be making solicitations for purposes of Sec.  226.5a. 15 
U.S.C. 1681 et seq. The Board proposes to amend the definition of 
``solicitation'' to clarify that such ``firm offers of credit'' for 
credit cards are solicitations for purposes of Sec.  226.5a, as 
discussed below.
    The definition ``solicitation'' was adopted in 1989 to implement 
part of the Fair Credit and Charge Card Disclosure Act of 1988. It 
captures situations where an issuer has preapproved a consumer to 
receive a card, and thus, no application is required. In 1996, the FCRA 
was amended to allow creditors to use consumer report information in 
connection with pre-selecting consumers to receive ``firm offers of 
credit.'' 15 U.S.C. 1681a(l), 1681b(c). A ``firm offer of credit'' is 
an offer that must be honored by a creditor if a consumer continues to 
meet the specific criteria used to select the consumer for the offer. 
15 U.S.C. 1681a(l). Creditors may obtain additional credit information 
from consumers, such as income information, when the consumer responds 
to the offer. However, creditors may decline to extend credit to the 
consumer based on this additional information only where the consumer 
does not meet specific criteria established by the creditor before 
selecting the consumer for the offer. Thus, because consumers who 
receive ``firm offers of credit'' have been preapproved to receive a 
credit card and may be turned down for credit only under limited 
circumstances, the Board believes that these preapproved offers are of 
the type intended to be captured as a ``solicitation,'' even though 
consumers are asked to provide some additional information in 
connection with accepting the offer.
    Invitations to apply. The Board also proposes to add comment 
5a(a)(1)-1 to distinguish solicitations from ``invitations to apply,'' 
which are not covered by Sec.  226.5a. An ``invitation to apply'' 
occurs when a card issuer contacts a consumer who has not been 
preapproved for a card account about opening an account (whether by 
direct mail, telephone, or other means) and invites the consumer to 
complete an application, but the contact itself does not include an 
application. The Board believes that these ``invitations to apply'' do 
not meet the definition of ``solicitation'' because the consumer must 
still submit an application in order to obtain the offered card. Thus, 
proposed comment 5a(a)(1)-1 would clarify that this ``invitation to 
apply'' is not covered by Sec.  226.5a unless the contact itself 
includes an application form in a direct mailing, electronic 
communication or ``take one,'' an oral application in a telephone 
contact initiated by the card issuer, or an application in an in-person 
contact initiated by the card issuer.
5a(a)(2) Form of Disclosures and Tabular Format
    Fees for late payment, over-the-credit-limit, balance transfers and 
cash advances. Currently, Sec.  226.5a(a)(2)(ii) and comment 5a(a)(2)-
5, which implement TILA Section 127(c)(1)(B), provide that card issuers 
may disclose late payment fees, over-the-credit-limit fees, balance 
transfer fees, and cash advance fees in the table or outside the table. 
15 U.S.C. 1637(c)(1)(B). In the December 2004 ANPR, the Board requested 
comment on whether these fees should be required to be in the table. 
Q8. Many commenters indicated that the Board should require these fees 
to be in the table, because these are core fees, and uniformity in the 
placement of the fees would make the disclosures more familiar and 
predictable for consumers. Some commenters, however, urged the Board to 
retain the flexibility for card issuers to place the fee disclosures 
either in the table or immediately outside the table.
    The Board proposes to require that these fees be disclosed in the 
table. In the consumer testing conducted for the Board, participants 
consistently identified these fees as among the most important pieces 
of information they consider as part of the credit card offer. With 
respect to the disclosure of these fees, the Board tested placement of 
these fees in the table and immediately below the table. Participants 
who were shown forms where the fees were disclosed below the table 
tended not to notice these fees compared to participants who were shown 
forms where the fees were presented in the table. The Board proposes to 
amend Sec.  226.5a(a)(2)(i) to require these fees to be disclosed in 
the table, so that consumers can easily identify them. Current Sec.  
226.5a(a)(2)(ii) and comment 5a(a)(2)-5, which currently allow issuers 
to place the fees outside the table, would be deleted. These proposed 
revisions are based in part on TILA Section 127(c)(5), which authorizes 
the Board to add or modify Sec.  226.5a disclosures. 15 U.S.C. 
1637(c)(5).
    Highlighting APRs and fee amounts in the table. Section 226.5a 
generally requires that certain information about rates and fees 
applicable to the card offer be disclosed to the consumer in

[[Page 32975]]

card applications and solicitations. This information includes not only 
the annual percentage rates and fee amounts that will apply, but also 
explanatory information that gives context to these figures. The Board 
seeks to enable consumers to identify easily the rates and fees 
disclosed in the table. Thus, the Board proposes to add Sec.  
226.5a(a)(2)(iv) to require that when a tabular format is required, 
issuers must disclose in bold text any APRs required to be disclosed, 
any discounted initial rate permitted to be disclosed, and any fee 
amounts or percentages required to be disclosed, except for any maximum 
limits on fee amounts disclosed in the table. Proposed Samples G-10(B) 
and G-10(C) provide guidance on how to show the rates and fees 
described in bold text. Proposed Samples G-10(B) and G-10(C) also 
provide guidance to issuers on how to disclose the percentages and fees 
described above in a clear and conspicuous manner, by including these 
percentages and fees generally as the first text in the applicable rows 
of the table so that the highlighted rates and fees generally are 
aligned vertically. In consumer testing conducted for the Board, 
participants who saw a table with the APRs and fees in bold and 
generally before any text in the table were more likely to identify the 
APRs and fees quickly and accurately than participants who saw other 
forms in which the APRs and fees were not highlighted in such a 
fashion.
    Electronic applications and solicitations. Section 1304 of the 
Bankruptcy Act amends TILA Section 127(c) to require solicitations to 
open a card account using the Internet or other interactive computer 
service to contain the same disclosures as those made for applications 
or solicitations sent by direct mail. Regarding format, the Bankruptcy 
Act specifies that disclosures provided using the Internet or other 
interactive computer service must be ``readily accessible to consumers 
in close proximity'' to the solicitation. 15 U.S.C. 1637(c)(7).
    In September 2000, the Board revised Sec.  226.5a, and as part of 
these revisions, provided guidance on how card issuers using electronic 
disclosures may comply with the Sec.  226.5a requirement that certain 
disclosures be ``prominently located'' on or with the application or 
solicitation. 65 FR 58,903; October 3, 2000. In March 2001, the Board 
issued interim final rules, which are not mandatory, containing 
additional guidance for the electronic delivery of disclosures under 
Regulation Z, consistent with the requirements of the E-Sign Act. 66 FR 
17,329; March 30, 2001. As discussed above, in April 2007, the Board 
issued for public comment the 2007 Electronic Disclosure Proposal. See 
section-by-section analysis to Sec.  226.5(a)(1).
    The Bankruptcy Act provision applies to solicitations to open a 
card account ``using the Internet or other interactive computer 
service.'' The term ``Internet'' is defined as the international 
computer network of both Federal and non-Federal interoperable packet-
switched data networks. The term ``interactive computer service'' is 
defined as any information service, system or access software provider 
that provides or enables computer access by multiple users to a 
computer server, including specifically a service or system that 
provides access to the Internet and such systems operated or services 
offered by libraries or educational institutions. 15 U.S.C. 1637(c)(7). 
Based on the definitions of ``Internet'' and ``interactive computer 
service,'' the Board believes that Congress intended to cover card 
offers that are provided to consumers in electronic form, such as via 
e-mail or an Internet Web site.
    In addition, although this Bankruptcy Act provision refers to 
credit card solicitations (where no application is required), the Board 
requested comment in the October 2005 ANPR on whether the provision 
should be interpreted also to include applications. Q93. Almost all 
commenters on this issue stated that there is no reason to treat 
electronic applications differently from electronic solicitations. With 
respect to both electronic applications and solicitations, it is 
important for consumers who are shopping for credit to receive accurate 
cost information before submitting an electronic application or 
responding to an electronic solicitation. The Board proposes to apply 
the Bankruptcy Act provision relating to electronic offers to both 
electronic solicitations and applications to promote the informed use 
of credit and avoid circumvention of TILA. 15 U.S.C. 1601(a), 1604(a). 
Thus, in implementing the Bankruptcy Act provision, the Board proposes 
to amend Sec.  226.5a(c) to require that applications and solicitations 
that are provided in electronic form contain the same disclosures as 
applications and solicitations sent by direct mail. The same proposal 
is included in the Board's 2007 Electronic Disclosure Proposal.
    With respect to the form of disclosures required under Sec.  
226.5a, the Board proposes to amend Sec.  226.5a(a)(2) by adding a new 
paragraph (v) to provide that if a consumer accesses an application or 
solicitation for a credit card in electronic form, the disclosures 
required on or with an application or solicitation for a credit card 
must be provided to the consumer in electronic form on or with the 
application or solicitation. A consumer accesses an application or 
solicitation in electronic form when, for example, the consumer views 
the application or solicitation on his or her personal computer. On the 
other hand, if a consumer receives an application or solicitation in 
the mail, the creditor would not satisfy its obligation to provide 
Sec.  226.5a disclosures at that time by including a reference in the 
application or solicitation to the Web site where the disclosures are 
located. See proposed comment 5a(a)(2)-6. The same proposal is included 
in the Board's 2007 Electronic Disclosure Proposal. See Sec.  
226.5a(a)(2)(v) and comment 5a(a)(2)-9 in the 2007 Electronic 
Disclosure Proposal.
    The Board also proposes to revise existing comment 5a(a)(2)-8 added 
by the 2001 interim final rule, which states that a consumer must be 
able to access the electronic disclosures at the time the application 
form or solicitation reply form is made available by electronic 
communication. The Board proposes to revise this comment to describe 
alternative methods for presenting electronic disclosures. This comment 
is intended to provide examples of the methods rather than an 
exhaustive list. The same proposal was included in the Board's 2007 
Electronic Disclosure Proposal.
    The Board also proposes to provide guidance on a Bankruptcy Act 
provision requiring that the Sec.  226.5a disclosures must be ``readily 
accessible to consumers in close proximity'' to an application or 
solicitation that is made electronically. In the October 2005 ANPR, the 
Board asked whether additional or different guidance is needed from the 
guidance previously issued by the Board in 2000 regarding how card 
issuers using electronic disclosures may comply with the Sec.  226.5a 
requirement that certain disclosures be ``prominently located'' on or 
with the application or solicitation. Q95.
    In particular, the 2000 guidance states that the disclosures 
required by Sec.  226.5a must be prominently located on or with 
electronic applications and solicitations. 65 FR 58,903; October 3, 
2000. The guidance provides flexibility for satisfying this 
requirement. For example, a card issuer could provide on the 
application or reply form a link to disclosures provided elsewhere, as 
long as consumers cannot bypass the disclosures before submitting the 
application or reply form. Alternatively, if a link to the disclosures 
is not used,

[[Page 32976]]

the electronic application or reply form could clearly and 
conspicuously indicate where the fact that rate, fee or other cost 
information could be found. Or the disclosures could automatically 
appear on the screen when the application or reply form appears. (See 
current comment 5a(a)(2)-2, which would be renumbered as 5a(a)(2)-1 
under the proposal.)
    Most commenters stated that the Board should retain this existing 
guidance to interpret the ``close proximity'' standard. A few industry 
commenters stated that the existing guidance should not apply, and 
that, for example, it should suffice to provide a link to the 
disclosures that the consumer could choose to access or not. Some 
commenters urged the Board generally to allow maximum flexibility to 
creditors regarding the display of electronic disclosures, and stated 
that no guidance or specific rules were necessary.
    The Board proposes to revise the existing guidance to interpret the 
``close proximity'' standard. The existing guidance would be revised to 
be consistent with proposed changes to comment 5a(a)(2)-8, that 
provides guidance to issuers on providing access to electronic 
disclosures at the time the application form or solicitation reply form 
is made available by electronic communication. Specifically, the Board 
proposes to provide that electronic disclosures are deemed to be 
closely proximate to an application or solicitation if, for example, 
(1) they automatically appear on the screen when the application or 
reply form appears, (2) they are located on the same Web ``page'' as 
the application or 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 (3) 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. See proposed comment 5a(a)(2)-1.ii.
    The Board proposes to retain the requirement that if an electronic 
link to the disclosures is used, the consumer must not be able to 
bypass the link before submitting an application or a reply form. The 
Board believes that the ``close proximity'' standard is designed to 
ensure that the disclosures are easily noticeable to consumers, and 
this standard is not met when consumers are only given a link to the 
disclosures, but not to the disclosures themselves. The Board proposes 
to incorporate the ``close proximity'' standard for electronic 
applications and solicitations in Sec.  226.5a(a)(2)(vi)(B), and the 
guidance regarding the location of the Sec.  226.5a disclosures in 
electronic applications and solicitations in comment 5a(a)(2)-1.ii.
    Terminology. Section 226.5a currently requires terminology in 
describing the disclosures required by Sec.  226.5a must be consistent 
with terminology describing the account-opening disclosures (Sec.  
226.6) and for the periodic statement disclosures (Sec.  226.7). TILA 
and Sec.  226.5a also require that the term ``grace period'' be used to 
describe the date by which or the period within which any credit 
extended for purchases may be repaid without incurring a finance 
charge. 15 U.S.C. 1632(c)(2)(C). The Board proposes that all guidance 
for terminology requirements with respect to Sec.  226.5a disclosures 
be placed in proposed Sec.  226.5(a)(2)(iii). The Board proposes to add 
comment 5a(a)(2)-7 to cross-reference the guidance in Sec.  
226.5(a)(2).
5a(a)(4) Certain Fees That Vary by State
    Currently, under Sec.  226.5a, if the amount of a late-payment fee, 
over-the-credit-limit fee, cash advance fee or balance transfer fee 
varies from state to state, a card issuer may disclose the range of the 
fees instead of the amount for each state, if the disclosure includes a 
statement that the amount of the fee varies from state to state. See 
existing Sec.  226.5a(a)(5), renumbered as new Sec.  226.5a(a)(4). As 
discussed below, the Board proposes to require card issuers to disclose 
in the table any fee imposed when a payment is returned. See proposed 
Sec.  226.5a(b)(12). The Board proposes to amend new Sec.  226.5a(a)(4) 
to add returned payment fees to the list of fees for which an issuer 
may disclose a range of fees. The Board requests comment on whether 
other fees required to be disclosed under Sec.  226.5a should be added 
to the list of fees for which the issuer may disclose a range of fees, 
such as fees for required insurance or debt cancellation or suspension 
coverage under proposed Sec.  226.5a(b)(14).
5a(a)(5) Exceptions
    Section 226.5a currently contains several exceptions to the 
disclosure requirements. Some of these exceptions are in the regulation 
itself, while others are contained in the commentary. For clarity, all 
exceptions would be placed together in new Sec.  226.5a(a)(5), as 
indicated in the redesignation table below.
5a(b) Required Disclosures
    Section 226.5a(b) specifies the disclosures that are required to be 
included on or with certain applications and solicitations.
5a(b)(1) Annual Percentage Rate
    Section 226.5a requires card issuers to disclose the rates 
applicable to the account, such as rates applicable to purchases, cash 
advances, and balance transfers. 15 U.S.C. 1637(c)(1)(A)(i)(I).
    16-point font for disclosure of purchase APRs. Currently, under 
Sec.  226.5a(b)(1), the purchase rate must be disclosed in the table in 
at least 18-point font. This font requirement does not apply to (1) a 
temporary initial rate for purchases that is lower than the rate that 
will apply after the temporary rate expires; or (2) a penalty rate that 
will apply upon the occurrence of one or more specified events. In 
response to the December 2004 ANPR, several industry commenters 
suggested that the Board delete this 18-point font requirement. These 
commenters indicated that disclosing the purchase rate in 18-point font 
size might distract consumers from other important terms being 
disclosed, and that disclosing the purchase rate in the table in large 
font size is not necessary because simply disclosing the purchase rate 
in the table provides consumers meaningful and comparable disclosure of 
that term.
    The Board is proposing to reduce the 18-point font requirement to a 
16-point font. The purchase rate is one of the most important terms 
disclosed in the table, and it is essential that consumers be able to 
identify that rate easily. A 16-point font size requirement for the 
purchase APR appears to be sufficient to highlight the purchase APR. 
(The Board is proposing that other disclosures in the table are 
required to be in 10-point type. See proposed comment 5(a)(1)-3.) In 
consumer testing conducted for the Board, versions of the table in 
which the purchase rate was the same font as other rates included in 
the table were reviewed. In other versions, the purchase rate was in 
16-point type while other disclosures were in 10-point type. 
Participants tended to notice the purchase rate more often when it was 
in a font bigger than the font used for other rates. Nonetheless, there 
was no evidence from consumer testing that it was necessary to use a 
font size of 18-point in order for the purchase APR to be noticeable to 
participants. Given that the proposal is requiring a minimum of 10-
point type for the disclosure of other terms in the table, based on 
document design principles, the Board believes that a 16-point font 
size for the purchase

[[Page 32977]]

APR would be effective in highlighting the purchase APR in the table.
    Periodic rate. Currently, comment 5a(b)(1)-1 allows card issuers to 
disclose the periodic rate in the table in addition to the required 
disclosure of the corresponding APR. The Board proposes to delete 
comment 5a(b)(1)-1, and thus, prohibit disclosure of the periodic rate 
in the table. Based on consumer testing conducted for the Board, 
consumers do not appear to shop using the periodic rate, nor is it 
clear that this information is important to understanding a credit card 
offer. Allowing the periodic rate to be disclosed in the table may 
distract from more important information in the table, and contribute 
to ``information overload.'' Thus, in an effort to streamline the 
information that appears in the table, the Board proposes to prohibit 
disclosure of the periodic rate in the table. Nonetheless, card issuers 
may disclose this information outside of the table.
    Variable rate information. Section 226.5a(b)(1)(i), which 
implements TILA Section 127(c)(1)(A)(i)(II), currently requires for 
variable-rate accounts, that the card issuer must disclose the fact 
that the rate may vary and how the rate is determined. 15 U.S.C. 
1637(c)(1)(A)(i)(II). In disclosing how the applicable rate will be 
determined, the card issuer is required to provide the index or formula 
used and disclose any margin or spread added to the index or formula in 
setting the rate. The card issuer may disclose the margin or spread as 
a range of the highest and lowest margins that may be applicable to the 
account. A disclosure of any applicable limitations on rate increases 
or decreases may also be included in the table. See current comment 
5a(b)(1)-3.
    1. Index and margins. Currently, the variable rate information is 
required to be disclosed separately from the applicable APR, in a row 
of the table with the heading ``Variable Rate Information.'' Some card 
issuers will include the phrase ``variable rate'' with the disclosure 
of the applicable APR and include the details about the index and 
margin under the ``Variable Rate Information'' heading. In the consumer 
testing conducted for the Board, many participants who saw the variable 
rate information presented as described above understood that the label 
``variable'' meant that a rate could change, but could not locate 
information on the tested form regarding how or why these rates could 
change. This was true even if the index and margin information was 
taken out of the row of the table with the heading ``Variable Rate 
Information'' and placed in a footnote to the phrase ``variable rate.'' 
Many participants who did find the variable rate information were 
confused by the variable-rate margins, often interpreting them 
erroneously as the actual rate being charged. In addition, very few 
participants indicated that they would use the margins in shopping for 
a credit card account.
    Accordingly, the Board proposes to amend Sec.  226.5a(b)(1)(i) to 
specify that issuers may not disclose the amount of the index or 
margins in the table. Specifically, card issuers would not be allowed 
to disclose in the table the current value of the index (for example, 
that the prime rate currently is 7.5 percent) or the amount of the 
margin that is used to calculate the variable rate. Card issuers would 
be allowed to indicate only that the rate varies and the type of index 
used to determine the rate (such as the ``prime rate,'' for example.) 
In describing the type of index, the issuer may not include details 
about the index in the table. For example, if the issuer uses a prime 
rate, the issuer must just describe the rate as tied to a ``prime 
rate'' and may not disclose in the table that the prime rate used is 
the highest prime rate published in the Wall Street Journal two 
business days before the closing date of the statement for each billing 
period. See proposed comment 5a(b)(1)-2. Also, the Board would require 
that the disclosure about a variable rate (the fact that the rate 
varies and the type of index used to determine the rate) must be 
disclosed with the applicable APRs, so that consumers can more easily 
locate this information. See proposed Model Form G-10(A), Samples G-
10(B) and G-10(C). Proposed Samples G-10(B) and G-10(C) provide 
guidance to issuers on how to disclose the fact that the applicable 
rate varies and how it is determined.
    2. Rate floors and ceilings. Currently, card issuers may disclose 
in the table, at their option, any limitations on how high (i.e., a 
rate ceiling) or low (i.e., a rate floor) a particular rate may go. For 
example, assume that the purchase rate on an account could not go below 
12 percent or above 24 percent. An issuer would be required to disclose 
in the table the current rate offered on the credit card (for example, 
18 percent), and would be permitted to disclose in the table that the 
rate would not go below 12 percent and above 24 percent. See current 
comment 5a(b)(1)-4. The Board proposes to revise the commentary to 
prohibit the disclosure of the rate floors and ceilings in the table. 
Based on consumer testing conducted for the Board, consumers do not 
appear to shop based on these rate floors and ceilings, and allowing 
them to be disclosed in the table may distract from more important 
information in the table, and contribute to ``information overload.'' 
Thus, in an effort to streamline the information that may appear in the 
table, the Board proposes to prohibit disclosure of the rate floors and 
ceilings in the table. Nonetheless, card issuers may disclose this 
information outside of the table.
    Discounted initial rates. Currently, comment 5a(b)(1)-5 specifies 
that if the initial rate is temporary and is lower than the rate that 
will apply after the temporary rate expires, a card issuer must 
disclose the rate that will otherwise apply to the account. A 
discounted initial rate may be provided in the table along with the 
rate required to be disclosed if the card issuer also discloses the 
time period during which the introductory rate will remain in effect. 
The Board proposes to move comment 5a(b)(1)-5 to new Sec.  
226.5a(b)(1)(ii). The Board also proposes to add new comment 5a(b)(1)-3 
to specify that if a card issuer discloses the discounted initial rate 
and expiration date in the table, the issuer is deemed to comply with 
the standard to provide this information clearly and conspicuously if 
the issuer uses the format specified in proposed Samples G-10(B) and G-
10(C) to present this information.
    In addition, under TILA Section 127(c)(6)(A), as added by Section 
1303(a) of the Bankruptcy Act, the term ``introductory'' must be used 
in immediate proximity to each listing of a discounted initial rate in 
the application, solicitation, or promotional materials accompanying 
such application or solicitation. Thus, the Board proposes to revise 
new Sec.  226.5a(b)(1)(ii) to specify that if an issuer provides a 
discounted initial rate in the table along with the rate required to be 
disclosed, the card issuer must use the term ``introductory'' in 
immediate proximity to the listing of the initial discounted rate.
    In the October 2005 ANPR, commenters asked the Board to consider 
permitting creditors to use the term ``intro'' as an alternative to the 
word ``introductory.'' Because ``intro'' is a commonly understood 
abbreviation of the term ``introductory,'' and consumer testing 
indicates that consumers understand this term, the Board proposes to 
allow creditors to use ``intro'' as an alternative to the requirement 
to use the term ``introductory'' and is proposing to clarify this 
approach in new Sec.  226.5a(b)(1)(ii). Also, to give card issuers 
guidance on the meaning of ``immediate proximity,'' the Board is

[[Page 32978]]

proposing to provide guidance for creditors that place the word 
``introductory'' or ``intro'' within the same phrase as each listing of 
the discounted initial rate. This guidance is set forth in proposed 
comment 5a(b)(1)-3. The Board believes that interpreting ``immediate 
proximity'' to mean adjacent to the rate may be too restrictive. 
Moreover, the Board has proposed the ``within the same phrase'' 
standard as a safe harbor instead of requiring this placement, 
recognizing that even if the term ``introductory'' is not ``within the 
same phrase'' as the rate it may still meet the ``immediate proximity'' 
standard.
    Penalty rates. Currently, comment 5a(b)(1)-7 requires that if a 
rate may increase upon the occurrence of one or more specific events, 
such as a late payment or an extension of credit that exceeds the 
credit limit, the card issuer must disclose the increased penalty rate 
that may apply and the specific event or events that may result in the 
increased rate. If a tabular format is required, the issuer must 
disclose the penalty rate in the table under the heading ``Other 
APRs,'' along with any balance transfer or cash advance rates.
    The specific event or events must be described outside the table 
with an asterisk or other means to direct the consumer to the 
additional information. At its option, the issuer may include outside 
the table with the explanation of the penalty rate the period for which 
the increased rate will remain in effect, such as ``until you make 
three timely payments.'' The issuer need not disclose an increased rate 
that is imposed if credit privileges are permanently terminated.
    In the December 2004 ANPR, the Board solicited comment on whether 
the table was effective as currently designed. Q7. In response to this 
question, many commenters suggested that the specific event or events 
that may result in the penalty rate should be disclosed in the table 
along with the penalty rate, because this would enhance comparison 
shopping and consumer understanding by highlighting penalty pricing and 
its effect on the other rates for the account.
    In the consumer testing conducted for the Board, when reviewing 
forms in which the specific events that trigger the penalty rate were 
disclosed outside the table, many participants did not readily notice 
the penalty rate triggers when they initially read through the document 
or when asked follow-up questions. In addition, many participants did 
not readily notice the penalty rate when it was included in the row 
``Other APRs'' along with other rates. The GAO also found that 
consumers had difficulty identifying the default rate and circumstances 
that would trigger rate increases. See GAO Report on Credit Card Rates 
and Fees, at page 49. In the testing conducted for the Board, when the 
penalty rate was placed in a separate row in the table, participants 
tended to notice the rate more often. Moreover, participants tended to 
notice the specific events that result in the penalty rate more often 
when these events were included with the penalty rate in a single row 
in the table. For example, two types of forms related to placement of 
the events that could trigger the penalty rate were tested--several 
versions showed the penalty rate in one row of the table and the 
description of the events that could trigger the penalty rate in 
another row of the table. Several other versions showed the penalty 
rate and the triggering events in the same row. Participants who saw 
the versions of the table with the penalty rate in a separate row from 
the description of the triggering events tended to skip over the row 
that specified the triggering events when reading the table. 
Nonetheless, participants who saw the versions of the table in which 
the penalty rate and the triggering events were in the same row tended 
to notice the triggering events when they reviewed the table.
    As a result, the Board proposes to add Sec.  226.5a(b)(1)(iv) and 
amend new comment 5a(b)(1)-4 (previously comment 5a(b)(1)-7) to require 
card issuers to briefly disclose in the table the specific event or 
events that may result in the penalty rate. In addition, the Board is 
proposing that the penalty rate and the specific events that cause the 
penalty rate to be imposed must be disclosed in the same row of the 
table. See proposed Model Form G-10(A). In describing the specific 
event or events that may result in an increased rate, new comment 
5a(b)(1)-4 provides that the descriptions of the triggering events in 
the table should be brief. For example, if an issuer may increase a 
rate to the penalty rate if 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.'' Proposed Samples G-10(B) and G-10(C) provide additional 
guidance on the level of detail that issuers should use in describing 
the specific events that result in the penalty rate.
    The Board also proposes to specify in new Sec.  226.5a(b)(1)(iv) 
that in disclosing a penalty rate, a card issuer also must specify the 
balances to which the increased rate will apply. Typically, card 
issuers apply the increased rate to all balances on the account. The 
Board believes that this information helps consumers better understand 
the consequences of triggering the penalty rate.
    In addition, the Board proposes to specify in new Sec.  
226.5a(b)(1)(iv) that in disclosing the penalty rate, a card issuer 
must describe how long the increased rate will apply. Proposed comment 
5a(b)(1)-4 provides that in describing how long the increased rate will 
remain in effect, the description should be brief, and refers issuers 
to Samples G-10(B) and G-10(C) for guidance on the level of detail that 
issuer should use to describe how long the increased rate will remain 
in effect. Also, proposed comment 5a(b)(1)-4 provides that if a card 
issuer reserves the right to apply the increased rate indefinitely, 
that fact should be stated. The Board believes that this information 
may help consumers better understand the consequences of triggering the 
penalty rate.
    Also, the Board proposes to add language to new Sec.  
226.5a(b)(1)(iv) to specify that in disclosing a penalty rate, card 
issuers must include a brief description of the circumstances under 
which any discounted initial rates may be revoked and the rate that 
will apply after the discounted initial rate is revoked. Section 
1303(a) of the Bankruptcy Act requires that a credit card application 
or solicitation must contain in a prominent location on or with the 
application or solicitation a clear and conspicuous disclosure of a 
general description of the circumstances that may result in revocation 
of a discounted initial rate offered with the card, and the rate that 
will apply after the discounted initial rate is revoked. 15 U.S.C. 
1637(c)(6)(C). The Board is proposing that this information be 
disclosed in the table along with other penalty rate information. 
Often, the same events that trigger a loss of a discounted initial rate 
and an increase to the penalty rate also trigger an increase in other 
rates on the account.
    Rates that depend on consumers' creditworthiness. Credit card 
issuers often engage in risk-based pricing such that the rates offered 
on a credit card will depend on later determinations of a consumer's 
creditworthiness. For example, an issuer may use information collected 
in a consumer's application or solicitation reply form (e.g., income 
information) or obtained through a credit report from a consumer 
reporting agency to determine the rate for which a consumer qualifies. 
For preapproved solicitations, issuers that engage in risk-based 
pricing typically will disclose the

[[Page 32979]]

specific rates offered to the consumer, because for these offers, 
issuers typically will have some indication of a consumer's 
creditworthiness based on the prescreening process done through a 
consumer reporting agency. For applications not involving prescreens, 
however, issuers that use risk-based pricing may not be able to 
disclose the specific rate that would apply to a consumer, because 
issuers may not have sufficient information about a consumer's 
creditworthiness at the time the application is given.
    In response to the December 2004 ANPR, industry commenters asked 
for guidance on how rates should be disclosed under Sec.  226.5a when 
an issuer does not know the specific rate for which the consumer will 
qualify at the time the disclosures are made because the specific rate 
depends on a later determination of the consumer's creditworthiness. 
Some industry commenters asked the Board to clarify that issuers may 
disclose the range of possible rates, with an explanation that the rate 
obtained by the consumer is based on the consumer's creditworthiness. 
Another industry commenter suggested that the Board should allow 
issuers to disclose a recent APR or the median rate within the range of 
possible rates, with an explanation that the rate could be higher or 
lower depending on the consumer's creditworthiness. Several consumer 
group commenters suggested that the Board should not allow issuers to 
disclose a range of possible rates. Instead, issuers should be required 
to disclose the actual APR that the creditor is offering, because 
otherwise, consumers do not know the rate for which they are applying.
    The Board proposes to add Sec.  226.5(b)(1)(v) and comment 
5a(b)(1)-5 to clarify that in circumstances in which an issuer cannot 
state a single specific rate being offered at the time disclosures are 
given because the rate will depend on a later determination of the 
consumer's creditworthiness, issuers must disclose the possible rates 
that might apply, and a statement that the rate for which the consumer 
may qualify at account opening depends on the consumer's 
creditworthiness. A card issuer may disclose the possible rates as 
either specific rates or a range of rates. For example, if there are 
three possible rates that may apply (e.g., 9.99, 12.99 or 17.99 
percent), an issuer may disclose specific rates (9.99, 12.99 or 17.99 
percent) or a range of rates (9.99 to 17.99 percent). Proposed Samples 
G-10(B) and G-10(C) provide guidance for issuers on how to meet these 
requirements. In addition, the Board solicits comment on whether card 
issuer should alternatively be permitted to list only the highest 
possible rate that may apply instead of a range of rates (e.g., up to 
17.99 percent).
    As discussed above, one industry commenter suggested that the Board 
should allow issuers to disclose a recent APR or the median rate within 
the range of possible rates, with an explanation that the APR could be 
higher or lower depending on the consumer's creditworthiness. The Board 
believes that requiring card issuers to disclose all the possible rates 
(as either specific rates, or as a range of rates) provides more useful 
information to consumers than allowing issuers to disclose a median APR 
within the range. If only one rate is disclosed in the table, consumers 
may mistake the rate disclosed as the specific rate offered on the 
account, and not understand that it is a median rate within a certain 
range, even if there is an explanation that the rate could be higher or 
lower. If a consumer sees a range or several specific rates, the 
consumer may be better able to determine that more than one rate is 
being disclosed.
    Transactions with both rate and fee. When a consumer initiates a 
balance transfer or cash advance, card issuers typically charge 
consumers both interest on the outstanding balance of the transaction, 
and a fee to complete the transaction. It is important that consumers 
understand when both a rate and a fee apply to specific transactions. 
In the consumer testing conducted for the Board, several ways of 
presenting rate and fee information were reviewed. In some tests, the 
cash advance and balance transfer rates were included in a section with 
other rates, and cash advance and balance transfer fees were included 
in a section with other fees. In other tests, cash advance and balance 
transfer fees were not included with other fees, but instead were 
included with the cash advance and balance transfer rates. Participants 
in the first test (the one where balance transfer and cash advance fees 
were grouped with other fees) were more likely to notice the balance 
transfer and cash advance fees than participants in the other tests. 
Participants tended to notice rates more easily when they were grouped 
together, and fees more easily when they are grouped together. Thus, 
the Board is proposing to group APRs together in the table and fees 
together in the table, rather than grouping APRs and fees related to 
cash advances together and APRs and fees related to balance transfers 
together.
    Nonetheless, because the rates and the fees related to cash 
advances and balance transfers are not grouped together, a cross 
reference from the cash advance and balance transfer rates to the 
applicable fees may help consumers notice both the rate and the fee. In 
consumer testing conducted for the Board, some participants were more 
aware that an interest rate applies to cash advances and balance 
transfers than they were aware of the fee component, so a cross 
reference between the rate and the fee may help those consumers notice 
both the rate and the fee components. Therefore, the Board proposes to 
add new Sec.  226.5a(b)(1)(vi) to require that if a rate and fee both 
apply to a balance transfer or cash advance transaction, a card issuer 
must disclose that a fee also applies when disclosing the rate, and a 
cross-reference to the fee. 15 U.S.C. 1637(c)(5).
    Typical APR. In response to the December 2004 ANPR, several 
consumer groups indicated that the current disclosure requirements in 
Sec.  226.5a allow card issuers to promote low APRs, that include 
interest but not fees, while charging high penalty fees and penalty 
rates when consumers, for example, pay late or exceed the credit limit. 
As a result, these consumer groups suggested that the Board require 
credit card issuers to disclose in the table a ``typical rate'' that 
would include fees and charges that consumers pay for a particular 
open-end credit products. This rate would be calculated as the average 
effective rate disclosed on periodic statements over the last three 
years for customers with the same or similar credit card product. These 
consumer groups believe that this ``typical rate'' would reflect the 
real rate that consumers pay for the credit card product.
    The Board is not proposing that card issuers disclose the ``typical 
rate'' as part of the Sec.  226.5a disclosures. Although a single cost 
figure (like the APR on closed-end credit) is a laudable objective, the 
Board does not believe that the proposed typical APR would be helpful 
to consumers that seek credit cards. There are many different ways 
consumers may use their credit cards, such as the features they use, 
what fees they incur, and whether a balance is carried from month to 
month. For example, some consumers use their cards only for purchases, 
always pay off the bill in full, and never pay fees. Other consumers 
may use their cards for purchases, balance transfers or cash advances, 
but never pay late-payment fees, over-the-credit-limit fees or other 
penalty fees. Still others may pay penalty fees and incur penalty 
rates. A ``typical rate,'' however, would be based

[[Page 32980]]

on average fees and average balances that may not be typical for many 
consumers. Moreover, such a rate may confuse consumers about the actual 
rate that may apply to their account.
    Nonetheless, the Board believes it is important that consumers 
understand the penalty rates and penalty fees that apply to a credit 
card account. Thus, the Board is proposing to make penalty rates more 
prominent in the table and require card issuers to describe in the 
table the reasons why a penalty rate may apply and how long the penalty 
rate will apply. See proposed Sec.  226.5a(b)(1)(iv). Likewise, the 
Board is proposing to highlight penalty fees by requiring that late 
payment fees, over-the-credit-limit fees, and returned-payment fees be 
disclosed in the table. See proposed Sec.  226.5a(a)(2)(i).
5a(b)(2) Fees for Issuance or Availability
    Section 226.5a(b)(2), which implements TILA Section 
127(c)(1)(A)(ii)(I), requires card issuers to disclose any annual or 
other periodic fee, expressed as an annualized amount, that is imposed 
for the issuance or availability of a credit card, including any fee 
based on account activity or inactivity. 15 U.S.C. 
1637(c)(1)(A)(ii)(I). In 1989, the Board used its authority under TILA 
Section 127(c)(5) to require that issuers also disclose non-periodic 
fees related to opening the account, such as one-time membership or 
participation fees. 15 U.S.C. 1637(c)(5); 54 FR 13,855, April 6, 1989.
    Fees for issuance or availability of credit card products targeted 
to subprime borrowers. Often, subprime credit cards will have 
substantial fees related to the issuance and availability of credit. 
For example, these cards may impose an annual fee, and a monthly 
maintenance fee for the card. In addition, these cards may impose 
multiple one-time fees when the consumer opens the card account, such 
as an application fee and a program fee. The Board believes that these 
fees should be clearly explained to consumers at the time of the offer 
so that consumers better understand when these fees will be imposed.
    The Board proposes to amend Sec.  226.5a(b)(2) to require 
additional information about periodic fees. 15 U.S.C. 1637(c)(5). 
Currently, issuers are required to disclose only the annualized amount 
of the fee. The Board proposes to amend Sec.  226.5a(b)(2) to require 
issuers also to disclose the amount of the periodic fee, and how 
frequently it will be imposed. For example, if an issuer imposes a $10 
monthly maintenance fee for a card, the issuer must disclose in the 
table that there is a $10 monthly maintenance fee, and that the fee is 
$120 on an annual basis.
    In addition, the Board proposes to amend Sec.  226.5a(b)(2) to 
require additional information about non-periodic fees related to 
opening the account. Currently, issuers are required to disclose the 
amount of the non-periodic fee, but not that it is a one-time fee. The 
Board proposes to amend Sec.  226.5a(b)(2) to require card issuers to 
disclose the amount of the fee and that it is a one-time fee. This 
additional information will allow consumers to better understand set-up 
and maintenance fees that are often imposed in connection with subprime 
credit cards. For example, the proposed changes would provide consumers 
with additional information about when the fees will be imposed by 
identifying which fees are one-time fees, which fees are periodic fees 
(such as monthly fees), and which fees are annual fees.
    In addition, application fees that are charged regardless of 
whether the consumer receives credit currently are not considered fees 
as imposed for the issuance or availability of a credit card, and thus 
are not disclosed in the table. See current comment 5a(b)(2)-3 and 
Sec.  226.4(c)(1). The Board proposes to delete the exception for these 
application fees and require that they be disclosed in the table as 
fees imposed for the issuance or availability of a credit card. The 
Board believes that consumers should be aware of these fees when they 
are shopping for a credit card.
5a(b)(3) Minimum Finance Charge
    Currently, Sec.  226.5a(b)(3), which implements TILA Section 
127(c)(1)(A)(ii)(II), requires that card issuers must disclose any 
minimum or fixed finance charge that could be imposed during a billing 
cycle. Card issuers typically impose a minimum charge (e.g., $.50) in 
lieu of interest in those months where a consumer would otherwise incur 
an interest charge that is less than the minimum charge (a so-called 
``minimum interest charge''). In response to the December 2004 ANPR, 
one industry commenter suggested that the Board no longer require that 
the minimum finance charge be disclosed in the table because these fees 
are typically small (e.g., $.50) and consumers do not shop on them. 
Another industry commenter suggested that the Board only require that 
the minimum finance charge be included in the table if the charge is a 
significant amount. On the other hand, several consumer groups urged 
the Board to continue to include the minimum finance charge in the 
table because this charge can have a significant effect on the cost of 
credit.
    The Board proposes to retain the minimum finance charge disclosure 
in the table. Although minimum charges currently may be small, card 
issuers may increase these charges in the future. Also, Board is aware 
of at least one credit card product for which no APR is charged, but 
each month a fixed charge is imposed based on the outstanding balance 
(for example, $6 charge per $1,000 balance). If the minimum finance 
charge disclosure was eliminated from the table, card issuers that 
offer this type of pricing would no longer be required to disclose the 
fixed charge in the table. The Board is not proposing to require the 
minimum finance charge only if it is a significant amount. This 
approach could undercut the uniformity of the table, and could be 
misleading to consumers. If consumers do not see a minimum finance 
charge disclosed in the table, the Board is concerned that most 
consumers might assume that there is not a minimum finance charge on 
the card, when the charge was below a certain threshold.
    Under Sec.  226.5a(b)(3), card issuers are only required to 
disclose the amount of any minimum or fixed finance charge that could 
be imposed during a billing cycle. Card issuers currently are not 
required to provide a description of when this charge may be imposed. 
In consumer testing conducted for the Board, model forms were tested 
that only included the amount of the minimum interest charge in the 
table. In viewing these forms, some participants misunderstood that 
they would pay the minimum interest charge every month, not just those 
months where they otherwise would incur interest that was less than the 
minimum charge. Thus, the Board proposes to amend Sec.  226.5a(b)(3) to 
require card issuers to disclose in the table a brief description of 
the minimum finance charge, to give consumers context for when this 
charge will be imposed. 15 U.S.C. 1637(c)(5). Proposed Samples G-10(B) 
and G-10(C) provide guidance regarding how to disclose a minimum 
interest charge.
5a(b)(4) Transaction Charges
    Section 226.5a(b)(4), which implements TILA Section 
127(c)(1)(A)(ii)(III), requires that card issuers disclose any 
transaction charge imposed on purchases. The current commentary to this 
provision clarifies that only transaction fees on purchases imposed by 
the issuer must be disclosed. (See comment 5a(b)(4)-1.) For clarity, 
the Board would amend Sec.  226.5a(b)(4) to incorporate this commentary 
provision.

[[Page 32981]]

    In addition, the Board proposes to amend Sec.  226.5a(b)(4) to 
specify that fees charged for transactions in a foreign currency or 
that take place in a foreign country may not be disclosed in the table. 
In an effort to streamline the contents of the table, the Board 
proposes to highlight only those fees that may be important for a 
significant number of consumers. In consumer testing for the Board, 
participants did not tend to mention foreign transaction fees as 
important fees they use to shop. There are few consumers who may pay 
these fees with any frequency. Thus, the Board proposes to except 
foreign transaction fees from disclosure of transaction fees. The Board 
proposes to include foreign transaction fees in the account-opening 
summary table that is required under Sec.  226.6(b)(4), so that 
interested consumers can learn of the fees before using the card.
5a(b)(5) Grace Period
    Section 226.5a(b)(5), which implements TILA Section 
127(c)(A)(iii)(I), requires that card issuers disclose in the table the 
date by which or the period within which any credit extended for 
purchases may be repaid without incurring a finance charge. If no grace 
period is provided, that fact must be disclosed. Comment 5a(b)(5)-1 
provides that a card issuer may, but need not, refer to the beginning 
or ending point of any grace period and briefly state any conditions on 
the applicability of the grace period. For example, the grace period 
disclosure might read ``30 days'' or ``30 days from the date of the 
periodic statement (provided you have paid your previous balance in 
full by the due date).''
    The consumer testing conducted for the Board indicated that some 
participants misunderstood the word ``grace period'' to mean the time 
after the payment due date that an issuer may give the consumer to pay 
the bill without charging a late-payment fee. The GAO found similar 
misunderstandings by consumers in its consumer testing. Furthermore, 
many participants in the GAO testing incorrectly indicated that the 
grace period was the period of time promotional interest rates applied. 
See GAO Report on Credit Card Rates and Fees, at page 50.
    In consumer testing conducted for the Board, participants tended to 
understand the grace period more clearly when additional context was 
added, such as describing that if the consumer paid the bill in full 
each month, the consumer would have some period of time (e.g., 25 days) 
to pay the new purchase balance in full to avoid interest. Thus, the 
Board proposes to amend Sec.  226.5a(b)(5) to require card issuers to 
disclose briefly any conditions on the applicability of the grace 
period. 15 U.S.C. 1637(c)(5). The Board also proposes to amend comment 
5a(b)(5)-1 to provide guidance for how issuers may meet the 
requirements in proposed Sec.  226.5a(b)(5).
5a(b)(6) Balance Computation Method
    TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance on which finance charges are 
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the 
balance computation methods named by the Board, Sec.  226.5a(b)(6) 
requires that issuers must disclose the name of that balance 
computation method in the table as part of the disclosures required by 
Sec.  226.5a, and issuers are not required to provide a description of 
the balance computation method. If the issuer uses a balance 
computation method that is not named by the Board, the issuer must 
disclose a detailed explanation of the balance computation method. See 
current Sec.  226.5a(b)(6); Sec.  226.5a(a)(2)(i).
    In response to the December 2004 ANPR, several commenters suggested 
that the Board delete the description of the balance computation method 
from the table. These commenters believed that the implications of the 
balance computation method on the actual cost of credit are simply too 
complex and too contingent on future purchasing patterns to be of any 
use to consumers in shopping for credit.
    The Board agrees that balance computation methods are too complex 
to explain in a simple fashion in the table. Most card issuers use one 
of two methods--either the ``average daily balance method (including 
new purchases)'' or the ``two-cycle average daily balance method 
(including new purchases).'' For consumers that carry a balance on 
their credit card every month or for consumers that pay off their 
balance in full every month, there essentially is no difference between 
these two methods. There is a difference between the two methods only 
in those months where a consumer paid off their previous balance in 
full, but did not pay off their current balance in full. In those 
months, the consumer will pay more interest under the ``two-cycle 
average daily balance method'' than under the ``average daily balance 
method.'' How much more interest the consumer pays depends on the 
amount of the purchases in the previous billing cycle, when those 
purchases were made, the amount of any payments made in that billing 
cycle, and when those payments were made.
    In consumer testing conducted for the Board, virtually no 
participants understood the two balance computation methods most used 
by card issuers--the average daily balance method and the two-cycle 
average daily balance method--when those methods were just described by 
name. The GAO found similar results in its consumer testing. See GAO 
Report on Credit Card Rates and Fees, at pages 50-51. In the consumer 
testing conducted for the Board, a version of the table was used which 
attempted to explain briefly that the ``two-cycle average daily balance 
method'' would be more expensive than the ``average daily balance 
method'' for those consumers that sometimes pay their bill in full and 
sometimes do not. Participants' answers suggested they did not 
understand this disclosure. They appeared to need more information 
about how balances are calculated. Nonetheless, the addition of more 
information would likely add too much detail to the disclosures and 
result in ``information overload.'' In addition, it is unclear whether 
most consumers would consider the balance computation method when 
shopping for a credit card.
    As a result, the Board proposes to retain a brief reference to the 
balance computation method, but move the disclosure from the table to 
directly below the table. See Sec.  226.5a(a)(2)(iii). TILA Section 
122(c)(2) states that for certain disclosures set forth in Section TILA 
127(c)(1)(A), including the balance computation method, the Board shall 
require that the disclosure of such information shall, to the extent 
the Board determines to be practicable and appropriate, be in the form 
of a table. 15 U.S.C. 1632(c)(2). The Board believes that it is no 
longer appropriate to continue to disclose the balance computation 
method in the table, because the name of the balance computation method 
used by issuers does not appear to be meaningful to consumers without 
additional context and may distract from more important information 
contained in the table. The Board proposes to continue to require that 
issuers disclose the name of the balance computation method beneath the 
table, so that consumers and others will have access to this 
information if they find it useful.
5a(b)(8) Cash Advance Fee
    Currently, comment 5a(b)(8)-1 provides that a card issuer must 
disclose only those fees it imposes for a cash advance that are finance 
charges under

[[Page 32982]]

Sec.  226.4. For example, a charge for a cash advance at an automated 
teller machine (ATM) would be disclosed under Sec.  226.5a(b)(8) if no 
similar charge is imposed for ATM transactions not involving an 
extension of credit. As discussed in the section-by-section analysis to 
Sec.  226.4, the Board proposes to provide that all transaction fees on 
credit cards would be considered finance charges. Thus, the Board 
proposes to delete the current guidance discussed in comment 5a(b)(8)-1 
as obsolete.
5a(b)(12) Returned Payment Fee
    Currently, Sec.  226.5a does not require a card issuer to disclose 
a fee imposed when a payment is returned. The Board proposes to add 
Sec.  226.5a(b)(12) to require issuers to disclose this fee in the 
table. Typically, card issuers will impose a fee and a penalty rate if 
a cardholder's payment is returned. As discussed above, the Board 
proposes to require card issuers to disclose in the table the reasons 
that a penalty rate may be imposed. See proposed Sec.  
226.5a(b)(1)(iv). The Board proposes that the returned payment fee be 
disclosed too, so that consumers are told both consequences of returned 
payments.
5a(b)(13) Cross References from Fees to Penalty Rate
    Card issuers often impose both a fee and penalty rate for the same 
behavior--such as a consumer paying late, exceeding the credit limit, 
or having a payment returned. In consumer testing conducted for the 
Board, participants tended to associate paying penalty fees with 
certain behaviors (such as paying late or going over the credit limit), 
but they did not tend to associate rate increases with these same 
behaviors. By linking the penalty fees with the penalty rate, 
participants more easily understood that if they engage in certain 
behaviors, such as paying late, their rates may increase in addition to 
incurring a fee. Thus, the Board proposes to add Sec.  226.5a(b)(13) to 
provide that if a card issuer may impose a penalty rate for any of the 
reasons that a penalty fee would be disclosed in the table (such as 
late payments, going over the credit limit, or returned payments), the 
issuer in disclosing the fee also must disclose that the penalty rate 
may apply, and a cross-reference to the penalty rate. Proposed Samples 
G-10(B) and G-10(C) provide guidance on how to provide these 
disclosures.
5a(b)(14) Required Insurance, Debt Cancellation Or Debt Suspension 
Coverage
    Credit card issuers often offer optional insurance or debt 
cancellation or suspension coverage with the credit card. Under the 
current rules, costs associated with the insurance or debt cancellation 
or suspension coverage are not considered ``finance charges'' if the 
coverage is optional, the issuer provides certain disclosures to the 
consumer about the coverage, and the issuer obtain an affirmative 
written request for coverage after the consumer has received the 
required disclosures. Card issuers frequently provide the disclosures 
discussed above on the application form and a space to sign or initial 
an affirmative written request for the coverage. Currently, issuers are 
not required to provide any information about the insurance or debt 
cancellation or suspension coverage in the table that contains the 
Sec.  226.5a disclosures.
    In the event that a card issuer requires the insurance or debt 
cancellation or debt suspension coverage (to the extent permitted by 
state or other applicable law), the Board proposes new Sec.  
226.5a(b)(14) to require that the issuer disclose any fee for this 
coverage in the table. In addition, new Sec.  226.5a(b)(14) would 
require that the card issuer also disclose a cross-reference to where 
the consumer may find more information about the insurance or debt 
cancellation or debt suspension coverage, if additional information is 
included on or with the application or solicitation. Proposed Sample G-
10(B) provides guidance on how to provide the fee information and the 
cross-reference in the table. If insurance or debt cancellation or 
suspension coverage is required in order to obtain a credit card, the 
Board believes that fees required for this coverage should be 
highlighted in the table so that consumers are aware of these fees when 
considering an offer, because they will be required to pay the fee for 
this coverage every month in order to have the credit card.
5a(b)(15) Payment Allocation
    Some credit card issuers will allocate payments first to balances 
that are subject to the lowest APR. For example, if a cardholder made 
purchases using a credit card account and then initiated a balance 
transfer, the card issuer might allocate a payment (less than the 
amount of the balances) to the transferred balance portion of the 
account if that balance was subject to a lower APR than the purchases. 
Card issuers often will offer a discounted initial rate on balance 
transfers (such as 0 percent for an introductory period) with a credit 
card solicitation, but not offer the same discounted rate for 
purchases. In addition, the Board is aware of at least one issuer that 
offers the same discounted initial rate for balance transfers and 
purchases for a specified period of time, where the discounted rate for 
balance transfers (but not the discounted rate for purchases) may be 
extended until the balance transfer is paid off if the consumer makes a 
certain number of purchases each billing cycle. At the same time, 
issuers typically offer a grace period for purchases if a consumer pays 
his or her bill in full each month. Card issuers, however, do not 
typically offer a grace period on balance transfers or cash advances. 
Thus, on the offers described above, a consumer cannot take advantage 
of both the grace period on purchases and the discounted rate on 
balance transfers. Because the payments will be allocated to the 
balance transfers first, the only way for a consumer to avoid paying 
interest on purchases--and thus have the benefit of the grace period--
is to pay off the entire balance, including the balance transfer 
subject to the discounted rate.
    The Board believes that it is important that consumers understand 
payment allocation in these circumstances, so that they can better 
understand the offer and decide whether to use this particular card for 
purchases. For example, if consumers knew that they would pay interest 
on all purchases made while paying off the balance transfer at the 
discounted rate, they might not use that particular card for purchases. 
They might use another card for purchases and pay that card in full 
every month to take advantage of the grace period on purchases. Or they 
might use another card with a lower purchase rate, if they did not plan 
to pay off the purchases in full each month.
    In the consumer testing conducted for the Board, many participants 
did not understand that they could not take advantage of the grace 
period on purchases and the discounted rate on balance transfers at the 
same time. Model forms were tested that included a disclosure notice 
attempting to explain this to consumers. Nonetheless, testing showed 
that a significant percentage of participants still did not fully 
understand how payment allocation can affect their interest charges, 
even after reading the disclosure tested. The Board plans to conduct 
further testing of the disclosure to determine whether the disclosure 
can be improved to be more effectively communicate to consumers how

[[Page 32983]]

payment allocation can affect their interest charges. Nonetheless, 
because some participants did benefit from the disclosure, and in light 
of further testing, the Board, under its authority pursuant to TILA 
Section 127(c)(5), proposes to add Sec.  226.5a(b)(15) to require a 
card issuer to explain payment allocation to consumers. 15 U.S.C. 
1637(c)(5). Proposed Sec.  226.5a(b)(15) states that if (1) a card 
issuer offers a discounted initial rate on a balance transfers or cash 
advance that is lower than the rate on purchases, (2) the issuer offers 
a grace period on purchases, and (3) the issuer may allocate payments 
to the lower rate balance first, then the issuer must make certain 
disclosures in the table. Specifically, issuers would be required to 
disclose: (1) that the discounted initial rate applies only to balance 
transfers or cash advances, as applicable, and not to purchases; (2) 
that payments will be allocated to the balance transfer or cash advance 
balance, as applicable, before being allocated to any purchase balance 
during the time the discounted initial rate is in effect; and (3) that 
the consumer will incur interest on the purchase balance until the 
entire balance is paid, including the transferred balance or cash 
advance balance, as applicable. The Board would require these 
disclosures in the table only if the discounted initial rate applies to 
balance transfers or cash advances that consumers can request as part 
of accepting the offer. If the discounted initial rate only applies to 
subsequent balance transfers or checks that access a credit card 
account, the issuer would not need to provide this disclosure with the 
offer. The Board proposes to add comment 5a(b)(15)-1 to provide 
examples of when these disclosures must be given. The Board also 
proposes to add comment 5a(b)(15)-2 to specify that a card issuer may 
comply with the requirements in new Sec.  226.5a(b)(15) by providing 
the applicable disclosures contained in proposed Samples G-10(B) and G-
10(C).
5a(b)(16) Available Credit
    Subprime credit cards often have substantial fees assessed when the 
account is opened. Those fees will be billed to the consumer as part of 
the first statement, and will substantially reduce the amount of credit 
that the consumer initially has available with which to make purchases 
or other transactions on the account. For example, for cards for which 
a consumer is given a minimum credit line of $250, after the start-up 
fees have been billed to the account, the consumer may have less than 
$100 of available credit with which to make purchases or other 
transactions in the first month. In addition, consumers will pay 
interest on these fees until they are paid in full.
    The federal banking agencies have received a number of complaints 
from consumers with respect to cards of this type. Complainants often 
claim that they were not aware of how little available credit they 
would have after all the fees were assessed. Thus, the Board is 
proposing to add Sec.  226.5a(b)(16) to inform consumers about the 
impact of these fees on their initial available credit. Specifically, 
Sec.  226.5a(b)(16) would provide that if (1) a card issuer imposes 
required fees for the issuance or availability of credit, or a security 
deposit, that will be charged against the card when the account is 
opened, and (2) the total of those fees and/or security deposit equal 
25 percent or more of the minimum credit limit applicable to the card, 
a card issuer must disclose in the table an example of the amount of 
the available credit that a consumer would have remaining after these 
fees or security deposit are debited to the account, assuming that the 
consumer receives the minimum credit limit offered on the relevant 
account. In determining whether the 25 percent threshold test is met, 
the issuer must only consider fees for issuance or availability of 
credit, or a security deposit, that are required. If certain fees for 
issuance or availability are optional, these fees should not be 
considered in determining whether the disclosure must be given. 
Nonetheless, if the 25 percent threshold test is met in connection with 
the required fees or security deposit, the issuer must disclose the 
available credit after excluding any optional fees from the amounts 
debited to the account, and the available credit after including any 
optional fees in the amounts debited to the account. The Board believes 
that 25 percent is an appropriate threshold because it represents a 
significant reduction in the initial available credit as a result of 
the imposition of fees or security deposit. The Board solicits comment 
on this threshold amount.
    In addition, the Board proposes comment 5a(b)(16)-1 to clarify that 
in calculating the amount of available credit that must be disclosed in 
the table, an issuer must consider all fees for the issuance or 
availability of credit described in Sec.  226.5a(b)(2), and any 
security deposit, that will be imposed when the account is opened and 
charged to the account, such as one-time issuance and set-up fees that 
will be imposed when the card is opened. For example, in calculating 
the available credit, issuers must consider the first year's annual fee 
and the first month's maintenance fee (if applicable) if they are 
charged to the account immediately at account opening. Proposed Sample 
G-10(C) provides guidance to issuers on how to provide this disclosure. 
(See proposed comment 5a(b)(16)-2).
    As described above, a card issuer would consider only required fees 
for issuance or availability of credit, or a security deposit, that 
will be charged against the card when the account is opened in 
determining whether the 25 percent threshold test is met. The Board 
requests comment on whether there are other fees (other than fees 
required for issuance or availability of credit) that are typically 
imposed on these types of accounts when the account is opened, and 
should be included in determining whether the 25 percent threshold test 
is met.
5a(b)(17) Reference to Board Web Site for Additional Information
    In the December 2004 ANPR, the Board requested comment on 
suggestions for non-regulatory approaches that may further the Board's 
goal of improving the effectiveness of TILA's disclosures and 
substantive protections. Q57. In response to the ANPR, several 
commenters encouraged the Board to develop educational materials, such 
as pamphlets, targeted media, and interactive Web sites, that could 
educate consumers on a variety of topics related to shopping for and 
using credit cards. These commenters believe that certain topics that 
are difficult to explain to consumers, such as balance computation 
methods, are better provided in educational materials than in the TILA 
disclosures.
    The Board proposes to revise Sec.  226.5a to require that credit 
card issuers must disclose in the table a reference to a Board Web site 
and a statement that consumers can find on this Web site educational 
materials on shopping for and using credit card accounts. See proposed 
Sec.  226.5a(b)(17). Such materials would expand those already 
available on choosing a credit card at the Board's Web site.\12\ The 
Board recognizes that some consumers may need general education about 
how credit cards work and an explanation of typical account terms that 
apply to credit cards. In the consumer testing conducted for the Board, 
participants showed a wide range of knowledge about how credit cards 
work generally, with some participants showing a firm understanding of 
terms that relate to

[[Page 32984]]

credit card accounts, while others had difficulty expressing basic 
financial concepts, such as how the interest rate differs from a one-
time fee. The Board's current Web site explains some basic financial 
concepts--such as what an annual percentage rate is--as well as terms 
that typically apply to credit card accounts. Through the Web site, the 
Board could expand the explanation of other credit card terms, such as 
balance computation methods, that may be difficult to explain concisely 
in the disclosures given with applications and solicitations.
---------------------------------------------------------------------------

    \12\ The materials can be found at http://
www.federalreserve.gov/pubs/shop/default.htm.
---------------------------------------------------------------------------

    As part of consumer testing, participants were asked whether they 
would use a Board Web site to obtain additional information about 
credit cards generally. Some participants indicated they might use the 
Web site, while others indicated that it was unlikely they would use 
such a Web site. Although it is hard to predict from the results of the 
testing how many consumers might use the Board's Web site, and 
recognizing that not all consumers have access to the Internet, the 
Board believes that this Web site may be helpful to some consumers as 
they shop for a credit card and manage their account once they obtain a 
credit card. Thus, the Board is proposing that a reference to a Board 
Web site be included in the table because this is a cost-effective way 
to provide consumers with supplemental information on credit cards. The 
Board seeks comments on the content for the Web site.
    Additional disclosures. In response to the December 2004 ANPR, 
several consumer groups suggested that the Board require information 
about the minimum payment formula, credit limit, any security interest, 
and all fees imposed on the account be disclosed in the table. The 
Board has decided not to propose this additional information in the 
table for the reasons detailed below.
    1. Minimum payment formula. In the consumer testing conducted for 
the Board, participants did not tend to mention the minimum payment 
formula as one of the terms on which they shop for a card. In addition, 
minimum payment formulas used by card issuers can be complicated 
formulas that would be hard to describe concisely in the table. For 
example, while some issuers still use a percentage to calculate the 
payment, such as 2 percent of the outstanding balance or $10, whichever 
is less, other issuers use much more complicated formulas, such as 
``the greater of (1) $15 or (2) 2 percent of the balance or (3) the 
applicable finance charges, and if the finance charges are largest, add 
$15 to that amount.'' Even if the Board were to require issuers to 
provide an example showing the amount of the minimum payment for a 
certain balance (for example, $1000), this example would be of doubtful 
usefulness for the many consumers who have balances different from the 
example. In addition, the example might mislead consumers, because one 
card might yield a lower minimum payment amount than another card for 
one balance (for example, $1000), but the second card might yield a 
lower minimum payment than the first card if the minimum payment was 
calculated on a different balance.
    2. Credit limit. Card issuers often indicate a credit limit in a 
cover letter sent with an application or solicitation. Frequently, this 
credit limit is not stated as a specific amount but, instead, is stated 
as an ``up to'' amount, indicating the maximum credit limit for which a 
consumer may qualify. The actual credit limit for which a consumer 
qualifies depends on the consumer's creditworthiness, which is 
evaluated after the application or solicitation is submitted. Several 
consumer groups suggested that the Board include the credit limit in 
the table because it is a key factor for many consumers in shopping for 
a credit card. These groups also suggested that the Board require 
issuers to state a specific credit limit, and not an ``up to'' amount.
    The Board is not proposing to include the credit limit in the 
table. As explained above, in most cases, the credit limit for which a 
consumer qualifies depends on the consumer's creditworthiness, which is 
fully evaluated after the application or solicitation has been 
submitted. In addition, in consumer testing conducted for the Board, 
participants were not generally confused by the ``up to'' credit limit. 
Most participants understood that the ``up to'' amount on the 
solicitation letter was a maximum amount, rather than the amount the 
issuer was promising them. Almost all participants tested understood 
that the credit limit for which they would qualify depended on their 
creditworthiness, such as credit history.
    3. Security interest. Several consumer groups suggested that any 
required security interest should be disclosed in the table. These 
commenters suggest that if a security interest is required, the 
disclosure in the table should describe it briefly, such as ``in items 
purchased with card'' or ``required $200 deposit.'' These commenters 
indicated that a security deposit is a very important consideration in 
credit shopping, especially for low-income consumers. In addition, they 
stated that many credit cards issued by merchants are secured by the 
goods that the consumer purchases, but consumers are often unaware of 
the security interest.
    The Board is not proposing to include a disclosure of any required 
security interest in the table at this time. Credit card-issuing 
merchants may include in their account agreements a security interest 
in the goods that are purchased with the card. It is not apparent that 
consumers would shop on whether a retail card has this type of security 
interest. Requiring or allowing this type of security interest to be 
disclosed in the table may distract from important information in the 
table, and contribute to ``information overload.'' Thus, in an effort 
to streamline the information that may appear in the table, the Board 
is not proposing to include this disclosure in the table.With respect 
to security deposits, if a consumer is required to pay a security 
deposit prior to obtaining a credit card and that security deposit is 
not charged to the account but is paid by the consumer from separate 
funds, a card issuer must necessarily disclose to the consumer that a 
security deposit is required, so that the consumer knows to submit the 
deposit in order to obtain the card. A security deposit in these 
instances may already be sufficiently highlighted in the materials 
accompanying the application or solicitation, and may not need to 
appear in the table. Nonetheless, the Board recognizes that a security 
deposit may need to be highlighted when the deposit is not paid from 
separate funds but is charged to the account when the account is 
opened. In those cases, consumers may not realize that the security 
deposit may significantly decrease their available credit when the 
account is opened. Thus, as described above, the Board proposes to 
provide that if (1) a card agreement requires payment of a fee for 
issuance or availability of credit, or a security deposit, (2) the fee 
or security deposit will be charged to the account when it is opened, 
and (3) the total of those fees and security deposit equal 25 percent 
or more of the minimum credit limit offered with the card, the card 
issuer must disclose in the table an example of the amount of the 
available credit that a consumer would have remaining after these fees 
or security deposit are debited to the account, assuming that the 
consumer receives the minimum credit limit offered on the card.
    4. Fees. In response to the December 2004 ANPR, several consumer 
groups suggested that all fees imposed on an account should be included 
in the table. They believed that by requiring only certain fees in the 
table, card issuers have an incentive to devise new fees

[[Page 32985]]

that do not have to be disclosed so prominently. They indicate that if 
the Board excludes any fees, the list of such fees should be an 
exclusive list. They also suggested that the Board should require card 
issuers to report periodically on the volume of the excluded fees 
collected. If a certain type of fee increases in volume, these 
commenters suggested that the Board should delete this fee from the 
list of excluded fees on the grounds that that fee has become a more 
significant component of the cost of credit.
    As described above, the Board is proposing to include certain 
transaction fees and penalty fees, such as cash advance fees, balance 
transfer fees, late-payment fees, and over-the-credit limit fees, in 
the table because these fees are frequently paid by consumers, and 
consumers have indicated these fees are important for shopping 
purposes. The Board is not proposing to include other fees in the 
table, such as copying fees and stop-payment fees, in the table because 
these fees tend to be imposed less frequently and are not fees on which 
consumers tend to shop. In consumer testing conducted for the Board, 
participants tended to mention cash advance fees, balance transfer 
fees, late-payment fees, and over-the-credit-limit fees as the most 
important fees they would want to know when shopping for a credit card. 
In addition, most participants understood that issuers were allowed to 
impose additional fees, beyond those disclosed in the table. Thus, the 
Board believes it is important to highlight in the table the fees that 
consumers want to know when shopping for a card, rather than including 
infrequently-paid fees, to avoid creating ``information overload'' such 
that consumers could not easily identify the fees that are most 
important to them. Nonetheless, the Board recognizes that fees can 
change over time, and the Board plans to monitor the market and update 
the fees required to be disclosed in the table as necessary.
5a(c) Direct-Mail and Electronic Applications
5a(c)(1) General
    Electronic applications and solicitations. As discussed above, the 
Bankruptcy Act amends TILA Section 127(c) to require that solicitations 
to open a card account using the Internet or other interactive computer 
service must contain the same disclosures as those made for 
applications or solicitations sent by direct mail. 15 U.S.C. 
1637(c)(7). The interim final rules adopted by the Board in 2001 
revised Sec.  226.5a(c) to apply the direct mail rules to electronic 
applications and solicitations. The Board proposes to retain these 
provisions in Sec.  226.5a(c)(1). (Current Sec.  226.5a(c) would be 
revised and renumbered as new Sec.  226.5a(c)(1).) The same proposal 
was included in the Board's 2007 Electronic Disclosure Proposal.
    The Bankruptcy Act also requires that the disclosures for 
electronic offers must be ``updated regularly to reflect the current 
policies, terms, and fee amounts.'' In the October 2005 ANPR, the Board 
also solicited comment on what guidance the Board should provide on how 
to apply that standard for credit card accounts. The Board's 2001 
interim final rules provided guidance that disclosures for a variable-
rate credit card plan provided electronically must be based on an APR 
in effect within the last 30 days. The 2001 guidance did not contain 
specific guidance on accuracy requirements for other disclosures 
provided electronically, such as disclosure of fees. The majority of 
commenters on the October 2005 ANPR which addressed the accuracy of 
variable rates agreed that a 30-day standard would be appropriate to 
implement the ``updated regularly'' standard in the Bankruptcy Act. 
Some commenters advocated longer periods such as 60 days or shorter 
periods such as daily or weekly updating, or suggested that the Board 
should not provide specific guidance or rules, instead allowing maximum 
flexibility in this area.
    The Board proposes to revise Sec.  226.5a(c) to implement the 
``updated regularly'' standard in the Bankruptcy Act with regard to the 
accuracy of variable rates. A new Sec.  226.5a(c)(2) would be added to 
address the accuracy of variable rates in direct mail and electronic 
applications and solicitations. This new section would require issuers 
to update variable rates disclosed on mailed applications and 
solicitations every 60 days and variable rates disclosed on 
applications and solicitations provided in electronic form every 30 
days, and to update other terms when they change. The Board believes 
the 30-day and 60-day accuracy requirements for variable rates strike 
an appropriate balance between seeking to ensure consumers receive 
updated information and avoiding imposing undue burdens on creditors. 
The Board believes it is unnecessary for creditors to disclose to 
consumers the exact variable APR in effect on the date the application 
or solicitation is accessed by the consumer, so long as consumers 
understand that variable rates are subject to change. Moreover, it 
would be costly and operationally burdensome for creditors to comply 
with a requirement to disclose the exact variable APR in effect at the 
time the application or solicitation is accessed. The obligation to 
update the other terms when they change ensures that consumers receive 
information that is accurate and current, and should not impose 
significant burdens on issuers. These terms generally do not fluctuate 
with the market like variable rates. In addition, based on discussions 
with industry representatives concerning operational issues, the Board 
staff understands that issuers typically change other terms 
infrequently, perhaps once or twice a year.
    Section 226.5a(c)(2) consists of two subsections. Section 
226.5a(c)(2)(i) would provide that Sec.  226.5a disclosures mailed to a 
consumer must be accurate as of the time the disclosures are mailed. 
This section would also provide that an accurate variable APR is one 
that is in effect within 60 days before mailing. Section 
226.5a(c)(2)(ii) would provide that Sec.  226.5a disclosures provided 
in electronic form (except for a variable APR) must be accurate as of 
the time they are sent to a consumer's e-mail address, or as of the 
time they are viewed by the public on a Web site. For the reasons 
discussed above, this section would provide that a variable APR is 
accurate if it is in effect within 30 days before it is sent, or viewed 
by the public. Presently, variable APRs on most credit cards may change 
on a monthly basis, so a 30-day accuracy requirement for variable APRs 
appears appropriate.
    Many of the provisions included in proposed Sec.  226.5a(c)(2) have 
been incorporated from current Sec.  226.5a(b)(1). To eliminate 
redundancy, the Board proposes to revise Sec.  226.5a(b)(1) by deleting 
Sec.  226.5a(b)(1)(ii), Sec.  226.5a(b)(1)(iii), and comment 5a(c)-1. 
The same revisions were included in the Board's 2007 Electronic 
Disclosure Proposal.
5a(d) Telephone Applications and Solicitations
5a(d)(2) Alternative Disclosure
    Section 226.5a(d) specifies rules for providing cost disclosures in 
oral applications and solicitations initiated by a card issuer. Card 
issuers generally must provide certain cost disclosures during the oral 
conversation in which the application or solicitation is given. 
Alternatively, an issuer is not required to give the oral disclosures 
if the card issuer either does not impose a fee for the issuance or 
availability of a credit card (as described in Sec.  226.5a(b)(2)) or 
does not impose such a fee unless the

[[Page 32986]]

consumer uses the card, provided that the card issuer provides the 
disclosures later in a written form. Specifically, the issuer must 
provide the disclosures required by Sec.  226.5a(b) in a tabular format 
in writing within 30 days after the consumer requests the card (but in 
no event later than the delivery of the card), and disclose the fact 
that the consumer need not accept the card or pay any fee disclosed 
unless the consumer uses the card. The Board proposes to add comment 
5a(d)-2 to indicate that an issuer may disclose in the table that the 
consumer is not required to accept the card or pay any fee unless the 
consumer uses the card.
5a(d)(3) Accuracy
    Proposed Sec.  226.5a(d)(3) would provide guidance on the accuracy 
of telephone disclosures. Current comment 5a(b)(1)-3 specifies that for 
variable-rate disclosures in telephone applications and solicitations, 
the card issuer must provide the rates currently applicable when oral 
disclosures are provided. For the alternative disclosures under Sec.  
226.5a(d)(2), an accurate variable APR is one that is (1) in effect at 
the time the disclosures are mailed or delivered; (2) in effect as of a 
specified date (which rate is then updated from time to time, for 
example, each calendar month); or (3) an estimate in accordance with 
Sec.  226.5(c). Current comment 5a(b)(1)-3 would be moved to Sec.  
226.5a(d)(3), except that the option of estimating a variable APR would 
be eliminated as the least meaningful of the three options. Proposed 
Sec.  226.5a(d)(3) also would specify that if an issuer discloses a 
variable APR as of a specified date, the issuer must update the rate on 
at least a monthly basis, the frequency with which variable rates on 
most credit card products are adjusted. The Board also would amend 
proposed Sec.  226.5a(d)(3) to specify that oral disclosures under 
Sec.  226.5a(d)(i) must be accurate when given, consistent with the 
requirement in Sec.  226.5(c) that disclosures must reflect the terms 
of the legal obligation between the parties. For the alternative 
disclosures, terms other than variable APRs must be accurate as of the 
time they are mailed or delivered. See proposed Sec.  226.5a(d)(3).
5a(e) Applications and Solicitations Made Available to General Public
    TILA Section 127(c)(3) and Sec.  226.5a(e) specify rules for 
providing disclosures in applications and solicitations made available 
to the general public such as ``take-one'' applications and catalogs or 
magazines. 15 U.S.C. 1637(c)(3). These applications and solicitations 
must either contain: (1) The disclosures required for direct mail 
applications and solicitations, presented in a table; (2) a narrative 
that describes how finance charges and other charges are assessed; or 
(3) a statement that costs are involved, along with a toll-free 
telephone number to call for further information.
    Narrative that Describes How Finance Charges and Other Charges Are 
Assessed. TILA Section 127(c)(3)(D) and Sec.  226.5a(e)(2) allow 
issuers to meet the requirements of Sec.  226.5a for take-one 
applications and solicitations by giving a narrative description of 
certain account-opening disclosures (such as information about how 
finance charges and other charges are assessed), a statement that the 
consumer should contact the card issuer for any change in the required 
information, and a toll-free telephone number or a mailing address for 
that purpose. 15 U.S.C. 1637(c)(3)(D). Currently, this information does 
not need to be in the form of a table, but may be a narrative 
description, as is also currently allowed for account-opening 
disclosures. The Board is proposing, however, to require that certain 
account-opening information (such as information about key rates and 
fees) must be given in the form of a table. See the section-by-section 
analysis to Sec.  226.6(b)(4). Therefore, the Board also is proposing 
that card issuers give this same information in a tabular form in take-
one applications and solicitations. Thus, the Board proposes to delete 
Sec.  226.5a(e)(2) and comments 5a(e)(2)-1 and -2 as obsolete. Card 
issuers that provide cost disclosures in take-one applications and 
solicitations would be required to provide the disclosures in the form 
of a table, for which they could use the account-opening summary table. 
See Sec.  226.5a(e)(1) and comment 5a-2.
5a(e)(4) Accuracy
    For applications or solicitations that are made available to the 
general public, if a creditor chooses to provide the cost disclosures, 
Sec.  226.5a(b)(1)(ii) currently requires that any variable APR 
disclosed must be accurate within 30 days before printing. The proposal 
would move this provision to Sec.  226.5a(e)(4). Proposed Sec.  
226.5a(e)(4) also would specify that other disclosures must be accurate 
as of the date of printing.
5a(f) In-Person Applications and Solicitations
    Card issuer and person extending credit are not the same. Existing 
Sec.  226.5a(f) and its accompanying commentary contain special charge 
card rules that address circumstances in which the card issuer and the 
person extending credit are not the same person. (These provisions 
implement TILA Section 127(c)(4)(D), 15 U.S.C. 1637(c)(4)(D).) The 
Board understands that these types of cards are no longer being 
offered. Thus, the Board proposes to delete these provisions and the 
Model Clause G-12 from Regulation Z as obsolete, recognizing that the 
statutory provision in TILA Section 127(c)(4)(D) will remain in effect 
if these products are offered in the future. The Board requests comment 
on whether these provisions should be retained in the regulation. A 
commentary provision referencing the statutory provision would be added 
to Sec.  226.5(d), which addresses disclosure requirements for multiple 
creditors. See proposed comment 5(d)-3.
    In-person applications and solicitations. The Board is proposing a 
new Sec.  226.5a(f) and accompanying commentary to address in-person 
applications and solicitations initiated by the card issuer. In in-
person applications, a card issuer initiates a conversation with a 
consumer inviting the consumer to apply for a card account, and if the 
consumer responds affirmatively, the issuer takes application 
information from the consumer. For example, in-person applications 
include instances in which a retail employee, in the course of 
processing a sales transaction using the customer's bank credit card, 
invites the customer to apply for the retailer's credit card and the 
customer submits an application.
    In in-person solicitations, a card issuer offers a consumer in-
person to open an account that does not require an application. For 
example, in-person solicitations include instances where a bank 
employee offers a preapproved credit card to a consumer who came into 
the bank to open a checking account.
    Currently, in-person applications in response to an invitation to 
apply are exempted from Sec.  226.5a because they are considered 
applications initiated by consumers. (See current comments 5a(a)(3)-2 
and 5a(e)-2.) On the other hand, in-person solicitations are not 
specifically addressed in Sec.  226.5a. Neither in-person applications 
nor solicitations are specifically addressed in TILA.
    The Board proposes to cover in-person applications and 
solicitations under Sec.  226.5a, pursuant to the Board's authority 
under TILA Section 105(a). Requiring in-person applications and 
solicitations to include credit terms under Sec.  226.5a could help 
serve TILA's purpose to provide meaningful disclosure of credit terms 
so that

[[Page 32987]]

consumers will be able to compare more readily the various credit terms 
available to him or her, and avoid the uninformed use of credit. 15 
U.S.C. 1601(a). Also, the Board understands that card issuers routinely 
provide Sec.  226.5a disclosures in these circumstances; therefore, any 
additional compliance burden would be minimal.
    Card issuers must provide the disclosures required by Sec.  226.5a 
in the form of a table, and those disclosures must be accurate when 
given (consistent with the direct mail rules) or when printed 
(consistent with one option for the take-one rules). See Sec.  
226.5a(c), (e)(1). These two alternatives appear to provide issuers 
flexibility, while also providing consumers with the information they 
need to make informed credit decisions. Existing comment 5a(a)(3)-2 
(which would be moved to comment 5a(a)(5)-1) and comment 5a(e)-2 would 
be revised to be consistent with Sec.  226.5a(f).
5a(g) Balance Computation Methods Defined
    TILA Section 127(c)(1)(A)(iv) calls for the Board to name not more 
than five of the most common balance computation methods used by credit 
card issuers to calculate the balance on which finance charges are 
computed. 15 U.S.C. 1637(c)(1)(A)(iv). If issuers use one of the 
balance computation methods named by the Board, the issuer must 
disclose that name of the balance computation method as part of the 
disclosures required by Sec.  226.5a, and is not required to provide a 
description of the balance computation method. If the issuer uses a 
balance computation method that is not named by the Board, the issuer 
must disclose a detailed explanation of the balance computation method. 
See current Sec.  226.5a(b)(6). Currently, the Board has named four 
balance computation methods: (1) Average daily balance (including new 
purchases) or (excluding new purchases); (2) two-cycle average daily 
balance (including new purchases) or (excluding new purchases); (3) 
adjusted balance; and (4) previous balance. The Board proposes to 
retain these four balance computation methods. The Board requests 
comment on whether the list should be revised, along with data 
indicating why.

Section 226.6 Account-Opening Disclosures

    TILA Section 127(a), implemented in Sec.  226.6, requires creditors 
to provide information about key credit terms before an open-end plan 
is opened, such as rates and fees that may be assessed on the account. 
Consumers' rights and responsibilities in the case of unauthorized use 
or billing disputes are also explained. 15 U.S.C. 1637(a). See also 
Model Forms G-2 and G-3 in Appendix G.
    Home-equity lines of credit. Account-opening disclosure and format 
requirements for home-equity lines of credit (HELOCs) subject to Sec.  
226.5b would be unaffected by the proposal, consistent with the Board's 
plan to review Regulation Z's disclosure rules for home-secured credit 
in a separate rulemaking. To facilitate compliance, the substantively 
unrevised rules applicable only to HELOCs are grouped together in 
proposed Sec.  226.6(a), including rules relating to the disclosure of 
finance charges, other charges, and specific HELOC-related disclosures. 
(See redesignation table below.) For the reasons set forth in the 
section-by-section analysis to Sec.  226.6(b)(1), the Board would 
update references to ``free-ride period'' as ``grace period'' in the 
regulation and commentary, without any intended substantive change.
    Open-end (not home-secured) plans. The Board proposes two 
significant revisions to account-opening disclosures for open-end (not 
home-secured) plans, which are set forth in proposed Sec.  226.6(b). 
The rule would (1) require a tabular summary of key terms to be 
provided before an account is opened (see proposed Sec.  226.6(b)(4)), 
and (2) reform how and when cost disclosures must be made (see proposed 
Sec.  226.6(b)(1) for content, Sec.  226.5(b) and Sec.  226.9(c) for 
timing). The Board proposes to apply the tabular summary requirement to 
all open-end loan products, except HELOCs. Such products include credit 
card accounts, traditional overdraft credit plans, personal lines of 
credit, and revolving plans offered by retailers without a credit card. 
The benefit to consumers from receiving a concise summary of rates and 
important fees appears to outweigh the costs, such as developing the 
new disclosures and revising them as needed.
    Disclosure requirements in Sec.  226.6 that potentially affect all 
open-end creditors, namely rules relating to security interests and 
billing error disclosure requirements, are grouped together in proposed 
Sec.  226.6(c). The section also would be retitled ``Account-opening 
disclosures'' to more accurately reflect the timing of the disclosures. 
In today's marketplace, there are few open-end products for which 
consumers receive the disclosures required under Sec.  226.6 as their 
``initial'' Truth in Lending disclosure. See Sec.  226.5a, Sec.  
226.5b. The substance of footnotes 11 and 12 is moved to the 
regulation; the substance of footnote 13 is moved to the commentary. 
(See redesignation table below.)
    In technical revisions, comments 6-1 and 6-2 would be deleted. The 
substance of comment 6-1, which requires consistent terminology, is 
discussed more generally in proposed Sec.  226.5(a)(2). Comment 6-2 
addresses certain open-end plans involving more than one creditor, and 
is proposed to be deleted as obsolete. See section-by-section analysis 
to Sec.  226.5a(f).
    Tabular summary. As provided by Regulation Z, creditors may, and 
typically do, include account-opening disclosures as a part of an 
account agreement document that also contains other contract terms and 
state-law disclosures. The agreement is typically lengthy and in small 
print. In the December 2004 ANPR, the Board sought comment on possible 
approaches to ease consumers' ability to navigate account-opening 
disclosures, such as a summary paragraph, a table similar to the one 
required on or with credit and charge card applications, or a table of 
contents to highlight key features and terms of the account. Q2-Q3.
    Commenters generally encouraged the Board to consider format rules 
that focus on providing essential terms in a simplified way. In 
general, commenters suggested that a summary of key terms would improve 
the effectiveness of the now-lengthy and complex account agreement 
documents. Some industry commenters, however, opposed a summary. These 
commenters noted that the current format rules integrating account 
terms and TILA disclosures allow creditors to explain features 
coherently, and noted that summarizing information and repeating it in 
detail in the contract document may result in information overload. As 
a part of consumer research conducted for the Board regarding consumer 
understanding of current TILA disclosures, tests simulated consumers' 
review of packets of information typically received when new accounts 
are opened. Most of the consumers in the Board's sample group set aside 
the lengthy multi-fold account agreement pamphlets without reading 
them, saying they were too long, the type was too small, and the 
language too legalistic. Consumers who reviewed packets that included a 
summary of account terms generally noticed and reviewed the summary, 
even if they set aside the contract document.
    Based on public comment, consumer testing, and its own analysis, 
the Board is proposing to introduce format requirements for account-
opening disclosures for open-end (not home-

[[Page 32988]]

secured) plans. The Board proposes to summarize key information most 
important to informed decision-making in a table similar to that 
required on or with credit and charge card applications and 
solicitations. The proposal would permit TILA disclosures that are 
typically lengthy or complex and less-often used in determining how to 
use an account, such as how variable rates are determined, to be 
integrated with the account agreement terms. The content requirements 
for the proposed summary are set forth in new Sec.  226.6(b)(4) and are 
discussed below; proposed Model Form G-17(A) and Samples G-17(B) and G-
17(C) in Appendix G illustrate the table.
    Charges imposed as part of the plan. The Board proposes to reform 
its rules regarding cost disclosures provided at account opening for 
open-end (not home-secured) plans. Under TILA and current Regulation Z, 
account-opening disclosures must include charges that are either a 
``finance charge'' or an ``other charge'' (TILA charges). According to 
TILA, a charge is a finance charge if it is payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor ``as an incident to the extension of credit.'' The Board 
implemented the definition by including as a finance charge under 
Regulation Z, any charge imposed ``as an incident to or a condition of 
the extension of credit.'' TILA also requires a creditor to disclose, 
before opening an account, ``other charges which may be imposed as part 
of the plan * * * in accordance with regulations of the Board.'' The 
Board implemented the provision virtually verbatim, and the staff 
commentary interprets the provision to cover ``significant charges 
related to the plan.'' 15 U.S.C. 1605(a), Sec.  226.4; 15 U.S.C. 
1637(a)(5), Sec.  226.6(b), current comment 6(b)-1.
    The terms ``finance charge'' and ``other charge'' are given broad 
and flexible meanings in the regulation and commentary. This ensures 
that TILA adapts to changing conditions, but it also creates 
uncertainty. The distinctions among finance charges, other charges, and 
charges that do not fall into either category are not always clear. As 
creditors develop new kinds of services, some find it difficult to 
determine if associated charges for the new services meet the standard 
for a ``finance charge'' or ``other charge'' or are not covered by TILA 
at all. This uncertainty can pose legal risks for creditors that act in 
good faith to classify fees. Examples of charges that are included or 
excluded charges are in the regulation and commentary, but they cannot 
provide definitive guidance in all cases.
    A 2003 rulemaking concerning charges for two services--expediting 
payments and expediting card delivery--illustrates the challenges in 
applying current rules. 68 FR 16,185; April 3, 2003. Public comments on 
the proposal reflected a lack of consensus about the proposed 
interpretations of expedited payment fee as an ``other charge'' and 
expedited card delivery fee as not covered by TILA. More broadly, the 
comments reflected a lack of consensus over the basic principles that 
should determine whether a charge is a finance charge or an ``other 
charge.''
    In the final rule, staff adopted official interpretations 
indicating that neither charge was a charge covered by TILA. In the 
supplementary information accompanying the final rule, Board staff 
recognized that requiring a written disclosure of a charge for a 
service long before the consumer might consider purchasing the service 
did not provide the consumer with any material benefit. The staff also 
noted creditors' current practice of disclosing the charge when the 
service is requested, and encouraged the continuation of that practice.
    Board staff also indicated that a more comprehensive review of 
existing rules was needed. Accordingly, the December 2004 ANPR 
solicited comment on the effectiveness of the rules governing 
disclosure of charges covered by TILA, and on potential alternatives. 
The comments indicated a consensus that the current approach should be 
replaced with a new one. Commenters split, however, on the proper 
approach. Most focused on the definition of ``finance charge'' or 
``other charge.'' Approaches ranged from industry's suggestions to 
restrict finance charges to interest or to charges required as a 
condition to the extension of credit, to consumer groups' suggestion to 
include virtually all charges the consumer would pay. While commenters 
disagreed over which approach would best serve TILA's purposes, they 
shared a common objective: Provide a clear test.
    In light of the comments received, consumer testing, and the 
Board's experience and analysis, the Board is proposing to reform the 
rules governing disclosure of charges before they are imposed, as 
discussed below. The proposed rule is intended to respond collectively 
to these concerns by (1) giving full effect to TILA's requirement that 
all charges imposed as part of an open-end (not home-secured) plan be 
disclosed before they are imposed, (2) specifying precisely important 
costs that must be disclosed in writing at account opening (e.g., 
interest rates, annual fees, and late-payment or over-the-credit-limit 
fees), and (3) permitting the creditor to disclose all other charges 
imposed as part of the plan (e.g., fees to expedite payments or to 
provide an additional card) at account opening or orally at any time 
before the consumer agrees to or becomes obligated to pay the charge. 
Charges added or increased during the life of the plan would be subject 
to similar rules. See Sec.  226.9(c)(2).
    Under the proposal, some charges would be covered by TILA that the 
current regulation, as interpreted by the staff commentary, excludes 
from TILA coverage, such as fees for expedited payment and expedited 
delivery. It may not have been useful to consumers to cover such 
charges under TILA when such coverage would have meant only that the 
charges were disclosed long before they became relevant to the 
consumer. It may, however, be useful to cover such charges under TILA 
as part of a rule that permits their disclosure at a (later) more 
relevant time. Further, as new services (and associated charges) are 
developed, the proposal is intended to reduce uncertainty of how to 
disclose such fees and risks of civil liability. The list of charges 
creditors must disclose in the account-opening table would be specific 
and exclusive, not open-ended as is the case today. Creditors could 
otherwise comply with the rule by disclosing other costs at any other 
relevant time.
6(a) Rules Affecting Home-Equity Plans
    For the reasons discussed above and as illustrated in the 
redesignation table below, the proposal would set forth in Sec.  
226.6(a) all requirements applying exclusively to home-equity plans 
subject to Sec.  226.5b (HELOCs). Rules relating to the disclosure of 
finance charges currently in Sec.  226.6(a)(1) through (4) would be 
moved to proposed Sec.  226.6(a)(1)(i) through (iv); those rules and 
accompanying official staff interpretations are substantively 
unchanged. Rules relating to the disclosure of other charges would be 
moved from current Sec.  226.6(b) to proposed Sec.  226.6(a)(2), and 
specific HELOC-related disclosure requirements would be moved from 
current Sec.  226.6(e) to proposed Sec.  226.6(a)(3). Several technical 
revisions to commentary provisions are proposed for clarity and in some 
cases for consistency with corresponding comments to proposed Sec.  
226.6(b)(2), which addresses rate disclosures for open-end (not home-
secured) plans, but these revisions are not intended to be substantive. 
See, for example, proposed comments 6(a)(1)(ii)-1 and 6(b)(2)(i)(B)-1, 
which address disclosing ranges of balances. Also, commentary 
provisions that

[[Page 32989]]

currently apply to open-end plans generally but are inapplicable to 
HELOCs would not be moved. For example, guidance in current 6(a)(2)-2 
regarding a creditor's general reservation of the right to change terms 
would not be moved to proposed comment 6(a)(1)(ii)-2, because Sec.  
226.5b(f)(1) prohibits ``rate-reservation'' clauses for HELOCS. Comment 
6-1, which addresses the need for consistent terminology with periodic 
statement disclosures, would be deleted as duplicative. See proposed 
Sec.  226.5(a)(2)(i).
6(b) Rules Affecting Open-End (Not Home-Secured) Plans
6(b)(1) Charges Imposed as Part of Open-End (Not Home-Secured) Plans
    Proposed Sec.  226.6(b)(1) would apply to all open-end plans except 
HELOCs subject to Sec.  226.5b. It retains TILA's general requirements 
for disclosing costs for open-end plans: Creditors would be required to 
continue to disclose the circumstances under which charges are imposed 
as part of the plan, including the amount of the charge (e.g., $3.00) 
or an explanation of how the charge is determined (e.g., 3 percent of 
the transaction amount). For finance charges, creditors must include a 
statement of when the finance charge begins to accrue and an 
explanation of whether or not a ``grace period'' or ``free-ride 
period'' exists (a period within which any credit that has been 
extended may be repaid without incurring the charge). Regulation Z 
generally refers to this period as a ``free-ride period.'' Since 1989, 
creditors have been required to use the term ``grace period'' in 
complying with disclosure requirements for credit and charge card 
applications and solicitations in Sec.  226.5a. 15 U.S.C. 
1632(c)(2)(C); current Sec.  226.5a(a)(2)(iii); 54 FR 13,856; April 6, 
1989. For consistency and the reasons set forth in the section-by-
section analysis to Sec.  226.6(b)(1), the Board would update 
references to ``free-ride period'' as ``grace period'' in the 
regulation and commentary, without any intended substantive change.
    Currently, the rules for disclosing costs related to open-end plans 
create two categories of charges covered by TILA: finance charges 
(Sec.  226.6(a)) and ``other charges'' (Sec.  226.6(b)). Under the 
proposal, the rules would create a single category of ``charges imposed 
as part of an open-end (not home-secured) plan'' as identified in 
proposed Sec.  226.6(b)(1)(i). This new section would identify a 
complete description of the types of charges that would be considered 
to be imposed as part of a plan. These charges include finance charges 
under Sec.  226.4(a) and (b), penalty charges, taxes, and charges for 
voluntary credit insurance, debt cancellation or debt suspension 
coverage.
    Charges to be disclosed would also include any charge the payment, 
or nonpayment, of which affects the consumer's access to the plan, 
duration of the plan, the amount of credit extended, the period for 
which credit is extended, and the timing or method of billing or 
payment. This proposed provision is intended to be broad but provide 
greater clarity than current rules and capture charges that relate to 
the key attributes of a credit plan. The proposed commentary would 
provide examples of charges covered by the provision, such as 
application fees and participation fees (which affect access to the 
plan), fees to expedite card delivery (which also affect access to the 
plan), and fees to expedite payment (which affect the timing and method 
of payment). See proposed comment 6(b)(1)(i)-2.
    Three examples of types of charges that are not imposed as part of 
the plan are listed in proposed Sec.  226.6(b)(1)(ii). These examples 
include charges imposed on a cardholder by an institution other than 
the card issuer for the use of the other institution's ATM; and charges 
for a package of services that includes an open-end credit feature, if 
the fee is required whether or not the open-end credit feature is 
included and the non-credit services are not merely incidental to the 
credit feature. Comment 6(b)(1)(ii)-1 provides examples of fees for 
packages of services that are considered to be imposed as part of the 
plan and fees for packages of services that are not. This comment is 
substantively identical to current comment 6(b)-1.v.
    The proposal would not completely eliminate ambiguity about what 
are TILA charges. To mitigate ambiguity, however, the proposal provides 
a complete list in new Sec.  226.6(b)(4) of which charges identified 
under Sec.  226.6(b)(1) must be disclosed in writing at account opening 
(or before they are increased or newly introduced). See proposed Sec.  
226.5(b)(1) and Sec.  226.9(c)(2) for timing rules. Any fees aside from 
those identified in proposed Sec.  226.6(b)(4) would not be required to 
be disclosed in writing at account opening. However, other charges 
imposed as part of an open-end (not home-secured) plan may be disclosed 
at account opening, or orally at any relevant time before the consumer 
agrees to or becomes obligated to pay the charge. This approach is 
intended in part to reduce creditor burden. Creditors presumably 
disclose fees at relevant times, such as when a consumer orders a 
service by telephone, for business reasons and to comply with other 
state and federal laws. Moreover, compared to the approach reflected in 
the current regulation, the proposed broad application of the statutory 
standard of fees ``imposed as part of the plan'' should make it easier 
for a creditor to determine whether a fee is a charge covered by TILA, 
and reduce litigation and liability risks. In addition, this approach 
will help ensure that consumers receive the information they need when 
it would be most helpful to them.
6(b)(2) Rules Relating to Rates for Open-End (Not Home-Secured) Plans
    Rules for disclosing rates that affect the amount of interest that 
will be imposed would be reorganized and consolidated in proposed Sec.  
226.6(b)(2). (See redesignation table below.)
6(b)(2)(i)
    Finance charges attributable to periodic rates. Currently, 
creditors must disclose finance charges attributable to periodic rates. 
These costs are typically interest but may include other costs such as 
premiums for required credit insurance. As discussed earlier, in 
consumer testing for the Board, participants understood credit costs in 
terms of interest and fees. The text of proposed Sec.  226.6(b)(2)(i) 
reflects the Board's intention to make the distinction between interest 
and fees clear.
    Balance computation methods. Proposed Sec.  226.6(b)(2)(i) sets 
forth rules relating to the disclosure of rates. Proposed Sec.  
226.6(b)(2)(i)(D) (currently Sec.  226.6(a)(3)) requires creditors to 
explain the method used to determine the balance to which rates apply. 
15 U.S.C. 1637(a)(2). Model Clauses that explain commonly used methods, 
such as the average daily balance method, are at Appendix G-1. The 
Board requests comment on whether model clauses for methods such as 
``adjusted balance'' and ``previous balance'' should be deleted as 
obsolete, and more broadly, whether G-1 should be eliminated entirely 
because creditors no longer use the model clauses.
    In the December 2004 ANPR, the Board sought comment on how 
significantly the choice of a balance computation method might affect 
consumers' cost of credit, and on possible ways to enhance the 
effectiveness of any required disclosure. Q28-Q30. Commenters 
acknowledged that balance computation methods can affect consumers' 
cost of credit but in

[[Page 32990]]

general would favor an approach that emphasizes other key cost terms 
instead of the details of balance computation methods. The Board 
concurs with these views.
    Calculating balances on open-end plans can be complex, and requires 
an understanding of how creditors allocate payments, assess fees, and 
record transactions as they occur during a billing cycle. Currently, 
neither TILA nor Regulation Z requires creditors to disclose all the 
information necessary to compute balances to which periodic rates are 
applied, and requiring that level of detail would not appear to benefit 
consumers because consumers are unlikely to review such detailed 
information. Although the Board's model clauses are intended to assist 
creditors in explaining common methods, consumers continue to find 
explanations in account agreements to be lengthy and complex, and are 
not understood. The proposal would require creditors to continue to 
explain the balance computation methods in the account-opening 
agreement, but the explanation would not be permitted in the account-
opening summary. As discussed below, along with the account-opening 
summary proposed in Sec.  226.6(b)(4), creditors would name the balance 
computation method and refer consumers to the account-opening 
disclosures for an explanation of the balance computation method.
6(b)(2)(ii)
    New Sec.  226.6(b)(2)(ii) would set forth the rules for variable-
rate disclosures now contained in footnote 12. In addition, guidance on 
the accuracy of variable rates provided at account opening would be 
moved from the commentary to the regulation, and revised. Currently, 
comment 6(a)(2)-3 provides that creditors may provide the current rate, 
a rate as of a specified date if the rate is updated from time to time, 
or an estimated rate under Sec.  226.5(c). The Board proposes an 
accuracy standard that is consistent with the Board's 2007 Electronic 
Disclosure Proposal; that is, the rate disclosed is accurate if it was 
in effect as of a specified date within 30 days before the disclosures 
are provided. See 72 FR 21,1141; April, 30, 2007. The proposal would 
eliminate creditors' option to provide an estimate as the rate in 
effect for a variable-rate account. The Board believes creditors are 
provided with sufficient flexibility under the proposal to provide a 
rate as of a specified date, so the use of an estimate would not be 
appropriate. New proposed comment 6(b)(2)(ii)-5, which addresses 
discounted variable-rate plans and is substantively unchanged from 
current comment 6(a)(2)-10, contains technical revisions.
    The Board also proposes to require that, in describing how a 
variable rate is determined, creditors must disclose the applicable 
margin, if any. See proposed Sec.  226.6(b)(2)(ii)(B). Creditors state 
the margin for purposes of contract or other law and are currently 
required to disclose margins related to penalty rates, if applicable. 
No particular format requirements would apply. Thus, the Board does not 
expect the revision would add burden.
6(b)(2)(iii)
    New Sec.  226.6(b)(2)(iii) would consolidate existing rules for 
rate changes that are specifically set forth in the account agreement 
but are not due to changes in an index or formula, such as rules for 
disclosing introductory and penalty rates. In addition to identifying 
the circumstances under which a rate may change (such as the end of an 
introductory period or a late payment), creditors would be required to 
disclose how existing balances would be affected by the new rate. The 
proposed change is intended to improve consumer understanding as to 
whether a penalty rate triggered by, for example, a late payment would 
apply not only to outstanding balances for purchases but to existing 
balances that were transferred at a low promotional rate. If the 
increase in rate is due to an increased margin, creditors must disclose 
the increase; the highest margin can be stated if more than one might 
apply. See proposed comment 6(b)(2)(iii)-2.
6(b)(3) Voluntary Credit Insurance; Debt Cancellation or Suspension
    As discussed in the section-by-section analysis to Sec.  226.4, the 
Board is proposing revisions to the requirements to exclude charges for 
voluntary credit insurance or debt cancellation or debt suspension 
coverage from the finance charge. See proposed Sec.  226.4(d). 
Creditors must provide information about the voluntary nature and cost 
of the credit insurance or debt cancellation or suspension product, and 
about the nature of coverage for debt suspension products. Because 
creditors must obtain the consumer's affirmative request for the 
product as a part of the disclosure requirements, the Board expects the 
disclosures proposed under Sec.  226.4(d) will be provided at the time 
the product is offered to the consumer. Thus, consumers may receive the 
disclosures at the time they open an open-end account, or earlier in 
time, such as at application.
6(b)(4) Tabular Format Requirements for Open-End (Not Home-Secured) 
Plans
    Proposed Sec.  226.6(b)(4) would introduce format requirements for 
account-opening disclosures for open-end (not home-secured) plans. The 
proposed summary of account-opening disclosures is based on the format 
and content requirements for the tabular disclosures provided with 
direct mail applications for credit and charge cards under Sec.  
226.5a, as it would be revised under the proposal. Proposed forms under 
G-17 in Appendix G illustrate the account-opening tables. As proposed, 
comment 6(b)(4)-1 would refer generally to guidance in Sec.  226.5a 
regarding format and disclosure requirements for the application and 
solicitation table. For clarity, rules under Sec.  226.5a that do not 
apply to account-opening disclosures are specifically noted. Comment is 
requested on this approach, or whether importing essentially identical 
guidance from Sec.  226.5a to Sec.  226.6 would ease compliance.
    Rates. Proposed Sec.  226.6(b)(4)(ii) sets forth disclosure 
requirements for rates that would apply to accounts. Periodic rates and 
index and margin values would not be permitted to be disclosed in the 
table, for the same reasons underlying, and consistent with, the 
proposed requirements for the table provided with credit card 
applications and solicitations. See comment 6(b)(4)(ii)-1. Creditors 
would continue to disclose periodic rates, and index and margin values 
as part of the account opening disclosures, and these could be provided 
in the credit agreement, as is likely currently the case.
    The rate disclosures required for the account-opening table differ 
from those required for the table provided with credit card 
applications and solicitations. For applications and solicitations, 
creditors may provide a range of APRs or specific APRs that may apply, 
where the APR is based on a later determination of the consumer's 
creditworthiness. At account opening, creditors must disclose the 
specific APRs that will apply to the account.
    Fees. Fees that would be highlighted in the account-opening summary 
are identified in Sec.  226.6(b)(4)(iii). The Board believes that these 
fees, among the charges that TILA covers, are the most important fees, 
at least in the current marketplace, for consumers to know about before 
they start to use an account. They include charges that the consumer 
could incur without creditors otherwise being able to disclose the cost 
in advance of the consumers' act that triggers the cost, such as fees 
triggered

[[Page 32991]]

by a consumer's use of a cash advance check or by a consumers' late 
payment. Transaction fees imposed for transactions in a feign currency 
or that take place in a foreign country would be among the fees 
disclosed at account opening, though the Board is not proposing to 
require that foreign transaction fees be disclosed in the table 
provided with credit card applications and solicitations. See section-
by-section analysis to Sec.  226.5a(b)(4). Although consumer testing 
for the Board indicated that consumers do not choose to apply for a 
card based on foreign transaction fees, the Board believes highlighting 
the fee may be useful for some consumers before they obtain credit on 
the account.
    The Board intends this list of fees to be exclusive, for two 
reasons. An exclusive list eases compliance and reduces the risk of 
litigation; creditors have the certainty of knowing that as new 
services (and associated fees) develop, the new fees need not be 
highlighted in the account-opening summary unless and until the Board 
requires their disclosure after notice and public comment. And as 
discussed in the section-by-section analysis to Sec.  226.5(a)(1) and 
Sec.  226.5(b)(1), charges required to be highlighted under new Sec.  
226.6(b)(4) would have to be provided in a written and retainable form 
before the first transaction and before being increased or newly 
introduced. Creditors would have more flexibility regarding disclosure 
of other charges imposed as part of an open-end (not home-secured) 
plan.
    The exclusive list of fees also benefits consumers. The list 
focuses on fees consumer testing conducted for the Board showed to be 
most important to consumers. The list is manageable and focuses on key 
information rather than attempting to be comprehensive. Since all fees 
imposed as part of the plan must be disclosed before the cost is 
incurred, not all fees need to be included in the table.
    The Board notes that if the amount of a fee such as a late-payment 
fee or balance transfer fee varies from state to state, for disclosures 
required to be provided with credit card applications and 
solicitations, card issuers may disclose a range of fees and a 
statement that the amount of the fee varies from state to state. See 
existing Sec.  226.5a(a)(5), renumbered as new Sec.  226.5a(a)(4). A 
goal of the proposed account-opening summary table is to provide to a 
consumer with key information about the terms of the account. 
Permitting creditors to disclose a range of fees seems not to meet that 
standard. Nonetheless, the Board solicits comment on whether there are 
any operational issues presented by the proposed rule to disclose fees 
applicable to the consumer's account in the account-opening summary 
table, and if so, suggested solutions.
    Grace period. Under TILA, creditors providing disclosures with 
applications and solicitations must discuss grace periods on purchases; 
at account opening, creditor must explain grace periods more generally. 
15 U.S.C. 1637(c)(1)(A)(iii); 15 U.S.C. 1637(a)(1). Under proposed 
Sec.  226.6(b)(4)(iv), creditors would state for all balances on the 
account, whether or not a period exists in which consumers may avoid 
the imposition of finance charges, and if so, the length of the period.
    Required insurance, debt cancellation or debt suspension. For the 
reasons discussed in the section-by-section analysis to Sec.  
226.5a(b)(14), as permitted by applicable law, creditors that require 
credit insurance, or debt cancellation or debt suspension coverage, as 
part of the plan would be required to disclose the cost of the product 
and a reference to the location where more information about the 
product can be found with the account-opening materials, as applicable. 
See proposed Sec.  226.6(b)(4)(v).
    Payment allocation. In the December 2004 ANPR, the Board asked 
about creditors' payment allocation methods, how the methods are 
typically disclosed, and whether additional disclosures about payment 
allocation should be required. Q34-Q36. Responses suggest that in 
general, creditors tend to apply consumers' payments to satisfy low-
rate balances first, but that payment allocation methods vary. The 
timing and detail of disclosures also vary. Some card issuers disclose 
their payment allocation policies in materials accompanying credit card 
applications, while others provide information as part of the account 
agreement. Descriptions of payment allocation are typically general.
    The Board proposes in Sec.  226.6(b)(4)(vi) to require creditors to 
disclose, if applicable, the information proposed to be required with 
credit card applications and solicitations regarding how payments will 
be allocated if the consumer transfers balances at a low rate and then 
makes purchases on the account. The Board believes the information is 
useful to the consumer, although perhaps more so at the time of 
application when consumers may establish an account to take advantage 
of a promotional balance transfer rate. Because the Board is proposing 
to allow the account-opening table to substitute for the table given 
with an application or solicitation, the Board proposes also to include 
the payment allocation disclosure in the account-opening summary, to 
ensure that consumers receive this information, if applicable, at the 
time of application or solicitation.
    Available credit. For the reasons discussed under Sec.  
226.5a(b)(16), the Board proposes a disclosure targeted at subprime 
card accounts that assess substantial fees at account opening and leave 
consumers with a limited amount of available credit. Proposed Sec.  
226.6(b)(4)(vii) would require creditors to disclose in the account-
opening table the disclosures required under Sec.  226.5a(b)(16). The 
proposed requirements would apply to creditors that require fees for 
the availability or issuance of credit, or a security deposit, that 
equals 25 percent or more of the minimum credit limit offered on the 
account. If that threshold is met, card issuers must disclose in the 
table an example of the amount of available credit the consumer would 
have after the fees or security deposit are debited to the account, 
assuming the consumer receives the minimum credit limit.
    Web site reference. For the reasons stated under Sec.  
226.5a(b)(17), credit card issuers would be required under proposed 
Sec.  226.6(b)(4)(viii) to provide a reference to the Board's Web site 
for additional information about shopping for and using credit card 
accounts.
    Balance computation methods. TILA requires creditors to explain as 
part of the account-opening disclosures the method used to determine 
the balance to which rates are applied. 15 U.S.C. 1637(a)(2). 
Explaining balance computation methods in the account-opening table may 
not benefit consumers, because the explanations can be lengthy and 
complex, and consumer testing indicates the explanations are not 
understood. Including an explanation in the table also may undermine 
the goal of presenting essential information in a simplified way. 
Nonetheless, some balance computation methods are more favorable to 
consumers than others, and the Board believes it is appropriate to 
highlight the method used, if not the technical computation details. 
For those reasons, the Board proposes that the name of balance 
computation methods used be disclosed beneath the table, along with a 
statement that an explanation of the method is provided in the account 
agreement or disclosure statement. See proposed Sec.  226.6(b)(4)(ix). 
To determine the name of the balance computation method to be 
disclosed, creditors would refer to Sec.  226.5a(g) for a list of 
commonly-used

[[Page 32992]]

methods; if the method used is not among those identified, creditors 
would provide a brief explanation in place of the name.
    Billing error rights reference. All creditors offering open-end 
plans must provide notices of billing rights at account opening. See 
current Sec.  226.6(d); proposed Sec.  226.6(c)(2). This information is 
important, but lengthy. The Board proposes to draw consumers' attention 
to the notices by requiring a statement that information about billing 
rights and how to exercise them is provided in the account-opening 
disclosures. See proposed Sec.  226.6(b)(4)(x). The statement, along 
with the name of the balance computation method, would be located 
directly below the table.
6(c) Rules of General Applicability
6(c)(1) Security Interests
    Comments to proposed Sec.  226.6(c)(1) (current Sec.  226.6(c)) are 
revised for clarity, without any substantive change. &
6(c)(2) Statement of Billing Rights
    Creditors offering open-end plans must provide information to 
consumers at account opening about consumers' billing rights under 
TILA, in the form prescribed by the Board. 15 U.S.C. 1637(a)(7). This 
requirement is implemented in the Board's Model Form G-3. The Board is 
proposing revisions to Model Form G-3, proposed as G-3(A). The proposed 
revisions are not based on consumer testing, although design techniques 
and changes in terminology are proposed to improve consumer 
understanding of TILA's billing rights. Creditors offering HELOCs 
subject to Sec.  226.5b could continue to use current Model Form G-3, 
or proposed G-3(A), at the creditor's option.

Section 226.7 Periodic Statement

    TILA Section 127(b), implemented in Sec.  226.7, identifies 
information about an open-end account that must be disclosed when a 
creditor is required to provide periodic statements. 15 U.S.C. 1637(b).
    Home-equity lines of credit. Periodic statement disclosure and 
format requirements for home-equity lines of credit (HELOCs) subject to 
Sec.  226.5b would be unaffected by the proposal, consistent with the 
Board's plan to review Regulation Z's disclosure rules for home-secured 
credit in a separate rulemaking. To facilitate compliance, the 
substantively unrevised rules applicable only to HELOCs are grouped 
together in proposed Sec.  226.7(a). (See redesignation table below.)
    Open-end (not home-secured) plans. The Board proposes a number of 
significant revisions to periodic statement disclosures for open-end 
(not home-secured) plans. These rules are grouped together in proposed 
Sec.  226.7(b). First, interest and fees imposed as part of the plan 
during the statement period would be disclosed in a simpler manner and 
in a consistent location. Second, the Board is proposing for comment 
two alternative approaches to disclose the effective APR: The first 
approach would try to improve consumer understanding of this rate and 
reduce creditor uncertainty about its computation. The second approach 
would eliminate the requirement to disclose the effective APR. Third, 
if an advance notice of changed rates or terms is provided on or with a 
periodic statement, a summary of the change would be required on the 
front of the periodic statement. Model clauses would illustrate the 
proposed revisions, to facilitate compliance. In addition, the Board 
proposes to add new paragraphs Sec.  226.7(b)(11) and (12) to implement 
disclosures regarding late-payment fees and the effects of making 
minimum payments in Section 1305(a) and 1301(a) of the Bankruptcy Act 
(further discussed below). TILA Section 127(b)(11) and (12); 15 U.S.C. 
1637(b)(11) and (12).
    A number of technical revisions are made for clarity. For the 
reasons set forth in the section-by-section analysis to Sec.  
226.6(b)(1), the Board would update references to ``free-ride period'' 
as ``grace period'' in the regulation and commentary, without any 
intended substantive change. Current comment 7-2, which addresses open-
end plans involving more than one creditor, would be deleted as 
obsolete and unnecessary.
    Format requirements for periodic statements. TILA and Regulation Z 
contain few formatting requirements for periodic statement disclosures. 
In the December 2004 ANPR, the Board noted that some information about 
past account activity also may be useful to consumers in making future 
decisions concerning the plan. The Board sought comment on possible 
ways to format information to improve the effectiveness of periodic 
statement disclosures, including proximity requirements or grouping of 
terms or fees. Q4-Q6.
    Commenters' views were mixed. Industry commenters generally opposed 
mandating specific format requirements. They suggested that consumers 
are not confused by basic information conveyed on periodic statements, 
and that mandated format requirements would be expensive to implement 
and could stifle creditors' ability to tailor statements to specific 
products. Some of these commenters suggested that grouping of terms or 
fees might be helpful, but cautioned against a total of fees that would 
not differentiate interest from other charges such as penalty fees 
(late or over-the-credit-limit, for example). Some consumer group 
commenters suggested importing format requirements similar to the 
tabular disclosures for credit card applications and solicitations.
    Consumer testing conducted for the Board has shown that targeted 
proximity requirements on periodic statements tend to improve the 
effectiveness of cost disclosures for consumers. For the reasons 
discussed below, the Board proposes several proximity requirements. For 
example, the proposal would link by proximity the payment due date with 
the late payment fee and penalty rate that could be triggered by an 
untimely payment. The minimum payment amount also would be linked by 
proximity with the new warning required by the Bankruptcy Act about the 
effects of making such payments on the account. The Board believes 
grouping these disclosures together would enhance consumers' informed 
use of credit.
    To ensure consumers are alerted to rate increases and other changes 
that increase the cost of using their account, a summary of key rate 
and term changes would precede the transactions when an advance notice 
of a change in term or rate accompanies a periodic statement. 
Transactions would be grouped by type, and fee and interest charge 
totals would be located with the transactions. Participants in the 
consumer testing conducted for the Board tended to review their 
transactions and to notice fees and interest charges when placed there. 
The Board notes that some financial institutions presently group 
transactions by type. Form G-18(A) would illustrate these requirements.
    The Board is publishing for the first time forms illustrating front 
sides of a periodic statement. The Board is publishing forms G-18(G) 
and G-18(H) to illustrate how a periodic statement might be designed to 
comply with the requirements of Sec.  226.7. Forms G-18(G) and G-18(H) 
contain some additional disclosures that are not required by Regulation 
Z. The forms also present information in some additional formats that 
are not required by Regulation Z. The Board is publishing the front 
side of a statement form as a compliance aid.
    Consumer testing for the Board indicates that the effectiveness of 
periodic statement disclosures is improved when certain information is 
grouped together. The Board seeks comment on any alternative approaches 
that would provide creditors more flexibility in grouping related

[[Page 32993]]

information together on the periodic statement.
7(a) Rules Affecting Home-Equity Plans
    For HELOCs, creditors are required to comply with the disclosure 
requirements under proposed Sec.  226.7(a)(1) through (10), including 
existing rules and guidance regarding the disclosure of finance charges 
and other charges, which would be combined in a new Sec.  226.7(a)(6). 
These rules and accompanying commentary are substantively unchanged 
from current Sec.  226.7(a) through (k). Proposed Sec.  226.7(a) also 
provides that at their option, creditors offering HELOCs may comply 
with the requirements of Sec.  226.7(b). The Board understands that 
some creditors may use a single processing system to generate periodic 
statements for all open-end products they offer, including HELOCs. 
These creditors would have the option to generate statements according 
to a single set of rules.
    In technical revisions, the substance of footnotes referenced in 
Sec.  226.7(d) is moved to proposed Sec.  226.7(a)(4) and comment 
7(a)(4)-6.
7(a)(7) Annual Percentage Rate
    The Board is proposing two alternative approaches to address 
concerns about the effective APR. These approaches are discussed in 
detail in the section-by-section analysis to proposed Sec.  
226.7(b)(7). The first approach seeks to improve the effective APR. For 
HELOCs subject to Sec.  226.5b, creditors would have an option to 
comply with the new rules or continue to comply with the current rules 
applicable to the effective APR. This is intended as a temporary 
measure until the Board reviews comprehensively the rules for HELOCs 
subject to Sec.  226.5b. The second approach would eliminate the 
requirement to disclose the effective APR; thus, under this approach, 
the effective APR would be optional for HELOC creditors pending the 
Board's review of home-secured disclosure rules.
7(b) Rules Affecting Open-End (Not Home-Secured) Plans
    Current comment 7-3 provides guidance on various periodic statement 
disclosures for deferred-payment transactions, such as when a consumer 
may avoid interest charges if a purchase balance is paid in full by a 
certain date. Under the proposal, the substance of comment 7-3, revised 
to conform to other proposed revisions in Sec.  226.7(b), is proposed 
as comment 7(b)-1. The Board believes the guidance is unnecessary for 
HELOCs.
7(b)(2) Identification of Transactions
    Proposed Sec.  226.7(b)(2) requires creditors to identify 
transactions in accordance with rules set forth in Sec.  226.8. The 
Board proposes to revise and significantly simplify those rules, as 
discussed in the section-by-section analysis relating to Sec.  226.8 
below.
    The Board would introduce a format requirement to group 
transactions by type, such as purchases and cash advances. In consumer 
testing conducted for the Board, participants found such groupings 
helpful. Moreover, consumers noticed fees and interest charges more 
readily when transactions were grouped together, the fees imposed for 
the statement period were not interspersed among the transactions, and 
the interest and fees were disclosed in proximity to the transactions. 
Comment 7(b)(2)-1 would reflect the new requirement. Sample G-18(A) 
would illustrate the proposal.
7(b)(3) Credits
    Creditors are required to disclose any credits to the account 
during the billing cycle. Creditors typically disclose credits among 
other transactions. The Board proposes no substantive changes to the 
disclosure requirements for credits. However, consistent with the 
format requirements proposed in Sec.  226.7(b)(2), the proposal would 
require credits and payments to be grouped together. Consumers who 
participated in testing conducted for the Board consistently identified 
credits as statement information they review each month, and favored a 
separation of credits and payments among the transactions.
    Current comment 7(c)-2, which permits creditors to commingle 
credits related to extensions of credit and credits related to non-
credit accounts, such as a deposit account, is not proposed under new 
Sec.  226.7(b)(3). The Board solicits comment on the need for 
alternatives to the proposed format requirements to segregate 
transactions and credit, such as when a depository institution provides 
on a single periodic statement account activity for a consumer's 
checking account and an overdraft line of credit. Sample G-18(A) would 
illustrate the proposal. Comment 7(b)(3)-3, as renumbered, is revised 
for clarity.
7(b)(4) Periodic Rates
    Periodic rates. TILA Section 127(b)(5) and current Sec.  226.7(d) 
require creditors to disclose all periodic rates that may be used to 
compute the finance charge, and an APR that corresponds to the periodic 
rate multiplied by the number of periods in the years. 15 U.S.C. 
1637(b)(5); Sec.  226.14(b). The Board is proposing to eliminate, for 
open-end (not home-secured) plans, the requirement to disclose periodic 
rates on periodic statements.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes that proposing the exemption is appropriate. 
In consumer testing conducted for the Board, consumers indicated they 
do not use periodic rates to verify interest charges. Consistent with 
the Board's proposal to not allow periodic rates to be disclosed in the 
tabular summary on or with credit card applications and disclosures, 
the Board believes that requiring periodic rates to be disclosed on 
periodic statements may distract from more important information on the 
statement, and contribute to information overload. The proposal to 
eliminate periodic rates from the periodic statement therefore has the 
potential to better inform consumers and further the goals of consumer 
protection and the

[[Page 32994]]

informed use of credit for open-end (not home-secured) credit. The 
Board welcomes comment on this matter.
    Labeling APRs. Currently creditors are provided with considerable 
flexibility in identifying the APR that corresponds to the periodic 
rate. Current comment 7(d)-4 permits labels such as ``corresponding 
annual percentage rate,'' ``nominal annual percentage rate,'' or 
``corresponding nominal annual percentage rate.'' To promote 
uniformity, creditors offering open-end (not home-secured) plans would 
be required to label the annual percentage rate disclosed under 
proposed Sec.  226.7(b)(4) as ``annual percentage rate.'' In 
combination with the Board's proposed approach to improve consumers' 
understanding of the effective APR discussed in the section-by-section 
analysis to proposed Sec.  226.7(b)(7), it is important that the 
``interest only'' APR be uniformly distinguishable from the effective 
APR that includes interest and fees. Forms G-18(G) and G-18(H) 
illustrate periodic statements that disclose an APR but no periodic 
rates.
    Rates that ``may be used.'' Currently, comment 7(d)-1 interprets 
the requirement to disclose all periodic rates that ``may be used'' to 
mean ``whether or not [the rate] is applied during the cycle.'' For 
example, rates on cash advances must be disclosed on all periodic 
statements, even for billing periods with no cash advance activity or 
balances. The regulation and commentary do not clearly state whether 
promotional rates, such as those offered for using checks accessing 
credit card accounts, that ``may be used'' should be disclosed under 
current Sec.  226.7(d) regardless of whether they are imposed during 
the period. See current comment 7(d)-2. The Board is proposing a 
limited exception to TILA Section 127(b)(5) to effectuate the purposes 
of TILA to require disclosures that are meaningful and to facilitate 
compliance.
    Under the proposal, creditors would be required to disclose 
promotional rates only if the rate actually applied during the billing 
period. See proposed Sec.  226.7(b)(4)(ii). For example, a card issuer 
may impose a 22 percent APR for cash advances but offer for a limited 
time a 1.99 percent promotional APR for advances obtained through the 
use of a check accessing a credit card account. Creditors are currently 
required to disclose, in this example, the 22 percent cash advance APR 
on periodic statements whether or not the consumer obtains a cash 
advance during the previous statement period. The proposal would make 
clear that creditors are not required to disclose the 1.99 percent 
promotional APR unless the consumer used the check during the statement 
period. The Board believes that interpreting TILA to require the 
disclosure of all promotional rates would be operationally burdensome 
for creditors and result in information overload for consumers. The 
proposed exception would not apply to HELOCs covered by Sec.  226.5b. 
The Board requests comment on whether the class of transactions under 
the proposed exceptions should be tailored more broadly to include 
HELOCs subject to Sec.  226.5b, and if so, why.
    Combining interest and other charges. Currently, creditors must 
disclose finance charges attributable to periodic rates. These costs 
are typically interest but may include other costs such as premiums for 
required credit insurance. If applied to the same balance, creditors 
may disclose each rate, or a combined rate. See current comment 7(d)-3. 
As discussed earlier, consumer testing for the Board indicates that 
participants appeared to understand credit costs in terms of 
``interest'' and ``fees,'' and the proposal would require disclosures 
to distinguish between interest and fees. To the extent consumers 
associate periodic rates with ``interest,'' it seems unhelpful to 
consumers' understanding to permit creditors to include periodic rate 
charges other than interest into the dollar cost disclosed. Thus, 
guidance about combining periodic rates attributable to interest and 
other finance charges would be retained for HELOCs in proposed comment 
7(a)(4)-3, but would be eliminated for open-end (not home-secured) 
plans.
    A new comment 7(b)(4)-7 would be added to provide guidance to 
creditors when a fee is imposed, remains unpaid, and accrues interest 
on the unpaid balance. The comment provides that creditors disclosing 
fees in accordance with the format requirements of Sec.  226.7(b)(6) 
need not separately disclose which periodic rate applies to the unpaid 
fee balance.
    In technical revisions, the substance of footnotes referenced in 
Sec.  226.7(d) is moved to the regulation and comment 7(b)(4)-5.
7(b)(5) Balance on which Finance Charge is Computed
    Creditors must disclose the amount of the balance to which a 
periodic rate was applied and an explanation of how the balance was 
determined. The Board provides model clauses creditors may use to 
explain common balance computation methods. 15 U.S.C. 1637(b)(7); 
current Sec.  226.7(e); Model Clauses G-1, Appendix G. The staff 
commentary to current Sec.  226.7(e) interprets how creditors may 
comply with TILA in disclosing the ``balance,'' which typically changes 
in amount throughout the cycle, on periodic statements.
    Amount of balance. The proposal does not change how creditors are 
required to disclose the amount of the balance on which finance charges 
are computed. It would, however, permit creditors, at their option, not 
to include an explanation of how the finance charge may be verified for 
creditors that use a daily balance method. Currently, creditors that 
use a daily balance method are permitted to disclose an average daily 
balance for the period, provided they explain that the amount of the 
finance charge can be verified by multiplying the average daily balance 
by the number of days in the statement period, and then applying the 
periodic rate. The Board would retain the rule permitting creditors to 
disclose an average daily balance but would eliminate the requirement 
to provide the explanation. Consumer testing conducted for the Board 
suggests that the explanation may not be used by consumers as an aid to 
calculate their interest charges. Participants suggested that if they 
attempted without satisfaction to calculate balances and verify 
interest charges based on information on the periodic statement, they 
would call the creditor for assistance.
    The section-by-section analysis to Sec.  226.7(b)(6) discusses 
proposed revisions intended to further consumers' understanding of 
interest charges, as distinguished from fees. To complement those 
proposed revisions, the Board would require creditors to refer to the 
balance as ``balances subject to interest rate,'' for consistency. 
Forms G-18(G) and 18(H) illustrate this format requirement. For the 
reasons discussed regarding guidance on disclosing periodic rates, 
guidance about disclosing balances to which periodic rates attributable 
to interest and other finance charges are applied would be retained for 
HELOCs in proposed comment 7(a)(5)-1, but would be eliminated for open-
end (not home-secured) plans.
    Explanation of balance computation method. The Board is proposing 
an alternative to providing an explanation of how the balance was 
determined. Under the proposal, a creditor that uses a balance 
computation method identified in Sec.  226.5a(g) has two options. The 
creditor may: (1) Provide an explanation, as the rule currently 
requires, or (2) identify the name of the balance computation method 
and

[[Page 32995]]

provide a toll-free telephone number where consumers may obtain more 
information from the creditor about how the balance is computed and 
resulting finance charges are determined. If the creditor uses a 
balance computation method that is not identified in Sec.  226.5a(g), 
the creditor would provide a brief explanation of the method. The 
Board's proposal is guided by the following factors.
    Calculating balances on open-end plans can be complex, and requires 
an understanding of how creditors allocate payments, assess fees, and 
record transactions as they occur during the cycle. Currently, neither 
TILA nor Regulation Z requires creditors to disclose on periodic 
statements all the information necessary to compute a balance, and 
requiring that level of detail appears not to be warranted. Although 
the Board's model clauses are intended to assist creditors in 
explaining common methods, consumers continue to find these 
explanations lengthy and complex. As stated earlier, consumer testing 
indicates that consumers call the creditor for assistance when they 
attempt without satisfaction to calculate balances and verify interest 
charges.
    The Board believes that providing the name of the balance 
computation method (or a brief explanation, if the name is not 
identified in Sec.  226.5a(g)), along with a reference to where 
additional information may be obtained provides essential information 
in a simplified way, and in a manner consistent with how consumers 
obtain further balance computation information. The proposal is 
consistent with the views of some commenters who responded to the 
December 2004 ANPR and suggested that the Board simplify some of the 
more complex disclosures not used by most consumers. Current comment 
7(e)-6, which refers creditors to guidance in Sec.  226.6 about 
disclosing balance computation methods would be deleted as unnecessary.
7(b)(6) Charges Imposed
    As discussed in the section-by-section analysis to Sec.  226.6, the 
Board proposes to reform cost disclosure rules for open-end (not home-
secured) plans, in part, to ensure that all charges assessed as part of 
an open-end (not home-secured) plan are disclosed before they are 
imposed and to simplify the rules for creditors to identify such 
charges. Consistent with the proposed revisions at account opening, the 
proposed revisions to cost disclosures on periodic statements are 
intended to simplify how creditors identify the dollar amount of 
charges imposed during the statement period.
    Consumer testing conducted for the Board indicates that most 
participants reviewing mock periodic statements could not correctly 
explain the term ``finance charge.'' The proposed revisions are 
intended to conform labels of charges more closely to common 
understanding, ``interest'' and ``fees.'' Format requirements would 
also help ensure that consumers notice charges imposed during the 
statement period.
    Two alternatives are proposed: One addresses interest and fees in 
the context of an effective APR disclosure, the second assumes no 
effective APR is disclosed.
    Charges imposed as part of the plan. Proposed Sec.  226.7(b)(6) 
would require creditors to disclose the amount of any charge imposed as 
part of an open-end (not home-secured) plan, as stated in Sec.  
226.6(b)(1). Guidance on which charges are deemed to be imposed as part 
of the plan is in proposed Sec.  226.6(b)(1) and accompanying 
commentary. Although coverage of charges would be broader under the 
proposed standard of ``charges imposed as part of the plan'' than under 
current standards for finance charges and other charges, the Board 
understands that creditors have been disclosing on the statement all 
charges debited to the account regardless of whether they are now 
defined as ``finance charges,'' ``other charges,'' or charges that do 
not fall into either category. Accordingly, the Board understands that 
creditors already disclose all charges that would be considered 
``imposed as part of the plan,'' and it does not expect this proposed 
change to affect significantly the disclosure of charges on the 
periodic statement.
    Interest charges and fees. For creditors complying with the new 
proposed cost disclosure requirements, the current requirement in Sec.  
226.7(f) to label finance charges as such would be eliminated. See 
current Sec.  226.7(f). Testing of this term with consumers found that 
it did not help them to understand charges. Instead, charges imposed as 
part of an open-end (not home-secured) plan would be disclosed under 
the labels of ``interest charges'' and ``fees.'' Consumer testing 
supplies evidence that consumers may generally understand interest as 
the cost of borrowing money over time and characterize other costs--
regardless of their characterization under TILA and Regulation Z--as 
fees (other than interest). The Board's proposal is consistent with 
this evidence.
    TILA Section 127(b)(4) requires creditors to disclose on periodic 
statements the amount of any finance charge added to the account during 
the period, itemized to show amounts due to the application of periodic 
rates and the amount imposed as a fixed or minimum charge. 15 U.S.C. 
1637(b)(4). This requirement is currently implemented in Sec.  
226.7(f), and creditors are given considerable flexibility regarding 
totaling or subtotaling finance charges attributable to periodic rates 
and other fees. See current Sec.  226.7(f) and comments 7(f)-1, -2, and 
-3. To improve uniformity and promote the informed use of credit, 
creditors would be required under proposed Sec.  226.7(b)(6)(ii) to 
itemize finance charges attributable to interest, by type of 
transaction labeled as such, and would be required to disclose, for the 
statement period, a total interest charge, labeled as such. Although 
creditors are not currently required to itemize interest charges by 
transaction type, creditors often do so. For example, creditors may 
disclose the dollar interest costs associated with cash advance and 
purchase balances. Based on consumer testing, the Board believes 
consumers' ability to make informed decisions about the future use of 
their open-end plans--primarily credit card accounts--may be promoted 
by a simply-labeled breakdown of the current interest cost of carrying 
a purchase or cash advance balance. The breakdown would enable 
consumers to better understand the cost for using each type of 
transaction, and uniformity among periodic statements would allow 
consumers to compare one account with other open-end plans the consumer 
may have. Under the proposal, finance charges attributable to periodic 
rates other than interest charges, such as required credit insurance 
premiums, would be identified as fees and would no longer be permitted 
to be combined with interest costs. See proposed comment 7(b)(4)-3.
    Current Sec.  226.7(h) requires the disclosure of ``other charges'' 
parallel to the requirement in TILA Section 127(a)(5) and current Sec.  
226.6(b) to disclose such charges at account opening. 15 U.S.C. 
1637(a)(5). Consistent with current rules to disclose ``other 
charges,'' revised Sec.  226.7(b)(6)(iii) would require that other 
costs be identified consistent with the feature or type, and itemized. 
The proposal differs from current requirements in the following 
respect: fees would be required to be grouped together and a total of 
all fees for the statement period would be required. Currently, 
creditors typically include fees among other transactions identified

[[Page 32996]]

under Sec.  226.7(b). In consumer testing, consumers were able to more 
accurately and easily determine the total cost of non-interest charges 
when fees were grouped together and a total of fees was given than when 
fees were scattered among the transactions without a total. (Section 
226.7(b)(6)(iii) also would require that certain fees that are included 
in the computation of the effective APR pursuant to Sec.  226.14 must 
be labeled either as ``transaction fees'' or ``fixed fees.'' This 
proposed requirement is discussed in further detail in the section-by-
section analysis to Sec.  226.7(b)(7).)
    To highlight the overall cost of the credit account to consumers, 
creditors would disclose the total amount of interest charges and fees 
for the statement period and calendar year to date. Participants in 
consumer testing conducted for the Board noticed the year-to-date cost 
figures and indicated they would find the numbers helpful in making 
future financial decisions. The Board believes that disclosure of year-
to-date totals would better inform consumers about the cumulative cost 
of their credit plans over a significant period of time. Comment 
7(b)(6)-3 would provide guidance on how creditors may disclose the year 
to date totals at the end of a calendar year.
    Proposed Sec.  226.7(b)(6)(iv) in Alternative 1 contains 
requirements for calculating and disclosing totals for interest and 
certain fees in connection with the disclosure of the effective APR 
pursuant to Sec.  226.7(b)(7). These requirements are in addition to 
the total interest and fee disclosures disclosed in proximity to 
transactions, and are discussed in further detail in the section-by-
section analysis to Sec.  226.7(b)(7).
    Format requirements. In consumer testing, consumers consistently 
reviewed transactions identified on their periodic statements and 
noticed fees and interest charges, itemized and totaled, when they were 
grouped together with transactions. Some creditors also disclose these 
costs in account summaries or in a progression of figures associated 
with disclosing finance charges attributable to periodic rates. The 
proposal would not affect creditors' flexibility to provide this 
information in such summaries. See Forms G-18(G) and G-18(H), which 
illustrate, but do not require, such summaries. However, the Board 
believes TILA's purpose to promote the informed use of credit would be 
furthered significantly if consumers are uniformly provided, in a 
location they routinely review, basic cost information--interest and 
fees--that enables consumers to compare costs among their open-end 
plans. The Board proposes that charges required to be disclosed under 
Sec.  226.7(b)(6)(i) would be grouped together with the transactions 
identified under Sec.  226.7(b)(2), substantially similar to Sample G-
18(A) in Appendix G. Proposed Sec.  226.7(b)(6)(iii) would require non-
interest fees to be itemized and grouped together, and a total of fees 
would be disclosed for the statement period and calendar year to date. 
Interest charges would be itemized by type of transaction, grouped 
together, and a total of interest charges would be disclosed for the 
statement period and year to date. Sample G-18(A) in Appendix G 
illustrates the proposal.
7(b)(7) Effective Annual Percentage Rate
    TILA Section 127(b)(6) requires disclosure of an APR calculated as 
the quotient of the total finance charge for the period to which the 
charge relates divided by the amount on which the finance charge is 
based, multiplied by the number of periods in the year. 15 U.S.C. 
1637(b)(6). This rate has come to be known as the ``historical APR'' or 
``effective APR.'' (This APR will be referred to as the ``effective 
APR'' in this section-by-section analysis, and in the regulation and 
accompanying commentary.) Section 127(b)(6) exempts a creditor from 
disclosing an effective APR when the total finance charge does not 
exceed 50 cents for a monthly or longer billing cycle, or the pro rata 
share of 50 cents for a shorter cycle. In such a case, TILA Section 
127(b)(5) requires the creditor to disclose only the periodic rate and 
the annualized rate that corresponds to the periodic rate. 15 U.S.C. 
1637(b)(5). When the finance charge exceeds 50 cents, the act requires 
creditors to disclose the periodic rate but not the corresponding APR. 
Since 1970, however, Regulation Z has required disclosure of the 
corresponding APR in all cases. See current Sec.  226.7(d). Current 
Sec.  226.7(g) implements TILA Section 127(b)(6)'s requirement to 
disclose an effective APR.
    The effective APR and corresponding APR for any given plan feature 
are the same when the finance charge in a period arises only from 
application of the periodic rate to the applicable balance (the balance 
calculated according to the creditor's chosen method, such as average 
daily balance method). When the two APRs are the same, Regulation Z 
requires that the APR be stated just once. The effective and 
corresponding APRs diverge when the finance charge in a period arises 
(at least in part) from a charge not determined by application of a 
periodic rate and the total finance charge exceeds 50 cents. When they 
diverge, Regulation Z requires that both be stated.
    The following example illustrates the relationship between the 
effective APR and the corresponding APR in a simple case. A credit 
cardholder with no balance in the previous cycle takes a cash advance 
of $100 on the first day of the cycle. A cash advance fee of 3 percent 
applies (a finance charge of $3), as does a periodic rate of 1\1/2\ 
percent per month on the average daily balance of $100 (a finance 
charge of $1.50). No other transactions, and no payments, occur during 
the cycle, which is 30 days. The corresponding APR is 18 percent (1\1/
2\ percent times 12). To determine the effective APR, first the total 
finance charge of $4.50 is divided by the balance of $100. This 
quotient, 4\1/2\ percent, is the rate of the total finance charge on a 
monthly basis. The monthly rate is annualized, or multiplied by 12, to 
yield an effective APR of 54 percent. Under Regulation Z, the creditor 
would disclose on the periodic statement both the corresponding APR of 
18 percent and the effective APR of 54 percent.
    The controversy over the effective APR. The statutory requirement 
of an effective APR is intended to provide the consumer with an annual 
rate that reflects the total finance charge, including both the finance 
charge due to application of a periodic rate (interest) and finance 
charges that take the form of fees. This rate, like other APRs required 
by TILA, presumably was intended to provide consumers information about 
the cost of credit that would help consumers compare credit costs and 
make informed credit decisions and, more broadly, strengthen 
competition in the market for consumer credit. 15 U.S.C. 1601(a). There 
is, however, a longstanding controversy about the extent to which the 
requirement to disclose an effective APR advances TILA's purposes or, 
as some argue, undermines them. This controversy has been reflected in 
such forums as discussions by the Board's Consumer Advisory Council and 
comments on the ANPR. Q23-Q25. The following discussion seeks to place 
the controversy over the effective APR in the context of certain 
objective characteristics of the disclosure.
    The effective APR is essentially retrospective, or ``historical.'' 
An effective APR on a particular periodic statement represents the cost 
of transactions in which the consumer engaged during the cycle to which 
that statement pertains. It is not likely, however, that the effective 
APR for a transaction in a given cycle will predict accurately the cost 
of a transaction in a

[[Page 32997]]

future cycle. If any one of several factors is different in the future 
cycle than it was in the past cycle, such as the balance at the 
beginning of the cycle or the amount and timing of each transaction and 
payment during the cycle, then the effective APRs in the two cycles 
will be different, too.\13\ In short, the effective APR is by nature 
retrospective and idiosyncratic and, therefore, provides limited 
information about the cost of future transactions.
---------------------------------------------------------------------------

    \13\ An example demonstrates how the effective APR depends 
critically on the timing of transactions during two different 
cycles. Assume for the sake of simplicity that the transaction 
amount and beginning balance remain the same in both cycles. In the 
example discussed above, a cash advance of $100 on the first day of 
a 30-day cycle yielded an effective APR of 54 percent, three times 
the corresponding APR of 18 percent. If in a later cycle the 
consumer were to take the cash advance on the last day of the 30-day 
cycle, the effective APR would be 36.6 percent, about twice the 
corresponding APR. (The finance charge produced by the periodic rate 
would be $.05 (1\1/2\ percent times the average daily balance of 
$3.33). The total finance charge of $3.05 divided by the transaction 
amount of $100 yields a quotient of 3.05 percent, which is 
multiplied by 12 to yield an effective APR of 36.6 percent.)
---------------------------------------------------------------------------

    Consumer groups argue that the information the rate provides about 
the cost of future transactions, even if limited, is meaningful. The 
effective APR for a specific transaction or set of transactions in a 
given cycle may provide the consumer a rough indication that the cost 
of repeating such transactions is high in some sense or, at least, 
higher than the corresponding APR alone conveys. Industry commenters 
respond that the cost of a transaction is not usually as high as the 
effective APR makes it appear, and that this tendency of the rate to 
exaggerate the cost makes this APR misleading. Commenters generally 
agree that the effective APR can be ``shocking,'' but they disagree as 
to whether it conveys meaningful information.
    One reason that effective APRs appear high is the assumption built 
into the disclosure that the borrower paid the balance at the end of 
the cycle. This assumption tends to make the APR higher, and more 
volatile, than if a longer repayment period were used. In the example 
given above, the effective APR on cash advances, 54 percent, is three 
times the corresponding APR, 18 percent. Moreover, the effective APR 
would have been 18 percent (the same as the corresponding APR) in the 
previous cycle if no cash advances had been taken then, and it will 
fall back to 18 percent in the next cycle if no cash advance is taken 
then (assuming the rate is fixed). Use of a longer repayment period 
would, other things being equal, yield a lower, and less volatile, 
effective APR. A lower APR based on available information about the 
consumer's expected time to repay might seem more realistic. But its 
disclosure would require making assumptions about activity in future 
cycles, such as the timing and amount of future transactions and 
payments--or it would require assuming that there is to be no activity 
on the account until the balance is repaid. Such assumptions would 
often appear arbitrary and unrealistic. Accordingly, Regulation Z has 
always required that the effective APR be calculated on the premise 
that payment was made at the end of the cycle. The likelihood that the 
premise is often wrong accounts, at least in part, for the controversy 
as to whether the effective APR can supply meaningful information about 
credit costs.
    Consumer advocates and industry representatives also disagree as to 
whether the effective APR promotes credit shopping. The dependence of 
the effective APR on the particular activity in a given cycle means 
that any given effective APR in any given cycle is not typically a 
practical shopping tool. Comparing two particular effective APRs for 
any two cycles on two different accounts is not usually a reliable 
basis to determine which account costs the consumer more. Moreover, an 
effective APR for a given month on an existing account cannot be 
compared reliably to the corresponding APR advertised on a different 
account, which by definition does not reflect any finance charges 
imposed in the form of fees. There may be cases in which repeated 
disclosure of effective APRs in consecutive cycles, as opposed to one 
effective APR for one cycle, would facilitate shopping. For example, if 
an account had a periodic rate and a corresponding APR of zero, the 
effective APRs disclosed on the account might provide the most 
practical basis for assessing the cost of the account in relationship 
to other advertised accounts. This example, though, does not appear to 
be common in today's market.
    Although the effective APR is not commonly usable as a shopping 
tool in itself, consumer group commenters argue that the effective APR 
promotes credit shopping by encouraging consumers to seek out other 
sources of credit, especially when the rate reaches levels that 
``shock'' consumers. Industry commenters respond, however, that the 
tendency of the effective APR to exaggerate the cost of credit may lead 
consumers to make invalid comparisons. They say that disclosure of a 
high effective APR in a cycle may cause a consumer to discontinue using 
the account in favor of another account that appears less expensive 
based on its corresponding APR but is in fact more expensive, because 
of fixed or minimum charges or other factors.
    Supporters of the effective APR also argue that high effective APRs 
typical for cash advances and balance transfers benefit consumers by 
discouraging them from engaging in these transactions. Industry 
commenters respond that consumers do not necessarily benefit if they 
refrain categorically from a particular kind of credit transaction; 
depending on the alternatives consumers choose, they may be worse-off 
rather than better-off. Some of these commenters also argue that 
discouraging particular kinds of credit transactions is not a valid 
objective of Regulation Z.
    Industry and community group commenters find some common ground in 
their observations that consumers do not understand the effective APR 
well. Industry commenters argue from their experience with their 
customers that consumers do not understand how this APR differs from 
the corresponding APR, why it is ``so high,'' or which fees it 
reflects. Creditor commenters say that when their customers call them 
and express alarm or confusion over the effective APR, the creditors 
find it difficult, if not impossible, to make the caller understand the 
disclosure. Nor, they argue, does a consumer find the disclosure any 
more useful than disclosure of interest and fees in dollars and cents, 
even if the consumer understands the disclosure. Consumer groups 
concede that, as implemented today, the effective APR is difficult for 
consumers to understand, and they support efforts to make it more 
understandable, such as improved presentation on the periodic 
statement. Industry commenters expressed doubt that such efforts would 
be worthwhile.
    Industry commenters also claim the effective APR imposes direct 
costs on creditors that consumers pay indirectly. They represent that 
the effective APR raises compliance costs when they introduce new 
services, including legal analysis of Regulation Z to determine whether 
the fee for the new service must be included in the effective APR and 
software programming if it is included; they are also concerned about 
litigation risks. Also, responding to telephone inquiries from confused 
customers and accommodating them (e.g., with fee waivers or rebates) 
increases operational costs. Costs associated with adverse consumer 
reactions to the effective APR may influence creditors to take steps to 
minimize the frequency with which

[[Page 32998]]

they must disclose it. One such step would be to price credit mostly 
through a periodic rate rather than fees. Although this effect is 
difficult to measure, a trade association commenter concedes a policy 
argument for retaining the effective APR as a hedge against creditors 
shifting their pricing from periodic rates to transaction-triggered 
fees and charges.
    Like most other industry commenters, however, this same commenter 
concludes that the effective APR should be eliminated because, for the 
reasons discussed above, its costs outweigh its benefits. Some industry 
commenters support replacing the effective APR with enhanced fee 
disclosures (for example, grouping fees on the statement or summing 
them for each period or for the year), but many do not. Consumer groups 
urge the Board not only to retain the effective APR, but to expand it 
in two respects: (1) Include in the rate all charges, including charges 
not currently defined as finance charges in Regulation Z; and (2) 
require creditors to disclose a ``typical effective APR'' (an average 
of effective APRs) on solicitations and account-opening 
disclosures.\14\
---------------------------------------------------------------------------

    \14\ Consumer group comments about a ``typical APR'' disclosure 
are summarized in the section-by-section analysis to Sec.  226.5a.
---------------------------------------------------------------------------

    Consumer research conducted for the Board. It is difficult to 
measure directly how the effective APR ultimately affects consumers, 
creditors, and the credit market generally. It is feasible, however, at 
a minimum, to assess to some degree consumers' awareness and 
understanding of the disclosure. Such assessments may support 
inferences about the disclosure's effectiveness.
    Accordingly, the Board undertook research, through a consultant, to 
shed light on consumer awareness and understanding of the effective 
APR; and on whether changes to the presentation of the disclosure could 
increase awareness and understanding. A Board consultant used a 
qualitative testing method, one-on-one cognitive interviews with 
consumers. Consumers were provided mock disclosures of periodic 
statements that included effective APRs and asked questions about the 
disclosure designed to elicit their understanding of the rate. In the 
first round the statements were copied from examples in the market. For 
subsequent testing rounds, however, statements were modified in 
language and design to better convey how the effective APR differs from 
the corresponding APR. Several different approaches and many variations 
on those approaches were tested.
    In most of the rounds, a minority of participants correctly 
explained that the effective APR for cash advances in the last cycle 
was higher than the corresponding APR for cash advances because a cash 
advance fee had been imposed. A smaller minority correctly explained 
that the effective APR for purchases was the same as the corresponding 
APR for purchases because no transaction fee had been imposed on 
purchases. A majority offered incorrect explanations or did not offer 
any explanation. Results changed at the final testing site, however, 
when a majority of participants evidenced an understanding that the 
effective APR for cash advances would be elevated for the statement 
period when a cash advance fee was imposed during that period, that the 
effective APR would not be as elevated for periods where a cash advance 
balance remained outstanding but no fee had been imposed, and that the 
effective APR for purchases was the same as the corresponding APR for 
purchases because no transaction fee had been imposed on purchases.
    The form in the final round labeled the rate ``Fee-Inclusive APR'' 
and placed it in a table separate from the corresponding APR. The 
``Fee-Inclusive APR'' table included the amount of interest and the 
amount of transaction fees. An adjacent sentence stated that the ``Fee-
Inclusive APR'' represented the cost of transaction fees as well as 
interest. Similar approaches had been tried in some of the earlier 
rounds, except that the effective APR had been labeled ``Effective 
APR.''
    The Board's two alternative proposals. The considerations and data 
discussed above lead the Board to propose two alternative approaches 
for disclosing the effective APR: The first approach would try to 
improve consumer understanding of this rate and reduce creditor 
uncertainty about its computation. The second approach would eliminate 
the requirement to disclose the effective APR. The evidence of consumer 
understanding of the effective APR supplied by the qualitative research 
conducted for the Board is mixed, but it suggests that it may be 
possible to increase current levels of understanding by modifying the 
presentation of the rate on the periodic statement. The Board's 
experience with Regulation Z also suggests that it may be possible to 
reduce burdens by simplifying computation of the effective APR.
    The Board plans to conduct further research into consumer 
understanding of the effective APR after the comment period has ended. 
The Board will evaluate this additional research with the research 
conducted to date, and with other information, including comments 
received on this proposal, and determine whether the effective APR 
should be retained with modifications as proposed, eliminated, or 
addressed in some other way.
    1. First alternative proposal. Under the first alternative, the 
Board proposes to impose uniform terminology and formatting on 
disclosure of the effective APR and the fees included in its 
computation. See proposed Sec. Sec.  226.7(b)(7)(i), 226.7(b)(6)(iv). 
This proposal is based largely on a form developed through several 
rounds of one-on-one interviews with consumers. The Board also proposes 
under this alternative to revise Sec.  226.14, which governs 
computation of the effective APR, in an effort to increase certainty 
about which fees the rate must include. See proposed Sec.  226.14(d). 
See section-by-section analysis to Sec.  226.7(a)(7) regarding how the 
proposal affects HELOCs subject to Sec.  226.5b.
    Under proposed Sec.  226.7(b)(7)(i) and Sample Form G-18(B), 
creditors would label the effective APR ``Fee-Inclusive APR'' and 
indicate that the Fee-inclusive APRs are the ``APRs that you paid this 
period when transactions or fixed fees are taken into account as well 
as interest.'' Creditors would disclose an effective APR for each 
feature, such as purchases and cash advances, in a tabular format. A 
composite effective APR for two or more features would no longer be 
permitted, as it is more difficult to explain to consumers. The 
effective APR(s) would appear in a table, by feature, with the total of 
interest, labeled as ``interest charges,'' and the total of the fees 
included in the effective APR, labeled as ``transaction and fixed 
charges.'' To facilitate understanding, proposed Sec.  226.7(b)(6)(iii) 
would require creditors to label the specific fees used to calculate 
the effective APR either as ``transaction'' or ``fixed'' fees, 
depending whether the fee relates to a specific transaction; such fees 
would be disclosed in the list of transactions. If the only finance 
charges in a billing cycle are interest charges, the corresponding and 
effective APRs are identical. In those cases, creditors would disclose 
only the corresponding APRs and would not be required to label fees as 
``transaction'' or ``fixed'' fees. These requirements would be 
illustrated in forms under G-18 in Appendix G, and creditors would be 
required to use the model or a substantially similar presentation.
    To facilitate compliance, the proposed regulation would give 
specific guidance about how to attribute fees to account

[[Page 32999]]

features. For convenience and uniformity, two kinds of charges, when 
used to calculate the effective APR, would be grouped under the 
purchase feature of the account: (1) Charges that relate to specific 
purchase transactions; and (2) minimum, fixed and other non-interest 
charges not related to a specific transaction. See proposed Sec.  
226.7(b)(6)(iv)(B). If there are purchase features other than the 
standard purchase feature--such as a promotional purchase feature--then 
the minimum, fixed or other non-interest charges would be grouped with 
other charges relating to the balance on the standard purchase feature. 
See proposed comment 7(b)(6)-5. In addition, a minimum charge would be 
disclosed as a fee, rather than as interest, and it would be grouped 
together with other fees related to standard purchases and used to 
calculate the effective APR with respect to the standard purchase 
feature. See proposed comment 7(b)(6)-4.
    The proposal also seeks to simplify computation of the effective 
APR, both to increase consumer understanding of the disclosure and 
facilitate creditor compliance. New Sec.  226.14(e) would provide a 
specific and exclusive list of finance charges that would be included 
in calculating the effective APR.\15\ This proposed change is discussed 
further in the section-by-section analysis to Sec.  226.14.
---------------------------------------------------------------------------

    \15\ Under the statute, the numerator of the quotient used to 
determine the historical APR is the total finance charge. See 
Section 107(a)(2), 15 U.S.C. 1606(a)(2). The Board has authority to 
make exceptions and adjustments to this calculation method to serve 
TILA's purposes and facilitate compliance. See Section 105(a), 15 
U.S.C. 1604(a). The Board has used this authority before to exclude 
certain kinds of finance charges from the historical APR. See 
current Sec.  226.14(c)(2), fn. 33.
---------------------------------------------------------------------------

    The Board seeks comment on the potential benefits and costs of the 
first alternative proposal.
    2. Second alternative proposal. Under the second alternative 
proposal, for the reasons discussed in the introduction to the 
discussion of the effective APR, the effective APR would no longer be 
disclosed. The Board proposes this approach pursuant to its exception 
and exemption authorities under TILA Section 105. Section 105(a) 
authorizes the Board to make exceptions to TILA to effectuate the 
statute's purposes, which include facilitating consumers' ability to 
compare credit terms and helping consumers avoid the uniformed use of 
credit. 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board 
to exempt any class of transactions (with an exception not relevant 
here) from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or makes more expensive the credit process; (3) 
the status of the borrower, including any related financial 
arrangements of the borrower, the financial sophistication of the 
borrower relative to the type of transaction, and the importance to the 
borrower of the credit, related supporting property, and coverage under 
TILA; (4) whether the loan is secured by the principal residence of the 
borrower; and (5) whether the exemption would undermine the goal of 
consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes that proposing the exemption is appropriate. 
Consumer testing suggests that consumers find the current requirement 
of disclosing an APR that combines rates and fees to be confusing. The 
proposal would require disclosure of the nominal interest rate and fees 
in a manner that is more readily understandable and comparable across 
institutions. It therefore has the potential to better inform consumers 
and further the goals of consumer protection and the informed use of 
credit for all types of open-end credit. A potentially competing 
consideration is the extent to which ``sticker shock'' from the 
effective APR benefits consumers, even if the disclosure is somewhat 
arbitrary. A second consideration is whether the effective APR is a 
hedge against fee-intensive pricing by creditors, and if so, the extent 
to which it promotes transparency. On balance, however, the Board 
believes that the benefits of the proposal would outweigh these 
considerations.
    The Board welcomes comment on this matter.
7(b)(9) Address for Notice of Billing Errors
    Consumers who allege billing errors must do so in writing. 15 
U.S.C. 1666; Sec.  226.13(b). Creditors must provide on or with 
periodic statements an address for this purpose. See current Sec.  
226.7(k). Currently, comment 7(k)-2 provides that creditors may also 
provide a telephone number along with the mailing address as long as 
the creditor makes clear a telephone call to the creditor will not 
preserve consumers' billing error rights. The Board would update 
comment 7(k)-2, renumbered as comment 7(b)(9)-2, to address 
notification by e-mail or via a Web site. The comment would provide 
that the address is deemed to be clear and conspicuous if a 
precautionary instruction is included that telephoning or notifying the 
creditor by e-mail or 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
    Creditors must disclose the closing date of the billing cycle and 
the account balance outstanding on that date. As a part of its proposal 
to implement TILA amendments in the Bankruptcy Act regarding late 
payment and the effect of making minimum payments, the Board is 
proposing to require creditors to group together, as applicable, 
disclosures of related information about due dates and payment amounts, 
including the new balance. This is discussed in the section-by-section 
analysis to Sec. Sec.  226.7(b)(11) and (b)(13) below, and illustrated 
in Forms G-18(G) and G-18(H) in Appendix G.
7(b)(11) Due Date; Late Payment Costs
    TILA Section 127(b)(12), added by Section 1305(a) of the Bankruptcy 
Act, requires creditors that charge a late-payment fee to disclose on 
the periodic statement (1) the payment due date or, if different, the 
earliest date on which the late-payment fee may be charged, and (2) the 
amount of the late-payment fee. 15 U.S.C. 1637(b)(12). The October 2005 
ANPR solicited comment on the need for additional guidance on the date 
to be disclosed under the new rule, and whether the Board should 
consider any format requirements, such as proximity rules, or the 
publication of model disclosures. Q97-Q99.
    Home-equity plans. The Board intends to implement the late payment 
disclosure for HELOCs as a part of its review of rules affecting home-
secured credit. Creditors offering HELOCs may comply with proposed 
Sec.  226.7(b)(11), at their option.
    Charge card issuers. TILA Section 127(b)(12) applies to 
``creditors.'' TILA's definition of ``creditor'' includes card issuers 
and other persons that offer consumer open-end credit. Issuers of 
``charge cards'' (which are typically products where outstanding 
balances cannot be carried over from one billing

[[Page 33000]]

period to the next and are payable when a periodic statement is 
received) are ``creditors'' for purposes of specifically enumerated 
TILA disclosure requirements. 15 U.S.C. 1602(f); Sec.  226.2(a)(17). 
The new disclosure requirement in TILA Section 127(b)(12) is not among 
those specifically enumerated.
    The Board proposes that charge card issuers are not subject to the 
late payment disclosure requirements contained in the Bankruptcy Act 
and to be implemented in new Sec.  226.7(b)(11); the new requirement is 
not specifically enumerated to apply to charge card issuers. In 
addition, the Board understands that for some charge card issuers, 
payments are not considered ``late'' for purposes of imposing a fee 
until a second statement is received without a payment. The Board 
believes it would be undesirable to encourage consumers who in January 
receive a statement with the balance due upon receipt, for example, to 
avoid paying the balance when due because a late-payment fee may not be 
assessed until mid-February; such a disclosure could cause issuers to 
change such a practice.
    Payment due date. Under the proposal, creditors must disclose the 
due date for a payment if a late-payment fee could be imposed under the 
credit agreement. The Board interprets this to be a date that is 
required by the legal obligation and not to encompass informal 
``courtesy periods'' that are not part of the legal obligation and that 
creditors may observe for a short period after the stated due date 
before a late-payment fee is imposed, to account for minor delays in 
payments such as mail delays. Several commenters asked the Board to 
clarify that in complying with the new late-payment fee disclosure, 
creditors need not disclose informal ``courtesy periods'' not part of 
the legal obligation. The Board proposes a comment to this effect. See 
proposed comment 7(b)(11)-1.
    Under the statute, creditors must disclose on periodic statements 
the payment due date or, if different, the earliest date on which the 
late-payment fee may be charged. Some state laws require that a certain 
number of days must elapse following a due date before a late-payment 
fee may be imposed. Under such a state law, the later date arguably 
would be required to be disclosed on periodic statements. The Board is 
concerned, however, that such a disclosure would not provide a 
meaningful benefit to consumers in the form of useful information or 
protection and would result in consumer confusion. For example, assume 
a payment is due on March 10 and state law provides that a late payment 
fee cannot be assessed before March 21. The Board is concerned that 
highlighting March 20 as the last date to avoid a late payment fee may 
mislead consumers into thinking that a payment made any time on or 
before March 20 would have no adverse financial consequences. However, 
failure to make a payment when due is considered an act of default 
under most credit contracts, and can trigger higher costs due to 
interest accrual and perhaps penalty APRs. Particularly in the case of 
an increased rate that applies to all account balances, the cost of 
paying late may be significant.
    The Board considered additional disclosures on the periodic 
statement that would more fully explain the consequences of paying 
after the due date and before the date triggering the late-payment fee, 
but such an approach appears cumbersome and overly complicated. For 
those reasons, the Board proposes that creditors must disclose the due 
date under the terms of the legal obligation, and not a date different 
than the due date, such as when creditors are required by state or 
other law to delay for a specified period imposing a late-payment fee 
when a payment is received after the due date. Consumers' rights under 
state laws to avoid the imposition of late-payment fees during a 
specified period following a due date are unaffected by the proposal; 
that is, in the above example, the creditor would disclose March 10 as 
the due date for purposes of Sec.  226.7(b)(11), but could not, under 
state law, assess a late-payment fee before March 21. However, the 
proposal would provide additional protections to consumers by not 
requiring a disclosure that a late-payment fee will be imposed only 
after a specified period after the due date, which, if followed, may 
result in even more costly consequence of an increased penalty rate.
    Cut-off time for making payments. As discussed in the section-by-
section analysis to Sec.  226.10(b), the Board proposes to require that 
creditors disclose any cut-off time for receiving payments closely 
proximate to each reference of the due date, if the cut-off time is 
before 5 p.m. on the due date. If cut-off times prior to 5 p.m. differ 
depending on the method of payment (such as by check or via the 
Internet), the creditor must state the earliest time without specifying 
the method to which it applies. This avoids information overload by 
potentially identifying several cut-off times. Cut-off hours of 5 p.m. 
or later may continue to be disclosed under the existing rule 
(including on the reverse side of periodic statements).
    Amount of late payment fee; penalty APR. Creditors must disclose 
the amount of the late-payment fee and the payment due date on periodic 
statements, under TILA amendments contained in the Bankruptcy Act. The 
purpose of the new late payment disclosure requirement is to ensure 
consumers know the consequences of paying late. To fulfill that 
purpose, the Board proposes that the amount of the late-payment fee 
must be disclosed in close proximity to the due date. If the amount of 
the late-payment fee is based on outstanding balances, the proposal 
would permit the creditor to disclose either the fee that would apply 
to that specific balance, or the highest fee in the range (e.g., ``up 
to'' a stated dollar amount).
    In addition, the Board believes that an equally (or more) important 
consequence of paying late is the potential increase in APRs. The 
extent of rate increases may be substantial, particularly where the 
increased APR applies to all existing balances, including balances at 
low promotional rates. Further, the increased APR may apply for a 
lengthy period of time (although if the creditor imposes a penalty 
rate, the increase would not become effective for at least 45 days, 
under the Board's proposal). See proposed Sec.  226.9(g). The Board is 
concerned that if the disclosure refers to only the late payment fee, 
consumers may overlook the more costly consequence of penalty rates. 
Therefore, the Board proposes to require creditors to disclose any 
increased rate that may apply if consumers' payments are received after 
the due date. If, under the terms of the account agreement, a late 
payment could result in the loss of a promotional rate, the imposition 
of a penalty rate, or both, the creditor must disclose the highest rate 
that could apply, to avoid information overload. Under the proposal, 
the increased APR would be disclosed closely proximate to the fee and 
due date, as set forth in proposed Sec.  226.7(b)(13). The Board 
believes this fulfills Congress's intent to warn consumers about the 
effects of paying late.
7(b)(12) Minimum Payment
    The Bankruptcy Act amends TILA Section 127(b) to require creditors 
that extend open-end credit to provide a disclosure on the front of 
each periodic statement in a prominent location about the effects of 
making only minimum payments. 15 U.S.C. Sec.  1637(b)(11). This 
disclosure must include: (1) A ``warning'' statement indicating that

[[Page 33001]]

making only the minimum payment will increase the interest the consumer 
pays and the time it takes to repay the consumer's balance; (2) a 
hypothetical example of how long it would take to pay off a specified 
balance if only minimum payments are made; and (3) a toll-free 
telephone number that the consumer may call to obtain an estimate of 
the time it would take to repay their actual account balance.
    Under the Bankruptcy Act, depository institutions may establish and 
maintain their own toll-free telephone numbers or use a third party. In 
order to standardize the information provided to consumers through the 
toll-free telephone numbers, the Bankruptcy Act directs the Board to 
prepare a ``table'' illustrating the approximate number of months it 
would take to repay an outstanding balance if the consumer pays only 
the required minimum monthly payments and if no other advances are 
made. The Board is directed to create the table by assuming a 
significant number of different APRs, account balances, and minimum 
payment amounts; instructional guidance must be provided on how the 
information contained in the table should be used to respond to 
consumers' requests. The Board is also required to establish and 
maintain, for two years, a toll-free telephone number for use by 
customers of creditors that are depository institutions having assets 
of $250 million or less. The Federal Trade Commission (FTC) must 
maintain a toll-free telephone number for creditors that are not 
depository institutions. 15 U.S.C. 1637(b)(11)(A)-(C).
    The Bankruptcy Act provides that consumers who call the toll-free 
telephone number may be connected to an automated device through which 
they can obtain repayment information by providing information using a 
touch-tone telephone or similar device, but consumers who are unable to 
use the automated device must have the opportunity to be connected to 
an individual from whom the repayment information may be obtained. 
Creditors, the Board and the FTC may not use the toll-free telephone 
number to provide consumers with repayment information other than the 
repayment information set forth in the ``table'' issued by the Board. 
15 U.S.C. 1637(b)(11)(F)-(H).
    Alternatively, a creditor may use a toll-free telephone number to 
provide the actual number of months that it will take consumers to 
repay their outstanding balance instead of providing an estimate based 
on the Board-created table. A creditor that does so also need not 
include a hypothetical example on its periodic statements, but must 
disclose the warning statement and the toll-free telephone number on 
its periodic statements. 15 U.S.C. 1637(b)(11)(J)-(K).
    For ease of reference, the Board will refer to the above 
disclosures about the effects of making only the minimum payment as 
``the minimum payment disclosures.''
    Proposal to limit the minimum payment disclosure requirements to 
credit card accounts. Under the Bankruptcy Act, the minimum payment 
disclosures apply to all open-end accounts (such as credit card 
accounts, HELOCs, and general-purpose credit lines). The Act expressly 
states that these disclosure requirements do not apply, however, to any 
``charge card'' account, the primary aspect of which is to require 
payment of charges in full each month.
    In the October 2005 ANPR, the Board requested comment on whether 
certain open-end accounts should be exempted from some or all of the 
minimum payment disclosure requirements. Q59. Many industry commenters 
urged the Board to limit the minimum payment disclosure requirements to 
credit card accounts because they believed that Congress intended the 
minimum payment disclosures only for such accounts. On the other hand, 
several consumer groups urged the Board to apply the minimum payment 
disclosures to all open-end plans because they believed that these 
disclosures could be useful to consumers for all open-end products, 
including HELOCs.
    The Board is proposing to exempt open-end credit plans other than 
credit card accounts from the minimum payment disclosure requirements. 
This exemption would cover, for example, HELOCs (including open-end 
reverse mortgages), overdraft lines of credit and other general-purpose 
personal lines of credit.
    The debate in Congress about the minimum payment disclosures 
focused on credit card accounts. For example, Senator Grassley, a 
primary sponsor of the Bankruptcy Act, in discussing the minimum 
payment disclosures, stated:

    [The Bankruptcy Act] contains significant new disclosures for 
consumers, mandating that credit card companies provide key 
information about how much [consumers] owe and how long it will take 
to pay off their credit card debts by only making the minimum 
payment. That is very important consumer education for every one of 
us.
    Consumers will also be given a toll-free number to call where 
they can get information about how long it will take to pay off 
their own credit card balances if they only pay the minimum payment. 
This will educate consumers and improve consumers' understanding of 
what their financial situation is.

Remarks of Senator Grassley (2005), Congressional Record (daily 
edition), vol. 151, March 1, p. S 1856.
    Thus, it appears the principal concern of Congress was that 
consumers may not be fully aware of the length of time it takes to pay 
off their credit card accounts if only minimum monthly payments are 
made. The concern expressed by Congress for credit card accounts does 
not necessarily apply to other types of open-end credit accounts. These 
other types of open-end accounts are discussed below.
    1. HELOCs. Many industry commenters requested that HELOCs be 
exempted from the minimum payment disclosure requirements. These 
commenters indicated that most HELOCs have a fixed repayment period 
specified in the account agreement, so that consumers know from the 
account agreement the length of the draw period and the length of the 
repayment period. Nonetheless, several consumer groups urged that 
HELOCs should not be exempted entirely. They advocated a warning to 
HELOC consumers that they can pay down the balance faster and save on 
finance charges if they pay more than the minimum monthly payment 
required.
    Based on the comments received in response to the October 2005 ANPR 
as well as other information, the Board understands that most HELOCs 
have a fixed repayment period. Thus, for those HELOCs, consumers could 
learn from the current disclosures the length of the draw period and 
the repayment period. See current Sec.  226.6(e)(2). The minimum 
payment disclosures would not appear to provide useful information to 
consumers that is not already disclosed to them. The cost of providing 
this information a second time, including the costs to reprogram 
periodic statement systems and to establish and maintain a toll-free 
telephone number, may not be justified by the limited benefit to 
consumers. Thus, the Board proposes to exempt HELOCs from the minimum 
payment disclosures requirements at this time, but will consider 
changes to HELOC disclosures as part of the HELOC review.
    2. Open-end reverse mortgages. An open-end reverse mortgage is a 
HELOC that is designed to allow consumers to convert the equity in 
their homes into cash. During an extended ``draw'' period consumers 
continue living in their homes, can draw on the line of credit to the 
extent they repay any outstanding balance. The principal and interest 
become due when the homeowner

[[Page 33002]]

moves, sells the home, or dies. Consumers with open-end reverse 
mortgages would not likely benefit from the minimum payment 
disclosures, because these disclosures would be based on assumptions 
about events difficult to predict, such as when the homeowner will 
move, sell the house or die.
    3. Overdraft lines of credit and other general-purpose personal 
lines of credit. In response to the October 2005 ANPR, several industry 
commenters suggested that the Board exempt overdraft lines of credit 
from the minimum payment disclosure requirements. For example, one 
industry trade group indicated that overdraft lines of credit have 
relatively low credit limits and are not intended as a long term credit 
option. The commenter also indicated that features and terms of 
overdraft lines of credit vary widely from institution to institution. 
Some banks require that an overdraft line of credit be paid in full 
within a short period after the consumer receives notice that the 
overdraft line has been used. Other banks permit longer periods of time 
to repay, but those periods and the size of any minimum payment vary 
significantly from bank to bank. This commenter indicated that the cost 
to small institutions of providing the minimum payment disclosures 
might cause them to stop providing overdraft products.
    The Board is proposing to exempt overdraft lines of credit and 
other general-purpose credit lines from the minimum payment disclosure 
requirements for several reasons. First, these lines of credit are not 
in wide use. The 2004 Survey of Consumer Finances data indicates that 
few families--1.6 percent--had a balance on lines of credit other than 
a home-equity line or credit card at the time of the interview. (In 
terms of comparison, 74.9 percent of families had a credit card, and 58 
percent of these families had a credit card balance at the time of the 
interview.) \16\ Second, these lines of credit typically are neither 
promoted, nor used, as long-term credit options of the kind for which 
the minimum payment disclosures are intended. Third, the Board is 
concerned that the operational costs of requiring creditors to comply 
with the minimum payment disclosure requirements with respect to 
overdraft lines of credit and other general-purpose lines of credit may 
cause some institutions to no longer provide these products as 
accommodations to consumers, to the detriment of consumers who 
currently use these products. For these reasons, the Board is proposing 
to exempt overdraft lines of credit and other general-purpose credit 
lines from the minimum payment disclosure requirements.
---------------------------------------------------------------------------

    \16\ Brian Bucks, et al., Recent Changes in U.S. Family 
Finances: Evidence from the 2001 and 2004 Survey of Consumer 
Finances, Federal Reserve Bulletin (March 2006).
---------------------------------------------------------------------------

7(b)(12)(i) General Disclosure Requirements
    Under the Bankruptcy Act, the hypothetical example that creditors 
must disclose on periodic statements varies depending on the creditor's 
minimum payment requirement. Generally, creditors that require minimum 
payments equal to 4 percent or less of the account balance must 
disclose on each statement that it takes 88 months to pay off a $1,000 
balance at an interest rate of 17 percent if the consumer makes a 
``typical'' 2 percent minimum monthly payment. Creditors that require 
minimum payments exceeding 4 percent of the account balance must 
disclose that it takes 24 months to pay off a balance of $300 at an 
interest rate of 17 percent if the consumer makes a ``typical'' 5 
percent minimum monthly payment (but a creditor may opt instead to 
disclose the statutory example for 2 percent minimum payments). The 5 
percent minimum payment example must be disclosed by creditors for 
which the FTC has the authority under the Truth in Lending Act to 
enforce the act and this regulation. Creditors also have the option to 
substitute an example based on an APR that is greater than 17 percent. 
The Bankruptcy Act authorizes the Board to periodically adjust the APR 
used in the hypothetical example and to recalculate the repayment 
period accordingly. 15 U.S.C. 1637(b)(11)(A)-(E).
    Wording of the examples. The Bankruptcy Act sets forth specific 
language for issuers to use in disclosing the applicable hypothetical 
example on the periodic statement. The Board proposes to amend the 
statutory language to facilitate consumers' use and understanding of 
the disclosures, pursuant to its authority under TILA Section 105(a) to 
make adjustments that are necessary to effectuate the purposes of TILA. 
15 U.S.C. 1604(a). First, the Board proposes to require that issuers 
disclose the payoff periods in the hypothetical examples in years, 
rounding fractional years to the nearest whole year, rather than in 
months as provided in the statute. Thus, issuers would disclose that it 
would take over 7 years to pay off the $1,000 hypothetical balance, and 
about 2 years for the $300 hypothetical balance. The Board believes 
that disclosing the payoff period in years allows consumers to better 
comprehend the repayment period without having to convert it themselves 
from months to years. Participants in the consumer testing conducted 
for the Board reviewed disclosures with the estimated payoff period in 
years, and they indicated they understood the length of time it would 
take to repay the balance if only minimum payments were made. Consumers 
may also appreciate more that the repayment periods are merely 
estimates.
    Second, the statute requires that issuers disclose in the examples 
the minimum payment formula used to calculate the payoff period. In the 
$1,000 example above, the statute would require issuers to indicate 
that a ``typical'' 2 percent minimum monthly payment was used to 
calculate the repayment period. In the $300 example above, the statute 
would require issuers to indicate that a 5 percent minimum monthly 
payment was used to calculate the repayment period. The Board proposes 
to eliminate the specific minimum payment formulas from the examples. 
The references to the 2 percent minimum payment in the $1,000 example, 
and a 5 percent minimum payment in the $300 example, are incomplete 
descriptions of the minimum payment requirement. In the $1,000 example, 
the minimum payment formula used to calculate the repayment period is 
the greater of 2 percent of the outstanding balance or $20. In the $300 
example, the minimum payment formula used to calculate the repayment 
period is the greater of 5 percent of the outstanding balance or $15. 
In fact, in each example, the hypothetical consumer always pays the 
absolute minimum ($20 or $15, depending on the example).
    The Board believes that including the entire minimum payment 
formula, including the floor amount, in the disclosure could make the 
example too complicated and have the unintended consequence of 
misleading a consumer who reads the language set out in the statute 
into concluding that the payment is smaller than it actually is. While 
the disclosures could be revised to indicate that the repayment period 
in the $1,000 balance was calculated based on a $20 payment, and 
repayment period in the $300 balance was calculated based on a $15 
payment, the Board believes that revising the statutory language in 
this way changes the disclosure to focus consumers on the effects of 
making a fixed payment each month as opposed to the effects of making 
minimum payments. Moreover, disclosing the

[[Page 33003]]

minimum payment formula is not necessary for consumers to understand 
the essential point of the examples--that it can take a significant 
amount of time to pay off a balance if only minimum payments are made. 
In testing conducted for the Board, the $1,000 balance example was 
tested without including the 2 percent minimum payment disclosure 
required by the statute. Consumers appeared to understand the purpose 
of the disclosure--that it would take a significant amount of time to 
repay a $1,000 balance if only minimum payments were made. For these 
reasons, the Board is proposing to require the hypothetical examples 
without a minimum payment formula.
    The proposed regulatory language for the examples is set forth in 
new Sec.  226.7(b)(12)(i). In addition to the revisions mentioned 
above, the Board also proposes several stylistic revisions to the 
statutory language, based on plain language principles, in an attempt 
to make the language of the examples more understandable to consumers.
    Adjustments to the APR used in the examples. The Bankruptcy Act 
specifically authorizes the Board to periodically adjust the APR used 
in the hypothetical example and to recalculate the repayment period 
accordingly. In the October 2005 ANPR, the Board requested comment on 
whether the Board should adjust the APR used in the hypothetical 
examples, because current APRs on credit cards may be less than the 17 
percent APR in the examples. Q62. Commenters were split on whether the 
Board should adjust the APR in the examples.
    The Board is not proposing to adjust the APR used in the 
hypothetical examples. The Board recognizes that the examples are 
intended to provide consumers with an indication that it can take a 
long time to pay off a balance if only minimum payments are made. 
Revising the APR used in the example to reflect the average APR paid by 
consumers would not significantly improve the disclosure, because for 
many consumers an average APR would not be the APR that applies to the 
consumer's account. Moreover, consumers will be able to obtain a more 
tailored disclosure of a repayment period based on the APR applicable 
to their accounts by calling the toll-free telephone number provided as 
part of the minimum payment disclosure.
7(b)(12)(ii) Estimate of Actual Repayment Period
    Under the Bankruptcy Act, a creditor may use a toll-free telephone 
number to provide consumers with the actual number of months that it 
will take consumers to repay their outstanding balance instead of 
providing an estimate based on the Board-created table. Creditors that 
choose to give the actual number via the telephone number need not 
include a hypothetical example on their periodic statements. Instead, 
they must disclose on periodic statements a warning statement that 
making the minimum payment will increase the interest the consumer pays 
and the time it takes to repay the consumer's balance and a toll-free 
telephone number that consumers may use to obtain the actual repayment 
disclosure. 15 U.S.C. 1637(b)(11)(I) and (K). The Board proposes to 
implement this statutory provision in new Sec.  226.7(b)(12)(ii)(A).
    In addition, the Board proposes to provide that if card issuers 
provide the actual repayment disclosure on the periodic statement, they 
need not disclose the warning, the hypothetical example and a toll-free 
telephone number on the periodic statement, nor need they maintain a 
toll-free telephone number to provide the actual repayment disclosure. 
See proposed Sec.  226.7(b)(12)(ii)(B).
    The Board strongly encourages card issuers to provide the actual 
repayment disclosure on periodic statements, and solicits comments on 
whether the Board can take other steps to provide incentives to card 
issuers to use this approach. A recent study conducted by the GAO on 
minimum payments suggests that certain cardholders would find the 
actual repayment disclosure more helpful than the generic disclosures 
required by the Bankruptcy Act. For this study, the GAO interviewed 112 
consumers and collected data on whether these consumers preferred to 
receive on the periodic statement (1) customized minimum payment 
disclosures that are based on the consumers' actual account terms (such 
as the actual repayment disclosure), (2) generic disclosures such as 
the warning statement and the hypothetical example required by the 
Bankruptcy Act; or (3) no disclosure.\17\ According to the GAO's 
report, in the interviews with the 112 consumers, most consumers who 
typically carry credit card balances (revolvers) found customized 
disclosures very useful and would prefer to receive them in their 
billing statements. Specifically, 57 percent of the revolvers preferred 
the customized disclosures, 30 percent preferred the generic 
disclosures, and 14 percent preferred no disclosure. In addition, 68 
percent of the revolvers found the customized disclosure extremely 
useful or very useful, 9 percent found the disclosure moderately 
useful, and 23 percent found the disclosure slightly useful or not 
useful. According to the GAO, the consumers that preferred the 
customized disclosures liked that such disclosures would be specific to 
their accounts, would change based on their transactions, and would 
provide more information than generic disclosures. GAO Report on 
Minimum Payments, pages 25, 27.
---------------------------------------------------------------------------

    \17\ United States Government Accountability Office, Customized 
Minimum Payment Disclosures Would Provide More Information to 
Consumers, but Impact Could Vary, 06-434 (April 2006). (The GAO 
indicated that the sample of 112 consumers was not designed to be 
statistically representative of all cardholders, and thus the 
results cannot be generalized to the population of all U.S. 
cardholders.)
---------------------------------------------------------------------------

    In addition, the Board believes that disclosing the actual 
repayment disclosure on the periodic statement would simplify the 
process for consumers and creditors. Consumers would not need to take 
the extra step to call the toll-free telephone number to receive the 
actual repayment disclosure, but instead would have that disclosure 
each month on their periodic statements. Card issuers (other than 
issuers that may use the Board or the FTC toll-free telephone number) 
would not have the operational burden of establishing a toll-free 
telephone number to receive requests for the actual repayment 
disclosure and the operational burden of linking the toll-free 
telephone number to consumer account data in order to calculate the 
actual repayment disclosure.
    The Board proposes this approach pursuant to its exception and 
exemption authorities under TILA Section 105. Section 105(a) authorizes 
the Board to make exceptions to TILA to effectuate the statute's 
purposes, which include facilitating consumers' ability to compare 
credit terms and helping consumers avoid the uniformed use of credit. 
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to 
exempt any class of transactions (with an exception not relevant here) 
from coverage under any part of TILA if the Board determines that 
coverage under that part does not provide a meaningful benefit to 
consumers in the form of useful information or protection. 15 U.S.C. 
1604(f)(1). Section 105(f) directs the Board to make this determination 
in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are 
(1) the amount of the loan and whether the disclosure provides a 
benefit to consumers who are parties to the transaction involving a 
loan of such amount; (2) the extent to which the requirement 
complicates, hinders, or

[[Page 33004]]

makes more expensive the credit process; (3) the status of the 
borrower, including any related financial arrangements of the borrower, 
the financial sophistication of the borrower relative to the type of 
transaction, and the importance to the borrower of the credit, related 
supporting property, and coverage under TILA; (4) whether the loan is 
secured by the principal residence of the borrower; and (5) whether the 
exemption would undermine the goal of consumer protection.
    The Board has considered each of these factors carefully, and based 
on that review, believes it is appropriate to provide an exemption from 
the requirement to provide on periodic statements a warning about the 
effects of making minimum payments, a hypothetical example, and a toll-
free telephone number consumers may call to obtain repayment periods, 
and to maintain a toll-free telephone number for responding to 
consumers' requests, if the creditor instead provides the actual 
repayment period on the periodic statement. As noted above, consumer 
testing indicated that actual repayment period information is more 
useful to consumers than estimated information. Providing that 
disclosure on a statement rather than over the telephone provides 
consumers with easier access to the information. Thus, the proposal has 
the potential to better inform consumers and further the goals of 
consumer protection and the informed use of credit for credit card 
accounts. The Board welcomes comment on this matter.
7(b)(12)(iii) Exemptions
    As explained above, the Board proposes to require the minimum 
payment disclosures only for credit card accounts. See proposed Sec.  
226.7(b)(12)(i). Thus, creditors would not need to provide the minimum 
payment disclosures for HELOCs (including open-end reverse mortgages), 
overdraft lines of credit or other general-purpose personal lines of 
credit. For the same reasons, the Board proposes to exempt these 
products regardless of whether they can be accessed by a credit card 
device. Specifically, proposed Sec.  226.7(b)(12)(iii) would exempt the 
following types of credit card accounts: (1) HELOCs accessible by 
credit cards that are subject to Sec.  226.5b; (2) overdraft lines of 
credit tied to asset accounts accessed by check-guarantee cards or by 
debit cards; and (3) lines of credit accessed by check-guarantee cards 
or by debit cards that can be used only at automated teller machines. 
See proposed Sec.  226.7(b)(12)(iii)(A)-(C). The Board also proposes to 
exempt charge cards from the minimum payment disclosure requirements, 
to implement TILA Section 127(b)(11)(I). 15 U.S.C. 1637(b)(11)(I); See 
proposed Sec.  226.7(b)(12)(iii)(D).
    Exemption for credit card accounts with a specific repayment 
period. In the October 2005 ANPR, the Board requested comment on 
whether certain open-end accounts should be exempted from some or all 
of the minimum payment disclosure requirements, such as open-end plans 
that have a fixed repayment period. Q59. Industry commenters generally 
supported an exemption for open-end plans that have a fixed repayment 
period. These commenters indicated that the minimum payment disclosures 
are not necessary in this context, because the consumer will already 
know from the account agreement how long it will take to repay the 
balance.
    The Board proposes to exempt credit card accounts where a fixed 
repayment period for the account is specified in the account agreement 
and the required minimum payments will amortize the outstanding balance 
within the fixed repayment period. See proposed Sec.  
226.7(b)(12)(iii)(E). The minimum payment disclosures would not appear 
to provide useful information to consumers that they do not already 
have in their account agreements. The cost of providing this 
information a second time, including the costs to reprogram periodic 
statement systems and to establish and maintain a toll-free telephone 
number, may not be justified by the limited benefit to consumers.
    In order for this proposed exemption to apply, a fixed repayment 
period must be specified in the account agreement. As proposed, this 
exemption would include, for example, accounts where the account has 
been closed due to delinquency and the required monthly payment has 
been reduced or the balance decreased to accommodate a fixed payment 
for a fixed period of time designed to pay off the outstanding balance. 
See proposed comment 7(b)(12)(iii)-1. This exemption would not apply 
where the credit card may have a fixed repayment period for one credit 
feature, but an indefinite repayment period on another feature. For 
example, some retail credit cards have several credit features 
associated with the account. One of the features may be a general 
revolving feature, where the minimum payment for this feature does not 
pay off the balance in a specific period of time. The card also may 
have another feature that allows consumers to make specific types of 
purchases (such as furniture purchases, or other large purchases), and 
the minimum payments for that feature will pay off the purchase within 
a fixed period of time, such as one year. New comment 7(b)(12)(iii)-1 
makes clear that the exemption relating to a fixed repayment period 
does not apply to the above situation, because the retail card account 
as a whole does not have a fixed repayment period.
    Exemption where cardholders have paid their accounts in full for 
two consecutive months. In the October 2005 ANPR, the Board requested 
comment on whether the Board should exempt credit card accounts of 
consumers who typically do not revolve balances or make monthly 
payments that regularly exceed the minimum. Q60. In response to the 
October 2005 ANPR, several industry commenters urged the Board to 
exempt card issuers from providing minimum payment disclosures to 
consumers who do not regularly make minimum payments. These commenters 
indicated that excluding non-minimum payers is appropriate because the 
minimum payment disclosures are less meaningful to those consumers. On 
the other hand, several consumer groups indicated that the Board should 
not provide an exemption based on the characteristics or habits of the 
accountholder, such as whether they typically pay in full. These 
commenters indicated that the typical behavior of a particular consumer 
can change quickly, due either to a temporary change in circumstances 
(a move, a layoff, or a major medical expense) or a permanent change 
(the death of a spouse or a disability). The consumer groups believed 
that in these circumstances, it is important that consumers have 
disclosure about the effects of paying the minimum payments in a timely 
fashion, before an outstanding balance grows unmanageable.
    The Board proposes to provide that card issuers are not required to 
comply with minimum payment disclosure requirements for a particular 
billing cycle if a consumer has paid the entire balance in full for the 
previous two billing cycles. See proposed Sec.  226.7(b)(12)(iii)(F). 
The GAO found in its study on minimum payment disclosures that 
cardholders who pay their balances in full each month (non-revolvers) 
were generally satisfied with receiving generic disclosures or none at 
all, and did not prefer customized disclosures such as actual repayment 
disclosures. Thirty-seven percent of non-revolvers found the customized 
disclosure extremely or very useful. Eight percent of non-revolvers 
found the customized disclosure moderately

[[Page 33005]]

useful and 55 percent found it slightly or not useful. The GAO 
indicated that many of the non-revolvers it interviewed who preferred 
not to receive a customized disclosure explained that they paid their 
balance in full each month, already understood the consequences of 
making only minimum payments, and did not need the additional reminder. 
See GAO Report on Minimum Payments, pages 26, 30-31.
    Thus, because non-revolvers may not find the minimum payment 
disclosures very useful or meaningful, the Board proposes to exempt 
card issuers from the requirement to provide the minimum payment 
disclosures in a particular billing cycle if a consumer has paid the 
entire balance in full for the two previous billing cycles. For 
example, if a consumer paid the entire balance in full for account 
activity in March and April, the creditor would not be required to 
provide the minimum payment disclosure for the statement representing 
account activity in May. The Board believes this approach strikes an 
appropriate balance between benefits to consumers from the disclosures, 
and compliance burdens on issuers in providing the disclosures. 
Consumers who might benefit from the disclosures will receive them. 
Consumers who carry a balance each month will always receive the 
disclosure, and consumers who pay in full each month will not. 
Consumers who sometimes pay their bill in full and sometimes do not 
will receive the minimum payment disclosures if they do not pay in full 
the prior two consecutive months (cycles). Also, if a consumer's 
typical payment behavior changes from paying in full to revolving, the 
consumer will begin receiving the minimum payment disclosures after not 
paying in full one billing cycle, when the disclosures would appear to 
be timely. In addition, creditors already typically track whether a 
consumer has paid their balance in full for two consecutive months. 
Typically, creditors provide a grace period on new purchases to 
consumers (that is, creditors do not charge interest to consumers on 
new purchases) if consumers paid both the current balance and the 
previous balance in full. Thus, creditors currently capture payment 
history for consumers for two billing cycles.
    In response to the October 2005 ANPR, one industry commenter 
indicated that many creditors do not have the processing systems that 
are capable of selectively pricing the disclosures from month-to-month 
based on customers' prior payment patterns. Card issuers are not 
required to take advantage of this exemption from providing the minimum 
payment disclosures for a particular billing cycle if a consumer has 
paid the entire balance in full for the previous two billing cycles. 
Card issuers may provide the minimum payment disclosures to all of its 
cardholders, even to those cardholders that fall within this exemption. 
If issuers choose to provide voluntarily the minimum payment 
disclosures to those cardholders that fall within this exemption, 
issuers should follow the disclosures rules set forth in Sec.  
226.7(b)(12), the accompanying commentary, and Appendices M1-M3 (as 
appropriate) for those cardholders.
    Exemption where balance has fixed repayment period. In response to 
the October 2005 ANPR, several industry commenters urged the Board to 
exempt credit cards with fixed payment features from the minimum 
payment disclosures. As described above, some retail credit cards may 
have several features on the card. One of those features may allow 
consumers to make certain types of purchases with the feature (such as 
furniture purchases, or other large purchases), and the minimum 
payments for that feature will pay off the purchase within a specific 
period of time, such as one year. Some commenters indicated that these 
types of accounts should be exempted from the minimum payment 
disclosure requirements because consumers would know the repayment 
period from the account agreement.
    The Board proposes to exempt credit card issuers from providing the 
minimum payment disclosures on periodic statements in a billing cycle 
where the entire outstanding balance held by consumers in that billing 
cycle is subject to a fixed repayment period specified in the account 
agreement and the required minimum payments applicable to this feature 
will amortize the outstanding balance within the fixed repayment 
period. This exemption is meant to cover the retail cards described 
above in those cases where the entire outstanding balance held by a 
consumer in a particular billing cycle is subject to a fixed repayment 
period specified in the account agreement. The minimum payment 
disclosures would not appear to provide useful information to consumers 
in this context because consumers would be able to learn from their 
account agreements how long it would take to repay the balance. The 
cost of providing this information a second time, including the costs 
to reprogram periodic statement systems and to establish and maintain a 
toll-free telephone number, may not be justified by the limited benefit 
to consumers. See proposed comment 7(b)(12)(iii)-2.
    Other exemptions. In response to the October 2005 ANPR, several 
commenters suggested other exemptions to the minimum payment 
requirements, as discussed below. For the reasons discussed below, the 
Board is not proposing to include these exemptions.
    1. Exemption for discontinued credit card products. In response to 
the October 2005 ANPR, one commenter urged the Board to provide a 
partial exemption for credit card products for which no new accounts 
are being opened and for which existing accounts are closed to new 
transactions. With respect to these products, the commenter urged the 
Board to exempt issuers of these products from having to place the 
minimum payment disclosures on the periodic statement, but instead 
allow issuers to provide these notices in freestanding inserts to the 
periodic statements. The commenter indicates that the number of 
accounts that are discontinued are usually very small and the computer 
systems used to produce the statements for the closed accounts are 
being phased out.
    The Board solicits further comment on why this exemption is needed. 
What are the costs of redesigning the old computer systems to provide 
the minimum payment disclosures (that is, the warning statement, the 
hypothetical example, and the toll-free telephone number) on the 
periodic statements?
    2. Exemption for credit card accounts purchased within the last 18 
months. In response to the October 2005 ANPR, one commenter urged the 
Board to provide an exemption for accounts purchased by a credit card 
issuer. With respect to these purchased accounts, the commenter urged 
the Board to exempt issuers from placing the minimum payment 
disclosures on the periodic statement during a transitional period (up 
to 18 months) while the purchasing issuer converts the new accounts to 
its statement system. In this situation, the commenter indicated that 
issuers should be allowed to provide these notices in freestanding 
inserts to the periodic statements.
    The Board solicits further comment on why this exemption is needed. 
Why could the purchasing issuer not continue to use the periodic 
statement system and toll-free telephone numbers used by the selling 
issuer to meet the requirements of the minimum payment disclosures, 
until the purchased accounts are converted to the purchaser's systems?
    3. Credit card products that do not use declining balance 
amortization. One commenter suggested that the Board

[[Page 33006]]

exempt from the minimum payment disclosure requirements credit card 
products that do not use declining balance amortization to calculate 
the minimum payment. For example, some retail credit cards base their 
minimum payment formula on the original purchase price or similar 
amount, rather than on the declining balance. The commenter indicates 
that these products should be exempt because amortization schedules for 
these products result in far shorter repayment periods. The Board is 
proposing not to adopt this exemption because even though the 
amortization schedules for these products may be shorter than for cards 
where the minimum payment is calculated on the declining balance, the 
payoff time may not be so short as to justify an exemption. For 
example, assume the minimum payment formula is 3.33 percent of the 
highest balance or $10, whichever is greater. It could still take 
around 4 years to pay off a $500 balance at a 21.9 percent APR if a 
consumer only made minimum payments. (For contrast, the repayment 
period would be around 7 years if the minimum payment was calculated 
based on the outstanding balance, instead of the highest balance.)
    4. Credit cards with balances of less than $500. One commenter 
suggested that the Board exempt credit card accounts from the minimum 
payment disclosure requirements in cases where the balance on the card 
is less than $500. This commenter indicated in cases of low balances, 
the repayment period is fairly short and so the minimum payment 
disclosure is less needed. The Board is not proposing to exempt these 
credit card accounts. Depending on how the minimum payment is 
calculated, it can still take a significant amount of time to pay off a 
$500 balance if only minimum payments are made. For example, assume the 
minimum payment is calculated based on the following formula: the 
greater of (1) 1 percent of the outstanding balance plus interest 
charges that accrued in the past month; or (2) $10. It could still take 
around 5 years to repay a $500 balance at a 7.99 percent APR if only 
minimum payments are made.
7(b)(12)(iv) Toll-free Telephone Numbers
    Under Section 1301(a) of the Bankruptcy Act, depository 
institutions generally must establish and maintain their own toll-free 
telephone numbers or use a third party to disclose the repayment 
estimates based on the ``table'' issued by the Board. 15 U.S.C. 
1637(b)(11)(F)(i). At the issuer's option, the issuer may disclose the 
actual repayment disclosure through the toll-free telephone number. The 
Board also is required to establish and maintain, for two years, a 
toll-free telephone number for use by customers of depository 
institutions having assets of $250 million or less. 15 U.S.C. 
1637(b)(11)(F)(ii). The FTC must maintain a toll-free telephone number 
for creditors other than depository institutions. 15 U.S.C. 
1637(b)(11)(F).
    The Bankruptcy Act also provides that consumers who call the toll-
free telephone number may be connected to an automated device through 
which they can obtain repayment information by providing information 
using a touch-tone telephone or similar device, but consumers who are 
unable to use the automated device must have the opportunity to be 
connected to an individual from whom the repayment information may be 
obtained. Unless the issuer is providing an actual repayment 
disclosure, the issuer may not provide through the toll-free telephone 
number a repayment estimate other than estimates based on the ``table'' 
issued by the Board. 15 U.S.C. 1637(b)(11)(F). These same provisions 
apply to the FTC's and the Board's toll-free telephone numbers as well.
    The Board proposes to add new Sec.  226.7(b)(12)(iv) and 
accompanying commentary to implement the above statutory provisions 
related to the toll-free telephone numbers. In addition, new comment 
7(b)(12)(iv)-3 would provide that once a consumer has indicated that he 
or she is requesting the generic repayment estimate or the actual 
repayment disclosure, as applicable, card issuers may not provide 
advertisements or marketing information to the consumer prior to 
providing the repayment information required or permitted by Appendix 
M1 or M2, as applicable.
7(b)(12)(v) Definitions
    As discussed above, Section 1301(a) of the Bankruptcy Act requires 
the Board to establish and maintain, for two years, a toll-free 
telephone number for use by customers of depository institutions having 
assets of $250 million or less. 15 U.S.C. 1637(b)(11)(F)(ii). For ease 
of reference in the regulation, the Board proposes to define the above 
depository institutions as ``small depository institution issuers.'' 
See proposed Sec.  226.7(b)(12)(v).
7(b)(13) Format Requirements
    As discussed throughout this section-by-section analysis to Sec.  
226.7, consumer testing conducted for the Board indicates improved 
understanding when related information is grouped together. Under the 
proposal, creditors would group together when a payment is due (due 
date and cut-off time if before 5 p.m.), how much is owed (minimum 
payment and ending balance), and what the potential costs are for 
paying late (late-payment fee, and penalty APR if triggered by a late 
payment). See proposed Samples G-18(E) and G-18(F) in Appendix G. The 
proposed format requirements are intended to fulfill Congress's intent 
to have the new late payment and minimum payment disclosures ensure 
consumers' ability to understand the consequences of paying late or 
making only minimum payments.
7(b)(14) Change-in-Terms and Increased Penalty Rate Summary for Open-
End (Not Home-Secured) Plans
    A major goal of its review of Regulation Z's open-end credit rules 
is to address consumers' surprise at increased rates (and/or fees). In 
part, the Board is addressing the issue in Sec.  226.9(c) and Sec.  
226.9(g) to give more time before new rates and changes to significant 
costs become effective. See proposed Sec.  226.9(c)(2) and Sec.  
226.9(g). The proposed new Sec.  226.7(b)(14) is intended to enable 
consumers to notice more easily changes in their account terms. 
Increasing the time period to act is ineffective if consumers do not 
see the change-in-term notice. Consumers who participated in testing 
conducted for the Board consistently set aside change of term notices 
that accompanied periodic statements. Research conducted for the Board 
indicates that consumers do look at the front side of periodic 
statements and do look at transactions. Therefore, when a change-in-
terms notice is provided on or with a periodic statement the proposal 
would require a summary of key changes to precede transactions. In 
addition, when a notice of a rate increase due to delinquency or 
default or as a penalty is provided on or with a periodic statement, 
the proposal would require this notice to precede transactions. Samples 
G-20 and G-21 in Appendix G illustrate the proposed format requirement 
under Sec.  226.7(b)(14) and the level of detail required for the 
notice under Sec.  226.9(c)(2)(iii) and Sec.  226.9(g)(3). Forms G-
18(G) and G-18(H) illustrate the placement of these notices on a 
periodic statement.

Section 226.8 Identifying Transactions on Periodic Statements

    TILA Section 127(b)(2) requires creditors to identify on periodic 
statements credit extensions that occurred during a billing cycle. 15

[[Page 33007]]

U.S.C. 1637(b)(2). The statute calls for the Board to implement 
requirements that are sufficient to identify the transaction or to 
relate the credit extension to sales vouchers or similar instruments 
previously furnished. The rules for identifying transactions are 
implemented in Sec.  226.8, and vary depending on whether: (1) The 
sales receipt or similar credit document is included with the periodic 
statement, (2) the transaction is sale credit (purchases) or nonsale 
credit (cash advances, for example), and (3) the creditor and seller 
are the ``same or related.'' TILA's billing error protections include 
consumers' requests for additional clarification about transactions 
listed on a periodic statement. 15 U.S.C. 1666(b)(2); Sec.  
226.13(a)(6).
    The Board proposes to update and simplify the rules for identifying 
sales transactions when the sales receipt or similar document is not 
provided with the periodic statement (so called ``descriptive 
billing''), which is typical today. The rules for identifying 
transactions where such receipts accompany the periodic statement are 
not affected by the proposal. The proposed changes reflect current 
business practices and consumer experience, and are intended to ease 
compliance. Currently, creditors that use descriptive billing are 
required to include on periodic statements an amount and date as a 
means to identify transactions, and the proposal would not affect those 
requirements. As an additional means to identify transactions, current 
rules contain description requirements that differ depending on whether 
the seller and creditor are ``same or related.'' For example, a retail 
department store with its own credit plan (seller and creditor are same 
or related) sufficiently identifies purchases on periodic statements by 
providing the department such as ``jewelry'' or ``sporting goods;'' 
item-by-item descriptions are not required. Periodic statements 
provided by issuers of general purpose credit cards, where the seller 
and creditor are not the same or related, identify transactions by the 
seller's name and location.
    The Board proposes to provide additional flexibility to creditors 
that do not provide sales slips or similar documents with the periodic 
statement. Under the proposal, all creditors would be permitted to 
identify sales transactions (in addition to the amount and date) by the 
seller's name and location. Thus, creditors and sellers that are the 
same or related could, at their option, identify transactions by a 
brief identification of goods or services, which they are currently 
required to do in all cases, or they could provide the seller's name 
and location for each transaction. Guidance on the level of detail 
required to describe amounts, dates, the identification of goods, or 
the seller's name and location remains unchanged.
    The Board's proposal is guided by several factors. The standard set 
forth by TILA for identifying transactions on periodic statements is 
quite broad. 15 U.S.C. 1637(b)(2). Whether a general description such 
as ``sporting goods'' or the store name and location would be more 
helpful to a consumer can depend on the situation. Many retailers 
permit consumers to purchase in a single transaction items from a 
number of departments; in that case, the seller's name and location may 
be as helpful as the description of a single department from which 
several dissimilar items were purchased. Also, the seller's name and 
location has become the more common means of identifying transactions, 
as the use of general purpose cards increases and the number of store-
only cards decreases. Under the proposed rule, retailers that commonly 
accept general purpose credit cards but also offer a credit card 
account or other open-end plan for use only at their store would not be 
required to maintain separate systems that enable different 
descriptions to be provided, depending on the type of card used. 
Finally, it appears that any consumer benefits would be minimally 
affected by the proposed change because many retailers permit purchases 
from different departments to be charged in a single transaction. 
Moreover, consumers are likely to carefully review transactions on 
periodic statements and inquire about transactions they do not 
recognize, such as when a retailer is identified by its parent company 
on sales slips which the consumer may not have noticed at the time of 
the transaction. Moreover, consumers are protected under TILA with the 
ability to assert a billing error to seek clarification about 
transactions listed on periodic statements, and are not required to pay 
the disputed amount while the creditor obtains the necessary 
clarification. Maintaining rules that require more standardization and 
detail would be costly, and likely without significant corresponding 
consumer benefit. Thus, the proposal is intended to provide flexibility 
for creditors without reducing consumer protection.
    The Board notes, however, that some retailers offering their own 
open-end credit plans tie their inventory control systems to their 
systems for generating sales receipts and periodic statements. In these 
cases, purchases listed on periodic statements may be described item by 
item, for example, to indicate brand name such as ``XYZ Sweater.'' This 
item-by-item description, while not required under current or proposed 
rules, would remain permissible under the proposal; thus, no 
operational changes would be required for these retailers.
    To implement the approach described above, Sec.  226.8 would be 
revised as follows. Section 226.8(a)(1) would set forth the proposed 
rule providing flexibility in identifying sales transactions, as 
discussed above. Section 226.8(a)(2) would contain the existing rules 
for identifying transactions when sales receipts or similar documents 
accompany the periodic statement. Section 226.8(b) is revised for 
clarity. A new Sec.  226.8(c) would be added to set forth rules now 
contained in footnotes 16 and 19; and, without references to ``same or 
related'' parties, footnotes 17 and 20. The substance of footnote 18, 
based on a statutory exception where the creditor and seller are the 
same person, would be deleted as unnecessary. The title of the section 
would be revised for clarity.
    The commentary to Sec.  226.8 would be reorganized and consolidated 
but would not be substantively changed. Comments 8-1, 8(a)-1, and 
8(a)(2)-4 would be deleted as duplicative. Similarly, comments 8-6 
through 8-8, which provide creditors with flexibility in describing 
certain specific classes of transactions regardless of whether they are 
``related'' or ``nonrelated'' sellers or creditors, would be deleted as 
unnecessary. Existing comments 8-4 and 8(a)(2)-3, which provide 
guidance when copies of credit or sales slips accompany the statement, 
also would be deleted. The Board believes this practice is no longer 
common, and to the extent sales or similar credit documents accompany 
billing statements, additional guidance seems unnecessary. Proposed 
Sec.  226.8(a)(1)(ii) and comments 8(a)-3 and 8(a)-7, which provide 
guidance for identifying mail or telephone transactions, also would 
refer to Internet transactions. Proposed comment 8(a)-1 would provide 
an example of new services that are now commonly purchased from 
creditors as well as third party service providers (sale credit).

Section 226.9 Subsequent Disclosure Requirements

    Section 226.9 sets forth a number of disclosure requirements that 
apply after an account is opened, including a requirement to provide 
billing rights

[[Page 33008]]

statements annually, a requirement to provide at least 15 days advance 
notice whenever a term required to be disclosed in the account-opening 
disclosures is changed, and a requirement to provide finance charge 
disclosures whenever credit devices or features are added on terms 
different from those previously disclosed.
    With respect to open-end (not home-secured) plans, the Board 
proposes a number of substantive and technical revisions to Sec.  226.9 
and the accompanying commentary, as further described below. The 
proposal would require certain disclosures to accompany checks that 
access a credit card account. In addition, the proposal would require 
creditors to provide a summary table of a limited number of key terms 
if those terms are changed. The summary table would appear on the first 
page of the notice or a separate piece of paper. Moreover, if the 
change-in-terms notice is included with a periodic statement, that 
summary table would be required to be provided on the front of the 
first page of the periodic statement, before the list of transactions 
for the statement period. Also, the Board would require creditors to 
provide advance notice when a rate is increased due to a consumer's 
delinquency or default or as a penalty. The Board's proposal also would 
require creditors to provide 45 days advance notice for changes in 
terms or increases in rates due to delinquency or default or penalty 
pricing. Home-equity lines of credit (HELOCs) subject to Sec.  226.5b 
would not be affected by these proposed revisions. For the reasons set 
forth in the section-by-section analysis to Sec.  226.6(b)(1), the 
Board would update references to ``free-ride period'' as ``grace 
period'' in the regulation and commentary, without any intended 
substantive change.
9(a) Furnishing Statement of Billing Rights
    TILA Section 127(a)(7) and Sec.  226.9(a) require creditors to mail 
or deliver a billing error rights statement annually, either to all 
consumers or to each consumer entitled to receive a periodic statement. 
15 U.S.C. 1637(a)(7). (See Model Form G-3.) Alternatively, creditors 
may provide a billing rights statement on each periodic statement. (See 
Model Form G-4.) Both the regulation and commentary would be unchanged 
under the proposal. However, the Board proposes to revise both Model 
Forms G-3 and G-4 to improve the readability of these notices. The 
revised forms are in G-3(A) and G-4(A) of Appendix G. For open-end (not 
home-secured) plans, creditors may use Model Forms G-3(A) and G-4(A). 
For HELOCs subject to the requirements of Sec.  226.5b, creditors may 
use the current Model Forms G-3 and G-4, or the revised forms.
9(b) Disclosures for Supplemental Credit Access Devices and Additional 
Features
    Section 226.9(b) requires certain disclosures when a creditor adds 
a credit device or feature to an existing open-end plan. When a 
creditor adds a credit feature or delivers a credit device to the 
consumer within 30 days of mailing or delivering the account-opening 
disclosures under current Sec.  226.6(a), and the device or feature is 
subject to the same finance charge terms previously disclosed, the 
creditor is not required to provide additional disclosures. If the 
credit feature or credit device is added more than 30 days after 
mailing or delivering the account-opening disclosures, and is subject 
to the same finance charge terms previously disclosed in the account-
opening agreement, the creditor must disclose that the feature or 
device is for use in obtaining credit under the terms previously 
disclosed. However, if the added credit device or feature has finance 
charge terms that differ from the disclosures previously given under 
Sec.  226.6(a), then the disclosures required by Sec.  226.6(a) that 
are applicable to the added feature or device must be given before the 
consumer uses the new feature or device.
    In the December 2004 ANPR, the Board solicited comment as to 
whether there are formatting tools or navigational aids that could more 
effectively link information in account-opening disclosures with 
information provided in subsequent disclosures under Sec.  226.9(b), 
such as checks that access a credit card account. Q45. Many creditors 
commented that there would be no benefit to linking subsequent 
disclosures and account-opening disclosures because many consumers fail 
to retain the information they receive at account opening. Several 
creditors commented that improved formatting could improve consumer 
understanding; however, they were concerned about overly prescriptive 
requirements that might hinder creditors' ability to tailor their 
disclosure formats to their products and product terms. Some creditors 
and consumer groups suggested importing the tabular format used to 
disclose information in credit card or charge card applications and 
solicitations to the subsequent disclosure context.
    The Board is proposing to retain the current rules set forth in 
Sec. Sec.  226.9(b)(1) and 226.9(b)(2) for all credit devices and 
credit features except checks that access a credit card account. With 
respect to such checks, the Board is concerned that the current rule in 
Sec.  226.9(b)(1) may not communicate effectively to the consumer the 
material terms of checks that access a credit card account, when those 
checks are mailed or sent to a consumer 30 days or more after the Sec.  
226.6 disclosures for the underlying account are provided. The Board 
agrees with commenters that, after a significant time has passed, it 
becomes less likely that consumers will still have a copy of the 
account-opening disclosures, and all relevant change-in-terms notices.
    With respect to open-end (not home-secured) plans, the Board is 
proposing to create a new Sec.  226.9(b)(3) that would require that 
certain information be disclosed each time that checks that access a 
credit card account are mailed to a consumer, for checks mailed more 
than 30 days following the delivery of the account-opening disclosures. 
This provision would apply regardless of whether that information was 
previously included in the account-opening disclosures. As under the 
current regulation, no additional disclosures would be required when a 
creditor provides, within 30 days of the account-opening disclosures, 
checks that access a credit card account, if the finance charge terms 
are the same as those that were previously disclosed. HELOCs would not 
be affected by this proposed revision.
    Creditors would be required to provide the new Sec.  226.9(b)(3) 
disclosures on the front of the page containing the checks that access 
a credit card account. Specifically, the proposed amendments would 
require the following key terms be disclosed on the front of the page 
containing the checks: (1) Any discounted initial rate, and when that 
rate will expire, if applicable; (2) the type of rate that will apply 
to the checks after expiration of any discounted initial rate (such as 
whether the purchase or cash advance rate applies) and the applicable 
annual percentage rate; (3) any transaction fees applicable to the 
checks; and (4) whether a grace period applies to the checks, and if 
one does not apply, that interest will be charged immediately. If a 
discounted initial rate applies, a creditor must disclose the type of 
rate that will apply after the discounted initial rate expires, and the 
rate that will apply after the discounted initial rate expires. The 
disclosures must be accurate as of the time the disclosures are given. 
A variable annual percentage rate is accurate if it was in effect 
within 30 days of when the disclosures are given. Proposed Sec.  
226.9(b)(3) would

[[Page 33009]]

require that these key terms be disclosed in a tabular format 
substantially similar to Sample G-19 in Appendix G.
    It is the Board's understanding that checks that access a credit 
card account often are mailed with the periodic statement, so consumers 
will frequently receive an updated disclosure of the periodic rate in 
the same envelope as the checks. The Board considered permitting 
creditors to disclose the rate that applies to a check by means of a 
reference to the type of applicable periodic rate (e.g., balance 
transfer or cash advance) accompanied by a reference to the consumer's 
periodic statement. However, consumer testing conducted for the Board 
showed that while participants looked at actual numbers on the front of 
the page of checks, they generally did not notice or pay attention to a 
cross reference to the periodic statement.
    Thus, the Board proposes that the actual APRs and fees applicable 
to the checks must be disclosed pursuant to Sec.  226.9(b)(3). The 
Board understands, however, that creditors may engage in risk-based 
pricing with regard to checks used by consumers, and seeks with this 
proposal to strike an appropriate balance between meaningful disclosure 
for consumers and the operational burden on creditors. The proposed 
rule would require that creditors customize each set of checks sent to 
reflect a particular consumer's rate. The Board seeks comment on the 
operational burden associated with customizing the checks, and on 
alternatives, such as whether providing a reference to the type of rate 
that will apply, accompanied by a toll-free telephone number that a 
consumer could call to receive additional information, would provide 
sufficient benefit to consumers while limiting burden on creditors.
    The Board also seeks comment as to whether there are other credit 
devices or additional features that creditors add to consumers' 
accounts to which this proposed rule should apply.
    The Board has proposed several technical revisions to improve the 
clarity of Sec.  226.9(b) and the associated commentary.
9(c) Change in Terms
    Under Sec.  226.9(c) of Regulation Z, certain changes to the terms 
of an open-end plan require specific notice of the change. (TILA does 
not address changes in terms to open-end plans.) The general rule is 
that creditors must provide 15 days' advance notice of changes in terms 
required to be included in the account-opening disclosures, with some 
exceptions, or to increase the minimum payment. See current Sec.  
226.9(c)(1).
    Advance notice currently is not required in all cases. For example, 
if an interest rate or other finance charge increases due to a 
consumer's default or delinquency, notice is required, but need not be 
given in advance. See current Sec.  226.9(c)(1); comment 9(c)(1)-3. 
Furthermore, no change-in-terms notice is required if the specific 
change is set forth initially by the creditor in the account-opening 
disclosures. See current comment 9(c)-1. For example, some credit card 
account agreements permit the card issuer to increase the periodic rate 
if the consumer makes a late payment. Because the circumstances of the 
increase are specified in advance in the account agreement, the 
creditor currently need not provide a change-in-terms notice; under 
current Sec.  226.7(d) the new rate will appear on the periodic 
statement for the cycle in which the increase occurs.
    In the December 2004 ANPR, the Board sought comment as to whether 
mailing a notice 15 days prior to the effective date of a change in an 
interest rate provided timely notice to consumers. Q26. The Board also 
asked whether existing disclosure rules for increases to interest rates 
and other finance charges were adequate to enable consumers to make 
timely decisions about how to manage their accounts. Q27. Some 
commenters noted that consumers are surprised by changes to the terms 
of their accounts and are not aware that such changes are possible 
before they take effect, because they do not receive advance notice of 
those changes and do not remember the information regarding those 
changes that was contained in the account-opening disclosures. Consumer 
advocates expressed concern that consumers are not aware when they have 
triggered rate increases, for example by paying late, and thus are 
unaware that it might be in their best interest to shop for alternative 
financing before the rate increase takes effect. Some consumer 
commenters requested that the Board ban certain practices, such as 
``universal default clauses,'' which permit a creditor to raise a 
consumer's interest rate to the penalty rate if the consumer, for 
example, makes a late payment on any account, not just on accounts with 
that creditor.
    The Board proposes three revisions to the regulation and commentary 
to improve consumers' awareness about changes in their account terms or 
increased rates due to delinquency or default or as a penalty. These 
revisions also are intended to enhance consumers' ability to shop for 
alternative financing before such account terms become effective. The 
proposed revisions generally apply when a creditor is changing terms 
that must be disclosed in the account-opening summary table under Sec.  
226.6(b)(4). See section-by-section analysis to Sec.  226.6(b)(4). 
First, the Board proposes to expand the circumstances under which 
consumers receive advance notice of changed terms, or increased rates 
due to delinquency, or for default or as a penalty. Second, the Board 
proposes to give consumers earlier notice of a change in terms, or for 
increased rates due to delinquency or default or as a penalty. Third, 
the Board proposes to introduce format requirements to make the 
disclosures about changes in terms or for increased rates due to 
delinquency, default or as a penalty more effective. HELOCs would not 
be affected by these proposed revisions. The provisions dealing with 
notices about increased rates due to delinquency, or default or as a 
penalty are discussed in the section-by-section analysis to Sec.  
226.9(g).
    Changes in late-payment fees and over-the-credit limit fees. 
Creditors currently do not have to provide notice of changes to late-
payment fees and over-the-credit-limit charges, pursuant to current 
Sec.  226.9(c)(2). For open-end (not home-secured) plans, the Board's 
proposal would require 45 days advance notice for changes involving 
late-payment charges or over-the-credit-limit charges, other than a 
reduction in the amount of the charges. See proposed Sec.  
226.9(c)(2)(i). The Board believes that it would be beneficial for 
consumers to have advance notice of changes to these charges, which can 
be substantial depending on how a consumer uses his or her account. 
Late-payment charges and over-the-credit-limit charges can have a large 
aggregate effect, particularly since they need not be one-time charges, 
and can be charged month after month if a consumer repeatedly makes 
late payments or exceeds his or her credit limit. Advance notice 
regarding changes in the amount of these charges may assist consumers 
to make better decisions regarding their account usage and regarding 
when and in what amount they should make payments in order to avoid 
these potentially recurring charges. This amendment would require that 
45 days' advance notice be given only when the amount of a late-payment 
fee or over-the-credit-limit fee changes, not when such a fee is 
applied to a consumer's account.
    Timing. As discussed above, Sec.  226.9(c)(1) currently provides 
that whenever any term required to be disclosed under Sec.  226.6 is 
changed or the required minimum payment is

[[Page 33010]]

increased, a written notice must be mailed or delivered to the consumer 
at least 15 days before that change becomes effective. Commenters 
responding to the December 2004 ANPR expressed a number of opinions 
about this requirement. One consumer group and a number of individual 
consumers stated that 15 days is not enough time for a consumer to seek 
alternative financing, and recommended that consumers be given more 
time. Some creditors stated that 15 days' advance notice was adequate. 
Other industry commenters stated that they did not oppose increasing 
the notice period from 15 days to 30 days, and added that many 
consumers already receive notice approximately one month before a 
change in terms becomes effective, because the notices often are sent 
with periodic statements. A few consumer group commenters recommended 
90 days' advance notice for all changes to terms.
    In light of the comments received and upon further consideration of 
this issue, for open-end (not home-secured) plans, the Board proposes 
to add Sec.  226.9(c)(2)(i) to extend the notice period from 15 days to 
45 days. For changes that require advance notice, the Board believes 
that consumers should have sufficient time, following the notice and 
before the change becomes effective, to change the usage of their plan 
or to pursue alternative means of financing their purchases, such as 
using another credit card, utilizing a home-equity line or installment 
loan, or shopping for a new credit card.
    The Board considered requiring that advance notice of changes in 
terms be sent 30 days in advance, but concluded that 30 days could be 
inadequate in some circumstances. The rule governs when notices must be 
sent, not received by the consumer, so in practice the notice will be 
received by the consumer with less days remaining to act than the full 
advance notice period specified in the rule. In light of delays in mail 
delivery, for example, a notice sent to a consumer 30 days in advance 
may give a consumer only 25 days to seek alternative financing before 
the change in terms takes effect. For example, if a consumer wants to 
shop for another credit card, apply for, open, and transfer a balance 
from an existing card to a new card, 30 days may be too short a time in 
some cases. The Board's proposal that notice be sent 45 days in advance 
should ensure, in most cases, that a consumer will have at least one 
calendar month following receipt of the notice and before the change in 
terms takes effect, to seek alternative financing or otherwise mitigate 
the effect of the new terms.
    The proposed 45 day notice period would not apply when the changes 
affect charges that are not required to be disclosed under Sec.  
226.6(b)(4). See proposed Sec.  226.9(c)(2)(ii). Specifically, if a 
creditor increases any component of a charge, or introduces a new 
charge, that is imposed as part of the plan under Sec.  226.6(b)(1) but 
is not required to be disclosed as part of the account-opening summary 
table under Sec.  226.6(b)(4), the creditor may either, at its option 
(1) provide at least 45 days written advance notice before the change 
becomes effective, or (2) provide notice orally or in writing of the 
amount of the charge to an affected consumer at a relevant time before 
the consumer agrees to or becomes obligated to pay the charge. For 
example, a fee for expedited delivery of a credit card is a charge 
imposed as part of the plan under Sec.  226.6(b)(1) but is not required 
to be disclosed in the account-opening summary table under Sec.  
226.6(b)(4). 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 notice orally or in 
writing of the amount of the charge to an affected consumer at a 
relevant time before the consumer agrees to or becomes obligated to pay 
the charge. See comment 9(c)(2)(ii)-1. Creditors meet the standard to 
provide the notice at a relevant time if the oral or written notice of 
a charge is given when a consumer would likely notice it, such as when 
deciding whether to purchase the service that would trigger the charge. 
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. See comment 9(c)(2)(ii)-2. The 
Board believes that for these charges, consumers do not need advance 
notice of the current amount of the charge.
    As discussed in the section-by-section analysis to Sec.  
226.5(a)(1)(ii), creditors are permitted under the E-Sign Act to 
provide in electronic form any TILA disclosure that is required to be 
provided or made available to consumers in writing if the consumer 
affirmatively consents to receipt of electronic disclosures in a 
prescribed manner. 15 U.S.C. 7001 et seq. The Board requests comment on 
whether there are circumstances in which creditors should be permitted 
to provide cost disclosures in electronic form to consumers who have 
not affirmatively consented to receive electronic disclosures for the 
account, such as when a consumer seeks to make a payment online, and 
the creditor imposes a fee for the service.
    Format. Section 226.9 currently contains no restrictions or 
requirements with regard to how change-in-terms notices are presented 
or formatted. The consumer testing conducted for the Board explored the 
usability of current change-in-terms notices. The results of this 
consumer testing suggest that typical change-in-terms notices are not 
formatted in a manner that is noticeable and easy for consumers to 
understand. Consumer testing also suggests that improvements can be 
made to these notices. A typical change-in-terms notice contains dense 
blocks of contractual language in a small font, and may be on an 
accordion-style pamphlet included with the consumer's periodic 
statement. Consumer testing indicated that consumers may not look at 
these pamphlets when they are included with periodic statements, and 
that some consumers have trouble navigating these notices even when 
their attention is explicitly drawn to the disclosures. These pamphlets 
generally are not designed to draw attention to the changes because 
they provide a disclosure of contractual provisions.
    For open-end (not home-secured) plans, the Board proposes that 
creditors be required to provide a summary table of a limited specified 
number of key terms on the front of the first page of the change-in-
terms notice, or segregated on a separate sheet of paper. See proposed 
Sec.  226.9(c)(2)(iii), Sample G-20 in Appendix G. Creditors would be 
required to utilize the same headings as in the account-opening tables 
in Model Form G-17(A) and Samples G-17(B) and G-17(C) in Appendix G. If 
the change-in-terms notice were included with a periodic statement, a 
summary table would be required to appear on the front of the periodic 
statement, preceding the list of transactions for the period. See 
Sec. Sec.  226.7(b)(14), 226.9(c)(2)(iii).
    The Board believes that requiring a tabular summary of the key 
terms of the consumer's account would make change-in-terms notices more 
useful to consumers by highlighting those terms that may be of most 
interest to them. Based on consumer testing conducted for the Board, 
when a summary of key terms was included on change-in-terms notices 
tested, consumers tended to read the notice and appeared to understand 
better what key terms were being changed than when a summary was not 
included.

[[Page 33011]]

    The proposal also would require that creditors provide other 
information in the change-in-terms notice, specifically (1) a statement 
that changes are being made to the account; (2) a statement indicating 
the consumer has the right to opt out of these changes, if applicable, 
and a reference to additional information describing the opt out right 
provided in the notice, if applicable; (3) the date the changes to 
terms described in the summary table will become effective; (4) if 
applicable, an indication that the consumer may find additional 
information about the summarized changes, and other changes to the 
account, in the notice; and (5) if the creditor is changing a rate on 
the account, other than a penalty rate, a statement that if a penalty 
rate applies to the consumer's account, the new rate described in the 
notice does not apply to the consumer's account until the consumer's 
account balances are no longer subject to the penalty rate. This 
information must be placed directly above the summary of key changes 
described above. This information is intended to give context to the 
summary of key changes.
    With respect to the reference to a right to opt out of the changes, 
the Board is not requiring that creditors provide such an opt out 
right. State law or other applicable laws may provide consumers with a 
right to opt out of certain changes. If a consumer has the right to opt 
out of the changes in the notice, a creditor must include 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.
    Reduction in credit limit. Under Regulation Z, a creditor generally 
may decrease a consumer's credit limit without providing any notice, 
except with regard to HELOCs. As a result, there could be situations 
where a consumer may exceed his or her credit limit without realizing 
it, potentially triggering late-payment fees and penalty pricing. Under 
new Sec.  226.9(c)(2)(v), for open-end (not home-secured) plans, 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. Under the proposal, notice must 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. The Board and other 
federal banking agencies in the past have received a number of 
complaints from consumers who were not notified when their credit 
limits were decreased, and were surprised at the subsequent imposition 
of an over-the-credit-limit fee. The Board is not proposing that 
creditors may not reduce a consumer's credit limit. The Board 
recognizes that creditors have a legitimate interest in mitigating the 
risk of loss when a consumer's creditworthiness deteriorates, and that 
a consumer's creditworthiness can deteriorate quickly. Therefore, the 
Board's proposal would simply require that a creditor provide a notice 
that it has reduced or will be reducing a consumer's credit limit 45 
days before imposing any fee or penalty rate for exceeding that new 
limit. This proposed amendment would apply only when the over-the-
credit-limit fee is imposed solely as a result of a reduction in the 
credit limit; if the over-the-credit-limit fee would have been charged 
notwithstanding the reduction in a credit limit, no advance notice 
would be required. This provision is not intended to permit creditors 
to provide a general notice at account opening that a consumer's credit 
limit may change from time to time; rather, the notice should be sent 
with regard to a specific credit limit reduction that has occurred or 
will be occurring.
    Rules affecting home-equity plans. The Board proposes at the 
present time to retain in proposed Sec.  226.9(c)(1), without intended 
substantive change, the current rules regarding the circumstances, 
timing, and content of change-in-terms notices for HELOCs. These rules 
will be reviewed in the Board's upcoming review of the provisions of 
Regulation Z addressing closed-end and open-end (home-secured) credit.
    The Board is aware that the current change-in-terms rules, which 
have applicability both to HELOCs and open-end (not home-secured) 
credit, address several types of changes in terms that are 
impermissible for HELOCs subject to Sec.  226.5b. Section 226.5b 
imposes substantive restrictions on which terms of HELOCs may be 
changed, and in retaining the current change-in-terms rules for HELOCs, 
the Board does not intend to amend or in any way change the substantive 
restrictions imposed by Sec.  226.5b. Accordingly, the Board proposes 
to make several deletions in proposed Sec.  226.9(c)(1) and the related 
commentary with respect to HELOCs. For example, the Board proposes 
deleting in new comment 9(c)(1)-1 the requirement that notice ``be 
given if the contract allows the creditor to increase the rate at its 
discretion but does not include specific terms for an increase,'' 
because such a contractual term would be prohibited under Sec.  226.5b.
    The Board welcomes comment on whether there are any remaining 
references in Sec.  226.9(c)(1) and the related commentary to changes 
in terms that would be impermissible for open-end (home-secured) credit 
pursuant to Sec.  226.5b.
9(e) Disclosures Upon Renewal of Credit or Charge Card
    TILA Section 127(d), which is implemented in Sec.  226.9(e), 
requires card issuers that assess an annual or other periodic fee, 
including a fee based on activity or inactivity, on a credit card 
account of the type subject to Sec.  226.5a to provide a renewal notice 
before the fee is imposed. 15 U.S.C. 1637(d). The creditor must provide 
disclosures required for credit card applications (although not in a 
tabular format) and must inform the consumer that the renewal fee can 
be avoided by terminating the account by a certain date. The notice 
must generally be provided at least 30 days or one billing cycle, 
whichever is less, before the renewal fee is assessed to the account. 
However, there is an alternative delayed notice procedure where the fee 
can be assessed; the fee must be reversed if the consumer terminates 
the account provided the consumer is given notice.
    Creditors are given considerable flexibility in the placement of 
the disclosures required under Sec.  226.9(e). For example, the notice 
can be preprinted on the periodic statement, such as on the back of the 
statement. See Sec.  226.9(e)(3) and comment 9(e)(3)-2. However, 
creditors that place any of the disclosures on the back of the periodic 
statement must include a reference to those disclosures under Sec.  
226.9(e)(3). To aid in compliance, a model clause that may, but is not 
required to, be used is proposed for creditors that use the delayed 
notice method. See proposed comment 9(e)(3)-1.
    Comment 9(e)-4, which addresses accuracy standards for disclosing 
rates on variable rate plans, would be revised, for the same reasons 
and consistent with the proposed accuracy standard for account-opening 
disclosures. See section-by-section analysis to Sec.  
226.6(b)(2)(ii)(G).
    Other proposed changes to Sec.  226.9(e) are minor with no intended 
substantive change. For example, footnote 20a, dealing with format, is 
deleted as unnecessary. The proposed reorganization of Sec.  226.5a is 
intended, in part, to separate more clearly content and format 
requirements in that section.

[[Page 33012]]

Nonetheless, to avoid any possible confusion, comment 9(e)-2, which 
generally repeats footnote 20a, would be retained.
9(g) Increase in Rates Due to Delinquency or Default or Penalty Pricing
    As discussed above with respect to Sec.  226.9(c), in the December 
2004 ANPR, the Board asked whether existing disclosure rules for 
increases to interest rates and other finance charges were adequate to 
enable consumers to make timely decisions about how to manage their 
accounts. Q27. Consumer advocates expressed concern that consumers are 
not aware when they have triggered rate increases, for example by 
paying late, and thus are unaware that it might be in their interest to 
shop for alternative financing before the rate increase takes effect. 
Some consumer commenters requested that the Board ban certain 
practices, such as ``universal default clauses,'' which permit a 
creditor to raise a consumer's interest rate to the penalty rate if the 
consumer defaults on any accounts, not just on accounts with that 
creditor.
    The Board is not proposing at the present time to prohibit 
universal default clauses or similar practices. Instead, as discussed 
in the section-by-section analysis to Sec.  226.5a, the Board's 
proposal seeks to improve the effectiveness of the disclosures given to 
consumers regarding the conditions in which penalty pricing will apply. 
In addition, the Board seeks to improve the ability of consumers to use 
the disclosures given to them by proposing that disclosures be provided 
prior to the application of penalty pricing to their accounts. To this 
end, with respect to open-end (not home-secured) plans, the Board's 
proposed rule would add Sec.  226.9(g)(1) to require creditors to 
provide 45 days advance notice when a rate is increased due to a 
consumer's delinquency or default, or if a rate is increased as a 
penalty for one or more events specified in the account agreement, such 
as a late payment or an extension of credit that exceeds the credit 
limit. This notice would be required even if, as is currently the case, 
the creditor specifies the penalty rate and the specific events that 
may trigger the penalty rate in the account-opening disclosures.
    Neither Regulation Z nor TILA defines what a ``default'' is, and 
the Board is aware that credit agreements of some creditors permit 
penalty pricing based on a single late payment by the consumer to that 
creditor. The Board is concerned that the imposition of penalty pricing 
can come as a costly surprise to consumers who are not aware of, or do 
not understand, what behavior is considered a ``default'' under their 
agreement. As discussed in the section-by-section analysis to Sec.  
226.5a, consumer testing conducted for the Board indicated that some 
consumers do not understand what factors can give rise to penalty 
pricing, such as the fact that one late payment may constitute a 
``default.'' Moreover, when penalty pricing is imposed, it may apply to 
all of the balances on a consumer's account and often applies to 
balances for several months or longer. Penalty rates can be more than 
twice as much as the consumer's normal rate on purchases; for example, 
default rates in excess of 30 percent are not uncommon.
    The Board believes that the way to address penalty pricing is 
through improved disclosures regarding the conditions under which 
penalty pricing may be imposed. In part, the Board is proposing, in 
connection with the disclosures given with credit card applications and 
solicitations and at account opening, to enhance disclosures about 
penalty pricing and revise terminology to address consumer confusion 
regarding the meaning of ``default.'' However, in light of the 
relatively low contractual threshold for rate increases based on 
consumer delinquency, default or as a penalty, the Board believes that 
consumers also would benefit from advance notice of these rate 
increases, which they otherwise may not expect. Advance notice would 
give consumers an opportunity to shop for alternate sources of credit, 
pay down account balances before the rate increase takes effect, or 
contact the card issuer to rectify any errors before penalty rates are 
imposed. To make this opportunity viable, the Board is proposing that 
the notice be provided at least 45 days before the increase takes 
effect. The Board requests comment on whether a shorter time period, 
such as 30 days' advance notice, would be adequate notice for consumers 
whose interest rates are being increased due to default or delinquency, 
or as a penalty.
    The proposed rule would impose a de facto limitation on the 
implementation of contractual terms between a consumer and creditor, in 
that creditors would no longer be permitted to provide for the 
immediate application of penalty pricing upon the occurrence of certain 
events specified in the contract. The Board believes that this delay in 
implementing contract terms is appropriate in light of the potential 
benefit to consumers. Many consumers are likely unaware of the events 
that will trigger such pricing. The account-opening disclosures may be 
provided to the consumer too far in advance for the consumer to recall 
the circumstances that may cause his or her rates to increase. In 
addition, the consumer may not have retained a copy of the account-
opening disclosures and may not be able to effectively link the 
information disclosed at account opening to the current repricing of 
his or her account.
    The Board notes that this advance notice provision does not, in any 
manner, limit the contractual ability of creditors to establish the 
events that trigger penalty pricing, or to establish the rates that 
apply for such events. The Board also notes that use of this sort of de 
facto delay in implementing contract terms has precedent in Regulation 
Z. For example, since 1988, Sec.  226.20(c) has provided that 25 days' 
advance notice must be given for certain increases in the payment for 
an adjustable rate mortgage, even if the circumstances of the increase 
are specified in advance in the contract.
    Under the proposed rule, creditors would retain the ability to 
mitigate risk by freezing credit accounts or lowering the credit limit 
without providing advance notice (subject to proposed Sec.  
226.9(c)(2)(v) discussed above, which addresses over-the-credit-limit 
fees or penalty rates). Thus, creditors would be able to effectively 
mitigate risk on accounts that are delinquent or in default 
notwithstanding the fact that they would be required to provide a 
notice 45 days before increasing the rate.
    The rule also would not require that 45 days' advance notice be 
given for certain changes made in accordance with the contract, 
provided that such adjustment is not due to delinquency, default or as 
a penalty. For example, if an employee offers an open-end plan with 
discounted rates to its employees, the employer would not be required 
to give a former employee 45 days' advance notice before increasing the 
rate on that individual's account from the preferential employees' rate 
to the standard rate, provided that the rate increase was set forth in 
the account agreement.
    Disclosure content and format. With respect to open-end (not home-
secured) plans, under the Board proposal, if a creditor is increasing 
the rate due to delinquency or default or as a penalty, the creditor 
must provide a notice with the following information: (1) A statement 
that the delinquency or default rate or penalty rate has been 
triggered, as applicable; (2) the date as of which the delinquency or 
default rate or penalty rate will be applied to the account, as 
applicable; (3) the

[[Page 33013]]

circumstances under which the delinquency or default rate or penalty 
rate, as applicable, will cease to apply to the consumer's account, or 
that the delinquency or default rate or penalty rate will remain in 
effect for a potentially indefinite time period; and (4) a statement 
indicating to which balances on the account the delinquency or default 
rate or penalty rate will be applied, as applicable. See proposed Sec.  
226.9(g)(3)(i). In consumer testing conducted for the Board, some 
participants did not appear to understand that penalty rates can apply 
to all of their balances, including existing balances. Some 
participants also did not appear to understand how long a penalty rate 
could be in effect. Without information about the balances to which the 
penalty rate applies and how long it applies, consumers might have 
difficultly determining whether they should shop for another card or 
pursue alternate sources of financing. Consumers also may consider the 
duration of penalty pricing when shopping for alternative sources of 
credit which would enhance their ability to make prudent decisions.
    If the notice regarding increases in rates due to delinquency, 
default or penalty pricing were included on or with a periodic 
statement, this notice must be in a tabular format. Under the proposal, 
the notice also would be required to appear on the front of the 
periodic statement, preceding the list of transactions for the period. 
See proposed Sec. Sec.  226.7(b)(14), 226.9(g)(3)(ii)(A). If the notice 
is not included on or with a periodic statement, the information 
described above must be disclosed on the front of the first page of the 
notice. See Sec.  226.9(g)(3)(ii)(B).

Section 226.10 Prompt Crediting of Payments

    Section 226.10, which implements TILA Section 164, generally 
requires a creditor to credit to a consumer's account a payment that 
conforms to the creditor's instructions (also known as a conforming 
payment) as of the date of receipt, except when a delay in crediting 
the account will not result in a finance or other charge. 15 U.S.C. 
1666c; Sec.  226.10(a). Section 226.10 also requires a creditor that 
accepts a non-conforming payment to credit the payment within five days 
of receipt. See Sec.  226.10(b). The Board has interpreted Sec.  226.10 
to permit creditors to specify cut-off times indicating the time when a 
payment is due, provided that the requirements for making payments are 
reasonable, to allow most consumers to make conforming payments without 
difficulty. See comments 10(b)-1 and -2. Pursuant to Sec.  226.10(b) 
and comment 10(b)-1, if a creditor imposes a cut-off time, it must be 
disclosed on the periodic statement; many creditors put the cut-off 
time on the back of statements.
    The December 2004 ANPR solicited comment regarding the cut-off 
times used currently by most issuers for receiving payments, whether 
cut-off times differ based on the type of payment (e.g., check, EFT, 
telephone, or Internet), and whether the operating times of third party 
processors differ from those of creditors. Q47-Q48, Q50. The December 
2004 ANPR also requested comment regarding the adequacy and clarity of 
current disclosures of payment due dates and cut-off times, and asked 
whether the Board should issue a rule requiring creditors to credit 
payments as of the date they are received, regardless of the time. Q49, 
Q51.
    Disclosure of cut-off times. In response to the December 2004 ANPR, 
the Board received a number of comments describing issuers' current 
practices regarding cut-off times. The majority of industry commenters 
noted that they do set cut-off times that are in the early or mid-
afternoon, but that cut-off times may differ based on the means by 
which a consumer makes his or her payment, with telephone and Internet 
payments often having later cut-off times than payments made by mail. 
These industry commenters argued that current disclosure of these cut-
off times is clear. Consumer groups and consumers commented that the 
majority of banks now set a cut-off time on payment due dates and that 
these cut-off times are a problem because they could result in a due 
date that is one day earlier in practice than the date disclosed. 
Consumer groups expressed particular concern about cut-off times 
because they believe that issuers simultaneously may be decreasing the 
time period between the end of the statement period and the time when 
the payment is due.
    Almost all industry comments opposed the Board's suggestion to 
require creditors to credit payments as of the date they are received, 
regardless of the time, noting that issuers need flexibility to work 
with external vendors and that creditors' internal processes and 
systems will to some extent dictate the timing of payment crediting. 
Consumer and consumer group comments proposed a rule that would require 
banks to consider the postmark to be the day the payment is received.
    The Board is not proposing to require a minimum cut-off time. 
Instead, as discussed above, the Board is proposing, in what would be 
new Sec.  226.7(b)(11), to require that for open-end (not home-secured) 
plans, creditors must disclose the earliest of their cut-off times for 
payments near the due date on the front page of the periodic statement, 
if that earliest cut-off time is before 5 p.m. on the due date. The 
Board believes that the disclosure-based approach may benefit consumers 
without imposing an unreasonable operational burden on creditors. 
Consumers would be able to make better decisions about when to make 
payments in order to avoid late-payment fees and default rates if 
earlier cut-off times such as 12:00 p.m. were more prominently 
disclosed on the periodic statement. In recognition of the fact that 
creditors may have different cut-off times depending on the type of 
payment (e.g., mail, Internet, or telephone), the Board's proposal 
would require that creditors disclose only the earliest cut-off time, 
if earlier than 5 p.m. on the due date. See proposed Sec.  
226.7(b)(11). HELOCs would not be affected by the disclosure rule in 
Sec.  226.7(b)(11).
    Receipt of electronic payments made through a creditor's Web site. 
The Board also proposes to add an example to comment 10(a)-2 that 
states that for payments made through a creditor's Web site, the date 
of receipt is the date as of which the consumer authorizes the creditor 
to debit that consumer's account electronically. Industry comments to 
the December 2004 ANPR stated that most credit card payments are still 
received by mail. Nevertheless, the Internet is an increasingly 
utilized resource for making credit card payments and for receiving 
information about accounts. Unlike payments delivered by mail, payments 
made via a creditor's Web site may be received almost immediately by 
that creditor.
    The proposed comment would refer to the date on which the consumer 
authorizes the creditor to effect the electronic payment, not the date 
on which the consumer gives the instruction. The consumer may give an 
advance instruction to make a payment and some days may elapse before 
the payment is actually made; accordingly, comment 10(a)-2 would refer 
to the date on which the creditor is authorized to debit the consumer's 
account. If the consumer authorized an immediate payment, but provided 
the instruction after a creditor's cut-off time, the relevant date 
would be the following business day. For example, a consumer may go 
online on a Sunday evening and instruct that a payment be made; 
however, the creditor could not transmit the request for the debit to 
the

[[Page 33014]]

consumer's account until the next day, Monday. Under proposed comment 
10(a)-2 the date on which the creditor was authorized to effect the 
electronic payment would be deemed to be Monday, not Sunday. Proposed 
comment 10(b)-1.i.B would clarify that the creditor may, as with other 
means of payment, specify a cut-off time for an electronic payment to 
be received on the due date in order to be credited on that date. The 
Board solicits comment regarding the incidence of, and types of, any 
delays that may prevent creditors or their third party processors from 
receiving electronic payments on the date on which the creditor is 
authorized to effect the payment.
    The Board considered expanding this comment to cover electronic 
payments received by other means (e.g., if the consumer authorizes a 
payment to his deposit account-holding bank's Web site), because it is 
likely that such electronic payments made through such parties also may 
be received by the creditor on the same day that they are authorized. 
However, it could be difficult for a creditor to monitor when a 
consumer gives a third party an instruction to send a payment, and, in 
addition, the creditor has no direct control over how long it takes the 
third party to process that instruction. As a result, the Board's 
proposed clarification of comment 10(a)-2 is limited to electronic 
payments effected through the creditor's own Web site, over which the 
creditor has control.
    Promotion of payment via the creditor's Web site. The Board also 
proposes to update the commentary to clarify that if a creditor 
discloses that payments can be made on that creditor's Web site, then 
payments made through the creditor's Web site will be considered 
conforming payments for purposes of Sec.  226.10(b). Many creditors now 
permit consumers to make payments via their Web site. Payment on the 
creditor's Web site may not be specified on or with the periodic 
statement as conforming payments, but it may be promoted in other ways, 
such as in the account-opening agreement, via e-mail, in promotional 
material, or on the Web site itself. It would be reasonable for a 
consumer who receives materials from the creditor promoting payment on 
the creditor's Web site to believe that it would be a conforming 
payment and credited on the date of receipt. Therefore, the Board 
proposes to amend comment 10(b)-2 to clarify that if a creditor 
promotes that it accepts payments via its Web site (such as disclosing 
on the Web site itself or on the periodic statement that payments can 
be made via the Web site), then it is considered a conforming payment 
for purposes of Sec.  226.10(b).
    Third party processors. With regard to third party processors, 
industry commenters noted that current practice is that payments 
received by a third party processor are treated as if they were 
received directly by the creditor, and that no further clarification is 
necessary. Accordingly, the Board is not currently proposing any 
amendments to specifically address third party processors.

Section 226.11 Treatment of Credit Balances; Account Termination

11(a) Credit Balances
    TILA Section 165, implemented in Sec.  226.11, sets forth specific 
steps that a creditor must take to return any credit balance in excess 
of $1 on a credit account, including making a good faith effort to 
refund any credit balance remaining in the consumer's account for more 
than six months. 15 U.S.C. 1666d. The substance of Sec.  226.11 would 
remain unchanged; however, the commentary would be revised to provide 
that a creditor may comply with this section by refunding any credit 
balance upon receipt of a consumer's oral or electronic request. See 
proposed comment 11(a)-1. In addition, the Board proposes to move the 
current rules in Sec.  226.11 to a new paragraph (a), with the 
commentary renumbered accordingly, and to add a new paragraph (b) which 
implements the account termination prohibition for certain open-end 
accounts in Section 1306 of the Bankruptcy Act (further discussed 
below). See TILA Section 127(h); 15 U.S.C. 1637(h). The section title 
would be amended to reflect the new subject matter.
11(b) Account Termination
    TILA Section 127(h), added by the Bankruptcy Act, prohibits an 
open-end creditor from terminating open-end accounts for certain 
reasons. Creditors cannot terminate an open-end plan before its 
expiration date solely because the consumer has not incurred finance 
charges on the account. The prohibition does not prevent a creditor 
from terminating an account for inactivity in three or more consecutive 
months. The October 2005 ANPR solicited comment on the need for 
additional guidance, such as when an account ``expires'' and when an 
account is ``inactive.'' Q106-Q108.
    The Board proposes to implement TILA Section 127(h) in new Sec.  
226.11(b). The general rule is stated in Sec.  226.11(b)(1) and mirrors 
the statute; the prohibition would apply to all open-end plans.
    Commenters expressed differing views on how the Board might 
interpret ``expiration date.'' Some suggested using the expiration date 
on credit cards as the date the account is deemed to expire. Others 
noted that while cards may expire from time to time, the underlying 
open-end plans commonly do not have maturity or expiration dates. These 
commenters were concerned that if an account were deemed to ``expire'' 
when a credit card's expiration date occurs, new account-opening 
disclosures would be required for the account to continue. The Board 
believes that Congress did not intend such a result. Therefore, comment 
11(b)(1)-1 would clarify that the underlying credit agreement, not the 
credit card, determines if there is a stated expiration (maturity) 
date. Creditors offering accounts without a stated expiration date 
could not terminate those accounts solely because the consumer does not 
incur finance charges on the account.
    Under the proposal, a new Sec.  226.11(b)(2) would be added to 
provide that the new rule in Sec.  226.11(b)(1) does not prevent 
creditors from terminating an account under an open-end plan (with or 
without an expiration date) that is inactive for three consecutive 
months. Commenters were split on the need for guidance on an 
``inactive'' account. Of those that suggested guidance, commenters 
generally concurred that ``activity'' includes purchases or cash 
advances, for example. But commenters disagreed whether an account with 
an outstanding balance was ``active.'' Because finance charges are 
likely to accrue on balances remaining after the end of a grace period 
if any, the Board believes the Congress was addressing situations where 
no finance charges were accruing due to inactivity. Therefore, proposed 
Sec.  226.11(b)(2) would provide that an account is inactive if there 
has been no extension of credit (such as by purchase, cash advance, or 
balance transfer) and the account has no outstanding balance.

Section 226.12 Special Credit Card Provisions

    Section 226.12 contains special rules applicable to credit cards 
and credit card accounts, including conditions under which a credit 
card may be issued, liability of cardholders for unauthorized use, and 
cardholder rights to assert merchant claims and defenses against the 
card issuer. The proposal would, among other things, provide additional 
guidance on the rules on unauthorized use and the rights of

[[Page 33015]]

cardholders to assert claims or defenses involving a merchant against 
the card issuer (consumer claims with merchants) and update the section 
to address Internet transactions.
12(a) Issuance of Credit Card
    TILA Section 132, which is implemented by Sec.  226.12(a) of 
Regulation Z, generally prohibits creditors from issuing credit cards 
except in response to a request or application. Section 132 explicitly 
exempts from this prohibition credit cards issued as renewals of or 
substitutes for previously accepted credit cards. 15 U.S.C. 1642. 
Existing comment 12(a)(2)-5, the ``one-for-one rule,'' interprets these 
statutory and regulatory provisions by providing that, in general, a 
creditor may not issue more than one credit card as a renewal of or 
substitute for an accepted credit card. The proposal would leave Sec.  
226.12(a) and the accompanying commentary generally unchanged, except 
that the text of footnote 21 defining the term ``accepted credit card'' 
would be moved to new comment 12(a)-2.
    In 2003, Board staff revised the commentary to Sec.  226.12(a) to 
allow card issuers to replace an accepted credit card with more than 
one card, subject to certain conditions, including the limitation that 
the consumer's total liability for unauthorized use with respect to the 
account could not increase with the issuance of the additional renewal 
or substitute card(s). See comment 12(a)(2)-6; 68 FR 16,185; April 3, 
2003. Card issuers could thus, for example, issue credit cards using a 
new format or technology to existing accountholders, even though the 
new card is intended to supplement rather than replace the traditional 
card. In the December 2004 ANPR, the Board solicited comment as to 
whether it should consider revising Sec.  226.12(a) to allow the 
unsolicited issuance of additional cards on an existing account outside 
of renewal or substitution under certain conditions, including that the 
additional cards be sent unactivated. Q46.
    Consumer groups stated that additional credit cards should only be 
sent if the consumer specifically requests such cards, citing identity 
theft concerns if issuers were permitted to send out credit cards 
without any advance warning or notice. One consumer group suggested 
that the Board require that consumers be notified in writing or by 
phone before additional cards are sent. Industry commenters strongly 
encouraged the Board to amend the regulation to permit the unsolicited 
issuance of additional cards on existing accounts even when a 
previously accepted card is not being replaced. These industry 
commenters observed that the current constraints on distributing new 
types of credit cards potentially impeded industry innovation in 
providing more convenient methods for consumers to access their 
accounts. Industry commenters also contested the notion that sending 
additional cards on an unsolicited basis would increase the risk of 
identity theft because, in their view, providing an additional card 
presents no greater risk than sending the first card, which the 
consumer has requested, or a renewal card, which consumers often would 
not know when to expect. Industry commenters also noted that allowing 
the unsolicited issuance of credit cards outside the context of a 
renewal or substitution would not expose consumers to greater liability 
for unauthorized transactions given the contemplated condition that 
liability for unauthorized use on the card account may not increase 
with the issuance of the additional card.
    At this time, the Board does not propose to amend Sec.  226.12(a) 
and the one-for-one rule to allow the unsolicited issuance of credit 
cards outside the context of a renewal or substitution of an accepted 
access device. Based on current card issuer practices, the Board 
understands that some issuers may be unable to require separate 
activation procedures for access devices on the same credit card 
account. As a result, additional cards sent on an unsolicited basis 
outside the context of a renewal or substitution might be sent in 
activated form, which could cause considerable harm to consumers. Even 
if the card issuer were not permitted to impose any additional 
liability on the consumer for unauthorized use, consumers would 
nevertheless still suffer the inconvenience of refuting unwarranted 
claims of liability.
12(b) Liability of Cardholder for Unauthorized Use
    TILA Section 133(a) limits a cardholder's liability for an 
unauthorized use of a credit card to no more than $50 for transactions 
that occur prior to notification of the card issuer that an 
unauthorized use has occurred or may occur as the result of loss, theft 
or otherwise. 15 U.S.C. 1643. Before a card issuer may impose liability 
for an unauthorized use of a credit card, it must satisfy certain 
conditions: (1) the card must be an accepted credit card; (2) the 
issuer must have provided adequate notice of the cardholder's maximum 
liability and of the means by which the issuer may be notified in the 
event of loss or theft of the card; and (3) the issuer must have 
provided a means to identify the cardholder on the account or the 
authorized user of the card. The statutory provisions on unauthorized 
use are implemented in Sec.  226.12(b) of the regulation. The Board is 
proposing a number of revisions that would clarify the scope of the 
provision and update the regulation to reflect current business 
practices. The proposed revisions also would provide guidance on the 
relationship between the unauthorized use provision and the billing 
error provisions in Sec.  226.13.
    Scope. The definition of ``unauthorized use'' currently found in 
footnote 22 would be moved into the regulation in new Sec.  
226.12(b)(1)(i). The definition provides that unauthorized use is use 
of a credit card by a person who lacks ``actual, implied, or apparent 
authority'' to use the credit card. Comment 12(b)(1)-1 further 
clarifies that whether such authority exists must be determined under 
state or other law. Commenters were asked in the December 2004 ANPR 
about whether there was a need to revise any of the substantive 
protections for open-end credit accounts. Q43. Some commenters urged 
the Board to consider adopting a provision similar to the existing 
staff commentary under Regulation E (Electronic Fund Transfer Act) to 
address circumstances where a consumer has furnished an access device 
to a person who has exceeded the authority given. The proposal would 
add a new comment 12(b)(1)-3 to clarify that if a cardholder furnishes 
a credit card to another person and that person exceeds the authority 
given, the cardholder is liable for that credit transaction unless the 
cardholder has notified (in writing, orally, or otherwise) the creditor 
that use of the credit card by that person is no longer authorized. See 
also comment 205.2(m)-2 of the Official Staff Commentary to Regulation 
E, 12 CFR part 205. New comment 12(b)(1)-4 would provide, however, that 
an unauthorized use would include circumstances where a person has 
obtained a credit card, or otherwise has initiated a credit card 
transaction through robbery or fraud (e.g., if the person holds the 
consumer at gunpoint). See also comment 205.2(m)-3 of the Official 
Staff Commentary to Regulation E, Sec.  205.5. In both cases, the Board 
believes it is appropriate for the same standard to apply to credit 
cards that applies to debit cards under Regulation E. Thus, the Board 
is proposing to adopt

[[Page 33016]]

the two standards under Regulation Z for consistency.
    The Board does not anticipate that the proposed comments would 
significantly expand the circumstances under which liability could be 
imposed on a cardholder for a particular transaction, in light of the 
existing reference in the definition of ``unauthorized use'' to 
``implied or apparent authority.'' Nevertheless, the addition of this 
comment could help provide greater clarity for issuers when 
investigating unauthorized use claims. Comment is requested, however, 
as to whether this clarification is necessary in light of the existing 
definition of ``unauthorized use.'' Current Sec.  226.12(b)(1) would be 
re-designated as Sec.  226.12(b)(1)(ii).
    Section 226.12(b)'s liability provisions apply only to unauthorized 
uses of a cardholder's credit card. Thus, the liability limits 
established in Sec.  226.12(b) do not apply to unauthorized 
transactions involving the use of a check that accesses a credit card 
account. (See prior discussion of ``credit card'' under Sec.  
226.2(a)(15).) The consumer would nevertheless be able to assert the 
billing error protections in Sec.  226.13 which are independent of the 
protections under Sec.  226.12(b). New comment 12(b)-4 would contain 
this clarification.
    Some commenters on the December 2004 ANPR urged the Board to adopt 
a time period within which consumers must make claims for unauthorized 
transactions made through the use of a credit card. These commenters 
asserted that over time, evidence becomes more difficult to obtain, 
making a creditor's investigation more difficult and that a consumer's 
early detection and notification would prevent additional fraud on the 
account. In contrast to TILA Section 161 which requires consumers to 
assert a billing error claim within 60 days after a periodic statement 
reflecting the error has been sent, TILA Section 133 does not prescribe 
a time frame for asserting an unauthorized use claim. 15 U.S.C. 1643. 
The Board believes that had Congress intended that a consumer's rights 
to assert an unauthorized use claim to be time-limited, it would have 
established a time frame for asserting the claim. Accordingly, the 
proposal does not contain the suggested change.
    Conditions for imposing liability. Section 226.12(b)(2) requires 
the card issuer to satisfy three conditions before the issuer may 
impose any liability for an unauthorized use of a credit card. First, 
the credit card must be an accepted credit card. See footnote 21; 
proposed comment 12-2. Second, the card issuer must have provided 
``adequate notice'' to the cardholder of his or her maximum potential 
liability and the means by which to notify the issuer of the loss or 
theft of the card. Third, the card issuer also must have provided a 
means to identify the cardholder on the account or the authorized user 
of the card. See Sec.  226.12(b)(2).
    Under the proposal, the guidance regarding what constitutes 
adequate notice currently in footnote 23 would be moved to the staff 
commentary. See new comment 12(b)(2)(ii)-2. In addition, the examples 
in comment 12(b)(2)(iii)-1 describing means of identifying a cardholder 
or user would be updated to contemplate additional biometric means of 
identification other than a fingerprint on a card.
    Comment 12(b)(2)(iii)-3 currently states that a cardholder may not 
be held liable under Sec.  226.12(b) when the card itself or some other 
sufficient means of identification of the cardholder is not presented. 
In these circumstances, the card issuer has not satisfied one of the 
conditions precedent necessary to impose liability; that is, it has not 
provided a means to identify the cardholder of the account or the user 
of the card. For example, no liability may be imposed on the cardholder 
if a person without authority to do so orders merchandise by telephone, 
using a credit card number or another number that appears only on the 
card. The example would be updated to also apply to Internet 
transactions.
    In many instances, a credit card will bear a separate 3- or 4-digit 
number, which is typically printed on the back of the card on the 
signature block or in some cases on the front of the card above the 
card number. Although the provision of the 3- or 4-digit number may 
suggest that the person providing the number is in possession of the 
card, it does not meet the requirement to provide a means to identify 
the cardholder or the authorized user of the card, as required by the 
regulation. Thus, comment 12(b)(2)(iii)-3 would clarify that a card 
issuer may not impose liability on the cardholder when merchandise is 
ordered by telephone or Internet if the person using the card without 
the cardholder's authority provides the credit card number by itself or 
with other information that appears on the card because it has not met 
the requirement that a means to identify the cardholder or authorized 
user of the card in the transaction.
    The Board is also proposing revisions to Model Clause G-2, which 
can be used to explain the consumer's liability for unauthorized use, 
to improve its readability. For HELOCs subject to Sec.  226.5b, at the 
creditor's option, the creditor may use Model Clause G-2 or G-2(A). For 
open-end (not home-secured) plans, the creditor may use G-2(A).
12(c) Right of Cardholder to Assert Claims or Defenses Against Card 
Issuer
    Under TILA Section 170, as implemented in Sec.  226.12(c) of the 
regulation, a cardholder may assert against the card issuer a claim or 
defense for defective goods or services purchased with a credit card. 
The claim or defense applies only as to unpaid balances for the goods 
or services, and if the merchant honoring the card fails to resolve the 
dispute. See 15 U.S.C. 1666i. The cardholder may withhold payment up to 
the unpaid balance of the purchase that gave rise to the dispute and 
any finance or other charges imposed on that amount. The right is 
limited to disputes exceeding $50 for purchases made in the consumer's 
home state or within 100 miles. See Sec.  226.12(c).\18\ The proposal 
would update the regulation to address current business practices and 
move guidance currently in the footnotes to the rule or the staff 
commentary as appropriate.
---------------------------------------------------------------------------

    \18\ Certain merchandise disputes, such as the nondelivery of 
goods, may also be separatel asserted as a ``billing error'' under 
Sec. 226.13(a)(3). See comment 12(c)-1.
---------------------------------------------------------------------------

    In order to assert a claim under Sec.  226.12(c), a cardholder must 
have used a credit card to purchase the goods or services associated 
with the dispute. Comment 12(c)(1)-1 lists examples of circumstances 
that are excluded or included by Sec.  226.12(c). The proposal would 
add Internet transactions charged to the credit card account to the 
list of circumstances included within the scope of Sec.  226.12(c) 
(provided that certain conditions are met, including that the disputed 
transaction take place in the same state as the cardholder's current 
designated address, or within 100 miles from that address).
    In technical revisions, guidance stating Sec.  226.12(c)'s 
inapplicability to the transactions listed in footnote 24 has been 
moved to comment 12(c)-3 with corresponding changes in comment 
12(c)(1)-1. The reference to ``paper-based debit cards'' in existing 
comment 12(c)(1)-1 would be deleted as obsolete. The Board is aware of 
at least one product, however, whereby a consumer can pay cash and is 
instantly issued an account number (along with a 3-digit card 
identification number and expiration date) that allows the consumer to 
conduct transactions with an online merchant. No physical card device 
is issued to the consumer.

[[Page 33017]]

Comment is requested whether the reference to paper-based debit cards 
should be retained or expanded to include these ``virtual'' cards. 
Comment is also requested as to whether the references to ``check-
guarantee cards'' under comments 12(c)-3 (see existing footnote 24) and 
12(c)(1)-1 should continue to be retained as guidance in the commentary 
or whether they should also be deleted as obsolete.
    Section 226.12 also requires that the disputed transaction must 
have occurred in the same state as the cardholder's current designated 
address or, if different, within 100 miles from that address. See Sec.  
226.12(c)(3). Thus, if applicable state law provides that a mail, 
telephone, or Internet transaction occurs at the cardholder's address, 
such transactions would be covered under Sec.  226.12(c), even if the 
merchant is located more than 100 miles from the cardholder's address. 
The conditions for asserting merchant claims would be re-designated 
under Sec.  226.12(c)(3)(i)(A) and (B) in the proposal. In addition, 
the Board proposes to move the guidance currently found in footnote 26 
regarding the applicability of some of the limitations in Sec.  
226.12(c) to Sec.  226.12(c)(3)(ii). Corresponding revisions to reflect 
the proposed changes would also be made to the staff commentary, with 
additional clarifying changes.
    Guidance regarding how to calculate the amount of the claim or 
defense that may be asserted by the cardholder under Sec.  226.12(c), 
currently found in footnote 25, would be moved to the commentary in 
proposed comment 12(c)-4.
12(d) Offsets by Card Issuer Prohibited
    TILA Section 169 prohibits card issuers from taking any action to 
offset a cardholder's credit card indebtedness against funds of the 
cardholder held on deposit with the card issuer. 15 U.S.C. 1666h. The 
statutory provision is implemented by Sec.  226.12(d) of the 
regulation. Section 226.12(d)(2) currently provides that card issuers 
are permitted to ``obtain or enforce a consensual security interest in 
the funds'' held on deposit. Comment 12(d)(2)-1 provides guidance on 
the security interest provision. For example, the security interest 
must be affirmatively agreed to by the consumer, and must be disclosed 
as part of the account-opening disclosures under Sec.  226.6. In 
addition, the comment provides that the security interest must not be 
``the functional equivalent of a right of offset.'' The comment states 
that the consumer ``must be aware that granting a security interest is 
a condition for the credit card account (or for more favorable account 
terms) and must specifically intend to grant a security interest in a 
deposit account.'' The comment gives some examples of how this 
requirement can be met, such as use of separate signature or initials 
to authorize the security interest, placement of the security agreement 
on a separate page, or reference to a specific amount or account number 
for the deposit account. The comment also states that the security 
interest must be ``obtainable and enforceable by creditors generally. 
If other creditors could not obtain a security interest in the 
consumer's deposit accounts to the same extent as the card issuer, the 
security interest is prohibited by Sec.  226.12(d)(2).''
    From time to time, questions have been raised about comment 
12(d)(2)-1. For example, some card issuers have asked whether using 
only one of the methods to ensure the consumer's awareness and intent 
is sufficient, versus using more than one. Card issuers have also asked 
about the requirement that the security interest be obtainable and 
enforceable by creditors generally. The Board requests comment on 
whether additional guidance is needed and, if so, the specific issues 
that the guidance should address.
12(e) through 12(g)
    Sections Sec.  226.12(e), (f), and (g) address, respectively: the 
prompt notification of returns and crediting of refunds; discounts and 
tie-in arrangements; and guidance on the applicable regulation 
(Regulation Z or Regulation E) in instances involving both credit and 
electronic fund transfer aspects. The Board does not propose any 
changes to these provisions.

Section 226.13 Billing Error Resolution

    TILA Section 161, as implemented in Sec.  226.13 of the regulation, 
addresses error resolution procedures for billing errors, and requires 
a consumer to provide written notice of the error within 60 days after 
the first periodic statement reflecting the alleged error is sent. 15 
U.S.C. 1666. The written notice triggers a creditor's duty to 
investigate the claim within prescribed time limits. In contrast to the 
consumer protections in Sec.  226.12 of the regulation, which are 
limited to transactions involving the use of a credit card, the billing 
error procedures apply to any extensions of credit that are made in 
connection with an open-end account. Commenters on the December 2004 
ANPR provided few comments addressing the billing error provisions, 
except to urge the Board to increase the time period for investigating 
errors. Q43.
    The proposed revisions would clarify, among other things, that (1) 
the billing error provisions apply to purchases made using a third-
party payment intermediary, where the purchase is funded through an 
extension of credit using the consumer's credit card or other open-end 
plan; (2) a creditor must complete its investigation within the time 
frames established under the regulation and may not reverse any credits 
made once the time frames have expired; and (3) a creditor may not 
deduct any portion of a disputed amount or related charges when a 
cardholder uses an automatic payment service offered directly by or 
through the creditor.
    In technical revisions, the substance of footnotes 27-30 would be 
moved to the regulation or the commentary, as appropriate, and footnote 
31 would be deleted. (See redesignation table below.) For the reasons 
set forth in the section-by-section analysis to Sec.  226.6(b)(1), the 
Board would update references to ``free-ride period'' as ``grace 
period'' in the regulation and commentary, without any intended 
substantive change.
13(a) Definition of Billing Error
    The definition of a billing error in Sec.  226.13(a) would be 
substantively unchanged in the proposal. Under Sec.  226.13(a)(3), the 
term ``billing error'' includes disputes about property or services 
that are not accepted by the consumer or not delivered to the consumer 
as agreed. See Sec.  226.13(a)(3). The proposal would add a new comment 
13(a)(3)-2 to clarify that Sec.  226.13(a)(3) also applies when a 
consumer uses his or her credit card or other open-end account to 
purchase a good or service through a third-party payment intermediary, 
such as a person-to-person Internet payment service.
    In some cases, a consumer might pay for merchandise purchased 
through an Internet auction site using an Internet payment service, 
which is in turn funded through an extension of credit from the 
consumer's credit card or other open-end account. As in the case of 
purchases made using a check that accesses a consumer's credit card 
account, there may not be a direct relationship between the merchant 
selling the merchandise and the card issuer when an Internet payment 
service is used. Because a consumer has billing error rights with 
respect to purchases made with checks that access a credit card 
account, the Board believes the same result should apply when the 
consumer makes a purchase using a third-party intermediary funded using 
the same credit card account. In particular, the Board believes that 
there

[[Page 33018]]

is little difference between a consumer using his or her credit card to 
make a payment directly to the merchant on the merchant's Internet Web 
site or to make a payment to the merchant through a third-party 
intermediary. Accordingly, comment 13(a)(3)-2 would clarify that when 
an extension of credit from the consumer's credit card or other open-
end account is used to fund a purchase through a third-party payment 
intermediary, the good or service purchased is not the payment medium, 
but rather the good or service that is obtained using the payment 
service.
    Proposed new comment 13(a)(3)-3 would clarify that prior notice to 
the merchant is not required before the consumer can assert a billing 
error that the good or service was not accepted or delivered as agreed. 
Thus, in contrast to claims or defenses asserted under TILA Section 170 
and Sec.  226.12(c) of the regulation which require that the cardholder 
first make a good faith attempt to obtain satisfactory resolution of a 
disagreement or problem with the person honoring the credit card, the 
consumer need not provide prior notice of the dispute to the person 
from whom the consumer purchased the good or service of the dispute 
before asserting a billing error claim directly with the creditor. 15 
U.S.C. 1666i.
    The text of footnote 27 prohibiting a creditor from accelerating a 
consumer's debt or restricting or closing the account because the 
consumer has exercised billing error rights, and alerting creditors to 
the statutory forfeiture penalty under TILA Section 161(e) (15 U.S.C. 
1666) for failing to comply with any of the requirements in Sec.  
226.13 would be moved to the list of error resolution rules under Sec.  
226.13(d)(3). Current comment 13-1 referring to this general 
prohibition would be deleted as redundant.
13(b) Billing-Error Notice
    To assert a billing error under Sec.  226.13(b), a consumer must 
provide a written notice of the error to the creditor no later than 60 
days after the creditor transmitted the first periodic statement that 
reflects the alleged error. The notice must provide sufficient 
information to enable the creditor to investigate the claim, including 
the consumer's name and account number, the type, date and amount of 
the error, and, to the extent possible, the consumer's reasons for his 
or her belief that a billing error exists.
    Comment 13(b)-1 would be revised to incorporate the guidance 
currently in footnote 28 stating that the creditor need not comply with 
the requirements of Sec.  226.13(c) through (g) if the consumer 
voluntarily withdraws the billing error notice. Comment 13(b)-2 would 
be added to incorporate the guidance currently in footnote 29 stating 
that the creditor may require that the written billing error notice not 
be made on the payment coupon or other material accompanying the 
periodic statement if the creditor so states in the billing rights 
statement on the account-opening disclosure and annual billing rights 
statement. In addition, comment 13(b)-2 would provide that billing 
error notices submitted electronically would be deemed to satisfy the 
requirement that billing error notices be provided in writing, provided 
that the creditor has stated in the billing rights statement required 
by Sec. Sec.  226.6(c)(2) and 226.9(a) that it will accept notices 
submitted electronically, including how the consumer can submit billing 
error notices in this manner.
13(c) Time for Resolution; General Procedures
    Section 226.13(c) generally requires a creditor to mail or deliver 
written acknowledgment to the consumer within 30 days of receiving a 
billing-error notice, and to complete the billing error investigation 
procedures within two billing cycles (but no later than 90 days) after 
receiving a billing-error notice. Comment 13(c)(2)-2 would be added to 
clarify that a creditor must complete its investigation and 
conclusively determine whether an error occurred within the error 
resolution time frames. Thus, once the error resolution time frame has 
expired, the creditor may not reverse any corrections it has made 
related to the asserted billing error, including any previously 
credited amounts, even if the creditor subsequently obtains evidence 
indicating that the billing error did not occur as asserted. The 
statute is clear that a creditor must complete its investigation and 
make appropriate corrections to the consumer's account within two 
complete billing cycles after the receipt of the consumer's notice of 
error, and does not permit the creditor to continue its investigation 
beyond the error resolution period. 15 U.S.C. 1666. This rule is 
intended to ensure finality in the error resolution process, and to 
ensure creditors complete their investigations in a timely manner. Of 
course, a creditor may reverse a prior determination, based on an 
investigation, that no error occurred and subsequently credit the 
consumer's account for the amount of the error even after the error 
resolution period has elapsed.
    Some commenters on the December 2004 ANPR urged the Board to 
increase the time period for investigating errors from 90 days to 120 
days to allow issuers to investigate billing error claims effectively. 
Q43. The 90-day time frame is statutory, and the Board does not propose 
to extend the maximum error resolution period. The Board further notes 
that the 90-day maximum time frame would apply only in cases where a 
creditor's billing cycle is 45 days or more. Otherwise, the creditor 
must complete its investigation within the time period represented by 
two billing cycles. Thus, for example, if a creditor's billing cycle is 
30 days, it would only have 60 days to conclude its investigation of 
alleged billing errors.
    Of course, any determination that an error has not occurred must be 
based upon a reasonable investigation. See Sec.  226.13(f).
13(d) Rules Pending Resolution
    Once a billing error is asserted by a consumer, the creditor is 
prohibited under Sec.  226.13(d) from taking certain actions with 
respect to the dispute in order to ensure that the consumer is not 
otherwise discouraged from exercising his or her billing error rights. 
For example, the creditor may not take action to collect any disputed 
amounts, including related finance or other charges, or make or 
threaten to make an adverse report, including reporting that the amount 
or account is delinquent, to any person about the consumer's credit 
standing arising from the consumer's failure to pay the disputed amount 
or related finance or other charges.
    Under the current rule, the card issuer is specifically prohibited 
from deducting any part of the disputed amount or related charges from 
a cardholder's deposit account that is also held by the card issuer. To 
reflect new payment practices, the proposal would extend the 
prohibition to automatic deductions from the consumer's deposit account 
where the consumer has enrolled in the card issuer's automatic payment 
plan. The Board believes that whenever an automatic payment service is 
offered by the card issuer, thereby giving the card issuer control over 
the amount to be debited, a cardholder should not be treated any 
differently solely because the consumer's deposit account is maintained 
at a different account-holding institution. Thus, for example, if the 
cardholder has agreed to pay a predetermined amount each month and 
subsequently disputes one or more transactions that appear on a 
statement, the card issuer must ensure that it does not debit the 
consumer's asset account for any part of the amount in dispute. The 
proposed revision would apply whether the card issuer operates the 
automatic payment service

[[Page 33019]]

itself or outsources the service to a third-party service provider, but 
would not apply where the consumer has enrolled in a third-party bill 
payment service that is not offered by the card issuer. Thus, for 
example, the proposed revision would not apply where the consumer uses 
a bill-payment service offered by his or her deposit account-holding 
institution to pay his debt (unless the account-holding institution is 
also the card issuer). Section 226.13(d)(1) and comment 13(d)(1)-4, 
which describes the coverage of the automatic payment plan exclusion, 
would be revised to reflect the proposed change. Comment is requested 
regarding any operational issues card issuers may encounter in 
implementing the systems changes necessary to comply with the proposed 
revision.
13(e) Procedures if Error Occurred as Asserted and 13(f) Procedures if 
Different Billing Error or No Billing Error Occurred
    Paragraphs (e) and (f) of Sec.  226.13 set forth procedures that a 
creditor must follow to resolve a billing error claim, depending on 
whether the billing error occurred as asserted, or if a different 
billing error or no billing error occurred. In particular, Sec.  
226.13(f) requires that a creditor first conduct a reasonable 
investigation before the creditor may deny the consumer's claim or 
conclude that the billing error occurred differently than as asserted 
by the consumer. See TILA Section 161(a)(3)(B)(ii); 15 U.S.C. 
1666(a)(3)(B)(ii). These provisions in the regulation would be 
substantively unchanged in the proposal. The text of footnote 31 is 
deleted as unnecessary in light of the general obligation under Sec.  
226.13(f) to conduct a reasonable investigation before a creditor may 
deny a billing error claim.
13(g) Creditor's Rights and Duties After Resolution
    Section 226.13(g) specifies the creditor's rights and duties once 
it has determined, after a reasonable investigation under Sec.  
226.13(f), that a consumer owes all or a portion of the disputed amount 
and related finance or other charges. The proposal would provide 
guidance to clarify the length of the time the consumer would have to 
repay the amount determined still to be owed without incurring 
additional finance charges (i.e., the grace period) that would apply 
under these circumstances.
    Before a creditor may collect any amounts owed related to a 
disputed charge that is determined to be proper, the creditor must 
promptly notify the consumer in writing when the payment is due and the 
portion of the disputed amount and related finance or other charges 
that is still owed (including any charges that may be retroactively 
imposed on the amount found not to be in error). See 15 U.S.C. 1666(a); 
Sec.  226.13(g)(1). The consumer must then be given any grace period 
disclosed under proposed Sec. Sec.  226.6(a)(1), 226.6(b)(1), 
226.7(a)(8), or 226.7(b)(8), as applicable, to pay the amount due as 
specified in the written notice without incurring any additional 
finance or other charges. See Sec.  226.13(g)(2). Comment 13(g)(2)-1 
would be revised to clarify that if the consumer was entitled to a 
grace period at the time the consumer asserted the alleged billing 
error, then the consumer must be given a period of time equivalent to 
the disclosed grace period to pay the disputed amount as well as 
related finance or other charges. The Board believes that this 
interpretation is necessary to ensure that consumers are not 
discouraged from asserting their statutory billing rights by putting 
the consumer in the same position (that is, with the same grace period) 
if the consumer had not disputed the transaction in the first place.
13(i) Relation to Electronic Fund Transfer Act and Regulation E
    Section 226.13(i) is designed to facilitate compliance when 
financial institutions extend credit incident to electronic fund 
transfers that are subject to the Board's Regulation E, for example, 
when the credit card account is used to advance funds to prevent a 
consumer's deposit account from becoming overdrawn or to maintain a 
specified minimum balance in the consumer's account. See 12 CFR part 
205. The provision states that under these circumstances, the creditor 
should comply with the error resolution procedures of Regulation E, 
rather than those in Regulation Z (except that the creditor must still 
comply with Sec. Sec.  226.13(d) and (g)). The Board is not proposing 
any changes to this provision as it appears in the regulation; however, 
a minor clarification is proposed for an existing comment.
    Comment 13(i)-2 states that 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. 
The example in the current comment would be revised to include a 
specific reference to overdraft protection services that are not 
subject to the Board's Regulation Z when there is no agreement between 
the creditor and the consumer to extend credit when the consumer's 
account is overdrawn. See Sec.  226.4(c)(3); 70 FR 29,582; May 24, 
2005.
    Comment is requested as to whether the Board should expand the 
guidance provided under Sec.  226.13(i) to apply more generally to 
other circumstances when an extension of credit is incident to an 
electronic fund transfer, rather than limited to transactions pursuant 
to an agreement between a consumer and a financial institution to 
extend credit when the consumer's account is overdrawn or to maintain a 
specified balance. For example, in situations where a consumer 
transfers funds from an open-end credit plan, such as a home-equity 
line of credit, to the consumer's checking or savings account, the 
wrong amount may be transferred from the credit plan to the deposit 
account. Both Regulation E and Z could potentially apply under this 
circumstance leaving a potential issue as to which set of error 
resolution provisions the creditor/ financial institution should 
follow. In particular, if Regulation E is deemed to apply, the 
institution would have a shorter period of time in which to complete 
its investigation.

Section 226.14 Determination of Annual Percentage Rate

    As discussed in the section-by-section analysis to Sec.  
226.7(b)(7), Regulation Z requires disclosure on periodic statements of 
both the effective APR and the corresponding APR. The regulation also 
requires disclosure of the corresponding APR in account-opening 
disclosures, change-in-terms notices, advertisements, and other 
documents. The computation methods for both the corresponding APR and 
the effective APR are implemented in Sec.  226.14 of Regulation Z. 
Section 226.14 also provides tolerances for accuracy in APR 
disclosures.
    As also discussed in the section-by-section analysis to Sec.  
226.7(b)(7), the Board is proposing for comment two alternative 
approaches regarding the computation and disclosure of the effective 
APR. Under the first alternative, the Board proposes to retain the 
requirement that the effective APR be disclosed on the periodic 
statement, with modifications to the rules for computing and disclosing 
the effective APR to reflect an approach tested with consumers. See 
proposed Sec.  226.7(b)(7) and Sec.  226.14(d). For HELOCs subject to 
Sec.  226.5b, the Board proposes to allow a creditor to comply with the 
current rules applicable to the effective APR; creditors would not be 
required to make changes in their periodic statement

[[Page 33020]]

systems for such plans at this time. See proposed Sec. Sec.  
226.7(a)(7), 226.14(c). If the creditor chooses, however, the creditor 
may disclose an effective APR for its HELOCs according to any revised 
rules adopted for the effective APR.
    The second alternative would be to eliminate the requirement to 
provide the effective APR on the periodic statement. Under the second 
alternative, for a HELOC subject to Sec.  226.5b, a creditor would have 
the option of providing the effective APR according to current rules. 
The two proposed alternatives are reflected in two proposed alternative 
versions of Sec.  226.14.
    Under either alternative, the current provisions in Sec.  226.14(a) 
and (b) dealing with tolerances for the APR and guidance on calculating 
the APR for certain disclosures other than the periodic statement would 
not be substantively revised, but minor changes would be made. Section 
226.14(b) identifies the regulatory sections where a corresponding APR 
(the periodic rate multiplied by the number of periods in a year) must 
be disclosed. A reference to proposed Sec. Sec.  226.7(a)(4) and 
226.7(b)(4) (currently Sec.  226.7(d)), which requires creditors to 
disclose corresponding APRs on periodic statements, would be added to 
Sec.  226.14(b). (A reference to Sec.  226.7(d) would be deleted from 
Sec.  226.14(c) as obsolete.) With respect to technical revisions, 
under both alternatives, the Sec.  226.14 regulatory and commentary 
text would be revised where necessary to reflect changes in terminology 
and to eliminate footnotes, moving their substance into the text of the 
regulation.
    First alternative proposal. Under the first alternative, the 
proposed new rules for calculating the effective APR are contained in 
Sec. Sec.  226.14(d) and 14(e), and accompanying commentary. As 
discussed above under Sec.  226.7(b)(7), for multifeatured plans, the 
Board proposes to require that the creditor must compute and disclose 
an effective APR separately for each feature. For example, purchases 
and cash advances would be separate features; there might be two 
separate cash advance features, if there was a promotional APR on 
certain cash advances and a different APR on others. Proposed Sec.  
226.14(d) and accompanying commentary provide rules on how the 
effective APR should be computed for each feature. (Current Sec.  
226.14(d) would be redesignated as Sec.  226.14(c)(5)).
    In proposed Sec.  226.14(e), the Board proposes to limit the 
finance charges that are included in calculating the effective APR. 
These charges would be: (1) Charges attributable to a periodic rate 
used to calculate interest; (2) charges that relate to a specific 
transaction; (3) charges related to required credit insurance or debt 
cancellation or suspension coverage; (4) minimum charges imposed if, 
and only 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 (such as a $1.00 minimum finance charge); and 
(5) charges based on the account balances, account activity or 
inactivity, or the amount of credit available. This exclusive list is 
intended to limit disclosure of an effective APR to situations in which 
it is more likely to be understood by consumers and be useful to 
consumers, as well as provide creditors with certainty as to the fees 
that must be included in the computation of the effective APR.
    For finance charges that relate to a specific transaction, such as 
cash advance and balance transfers, expressing the interest and 
transactions fees in the effective APR may help consumers better 
understand the costs of these transactions. For finance charges that 
relate to required credit insurance or debt cancellation or suspension 
coverage (coverage for which the regulation's conditions for excluding 
the charge from the finance charge have not been satisfied), consumers 
may benefit from seeing an effective APR that combines two costs that 
will be imposed every month if a consumer carries a balance--interest 
on the balance and the required fee for insurance or debt cancellation 
or suspension coverage. For finance charges that are minimum charges in 
lieu of interest described above, a consumer that typically carries a 
small balance may benefit from seeing an effective APR that includes 
this minimum charge, so that the consumer understands that he or she is 
paying a higher rate for carrying that small balance than the 
corresponding APR suggests. For finance charges based on the account 
balances, account activity or inactivity, or the amount of credit 
available, consumers may benefit from seeing an effective APR that 
includes these charges, because these charges could be imposed as often 
as every month as a substitute for interest or in addition to interest. 
For example, the Board is aware of at least one credit card product 
where there is no interest rate applicable to the card, but each month 
a fixed charge is charged based on the outstanding balance on the card 
(for example, $6 charge per $1,000 balance). For such a price 
structure, which has a corresponding APR of zero, consumers may find 
the effective APR helpful.
    Also, in proposed Sec.  226.14(e), the Board would make clear that 
a finance charge related to opening the account, and a finance charge 
imposed not more often than annually as a condition to continuing or 
renewing the account, is not included in calculating the effective APR. 
Because these fees would be imposed infrequently (either at account 
opening or annually, or less frequently, to continue or renew the 
account), including these finance charges in the effective APR may not 
be helpful to consumers.
    With respect to open-end (not home-secured) plans, the Board would 
also revise the current rule that exempts a creditor from disclosing an 
effective APR when the total finance charge does not exceed 50 cents 
for a monthly or longer billing cycle, or the pro rata share of 50 
cents for a shorter cycle. See 15 U.S.C. 127(b)(6); current Sec.  
226.14(c)(4). The Board would exercise its exceptions authority to 
adjust the 50-cent threshold to $1.00 to reflect adjusted prices since 
the rule was implemented. Section 226.14(d)(4) would also be revised to 
limit the finance charges included in determining whether the threshold 
is exceeded to those specified in proposed Sec.  226.14(e). See 
proposed Sec.  226.14(d)(4).
    Also under the first alternative, the Board proposes to place in 
Sec.  226.14(c) the rules for calculating the effective APR for 
periodic statements for HELOCs subject to Sec.  226.5b. As proposed, 
Sec.  226.14(c) provides that, for HELOCs subject to Sec.  226.5b, a 
creditor may comply either with (1) the current rules applicable to the 
effective APR, (which are contained in proposed Sec.  226.14(c)), or 
(2) with the revised rules applicable to open-end (not home-secured) 
plans (which are contained in proposed Sec.  226.14(d)).
    Second alternative proposal. Under the second alternative, for the 
reasons discussed in the section-by-section analysis to Sec.  
226.7(b)(7), the Board proposes to eliminate the requirement to provide 
the effective APR on the periodic statement. Under this alternative, 
however, for a HELOC subject to Sec.  226.5b, a creditor would have the 
option of disclosing an effective APR according to the current rules in 
Regulation Z for computing and disclosing the effective APR. No 
guidance would be given for disclosing the effective APR on open-end 
(not home-secured) plans, since the requirement to provide the 
effective APR on such plans would be eliminated.

Section 226.16 Advertising

    TILA Section 143, implemented by the Board in Sec.  226.16, governs 
advertisements of open-end credit plans. 15 U.S.C. 1663. The statute

[[Page 33021]]

applies to the advertisement itself, and therefore, the statutory and 
regulatory requirements apply to any person advertising an open-end 
credit plan, whether or not such person meets the definition of 
creditor. See comment 2(a)(2)-2. Under the statute, if an advertisement 
sets forth any of the specific terms of the plan, then the 
advertisement must also state: (1) Any minimum or fixed amount which 
could be imposed; (2) the periodic rates expressed as APRs, if periodic 
rates may be used to compute the finance charge; and (3) any other term 
the Board requires by regulation. The specific terms of an open-end 
plan that ``trigger'' additional disclosures, which are commonly known 
as ``triggering terms,'' are finance charges and other charges required 
to be disclosed under current Sec. Sec.  226.6(a) and 226.6(b). If an 
advertisement states a triggering term, the regulation requires that 
the advertisement also state (1) any minimum, fixed, transaction, 
activity or similar charge that could be imposed; (2) any periodic rate 
that may be applied expressed as an APR; and (3) any membership or 
participation fee that could be imposed. See current Sec.  226.16(b) 
and comment 16(b)-7 (as redesignated to proposed comment 16(b)-1).
    The Board is proposing several changes to the advertising rules in 
Sec.  226.16 in order to ensure meaningful disclosure of advertised 
credit terms, alleviate compliance burden for certain advertisements, 
and implement provisions of the Bankruptcy Act. Specifically, under 
Sec.  226.16(b), the Board is proposing to make the triggering terms 
consistent for all open-end credit advertisements by including terms 
stated negatively (for example, no interest), as is currently required 
under TILA for advertisements of HELOCs. Presently, for advertisements 
for open-end (not home-secured) plans, only positive terms trigger the 
additional disclosure.
    If an advertisement states a minimum monthly payment to finance a 
purchase under a plan established by a creditor or retailer, the 
proposal would amend Sec.  226.16(b) to require a disclosure of the 
total number of payments and time period to repay. In addition, the 
Board is proposing in new Sec.  226.16(g) to provide guidelines 
concerning use of the word ``fixed'' in connection with an APR. To ease 
compliance burden on advertisers, the Board is proposing in new Sec.  
226.16(f), alternative disclosures for television and radio 
advertisements in recognition of the time and space constraints on such 
media. Finally, the Board is implementing Section 1303 of the 
Bankruptcy Act, in part, in new Sec.  226.16(e) and Section 1309 of the 
Bankruptcy Act in the commentary on clear and conspicuous in new 
comment 16-2. The Board's proposed revisions to Sec.  226.16 and the 
accompanying commentary are described in more detail below.
    Clear and conspicuous standard. Comment 16-1 provides that 
disclosures made under Sec.  226.16 are subject to the clear and 
conspicuous standard required for all disclosures for open-end credit 
plans. See Sec.  226.5(a)(1). To be clear and conspicuous, disclosures 
must be in a reasonably understandable form. See comment 5(a)(1)-1. 
Generally, there are no specific rules regarding the format of 
disclosures in advertisements. See comment 16-1.
    Section 1309 of the Bankruptcy Act requires the Board to implement 
the ``clear and conspicuous'' term as it applies to certain disclosures 
required by Section 1303(a) of the Bankruptcy Act. Section 1303(a) 
applies to direct-mail applications and solicitations for credit cards 
and accompanying promotional materials. The Bankruptcy Act requires, in 
part, that when an introductory rate is stated, the time period in 
which the introductory period will end and the rate that will apply 
after the end of the introductory period must be stated ``in a clear 
and conspicuous manner'' in a prominent location closely proximate to 
the first listing of the introductory rate. The statute requires these 
disclosures to be ``reasonably understandable and designed to call 
attention to the nature and significance of the information in the 
notice.''
    The Board solicited comment in the October 2005 ANPR on 
interpreting the standard for clear and conspicuous set forth in 
Section 1309 of the Bankruptcy Act. Q85. Most industry commenters 
stated that additional guidance on clear and conspicuous was 
unnecessary. Consumer group commenters suggested that the Board impose 
minimum font size requirements, while industry commenters universally 
opposed such requirements.
    After considering comments, the Board is proposing in comment 16-2 
that creditors clearly and conspicuously disclose when the introductory 
period will end and the rate that will apply after the end of the 
introductory period if the information is equally prominent to the 
first listing of the introductory rate to which it relates. Guidance on 
what is considered the first listing of the introductory rate is given 
in proposed comment 16(e)-4, as discussed below. The Board is also 
proposing that if these disclosures are the same type size as the first 
listing of the introductory rate, they will be deemed to be equally 
prominent. See proposed comment 16-2. Requiring equal prominence for 
this information calls attention to the nature and significance of such 
information by ensuring that the information is at least as significant 
as the introductory rate to which it relates. Furthermore, an equally 
prominent standard for similar information currently applies to 
advertisements for HELOCs. See current Sec.  226.16(d)(2).
16(b) Advertisement of Terms That Require Additional Disclosures
    Negative terms as triggering terms. If an advertisement states 
certain terms, additional information must be disclosed. See Sec.  
226.16(b). The goal of this triggering term approach is to provide 
consumers with a more complete picture of costs that may apply to the 
plan when certain specified charges for the plan are given. TILA 
Section 143 provides that stating any specific term of the plan 
triggers additional disclosures. 15 U.S.C. 1663. The Board, however, 
limited triggering terms for advertisements of open-end (not home-
secured) plans to those terms that are stated as a positive number. For 
home-equity advertisements, under TILA Section 147(a) (15 U.S.C. 
1665b(a)), triggering terms include both positive as well as negative 
terms. See also current Sec.  226.16(d)(1) and comments 16(b)-2 and 
16(d)-1. Pursuant to TILA Section 143(3), the Board proposes to apply 
this approach to advertisements for all open-end plans. The Board 
believes that negative terms such as ``no interest'' and ``no annual 
fee'' alone may not provide consumers with a sufficiently accurate 
portrayal of possible costs associated with the plan if the additional 
disclosures are not provided. This approach would also ensure similar 
treatment for all open-end plans. Current comment 16(b)-2 would be 
amended accordingly and moved to a revised comment 16(b)-1, which 
includes guidance on triggering terms in general. See redesignation 
table below.
    Advertisement of minimum monthly payment. The Board has the 
authority under TILA Section 143(3) to require the disclosure in 
advertisements for open-end credit of any terms in addition to those 
explicitly required by the statute. 15 U.S.C. 1663(3). The Board 
proposes to require additional disclosures for advertisements that 
provide a minimum monthly payment for an open-end credit plan that 
would be established to finance the purchase of goods or services. If a 
minimum

[[Page 33022]]

monthly payment is advertised, the advertisement would be required to 
state, in equal prominence to the minimum payment, the time period 
required to pay the balance and the total dollar amount of payments if 
only minimum payments are made. Proposed Sec.  226.16(b)(2) would 
clarify that this disclosure should assume that the consumer makes only 
the minimum payment required during each payment period.
    The Board believes that advertisements that state a minimum monthly 
payment will provide a clearer picture of credit costs if such 
advertisements also state the total dollar amount of payments the 
consumer would make, and the amount of time needed to pay the balance 
if only the minimum payments are made. The Board has received comments 
from time to time from state attorneys general regarding creditors that 
sell large-ticket items and simultaneously arrange financing for the 
purchase of those items. See discussion regarding the definition of 
open-end credit in the section-by-section analysis to Sec.  
226.2(a)(20). The comments the Board has received indicate that some 
consumers agree to the financing on the basis of a certain advertised 
minimum payment but are later surprised to learn how long the debt will 
take to pay, and how much the credit will cost them over that time 
period. The Board believes that disclosure of the time period and total 
dollar amount of payments will help to improve consumer understanding 
about the cost of credit products for which a minimum monthly payment 
is advertised.
    Other changes to 226.16(b). Currently, terms that are required to 
be disclosed under Sec.  226.6 trigger the disclosure of additional 
terms. See Sec.  226.16(b). Under current comment 16(b)-1, this would 
include terms required to be disclosed under Sec. Sec.  226.6(a) and 
226.6(b). As discussed in the section-by-section analysis to Sec.  
226.6, the Board is proposing new cost disclosure rules for open-end 
(not home-secured) plans, but is preserving existing cost disclosure 
rules for HELOCs pending a review of all home-secured rules. Section 
226.16(b) would be conformed to reflect these revisions.
    In technical revisions, Sec.  226.16(b) has been renumbered: 
Triggering term requirements would be set forth in a revised Sec.  
226.16(b)(1); and the new proposed minimum monthly payment disclosures 
would be set forth in a revised Sec.  226.16(b)(2). Footnote 36d 
(stating that disclosures given in accordance with Sec.  226.5a do not 
constitute advertising terms) would be deleted as unnecessary since 
``advertisements'' do not include notices required under federal law, 
including disclosures required under Sec.  226.5a. See comment 2(a)(2)-
1(ii). The Board is proposing to move the guidance in current comments 
16(b)-1 and 16(b)-8 to new Sec.  226.16(b)(1), with some revisions. 
Proposed comment 16(b)-1 would provide guidance on triggering terms by 
consolidating current comment 16(b)-2, amended as discussed above, with 
current comment 16(b)-7. Current comment 16(b)-6 would be eliminated as 
duplicative of the requirements under proposed Sec.  226.16(e), as 
discussed below.
16(c) Catalogs or Other Multiple-Page Advertisements; Electronic 
Advertisements
    Amendments to Sec.  226.16(c) and comments 16(c)(1)-1, 16(c)(1)-2, 
and 16(c)(3)-1 reflect provisions contained in the 2007 Electronic 
Disclosure Proposal. See 72 FR 21,1141; April 30, 2007. The amendments 
provide that for an advertisement that is accessed by the consumer in 
electronic form, the disclosures required under Sec.  226.16 must be 
provided to the consumer in electronic form on or with the 
advertisement.
16(d) Additional Requirements for Home-Equity Plans
    No revisions are proposed for the advertising rules under Sec.  
226.16(d), consistent with the Board's plan to review rules affecting 
HELOCs in a separate rulemaking.
    High loan-to-value disclosures. Section 1302 of the Bankruptcy Act 
amends TILA Section 127(a)(13) to require that credit applications for, 
and advertisements related to, an extension of credit secured by a 
dwelling that may exceed the fair market value of the dwelling include 
a statement that 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. 15 U.S.C. 1637(a)(13). For 
these applications and advertisements, the statute also requires 
inclusion of a statement that the consumer should consult a tax adviser 
for further information on the deductibility of the interest. The new 
disclosures would apply to advertisements for home-secured credit, 
whether open-end or closed-end; thus, the Board plans to address issues 
related to this requirement during its review of the rules relating to 
home-secured credit.
16(e) Introductory Rates
    TILA Section 127(c)(6), as added by Section 1303(a) of the 
Bankruptcy Act, requires that if a credit card issuer states an 
introductory rate in applications, solicitations, and all accompanying 
promotional materials, the issuer must use the term ``introductory'' 
clearly and conspicuously in immediate proximity to each mention of the 
introductory rate. 15 U.S.C. 1637(c)(6). Credit card issuers also must 
disclose, in a prominent location closely proximate to the first 
mention of the introductory rate, other than the listing of the rate in 
the table required for credit card applications and solicitations, the 
time period when the introductory rate expires and the rate that will 
apply after the introductory rate expires.
    TILA Section 127(c)(7), as added by Section 1304(a) of the 
Bankruptcy Act, applies these requirements to ``any solicitation to 
open a credit card account for any person under an open end consumer 
credit plan using the Internet or other interactive computer service.'' 
15 U.S.C. 1637(c)(7). The Board proposes to implement these 
requirements for promotional materials accompanying such applications 
or solicitations in a new Sec.  226.16(e). In addition, the Board 
proposes to apply these requirements more broadly, pursuant to the 
Board's authority under TILA Section 105(a), to issue regulations with 
classification, differentiations or other provisions as in the judgment 
of the Board are necessary to effectuate the purposes of TILA, as 
discussed below. 15 U.S.C. 1604(a). Sections 1303 and 1304 of the 
Bankruptcy Act would be implemented in Sec.  226.5a, and are discussed 
in the section-by-section analysis to Sec.  226.5a.
16(e)(1) Scope
    The Bankruptcy Act amendments regarding ``introductory'' rates, the 
time period these rates may be in effect, and the post-introductory 
rate apply to direct-mail applications and solicitations, and 
accompanying promotional materials. 15 U.S.C. 1637(c)(1)(A). To provide 
meaningful disclosure of credit terms in order to avoid the uninformed 
use of credit, the Board is proposing to extend these requirements to 
applications or solicitations to open a credit card account, and all 
accompanying promotional materials, that are available publicly 
(``take-ones''). 15 U.S.C. 1601(a); 15 U.S.C. 1604(a); 15 U.S.C. 
1637(c)(3)(A). Consumers who obtain publicly available applications and 
solicitations are in essentially the same position in terms of the 
shopping

[[Page 33023]]

process as consumers who receive direct mail applications and 
solicitations or applications or solicitations offered through the 
Internet. Therefore, the Board believes the information provided about 
introductory rates in these materials should be the same.
    Moreover, as discussed in the section-by-section analysis to Sec.  
226.5a(a)(2), the Board is proposing to apply the Bankruptcy Act 
provisions relating to Internet offers to both electronic solicitations 
and applications, although the statute refers only to solicitations, in 
order to promote the informed use of credit. Therefore, proposed Sec.  
226.16(e)(1) would state that the introductory rate requirements in 
Sec.  226.16(e) apply to all promotional materials accompanying credit 
card applications and solicitations offered through direct mail and 
electronically as well as those available publicly.
    Furthermore, the Board proposes to extend some of the requirements 
in Section 1303 of the Bankruptcy Act regarding the presentation of 
introductory rates to other written advertisements for open-end credit 
plans that may not accompany an application or solicitation, other than 
advertisements of HELOCs subject to Sec.  226.5b, in order to promote 
the informed use of credit. Advertisements for open-end credit plans 
are already required to comply with similar, though not identical, 
requirements to those set forth in Section 1303 of the Bankruptcy Act 
for ``discounted variable-rate plans.'' See current comment 16(b)-6. 
Specifically, ``discounted variable-rate plans'' are required to 
provide both the initial rate (with the statement of how long it will 
remain in effect) and the current indexed rate (with the statement that 
this second rate may vary). The Board's proposal would ensure that the 
presentation of introductory rates in all written advertisements for 
open-end credit is consistent with the presentation requirements for 
promotional materials accompanying applications and solicitations, as 
discussed below. The Board believes consumers will benefit from these 
enhancements and advertisers will benefit from the consistent 
application of requirements related to introductory rates for all 
written open-end advertisements. Since the Board plans to address 
issues related to HELOCs during the next phase of its review of 
Regulation Z, proposed Sec.  226.16(e) would not apply to 
advertisements of HELOCs subject to Sec.  226.5b. The requirements of 
Sec.  226.16(e) would apply to communications that are considered 
advertisements, and would not include disclosures required under Sec.  
226.5a and under Sec.  226.6.
16(e)(2) Definitions
    TILA Section 127(c)(6)(D)(i), as added by Section 1303(a) of the 
Bankruptcy Act, defines a temporary APR as a rate of interest 
applicable to a credit card account for an introductory period of less 
than 1 year, if that rate is less than an APR that was in effect within 
60 days before the date of mailing the application or solicitation. 15 
U.S.C. 1637(c)(6)(D)(i). TILA Section 127(c)(6)(D)(ii) defines an 
``introductory period'' as ``the maximum time period for which the 
temporary APR may be applicable.'' 15 U.S.C. 1637(c)(6)(D)(ii). The 
Board proposes to implement the definition of ``introductory period'' 
in Sec.  226.16(e)(2) without change. With respect to the definition of 
``temporary APR,'' the Board proposes to implement the term more 
broadly, as discussed below.
    Since the term ``introductory rate'' is a commonly understood term 
that is currently used in Regulation Z, the Board proposes to use the 
term ``introductory rate'' in place of ``temporary APR'' for 
consistency and to facilitate compliance. Furthermore, for the reasons 
set forth below, the Board would implement the term more broadly to 
apply to any rate of interest applicable to an open-end plan for an 
introductory period if that rate is less than the advertised APR that 
will apply at the end of the introductory period.
    The statutory definition compares the temporary APR to an APR that 
was in effect within 60 days before the date of mailing of the 
application or solicitation. Since the advertised variable rate that 
will apply at the end of the introductory period in direct-mail credit 
card applications and solicitations (and accompanying promotional 
materials) must have been in effect within 60 days before the date of 
mailing, as required under proposed Sec.  226.5a(c)(2)(i) (and 
currently under Sec.  226.5a(b)(1)(ii)), the Board's proposed 
definition captures the same concept in more simple language. 
Furthermore, because the Board is proposing to extend these 
requirements to publicly available applications and solicitations as 
well as applications and solicitations offered through the Internet, 
the Board's proposed definition of ``introductory rate'' would also 
incorporate the timing requirements for variable rates under proposed 
Sec. Sec.  226.5a(c)(2) and 226.5a(e)(4).
    The statutory definition currently applies to offers where the 
introductory period is less than 1 year. The Board is proposing to 
extend the definition of ``introductory rate'' to include offers where 
the introductory period is a year or more, in order to promote the 
informed use of credit. Creditors, however, often offer an introductory 
rate for a year or more, and the Board believes that consumers would 
benefit from the application of the requirements imposed by the 
Bankruptcy Act on introductory rates to these types of offers as well. 
In addition, the requirements for the advertisement of ``discounted 
variable-rate plans'' under current comment 16(b)-6 are not limited to 
offers where the introductory period is less than 1 year, and the Board 
believes that these requirements should continue to apply to such 
advertised offers.
    The requirements for ``discounted variable-rate plans'' under 
current comment 16(b)-6 apply solely to variable-rate plans. In 
adopting the proposed definition of ``introductory rate'' at Sec.  
226.16(e)(2), the Board would cover both variable- and nonvariable-rate 
plans under the requirements regarding the presentation of introductory 
rates. Current comment 16(b)-6 would be deleted as obsolete.
16(e)(3) Stating the Term ``Introductory''
    Under TILA Section 127(c)(6)(A), as added by section 1303(a) of the 
Bankruptcy Act, the term ``introductory'' must be used in immediate 
proximity to each listing of the temporary APR in the application, 
solicitation, or promotional materials accompanying such application or 
solicitation. 15 U.S.C. 1637(c)(6)(A). The Board solicited comment in 
the October 2005 ANPR on what type of guidance was appropriate with 
respect to this requirement. Q86.
    Abbreviation. In the October 2005 ANPR, many commenters asked the 
Board to consider permitting creditors to use the term ``intro'' as an 
alternative to the word ``introductory.'' One commenter also asked the 
Board to consider permitting creditors to use terms that convey the 
same meaning (such as ``temporary''). Because ``intro'' is a commonly-
understood abbreviation of the term ``introductory,'' the Board 
proposes to allow creditors to use ``intro'' as an alternative to the 
requirement to use the term ``introductory'' in new Sec.  226.16(e)(3). 
Because the Bankruptcy Act requires the use of the term 
``introductory,'' the Board does not propose to allow use of a 
different term.
    Immediate proximity. Responses to the October 2005 ANPR suggested 
three general approaches to interpreting the meaning of ``immediate 
proximity:'' (1) Immediately preceding or following the

[[Page 33024]]

APR; (2) within the same sentence as the APR (or within a certain 
number of words); or (3) in the sentence immediately preceding or 
following the sentence with the APR. After considering comments, the 
Board is proposing to provide a safe harbor for creditors that place 
the word ``introductory'' or ``intro'' within the same phrase as each 
listing of the temporary APR. This guidance is in proposed comment 
16(e)-2. The Board believes that interpreting ``immediate proximity'' 
to mean adjacent to the rate may be too restrictive and would 
effectively ban phrases such as ``introductory balance transfer rate X 
percent.'' Moreover, the Board has proposed a safe harbor, recognizing 
that there may be instances where the term ``introductory'' may 
arguably appear in ``immediate proximity'' of the rate, yet not 
necessarily be in the same phrase as the rate, such as in a graphic.
16(e)(4) Stating the Introductory Period and Post-Introductory Rate
    TILA Section 127(c)(6)(A), as added by Section 1303(a) of the 
Bankruptcy Act, also requires that the time period in which the 
introductory period will end and the APR that will apply after the end 
of the introductory period be listed in a clear and conspicuous manner 
in a ``prominent location closely proximate to the first listing'' of 
the introductory APR (disclosures in the application and solicitation 
table are not covered). 15 U.S.C. 1637(c)(6)(A). The Board specifically 
solicited comments on this provision in the October 2005 ANPR. Q87-Q90.
    Prominent location closely proximate. Industry comments received 
during the October 2005 ANPR generally advocated flexibility in 
interpreting the phrases ``prominent location'' and ``closely 
proximate.'' Consumer group commenters suggested very specific 
formatting requirements in interpreting these phrases, including 
minimum font size and placement requirements.
    The Board believes flexible guidance is appropriate in interpreting 
``prominent location closely proximate'' given the numerous ways this 
information may be presented. Accordingly, the Board is proposing a 
safe harbor in order to provide guidance on this issue. Specifically, 
the Board would provide a safe harbor for advertisers that place the 
time period in which the introductory period will end and the APR that 
will apply after the end of the introductory period in the same 
paragraph as the first listing of the introductory rate. This proposal 
is in proposed comment 16(e)-3. Congress's use of the term ``closely 
proximate'' may be distinguished from its use of the term ``immediate 
proximity'', and thus, the Board believes that guidance on the meaning 
of ``prominent location closely proximate'' should be more flexible 
than the guidance given for the meaning of ``immediate proximity'' in 
comment 16(e)-2.
    Recognizing that there may be instances where the information may 
not appear in the same ``paragraph'' as the first listing and yet may 
still be considered in a prominent location closely proximate to the 
first listing (for example, in a graphic), the Board's guidance has 
been provided as a safe harbor. Consumer testing conducted for the 
Board suggests that placing this type of information in a footnote 
makes it much less likely the consumer will notice it. In light of the 
statutory provision providing that this information appear in a 
prominent location closely proximate to the listing, the Board believes 
that placing this information in footnotes would not be a prominent 
location closely proximate to the listing.
    First listing. In the October 2005 ANPR, the Board solicited 
comments on which listing of the temporary APR should be considered the 
``first listing'' other than the rate listed in the table required on 
or with credit card applications or solicitations. In particular, the 
Board requested comment on (1) which document within a multi-page 
mailing should be considered the one with the first listing, and (2) 
which listing of the introductory APR within a particular document 
should be considered the first listing. With respect to the first 
question, commenters suggested either (1) that the first listing should 
apply to the ``principal promotional document'' in the package, or (2) 
that the Board treat each separate document within a mailing as a 
separate solicitation such that the information would need to appear in 
a prominent location closely proximate to the first listing on each 
separate document. The ``principal promotional document'' is a concept 
used in connection with the placement of a prescreening opt-out notice 
under the Fair Credit Reporting Act (FCRA). 15 U.S.C. 1681 et seq. The 
FTC, in its regulations related to the FCRA, defines the ``principal 
promotional document'' as ``the document designed to be seen first by 
the consumer such as the cover letter.'' 16 CFR 642.2(b).
    After considering comments received during the ANPR, the Board is 
proposing in comment 16(e)-4 to provide that for a multi-page mailing 
or application or solicitation package, the first listing should apply 
solely to the ``principal promotional document'' in the package, unless 
the introductory rate is not listed in the principal promotional 
document and appears in another document in the package. If the 
introductory rate does not appear in the principal promotional document 
but appears in another document in the package, then the requirements 
apply to each separate document that lists the introductory rate. 
Proposed comment 16(e)-4 clarifies that the term ``principal 
promotional document'' includes solicitation letters. The Board's 
consumer testing efforts suggest that consumers are likely to read the 
principal promotional document. Applying the requirement to each 
document in a mailing/package would be unnecessary if the consumer will 
already have seen the introductory rate in the principal promotional 
document. If the introductory rate does not appear in the principal 
promotional document, however, the Board proposes that the requirements 
apply to the first listing of the introductory rate in each document in 
the package containing the introductory rate as it is not clear which 
document the consumer will read first in such circumstances.
    With respect to the question of which listing of the introductory 
rate within a particular document should be considered the first 
listing, many industry commenters suggested that creditors be given 
flexibility in determining which listing is the first listing. Some 
commenters suggested that the first listing be the highest listing on 
the page while other commenters advocated the most prominent listing. 
After considering comments, the Board is proposing that the first 
listing be the most prominent listing of the introductory rate on the 
front of the first page of the document. Consumer testing conducted for 
the Board suggests that consumers may not necessarily read documents in 
an application/solicitation package from top to bottom. Instead, they 
may tend to look first to the pieces of information that are set forth 
most prominently on the document. As a result, the Board believes that 
the first listing (i.e., the one the consumer sees first) would not 
necessarily be the highest one on the page, especially if such listing 
is in an inconspicuous format, and instead, it would be the one that is 
most prominent to the consumer. In terms of judging which listing is 
the ``most prominent,'' the Board is proposing a safe harbor for the 
listing with the largest type size. While type size is one measure for 
judging the most prominent listing, the Board recognizes that there may 
be

[[Page 33025]]

other ways to assess the most prominent listing independent of type 
size.
    Post-introductory rate. The Board requested comment in the October 
2005 ANPR regarding whether the Board should issue guidance with 
respect to listing the rate that will apply after the end of the 
introductory period. Q90. Most commenters agreed that advertisers 
should be permitted to list a range of rates. Consistent with the 
guidance given above for listing the APR in the table required for 
credit card applications and solicitations under Sec.  226.5a(b)(1)(v), 
the Board is proposing that a range of rates may be listed as the rate 
that will apply after the introductory period if the specific rate for 
which the consumer will qualify will depend on later determinations of 
a consumer's creditworthiness. See section-by-section analysis to Sec.  
226.5a(b)(1). The Board proposes comment 16(e)-5 to be consistent with 
comment 5a(b)(1)-5. In addition, the Board solicits comment on whether 
advertisers may alternatively list only the highest rate that may apply 
instead of a range of rates. For example, if there are three rates that 
may apply (9.99 percent, 12.99 percent or 17.99 percent), instead of 
disclosing three rates (9.99 percent, 12.99 percent or 17.99 percent) 
or a range of rates (9.99 percent to 17.99 percent), card issuers 
should be permitted to provide only the highest rate (up to 17.99 
percent).
16(e)(5) Envelope Excluded
    TILA Section 127(c)(6)(B), as added by Section 1303(a) of the 
Bankruptcy Act, specifically excludes envelopes or other enclosures in 
which an application or solicitation to open a credit card account is 
mailed from the requirements of TILA Section 127(c)(6)(A)(ii) and 
(iii). 15 U.S.C. 1637(c)(6)(B). This guidance is set forth in proposed 
Sec.  226.16(e)(5).
    In the October 2005 ANPR, the Board solicited comment on whether 
there should be any difference in guidance provided to applications and 
solicitations provided electronically with those that are provided in 
paper form. Q92. In response to comments received, the Board is 
proposing in Sec.  226.16(e)(5) to exclude banner advertisements and 
pop-up advertisements that are linked to an electronic application or 
solicitation. In the Board's view, these devices are similar to 
envelopes or other enclosures in the direct mail context.
16(f) Alternative Disclosures--Television or Radio Advertisements
    For radio and television advertisements, the Board is proposing to 
allow alternative disclosures to the ones required by Sec.  226.16(b) 
if a triggering term is stated in the advertisement. Radio and 
television advertisements would still be required to disclose any APR 
applicable to the plan, consistent with the requirements in proposed 
Sec.  226.16(b)(1)(ii); however, instead of the detailed information in 
proposed Sec. Sec.  226.16(b)(1)(i) and (iii) (minimum or fixed 
payments, and annual or membership fees, respectively) an advertisement 
would be able to provide a toll-free telephone number that the consumer 
may call to receive more information.
    This approach is consistent with the approach taken in the 
advertising rules for Regulation M (See Sec.  213.7(f)). Given the 
space and time constraints on radio and television advertisements, the 
additional disclosures required by proposed Sec. Sec.  226.16(b)(1)(i) 
and (iii) may go unnoticed by consumers or be difficult for them to 
retain and would therefore not provide a meaningful benefit to 
consumers. An alternative means of disclosure may be more effective in 
many cases given the nature of television and radio media.
    While proposed Sec.  226.16(f) is similar to Sec.  213.7(f) in 
Regulation M, it is not identical. For example, Sec.  213.7(f)(1)(ii) 
permits a leasing advertisement made through television or radio to 
direct the consumer to a written advertisement in a publication of 
general circulation in a community served by the media station. The 
Board believes that advertisers of open-end credit plans would be 
unlikely to use this option and has thus not proposed it for Sec.  
226.16(f).
16(g) Misleading Terms
    Creditors often refer to an APR as ``fixed'' to denote an APR that 
is not tied to an index. However, the Board has found through consumer 
testing efforts that most participants did not appear to understand the 
term ``fixed'' in this manner. Participants also did not appear to 
understand that creditors often reserve the right to increase a 
``fixed'' rate upon the occurrence of certain events (such as when a 
consumer pays late or goes over the credit limit) or for other reasons. 
Thus, consumer testing suggests many consumers believe a ``fixed'' rate 
does not change, such as with fixed-rate mortgage loans.
    Therefore, to avoid consumer confusion and the uninformed use of 
credit, the Board proposes to restrict the term ``fixed'' to instances 
where the rate will not change for any reason. 15 U.S.C. 1601(a), 
1604(a). Proposed Sec.  226.16(g) prohibits the use of the term 
``fixed'' or any similar term in describing an APR unless that rate 
will remain in effect unconditionally until the expiration of an 
advertised time period. If no time period is advertised, then the term 
``fixed'' or any similar term may not be used unless the rate will 
remain in effect unconditionally until the plan is closed. For example, 
a creditor could describe a rate that is subject to change as non-
indexed, to indicate that the rate will not change due to changes in 
the market. A creditor could not, however, describe a rate as 
``unchanging'' or ``permanent'' unless the standard in proposed Sec.  
226.16(g) is met. Restricting the use of the term ``fixed'' is intended 
to help consumers distinguish rates that do not change for any reason 
from rates that can change for one reason or another.

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

    Appendix E applies to card programs in which the card issuer and 
the seller are the same or related persons; no finance charge is 
imposed; cardholders are billed in full for each use of the card on a 
transaction-by-transaction basis; and no cumulative account is 
maintained reflecting transactions during a period of time such as a 
month. At the time the provisions now constituting Appendix E 
(originally adopted as an official Board interpretation to Regulation 
Z) were added to the regulation, they were intended to address card 
programs offered by automobile rental companies.
    Appendix E specifies the provisions of Regulation Z that apply to 
credit card programs covered by the Appendix. For example, for the 
account-opening disclosures under Sec.  226.6, the required disclosures 
are limited to penalty charges such as late charges, and to a 
disclosure of billing error rights and of any security interest. For 
the periodic statement disclosures under Sec.  226.7, the required 
disclosures are limited to identification of transactions and an 
address for notifying the card issuer of billing errors. Further, since 
Appendix E card issuers do not issue periodic statements of account 
activity, Appendix E provides that these disclosures may be made on the 
invoice or statement sent to the consumer for each transaction. In 
general, the disclosures that this category of card issuers need not 
provide are those that are clearly inapplicable, either because the 
disclosures relate to finance charges, are based on a system in which 
periodic statements are generated, or apply to three-party credit cards 
(such as bank-issued credit cards).
    The Board proposes to revise Appendix E by inserting material

[[Page 33026]]

explaining what is meant by ``related persons.'' In addition, technical 
changes would be made, including numbering the paragraphs within the 
appendix and changing cross-references to conform to the renumbering of 
other provisions of Regulation Z.
    The Board solicits comment on whether Appendix E should be revised 
to specify that the disclosures required under Sec.  226.5a apply to 
card programs covered by the appendix. For the most part, the credit 
card application and solicitation disclosures required by Sec.  226.5a 
appear to be inapplicable to this category of card programs because 
most of those disclosures relate to finance charges or APRs. However, a 
few of the Sec.  226.5a disclosures could potentially apply, such as 
annual or membership fees and late charges. (Appendix E does not 
currently require a disclosure of annual or membership fees; comment is 
requested, however, on whether the appendix should be revised to 
require such a disclosure, if a transaction-by-transaction card issuer 
were to impose such a fee.) If few or no such card issuers impose fees 
covered by Sec.  226.5a, there may be no need to revise Appendix E to 
apply these requirements. In addition, the value of such a revision may 
depend on whether transaction-by-transaction card issuers typically 
make credit card applications or solicitations available to consumers 
in the ways specified by Sec.  226.5a, such as by direct mail, 
telephone solicitation, or as take-ones. On the other hand, if Appendix 
E were revised to apply Sec.  226.5a to these card issuers, they would 
have to comply only to the extent the requirements are applicable. 
Thus, no burden would be imposed on card issuers that, for example, do 
not impose late-payment fees or annual fees, or do not conduct direct-
mail credit card solicitations or other activities that come within 
Sec.  226.5a.
    The Board also requests comment on whether any other provisions of 
Regulation Z not currently specified in Appendix E as applicable to 
transaction-by-transaction card issuers (such as Sec. Sec.  226.5b and 
226.16) should be specified as being applicable, and on whether any 
provisions currently specified as being applicable should be deleted.

Appendix F--Annual Percentage Rate Computations for Certain Open-End 
Credit Plans

    Appendix F provides guidance regarding the computation of the 
effective APR under Sec.  226.14(c)(3), which applies to situations 
where the finance charge imposed during a billing cycle includes a 
transaction charge, such as a balance transfer fee or a cash advance 
fee. As discussed in the section-by-section analysis to Sec. Sec.  
226.7(a)(7) and (b)(7), and Sec.  226.14, the Board is proposing two 
alternative approaches for computation and disclosure of the effective 
APR. Depending upon the alternative and upon whether or not the plan is 
home-secured, the creditor (1) may use proposed Sec.  226.14(c)(3) or 
Sec.  226.14(d)(3) if the finance charge for the billing cycle includes 
a transaction charge, or (2) would not be required to calculate and 
disclose an effective APR at all. The guidance in existing Appendix F 
would continue to apply to either proposed Sec.  226.14(c)(3) or 
proposed Sec.  226.14(d)(3). Therefore, the Board is not proposing 
changes to Appendix F except to add applicable cross references and to 
move the substance of footnote 1 to Appendix F to the text of the 
appendix. A cross-reference to proposed comment 14(d)(3)-3 is added to 
the staff commentary to Appendix F.

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

    Appendices G and H set forth model forms, model clauses and sample 
forms that creditors may use to comply with the requirements of 
Regulation Z. Appendix G contains model forms, model clauses and sample 
forms applicable to open-end plans. Appendix H contains model forms, 
model clauses and sample forms applicable to closed-end loans. Although 
use of the model forms and clauses is not required, creditors using 
them properly will be deemed to be in compliance with the regulation 
with regard to those disclosures. As discussed above, the Board 
proposes to add or revise several model and sample forms to Appendix G. 
The new or revised model and samples forms are discussed above in the 
section-by-section analysis applicable to the regulatory provisions to 
which the forms relate. See section-by-section analysis to Sec. Sec.  
226.4(d)(3), 226.5a(b), 226.6(b)(4), 226.6(c)(2), 226.7(b), 226.9(a), 
226.9(b), 226.9(c), 226.9(g) and 226.12(b). In addition, the Board 
proposes to add a new model clause and sample form relating to debt 
suspension coverage in Appendix H. These forms are discussed above in 
the section-by-section analysis of Sec.  226.4(d)(3). In Appendix G, 
all the existing forms applicable to home-equity lines of credit 
(HELOCs) have been retained without revision. The Board anticipates 
considering changes to these forms when it reviews the home-equity 
disclosure requirements in Regulation Z.
    The Board also proposes to revise or add commentary to the model 
and sample forms in Appendix G, as discussed below. The Board solicits 
comment on the proposed revisions below, as well as whether any 
additional commentary should be added to explain the model and sample 
forms contained in Appendix G.
    Permissible changes to the model and sample forms. The commentary 
to appendices G and H currently states that creditors may make certain 
changes in the format and content of the model forms and clauses and 
may delete any disclosures that are inapplicable to a transaction or a 
plan without losing the act's protection from liability. See comment 
app. G and H-1. As discussed above, the Board is proposing format 
requirements with respect to certain disclosures applicable to open-end 
(not home-secured) plans, such as a tabular requirement for certain 
account-opening disclosures and certain change-in-terms disclosures. 
See Sec.  226.5(a)(3). In addition, the Board is proposing revisions to 
certain model forms to improve their readability. See proposed G-2(A), 
G-3(A) and G-4(A). Thus, the Board would amend comment app. G and H-1 
to indicate that with respect to certain model and sample forms in 
Appendix G, formatting changes may not be made to the model and sample 
forms.
    In a technical revision, the Board proposes to delete comment app. 
G and H-1(vii) as obsolete. This comment allows a creditor to 
substitute appropriate references, such as ``bank,'' ``we'' or a 
specific name, for ``creditor'' in the account-opening disclosures, but 
none of the model or sample forms applicable to the account-opening 
disclosures uses the term ``creditor.''
    Model clauses for notice of liability for unauthorized use and 
billing-error rights. Currently, Appendix G contains Model Clause G-2 
which provides a model clause for the notice of liability for 
unauthorized use of a credit card. The Board is proposing revisions to 
Model Clause G-2 to improve its readability. This revised model clause 
is designated G-2(A). In addition, Appendix G currently contains Model 
Forms G-3 and G-4, which contain models for the long-form billing-error 
rights statement (for use with the account-opening disclosures and as 
an annual disclosure or, at the creditor's option, with each periodic 
statement) and the alternative billing-error rights statement (for use 
with each periodic statement), respectively. Like with Model Clause G-
2, the Board is proposing revisions to Model Forms G-3 and G-4 to 
improve readability.

[[Page 33027]]

The revised model forms are designated Model Form G-3(A) and G-4(A). 
The Board is proposing to revise comments app. G and H-2 and 3 to 
provide that for HELOCs subject to Sec.  226.5b, at the creditor's 
option, a creditor either may use the current forms (G-2, G-3, and G-4) 
or the revised forms (G-2(A), 3(A) and 4(A)). For open-end (not home-
secured) plans, creditors may use the revised forms.
    Model and sample forms applicable to disclosures for credit card 
applications and solicitations and account-opening disclosures. 
Currently, Appendix G contains several model forms related to the 
credit card application and solicitation disclosures required by Sec.  
226.5a. Current Model Form G-10(A) illustrates, in the tabular format, 
the disclosures required under Sec.  226.5a for applications and 
solicitations for credit cards other than charge cards. Current Sample 
G-10(B) is a sample disclosure illustrating an account with a lower 
introductory rate and a penalty rate. Model Form G-10(A) and Sample G-
10(B) would be substantially revised to reflect the proposed changes to 
Sec.  226.5a, as discussed in the section-by-section analysis to Sec.  
226.5a. In addition, the Board proposes to add Sample G-10(C) to 
provide another example of how certain disclosures required by Sec.  
226.5a may be given. Under the proposal, current Model Form G-10(C) 
illustrating the tabular format disclosures for charge card 
applications and solicitations would be moved to G-10(D) and revised. 
The Board proposes to add Sample G-10(E) to provide an example of how 
certain disclosures in Sec.  226.5a applicable to charge card 
applications and solicitations may be given. In addition, the Board 
proposes to add a model form and two sample forms to illustrate, in the 
tabular format, the disclosures required under Sec.  226.6(b)(4) for 
account-opening disclosures. See proposed Model G-17(A) and Samples G-
17(B) and G-17(C).
    The Board also proposes to revise the existing commentary that 
provides guidance to creditors on how to use Model Forms and Samples G-
10(A)-(E) and G-17(A)-(C). Currently, the commentary indicates that the 
disclosures required by Sec.  226.5a may be arranged horizontally 
(where headings are at the top of the page) or vertically (where 
headings run down the page, as is shown in the Model Forms G-10(A), G-
10(D) and G-17(A), and need not be highlighted aside from being 
included in the table. The Board proposes to delete this guidance and 
instead require that the table for credit card application and 
solicitation disclosures and account-opening disclosures be presented 
in the format shown in proposed Model Forms G-10(A), G-10(D) and G-
17(A), where a vertical format is used. The Board would no longer allow 
a horizontal format because such formats would be difficult for 
consumers to read, given the information that is required to be 
disclosed in the table. In addition, the Board proposes to delete the 
provision that disclosures in the tables need not be highlighted aside 
from being included in the table, as inconsistent with the proposed 
requirement that creditors must include certain rates and fees in the 
tables in bold text. See Sec. Sec.  226.5a(a)(2)(iv) and 
226.6(b)(4)(i)(C).
    In addition, Model Form G-10(A) applicable to credit card 
applications and solicitations currently uses the heading ``Minimum 
Finance Charge'' for disclosing a minimum finance charge under Sec.  
226.5a(b)(3). The Board proposes to amend Model Form G-10(A) to provide 
two alternative headings (``Minimum Interest Charge'' and ``Minimum 
Charge'') for disclosing a minimum finance charge under Sec.  
226.5a(b)(3). The same two headings are proposed for Model Form G-
17(A), the model form for the account-opening table required under 
Sec.  226.6(b)(4). In the consumer testing conducted for the Board, 
many participants did not understand the term ``finance charge'' in 
this context. The term ``interest'' was more familiar to many 
participants. Under the proposal, if a creditor imposes a minimum 
finance charge in lieu of interest in those months where a consumer 
would otherwise incur an interest charge but that interest charge is 
less than the minimum charge, the creditor should disclose this charge 
under the heading ``Minimum Interest Charge.'' Other minimum finance 
charges should be disclosed under the heading ``Minimum Charge.''
    Also, under the proposal, Model Forms G-10(A), G-10(D) and G-17(A) 
contain two alternative headings (``Annual Fees'' and ``Set-up and 
Maintenance Fees'') for disclosing fees for issuance or availability of 
credit under Sec.  226.5a(b)(2) or Sec.  226.6(b)(4)(iii)(A). The Board 
proposes to provide guidance on when a creditor should use each 
heading. Under the proposal, if the only fee for issuance or 
availability of credit disclosed under Sec.  226.5a(b)(2) or Sec.  
226.6(b)(4)(iii)(A) is an annual fee, a creditor should use the heading 
``Annual Fee'' to disclose this fee. If a creditor imposes fees for 
issuance or availability of credit disclosed under Sec.  226.5a(b)(2) 
or Sec.  226.6(b)(4)(iii)(A) other than, or in addition to, an annual 
fee, the creditor should use the heading ``Set-up and Maintenance 
Fees'' to disclose fees for issuance or availability of credit, 
including the annual fee.
    The Board also would revise the commentary to provide details about 
proposed sample forms G-10(B), G-10(C), G-17(B) and G-17(C) for credit 
card application and solicitation disclosures and account-opening 
disclosures. For example, the commentary indicates that samples G-
10(B), G-10(C), G-17(B) and G-17(C) are designed to be printed on an 
8x14 inch sheet of paper. In addition, the following formatting 
techniques were used in presenting the information in the table to 
ensure that the information was readable:
    1. A readable font style and font size (10-point Ariel font style, 
except for the purchase APR which is shown in 16-point type).
    2. Sufficient spacing between lines of the text. That is, words 
were not compressed to appear smaller than 10-point type.
    3. Adequate spacing between paragraphs when several pieces of 
information were included in the same row of the table, as appropriate. 
For example, in the samples, in the row of the tables with the heading 
``APR for Balance Transfers,'' the forms disclose three components: (a) 
The applicable balance transfer rate, (b) a cross-reference to the 
balance transfer fee, and (c) a notice about payment allocation. The 
samples show these three components on separate lines with adequate 
space between each component. On the other hand, in the samples, in the 
disclosure of the late payment fee, the form discloses two components: 
(a) The late-payment fee, and (b) the cross-reference to the penalty 
rate. Because the disclosure of both these components is short, these 
components are disclosed on the same line in the table.
    4. Standard spacing between words and characters.
    5. Sufficient white space around the text of the information in 
each row, by providing sufficient margins above, below and to the sides 
of the text.
    6. Sufficient contrast between the text and the background. Black 
text was used on white paper.
    While the Board is not requiring issuers to use the above 
formatting techniques in presenting information in the table (except 
for the 10-point and 16-point font size), the Board encourages issuers 
to consider these techniques when disclosing information in the table, 
to ensure that the information is presented in a readable format.

[[Page 33028]]

    Model and sample forms for periodic statements. The Board is 
proposing to add several model forms for periodic statements 
disclosures that creditors may use to comply with the requirements in 
proposed Sec.  226.7(b) applicable to open-end (not home-secured) 
plans. As discussed above in the section-by-section analysis of Sec.  
226.7(a), for HELOCs subject to Sec.  226.5b, at the creditor's option, 
a creditor either may comply with the current rules applicable to 
periodic statement disclosures in Sec.  226.7(a) or comply with the new 
rules applicable to periodic statement disclosures in Sec.  226.7(b). 
The Board proposes to added comment app. G and H-8 to provide that for 
HELOCs subject to Sec.  226.5b, if a creditor chooses to comply with 
the new periodic statement requirements in Sec.  226.7(b), the creditor 
may use Samples G-18(A)-(F) to comply with the requirements in Sec.  
226.7(b).

Appendix M1--Generic Repayment Estimates

    As discussed in the section-by-section analysis to Sec.  
226.7(b)(12), Section 1301(a) of the Bankruptcy Act requires creditors, 
the FTC and the Board to establish and maintain toll-free telephone 
numbers in certain instances in order to provide consumers with an 
estimate of the time it will take to repay the consumer's outstanding 
balance, assuming the consumer makes only minimum payments on the 
account and the consumer does not make any more draws on the account. 
15 U.S.C. Sec.  1637(b)(11)(F). The Act requires creditors, the FTC and 
the Board to provide estimates that are based on tables created by the 
Board that estimate repayment periods for different minimum monthly 
payment amounts, interest rates, and outstanding balances. Instead of 
issuing a table, the Board proposes to issue guidance in Appendix M1 to 
card issuers and the FTC for how to calculate this generic repayment 
estimate. The Board would use the same guidance to calculate the 
generic repayment estimates given through its toll-free telephone 
number. The Board expects that this guidance would be more useful than 
a table, because the guidance will facilitate the use of automated 
systems to provide the required disclosures, although the guidance also 
can be used to generate a table.
    Under Section 1301(a) of the Bankruptcy Act, a creditor may use a 
toll-free telephone number to provide the actual number of months that 
it will take consumers to repay their outstanding balance instead of 
providing an estimate based on the Board-created table. 15 U.S.C. 
1637(b)(11)(I)-(K). The Board proposes new Appendix M2 to provide 
guidance to issuers on how to calculate the actual repayment 
disclosure.
    Calculating generic repayment estimates. Proposed Appendix M1 
provides guidance on how to calculate the generic repayment estimates. 
In the October 2005 ANPR, the Board noted that the Bankruptcy Act 
directs the Board in estimating repayment periods to allow for a 
significant number of different minimum payment amounts, interest 
rates, and outstanding balances. With respect to the toll-free 
telephone numbers set up by the Board and the FTC, information about 
the consumers' account terms must come from consumers because the 
information is not available to the Board or the FTC. Consumers would 
need convenient access to this information to request an estimated 
repayment period. Because consumers' outstanding account balances 
appear on their monthly statements, consumers are able to provide that 
amount when requesting an estimate of the repayment period. Issues 
arise, however, with respect to the minimum payment requirement and 
interest rate information.
    Periodic statements do not disclose the fixed percentage or formula 
used to determine the minimum dollar amount that must be paid each 
month. The statements only disclose the minimum dollar amount that must 
be paid for the current statement period, which would vary each month 
as the account balance changes. Furthermore, while periodic statements 
must disclose all APRs applicable to the account, the statements may, 
but do not necessarily, indicate the portion of the account balance 
subject to each APR. This information is also needed to estimate the 
actual repayment period.
    The Board sought commenters' views regarding three basic approaches 
for developing a system to calculate estimated repayment periods for 
consumers who call the toll-free telephone number. The three approaches 
were:
    (1) Prompting consumers to provide an account balance, a minimum 
payment formula, and all applicable APRs in order to obtain an 
estimated repayment period. For information about minimum payments and 
APRs that is not currently disclosed on periodic statements, the Board 
could require additional disclosures on those statements. But the Board 
also could develop guidance that makes assumptions about these 
variables for a ``typical'' account.
    (2) Prompting consumers to input information, or using assumptions 
based on a ``typical'' account to calculate an estimated repayment 
period--but also giving creditors the option to input information from 
their own systems regarding consumers' account terms, to provide more 
accurate estimates. Estimates provided by creditors that elect this 
option would differ somewhat from the estimates provided by other 
creditors, the Board, and the FTC.
    (3) Prompting consumers to provide their account balance, but 
requiring creditors to input information from their own systems 
regarding the account's minimum payment requirement, APRs, and the 
portion of the balance subject to each APR. These estimates would be 
more accurate, but would impose additional compliance burdens, and 
would not necessarily reflect consumers' actual repayment periods 
because of the use of several other assumptions.
    In response to the October 2005 ANPR, industry commenters urged the 
Board not to require issuers to program their systems to obtain 
consumers' account information from their account management systems to 
calculate the generic repayment estimate. These commenters indicated 
that such a requirement was not contemplated by the statute. Several 
consumer group commenters indicated that issuers should be required to 
use inputs from their own systems about minimum monthly payment 
formulas, APRs, and account balances applicable to an account in 
calculating the generic repayment estimate.
    The Board is proposing to allow credit card issuers and the FTC to 
use a ``consumer input'' system to collect information from the 
consumer to calculate the generic repayment estimate. The Board would 
also use a ``consumer input'' system for its toll-free telephone 
number. For example, certain information is needed to calculate the 
generic repayment estimate, such as the outstanding balance on the 
account and the APR applicable to the account. The Board's proposed 
rule would allow issuers and the FTC to prompt the consumer to input 
this information so that the generic repayment estimate can be 
calculated. Although issuers have the ability to program their systems 
to obtain consumers' account information from their account management 
systems, the Board is not proposing that issuers be required to do so. 
Allowing issuers to use a ``consumer input'' system in calculating the 
generic repayment estimate preserves the distinction between estimates 
based on

[[Page 33029]]

the Board table and actual repayment disclosures contemplated in the 
statute.
    In proposed Appendix M1, the Board sets forth guidance for credit 
card issuers and the FTC in determining the minimum payment formula, 
the APR, and the outstanding balance to use in calculating the generic 
repayment estimates. With respect to other terms that could impact the 
calculation of the generic repayment estimate, the Board proposes to 
set forth assumptions about these terms that issuers and the FTC must 
use.
    1. Minimum payment formula. In the October 2005 ANPR, the Board 
sought comment on whether the Board should select a ``typical'' minimum 
payment formula that issuers and the FTC must use in calculating the 
generic repayment estimates. Q66. In response to the ANPR, many 
industry commenters acknowledged that there is no ``typical'' minimum 
payment formula for credit cards. Nonetheless, some industry commenters 
indicated that the Board should use a minimum formula of 1 percent of 
the outstanding balance plus the accrued finance charges for the 
billing period, with a minimum payment of $20. Another industry 
commenter indicated that the Board should require that issuers, the FTC 
and the Board use the minimum payment formula in the statutory examples 
to calculate the generic repayment estimate. As indicated above, 
several consumer groups indicated that issuers should be required to 
use the minimum payment formula(s) that is applicable to the consumer's 
account. These commenters indicated that the FTC and the Board should 
be required to use a minimum payment formula that is identified by the 
Board as producing the ``worst-case scenario'' repayment estimate.
    As indicated in Appendix M1, the Board proposes to require credit 
card issuers to use the minimum payment formula that applies to most of 
the issuer's accounts. The Board proposes different rules for general-
purpose credit cards and retail credit cards in selecting the ``most 
common'' minimum payment formula. The Board proposes to define retail 
credit cards as credit cards that are issued by a retailer for use only 
in transactions with the retailer or a group of retailers that are 
related by common ownership or control, or a credit card where a 
retailer arranges for a creditor to offer open-end credit under a plan 
that allows the consumer to use the credit only in transactions with 
the retailer or a group of retailers that are related by common 
ownership or control. General-purpose credit cards are defined as 
credit cards that are not retail credit cards.
    When calculating the generic repayment estimate for general-purpose 
credit cards, card issuers must use the minimum payment formula that 
applies to most of its general-purpose credit card accounts. The issuer 
must use this ``most common'' formula to calculate the generic 
repayment estimate for all of its general-purpose credit card accounts, 
regardless of whether this formula applies to a particular account. 
Proposed Appendix M1 contains additional guidance to issuers of 
general-purpose credit cards in complying with the ``most common'' 
formula approach. The Board solicits comment on the need for guidance 
if two or more formulas could apply equally to the same number of 
accounts.
    When calculating the generic repayment estimate for retail credit 
cards, credit card issuers must use the minimum payment formula that 
most commonly applies to its retail credit card accounts. If an issuer 
offers credit card accounts on behalf of more than one retailer, credit 
card issuers must group credit card accounts relating to each retailer 
separately, and determine the minimum formula that is most common to 
each retailer. For example, if Issuer A, the owner of Retailer A and 
Retailer B, issues separate cards for Retailer A and Retailer B, the 
proposal would require Issuer A to determine the most common formula 
separately for each retailer (A and B). Under the proposal, the issuer 
must use the ``most common'' formula for each retailer to calculate the 
generic repayment estimate for the retail credit card accounts related 
to each retailer, regardless of whether this formula applies to a 
particular account. Proposed Appendix M1 provides additional guidance 
to issuers of retail credit cards on how to comply with the ``most 
common'' formula approach. The Board solicits comment on whether Issuer 
A in the example above should be permitted to determine a single ``most 
common'' formula for all retailers under its common ownership or 
control, and if so, what the standard of affiliation should be. The 
Board also solicits comment on the need for guidance if two or more 
formulas could apply equally to the same number of accounts.
    The Board believes that the ``most common'' approach described 
above is preferable to using a ``typical'' minimum payment formula 
identified by the Board for several reasons. First, as acknowledged by 
the industry commenters, there is no ``typical'' minimum payment 
formula that generally applies to credit card accounts. Informally, the 
Board gathered data on the minimum payment formulas used by the top 10 
issuers of general-purpose credit cards. With respect to those 10 
issuers, there was no minimum payment formula that most of the issuers 
used. Second, the minimum payment formula can have a significant impact 
on the calculation of the generic repayment estimate. For example, 
based on the minimum payment formulas used by the top 10 issuers, the 
repayment period for paying a $1,000 balance at a 13.99 percent APR if 
only minimum payments are made can range from 6 years to 12 years 
depending on the issuer.
    In addition, it appears that at least for general-purpose credit 
cards, issuers typically use the same or similar minimum payment 
formula for their entire credit card portfolio. Thus, for those types 
of credit cards, the ``most common'' minimum payment formula identified 
by an issuer often will match the actual formula used on a consumer's 
account. The Board recognizes that in some cases the ``most common'' 
minimum payment formula will not match the actual formula used on a 
consumer's account, for example, where a consumer has opted out of a 
change in the minimum payment formula, and the consumer is paying off 
the balance under the old minimum payment formula. The Board also 
recognizes that allowing retail card issuers to use one minimum payment 
formula under the ``most common'' formula approach to calculate the 
generic repayment estimate even when multiple minimum payment formulas 
apply to the account yields a less accurate estimate than if the issuer 
were required to use all the minimum payment formulas applicable to a 
consumer's account. Nonetheless, short of requiring issuers to obtain 
the actual minimum payment formula(s) applicable to a consumer's 
account from the issuer's account management systems to calculate the 
generic repayment estimate, which does not appear to be contemplated by 
the statute, the Board believes that the approach of requiring issuers 
to identify their ``most common'' minimum payment formulas to calculate 
the generic repayment estimates is a preferable approach than allowing 
issuers to use a ``typical'' formula identified by the Board.
    As discussed in the section-by-section analysis to Sec.  
226.7(b)12), the Board is required to establish and maintain, for two 
years, a toll-free telephone number for use by customers of depository 
institutions having assets of $250 million or less to obtain generic 
repayment estimates. The Board

[[Page 33030]]

proposes to use the following minimum payment formula to calculate the 
generic repayment estimates: either 2 percent of the outstanding 
balance, or $20, whichever is greater. This is the same minimum payment 
formula used to calculate the repayment estimate for the statutory 
example related to the $1,000 balance. The Board proposes to use the 
same formula as in the statutory example because the Board is not aware 
of any ``typical'' minimum payment formula that applies to general-
purpose credit cards issued by smaller depository institutions. For the 
same reasons, the Board proposes that the FTC use the 5 percent minimum 
payment formula used in the $300 example in the statute to calculate 
the generic repayment estimates given through the FTC's toll-free 
telephone number.
    2. Annual percentage rates. In the October 2005 ANPR, the Board 
noted that the statute's hypothetical repayment examples assume that a 
single APR applies to a single account balance. But credit card 
accounts can have multiple APRs. The APR may differ for purchases, cash 
advances, and balance transfers. A card issuer may have a promotional 
APR that applies to the initial balance transfer and a separate APR for 
other balance transfers. Although all the APRs for accounts are 
disclosed on periodic statements, calculating the repayment period 
requires information about what percentage or amount of the total 
ending balance is subject to each APR, and what payment allocation 
method is used. 15 U.S.C. 1637(b)(5); current Sec.  226.7(d). 
Currently, the total ending balance is required to be disclosed, but 
not the portion of the cycle's ending balance that is subject to each 
APR. 15 U.S.C. 1637(b)(8); current Sec.  226.7(i). (Some creditors may 
voluntarily disclose such information on periodic statements.) For 
example, assuming a $1,000 outstanding balance on an account with a 12 
percent APR for purchases and a 19.5 percent APR on cash advances, the 
consumer will know from his or her periodic statement the amount of the 
total outstanding balance ($1,000), but may not know the percentage or 
amount of the ending balance is subject to the 12 percent rate and what 
amount of the ending balance is subject to the 19.5 percent rate. 
Creditors know the portion of the cycle's ending balance that is 
subject to each APR, and could develop automated systems that 
incorporate this information as part of their calculation. But again, 
the toll-free telephone systems developed by the Board and FTC would 
have to depend solely on data provided by the consumer.
    If multiple APRs apply to the outstanding balance, using the lowest 
APR to calculate the repayment period would estimate repayment periods 
that are shorter for some consumers, depending on the components of the 
balance, while using the highest APR would estimate repayment periods 
that are longer for some consumers. How much the repayment periods are 
underestimated or overestimated in each of these cases would depend on 
which rate applies to the outstanding balance. Using an average of the 
multiple rates may either overestimate or underestimate the repayment 
period depending on which rate applies to the outstanding balance. It 
is unclear whether detailed transaction data about how consumers use 
their credit card accounts would support a finding that there is a 
``typical'' approach that would provide the best estimate of the 
repayment periods in most cases.
    In the October 2005 ANPR, the Board solicited comment on whether it 
would be appropriate for accounts that have multiple APRs to calculate 
an estimated repayment period using a single APR, and if so, which APR 
for the account should be used. Q71. Most industry commenters suggested 
that the Board use a single APR. They pointed out that it would be 
impractical to use multiple APRs for the generic repayment estimate. 
Consumers would need to understand and input multiple APRs and balances 
that apply to the accounts (as well as any expiration dates and APRs 
that apply after any promotional APRs expire). The complexity and 
effort required to accommodate multiple APRs would be unduly burdensome 
for consumers, which could discourage consumers from using such an 
approach, and for creditors. In terms of which APR on the account to 
use to calculate the generic repayment estimate, some industry 
commenters indicated that the purchase APR should be used because this 
is the rate that most typically applies to the majority of the balances 
on consumers' accounts. Other industry commenters indicated that the 
highest APR on the account should be used to calculate the generic 
repayment estimates because this would provide consumers with the 
``worst-case scenario.'' Several consumer groups indicated that the 
Board should require issuers to use all the APRs applicable to a 
consumer's account in calculating the generic repayment estimates.
    The Board proposes to require that the generic repayment estimate 
be calculated using a single APR, even for accounts that have multiple 
APRs. As indicated above, the Board does not believe that the statute 
contemplates that issuers be required to use their account management 
systems to disclose an estimate based on all of the APRs applicable to 
a consumer's account and the actual balances to which those rates 
apply. The Board also agrees with several industry commenters that the 
complexity and effort required to accommodate multiple APRs using a 
``consumer-input'' system would be unduly burdensome. In selecting the 
single APR to be used in calculating the generic repayment estimates, 
the Board proposes to require that credit card issuers, and the FTC use 
the highest APR on which the consumer has outstanding balances. As 
proposed, an issuer and the FTC may use an automated system to prompt 
the consumer to enter in the highest APR on which the consumer has an 
outstanding balance, and calculate the generic repayment estimate based 
on the consumer's response. The Board would follow the same approach in 
calculating the generic repayment estimates for its toll-free telephone 
number. The Board recognizes that using the highest APR on which a 
consumer has an outstanding balance will overestimate the repayment 
period when the consumer has outstanding balances at lower APRs as 
well. Nonetheless, allowing issuers to use the purchase APR on the 
account to calculate the repayment period would underestimate the 
repayment period, if a consumer also has balances subject to higher 
APRs, such as cash advance balances. The Board believes that an 
overestimate of the repayment period is a better approach for purposes 
of this disclosure than an underestimate of the repayment period 
because it gives consumers the worst-case estimate of how long it may 
take to pay off their balance.
    3. Outstanding balance. As discussed above, because consumers' 
outstanding account balances appear on their monthly statements, 
consumers can provide that amount when requesting an estimate of the 
repayment period. The Board proposes that when calculating the generic 
repayment estimate, credit card issuers and the FTC must use the 
outstanding balance on a consumer's account as of the closing date of 
the last billing cycle to calculate the generic repayment estimates. As 
proposed, an issuer and the FTC may use an automated system to prompt 
the consumer to enter in the outstanding balance included on the last 
periodic statement received, and calculate the generic repayment 
estimate based on the consumer's response. The Board would

[[Page 33031]]

follow the same approach in calculating the generic repayment estimates 
for its toll-free telephone number.
    Other terms. In the October 2005 ANPR, the Board noted that Section 
1301(a) of the Bankruptcy Act appears to contemplate that the generic 
repayment estimate should be calculated based on three variables: The 
minimum payment formula, the APR, and the outstanding balance. 
Nonetheless, a number of other assumptions can also affect the 
calculation of a repayment period. For example, the hypothetical 
examples that must be disclosed on periodic statements incorporate the 
following assumptions, in addition to the statutory assumptions that 
only minimum monthly payments are made each month, and no additional 
extensions of credit are obtained: (1) The balance computation method 
used is the previous-balance method and finance charges are based on 
the beginning balance for the cycle; (2) no grace period applies to any 
portion of the balance; and (3) when the account balance becomes less 
than the required minimum payment, the receipt of the final amount in 
full completely pays off the account. In other words, there is no 
residual finance charge that accrues in the month when the final bill 
is paid in full.
    In the October 2005 ANPR, the Board requested comment on whether 
the Board should incorporate the above three assumptions into the 
calculation of the generic repayment estimates. Q67. Most industry 
commenters generally favored using the above three assumptions in the 
calculation of the generic repayment estimates. One consumer group 
commenter indicated that the Board should use ``worst-case scenario'' 
assumptions in calculating the generic repayment estimates.
    1. Balance computation method. Instead of using the previous-
balance method used in the statutory example, the Board proposes to use 
the average daily balance method for purposes of calculating the 
generic repayment estimate. The average daily balance method is more 
commonly used by issuers to compute the balance on credit card 
accounts. Nonetheless, requiring use of the average daily balance 
method makes other assumptions necessary, including the length of the 
billing cycle, and when payments are made. The Board proposes to assume 
that all months are the same length. In addition, in the absence of 
data on when consumers typically make their payments each month, the 
Board proposes to assume that payments are credited on the last day of 
the month.
    2. Grace period. The Board proposes to assume that no grace period 
exists. The required disclosures about the effect of making minimum 
payments are based on the assumption that the consumer will be 
``revolving'' or carrying a balance. Thus, it seems reasonable to 
assume that the account is already in a revolving condition at the time 
the consumer calls to obtain the estimate, and that no grace period 
applies. This assumption about the grace period is also consistent with 
the Board's proposal to exempt issuers from providing the minimum 
payment disclosures to consumers that have paid their balances in full 
for two consecutive months.
    3. Residual interest. When the consumer's account balance at the 
end of a billing cycle is less than the required minimum payment, the 
statutory examples assume that no additional transactions occurred 
after the end of the billing cycle, that the account balance will be 
paid in full, and that no additional finance charges will be applied to 
the account between the date the statement was issued and the date of 
the final payment. The Board proposes to make these same assumptions 
with respect to the calculation of the generic repayment estimates. 
These assumptions are necessary to have a finite solution to the 
repayment period calculation. Without these assumptions, the repayment 
period could be infinite.
    Disclosing the generic repayment estimates to consumers. The Board 
proposes in Appendix M1 to provide guidance regarding how the generic 
repayment estimate must be disclosed to consumers. As discussed in more 
detail below, credit card issuers and the FTC would be required to 
provide certain required disclosures to consumers in responding to a 
request through a toll-free telephone number for generic repayment 
estimates. In addition, issuers and the FTC would be permitted to 
provide certain other information to consumers, so long as that 
permitted information is disclosed after the required information. The 
Board would follow the same approach in disclosing the generic 
repayment estimates through its toll-free telephone number.
    1. Required disclosures. In the October 2005 ANPR, the Board 
requested comment on what key assumptions, if any, should be disclosed 
to consumers in connection with the estimated repayment period. Q76. 
Some commenters indicated that a number of assumptions should be 
disclosed to consumers, such as that the estimated repayment period is 
based on the assumption there will be no new transactions, no late 
payments, no changes in the APRs and the minimum payment formula, and 
that only minimum payments are made. Other commenters indicated that 
the Board should only require a more general statement that the 
repayment period provided is only an estimate and the actual repayment 
period would differ based on a number of factors related to the 
consumers' behavior and the particular terms of their account.
    As the rule is proposed, credit card issuers and the FTC would be 
required to provide the following information when responding to a 
request for generic repayment estimates through a toll-free telephone 
number: (1) The generic repayment estimate; (2) the beginning balance 
on which the generic repayment estimate is calculated; (3) the APR on 
which the generic repayment estimate is calculated; (4) the assumptions 
that only minimum payments are made and no other amounts are added to 
the balance; and (5) the fact that the repayment period is an estimate, 
and the actual time it may take to pay off the balance if only making 
minimum payment will differ based on the consumer's account terms and 
future account activity. The Board proposes to include a model form in 
Appendix M1 that credit card issuers and the FTC may use to comply with 
the above disclosure requirements. The Board is proposing to require a 
brief statement that the repayment period is an estimate rather than 
include a list of assumptions used to calculate the estimate, because 
the Board believes the brief statement is more helpful to consumers. 
The many assumptions that are necessary to calculate a repayment period 
are complex and unlikely to be meaningful or useful to most consumers. 
Nonetheless, the Board proposes to allow issuers and the FTC to 
disclose through the toll-free telephone number the assumptions used to 
calculate the generic repayment estimates, so long as this information 
is disclosed after the required information described above. The Board 
would follow the same approach in disclosing the generic repayment 
estimates through its toll-free telephone number.
    2. Negative amortization. Negative amortization can occur if the 
required minimum payment is less than the total finance charges and 
other fees imposed during the billing cycle. Several major credit card 
issuers have established minimum payment requirements that prevent 
prolonged negative amortization. But some creditors may use a minimum 
payment formula that allows negative amortization (such as by requiring 
a payment of 2 percent of the

[[Page 33032]]

outstanding balance, regardless of the finance charges or fees 
incurred). If negative amortization occurs when calculating the 
repayment estimate, issuers and the FTC would be required to disclose 
to the consumer that based on the assumptions used to calculate the 
repayment estimate, the consumer will not pay off the balance by making 
only the minimum payment. As proposed, Appendix M1 contains a model 
form that issuers and the FTC may use to disclose to the consumer that 
negative amortization is occurring. The Board would follow the same 
approach in disclosing through its toll-free telephone number that 
negative amortization is occurring.
    If creditors use a minimum payment formula that allows for negative 
amortization, the Board believes that consumers should be told that 
negative amortization is occurring. The Board recognizes that in some 
cases because of the assumptions used to calculate the generic 
repayment estimate, the estimate may indicate that negative 
amortization is occurring, when in fact, if the estimate was based on 
the consumer's actual account terms, negative amortization would not 
occur. The Board strongly encourages issuers to use the actual 
repayment disclosure provided in proposed Appendix M2 in these 
instances to avoid giving inaccurate information to consumers.
    3. Permitted disclosures. As the rule is proposed, credit card 
issuers and the FTC may provide the following information when 
responding to a request for the generic repayment estimate through a 
toll-free telephone number, so long as this permitted information is 
given after the required disclosures: (1) A description of the 
assumptions used to calculate the generic repayment estimate; (2) an 
estimate of the length of time it would take to repay the outstanding 
balance if an additional amount was paid each month in addition to the 
minimum payment amount, allowing the consumer to select the additional 
amount; (3) an estimate of the length of time it would take to repay 
the outstanding balance if the consumer made a fixed payment amount 
each month, allowing the consumer to select the amount of the fixed 
payment; (4) the monthly payment amount that would be required to pay 
off the outstanding balance within a specific number of months, 
allowing the consumer to select the payoff period, (5) a reference to 
Web sites that contains minimum payment calculators; and (6) the total 
interest that a consumer may pay if he or she makes minimum payments 
for the length of time disclosed in the generic repayment estimate. The 
Board would follow the same approach in disclosing permitted 
information through its toll-free telephone number.
    In consumer testing conducted for the Board, several participants 
reviewed a disclosure that provided an estimate of the time it would 
take to pay off a $1,000 balance at a 17 percent APR, if the consumer 
paid $10 more than the minimum payment each month. Most participants 
that reviewed this disclosure found it to be useful. Thus, the Board is 
proposing to allow credit card issuers and the FTC, via the toll-free 
telephone number, to provide this type of disclosure to consumers, as 
well as other relevant repayment information. The Board believes that 
consumers may find this information helpful in making decisions about 
how much to pay each month.
    In addition, in the October 2005 ANPR, the Board solicited comment 
on whether any creditors currently offer web-based calculation tools 
that permit consumers to obtain estimates of repayment periods. Several 
industry commenters indicated that they do offer such web-based 
calculation tools. In addition, other industry commenters indicated 
that such tools are available on the Internet from a variety of 
sources. For example, these Web sites may provide calculators that 
provide the monthly payment amount that would be required to pay off a 
particular balance within a specific number of months indicated by the 
consumer, and the total interest that would be paid during that period. 
Because these types of Web sites might be useful to consumers to obtain 
additional information about repayment periods, the Board proposes to 
allow issuers, and the FTC to provide Internet addresses for these Web 
sites as part of responding to a request for the generic repayment 
estimate through a toll-free telephone number.

Appendix M2--Actual Repayment Disclosures

    As indicated above, Section 1301(a) of the Bankruptcy Act allows 
creditors to forego using the toll-free telephone number to provide a 
generic repayment estimate if the creditor instead provides through the 
toll-free telephone number the ``actual number of months'' to repay the 
consumer's account. In the October 2005 ANPR, the Board requested 
comment on whether the Board should provide guidance on the how to 
calculate the actual repayment disclosures. Q77. Commenters generally 
favored the Board providing such guidance because without this 
guidance, issuers would be less likely to provide the actual repayment 
disclosures. The Board proposes to provide in Appendix M2 guidance to 
credit card issuers on how to calculate the actual repayment disclosure 
to encourage issuers to provide these estimates.
    Calculating the actual repayment disclosures. As a general matter, 
the Board is proposing that credit card issuers calculate the actual 
repayment disclosure for a consumer based on the minimum payment 
formula(s), the APRs and the outstanding balance currently applicable 
to a consumer's account. For other terms that may impact the 
calculation of the actual repayment disclosure, the Board proposes to 
allow issuers to make certain assumption about these terms.
    1. Minimum payment formulas. Generally, when calculating actual 
repayment disclosures, the Board proposes that credit card issuers 
generally must use the minimum payment formula(s) that apply to a 
cardholder's account. The Board proposes to allow issuers to disregard 
promotional terms that may be currently applicable to a consumer 
account when calculating the actual repayment disclosure. Specifically, 
if any promotional terms related to payments currently apply to a 
cardholder's account, such as a ``deferred payment plan'' where a 
consumer is not required to make payments on the account for a certain 
period of time, credit card issuers may assume the promotional terms do 
not apply, and use the minimum payment formula(s) that would currently 
apply without regard to the promotional terms. Allowing issuers to 
disregard promotional terms on accounts eases compliance burden on 
issuers, without a significant impact on the accuracy of the repayment 
estimates for consumers.
    In addition, in response to the October 2005 ANPR, one commenter 
indicated that the issuers should not be required in calculating the 
actual repayment disclosure to develop different estimating 
methodologies for minimum payment formulas that apply to atypical 
customers. The commenter indicated that this might occur, for example, 
where customers have opted out of a newer version of a creditor's 
minimum payment formula, customers have received test versions of newer 
minimum payment formulas, or customers have received a relatively 
unique product with relatively unique versions of the creditor's basic 
minimum payment formula. The commenter indicated that requiring 
creditors to develop special estimating methodologies for such small 
groups of customers would impose significant systems development costs, 
operational

[[Page 33033]]

complexities, and similar burdens on creditors in excess of benefits to 
those customers.
    The Board solicits additional comment on why an exception from the 
general requirement that the actual repayment estimate should be based 
on the minimum payment formula(s) applicable to a consumer's account is 
needed for atypical customers. Are the accounts for these atypical 
customers contained on separate periodic statements systems from other 
customers? If not, would not the issuer need to make changes only to 
one periodic statement system to obtain the minimum payment formula(s) 
applicable to a consumer's account, even if the minimum payment 
formulas applicable to the consumer's account were atypical?
    2. Annual percentage rates. Generally, when calculating actual 
repayment disclosures, the Board proposes that credit card issuers must 
use each of the APRs that currently apply to a consumer's account, 
based on the portion of the balance to which that rate applies. For the 
reason discussed above, the Board proposes to allow issuers to 
disregard promotional APRs that may currently apply to a consumer's 
account. Specifically, if any promotional terms related to APRs 
currently apply to a cardholder's account, such as introductory rates 
or deferred interest plans, credit card issuers may assume the 
promotional terms do not apply, and use the APRs that currently would 
apply without regard to the promotional terms.
    3. Outstanding balance. When calculating the actual repayment 
disclosures, the Board proposes that credit card issuers must use the 
outstanding balance on a consumer's account as of the closing date of 
the last billing cycle. Issuers would not be required to take into 
account any transactions consumers may have made since the last billing 
cycle. This rule makes it easier for issuers to place the estimate on 
the periodic statement, because the outstanding balance used to 
calculate the actual repayment disclosure would be the same as the 
outstanding balance shown on the periodic statement.
    4. Other terms. As discussed above, as a general matter, the Board 
is proposing that issuers calculate the actual repayment disclosures 
for a consumer based on the minimum payment formula(s), the APRs and 
the outstanding balance currently applicable to a consumer's account. 
For other terms that may impact the calculation of the actual repayment 
disclosures, the Board proposes to allow issuers to make certain 
assumptions about these terms. For example, the Board would allow 
issuers to make the same assumptions about balance computation method, 
grace period, and residual interest as are allowed for the generic 
repayment estimates. In addition, the Board proposes to allow issuers 
to assume that payments are allocated to lower APR balances before 
higher APR balances when multiple APRs apply to an account. This 
assumption is consistent with typical industry practice regarding how 
issuers allocate payments. Allowing issuers to make these assumptions 
eases compliance burden for issuers, without a significant impact on 
the accuracy of the actual repayment disclosures.
    Disclosing the actual repayment disclosures to consumers through 
the toll-free telephone number or on the periodic statement. The Board 
proposes in Appendix M2 to provide guidance regarding how the actual 
repayment disclosure must be disclosed to consumers if a toll-free 
telephone number is used or if the actual repayment disclosure is 
placed on the periodic statement. The Board proposes similar rules with 
respect to disclosing the actual repayment disclosures as are being 
proposed with respect to the generic repayment estimate. Specifically, 
the Board proposes to require credit card issuers to disclose certain 
information when providing the actual repayment disclosure, and permits 
the issuers to disclose other related information, so long as that 
permitted information is disclosed after the required information. See 
proposed Appendix M2.

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

    Proposed Appendix M3 provides samples calculations for the generic 
repayment estimate and the actual repayment disclosures discussed in 
appendices M1 and M2. Specifically, proposed Appendix M3 contains an 
example of how to calculate the generic repayment estimate using the 
guidance in Appendix M1 where the APR is 17 percent, the outstanding 
balance is $1,000, and the minimum payment formula is 2 percent of the 
outstanding balance or $20, whichever is greater. In addition, proposed 
Appendix M3 also provides an example of how to calculate the actual 
repayment disclosure using the guidance in Appendix M2 where three APRs 
apply, the total outstanding balance is $1,000, and the minimum payment 
formula is 2 percent of the outstanding balance or $20, whichever is 
greater. The sample calculations in Appendix M3 are written in SAS 
code.

VII. Initial Regulatory Flexibility Act Analysis

    In accordance with Section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 601-612) (RFA), the Board is publishing an initial regulatory 
flexibility analysis for the proposed amendment to Regulation Z.
    Based on its analysis and for the reasons stated below, the Board 
believes that this proposed rule will have a significant economic 
impact on a substantial number of small entities. A final regulatory 
flexibility analysis will be conducted after consideration of comments 
received during the public comment period. The Board requests public 
comment in the following areas.
    1. Reasons, statement of objectives and legal basis for the 
proposed rule. The purpose of the Truth in Lending Act is to promote 
the informed use of consumer credit by providing for disclosures about 
its terms and cost. In this regard, the goal of the proposed amendments 
to Regulation Z is to improve the effectiveness of the disclosures that 
creditors provide to consumers at application and throughout the life 
of an open-end account. Accordingly, the Board is proposing changes to 
format, timing, and content requirements for the five main types of 
disclosures governed by Regulation Z: (1) credit and charge card 
application and solicitation disclosures; (2) account-opening 
disclosures; (3) periodic statement disclosures; (4) change-in-terms 
notices; and (5) advertising provisions.
    The following sections of the Supplementary Information above 
describe in detail the reasons, objectives, and legal basis for each 
component of the proposed rule:
     A high-level summary of the major changes being proposed 
is in II. Summary of Major Proposed Changes, and a more detailed 
discussion is in V. Discussion of Major Proposed Revisions and VI. 
Section-by-section Analysis.
     The Board's major sources of rulemaking authority pursuant 
to TILA are summarized in IV. The Board's Rulemaking Authority. More 
detailed information regarding the source of rulemaking authority for 
each individual proposed change, as well as the rulemaking authority 
for certain changes mandated by the Bankruptcy Act, are discussed in 
VI. Section-by-section Analysis.
    2. Description of small entities to which the proposed rule would 
apply. The total number of small entities likely to be affected by the 
proposal is

[[Page 33034]]

unknown, because the open-end credit provisions of TILA and Regulation 
Z have broad applicability to individuals and businesses that extend 
even small amounts of consumer credit. See Sec.  226.1(c)(1).\19\ Based 
on December 2006 call report data, there are approximately 13,000 
depository institutions in the United States that have assets of $165 
million or less and thus are considered small entities for purposes of 
the Regulatory Flexibility Act. Of them, there were 2,293 banks, 3,603 
insured credit unions, and 33 other thrift institutions with credit 
card assets (or securitizations), and total assets less than $165 
million. The number of small non-depository institutions that are 
subject to Regulation Z's open-end credit provisions cannot be 
determined from information in call reports, but recent congressional 
testimony by an industry trade group indicated that 200 retailers, 40 
oil companies, and 40 third-party private label credit card issuers of 
various sizes also issue credit cards.\20\ There is no comprehensive 
listing of small consumer finance companies that may be affected by the 
proposed rules or of small merchants that offer their own credit plans 
for the purchase of goods or services. Furthermore, it is unknown how 
many of these small entities offer open-end credit plans as opposed to 
closed-end credit products, which would not be affected by the proposed 
rule.
---------------------------------------------------------------------------

    \19\ Regulation Z generally applies to ``each individual or 
business that offers or extends credit when four conditions are met: 
(i) The credit is offered or extended to consumers; (ii) the 
offering or extension of credit is done regularly, (iii) the credit 
is subject to a finance charge or is payable by a written agreement 
in more than four installments, and (iv) the credit is primarily for 
personal, family, or household purposes.'' Section 226.1(c)(1).
    \20\ Testimony of Edward L. Yingling for the American Bankers' 
Association before the Subcommittee on Financial Institutions and 
Consumer Credit, Financial Services Committee, United States House 
of Representatives, April 26, 2007, fn. 1, p 3.
---------------------------------------------------------------------------

    The effect of the proposed revisions to Regulation Z on small 
entities also is unknown. Small entities would be required to, among 
other things, conform their open-end credit disclosures, including 
those in solicitations, account opening materials, periodic statements, 
and change-in-terms notices, and advertisements to the revised rules. 
The precise costs to small entities of updating their systems are 
difficult to predict. These costs will depend on a number of factors 
that are unknown to the Board, including, among other things, the 
specifications of the current systems used by such entities to prepare 
and provide disclosures and administer open-end accounts, the 
complexity of the terms of the open-end credit products that they 
offer, and the range of such product offerings. Nevertheless, the Board 
believes that these costs will have a significant economic effect on 
small entities. The Board seeks information and comment on the effects 
of the proposed rules on small entities.
    3. Projected reporting, recordkeeping and other compliance 
requirements of the proposed rule. The compliance requirements of the 
proposed rules are described in VI. Section-by-section Analysis. The 
Board seeks information and comment on any costs, compliance 
requirements, or changes in operating procedures arising from the 
application of the proposed rule to small institutions.
    4. Other federal rules. As noted in the section-by-section analysis 
for Sec.  226.13(i), there is a potential conflict between Regulation Z 
and Regulation E with respect to error resolution procedures when a 
transaction involves both an extension of credit and an electronic fund 
transfer. The Board has not identified any other federal rules that 
duplicate, overlap, or conflict with the proposed revisions to 
Regulation Z. The Board seeks comment regarding any statutes or 
regulations, including state or local statutes or regulations, that 
would duplicate, overlap, or conflict with the proposed rule.
    5. Significant alternatives to the proposed revisions. As 
previously noted, the proposed rule implements the Board's mandate to 
prescribe regulations that carry out the purposes of TILA. In addition, 
the Board is directed to implement certain provisions of the Bankruptcy 
Act that require new disclosures on periodic statements, on credit card 
applications and solicitations, and in advertisements. The Board seeks 
with this proposed rule to balance the benefits to consumers arising 
out of more effective TILA disclosures against the additional burdens 
on creditors and other entities subject to TILA. To that end, and as 
discussed in VI. Section-by-section Analysis, consumer testing was 
conducted for the Board in order to assess the effectiveness of the 
proposed revisions to Regulation Z. In this manner, the Board has 
sought to avoid imposing additional regulatory requirements without 
evidence that these proposed revisions may be beneficial to consumer 
understanding regarding open-end credit products.
    The Board welcomes comments on any significant alternatives, 
consistent with TILA and the Bankruptcy Act, that would minimize the 
impact of the proposed rule on small entities.

VIII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The collection of information that is 
required by this proposed rule is found in 12 CFR part 226. The Federal 
Reserve may not conduct or sponsor, and an organization is not required 
to respond to, this information collection unless the information 
collection displays a currently valid OMB control number. The OMB 
control number is 7100-0199.
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 1601 et seq.). The respondents/
recordkeepers are creditors and other entities subject to Regulation Z, 
including for-profit financial institutions and small businesses.
    TILA and Regulation Z are intended to ensure effective disclosure 
of the costs and terms of credit to consumers. For open-end credit, 
creditors are required to, among other things, disclose information 
about the initial costs and terms and to provide periodic statements of 
account activity, notices of changes in terms, and statements of rights 
concerning billing error procedures. Regulation Z requires specific 
types of disclosures for credit and charge card accounts and home-
equity plans. For closed-end loans, such as mortgage and installment 
loans, cost disclosures are required to be provided prior to 
consummation. Special disclosures are required in connection with 
certain products, such as reverse mortgages, certain variable-rate 
loans, and certain mortgages with rates and fees above specified 
thresholds. TILA and Regulation Z also contain rules concerning credit 
advertising. Creditors are required to retain evidence of compliance 
for twenty-four months (Sec.  226.25), but Regulation Z does not 
specify the types of records that must be retained.
    Under the PRA, the Federal Reserve accounts for the paperwork 
burden associated with Regulation Z for the state member banks and 
other creditors supervised by the Federal Reserve that engage in 
lending covered by Regulation Z and, therefore, are respondents under 
the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: state member banks, branches and agencies of 
foreign banks (other than federal branches, federal agencies, and 
insured state branches of foreign banks), commercial lending

[[Page 33035]]

companies owned or controlled by foreign banks, and organizations 
operating under section 25 or 25A of the Federal Reserve Act. Other 
federal agencies account for the paperwork burden on other creditors. 
The current total annual burden to comply with the provisions of 
Regulation Z is estimated to be 552,398 hours for the 1,172 Federal 
Reserve-regulated institutions that are deemed to be respondents for 
the purposes of the PRA. To ease the burden and cost of complying with 
Regulation Z (particularly for small entities), the Federal Reserve 
provides model forms, which are appended to the regulation.
    The proposed rule would impose a one-time increase in the total 
annual burden under Regulation Z for all respondents regulated by the 
Federal Reserve by 73,240 hours, from 552,398 to 625,638 hours. The 
total one-time burden increase, as well as the estimates of the one-
time burden increase associated with each major section of the proposed 
rule as set forth below, represent averages for all respondents 
regulated by the Federal Reserve. The Federal Reserve expects that the 
amount of time required to implement each of the proposed changes for a 
given institution may vary based on the size and complexity of the 
respondent. (Furthermore, this one-time burden estimate does not 
include the burden addressing electronic disclosures as announced in a 
separate proposed rulemaking (Docket No. R-1284)). In addition, the 
Federal Reserve estimates that, on a continuing basis, the proposed 
revisions to the rules governing change-in-terms notices would increase 
the frequency with which such notices are required, and that this 
change would increase the total annual burden on a continuing basis 
from 552,398 to 607,759 hours.
    As discussed in the preamble, the Federal Reserve proposes changes 
to format, timing, and content requirements for the five main types of 
open-end credit disclosures governed by Regulation Z: (1) Application 
and solicitation disclosures; (2) account-opening disclosures; (3) 
periodic statement disclosures; (4) change-in-terms notices; and (5) 
advertising provisions.
    The proposed revisions to the application and solicitation 
disclosures are intended to make the content of those disclosures more 
meaningful and easier for consumers to use. The Federal Reserve 
estimates that 279 respondents regulated by the Federal Reserve would 
take, on average, 8 hours (one business day) to reprogram and update 
their systems to comply with the proposed disclosure requirements in 
Sec.  226.5a and estimates the annual one-time burden to be 2,232 
hours.
    The proposed revisions to the account-opening disclosures are 
intended to make the information in those disclosures more conspicuous 
and easier for consumers to read. The Federal Reserve estimates that 
1,172 respondents regulated by the Federal Reserve would take, on 
average, 8 hours (one business day) to reprogram and update their 
systems to comply with the proposed disclosure requirements in Sec.  
226.6 and estimates the annual one-time burden to be 9,376 hours.
    The proposed revisions to the periodic statement disclosures are 
intended to make the information in those disclosures more 
understandable, primarily through changes to the format requirements, 
such as by grouping fees, interest charges, and transactions together. 
The Federal Reserve estimates that 1,172 respondents regulated by the 
Federal Reserve would take, on average, 40 hours (one week) to 
reprogram and update their systems to comply with the proposed 
disclosure requirements in Sec.  226.7 and estimates the annual one-
time burden to be 42,880 hours.
    The proposed revisions to the change-in-terms notices would expand 
the circumstances under which consumers receive written notice of 
changes in the terms (e.g., an increase in the interest rate) 
applicable to their accounts, and increase the amount of time these 
notices must be sent before the change becomes effective. The Federal 
Reserve estimates that 1,172 respondents regulated by the Federal 
Reserve will take, on average, 8 hours (one business day) to reprogram 
and update their systems to comply with the proposed disclosure 
requirements in Sec.  226.9(c) and estimates the annual one-time burden 
to be 9,376 hours; In addition, the Federal Reserve estimates that, on 
a continuing basis, the proposed revisions to the change-in-terms 
notices would increase the estimated annual frequency for from 2,500 to 
3,750. The estimated annual burden for change-in-terms notices would 
increase from 36,907 to 55,361 hours.
    The proposed changes to the advertising provisions would revise the 
rules governing advertising of open-end credit to help improve consumer 
understanding of the credit terms offered. The Federal Reserve 
estimates that 1,172 respondents regulated by the Federal Reserve would 
take, on average, 8 hours (one business day) to reprogram and update 
their systems to comply with the proposed disclosure requirements in 
Sec.  226.16 and estimates the annual one-time burden to be 9,376 
hours.
    Additionally, the Federal Reserve proposes to revise the definition 
of open-end credit in Sec.  226.2(a)(20) to ensure that the appropriate 
(i.e., open-end or closed-end) disclosures are provided in connection 
with multifeatured plans. The Federal Reserve also proposes to extend 
the applicability of the rules in Sec.  226.4 for debt cancellation 
products to debt suspension products. The Federal Reserve estimates the 
burden to comply with the Sec.  226.2(a)(20) provisions for open-end 
credit would be minimal. The burden associated with reprogramming and 
updating a respondent's systems to comply with the proposed debt 
suspension disclosure requirements in Sec.  226.4, is included in the 
one-time burden estimates for application and solicitation and periodic 
statement disclosures mentioned above.
    The other federal financial agencies are responsible for estimating 
and reporting to OMB the total paperwork burden for the institutions 
for which they have administrative enforcement authority. They may, but 
are not required to, use the Federal Reserve's burden estimates. Using 
the Federal Reserve's method, the total current estimated annual burden 
for all financial institutions subject to Regulation Z, including 
Federal Reserve-supervised institutions, would be approximately 
12,324,037 hours. The proposed rule would impose a one-time increase in 
the estimated annual burden for all institutions subject to Regulation 
Z by 1,389,600 hours to 13,713,637 hours. On a continuing basis, the 
proposed revisions to the change-in-terms notices would increase the 
estimated annual frequency, thus increasing the total annual burden on 
a continuing basis from 12,324,037 to 13,516,584 hours. The above 
estimates represent an average across all respondents and reflect 
variations between institutions based on their size, complexity, and 
practices. All covered institutions, including card issuers, retailers, 
and depository institutions (of which there are approximately 19,300) 
potentially are affected by this collection of information, and thus 
are respondents for purposes of the PRA.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the Federal 
Reserve's functions; including whether the information has practical 
utility; (2) the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; (3) ways to enhance the quality, utility, and

[[Page 33036]]

clarity of the information to be collected; and (4) 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 Michelle Shore, Federal Reserve Board Clearance 
Officer, Division of Research and Statistics, Mail Stop 151-A, Board of 
Governors of the Federal Reserve System, Washington, DC 20551, with 
copies of such comments sent to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0200), Washington, DC 20503.

IX. Redesignation Table

    In reviewing the rules affecting open-end credit, The Board has 
proposed organizational revisions that are designed to make the 
regulation easier to use. The following table indicates the proposed 
redesignations.

------------------------------------------------------------------------
                Current                           Redesignation
------------------------------------------------------------------------
Footnote 3.............................  Sec.   226.2(a)(17)(v).
Footnote 4.............................  Comment 3-1.
Comment 3(a)-2.........................  Comment 3(a)-3.
Comment 3(a)-3.........................  Comment 3(a)-4.
Comment 3(a)-4.........................  Comment 3(a)-5.
Comment 3(a)-5.........................  Comment 3(a)-6.
Comment 3(a)-6.........................  Comment 3(a)-8.
Comment 3(a)-7.........................  Comment 3(a)-9.
Comment 3(a)-8.........................  Comment 3(a)-10.
Footnote 5.............................  Sec.   226.4(d)(2).
Footnote 6.............................  Sec.   226.4(d)(2)(i).
Footnote 7.............................  Sec.   226.5(a)(1)(ii)(A).
Footnote 8.............................  Sec.   226.5(a)(1)(ii)(B).
Sec.   226.5(a)(2).....................  Sec.   226.5(a)(2)(ii).
Footnote 9.............................  Sec.   226.5(a)(2)(ii).
Sec.   226.5(a)(3).....................  Sec.   226.5(a)(3)(i).
Sec.   226.5(a)(4).....................  Sec.   226.5(a)(3)(ii).
Sec.   226.5(a)(5).....................  Sec.   226.5(a)(1)(iii).
Comment 5(a)(1)-1......................  Comments 5(a)(1)-1 and 5(a)(1)-
                                          2.
Comment 5(a)(1)-2......................  Comment 5(a)(1)-4.
Footnote 10............................  Sec.   226.5(b)(2)(iii).
Comment 5(b)(1)-1......................  Sec.   226.5(b)(1)(iv)-(v);
                                          Comment 5(b)(1)(i)-1.
Sec.   226.5a(a)(2)(i) (prominent        Sec.   226.5a(a)(2)(vi).
 location).
Sec.   226.5a(a)(2)(iii)...............  Sec.   226.5(a)(2)(iii).
Sec.   226.5a(a)(2)(iv)................  Sec.   226.5(a)(2)(i).
Sec.   226.5a(a)(3)....................  Sec.   226.5a(a)(5).
Sec.   226.5a(a)(4)....................  Sec.   226.5a(a)(3).
Sec.   226.5a(a)(5)....................  Sec.   226.5a(a)(4).
Sec.   226.5a(b)(1)(ii)); Comment 5a(c)- Sec.   226.5a(c)(2)(i); Sec.
 1.                                       226.5a(e)(4).
Sec.   226.5a(b)(1)(iii)...............  Sec.   226.5a(c)(2)(ii).
Sec.   226.5a(e)(3)....................  Sec.   226.5a(e)(2).
Sec.   226.5a(e)(4)....................  Sec.   226.5a(e)(3).
Comment 5a(a)(2)-2.....................  Comment 5a(a)(2)-1.
Comment 5a(a)(2)-3.....................  Comment 5a(a)(2)-2.
Comment 5a(a)(2)-4.....................  Sec.   226.5a(a)(2)(ii).
Comment 5a(a)(2)-7.....................  Comment 5a(a)(2)-4.
Comments 5a(a)(3)-1; -3................  Sec.   226.5a(a)(5).
Comment 5a(a)(3)-2.....................  Sec.   226.5a(a)(5); Comment
                                          5a(a)(5)-1.
Comment 5a(a)(5)-1.....................  Comment 5a(a)(4)-1.
Comment 5a(b)(1)-2.....................  Comment 5a(b)(1)-1.
Comment 5a(b)(1)-3.....................  Sec.   226.5a(d)(3).
Comment 5a(b)(1)-4.....................  Sec.   226.5a(b)(1)(i); Comment
                                          5a(b)(1)-2.
Comment 5a(b)(1)-5.....................  Sec.   226.5a(b)(1)(ii).
Comment 5a(b)(1)-6.....................  Sec.   226.5a(b)(1)(iii).
Comment 5a(b)(1)-7.....................  Sec.   226.5a(b)(1)(iv);
                                          Comment 5a(b)(1)-4.
Comment 5a(c)-2........................  Comment 5(a)(c)-1.
Comment 5a(e)(3)-1.....................  Comment 5a(e)(2)-1.
Comment 5a(e)(4)-1.....................  Comment 5a(e)(3)-1.
Comment 5a(e)(4)-2.....................  Comment 5a(e)(3)-2.
Comment 5a(e)(4)-3.....................  Comment 5a(e)(3)-3.
Sec.   226.6(a)(1).....................  Sec.   226.6(a)(1)(i).
Sec.   226.6(a)(2).....................  Sec.   226.6(a)(1)(ii).
Footnote 11............................  Sec.   226.6(a)(1)(ii); Sec.
                                          226.6(b)(2)(i)(B).
Footnote 12............................  Sec.   226.6(a)(1)(ii); Sec.
                                          226.6(b)(2)(ii).
Sec.   226.6(a)(3).....................  Sec.   226.6(a)(1)(iii).
Sec.   226.6(a)(4).....................  Sec.   226.6(a)(1)(iv).
Footnote 13............................  Comments 6(a)(1)(iv)-1 and
                                          6(b)(1)-3.
Sec.   226.6(b)........................  Sec.   226.6(a)(2).
Sec.   226.6(c)........................  Sec.   226.6(c)(1).
Sec.   226.6(d)........................  Sec.   226.6(c)(2).
Sec.   226.6(e)(1).....................  Sec.   226.6(a)(3)(i).
Sec.   226.6(e)(2).....................  Sec.   226.6(a)(3)(ii).
Sec.   226.6(e)(3).....................  Sec.   226.6(a)(3)(iii).

[[Page 33037]]

 
Sec.   226.6(e)(4).....................  Sec.   226.6(a)(3)(iv).
Sec.   226.6(e)(5).....................  Sec.   226.6(a)(3)(v).
Sec.   226.6(e)(6).....................  Sec.   226.6(a)(3)(vi).
Sec.   226.6(e)(7).....................  Sec.   226.6(a)(3)(vii).
Comment 6(a)(1)-1......................  Comments 6(a)(1)(i)-1 and
                                          6(b)(1)-1.
Comment 6(a)(1)-2......................  Comments 6(a)(1)(i)-2 and
                                          6(b)(1)-2.
Comment 6(a)(2)-1......................  Comments 6(a)(1)(ii)-1 and
                                          6(b)(2)(i)(B)-1.
Comment 6(a)(2)-2......................  Comments 6(a)(1)(ii)-2 and
                                          6(b)(2)(ii)-1.
Comment 6(a)(2)-3......................  Comment 6(a)(1)(ii)-3.
Comment 6(a)(2)-4......................  Comment 6(a)(1)(ii)-4.
Comment 6(a)(2)-5......................  Comment 6(a)(1)(ii)-5.
Comment 6(a)(2)-6......................  Comments 6(a)(1)(ii)-6 and
                                          6(b)(2)(ii)-2.
Comment 6(a)(2)-7......................  Comments 6(a)(1)(ii)-7 and
                                          6(b)(2)(ii)-3.
Comment 6(a)(2)-8......................  Comments 6(a)(1)(ii)-8 and
                                          6(b)(2)(ii)-4.
Comment 6(a)(2)-9......................  Comment 6(a)(1)(ii)-9.
Comment 6(a)(2)-10.....................  Comments 6(a)(1)(ii)-10 and
                                          6(b)(2)(ii)-5.
Comment 6(a)(2)-11.....................  Comment 6(a)(1)(ii)-11.
Comment 6(a)(3)-1......................  Comment 6(a)(1)(iii)-1.
Comment 6(a)(3)-2......................  Comment 6(a)(1)(iii)-2.
Comment 6(a)(4)-1......................  Comment 6(a)(1)(iv)-1.
Comment 6(b)-1.........................  Comment 6(a)(2)-1.
Comment 6(b)-2.........................  Comment 6(a)(2)-2.
Comment 6(c)-1.........................  Comment 6(c)(1)-1.
Comment 6(c)-2.........................  Comment 6(c)(1)-2.
Comment 6(c)-3.........................  Comment 6(c)(1)-3.
Comment 6(c)-4.........................  Comment 6(c)(1)-4.
Comment 6(c)-5.........................  Comment 6(c)(1)-5.
Comment 6(d)...........................  Comment 6(c)(2).
Comment 6(e)-1.........................  Comment 6(a)(3)-1.
Comment 6(e)-2.........................  Comment 6(a)(3)-2.
Comment 6(e)-3.........................  Comment 6(a)(3)-3.
Comment 6(e)-4.........................  Comment 6(a)(3)-4.
Sec.   226.7(a)........................  Sec.   226.7(a)(1); Sec.
                                          226.7(b)(1).
Sec.   226.7(b)........................  Sec.   226.7(a)(2); Sec.
                                          226.7(b)(2).
Sec.   226.7(c)........................  Sec.   226.7(a)(3); Sec.
                                          226.7(b)(3).
Sec.   226.7(d)........................  Sec.   226.7(a)(4); Sec.
                                          226.7(b)(4).
Footnote 15............................  Sec.   226.7(a)(4); Sec.
                                          226.7(b)(4).
Sec.   226.7(e)........................  Sec.   226.7(a)(5); Sec.
                                          226.7(b)(5).
Sec.   226.7(f)........................  Sec.   226.7(a)(6)(i).
Sec.   226.7(g)........................  Sec.   226.7(a)(7); Sec.
                                          226.7(b)(7).
Sec.   226.7(h)........................  Sec.   226.7(a)(6)(ii).
Sec.   226.7(i)........................  Sec.   226.7(a)(10); Sec.
                                          226.7(b)(10).
Sec.   226.7(j)........................  Sec.   226.7(a)(8); Sec.
                                          226.7(b)(8).
Sec.   226.7(k)........................  Sec.   226.7(a)(9); Sec.
                                          226.7(b)(9).
Comment 7-3............................  Comment 7(b)-1.
Comment 7(a)-1.........................  Comments 7(a)(1)-1 and 7(b)(1)-
                                          1.
Comment 7(a)-2.........................  Comments 7(a)(1)-2 and 7(b)(1)-
                                          2.
Comment 7(a)-3.........................  Comments 7(a)(1)-3 and 7(b)(1)-
                                          3.
Comment 7(b)-1.........................  Comments 7(a)(2)-1 and 7(b)(2)-
                                          1.
Comment 7(b)-2.........................  Comments 7(a)(2)-2 and 7(b)(2)-
                                          2.
Comment 7(c)-1.........................  Comments 7(a)(3)-1 and 7(b)(3)-
                                          1.
Comment 7(c)-2.........................  Comment 7(a)(3)-2.
Comment 7(c)-3.........................  Comments 7(a)(3)-3 and 7(b)(3)-
                                          2.
Comment 7(c)-4.........................  Comments 7(a)(3)-4 and 7(b)(3)-
                                          3.
Comment 7(d)-1.........................  Comments 7(a)(4)-1 and 7(b)(4)-
                                          1.
Comment 7(d)-2.........................  Comments 7(a)(4)-2 and 7(b)(4)-
                                          2.
Comment 7(d)-3.........................  Comments 7(a)(4)-3 and 7(b)(4)-
                                          3.
Comment 7(d)-4.........................  Comment 7(a)(4)-4.
Comment 7(d)-5.........................  Comments 7(a)(4)-5 and 7(b)(4)-
                                          4.
Comment 7(d)-6.........................  Comments 7(a)(4)-6 and 7(b)(4)-
                                          5.
Comment 7(d)-7.........................  Comment 7(b)(4)-6.
Comment 7(e)-1.........................  Comment 7(a)(5)-1.
Comment 7(e)-2.........................  Comments 7(a)(5)-2 and 7(b)(5)-
                                          1.
Comment 7(e)-3.........................  Comments 7(a)(5)-3 and 7(b)(5)-
                                          2.
Comment 7(e)-4.........................  Comments 7(a)(5)-4 and 7(b)(5)-
                                          3.
Comment 7(e)-5.........................  Comments 7(a)(5)-5 and 7(b)(5)-
                                          4.
Comment 7(e)-6.........................  Comment 7(a)(5)-6.
Comment 7(e)-7.........................  Comments 7(a)(5)-7 and 7(b)(5)-
                                          5.
Comment 7(e)-8.........................  Comments 7(a)(5)-8 and 7(b)(5)-
                                          6.
Comment 7(e)-9.........................  Comments 7(a)(5)-9 and 7(b)(5)-
                                          7.
Comment 7(e)-10........................  Comment 7(b)(5)-8.
Comments 7(f)-1........................  Comment 7(a)(6)(i)-1.
Comment 7(f)-2.........................  Comment 7(a)(6)(i)-2.
Comment 7(f)-3.........................  Comment 7(a)(6)(i)-3.

[[Page 33038]]

 
Comment 7(f)-4.........................  Comment 7(a)(6)(i)-4.
Comment 7(f)-5.........................  Comment 7(a)(6)(i)-5.
Comment 7(f)-6.........................  Comment 7(a)(6)(i)-6.
Comment 7(f)-7.........................  Comment 7(a)(6)(i)-7.
Comment 7(f)-8.........................  Comment 7(a)(6)(i)-8.
Comment 7(g)-1.........................  Comments 7(a)(7)-1 and 7(b)(7)-
                                          1.
Comment 7(g)-2.........................  Comments 7(a)(7)-2 and 7(b)(7)-
                                          2.
Comment 7(h)-1.........................  Comment 7(a)(6)(ii)-1.
Comment 7(h)-2.........................  Comment 7(a)(6)(ii)-2.
Comment 7(h)-3.........................  Comment 7(a)(6)(ii)-3.
Comment 7(h)-4.........................  Comment 7(a)(6)(ii)-4.
Comment 7(i)-1.........................  Comments 7(a)(10)-1 and
                                          7(b)(10)-1.
Comment 7(i)-2.........................  Comments 7(a)(10)-2 and
                                          7(b)(10)-2.
Comment 7(i)-3.........................  Comments 7(a)(10)-3 and
                                          7(b)(10)-3.
Comment 7(j)-1.........................  Comments 7(a)(8)-1 and 7(b)(8)-
                                          1.
Comment 7(j)-2.........................  Comment 7(b)(8)-2.
Comment 7(k)-1.........................  Comments 7(a)(9)-1 and 7(b)(9)-
                                          1.
Comment 7(k)-2.........................  Comments 7(a)(9)-2 and 7(b)(9)-
                                          2.
Comment 8-2............................  Comment 8(a)-1.
Comment 8-3............................  Comment 8(b)-1.
Comment 8-5............................  Comment 8(a)-5.
Comment 8(a)-1.........................  Comment 8(a)-4.i.
Comment 8(a)-2.........................  Comment 8(a)-4.ii.
Comment 8(a)-4.........................  Comment 8(a)-2.
Comment 8(a)(2)-1......................  Comment 8(a)-6.
Comment 8(a)(2)-2......................  Comment 8(a)-6.
Comment 8(a)(2)-5......................  Comment 8(a)-3.
Comment 8(a)(3)-1......................  Comment 8(a)-7.
Comment 8(a)(3)-2......................  Comment 8(a)-8.
Comment 8(a)(3)-3......................  Comment 8(a)-8.
Comment 8(a)(3)-4......................  Comment 8(a)-3.
Comment 8(b)-1.........................  Comment 8(b)-3.
Comment 8(b)-3.........................  Comment 8(b)-2.
Footnote 16............................  Sec.   226.8(c)(1).
Footnote 17............................  Sec.   226.8(c)(2).
Footnote 19............................  Sec.   226.8(a)(1)(ii).
Sec.   226.9(c)........................  Sec.   226.9(c)(1) and
                                          226.9(c)(2).
Sec.   226.9(c)(1).....................  Sec.   226.9(c)(1)(i) and Sec.
                                           226.9(c)(2)(i).
Sec.   226.9(c)(2).....................  Sec.   226.9(c)(1)(ii) and Sec.
                                            226.9(c)(2)(iv).
Sec.   226.9(c)(3).....................  Sec.   226.9(c)(1)(iii).
Comment 9(c)-1.........................  Comments 9(c)(1)-1 and 9(c)(2)-
                                          1.
Comment 9(c)-2.........................  Comment 9(c)(1)-2 and 9(c)(2)-
                                          2.
Comment 9(c)-3.........................  Comment 9(c)(1)-3 and 9(c)(2)-
                                          3.
Comment 9(c)(1)-1......................  Comment 9(c)(1)(i)-1 and
                                          9(c)(2)(i)-1.
Comment 9(c)(1)-2......................  Comment 9(c)(1)(i)-2 and
                                          9(c)(2)(i)-2.
Comment 9(c)(1)-3......................  Comment 9(c)(1)(i)-3 and
                                          9(c)(2)(i)-3.
Comment 9(c)(1)-4......................  Comment 9(c)(1)(i)-4 and
                                          9(c)(2)(i)-4.
Comment 9(c)(1)-5......................  Comment 9(c)(1)(i)-5 and
                                          9(c)(2)(i)-5.
Comment 9(c)(1)-6......................  Comment 9(c)(1)(i)-6.
Comment 9(c)(2)-1......................  Comment 9(c)(1)(ii)-1 and
                                          9(c)(2)(iv)-1.
Comment 9(c)(2)-2......................  Comment 9(c)(1)(ii)-2 and
                                          9(c)(2)(iv)-2.
Comment 9(c)(3)-1......................  Comment 9(c)(1)(iii)-1.
Comment 9(c)(3)-2......................  Comment 9(c)(1)(iii)-2.
Sec.   226.11..........................  Sec.   226.11(a).
Sec.   226.11(a).......................  Sec.   226.11 (a)(1).
Sec.   226.11(b).......................  Sec.   226.11(a)(2).
Sec.   226.11(c).......................  Sec.   226.11(a)(3).
Comment 11-1...........................  Comment 11(a)-1.
Comment 11-2...........................  Comment 11(a)-2.
Comment 11(b)-1........................  Comment 11(a)(2)-1.
Comment 11(c)-1........................  Comment 11(a)(3)-1.
Comment 11(c)-2........................  Comment 11(a)(3)-2.
Sec.   226.12(b)(1)....................  Sec.   226.12(b)(1)(ii).
Sec.   226.12(c)(3)....................  Sec.   226.12(c)(3)(i).
Sec.   226.12(c)(3)(i).................  Sec.   226.12(c)(3)(i)(A).
Sec.   226.12(c)(3)(ii)................  Sec.   226.12(c)(3)(i)(B).
Footnote 21............................  Comment 12-2.
Footnote 22............................  Sec.   226.12(b)(1)(i).
Footnote 23............................  Comment 12(b)(2)(ii)-2.
Footnote 24............................  Comment 12(c)-3.
Footnote 25............................  Comment 12(c)-4.
Footnote 26............................  Sec.   226.12(c)(3)(ii).
Comment 12(c)(3)(i)-1..................  Comment 12(c)(3)(i)(A)-1.
Comment 12(c)(3)(ii)-1.................  Comment 12(c)(3)(i)(B)-1.

[[Page 33039]]

 
Comment 12(c)(3)(ii)-2.................  Comment 12(c)(3)(ii)-1.
Footnote 27............................  Sec.   226.13(d)(3).
Footnote 28............................  Comment 13(b)-1.
Footnote 29............................  Comment 13(b)-2.
Footnote 30............................  Sec.   226.13(d)(4).
Comment 13-2...........................  Comment 13-1.
Comment 13(a)-1........................  Comment 13(a)(1)-1.
Footnote 31a...........................  Sec.   226.14(a).
Footnote 32............................  Sec.   226.14(c)(2).
Footnote 33............................  Sec.   226.14(c)(2).
Sec.   226.14(d)(1)....................  Sec.   226.14(c)(5)(i).
Sec.   226.14(d)(2)....................  Sec.   226.14(c)(5)(ii).
Comment 14(c)-2........................  Comment 14(c)(1)-1.
Comment 14(c)-3........................  Comment 14(c)(2)-1.
Comment 14(c)-4........................  Comment 14(c)(2)-2.
Comment 14(c)-5........................  Comment 14(c)(3)-1.
Comment 14(c)-6........................  Comment 14(c)(3)-2.
Comment 14(c)-7........................  Comment 14(c)-2.
Comment 14(c)-8........................  Comment 14(c)-3.
Comment 14(c)-9........................  Comment 14(c)-4.
Comment 14(c)-10.......................  Comment 14(c)-5.
Comment 14(d)-1........................  Comment 14(c)-6.
Comment 14(d)-2........................  Comment 14(c)-6.
Sec.   226.16(b)(1)....................  Sec.   226.16(b)(1)(i).
Sec.   226.16(b)(2)....................  Sec.   226.16(b)(1)(ii).
Sec.   226.16(b)(3)....................  Sec.   226.16(b)(1)(iii).
Comment 16-2...........................  Comment 16-3.
Comment 16(b)-1........................  Sec.   226.16(b)(1).
Comment 16(b)-2........................  Comment 16(b)-1.
Comment 16(b)-3........................  Comment 16(b)-2.
Comment 16(b)-4........................  Comment 16(b)-3.
Comment 16(b)-6........................  Sec.   226.16(e).
Comment 16(b)-7........................  Comment 16(b)-1.
Comment 16(b)-8........................  Sec.   226.16(b)(1).
Comment 16(b)-9........................  Comment 16(b)-4.
------------------------------------------------------------------------

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside arrows while language that 
would be deleted is set off with brackets.

List of Subjects in 12 CFR Part 226

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

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation Z, 12 CFR part 226, as set forth below:

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 226.1 is amended by republishing paragraphs (a), (b), 
(c), and (e), revising paragraph (d), and removing and reserving 
footnote 1 to read as follows:

Subpart A--General


Sec.  226.1  Authority, purpose, coverage, organization, enforcement, 
and liability.

    (a) Authority. This regulation, known as Regulation Z, is issued by 
the Board of Governors of the Federal Reserve System to implement the 
Federal Truth in Lending Act, which is contained in title I of the 
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.). 
This regulation also implements title XII, section 1204 of the 
Competitive Equality Banking Act of 1987 (Pub. L. 100-86, 101 Stat. 
552). Information-collection requirements contained in this regulation 
have been approved by the Office of Management and Budget under the 
provisions of 44 U.S.C. 3501 et seq. and have been assigned OMB No. 
7100-0199.
    (b) Purpose. The purpose of this regulation is to promote the 
informed use of consumer credit by requiring disclosures about its 
terms and cost. The regulation also gives consumers the right to cancel 
certain credit transactions that involve a lien on a consumer's 
principal dwelling, regulates certain credit card practices, and 
provides a means for fair and timely resolution of credit billing 
disputes. The regulation does not govern charges for consumer credit. 
The regulation requires a maximum interest rate to be stated in 
variable-rate contracts secured by the consumer's dwelling. It also 
imposes limitations on home equity plans that are subject to the 
requirements of Sec.  226.5b and mortgages that are subject to the 
requirements of Sec.  226.32. The regulation prohibits certain acts or 
practices in connection with credit secured by a consumer's principal 
dwelling.
    (c) Coverage.
    (1) In general, this regulation applies to each individual or 
business that offers or extends credit when four conditions are met: 
(i) the credit is offered or extended to consumers; (ii) the offering 
or extension of credit is done regularly; \1\ (iii) the credit is 
subject to the 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.
---------------------------------------------------------------------------

    \1\ [rtrif][Reserved][ltrif] [The meaning of ``regularly'' is 
explained in the definition of ``creditor'' in Sec.  226.2(a).]
---------------------------------------------------------------------------

    (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

[[Page 33040]]

agreement in more than four installments, or if the credit card is to 
be used for business purposes.
    (3) In addition, certain requirements of Sec.  226.5b apply to 
persons who are not creditors but who provide applications for home 
equity plans to consumers.
    (d) Organization. The regulation is divided into subparts and 
appendices as follows:
    (1) Subpart A contains general information. It sets forth: (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 [rtrif]account-opening[ltrif] [initial] disclosures and periodic 
statements be provided, as well as additional disclosures for credit 
and charge card applications and solicitations and for home equity 
plans subject to the requirements of Sec.  226.5a and Sec.  226.5b, 
respectively. [rtrif]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.[ltrif]
    (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, 
[rtrif]disclosures in languages other than English[ltrif] [Spanish-
language disclosure in Puerto Rico], record retention, effect on state 
laws, state exemptions, and rate limitations.
    (5) Subpart E contains special rules for [rtrif]certain[ltrif] 
mortgage transactions. Section 226.32 requires certain disclosures and 
provides limitations for loans that have rates and fees above specified 
amounts. Section 226.33 requires disclosures, including the total 
annual loan cost rate, for reverse mortgage transactions. Section 
226.34 prohibits specific acts and practices in connection with 
[rtrif]certain[ltrif] mortgage transactions.
    (6) Several appendices contain information such as the procedures 
for determinations about state laws, state exemptions and issuance of 
staff interpretations, special rules for certain kinds of credit plans, 
a list of enforcement agencies, and the rules for computing annual 
percentage rates in closed-end credit transactions and total-annual-
loan-cost rates for reverse mortgage transactions.
    (e) Enforcement and liability. Section 108 of the act contains the 
administrative enforcement provisions. Sections 112, 113, 130, 131, and 
134 contain provisions relating to liability for failure to comply with 
the requirements of the act and the regulation. Section 1204(c) of 
title XII of the Competitive Equality Banking Act of 1987, Pub. L. No. 
100-86, 101 Stat. 552, incorporates by reference administrative 
enforcement and civil liability provisions of sections 108 and 130 of 
the act.
    3. Section 226.2 is amended by revising paragraph (a), republishing 
paragraph (b) and removing and reserving footnote 3 to read as follows:


Sec.  226.2  Definitions and rules of construction.

    (a) Definitions. For purposes of this regulation, the following 
definitions apply:
    (1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
    (2) Advertisement means a commercial message in any medium that 
promotes, directly or indirectly, a credit transaction.
    (3) [Reserved] \2\
---------------------------------------------------------------------------

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

    (4) Billing cycle or cycle means the interval between the days or 
dates of regular periodic statements. These intervals shall be equal 
and no longer than a quarter a year. An interval will be considered 
equal if the number of days in the cycle does not vary more than four 
days from the regular day or date of the periodic statement.
    (5) Board means the Board of Governors of the Federal Reserve 
System.
    (6) Business day means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Sec.  226.15 and 
Sec.  226.23, and for purposes of Sec.  226.31, the term means all 
calendar days except Sundays and the legal public holidays specified in 
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther 
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor 
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
    (7) Card issuer means a person that issues a credit card or that 
person's agent with respect to the card.
    (8) Cardholder means a natural person to whom a credit card is 
issued for consumer credit purposes, or a natural person who has agreed 
with the card issuer to pay consumer credit obligations arising from 
the issuance of credit card to another natural person. For purposes of 
Sec.  226.12(a) and (b), the term includes any person to whom a credit 
card is issued for any purpose, including business, commercial or 
agricultural use, or a person who has agreed with the card issuer to 
pay obligations arising from the issuance of such a credit card to 
another person.
    (9) Cash price means the price at which a creditor, in the ordinary 
course of business, offers to sell for cash property or service that is 
the subject of the transaction. At the creditor's option, the term may 
include the price accessories, services related to the sale, service 
contracts and taxes and fees for license, title, and registration. The 
term does not include any finance charge.
    (10) Closed-end credit means consumer credit other than ``open end 
credit'' as defined in this section.
    (11) Consumer means a cardholder or natural person to whom consumer 
credit is offered or extended. However, for purposes of the rescission 
under Sec.  226.15 and Sec.  226.23, the term also includes a natural 
person in whose principal dwelling a security interest is or will be 
retained or acquired, if that person's ownership interest in the 
dwelling is or will be subject to the security interest.
    (12) Consumer credit means credit offered or extended to a consumer 
primarily for personal, family, or household purposes.
    (13) Consummation means the time that a consumer becomes 
contractually obligated on credit transaction.
    (14) Credit means the right to defer payment of debt or to incur 
debt and defer its payment.
    (15) Credit card means any card, plate, [coupon book,] or other 
single credit device that may be used from time to time to obtain 
credit. Charge card means a credit card on an account for which no 
periodic rate is used to compute a finance charge.
    (16) Credit sale means a sale in which the seller is a creditor. 
The term includes a bailment or lease (unless terminable without 
penalty at any time by the consumer) under which the consumer--
    (i) Agrees to pay as compensation for use a sum substantially 
equivalent to, or in excess of, the total value of the property and 
service involved; and
    (ii) Will become (or has the option to become), for no additional 
consideration or for nominal consideration, the owner of the property 
upon compliance with the agreement.
    (17) Creditor means:

[[Page 33041]]

    (i) A person (A) who regularly extends consumer credit \3\ that is 
subject to a finance charge or is payable by written agreement in more 
than four installments (not including a down payment), and (B) to whom 
the obligation is initially payable, either on the face of the note or 
contract, or by agreement when there is no note or contract.
---------------------------------------------------------------------------

    \3\ [rtrif][Reserved][ltrif] [A person regularly extends 
consumer credit only if it extended credit (other than credit 
subject to the requirements of section 226.32) more than 25 times 
(or more than 5 times for transactions secured by the 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 section 226.32 or one or more such credit 
extensions through a mortgage broker.]
---------------------------------------------------------------------------

    (ii) For purposes of Sec. Sec.  226.4(c)(8) (Discounts), 226.9(d) 
(finance charge imposed at time of transaction), and 226.12(e) (prompt 
notification of returns and crediting of refunds), a person that honors 
a credit card.
    (iii) For purposes of subpart B, 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.  226.5a and 226.9(e) and (f), 
the finance charge disclosures contained in [rtrif]Sec. Sec.  
226.6(a)(1) and (b)(1) and Sec. Sec.  226.7(a)(4) through (7) and 
(b)(4) through (7)[ltrif] [Sec.  226.6(a) and Sec.  226.7(d) through 
(g)] and the right of rescission set forth in Sec.  226.15) 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.
    [rtrif](v) A person regularly extends consumer credit only if it 
extended credit (other than credit subject to the requirements of Sec.  
226.32) more than 25 times (or more than 5 times for transactions 
secured by the dwelling) in the preceding calendar year. If a person 
did not meet these numerical standards in the preceding calendar year, 
the numerical standards shall be applied to the current calendar year. 
A person regularly extends consumer credit if, in any 12-month period, 
the person originates more than one credit extension that is subject to 
the requirements of Sec.  226.32 or one or more such credit extensions 
through a mortgage broker.[ltrif]
    (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 dwelling to 
finance the acquisition or initial construction of that dwelling.
    (25) Security interest means an interest in property that secures 
performance of a consumer credit obligation and that is recognized by 
state or federal law. It does not include incidental interests such as 
interests in proceeds, accessions, additions, fixtures, insurance 
proceeds (whether or not the creditor is a loss payee or beneficiary), 
premium rebates, or interests in after-acquired property. For purposes 
of disclosures under Sec.  226.6 and Sec.  226.18, the term does not 
include an interest that arises solely by operation of law. However, 
for purposes of the right of rescission under Sec.  226.15 and Sec.  
226.23, the term does include interests that arise solely by operation 
of law.
    (26) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, and any territory or possession of the 
United States.
    (b) Rules of construction. For purposes of this regulation, the 
following rules of construction apply:
    (1) Where appropriate, the singular form of a word includes the 
plural form and plural includes singular.
    (2) Where the words obligation and transaction are used in the 
regulation, they refer to a consumer credit obligation or transaction, 
depending upon the context. Where the work credit is used in the 
regulation, it means consumer credit unless the context clearly 
indicates otherwise.
    (3) Unless defined in this regulation, the words used have the 
meanings given to them by state law or contact.
    (4) Footnotes have the same legal effect as the text of the 
regulation.
    (5) Where the word ``amount'' is used in this regulation to 
describe disclosure requirements, it refers to a numerical amount.
    4. Section 226.3 is amended by republishing paragraphs (a), (b), 
(c), (d), (e), and (f), adding a new paragraph (g), and removing and 
reserving footnote 4 to read as follows:


Sec.  226.3  Exempt transactions.

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

    \4\ [rtrif][Reserved][ltrif] [The provisions in Section 
226.12(a) and (b) governing the issuance of credit cards and the 
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.]
---------------------------------------------------------------------------

    (a) Business, commercial, agricultural, or organizational credit. 
(1) An extension of credit primarily for a business, commercial or 
agricultural purpose.
    (2) An extension of credit to other than a natural person, 
including credit to government agencies or instrumentalities.
    (b) Credit over $25,000 not secured by real property or a dwelling. 
An extension of credit not secured by real property, or by personal 
property used or expected to be used as the principal dwelling of the 
consumer, in which the amount financed exceeds $25,000 or in which 
there is an express written commitment to extend credit in excess of 
$25,000.
    (c) Public utility credit. An extension of credit that involves 
public utility services provided through pipe, wire,

[[Page 33042]]

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.).
    [rtrif](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 or a tax-
sheltered annuity under Section 403(b) of the Internal Revenue Code (26 
U.S.C. 401(a); 26 U.S.C. 403(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.).[ltrif]
    5. Section 226.4 is amended by republishing paragraphs (a), (c), 
(e), and (f), revising paragraphs (b) and (d), and removing and 
reserving footnotes 5 and 6 to read as follows:


Sec.  226.4  Finance charge.

    (a) Definition. The finance charge is the cost of consumer credit 
as a dollar amount. It includes any charge payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor as an incident to or a condition of the extension of credit. 
It does not include any charge of a type payable in a comparable cash 
transaction.
    (1) Charges by third parties. The finance charge includes fees and 
amounts charged by someone other than the creditor, unless otherwise 
excluded under this section, if the creditor:
    (i) Requires the use of a third party as a condition of or an 
incident to the extension of credit, even if the consumer can choose 
the third party; or
    (ii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (2) Special rule; closing agent charges. Fees charged by a third 
party that conducts the loan closing (such as a settlement agent, 
attorney, or escrow or title company) are finance charges only if the 
creditor--
    (i) Requires the particular services for which the consumer is 
charged;
    (ii) Requires the imposition of the charge; or
    (iii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (3) Special rule; mortgage broker fees. Fees charged by a mortgage 
broker (including fees paid by the consumer directly to the broker or 
to the creditor for delivery to the broker) are finance charges even if 
the creditor does not require the consumer to use a mortgage broker and 
even if the creditor does not retain any portion of the charge.
    (b) Examples of finance charges. The finance charge includes the 
following types of charges, except for charges specifically excluded by 
paragraphs (c) through (e) of this section:
    (1) Interest, time price differential, and any amount payable under 
an add-on or discount system of additional charges.
    (2) Service, transaction, activity, and carrying charges, including 
any charge imposed on a checking or other transaction account to the 
extent that the charge exceeds the charge for a similar account without 
a credit feature.
    (3) Points, loan fees, assumption fees, finder's fees, and similar 
charges.
    (4) Appraisal, investigation, and credit report fees.
    (5) Premiums or other charges for any guarantee or insurance 
protecting the creditor against the consumer's default or other credit 
loss.
    (6) Charges imposed on a creditor by another person for purchasing 
or accepting a consumer's obligation, if the consumer is required to 
pay the charges in cash, as an addition to the obligation, or as a 
deduction from the proceeds of the obligation.
    (7) Premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, written in connection with a credit 
transaction.
    (8) Premiums or other charges for insurance against loss of or 
damage to property, or against liability arising out of the ownership 
or use of property, written in connection with a credit transaction.
    (9) Discounts for the purpose of inducing payment by a means other 
than the use of credit.
    (10) Debt cancellation [rtrif]and debt suspension[ltrif] fees. 
Charges or premiums paid for debt cancellation [rtrif]or debt 
suspension[ltrif] coverage written in connection with a credit 
transaction, whether or not the [debt cancellation] 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 [rtrif]and debt 
suspension[ltrif] 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 [rtrif]in writing[ltrif]. If the term of insurance is less 
than the term of the transaction, the term of insurance also shall be

[[Page 33043]]

disclosed. The premium may be disclosed on a unit-cost basis only in 
open-end credit transactions, closed-end credit transactions by mail or 
telephone under Sec.  226.17(g), and certain closed-end credit 
transactions involving an insurance plan that limits the total amount 
of indebtedness subject to coverage.
    (iii) The consumer signs or initials an affirmative written request 
for the insurance after receiving the disclosures specified in this 
paragraph[rtrif], except as provided in paragraph (d)(4) of this 
section[ltrif]. Any consumer in the transaction may sign or initial the 
request.
    (2) [rtrif]Property insurance premiums.[ltrif] Premiums for 
insurance against loss of or damage to property, or against liability 
arising out of the ownership or use of property, [rtrif]including 
single interest insurance if the insurer waives all right of 
subrogation against the consumer,[ltrif] \5\ may be excluded from the 
finance charge if the following conditions are met:
---------------------------------------------------------------------------

    \5\ [rtrif][Reserved][ltrif] [This includes single interest 
insurance if the insurer waives all right of subrogation against the 
consumer.]
---------------------------------------------------------------------------

    (i) The insurance coverage may be obtained from a person of the 
consumer's choice,\6\ and this fact is disclosed. [rtrif](A creditor 
may reserve the right to refuse to accept, for reasonable cause, an 
insurer offered by the consumer.)[ltrif]
---------------------------------------------------------------------------

    \6\ [rtrif][Reserved][ltrif] [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.  226.17(g), and 
certain closed-end credit transactions involving an insurance plan that 
limits the total amount of indebtedness subject to coverage.
    (3) Voluntary debt cancellation [rtrif]or debt suspension[ltrif] 
fees. [(i)]Charges or premiums paid for debt cancellation coverage 
[rtrif]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[ltrif] [of the type specified in paragraph (d)(3)(ii) of this 
section] may be excluded from the finance charge, whether or not the 
coverage is insurance, if the following conditions are met:
    [rtrif](i)[ltrif] [(A)] The debt cancellation [rtrif]or debt 
suspension[ltrif] agreement or coverage is not required by the 
creditor, and this fact is disclosed in writing;
    [rtrif](ii)[ltrif] [(B)] The fee or premium for the initial term of 
coverage is disclosed [rtrif]in writing[ltrif]. If the term of coverage 
is less than the term of the credit transaction, the term of coverage 
also shall be disclosed. The fee or premium may be disclosed on a unit-
cost basis only in open-end credit transactions, closed-end credit 
transactions by mail or telephone under Sec.  226.17(g), and certain 
closed-end credit transactions involving a debt cancellation agreement 
that limits the total amount of indebtedness subject to coverage;
    [rtrif](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.[ltrif]
    [rtrif](iv)[ltrif] [(C)] The consumer signs or initials an 
affirmative written request for coverage after receiving the 
disclosures specified in this paragraph [rtrif], except as provided in 
paragraph (d)(4) of this section[ltrif]. Any consumer in the 
transaction may sign or initial the request.
    [(ii) Paragraph (d)(3)(i) of this section applies to fees paid for 
debt cancellation coverage that provides for cancellation of all or 
part of the debtor s liability for amounts exceeding the value of the 
collateral securing the obligation, or in the event of the loss of 
life, health, or income or in case of accident.]
    [rtrif](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 reasonable procedures to provide the disclosures to 
the consumer orally and maintain evidence that the consumer, after 
being provided the disclosures, affirmatively elected to purchase the 
insurance or coverage; and
    (ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or 
(d)(3)(i) through (iii) of this section, as applicable, within three 
business days after the telephone purchase.[ltrif]
    (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.
    6. Section 226.5 is amended by revising paragraphs (a) and (b), 
republishing paragraphs (c), (d), and (e), and removing and reserving 
footnotes 7 through 10 to read as follows:


Sec.  226.5  General disclosure requirements.

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

    \7\ [rtrif][Reserved][ltrif] [The disclosure required by Sec.  
226.9(d) when a finance charge is imposed at the time of a 
transaction need not be written.]
    \8\ [rtrif][Reserved][ltrif] [The disclosures required under 
Sec.  226.5a for credit and charge card applications and 
solicitations, the home equity disclosures required under Sec.  
226.5b(d), the alternative summary billing-rights statement provided 
for in Sec.  226.9(a)(2), the credit and charge card renewal 
disclosures required under Sec.  226.9(e), and the disclosures made 
under Sec.  226.10(b) about payment requirements need not be in a 
form that the consumer can keep.]
---------------------------------------------------------------------------

    (A) The following disclosures need not be written: disclosures 
under Sec.  226.6(b)(1) of charges that are imposed as part of the plan 
and may be provided at any time before the consumer agrees to pay or 
becomes obligated to pay for the charge, pursuant to the timing 
requirements of paragraph (b)(1)(ii) of this section and related 
disclosures under Sec.  226.9(c)(2)(ii)(B) of charges; and disclosures 
under Sec.  226.9(d) when a finance charge is imposed at the time of 
the transaction.
    (B) The following disclosures need not be in a retainable form: 
disclosures for credit and charge card applications and solicitations 
under Sec.  226.5a; home equity disclosures under Sec.  226.5b(d); the

[[Page 33044]]

alternative summary billing-rights statement under Sec.  226.9(a)(2); 
the credit and charge card renewal disclosures required under Sec.  
226.9(e); and the payment requirements under Sec.  226.10(b), except as 
provided in Sec.  226.7(b)(13).
    (iii) The disclosures required by this subpart may be provided to 
the consumer in electronic form, subject to compliance with the 
consumer consent and other applicable provisions of the Electronic 
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 
7001 et seq.). The disclosures required by Sec. Sec.  226.5a, 226.5b, 
and 226.16 may be provided to the consumer in electronic form without 
regard to the consumer consent or other provisions of the E-Sign Act in 
the circumstances set forth in those sections.[ltrif]
    [rtrif](2) Terminology.
    (i) Terminology used in providing the disclosures required by this 
subpart shall be consistent.
    (ii) The terms finance charge and annual percentage rate, when 
required to be disclosed with a corresponding amount or percentage 
rate, shall be more conspicuous than any other required disclosure.\9\ 
The terms need not be more conspicuous when used for credit and charge 
card applications and solicitations under Sec.  226.5a; for account-
opening disclosures in a tabular format under Sec.  226.6(b)(4); for 
periodic statements disclosures under Sec.  226.7(b)(4) and Sec.  
226.7(b)(7); for disclosures in a tabular format accompanying checks 
that access a credit card account under Sec.  226.9(b)(3); for 
information in change-in-terms notices in a tabular format under Sec.  
226.9(c)(2)(iii)(B); for information when rates are increased due to 
delinquency, default or penalty pricing under Sec.  226.9(g)(3)(ii); 
for credit and charge card renewal disclosures under Sec.  226.9(e); 
and for advertisements under Sec.  226.16.
---------------------------------------------------------------------------

    \9\ [rtrif][Reserved][ltrif] [The terms need not be more 
conspicuous when used under Sec.  226.5a generally for credit and 
charge card applications and solicitations, under Sec.  226.7(d) on 
periodic statements, under Sec.  226.9(e) in credit and charge card 
renewal disclosures, and under Sec.  226.16 in advertisements. (But 
see special rule for annual percentage rate for purchases, Sec.  
226.5a(b)(1).)]
---------------------------------------------------------------------------

    (iii) If disclosures are required to be presented in a tabular 
format pursuant to paragraph (a)(3) of this section, the term grace 
period and penalty APR shall be used, as applicable. 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.[ltrif]
    [rtrif](3) Specific formats.
    (i) Certain disclosures for credit and charge card applications and 
solicitations must be provided in a tabular format in accordance with 
the requirements of Sec.  226.5a(a)(2).
    (ii) Certain disclosures for home equity plans must precede other 
disclosures and must be given in accordance with the requirements of 
Sec.  226.5b(a).
    (iii) Certain account-opening disclosures must be provided in a 
tabular format in accordance with the requirements of Sec.  
226.6(b)(4).
    (iv) Certain disclosures provided on periodic statement must be 
provided in a tabular format in accordance with the requirements of 
Sec.  226.7(b)(7).
    (v) Certain disclosures provided on periodic statements must be 
grouped together in accordance with the requirements of Sec.  
226.7(b)(6) and Sec.  226.7(b)(13).
    (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.  226.9(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.  226.9(c)(2)(iii)(B).
    (viii) Certain disclosures provided when a rate is increased due to 
delinquency, default or as a rate must be provided in a tabular format 
in accordance with the requirements of Sec.  226.9(g)(3)(ii).[ltrif]
    [(2) 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.
    (3) Certain disclosures required under Sec.  226.5a for credit and 
charge card applications and solicitations must be provided in a 
tabular format or in a prominent location in accordance with the 
requirements of that section.
    (4) For rules governing the form of disclosures for home equity 
plans, see Sec.  226.5b(a).
    (5) Electronic communication. For rules governing the electronic 
delivery of disclosures, including the definition of electronic 
communication, see Sec.  226.36.]
    (b) Time of disclosures.
    (1) [Initial] [rtrif]Account-opening[ltrif] disclosures.
    [rtrif] (i) General rule.[ltrif] The creditor shall furnish 
[rtrif]account-opening disclosures[ltrif] [the initial disclosure 
statement] required by Sec.  226.6 before the first transaction is made 
under the plan.
    [rtrif](ii) Charges imposed as part of an open-end (not home-
secured) plan. Charges that are imposed as part of an open-end (not 
home-secured) plan and are not required to be disclosed under Sec.  
226.6(b)(4) may be provided at any relevant time before the consumer 
agrees to pay or becomes obligated to pay for the charge. This 
provision does not apply to charges imposed as part of a home equity 
plan subject to the requirements of Sec.  226.5b.
    (iii) Telephone purchases. Disclosures required by Sec.  226.6 may 
be provided as soon as reasonably practicable after the first 
transaction if:
    (A) The first transaction occurs when a consumer contacts a 
merchant by telephone to purchase goods and at the same time the 
consumer accepts an offer to finance the purchase by establishing an 
open-end plan with the merchant,
    (B) The merchant 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 receiving the written 
disclosures required by Sec.  226.6, and
    (C) The consumer's right to reject the plan and return the goods is 
disclosed to the consumer as a part of the offer to finance the 
purchase.
    (iv) Membership fees. A creditor may collect, or obtain the 
consumer's agreement to pay, a membership fee before providing account-
opening disclosures if the consumer may reject the plan after receiving 
the disclosures. 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 the 
fee.
    (v) Application fees. A creditor may collect an application fee 
excludable from the finance charge under Sec.  226.4(c)(1) before 
providing account-opening disclosures.[ltrif]
    (2) Periodic statements.
    (i) The creditor shall mail or deliver a periodic statement as 
required by Sec.  226.7 for each billing cycle at the end of which an 
account has a debit or credit balance of more than $1 or on which a 
finance charge has been imposed. A periodic statement need not be sent 
for an account if the creditor deems it uncollectible, or if 
delinquency

[[Page 33045]]

collection proceedings have been instituted, or if furnishing the 
statement would violate federal law.
    (ii) The creditor shall mail or deliver the periodic statement at 
least 14 days prior to any date or the end of any time period required 
to be disclosed under [rtrif]Sec.  226.7(a)(8) or Sec.  226.7(b)(8), as 
applicable,[ltrif] [Sec.  226.7(j) in order] for the consumer to avoid 
an additional finance or other charge.\10\ A creditor that fails to 
meet this requirement shall not collect any finance or other charge 
imposed as a result of such failure.
---------------------------------------------------------------------------

    \10\ [rtrif][Reserved][ltrif] [This timing requirement does not 
apply if the creditor is unable to meet the requirement because of 
an act of God, war, civil disorder, natural disaster, or strike.]
---------------------------------------------------------------------------

    [rtrif](iii) The timing requirement under this paragraph (b)(2) 
does not apply if the creditor is unable to meet the requirement 
because of an act of God, war, civil disorder, natural disaster, or 
strike.[ltrif]
    (3) Credit and charge card application and solicitation 
disclosures. The card issuer shall furnish the disclosures for credit 
and charge card applications and solicitations in accordance with the 
timing requirements of Sec.  226.5a.
    (4) Home equity plans. Disclosures for home equity plans shall be 
made in accordance with the timing requirements of Sec.  226.5b(b).
    (c) Basis of disclosures and use of estimates. Disclosures shall 
reflect the terms of the legal obligation between the parties. If any 
information necessary for accurate disclosure is unknown to the 
creditor, it shall make the disclosure based on the best information 
reasonably available and shall state clearly that the disclosure is an 
estimate.
    (d) Multiple creditors; multiple consumers. If the credit plan 
involves more than one creditor, only one set of disclosures shall be 
given, and the creditors shall agree among themselves which creditor 
must comply with the requirements that this regulation imposes on any 
or all of them. If there is more than one consumer, the disclosures may 
be made to any consumer who is primarily liable on the account. If the 
right of rescission under Sec.  226.15 is applicable, however, the 
disclosures required by Sec.  226.6 and Sec.  226.15(b) shall be made 
to each consumer having the right to rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor mails or delivers 
the disclosures, the resulting inaccuracy is not a violation of this 
regulation, although new disclosures may be required under Sec.  
226.9(c).
    7. Section 226.5a is amended by revising paragraphs (a), (b), (c), 
(d), (e), (f), and republishing paragraph (g) to read as follows:


Sec.  226.5a  Credit and charge card applications and solicitations.

    (a) General rules. The card issuer shall provide the disclosures 
required under this section on or with a solicitation or an application 
to open a credit or charge card account.
    (1) Definition of solicitation. For purposes of this section, the 
term solicitation means an offer by the card issuer to open a credit or 
charge card account that does not require the consumer to complete an 
application. [rtrif]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.[ltrif]
    (2) Form of disclosures [rtrif]; tabular format.[ltrif]
    (i) The disclosures in paragraphs (b)(1) through [rtrif](5) and 
(b)(7) through (17)[ltrif] [(7)] of this section [rtrif]made pursuant 
to paragraph (c), (d)(2), (e)(1) or (f) of this section 
generally[ltrif] shall be [provided in a prominent location on or with 
an application or a solicitation, or other applicable document , and] 
in the form of a table with headings, content, and format substantially 
similar to any of the applicable tables found in [rtrif]G-10 in[ltrif] 
appendix G.
    [rtrif](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 paragraph (b)(6) of this section must 
be placed directly beneath the table.
    (iv) When a tabular format is required, any APR required to be 
disclosed pursuant to paragraph (b)(1) of this section, any discounted 
initial rate permitted to be disclosed pursuant to paragraph (b)(1)(ii) 
of this section, and any fee or percentage amounts required to be 
disclosed pursuant to paragraphs (b)(2), (4), (8) through (12) or (14) 
of this section must be disclosed in bold text, except for any maximum 
limits on fee amounts disclosed in the table. Other APRs or fee amounts 
disclosed in the table shall not be in bold text.
    (v) For an application or a solicitation that is accessed by the 
consumer in electronic form, the disclosures required under this 
section must 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.[ltrif]
    [(ii) The disclosures in paragraphs (b)(8) through (11) of this 
section shall be provided either in the table containing the 
disclosures in paragraphs (b)(1) through (7), or clearly and 
conspicuously elsewhere on or with the application or solicitation.
    (iii) The disclosure required under paragraph (b)(5) of this 
section shall contain the term grace period.
    (iv) The terminology in the disclosures under paragraph (b) of this 
section shall be consistent with that to be used in the disclosures 
under Sec. Sec.  226.6 and 226.7.
    (3) Exceptions. This section does not apply to home equity plans 
accessible by a credit or charge card that are of the type subject to 
the requirements of Sec.  226.5b; overdraft lines of credit tied to 
asset accounts accessed by check-guarantee cards or by debit cards; or 
lines of credit accessed by check-guarantee cards or by debit cards 
that can be used only at automated teller machines.]
    [rtrif](3)[ltrif] [(4)] 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.
    [rtrif](4)[ltrif] [(5)] Certain fees that vary by state. If the 
amount of any fee referred to in paragraphs (b)(8) through [rtrif] (12) 
[ltrif] [(11)] of this section varies from state to state, the card 
issuer may disclose the range of the fees instead of the amount for 
each state, if the disclosure includes a statement that the amount of 
the fee varies from state to state.
    [rtrif](5) Exceptions. This section does not apply to:
    (i) Home equity plans accessible by a credit or charge card that 
are subject to the requirements of Sec.  226.5b;
    (ii) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (iii) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines;
    (iv) Lines of credit accessed solely by account numbers;

[[Page 33046]]

    (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.[ltrif]
    (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), [or (e)] 
[rtrif](e)(1) or (f)[ltrif] of this section. A credit card issuer shall 
disclose all applicable items in this paragraph except for paragraph 
(b)(7) of this section. A charge card issuer shall disclose the 
applicable items in paragraphs (b)(2), (4), (7) through [rtrif](12), 
and (16)[ltrif] [(11)] of this section.
    (1) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec.  226.14(b)). When more than one rate 
applies for a category of transactions, the range of balances to which 
each rate is applicable shall also be disclosed. The annual percentage 
rate for purchases disclosed pursuant to this paragraph shall be in at 
least [18-point] [rtrif]16-point[ltrif] type, except for the following: 
[rtrif]oral disclosures of the annual percentage rate for 
purchases,[ltrif] a temporary initial rate that is lower than the rate 
that will apply after the temporary rate expires, and a penalty rate 
that [rtrif]may[ltrif] [will] apply upon the occurrence of one or more 
specific events.
    (i) [rtrif]Variable rate information. If a rate disclosed under 
paragraph (b)(1) of this section is a variable rate,[ltrif] [If the 
account has a variable rate,] the card issuer shall also disclose the 
fact that the rate may vary and how the rate is determined. [rtrif]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.[ltrif]
    [rtrif](ii) Discounted initial rate. If the initial rate is 
temporary and is lower than the rate that will apply after the 
temporary rate expires, pursuant to paragraph (b)(1) of this section 
the card issuer must disclose the rate that would otherwise apply to 
the account. Where the rate is not tied to an index or formula, the 
card issuer must disclose the rate that will apply after the 
introductory rate expires. In a variable-rate account, the card issuer 
must disclose a rate based on the applicable index or formula in 
accordance with the accuracy requirements set forth in paragraphs (c), 
(d), or (e) of this section, as applicable. The issuer may disclose in 
the table the discounted initial rate along with the rate that would 
otherwise apply to the account if the card issuer also discloses the 
time period during which the discounted initial rate will remain in 
effect, and uses the term ``introductory'' or ``intro'' in immediate 
proximity to the listing of the discounted initial rate.
    (iii) Premium initial rate. If the initial rate is temporary and is 
higher than the rate that will apply after the temporary rate expires, 
pursuant to paragraph (b)(1) of this section the card issuer must 
disclose the premium initial rate. The issuer may disclose in the table 
the rate that will apply after the premium initial rate expires if the 
issuer also discloses the time period during which the premium initial 
rate will remain in effect. The premium initial rate must be in at 
least 16-point type unless the issuer also discloses in the table the 
rate that will apply after the premium initial rate expires. In that 
case, the rate that will apply after the premium initial rate expires 
must be in at least 16-point type.
    (iv) Penalty 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, pursuant to 
paragraph (b)(1) of this section the card issuer must disclose the 
increased rate that would apply, a description of the types of balances 
to which the increased rate will 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. 
Issuers must briefly disclose the circumstances under which any 
discounted initial rate may be revoked, and the rate that will apply 
after the revocation. The issuer need not disclose an increased rate 
that would be imposed if credit privileges are permanently terminated.
    (v) Rates depend on consumer's creditworthiness. If a rate cannot 
be determined at the time disclosures are given because the rate 
depends 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.
    (vi) Transaction with both rate and fee. If both a rate and a fee 
would apply to a balance transfer or cash advance transaction, the card 
issuer must disclose that a fee also applies when disclosing the rate, 
and provide a cross-reference to the fee.[ltrif]
    [(ii) When variable rate disclosures are provided under paragraph 
(c) of this section, an annual percentage rate disclosure is accurate 
if the rate was in effect within 60 days before mailing the 
disclosures. When variable rate disclosures are provided under 
paragraph (e) of this section, an annual percentage rate disclosure is 
accurate if the rate was in effect within 30 days before printing the 
disclosures. Disclosures provided by electronic communication are 
subject to paragraph (b)(1)(iii) of this section.
    (iii) When variable rate disclosures are provided by electronic 
communication, an annual percentage rate disclosure is accurate if the 
rate was in effect within 30 days before mailing the disclosures to a 
consumer's e-mail address. If disclosures are made available at another 
location such as the card issuer s Internet Web site, the annual 
percentage rate must be one in effect within the last 30 days.]
    (2) Fees for issuance or availability. [rtrif](i)[ltrif] Any annual 
or other periodic fee [expressed as an annualized amount, or any other 
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[.] [rtrif]; 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.[ltrif]
    (3) Minimum finance charge. Any minimum or fixed finance charge 
that could be imposed during a billing cycle [rtrif]and a brief 
description of the charge[ltrif].
    (4) Transaction charges. [rtrif](i) Except as provided in paragraph 
(b)(4)(ii) of this section, any[ltrif] [Any] transaction charge imposed 
[rtrif]by the card issuer[ltrif] for the use of the card for purchases.
    [rtrif](ii) A card issuer shall not disclose in the table required 
by paragraph (a)(2)(i) of this section a fee imposed by the issuer for 
transactions in a foreign currency or that take place in a foreign 
country.[ltrif]
    (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 [rtrif]due to a periodic interest rate and any conditions on the 
availability of the grace period.[ltrif] 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

[[Page 33047]]

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.
    (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. 
[rtrif]A card issuer must provide this information directly below the 
table, if a tabular format is required.[ltrif] [The explanation of the 
method may appear outside the table if the table contains a reference 
to the explanation.] 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.
    [rtrif](12) Returned payment fee. Any fee imposed by the card 
issuer for a returned payment.
    (13) Cross-reference to penalty rate. If a card issuer may impose a 
penalty rate as described in paragraph (b)(1)(iv) of this section for 
any of the circumstances for which a fee must be disclosed in paragraph 
(b)(9), (b)(10) or (b)(12), the card issuer must disclose the fact that 
the penalty rate also may apply, and a cross-reference to the penalty 
rate.
    (14) Required insurance, debt cancellation or debt suspension 
coverage.
    (i) A fee for insurance described in Sec.  226.4(b)(7) or debt 
cancellation or suspension coverage described in Sec.  226.4(b)(10), if 
the insurance or debt cancellation or suspension coverage is required 
as part of the plan; and
    (ii) A cross-reference to any additional information provided about 
the insurance or coverage accompanying the application or solicitation.
    (15) Payment allocation. If a card issuer offers a discounted 
initial rate on a balance transfer or cash advance that is lower than 
the rate on purchases, the issuer offers a grace period on purchases, 
and the issuer may allocate a payment to the lower rate balance first, 
then the issuer must state the following: the initial discounted rate 
applies to balances transfers or cash advances (as applicable) and not 
to purchases; payments will be allocated to the balance transfer or 
cash advance balance (as applicable) before being allocated to any 
purchase balance during the time the discounted initial rate is in 
effect; and the consumer will be charged interest on all purchases 
until the entire account balance is paid off, including the transferred 
balance or cash advance balance (as applicable). This paragraph (b)(15) 
applies only if the initial discounted rate applies to balance 
transfers or cash advances that consumers can request as part of 
accepting the offer.
    (16) 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 when the account is opened and charged to the account equal 
25 percent or more of the minimum credit limit offered with 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 
25 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 25 percent threshold test is met, the issuer 
in providing the disclosure must disclose the amount of available 
credit excluding those optional fees, and the available credit 
including those optional fees.
    (17) Reference to Web site for additional information. 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.[ltrif]
    (c) Direct-mail and electronic applications and solicitations. 
[rtrif](1) General.[ltrif] 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 by 
electronic communication] [rtrif]or provided to consumers in electronic 
form[ltrif].
    [rtrif](2) Accuracy. (i) Disclosures in direct mail applications 
and solicitations must be accurate as of the time the disclosures are 
mailed. An accurate variable annual percentage rate is one in effect 
within 60 days before mailing.
    (ii) Disclosures provided in electronic form must be accurate as of 
the time they are sent, in the case of disclosures sent to a consumer's 
e-mail address, or as of the time they are viewed by the public, in the 
case of disclosures made available at a location such as a card 
issuer's Internet Web site. An accurate variable annual percentage rate 
provided in electronic form is one in effect within 30 days before it 
is sent to a consumer's e-mail address, or viewed by the public, as 
applicable.[ltrif]
    (d) Telephone applications and solicitations--(1) Oral disclosure. 
The card issuer shall disclose orally the information in paragraphs 
(b)(1) through (7) 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 does 
not impose a fee described in paragraph (b)(2) of this section or does 
not impose such a fee unless the consumer uses the card, and 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:
    (i) The applicable information in paragraph (b) of this section; 
and
    (ii) The fact that the consumer need not accept the card or pay any 
fee disclosed unless the consumer uses the card.
    [rtrif](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).[ltrif]
    (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

[[Page 33048]]

(e)(1)[,] [rtrif]or (e)[ltrif] (2) [or (3)] 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) Inclusion of certain initial disclosures. The card issuer may 
disclose on or with the application or solicitation the following:
    (i) The disclosures required under Sec.  226.6 (a) through (c); and
    (ii) A statement that the consumer should contact the card issuer 
for any change in the required information, and a toll-free telephone 
number or a mailing address for that purpose.]
    [(3)] [rtrif](2)[ltrif] No disclosure of credit information. If 
none of the items in paragraph (b) of this section is provided on or 
with the application or solicitation, the card issuer may state in a 
prominent location on the application or solicitation the following:
    (i) There are costs associated with the use of the card; and
    (ii) The consumer may contact the card issuer to request specific 
information about the costs, along with a toll-free telephone number 
and a mailing address for that purpose.
    [(4)] [rtrif](3)[ltrif] 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.
    [rtrif](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.[ltrif]
    [rtrif](f) In-person applications and solicitations--General. 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.[ltrif]
    [(f) Special charge card rule--card issuer and person extending 
credit not the same person. If a cardholder may by use of a charge card 
access an open-end credit plan that is not maintained by the charge 
card issuer, the card issuer need not provide the disclosures in 
paragraphs (c), (d) or (e) of this section for the open-end credit plan 
if the card issuer states on or with an application or a solicitation 
the following:
    (1) The card issuer will make an independent decision whether to 
issue the card;
    (2) The charge card may arrive before the decision is made about 
extending credit under the open-end credit plan; and
    (3) Approval for the charge card does not constitute approval for 
the open-end credit plan.]
    (g) Balance computation methods defined. The following methods may 
be described by name. Methods that differ due to variations such as the 
allocation of payments, whether the finance charge begins to accrue on 
the transaction date or the date of posting the transaction, the 
existence or length of a grace period, and whether the balance is 
adjusted by charges such as late-payment fees, annual fees and unpaid 
finance charges do not constitute separate balance computation methods.
    (1)(i) Average daily balance (including new purchases). This 
balance is figured by adding the outstanding balance (including new 
purchases and deducting payments and credits) for each day in the 
billing cycle, and then dividing by the number of days in the billing 
cycle.
    (ii) Average daily balance (excluding new purchases). This balance 
is figured by adding the outstanding balance (excluding new purchases 
and deducting payments and credits) for each day in the billing cycle, 
and then dividing by the number of days in the billing cycle.
    (2)(i) Two-cycle average daily balance (including new purchases). 
This balance is the sum of the average daily balances for two billing 
cycles. The first balance is for the current billing cycle, and is 
figured by adding the outstanding balance (including new purchases and 
deducting payments and credits) for each day in the billing cycle, and 
then dividing by the number of days in the billing cycle. The second 
balance is for the preceding billing cycle.
    (ii) Two-cycle average daily balance (excluding new purchases). 
This balance is the sum of the average daily balances for two billing 
cycles. The first balance is for the current billing cycle, and is 
figured by adding the outstanding balance (excluding new purchases and 
deducting payments and credits) for each day in the billing cycle, and 
then dividing by the number of days in the billing cycle. The second 
balance is for the preceding billing cycle.
    (3) Adjusted balance. This balance is figured by deducting payments 
and credits made during the billing cycle from the outstanding balance 
at the beginning of the billing cycle.
    (4) Previous balance. This balance is the outstanding balance at 
the beginning of the billing cycle.
    8. Section 226.6 is amended by revising the heading, revising the 
introductory paragraph, revising paragraphs (a), (b), and (c), removing 
paragraphs (d) and (e), and removing and reserving footnotes 11 through 
13 to read as follows:


Sec.  226.6 [rtrif]Account-opening disclosures[ltrif] [Initial 
disclosure statement].  

    [rtrif]Creditors shall disclose the items in this section, to the 
extent applicable.[ltrif] [The creditor shall disclose to the consumer, 
in terminology consistent with that to be used on the periodic 
statement, each of the following items, to the extent applicable:]
    (a) [rtrif]Rules affecting home equity plans. The requirements of 
paragraph (a) of this section apply only to home equity plans subject 
to the requirements of Sec.  226.5b.
    (1) [ltrif]Finance charge. The circumstances under which a finance 
charge will be imposed and an explanation of how it will be determined, 
as follows.
    [rtrif](i)[ltrif] [(1)] 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.
    [rtrif](ii)[ltrif] [(2)] A disclosure of each periodic rate that 
may be used to compute the finance charge, the range of balances to 
which it is applicable,\11\ and the corresponding annual percentage 
rate.\12\ [rtrif]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

[[Page 33049]]

effect(s) of an increase.[ltrif] When different periodic rates apply to 
different types of transactions, the types of transactions to which the 
periodic rates shall apply shall also be disclosed. [rtrif]A creditor 
is not required to adjust the range of balances disclosure to reflect 
the balance below which only a minimum charge applies.[ltrif]
---------------------------------------------------------------------------

    \11\ [rtrif][Reserved][ltrif] [A creditor is not required to 
adjust the range of balances disclosure to reflect the balance below 
which only a minimum charge applies.]
    \12\ [rtrif][Reserved][ltrif] [If a creditor is offering a 
variable-rate plan, the creditor shall also disclose, (1) the 
circumstances under which the rate(s) may increase; (2) any 
limitations on the increase; and (3) the effect(s) of an increase.]
---------------------------------------------------------------------------

    [rtrif](iii)[ltrif] [(3)] An explanation of the method used to 
determine the balance on which the finance charge may be computed.
    [rtrif] (iv) [ltrif][(4)] An explanation of how the amount of any 
finance charge will be determined,\13\ including a description of how 
any finance charge other than the periodic rate will be determined.
---------------------------------------------------------------------------

    \13\ [rtrif][Reserved][ltrif] [If no finance charge is imposed 
when the outstanding balance is less than a certain amount, no 
disclosure is required of that fact or of the balance below which no 
finance charge will be imposed.]
---------------------------------------------------------------------------

    [rtrif](2)[ltrif] [(b)] 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.
    [rtrif](3) Home equity plan information. The following disclosures 
described in Sec.  226.5b(d), as applicable:
    (i) A statement of the conditions under which the creditor may take 
certain action, as described in Sec.  226.5b(d)(4)(i), such as 
terminating the plan or changing the terms.
    (ii) The payment information described in Sec.  226.5b(d)(5)(i) and 
(ii) for both the draw period and any repayment period.
    (iii) A statement that negative amortization may occur as described 
in Sec.  226.5b(d)(9).
    (iv) A statement of any transaction requirements as described in 
Sec.  226.5b(d)(10).
    (v) A statement regarding the tax implications as described in 
Sec.  226.5b(d)(11).
    (vi) A statement that the annual percentage rate imposed under the 
plan does not include costs other than interest as described in 
Sec. Sec.  226.5b(d)(6) and 226.5b(d)(12)(ii).
    (vii) The variable-rate disclosures described in Sec.  
226.5b(d)(12)(viii), (x), (xi), and (xii), as well as the disclosure 
described in Sec.  226.5b(d)(5)(iii), unless the disclosures provided 
with the application were in a form the consumer could keep and 
included a representative payment example for the category of payment 
option chosen by the consumer.[ltrif]
    [rtrif](b) Rules affecting open-end (not home-secured) plans. The 
requirements of paragraph (b) of this section apply to plans other than 
home equity plans subject to the requirements of Sec.  226.5b.[ltrif]
    [rtrif](1) Charges imposed as part of open-end (not home-secured) 
plans. The circumstances under which a charge may be imposed as part of 
the plan, 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.
    (i) Charges imposed as part of the plan are:
    (A) Finance charges identified under Sec.  226.4(a) and Sec.  
226.4(b).
    (B) Charges resulting from the consumer's failure to use the plan 
as agreed, except amounts payable for collection activity after 
default, attorney's fees whether or not automatically imposed, and 
post-judgment interest rates permitted by law.
    (C) Taxes imposed on the credit transaction by a state or other 
governmental body, such as documentary stamp taxes on cash advances.
    (D) Charges for which the payment, or nonpayment, affect the 
consumer's access to the plan, the duration of the plan, the amount of 
credit extended, the period for which credit is extended, or the timing 
or method of billing or payment.
    (E) Charges imposed for terminating a plan.
    (F) Charges for voluntary credit insurance, debt cancellation or 
debt suspension.
    (ii) Charges that are not imposed as part of the plan include:
    (A) Charges imposed on a cardholder by an institution other than a 
creditor for the use of the other institution's ATM in a shared or 
interchange system.
    (B) A charge for a package of services that includes an open-end 
credit feature, if the fee is required whether or not the open-end 
credit feature is included and the non-credit services are not merely 
incidental to the credit feature.
    (C) Charges under Sec.  226.4(e) disclosed as specified.[ltrif]
    [rtrif](2) Rules relating to rates for open-end (not home-secured) 
plans. If a finance charge disclosed under paragraph (b)(1) of this 
section is computed by using a periodic rate:
    (i) For each periodic rate that may be used to calculate interest:
    (A) The rate, expressed as a periodic rate and a corresponding 
annual percentage rate.
    (B) 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) The type of transaction to which the rate applies, if different 
rates apply to different types of transactions.
    (D) An explanation of the method used to determine the balance to 
which the rate is applied.
    (ii) For interest rate changes that are specifically set forth in 
the account agreement and are tied to increases in an index or formula 
(variable-rate accounts):
    (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) A rate is accurate if it is a rate as of a specified date 
within the last 30 days before the disclosures are provided.
    (iii) 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)(2)(i) of this section.
    (B) How long the initial rate will remain in effect or 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) Whether the new rate will apply to balances outstanding at the 
time of the change.[ltrif]
    [rtrif](3) Voluntary credit insurance, debt cancellation or debt 
suspension. See Sec. Sec.  226.4(d)(1)(i) and (ii) and (d)(3)(i) 
through (iii) for disclosures required if optional credit insurance or 
debt cancellation or debt suspension coverage identified in Sec.  
226.4(b)(7) or Sec.  226.4(b)(10) is offered before the consumer opens 
the plan.[ltrif]
    [rtrif](4) Tabular format requirements for open-end (not home-
secured) plans.
    (i) Tabular format. The disclosures in paragraph (b)(4)(ii) through 
(b)(4)(viii) of this section shall be in the form of a

[[Page 33050]]

table with the headings, content, and format substantially similar to 
any of the applicable tables found in G-17 in appendix G.
    (A) The table described in paragraph (b)(4)(i) of this section 
shall contain only the information required or permitted by this 
section. Other information may be presented with the account agreement 
or account-opening disclosure statement, provided such information 
appears outside the required table.
    (B) Disclosures required by paragraphs (b)(4)(ix) and b(4)(x) of 
this section must be placed directly below the table.
    (C) When a tabular format is required, any annual percentage rate 
required to be disclosed pursuant to paragraph (b)(4)(ii) of this 
section and any fee amounts required to be disclosed pursuant to 
paragraph (b)(4)(iii) must be disclosed in bold text, except for any 
maximum limits on fee amounts disclosed in the table. Other annual 
percentage rates or fee amounts disclosed in the table shall not be in 
bold text.
    (ii) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec.  226.14(b)). When more than one rate 
applies for a category of transactions, the range of balances to which 
each rate is applicable shall also be disclosed. The annual percentage 
rate for purchases disclosed pursuant to this paragraph shall be in at 
least 16-point type, except for the following: a temporary initial rate 
that is lower than the rate that will apply after the temporary rate 
expires, and 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)(4)(ii) 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.
    (B) Temporary initial rates. If an initial rate is temporary, the 
initial rate, the circumstances under which that rate expires, and the 
rate that will apply after the temporary rate will expire shall be 
disclosed.
    (C) Increased penalty rates. If a rate may increase upon the 
occurrence of 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)(4)(ii) of this section the increased penalty rate that may apply, a 
description of the types of balances to which the increased rate will 
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 a temporary initial rate is lower than 
the rate that will apply after the temporary rate expires, creditors 
must briefly disclose the circumstances under which any initial 
discounted rates may be revoked, and the rate that will apply after the 
initial discounted rate is revoked. The creditor need not disclose an 
increased rate that would be imposed if credit privileges are 
permanently terminated.
    (D) Rate and fee both apply to the same transaction. If a rate and 
fee both apply to a balance transfer or cash advance transaction, the 
creditor must disclose that a fee also applies when disclosing the 
rate, and provide a cross reference to the fee.
    (iii) Fees.
    (A) Fees for issuance or availability of credit. 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; and any non-periodic fee that relates to opening the plan. 
A creditor must disclose the amount of the periodic fee, how frequently 
it will be imposed, and the annualized amount of the fee. A creditor 
disclosing a non-periodic fee must disclose that the fee is a one-time 
fee.
    (B) Transaction charges. Any transaction charge imposed on 
purchases, for cash advances or to transfer balances, including fees 
imposed by the creditor for using automated teller machines or for 
transactions in a foreign currency or that take place in a foreign 
country.
    (C) Penalty fees. Any fee imposed for a late payment, exceeding a 
credit limit, or for a returned payment. If a creditor may impose a 
penalty rate as described in paragraph (b)(4)(ii) of this section for 
any of the circumstances where a fee must be disclosed in this 
paragraph, the creditor must also disclose that the penalty rate also 
may apply and a cross reference to the fee.
    (D) Minimum finance charge. Any minimum or fixed finance charge 
that could be imposed during a billing cycle and a brief description of 
the charge.
    (iv) Grace period. An explanation of whether or not any time period 
exists within which any credit that has been extended may be repaid 
without incurring a finance charge.
    (v) Required insurance, debt cancellation or debt suspension 
coverage. A fee for insurance described in Sec.  226.4(b)(7) or debt 
cancellation or suspension coverage described in Sec.  226.4(b)(10), if 
the insurance, or debt cancellation or suspension coverage is required 
as part of the plan; and a cross-reference to any additional 
information provided about the insurance or coverage, as applicable.
    (vi) Payment allocation. If a creditor offers an initial discounted 
rate on a balance transfer or cash advance that is lower than the rate 
on purchases where the creditor offers a grace period on purchases, and 
the creditor allocates payments to the lower rate balance first, the 
creditor must provide a statement that payments will be allocated to 
the lower rate balance first during the time the lower rate is in 
effect, and during that time the consumer will incur interest on the 
higher rate balance until the lower rate balance is paid off 
completely.
    (vii) Available credit. If a creditor requires fees for the 
issuance or availability of an open-end plan described in paragraph 
(b)(4)(iii)(A) of this section, or a security deposit, and the total 
amount of those required fees or security deposit that will be imposed 
when the account is opened and charged to the account equal 25 percent 
or more of the minimum credit limit offered with the card, a creditor 
must disclose the amount of the available credit that a consumer will 
have 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 25 percent threshold test is met, the 
creditor must only consider fees for issuance or availability of 
credit, or a security deposit, that is 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 
25 percent threshold test is met, the creditor in providing the 
disclosure must disclose the amount of available credit excluding those 
optional fees, and the available credit including those optional fees.
    (viii) Web site reference. For issuers of credit cards that are not 
charge cards, a reference to the Web site established by the Board and 
a statement that consumers may obtain on the Web site information about 
shopping for and using credit card accounts.
    (ix) Balance computation method. The name of the balance 
computation

[[Page 33051]]

method listed in Sec.  226.5a(g) 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, along with a 
statement that an explanation of the method required by paragraph 
(b)(2)(i)(D) of this section is provided with the account-opening 
disclosures. In determining which balance computation method to 
disclose, the card issuer shall assume that credit extended for 
purchases will not be repaid within any grace period.
    (x) Billing error rights reference. A statement that information 
about consumers' right to dispute transactions is included in the 
account-opening disclosures.[ltrif]
    [rtrif] (c) Rules of general applicability.
    (1) 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.
    (2) Statement of billing rights. For plans other than home equity 
plans subject to the requirements of Sec.  226.5b, a statement that 
outlines the consumer's rights and the creditor's responsibilities 
under Sec. Sec.  226.12(c) and 226.13 and that is substantially similar 
to the statement found in Model Form G-3(A) in appendix G. Creditors 
offering home equity plans subject to the requirements of Sec.  226.5b 
may use Model Form G-3 or G-3A, at their option.[ltrif]
    [(c) 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.]
    [(d) Statement of billing rights. A statement that outlines the 
consumer's rights and the creditor's responsibilities under Sec. Sec.  
226.12(c) and 226.13 and that is substantially similar to the statement 
found in appendix G.]
    [(e) Home equity plan information. The following disclosures 
described in Sec.  226.5b(d), as applicable:
    (1) A statement of the conditions under which the creditor may take 
certain action, as described in Sec.  226.5b(d)(4)(i), such as 
terminating the plan or changing the terms.
    (2) The payment information described in Sec.  226.5b(d)(5)(i) and 
(ii) for both the draw period and any repayment period.
    (3) A statement that negative amortization may occur as described 
in Sec.  226.5b(d)(9).
    (4) A statement of any transaction requirements as described in 
Sec.  226.5b(d)(10).
    (5) A statement regarding the tax implications as described in 
Sec.  226.5b(d)(11).
    (6) A statement that the annual percentage rate imposed under the 
plan does not include costs other than interest as described in 
Sec. Sec.  226.5b(d)(6) and 226.5b (d)(12)(ii).
    (7) The variable-rate disclosures described in Sec.  
226.5b(d)(12)(viii), (x), (xi), and (xii), as well as the disclosure 
described in Sec.  226.5b(d)(5)(iii), unless the disclosures provided 
with the application were in a form the consumer could keep and 
included a representative payment example for the category of payment 
option chosen by the consumer.]
    9. Section 226.7 is amended by republishing the introductory text, 
revising paragraphs (a) and (b), removing paragraphs (c), (d), (e), 
(f), (g), (h), (i), (j), and (k), and removing and reserving footnotes 
14 and 15 to read as follows:


Sec.  226.7  Periodic statement.

    The creditor shall furnish the consumer with a periodic statement 
that discloses the following items, to the extent applicable:
    [rtrif](a) Rules affecting home equity plans. The requirements of 
paragraph (a) of this section apply only to home equity plans subject 
to the requirements of Sec.  226.5b. Alternatively, a creditor subject 
to this paragraph may, at its option, comply with any of the 
requirements of paragraph (b) of this section; however, any creditor 
that chooses to comply with paragraph (b)(6) of this section must also 
comply with paragraph (b)(7) of this section.[ltrif]
    [rtrif](1)[ltrif] [(a)] Previous balance. The account balance 
outstanding at the beginning of the billing cycle.
    [rtrif](2)[ltrif] [(b)] Identification of transactions. An 
identification of each credit transaction in accordance with Sec.  
226.8.
    [rtrif](3)[ltrif] [(c)] 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.
    [rtrif](4)[ltrif] [(d)] Periodic rates. Each periodic rate that may 
be used to compute the finance charge, the range of balances to which 
it is applicable,\14\ and the corresponding annual percentage rate.\15\ 
[rtrif]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.[ltrif] If different periodic rates apply to different types of 
transactions, the types of transactions to which the periodic rates 
apply shall also be disclosed. [rtrif]For variable-rate plans, the fact 
that the periodic rate(s) may vary.[ltrif]
---------------------------------------------------------------------------

    \14\ [rtrif][Reserved][ltrif] [See footnotes 11 and 13.]
    \15\ [rtrif][Reserved[ltrif].] [If a variable-rate plan is 
involved, the creditor shall disclose the fact that the periodic 
rate(s) may vary.]
---------------------------------------------------------------------------

    [rtrif](5)[ltrif] [(e)] 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.
    [rtrif](6)[ltrif] [(f)] Amount of finance charge [rtrif] 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.[ltrif] 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.
    [rtrif](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.[ltrif]
    [rtrif](7)[ltrif] [(g)] Annual percentage rate.
    ALTERNATIVE 1--PARAGRAPH (a)(7).
    (i) When a finance charge is imposed during the billing cycle, the 
annual percentage rate(s) determined under Sec.  226.14 using the term 
annual percentage rate.
    (ii) Creditors may comply with paragraph (a)(7)(i) of this section 
or with paragraph (b)(7) of this section, at their option. If a 
creditor chooses to comply with paragraph (b)(7) of this section with 
respect to its home equity plans, the creditor must also comply with 
paragraph (b)(6) of this section.
    ALTERNATIVE 2--PARAGRAPH (a)(7).
    At a creditor's option, when a finance charge is imposed during the 
billing cycle, the annual percentage rate(s) determined under Sec.  
226.14 using the term annual percentage rate.
    [rtrif](8)[ltrif] [(j)] [rtrif]Grace[ltrif] [Free-ride] period. The 
date by which or the time period within 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

[[Page 33052]]

disclosure, impose no finance charge if payment is received after the 
time period s expiration.
    [rtrif](9)[ltrif] [(k)] Address for notice of billing errors. The 
address to be used for notice of billing errors. Alternatively, the 
address may be provided on the billing rights statement permitted by 
Sec.  226.9(a)(2).
    [rtrif](10)[ltrif] [(i)] Closing date of billing cycle; new 
balance. The closing date of the billing cycle and the account balance 
outstanding on that date.
    [rtrif](b) Rules affecting open-end (not home-secured) plans. The 
requirements of paragraph (b) of this section apply only to plans other 
than home equity plans subject to the requirements of Sec.  226.5b.
    (1) Previous balance. The account balance outstanding at the 
beginning of the billing cycle.
    (2) Identification of transactions. An identification of each 
credit transaction in accordance with Sec.  226.8, grouped by type of 
transaction in a form substantially similar to that shown in Sample G-
18(A) in appendix G.
    (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. Credits must be grouped together, and grouped with 
transactions identified under paragraph (b)(2) of this section, in a 
form substantially similar to that shown in Sample G-18(A) in appendix 
G.
    (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.
    (ii) Exception. An annual percentage rate that differs from the 
rate that would otherwise apply and is offered only for a specific and 
limited time 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, using the term Balance Subject to Interest 
Rate. When a balance is determined without first deducting all credits 
and payments made during the billing cycle, the fact and the amount of 
the credits and payments shall be disclosed. As an alternative to 
providing an explanation of how the balance was determined, a creditor 
that uses a balance computation method identified in Sec.  226.5a(g) 
may, at the creditor's option, identify the name of the balance 
computation method and provide a toll-free telephone number where 
consumers may obtain from the creditor more information about the 
balance computation method and how resulting finance charges were 
determined. If the method used is not identified in Sec.  226.5a(g), 
the creditor shall provide a brief explanation of the method used.
    (6) Charges imposed. (i) The amounts of any charges imposed as part 
of a plan as stated in Sec.  226.6(b)(1), grouped together, in 
proximity to transactions identified under paragraph (b)(2) of this 
section, substantially similar to Sample G-18(A) in appendix G.
    (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 interest charge, using the term Total Interest 
Charge, 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.
    (iii) Fees. Charges imposed as part of the plan other than interest 
must be grouped together under the heading Fees, identified consistent 
with the feature or type, and itemized. A total of charges, using the 
term Fees, must be disclosed for the statement period and calendar year 
to date. Fees identified in Sec.  226.14(e) that relate to a specific 
transaction must be labeled using the term Transaction fee, and fees 
identified in Sec.  226.14(e) that do not relate to a specific 
transaction must be labeled using the term Fixed fee, using a format 
substantially similar to Sample G-18(A) in appendix G.
    ALTERNATIVE 1 ONLY--PARAGRAPH (b)(6)(iv).
    (iv) In addition to the disclosures of interest and fees required 
under paragraphs (b)(6)(ii) and (b)(6)(iii) of this section, the 
creditor must also disclose, unless paragraph (b)(7)(ii) of this 
section applies, charges identified under this paragraph for the 
statement period, grouped together in a tabular format with the Fee-
Inclusive APR information identified under paragraph (b)(7)(i) of this 
section, in a format substantially similar to Sample G-18(A) in 
appendix G.
    (A) Finance charges attributable to interest, using the term 
interest charges, must be totaled by type of transaction and identified 
as relating to balances for that type of transaction.
    (B) Charges imposed as part of the plan other than interest that 
are identified in Sec.  226.14(e), using the term Transaction and Fixed 
Fees, must be grouped together. For multifeatured plans, charges that 
relate to a specific purchase transaction and charges that do not 
relate to a specific transaction must be totaled and identified as 
relating to purchase balances; charges that relate to a specific type 
of transaction other than purchases must be totaled and identified as 
relating to balances for that type of transaction. For single-featured 
plans, charges described in paragraph (b)(7)(iv) of this section must 
be grouped together and totaled.
    ALTERNATIVE 1--PARAGRAPH (b)(7).
    (7) Effective annual percentage rate. (i) Except as provided in 
paragraph (b)(7)(ii) of this section, when a finance charge identified 
in Sec.  226.14(e) is imposed during the billing cycle, the effective 
annual percentage rate(s) determined for each type of transaction under 
Sec.  226.14, using the term Fee-Inclusive APR and disclosed for each 
type of transaction; a description of the Fee-Inclusive APR; and a 
format substantially similar to Sample G-18(B) in appendix G.
    (ii) When a finance charge identified in Sec.  226.14(e) is imposed 
during the billing cycle and the finance charge is determined solely by 
applying one or more periodic rates used to calculate interest, by 
multiplying each periodic rate by the number of periods in a year, 
disclosed for each type of transaction.
    ALTERNATIVE 2--PARAGRAPH (b)(7).
    (7) [Reserved.]
    (8) Grace period. The date by which or the time period within the 
new balance or any portion of the new balance must be paid to avoid 
additional finance charges. If such a time period is provided, a 
creditor may, at its option and without disclosure, impose no finance 
charge if payment is received after the time period's expiration.
    (9) Address for notice of billing errors. The address to be used 
for notice of billing errors. Alternatively, the address may be 
provided on the billing rights statement permitted by Sec.  
226.9(a)(2).
    (10) Closing date of billing cycle; new balance. The closing date 
of the billing cycle and the account balance outstanding on that date. 
The new balance must be disclosed in accordance

[[Page 33053]]

with the format requirements of paragraph (b)(13) of this section.
    (11) Due date; late payment costs. (i) Except as provided in 
paragraph (b)(11)(ii) of this section and in accordance with the format 
requirements in paragraph (b)(13) of this section:
    (A) The due date for a payment, if a late payment fee or penalty 
rate may be imposed.
    (B) A cut-off time, if the creditor imposes a cut-off time before 5 
p.m. for payment to be received. If the cut-off time differs depending 
on the method of payment, the creditor must state the earliest time if 
before 5 p.m. without specifying the payment method to which it 
applies.
    (C) The amount of the fee and any increased periodic rate(s) 
(expressed as an annual percentage rate(s)) that may be imposed as a 
result of a late payment. If a range of fees may be assessed, the 
creditor must state the highest fee. If the rate may be increased for 
more than one feature or balance, the creditor must state the highest 
rate that could apply.
    (ii) Exemptions. The requirements of paragraph (b)(11) of this 
section do not apply to periodic statements provided for charge cards 
accounts.
    (12) Minimum payment. (i) General disclosure requirements. Except 
as provided in paragraphs (b)(12)(ii) and (b)(12)(iii) of this section, 
a card issuer shall disclose on each periodic statement, in accordance 
with the format requirements of paragraph (b)(13) of this section:
    (A) Minimum payment not exceeding 4%. Except as provided in 
paragraph (b)(12)(i)(C) or (D) of this section, if the required minimum 
periodic payment does not exceed 4% of the balance upon which finance 
charges accrue, the following statement with a bolded heading: ``Notice 
About Minimum Payments: If you make only the minimum payment each 
period, you will pay more in interest and it will take you longer to 
pay off your balance. For example, if you had a balance of $1,000 at an 
interest rate of 17% and always paid only the minimum required, it 
would take over 7 years to repay this balance. For an estimate of the 
time it would take to repay your actual balance making only minimum 
payments, call: [toll-free telephone number]'' A card issuer must 
disclose a toll-free telephone number established and maintained 
pursuant to paragraph (b)(12)(iv)(A)(1) of this section to provide 
generic repayment estimates discussed in appendix M1. Alternatively, 
for a two-year period after the date that card issuers must begin 
complying with the minimum payment disclosure requirement in paragraph 
(b)(12) of this section, small depository institution issuers (as 
defined in paragraph (b)(12)(v) of this section) may provide the toll-
free telephone number operated by or on behalf of the Federal Reserve 
Board.
    (B) Minimum payment exceeding 4%. (1) Except as provided in 
paragraphs (b)(12)(i)(B)(2), (b)(12)(i)(C) or (b)(12)(i)(D) of this 
section, if the required minimum periodic payment exceeds 4% of the 
balance upon which finance charges accrue, the following statement with 
a bolded heading: ``Notice About Minimum Payments: If you make only the 
minimum payment each period, you will pay more in interest and it will 
take you longer to pay off your balance. For example, if you had a 
balance of $300 at an interest rate of 17% and always paid only the 
minimum required, it would take about 2 years to repay this balance. 
For an estimate of the time it would take to repay your actual balance 
making only minimum payments, call: [toll-free telephone number]'' A 
card issuer must disclose a toll-free telephone number established and 
maintained pursuant to paragraph (b)(12)(iv)(A)(1) of this section to 
provide generic repayment estimates discussed in appendix M1. 
Alternatively, for a two-year period after the date that card issuers 
must begin complying with the minimum payment disclosure requirement in 
paragraph (b)(12) of this section, small depository institution issuers 
(as defined in paragraph (b)(12)(v) of this section) may provide the 
toll-free telephone number operated by or on behalf of the Federal 
Reserve Board.
    (2) At a card issuer's option, an issuer subject to this paragraph 
is not required to comply with this paragraph if the issuer complies 
with paragraph (b)(12)(i)(A) of this section.
    (C) FTC-regulated credit card issuers. Except as provided in 
paragraph (b)(12)(i)(D) of this section, if the Federal Trade 
Commission has authority under the Truth in Lending Act to enforce the 
act and this regulation as to a card issuer, the following statement 
with a bolded heading: ``Notice About Minimum Payments: If you make 
only the minimum payment each period, you will pay more in interest and 
it will take you longer to pay off your balance. For example, if you 
had a balance of $300 at an interest rate of 17% and always paid only 
the minimum required, it would take about 2 years to repay this 
balance. For an estimate of the time it would take to repay your actual 
balance making only minimum payments, call the Federal Trade Commission 
at this toll-free telephone number:--------.'' The card issuer must 
disclose the toll-free telephone number established by or on behalf of 
the Federal Trade Commission pursuant to paragraph (b)(12)(iv)(B) of 
this section.
    (D) Alternative rate. Card issuers that provide the statements 
under paragraphs (b)(12)(i)(A) through (b)(12)(i)(C) of this section 
may, at their option, substitute an example that uses an annual 
percentage rate that is greater than 17 percent.
    (ii) Estimate of actual repayment period. A card issuer is not 
required to comply with paragraphs (b)(12)(i)(A) through (b)(12)(i)(D) 
of this section if the issuer, at its option:
    (A) Establishes and maintains a toll-free telephone number for the 
purpose of providing consumers with the actual repayment disclosure 
described in appendix M2; and discloses the following statement on each 
periodic statement: ``Notice About Minimum Payments: If you make only 
the minimum payment each period, you will pay more in interest and it 
will take you longer to pay off your balance. For more information, 
call this toll-free number:--------.'' A card issuer must disclose a 
toll-free telephone number established and maintained pursuant to 
paragraph (b)(12)(iv)(A)(3) of this section to provide the actual 
repayment disclosures described in appendix M2; or
    (B) Provides on the periodic statement a disclosure of the actual 
repayment information as described in appendix M2, substantially 
similar to Sample G-18(D) in appendix G.
    (iii) Exemptions. Paragraph (b)(12) of this section does not apply 
to:
    (A) Home equity plans subject to the requirements of Sec.  226.5b;
    (B) Overdraft lines of credit tied to asset accounts accessed by 
check-guarantee cards or by debit cards;
    (C) Lines of credit accessed by check-guarantee cards or by debit 
cards that can be used only at automated teller machines;
    (D) Charge card accounts that require payment of outstanding 
balances in full at the end of each billing cycle;
    (E) Credit card accounts where a fixed repayment period for the 
account is disclosed in the account agreement and the required minimum 
payments will amortize the outstanding balance within the fixed 
repayment period;
    (F) A billing cycle where a consumer has paid the entire balance in 
full for that billing cycle and the previous billing cycle, or had a 
zero outstanding balance or credit balance in those two billing cycles; 
and

[[Page 33054]]

    (G) A billing cycle where the entire outstanding balance is subject 
to a fixed repayment period specified in the account agreement and the 
required minimum payments applicable to that feature will amortize the 
outstanding balance within the fixed repayment period.
    (iv) Toll-free telephone numbers. (A) Issuer-operated toll-free 
telephone number.
    (1) Subject to paragraph (b)(12)(iv)(A)(2) of this section, if a 
card issuer provides the disclosures in paragraphs (b)(12)(i)(A) or 
(b)(12)(i)(B) of this section, the issuer must establish and maintain a 
toll-free telephone number for the purpose of providing its customers 
with generic repayment estimates, as described in appendix M1.
    (2) For a two-year period after the date that card issuers must 
begin complying with the minimum payment disclosure requirement in 
paragraph (b)(12) of this section, small depository institution issuers 
(as defined in paragraph (b)(12)(v) of this section) that provide the 
disclosures in paragraphs (b)(12)(i)(A) or (b)(12)(i)(B) of this 
section are not required to establish and maintain a toll-free 
telephone number for purposes of providing their customers with generic 
repayment estimates, as described in appendix M1. Instead, small 
depository institutions may disclose the toll-free telephone number 
operated by or on behalf of the Federal Reserve Board.
    (3) If a card issuer provides the disclosure in paragraph 
(b)(12)(ii)(A) of this section, the issuer must establish and maintain 
a toll-free telephone number for the purpose of providing its customers 
with actual repayment disclosures, as described in appendix M2.
    (B) FTC-operated toll-free telephone number. The Federal Trade 
Commission is required by Section 1637(b)(11)(G) of the Truth in 
Lending Act (15 U.S.C. 1637(b)(11)(G)) to establish and maintain a 
toll-free telephone number for use by customers of creditors that are 
subject to the Federal Trade Commission's authority to enforce the act 
and this regulation.
    (C) Additional information. In responding to a request for generic 
repayment estimates or actual repayment disclosures, as described in 
appendices M1 and M2 respectively, through a toll-free telephone 
number, neither card issuers nor the FTC may provide any information 
other than the repayment information required or permitted by appendix 
M1 or M2, as applicable.
    (v) Definitions. Small depository institution issuers are card 
issuers that are depository institutions (as defined by section 3 of 
the Federal Deposit Insurance Act), including Federal credit unions or 
State credit unions (as defined in section 101 of the Federal Credit 
Union Act), with total assets not exceeding $250 million, as of 
December 31 of the year prior to the year in which institutions must 
begin complying with the requirements in Sec.  226.7(b)(12).
    (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 cut-off time, the amount of the 
fee, and the annual percentage rate(s) required by paragraph (b)(11) of 
this section shall be stated in close proximity to the due date. The 
ending balance required by paragraph (b)(10) of this section and the 
minimum payment disclosure required by paragraph (b)(12) of this 
section shall be disclosed closely proximate to the minimum payment 
due. The due date, cut-off time, fee and annual percentage rate, ending 
balance, minimum payment due, and minimum payment disclosure shall be 
grouped together, substantially similar to Samples G-18(E) or G-18(F) 
in appendix G.
    (14) Change-in-terms and increased penalty rate summary for open-
end (not home-secured) plans. Creditors that provide a change-in-term 
notice required by Sec.  226.9(c), or a rate increase notice required 
by Sec.  226.9(g), on or with the periodic statement, must disclose the 
information in Sec.  226.9(c)(2)(iii)(A) or Sec.  226.9(g)(3)(i) on the 
periodic statement in accordance with the format requirements in Sec.  
226.9(c)(2)(iii)(B), and Sec.  226.9(g)(3)(ii). This information shall 
precede the transactions disclosed pursuant to paragraph (b)(2) of this 
section. See Forms G-18(G) and G-18(H) in appendix G.[ltrif]
    [(c) 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.]
    [(d) Periodic rates. 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 different periodic 
rates apply to different types of transactions, the types of 
transactions to which the periodic rates apply shall also be 
disclosed.]
    [(e) 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.]
    [(f) Amount of finance charge. 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 rate, the amount of the finance charge attributable to each 
rate need not be separately itemized and identified.]
    [(g) Annual percentage rate. When a finance charge is imposed 
during the billing cycle, the annual percentage rate(s) determined 
under Sec.  226.14, using the term annual percentage rate.]
    [(h) Other charges. The amounts, itemized and identified by type, 
of any charges other than finance charges debited to the account during 
the billing cycle.]
    [(i) Closing date of billing cycle; new balance. The closing date 
of the billing cycle and the account balance outstanding on that date.]
    [(j) Free-ride period. The date by which or the time period within 
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 payment is received after time period's expiration.]
    [(k) Address for notice of billing errors. The address to be used 
for notice of billing errors. Alternatively, the address may be 
provided on the billing rights statement permitted by Sec.  
226.9(a)(2).]
    10. Section 226.8 is amended by revising the heading, revising 
paragraphs (a) and (b), adding a new paragraph (c), and removing and 
reserving footnotes 16 through 20 to read as follows:


Sec.  226.8  [Identification of] [rtrif]Identifying[ltrif] transactions 
[rtrif]on periodic statements.[ltrif]

    The creditor shall identify credit transactions on or with the 
first periodic statement that reflects the transaction by furnishing 
the following information, as applicable.\16\
---------------------------------------------------------------------------

    \16\ [rtrif][Reserved][ltrif] [Failure to disclose the 
information required by this section shall not be deemed a failure 
to comply with the regulation if (1) the creditor maintains 
procedures reasonably adapted to obtain and provide the information; 
and (2) the creditor treats an inquiry for clarification or 
documentation as a notice of a billing error, including correcting 
the account in accordance with Sec.  226.13(e). This applies to 
transactions that take place outside a state, as defined in Sec.  
226.2(a), whether or not the creditor maintains procedures 
reasonably adapted to obtain the required information].

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[[Page 33055]]

    (a) Sale credit.
    [rtrif](1) Except as provided in paragraph (a)(2) of this section, 
for each credit transaction involving the sale of property or services, 
the creditor must disclose the amount and date of the transaction, and 
either:
    (i) A brief identification \17\ of the property or services 
purchased, for creditors and sellers that are the same or related; \18\ 
or
---------------------------------------------------------------------------

    \17\ [rtrif][Reserved][ltrif] [As an alternative to the brief 
identification, 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, and if the creditor treats an 
inquiry for clarification or documentation as a notice of a billing 
error, including correcting the account in accordance with Sec.  
226.13(e).]
    \18\ [rtrif][Reserved][ltrif] [An identification of property or 
services may be replaced by the seller's name and location of the 
transaction when: (1) The creditor and the seller are the same 
person; (2) the creditor's open-end plan has fewer than 15,000 
accounts; (3) the creditor provides the consumer with point-of-sale 
documentation for that transaction; and (4) the creditor treats an 
inquiry for clarification or documentation as a notice of a billing 
error, including correcting the account in accordance with Sec.  
226.13(e).]
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    (ii) The seller's name; and the city, and state or foreign country 
where the transaction took place.\19\ The creditor may omit the address 
or provide any suitable designation that helps the consumer to identify 
the transaction when the transaction took place at a location that is 
not fixed; took place in the consumer's home; or was a mail, Internet, 
or telephone order.
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    \19\ [rtrif][Reserved][ltrif] [The creditor may omit the address 
or provide any suitable designation that helps the consumer to 
identify the transaction when the transaction (1) took place at a 
location that is not fixed; (2) took place in the consumer's home; 
or (3) was a mail or telephone order.]
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    (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.[ltrif]
    [(a) Sale credit. For each credit transaction involving the sale of 
property or services, the following rules shall apply:
    (1) Copy of credit document provided. When an actual copy of the 
receipt or other credit document is provided with the first periodic 
statement reflecting the transaction, the transaction is sufficiently 
identified if the amount of the transaction and either the date of the 
transaction or the date of debiting the transaction to the consumer's 
account are disclosed on the copy or on the periodic statement.
    (2) Copy of credit document not provided--creditor and seller same 
or related person(s). When the creditor and the seller are the same 
person or related persons, and an actual copy of the receipt or other 
credit document is not provided with the periodic statement, the 
creditor shall disclose the amount and date of the transaction, and a 
brief identification of the property or services purchased.
    (3) Copy of credit document not provided--creditor and seller not 
same or related person(s). When the creditor and seller are not the 
same person or related persons, and an actual copy of the receipt or 
other credit document is not provided with the periodic statement, the 
creditor shall disclose the amount and date of the transaction; the 
seller's name; and the city, and state or foreign country where the 
transaction took place.]
    (b) Nonsale credit. [A nonsale credit transaction is sufficiently 
identified if the first periodic statement reflecting the transaction 
discloses] [rtrif]For each credit transaction not involving the sale of 
property or services, the creditor must disclose[ltrif] a brief 
identification of the transaction; \20\ the amount of the transaction; 
and at least one of the following dates: the date of the transaction, 
the date the transaction was debited to the consumer's account, or, if 
the consumer signed the credit document, the date appearing on the 
document. If an actual copy of the receipt or other credit document is 
provided and that copy shows the amount and at least one of the 
specified dates, the brief identification may be omitted.
---------------------------------------------------------------------------

    \20\ [rtrif][Reserved][ltrif] [See footnote 17].
---------------------------------------------------------------------------

    [rtrif](c) Alternative creditor procedures; consumer inquiries for 
clarification or documentation. The following procedures apply to 
creditors that treat an inquiry for clarification or documentation as a 
notice of a billing error, including correcting the account in 
accordance with Sec.  226.13(e):
    (1) Failure to disclose the information required by paragraphs (a) 
and (b) of this section is not a failure to comply with the regulation, 
provided that the creditor also maintains procedures reasonably 
designed to obtain and provide the information. This applies to 
transactions that take place outside a state, as defined in Sec.  
226.2(a), 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.[ltrif]
    11. Section 226.9 is amended by revising paragraphs (a), (b), (c), 
and (e), republishing paragraph (d) and (f), adding a new paragraph 
(g), and removing and reserving footnote 20a to read as follows:


Sec.  226.9  Subsequent disclosure requirements.

    (a) Furnishing statement of billing rights--
    (1) Annual statement. The creditor shall mail or deliver the 
billing rights statement required by [rtrif]Sec.  226.6(c)(2)[ltrif] 
[Sec.  226.6(d)] at least once per calendar year, at intervals of not 
less than 6 months nor more than 18 months, either to all consumers or 
to each consumer entitled to receive a periodic statement under Sec.  
226.5(b)(2) for any one billing cycle.
    (2) Alternative summary statement. As an alternative to paragraph 
(a)(1) of this section, the creditor may mail or deliver, on or with 
each periodic statement, a statement substantially similar to [that in 
appendix G] [rtrif]Model Forms G-4 and G-4(A) in appendix G, as 
applicable[ltrif].
    (b) Disclosures for supplemental credit [rtrif]access[ltrif] 
devices and additional features.
    (1) If a creditor, within 30 days after mailing or delivering the 
[initial] [rtrif]account-opening[ltrif] disclosures under [Sec.  
226.6(a)] [rtrif]Sec. Sec.  226.6(a)(1) or 226.6(b)(1), as 
applicable[ltrif], adds a credit feature to the consumer's account or 
mails or delivers to the consumer a credit [rtrif]access[ltrif] device 
[rtrif], including but not limited to checks that access a credit card 
account,[ltrif] for which the finance charge terms are the same as 
those previously disclosed, no additional disclosures are necessary. 
[rtrif]Except as provided in paragraph (b)(3) of this section, 
after[ltrif] [After] 30 days, if the creditor adds a credit feature or 
furnishes a credit [rtrif]access[ltrif] 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) [rtrif]Except as provided in paragraph (b)(3) of this section, 
whenever[ltrif] [Whenever] a credit feature is added or a credit 
[rtrif]access[ltrif] device is mailed or delivered, and the finance 
charge terms for the feature or device differ from disclosures 
previously given, the disclosures required by [Sec.  226.6(a)]

[[Page 33056]]

[rtrif]Sec. Sec.  226.6(a)(1) or 226.6(b)(1), as applicable[ltrif], 
that are applicable to the added feature or device shall be given 
before the consumer uses the feature or device for the first time.
    [rtrif](3) Checks that access a credit card account. (i) 
Disclosures. For open-end plans not subject to the requirements of 
Sec.  226.5b, if checks that can be used to access a credit card 
account are provided more than 30 days after account-opening 
disclosures under Sec.  226.6(b)(1) are given, or are provided within 
30 days of the account-opening disclosures and the finance charge terms 
for the checks differ from disclosures previously given, 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:
    (A) If an initial rate that applies to the checks is temporary and 
is lower than the rate that will apply after the temporary rate 
expires, the discounted initial rate and the time period during which 
the discounted initial rate will remain in effect. A creditor must use 
the term ``introductory'' or ``intro'' in immediate proximity to the 
listing of the discounted initial rate.
    (B) The type of rate that will apply to the checks (such as whether 
the purchase or cash advance rate applies) and the applicable annual 
percentage rate. If a discounted initial rate applies, a creditor must 
disclose the type of rate that will apply after the discounted initial 
rate expires, and the annual percentage rate that will apply after the 
discounted initial rate expires. In 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.
    (C) Any transaction fees applicable to the checks disclosed under 
Sec.  226.6(b)(1); 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. If no grace period is given, 
the issuer must state that no grace period applies and interest will be 
charged immediately.
    (ii) Accuracy. The disclosures in paragraph (b)(3)(i) of this 
section must be accurate as of the time the disclosures are given. A 
variable annual percentage rate is accurate if it was in effect within 
30 days of when the disclosures are given.[ltrif]
    (c) Change in terms.--(1) [Written notice required.] [rtrif]Rules 
affecting home equity plans. (i) Written notice required. For home 
equity plans subject to the requirements of Sec.  226.5b, 
whenever[ltrif] [Whenever] any term required to be disclosed under 
Sec.  226.6 [rtrif](a)[ltrif] 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[, or if a 
periodic rate or other finance charge is increased because of the 
consumer's delinquency or default]; the notice shall be given, however, 
before the effective date of the change.
    [rtrif](ii)[ltrif] [(2)] Notice not required. [rtrif]For home 
equity plans subject to the requirements of Sec.  226.5b, a creditor is 
not required to provide[ltrif] [No] notice under this section [is 
required] when the change involves [late payment charges, charges for 
documentary evidence, or over-the-limit charges;] a reduction of any 
component of a finance or other charge[; suspension of future credit 
privileges or termination of an account or plan;] or when the change 
results from an agreement involving a court proceeding[, or from the 
consumer's default or delinquency (other than an increase in the 
periodic rate or other finance charge)].
    [rtrif](iii)[ltrif] [(3)] [rtrif]Notice to restrict credit[ltrif] 
[Notice for home equity plans]. [rtrif]For home equity plans subject to 
the requirements of Sec.  226.5b, if the[ltrif] [If a] creditor 
prohibits additional extensions of credit or reduces the credit limit 
[applicable to a home equity plan] pursuant to Sec.  226.5b(f)(3)(i) or 
Sec.  226.5b(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.
    [rtrif](2) Rules affecting open-end (not home-secured) plans.
    (i) Changes where written advance notice is required. For plans 
other than home equity plans subject to the requirements of Sec.  
226.5b, except as provided in paragraphs (c)(2)(ii) and (c)(2)(iv) of 
this section, when a term required to be disclosed under Sec. Sec.  
226.6(b)(1), 226.6(b)(2) or 226.6(c)(1) is changed or the required 
minimum periodic payment is increased, a creditor must provide a 
written notice of the change at least 45 days prior to the effective 
date of the change to each consumer who may be affected. The 45-day 
timing requirement does not apply if the consumer has agreed to a 
particular change; the notice shall be given, however, before the 
effective date of the change. Increases in the rate applicable to a 
consumer's account due to delinquency, default or as a penalty 
described in paragraph (g) of this section that are not due to a change 
in the contractual terms of the consumer's account must be disclosed 
pursuant to paragraph 9(g) of this section instead of paragraph (c)(2) 
of this section.
    (ii) Charges not covered by Sec.  226.6(b)(4). Except as provided 
in paragraph (c)(2)(iv) of this section, if a creditor increases any 
component of a charge, or introduces a new charge, required to be 
disclosed under Sec.  226.6(b)(1) that is not required to be disclosed 
under Sec.  226.6(b)(4), a creditor may either, at its option:
    (A) Comply with the requirements of paragraphs (c)(2)(i) of this 
section, or
    (B) Provide notice of the amount of the charge at a relevant time 
before the consumer agrees to or becomes obligated to pay the charge. 
The notice may be provided orally or in writing.
    (iii) Disclosure requirements.
    (A) Changes to terms described in account-opening table. If a 
creditor changes a term required to be disclosed pursuant under Sec.  
226.6(b)(4), the creditor must provide the following information on the 
notice provided pursuant to paragraph (c)(2)(i) of this section:
    (1) A summary of the changes made to terms described in Sec.  
226.6(b)(4);
    (2) A statement that changes are being made to the account;
    (3) A statement indicating the consumer has the right to opt-out of 
these changes, if applicable, and a reference to additional information 
describing the opt out right provided in the notice, if applicable;
    (4) The date the changes will become effective;
    (5) If applicable, a statement that the consumer may find 
additional information about the summarized changes, and other changes 
to the account, in the notice; and
    (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.
    (B) Format requirements. (1) Tabular format. The summary of changes 
described in paragraph (c)(2)(iii)(A)(1)

[[Page 33057]]

of this section must be in a tabular format, with headings and format 
substantially similar to any of the account-opening tables found in G-
17 in appendix G. The table must disclose the changed term and 
information relevant to the change, if that relevant information is 
required by Sec.  226.6(b)(4). The new terms shall be described in the 
same level of detail as required when disclosing the terms under Sec.  
226.6(b)(4).
    (2) Notice included with periodic statement. If a notice required 
by paragraph (c)(2)(i) of this section is included on or with a 
periodic statement, the information described in paragraph 
(c)(2)(iii)(A)(1) of this section must be disclosed on the statement 
beginning on the front of the first page of the periodic statement 
directly above the grouping of transactions, credits, fees and interest 
required to be disclosed by Sec. Sec.  226.7(b)(2), 226.7(b)(3), and 
226.7(b)(6), but may continue on the front of the second page if 
necessary, so long as there is a reference on the first page indicating 
the information continues on the following page. The summary of changes 
described in paragraph (c)(1)(iii)(A)(1) of this section must 
immediately follow the information described in paragraph 
(c)(1)(iii)(A)(2) through (6) of this section, substantially similar to 
the format shown in Sample G-20 in appendix G.
    (3) Notice provided separately from periodic statement. If a notice 
required by paragraph (c)(2)(i) of this section is not included on or 
with a periodic statement, the information described in paragraph 
(c)(2)(iii)(A)(1) of this section must, at the creditor's option, be 
disclosed on the front of the first page of the notice or segregated on 
a separate page from other information given with the notice. The 
summary of changes required to be in a table pursuant to paragraph 
(c)(2)(iii)(A)(1) of this section may be on more than one page, and may 
use both the front and reverse sides, so long as the table begins on 
the front of the first page of the notice and there is a reference on 
the first page indicating that the table continues on the following 
page. The summary of changes described in paragraph (c)(2)(iii)(A)(1) 
of this section must immediately follow the information described in 
paragraph (c)(1)(iii)(A)(2) through (6) of this section, substantially 
similar to the format shown in Sample G-20 in appendix G.
    (iv) Notice not required. For open-end plans not subject to the 
requirements of Sec.  226.5b, a creditor is not required to provide 
notice under this section when the change involves charges for 
documentary evidence; a reduction of any component of a finance or 
other charge; suspension of future credit privileges (except as 
provided in paragraph (c)(2)(v) of this section) or termination of an 
account or plan; or when the change results from an agreement involving 
a court proceeding.
    (v) Reduction of the credit limit. For open-end plans that are not 
subject to the requirements of Sec.  226.5b, if a creditor decreases 
the credit limit on an account, advance notice of the decrease must be 
provided before an over-the-limit fee or a penalty rate can be imposed 
solely as a result of the consumer exceeding the newly decreased credit 
limit. Notice shall be provided in writing or orally at least 45 days 
prior to imposing the over-the-limit fee or penalty rate and shall 
state that the credit limit on the account has been or will be 
decreased.[ltrif]
    (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.  [rtrif]Sec. [ltrif] 226.5a, [Sec.  ] 
226.6 and [Sec.  ] 226.7.
    (e) Disclosures upon renewal of credit or charge card.
    (1) Notice prior to renewal. Except as provided in paragraph (e)(2) 
of this section, a card issuer that imposes any annual or other 
periodic fee to renew a credit or charge card account of the type 
subject to Sec.  226.5a, including any fee based on account activity or 
inactivity, shall mail or deliver written notice of the renewal to the 
cardholder. The notice shall be provided at least 30 days or one 
billing cycle, whichever is less, before the mailing or the delivery of 
the periodic statement on which the renewal fee is initially charged to 
the account. The notice shall contain the following information:
    (i) The disclosures contained in Sec.  226.5a(b)(1) through (7) 
that would apply if the account were renewed; 20a and
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    \20a\ [rtrif][Reserved][ltrif] [These disclosures need not be 
provided in tabular format or in a prominent location.]
---------------------------------------------------------------------------

    (ii) How and when the cardholder may terminate credit availability 
under the account to avoid paying the renewal fee.
    (2) Delayed notice. [rtrif]Alternatively,[ltrif] the disclosures 
required by paragraph (e)(1) of this section may be provided later than 
the time in paragraph (e)(1) of this section, but no later than the 
mailing or the delivery of the periodic statement on which the renewal 
fee is initially charged to the account, if the card issuer also 
discloses at that time that[rtrif]:[ltrif] [--]
    (i) The cardholder has 30 days from the time the periodic statement 
is mailed or delivered to avoid paying the fee or to have the fee 
recredited if the cardholder terminates credit availability under the 
account; and
    (ii) The cardholder may use the card during the interim period 
without having to pay the fee.
    (3) Notification on periodic statements. The disclosures required 
by this paragraph may be made on or with a periodic statement. If any 
of the disclosures are provided on the back of a periodic statement, 
the card issuer shall include a reference to those disclosures on the 
front of the statement.
    (f) Change in credit card account insurance provider--(1) Notice 
prior to change. If a credit card issuer plans to change the provider 
of insurance for repayment of all or part of the outstanding balance of 
an open-end credit card account of the type subject to Sec.  226.5a, 
the card issuer shall mail or deliver the cardholder written notice of 
the change not less than 30 days before the change in providers 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.

[[Page 33058]]

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.
    [rtrif](g) Increase in rates due to delinquency or default or as a 
penalty.
    (1) Increases subject to this section. For plans other than home 
equity plans subject to the requirements of Sec.  226.5b, a creditor 
must provide a written notice to each consumer who may be affected 
when:
    (i) A rate is increased due to the consumer's delinquency or 
default; or
    (ii) A rate is increased as a penalty for one or more events 
specified in the account agreement, such as making a late payment or 
obtaining an extension of credit that exceeds the credit limit.
    (2) Timing of written notice. Whenever any notice is required to be 
given pursuant to paragraph (g)(1) of this section, the creditor shall 
provide written notice of the increase in rates at least 45 days prior 
to the effective date of the increase. The notice must be provided 
after the occurrence of the events described in paragraphs (g)(1)(i) 
and (g)(1)(ii) of this section that trigger the imposition of the rate 
increase.
    (3)(i) Disclosure requirements for rate increases. If a creditor is 
increasing the rate due to delinquency or default or as a penalty, the 
creditor must provide the following information on the notice sent 
pursuant to paragraph (g)(1) of this section:
    (A) A statement that the consumer's actions have triggered the 
delinquency or default rate or penalty rate, as applicable;
    (B) The date on which the delinquency or default rate or penalty 
rate will apply;
    (C) The circumstances under which the delinquency or default rate 
or penalty rate, as applicable, will cease to apply to the consumer's 
account, or that the delinquency or default rate or penalty rate will 
remain in effect for a potentially indefinite time period; and
    (D) A statement indicating to which balances the delinquency or 
default rate or penalty rate will be applied, as applicable.
    (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 the first page of the 
periodic statement directly above the grouping of transactions, 
credits, fees and interest required to be disclosed by Sec. Sec.  
226.7(b)(2), 226.7(b)(3), and 226.7(b)(6), or above the notice 
described in paragraph (c)(2)(iii)(A) of this section if that notice is 
provided on the same statement.
    (B) If a notice required by paragraph (g)(1) of this section is not 
included on or with a periodic statement, the information described in 
paragraph (g)(3)(i) of this section must be disclosed on the front of 
the first page of the notice. Only information related to the increase 
in the rate to a penalty rate may be included with the notice, except 
that this notice may be combined with a notice described in paragraph 
(c)(2)(iii)(A) of this section.[ltrif]
    12. Section 226.10 is amended by republishing paragraphs (a) and 
(c), and revising paragraph (b) to read as follows:


Sec.  226.10  Prompt crediting of payments.

    (a) General rule. A creditor shall credit a payment to the 
consumer's account as of the date of receipt, except when a delay in 
crediting does not result in a finance or other charge or except as 
provided in paragraph (b) of this section.
    (b) Specific requirements for payments. If a creditor specifies, on 
or with the periodic statement, requirements for the consumer to follow 
in making payments, but accepts a payment that does not conform to the 
requirements, the creditor shall credit the payment within five days of 
receipt. [rtrif](See Sec.  226.7(b)(11) for disclosure requirements for 
certain cut-off times for plans other than home equity plans subject to 
the requirements of Sec.  226.5b.)[ltrif]
    (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.
    13. Section 226.11 is revised to read as follows:


Sec.  226.11  Treatment of credit balances[rtrif]; account 
termination[ltrif].

    [rtrif](a) Credit balances.[ltrif] 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--
    [rtrif](1)[ltrif][(a)] Credit the amount of the credit balance to 
the consumer's account;
    [rtrif](2)[ltrif][(b)] Refund any part of the remaining credit 
balance within seven business days from receipt of a written request 
from the consumer;
    [rtrif](3)[ltrif][(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 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.
    [rtrif](b) Account termination.
    (1) Creditors 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 
consecutive months. An account is inactive if no credit has been 
extended (such as by purchase, cash advance or balance transfer) and if 
the account has no outstanding balance.[ltrif]
    14. Section 226.12 is amended by republishing paragraphs (a), (d), 
(e), (f), and (g), revising paragraphs (b) and (c), and removing and 
reserving footnotes 21 through 26 to read as follows:


Sec.  226.12  Special credit card provisions.

    (a) Issuance of credit cards. Regardless of the purpose for which a 
credit card is to be used, including business, commercial, or 
agricultural use, no credit card shall be issued to any person except--
    (1) In response to an oral or written request or application for 
the card; or
    (2) As a renewal of, or substitute for, an accepted credit 
card.\21\
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    \21\ [rtrif][Reserved][ltrif] [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 this paragraph 
becomes an accepted credit card when received by the cardholder.]

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[[Page 33059]]

    (b) Liability of cardholder for unauthorized use--(1) [rtrif](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)[ltrif] Limitation on amount. The liability of a cardholder for 
unauthorized use \22\ of a credit card shall not exceed the lesser of 
$50 or the amount of money, property, labor, or services obtained by 
the unauthorized use before notification to the card issuer under 
paragraph (b)(3) of this section.
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    \22\ [rtrif][Reserved][ltrif] [``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.]
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    (2) Conditions of liability. A cardholder shall be liable for 
unauthorized use of a credit card only if:
    (i) The credit card is an accepted credit card;
    (ii) The card issuer has provided adequate notice \23\ of the 
cardholder's maximum potential liability and of means by which the card 
issuer may be notified of loss or theft of the card. The notice shall 
state that the cardholder's liability shall not exceed $50 (or any 
lesser amount) and that the cardholder may give oral or written 
notification, and shall describe a means of notification (for example, 
a telephone number, an address, or both); and
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    \23\ [rtrif][Reserved][ltrif] [``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.]
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    (iii) The card issuer has provided a means to identify the 
cardholder on the account or the authorized user of the card.
    (3) Notification to card issuer. Notification to a card issuer is 
given when steps have been taken as may be reasonably required in the 
ordinary course of business to provide the card issuer with the 
pertinent information about the loss, theft, or possible unauthorized 
use of a credit card, regardless of whether any particular officer, 
employee, or agent of the card issuer does, in fact, receive the 
information. Notification may be given, at the option of the person 
giving it, in person, by telephone, or in writing. Notification in 
writing is considered given at the time of receipt or, whether or not 
received, at the expiration of the time ordinarily required for 
transmission, whichever is earlier.
    (4) Effect of other applicable law or agreement. If state law or an 
agreement between a cardholder and the card issuer imposes lesser 
liability than that provided in this paragraph, the lesser liability 
shall govern.
    (5) Business use of credit cards. If 10 or more credit cards are 
issued by one card issuer for use by the employees of an organization, 
this section does not prohibit the card issuer and the organization 
from agreeing to liability for unauthorized use without regard to this 
section. However, liability for unauthorized use may be imposed on an 
employee of the organization, by either the card issuer or the 
organization, only in accordance with this section.
    (c) Right of cardholder to assert claims or defenses against card 
issuer \24\--(1) General rule. When a person who honors a credit card 
fails to resolve satisfactorily a dispute as to property or services 
purchased with the credit card in a consumer credit transaction, the 
cardholder may assert against the card issuer all claims (other than 
tort claims) and defenses arising out of the transaction and relating 
to the failure to resolve the dispute. The cardholder may withhold 
payment up to the amount of credit outstanding for the property or 
services that gave rise to the dispute and any finance or other charges 
imposed on that amount.\25\
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    \24\ [rtrif][Reserved][ltrif] [This paragraph 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].
    \25\ [rtrif][Reserved][ltrif] [The amount of the claim or 
defense that the cardholder may assert shall not exceed the amount 
of credit outstanding for the disputed transaction at the time the 
cardholder first notifies the card issuer or the person honoring the 
credit card of the existence of the claim or defense. To determine 
the amount of credit outstanding for purposes of this section, 
payments and other credits shall be applied to: (1) Late charges in 
the order of entry to the account; then to (2) finance charges in 
the order of entry to the account; and then to (3) any other debits 
in the order of entry to the account. If more than one item is 
included in a single extension of credit, credits are to be 
distributed pro rata according to prices and applicable taxes.]
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    (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. [rtrif](i) General.[ltrif] The rights stated in 
paragraphs (c)(1) and (2) of this section apply only if:
    [(i)] [rtrif](A)[ltrif] The cardholder has made a good faith 
attempt to resolve the dispute with the person honoring the credit 
card; and
    [(ii)] [rtrif](B)[ltrif] 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.\26\
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    \26\ [rtrif][Reserved][ltrif] [The limitations stated in 
paragraph (c)(3)(i)(A) of this section shall not apply when the 
person honoring the credit card: (1) Is the same person as the card 
issuer; (2) is controlled by the card issuer directly or indirectly; 
(3) is under the direct or indirect control of a third person that 
also directly or indirectly controls the card issuer; (4) controls 
the card issuer directly or indirectly; (5) is a franchised dealer 
in the card issuer's products or services; or (6) has obtained the 
order for the disputed transaction through a mail solicitation made 
or participated in by the card issuer.]
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    [rtrif](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.[ltrif]
    (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

[[Page 33060]]

issuer (subject to the limitations in Sec.  226.13(d)(1)).
    (e) Prompt notification of returns and crediting of refunds. (1) 
When a creditor other than the card issuer accepts the return of 
property or forgives a debt for services that is to be reflected as a 
credit to the consumer's credit card account, that creditor shall, 
within seven business days from accepting the return or forgiving the 
debt, transmit a credit statement to the card issuer through the card 
issuer's normal channels for credit statements.
    (2) The card issuer shall, within three business days from receipt 
of a credit statement, credit the consumer's account with the amount of 
the refund.
    (3) If a creditor other than a card issuer routinely gives cash 
refunds to consumers paying in cash, the creditor shall also give 
credit or cash refunds to consumers using credit cards, unless it 
discloses at the time the transaction is consummated that credit or 
cash refunds for returns are not given. This section does not require 
refunds for returns nor does it prohibit refunds in kind.
    (f) Discounts; tie-in arrangements. No card issuer may, by contract 
or otherwise:
    (1) Prohibit any person who honors a credit card from offering a 
discount to a consumer to induce the consumer to pay by cash, check, or 
similar means rather than by use of a credit card or its underlying 
account for the purchase of property or services; or
    (2) Require any person who honors the card issuer's credit card to 
open or maintain any account or obtain any other service not essential 
to the operation of the credit card plan from the card issuer or any 
other person, as a condition of participation in a credit card plan. If 
maintenance of an account for clearing purposes is determined to be 
essential to the operation of the credit card plan, it may be required 
only if no service charges or minimum balance requirements are imposed.
    (g) Relation to Electronic Fund Transfer Act and Regulation E. For 
guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12 
CFR part 205) applies in instances involving both credit and electronic 
fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a) 
regarding issuance and liability for unauthorized use. On matters other 
than issuance and liability, this section applies to the credit aspects 
of combined credit/electronic fund transfer transactions, as 
applicable.
    15. Section 226.13 is amended by revising paragraphs (a), (b), (d), 
and (g), republishing paragraphs (c), (e), (f), (h), and (i), and 
removing and reserving footnotes 27 through 31 to read as follows:


Sec.  226.13  Billing error resolution.\27\
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    \27\ [rtrif][Reserved][ltrif] [A creditor shall not accelerate 
any part of the consumer's indebtedness or restrict or close a 
consumer's account solely because the consumer has exercised in good 
faith rights provided by this section. A creditor may be subject to 
the forfeiture penalty under section 161(e) of the Act for failure 
to comply with any of the requirements of this section.]
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    (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.  [rtrif]Sec. Sec.  226.7(a)(2) or (b)(2), as 
applicable[ltrif] [226.7(b)] and 226.8.
    (3) A reflection on or with a periodic statement of an extension of 
credit for property or services not accepted by the consumer or the 
consumer's designee, or not delivered to the consumer or the consumer's 
designee as agreed.
    (4) A reflection on a periodic statement of the creditor's failure 
to credit properly a payment or other credit issued to the consumer's 
account.
    (5) A reflection on a periodic statement of a computational or 
similar error of an accounting nature that is made by the creditor.
    (6) A reflection on a periodic statement of an extension of credit 
for which the consumer requests additional clarification, including 
documentary evidence.
    (7) The creditor's failure to mail or deliver a periodic statement 
to the consumer's last known address if that address was received by 
the creditor, in writing, at least 20 days before the end of the 
billing cycle for which the statement was required.
    (b) Billing error notice.\28\ A billing error notice is a written 
notice \29\ from a consumer that:
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    \28\ [rtrif][Reserved][ltrif] [The creditor need not comply with 
the requirements of paragraphs (c) through (g) of this section if 
the consumer concludes that no billing error occurred and 
voluntarily withdraws the billing error notice].
    \29\ [rtrif][Reserved][ltrif] [The creditor may require that the 
written notice not be made on the payment medium or other material 
accompanying the periodic statement if the creditor so stipulates in 
the billing rights statement required by Sec. Sec.  226.6(d) and 
226.9(a)].
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    (1) Is received by a creditor at the address disclosed under 
[rtrif]Sec. Sec.  226.7(a)(9) or (b)(9), as applicable,[ltrif] [Sec.  
226.7(k)] 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).\30\ If the cardholder [maintains a deposit account with the 
card issuer and] [rtrif]has enrolled in an automatic payment plan 
offered by the card issuer and[ltrif] 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.
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    \30\ [rtrif][Reserved][ltrif] [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.]
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    (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

[[Page 33061]]

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.
    [rtrif](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 would be subject to the forfeiture penalty under 
section 161(e) of the Act for failure to comply with any of the 
requirements of this section.
    (4) Permitted creditor actions. A creditor is not prohibited from 
taking action to collect any undisputed portion of the item or bill; 
from deducting any disputed amount and related finance or other charges 
from the consumer's credit limit on the account; or from reflecting a 
disputed amount and related finance or other charges on a periodic 
statement, provided that the creditor indicates on or with the periodic 
statement that payment of any disputed amount and related finance or 
other charges is not required pending the creditor's compliance with 
this section.[ltrif]
    (e) Procedures if billing error occurred as asserted. If a creditor 
determines that a billing error occurred as asserted, it shall within 
the time limits in paragraph (c)(2) of this section:
    (1) Correct the billing error and credit the consumer's account 
with any disputed amount and related finance or other charges, as 
applicable; and
    (2) Mail or deliver a correction notice to the consumer.
    (f) Procedures if different billing error or no billing error 
occurred. If, after conducting a reasonable investigation,\31\ a 
creditor determines that no billing error occurred or that a different 
billing error occurred from that asserted, the creditor shall within 
the time limits in paragraph (c)(2) of this section:
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    \31\ [rtrif][Reserved][ltrif] [If a consumer submits a billing 
error notice alleging either the nondelivery of property or services 
under paragraph (a)(3) of this section or that information appearing 
on a periodic statement is incorrect because a person honoring the 
consumer's credit card has made an incorrect report to the card 
issuer, 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 or that 
the information was correct].
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    (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. Sec.  
226.6(a)(1) [rtrif]or 226.6(b)(1), as applicable[ltrif], and 
[rtrif]226.7(a)(8) or (b)(8), as applicable[ltrif] [226.7(j)], 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. Sec.  
226.6(a)(1) [rtrif]or 226.6(b)(1), as applicable[ltrif], and 
[rtrif]226.7(a)(8) or (b)(8), as applicable[ltrif] [226.7(j)] or 10 
days (whichever is longer) during which the consumer can pay the 
amount; but
    (4) May not report that an amount or account is delinquent because 
the amount due under paragraph (g)(1) of the section remains unpaid, if 
the creditor receives (within the time allowed for payment in paragraph 
(g)(3) of this section) further written notice from the consumer that 
any portion of the billing error is still in dispute, unless the 
creditor also:
    (i) Promptly reports that the amount or account is in dispute;
    (ii) Mails or delivers to the consumer (at the same time the report 
is made) a written notice of the name and address of each person to 
whom the creditor makes a report; and
    (iii) Promptly reports any subsequent resolution of the reported 
delinquency to all persons to whom the creditor has made a report.
    (h) Reassertion of billing error. A creditor that has fully 
complied with the requirements of this section has no further 
responsibilities under this section (other than as provided in 
paragraph (g)(4) of this section) if a consumer reasserts substantially 
the same billing error.
    (i) Relation to Electronic Fund Transfer Act and Regulation E. If 
an extension of credit is incident to an electronic fund transfer, 
under an agreement between a consumer and a financial institution to 
extend credit when the consumer's account is overdrawn or to maintain a 
specified minimum balance in the consumer's account, the creditor shall 
comply with the requirements of Regulation E, 12 CFR 205.11 governing 
error resolution rather than those of paragraphs (a), (b), (c), (e), 
(f), and (h) of this section.
    16. Section 226.14 is amended by revising paragraphs (a), (b), (c), 
and (d), adding a new paragraph (e), and by removing and reserving 
footnotes 31a through 35 to read as follows:


Sec.  226.14  Determination of annual percentage rate.

    (a) General rule. The annual percentage rate is a measure of the 
cost of credit, expressed as a yearly rate. An annual percentage rate 
shall be considered accurate if it is not more than \1/8\ of 1 
percentage point above or below the annual percentage rate determined 
in accordance with this section.\31a\ [rtrif]An error in disclosure of 
the annual percentage rate or finance charge shall not, in itself, be 
considered a violation of this regulation if:
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    \31a\ [rtrif][Reserved][ltrif] [An error in disclosure of the 
annual percentage rate or finance charge shall not, in itself, be 
considered a violation of this regulation 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 Board in writing of the error in the 
calculation tool.]
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    (1) The error resulted from a corresponding error in a calculation 
tool used in good faith by the creditor; and
    (2) Upon discovery of the error, the creditor promptly discontinues 
use of that calculation tool for disclosure purposes, and notifies the 
Board in writing of the error in the calculation tool.[ltrif]
    (b) Annual percentage rate [rtrif]--in general[ltrif] [for 
Sec. Sec.  226.5a and 226.5b disclosures, for initial disclosures, and 
for advertising purposes]. Where one or more periodic rates may be used 
to compute the finance charge, the annual percentage rate(s) to be 
disclosed for purposes of Sec. Sec.  226.5a, 226.5b, 226.6, 
[rtrif]226.7(a)(4) or (b)(4), 226.9, 226.15,[ltrif] [and] 226.16 
[rtrif], and 226.26[ltrif] shall be computed by multiplying each 
periodic rate by the number of periods in a year.
    (c) [rtrif]Effective[ltrif] annual percentage rate [rtrif]for home 
equity plans[ltrif] [for periodic statements]. [The annual percentage 
rate(s) to be disclosed for purposes of Sec.  226.7(d) shall be

[[Page 33062]]

computed by multiplying each periodic rate by the number of periods in 
a year and, for purposes of Sec.  226.7(g), shall be determined as 
follows:]
    ALTERNATIVE 1--PARAGRAPH (c) INTRODUCTORY TEXT.
    [rtrif]For home equity plans subject to the requirements of Sec.  
226.5b, a creditor may, at its option, disclose an effective annual 
percentage rate(s) pursuant to Sec.  226.7(b)(7) and compute the annual 
percentage rate in accordance with paragraph (d) of this section. 
Alternatively, the creditor may disclose an effective annual percentage 
rate pursuant to Sec.  226.7(a)(7) and compute the rate as follows:
    ALTERNATIVE 2--PARAGRAPH (c) INTRODUCTORY TEXT.
    A creditor need not disclose an effective annual percentage rate. 
For home equity plans subject to the requirements of Sec.  226.5b, a 
creditor may, at its option, disclose an effective annual percentage 
rate(s) pursuant to Sec.  226.7(a)(7) and compute the effective annual 
percentage rate as follows:[ltrif]
    (1) [rtrif]Solely periodic rates imposed.[ltrif] 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) [rtrif]Minimum or fixed charge, but not transaction charge, 
imposed.[ltrif] If the finance charge imposed during the billing cycle 
is or includes a minimum, fixed, or other charge not due to the 
application of a periodic rate, other than a charge with respect to any 
specific transaction during the billing cycle, by dividing the total 
finance charge for the billing cycle by the amount of the balance(s) to 
which it is applicable \32\ and multiplying the quotient (expressed as 
a percentage) by the number of billing cycles in a year.\33\ [rtrif]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.[ltrif]
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    \32\ [rtrif][Reserved][ltrif] [If there is no balance to which 
the finance charge is applicable, an annual percentage rate cannot 
be determined under this section.]
    \33\ [rtrif][Reserved][ltrif] [Where the finance charge imposed 
during the billing cycle is or includes a loan fee, points, or 
similar charge that relates to the opening of the account, the 
amount of such charge shall not be included in the calculation of 
the annual percentage rate.]
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    (3) [rtrif]Transaction charge imposed.[ltrif] If the finance charge 
imposed during the billing cycle is or includes a charge relating to a 
specific transaction during the billing cycle (even if the total 
finance charge also includes any other minimum, fixed, or other charge 
not due to the application of a periodic rate), by dividing the total 
finance charge imposed during the billing cycle by the total of all 
balances and other amounts on which a finance charge was imposed during 
the billing cycle without duplication, and multiplying the quotient 
(expressed as a percentage) by the number of billing cycles in a 
year,\34\ except that the annual percentage rate shall not be less than 
the largest rate determined by multiplying each periodic rate imposed 
during the billing cycle by the number of periods in a year.\35\ 
[rtrif]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 regarding determination of the denominator of the 
fraction under this paragraph.[ltrif]
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    \34\ [rtrif][Reserved][ltrif] [See appendix F regarding 
determination of the denominator of the fraction under this 
paragraph.]
    \35\ [rtrif][Reserved][ltrif] [See footnote 33.]
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    (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 (3) of this section.
    [rtrif](5)[ltrif] [(d)] Calculations where daily periodic rate 
applied. If the provisions of paragraph (c)(1)(ii) or (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:
    [rtrif](i)[ltrif] [(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
    [rtrif](ii)[ltrif] [(2)] By dividing the total finance charge by 
the sum of the daily balances and multiplying the quotient by 365.
    ALTERNATIVE 1 ONLY.--PARAGRAPHS (d) AND (e).
    (d) Effective annual percentage rates for open-end (not home-
secured) plans. For plans not subject to the requirements of Sec.  
226.5b, the effective annual percentage rate shall be disclosed 
pursuant to Sec.  226.7(b)(7) and computed as follows:
    (1) Solely periodic rates imposed. If the finance charge identified 
in paragraph (e) of this section is determined solely by applying one 
or more periodic rates used to calculate interest, by multiplying each 
periodic rate by the number of periods in a year.
    (2) Minimum or fixed charge, but not transaction charge, imposed. 
If the finance charge identified in paragraph (e) of this section 
imposed during the billing cycle is or includes a minimum charge or 
other charge not attributable to a periodic rate used to calculate 
interest, and does not include a charge that relates to any specific 
transaction during the billing cycle, as follows:
    (i) Multifeatured plans. For multifeatured plans, by feature, as 
follows:
    (A) Purchases. Except as provided in paragraph (d)(4) of this 
section, for purchase transactions, by totaling the minimum charges and 
other charges identified in paragraph (e) of this section that are not 
attributable to periodic rates used to calculate interest and not 
related to a specific transaction, and any finance charge identified in 
paragraph (e) of this section attributable to periodic rates used to 
calculate interest on purchase balances, dividing that total by the 
amount of the balance to which such charges are 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 such charges 
are applicable, an annual percentage rate cannot be determined under 
this paragraph (d)(2)(i)(A) and shall be disclosed as 0.00%. If a 
portion of the finance charge described in this paragraph (d)(2)(i)(A) 
is determined by the application of one or more daily periodic rates, 
the annual percentage rate may be determined, at the creditor's option, 
by dividing the total of the finance charges determined above by the 
average of the daily purchase balances and multiplying the quotient by 
the number of billing cycles in a year; or by dividing the total 
finance charge by the sum of the daily purchase balances, and 
multiplying the quotient by 365.

[[Page 33063]]

    (B) Other features. For other features, by multiplying each 
applicable periodic rate by the number of periods in a year. If there 
is no balance on a feature to which a periodic interest rate is 
applicable, the annual percentage rate for that feature shall be 
disclosed as 0.00%.
    (ii) Single-featured plans. Subject to paragraph (d)(4) of this 
section, for single-featured plans, the annual percentage rate shall be 
determined by dividing the total finance charge identified in paragraph 
(e) of this section by the amount of the balance(s) to which such 
charge 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 such charges are applicable, an annual percentage rate 
cannot be determined under this paragraph and shall be disclosed as 
0.00%. If a portion of the finance charge described in this paragraph 
is determined by the application of one or more daily periodic rates, 
the annual percentage rate may be determined, at the creditor's option, 
by dividing the total finance charge by the average of the daily 
purchase balances and multiplying the quotient by the number of billing 
cycles in a year; or by dividing the total finance charge by the sum of 
the daily purchase balances, and multiplying the quotient by 365.
    (3) Transaction charge imposed. If any finance charge imposed 
during the billing cycle is identified in paragraph (e) of this section 
and is or includes a charge relating to a specific transaction during 
the billing cycle, as follows:
    (i) Multifeatured plans. For multifeatured plans, by feature, as 
follows:
    (A) Purchases. Except as provided in paragraph (d)(4) of this 
section, for purchase transactions, by totaling the minimum charges and 
other charges identified in Sec.  226.14(e) that are not attributable 
to periodic rates used to calculate interest and not related to a 
specific transaction, any finance charges identified in paragraph (e) 
of this section attributable to periodic rates used to calculate 
interest applicable to purchase transactions, and any charges 
identified in paragraph (e) of this section relating to a specific 
purchase transaction, dividing that total by the total of all balances 
and other amounts to which such charges are applicable 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 on 
purchase transactions by the number of periods in a year. See appendix 
F regarding determination of the denominator of the fraction under this 
paragraph (e)(3)(i)(A).
    (B) Other features. Except as provided in paragraph (d)(4) of this 
section, for other types of transactions, by totaling any finance 
charge identified in paragraph (e) of this section attributable to 
periodic rates used to calculate interest for the type of transaction, 
and any charges identified in paragraph (e) of this section relating to 
a specific transaction of that type, dividing that total by the total 
of all balance(s) and other amounts to which such charges are 
applicable 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 on that type of transaction by the number of periods in a year. 
See appendix F regarding determination of the denominator of the 
fraction under this paragraph (e)(3)(i)(B).
    (ii) Single-featured plans. Subject to paragraph (d)(4) of this 
section, for single-featured plans, the annual percentage rate shall be 
determined by dividing the total finance charge identified in paragraph 
(e) of this section by the total of all balance(s) and other amounts to 
which such charges are applicable 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. 
See appendix F regarding determination of the denominator of the 
fraction under this paragraph (e)(3)(ii).
    (4) If the finance charge identified in paragraph (e) of this 
section imposed during the billing cycle is or includes a minimum 
charge or other charge not attributable to periodic rates used to 
calculate interest and the total finance charge identified in paragraph 
(e) of this section imposed during the billing cycle does not exceed 
$1.00 for a monthly or longer billing cycle, or the pro rata part of 
$1.00 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 (d)(2) 
and (3) of this section.
    (e) Finance charges to be included in the calculation of the 
effective annual percentage rate under Sec.  226.14(d). (1) Subject to 
paragraph (e)(2) of this section, for purposes of the calculations in 
paragraph (d) of this section, only the following finance charges shall 
be included:
    (i) Charges attributable to a periodic rate used to calculate 
interest;
    (ii) Charges that relate to a specific transaction;
    (iii) Charges related to required credit insurance or debt 
cancellation or debt suspension coverage;
    (iv) Minimum charges imposed if, and only if, a charge would 
otherwise have been determined by applying a periodic rate used to 
calculate interest to a balance except for the fact that such charge is 
smaller than the minimum; and
    (v) Charges based on the account balance, account activity or 
inactivity, or the amount of credit available;
    (2) Notwithstanding paragraph (e)(1) of this section, the following 
finance charges shall not be included for purposes of the calculations 
in paragraph (d) of this section:
    (i) A charge related to opening the account; or
    (ii) A charge related to continuing or renewing the account and 
imposed not more often than annually.[ltrif]
    17. Section 226.16 is amended by republishing paragraph (a), 
revising paragraphs (b), (c), and (d), adding new paragraphs (e), (f), 
and (g), and removing and reserving footnote 36d and footnote 36e to 
read as follows:


Sec.  226.16  Advertising.

    (a) Actually available terms. If an advertisement for credit states 
specific credit terms, it shall state only those terms that actually 
are or will be arranged or offered by the creditor.
    (b) Advertisement of terms that require additional disclosures.
    [rtrif](1) Any term required to be disclosed under Sec.  
226.6(b)(1) 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. Sec.  226.6(a)(1) or 226.6(a)(2) set forth affirmatively or 
negatively in an advertisement for a home equity plan subject to the 
requirements of Sec.  226.5b triggers additional disclosures under this 
section.[ltrif] If any of the terms [rtrif]that trigger additional 
disclosures under paragraph (b)(1) of this section[ltrif] [required to 
be disclosed under Sec.  226.6] is set forth in an advertisement, the 
advertisement shall also clearly and conspicuously set forth the 
following:\36d\
---------------------------------------------------------------------------

    \36d\ [rtrif][Reserved][ltrif] [The disclosures given in 
accordance with Sec.  226.5a do not constitute advertising terms for 
purposes of the requirements of this section.]

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

[[Page 33064]]

    [rtrif](i)[ltrif] [(1)] Any minimum, fixed, transaction, activity 
or similar charge [rtrif]that is a finance charge under Sec.  
226.4[ltrif] that could be imposed.
    [rtrif](ii)[ltrif] [(2)] Any periodic rate that may be applied 
expressed as an annual percentage rate as determined under Sec.  
226.14(b). If the plan provides for a variable periodic rate, that fact 
shall be disclosed.
    [rtrif](iii)[ltrif] [(3)] Any membership or participation fee that 
could be imposed.
    [rtrif](2) If an advertisement for credit to finance the purchase 
of specific goods or services states a minimum monthly payment, the 
advertisement shall also state the total of payments and the time 
period to repay the obligation, assuming that the consumer makes only 
the minimum payment required for each periodic statement. The 
disclosure of the total of payments and the time period to repay the 
obligation must be equally prominent to the statement of the minimum 
monthly payment.[ltrif]
    (c) Catalogs or other multiple-page advertisements; electronic 
advertisements.
    (1) If a catalog or other multiple-page advertisement, or an 
[rtrif]electronic[ltrif] advertisement [rtrif](such as an advertisement 
appearing on an Internet Web site)[ltrif] [using electronic 
communication], gives information in a table or schedule in sufficient 
detail to permit determination of the disclosures required by paragraph 
(b) of this section, it shall be considered a single advertisement if:
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of terms set forth in Sec.  226.6 appearing 
anywhere else in the catalog or advertisement clearly refers to the 
page or location where the table or schedule begins.
    (2) A catalog or other multiple-page advertisement or an 
[rtrif]electronic[ltrif] advertisement [rtrif](such as an advertisement 
appearing on an Internet Web site)[ltrif] [using electronic 
communication] 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.
    [rtrif](3) For an advertisement that is accessed by the consumer in 
electronic form, the disclosures required under this section must be 
provided to the consumer in electronic form on or with the 
advertisement.[ltrif]
    (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 [rtrif]Sec.  
226.6(a)(6)[ltrif] [Sec.  226.6(a) or (b)] 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.  226.5b, the 
advertisement also shall clearly and conspicuously set forth the 
following:
    (i) Any loan fee that is a percentage of the credit limit under the 
plan and an estimate of any other fees imposed for opening the plan, 
stated as a single dollar amount or a reasonable range.
    (ii) Any periodic rate used to compute the finance charge, 
expressed as an annual percentage rate as determined under Sec.  
226.14(b).
    (iii) The maximum annual percentage rate that may be imposed in a 
variable-rate plan.
    (2) Discounted and premium rates. If an advertisement states an 
initial annual percentage rate that is not based on the index and 
margin used to make later rate adjustments in a variable-rate plan, the 
advertisement also shall state the period of time such rate will be in 
effect, and, with equal prominence to the initial rate, 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 about 
any minimum periodic payment, the advertisement also shall state, if 
applicable, that a balloon payment may result.\36e\ [rtrif]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.[ltrif]
---------------------------------------------------------------------------

    \36e\ [rtrif][Reserved][ltrif] [See footnote 10b.]
---------------------------------------------------------------------------

    (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.
    (5) Misleading terms. An advertisement may not refer to a home 
equity plan as ``free money'' or contain a similarly misleading term.
    [rtrif](e) Introductory Rates.
    (1) Scope. The requirements of this paragraph apply to any written 
or electronic advertisement of an open-end (not home-secured) plan, 
including promotional materials accompanying applications or 
solicitations subject to Sec.  226.5a(c) or accompanying applications 
or solicitations subject to Sec.  226.5a(e).
    (2) Definitions. The term introductory rate means any rate of 
interest applicable to a credit card account for an introductory period 
if that rate is less than the advertised annual percentage rate that 
will be in effect at the end of the introductory period. An 
``introductory period'' means the maximum time period for which the 
introductory rate may be applicable.
    (3) Stating the term ``introductory''. If any annual percentage 
rate that may be applied to the account is an introductory rate, the 
term introductory or intro must be in immediate proximity to each 
listing of the introductory rate.
    (4) Stating the introductory period and post-introductory rate. If 
any annual percentage rate that may be applied to the account is an 
introductory rate, the following must be stated in a clear and 
conspicuous manner in a prominent location closely proximate to the 
first listing of the introductory rate:
    (i) When the introductory rate will end; and
    (ii) The annual percentage rate that will apply after the end of 
the introductory period. If such rate is variable, the annual 
percentage rate must comply with the accuracy standards in Sec. Sec.  
226.5a(c)(2), 226.5a(e)(4), or 226.16(b)(1)(ii) as applicable. If such 
rate cannot be determined at the time disclosures are given because the 
rate depends on a later determination of the consumer's 
creditworthiness, the advertisement must disclose the specific rates or 
the range of rates that might apply.
    (5) Envelope excluded. The requirements in paragraph (e)(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.[ltrif]
    [rtrif](f) Alternative disclosures--television or radio 
advertisements. An advertisement made through television or radio 
stating any of the terms requiring additional disclosures under 
paragraph (b)(1) of this section may alternatively comply with 
paragraph (b)(1) of this section by stating the information required by 
paragraph (b)(1)(ii) of this section, and listing a toll-free telephone 
number along with a reference that such number may be used by consumers 
to obtain the additional cost information.[ltrif]
    [rtrif](g) 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.[ltrif]

[[Page 33065]]

    18. In Part 226, Appendix E is revised to read as follows:

Appendix E to Part 226--Rules for Card Issuers That Bill on a 
Transaction-by-Transaction Basis

    The following provisions of Subpart B apply if credit cards are 
issued and [(1)] the card issuer and the seller are the same or 
related persons; [(2)] no finance charge is imposed; [(3)] 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 [(4)] no cumulative account is 
maintained which reflects the transactions by each consumer during a 
period of time, such as a month[:][rtrif]. 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.[ltrif]
    [rtrif]1.[ltrif] Section [rtrif]226.6(c)(2)[ltrif] [226.6(d)], 
and, as applicable, [rtrif]Sec. Sec.  226.6(1)(i)(B) and 
226.6(c)(1)[ltrif] [section 226.6(b) and (c)]. The disclosure 
required by [rtrif]Sec.  226.6(b)(1)(i)(B)[ltrif] [section 226.6(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. [rtrif]A tabular format is not 
required.[ltrif]
    [rtrif]2.[ltrif] Section [rtrif]226.7(a)(2) or Sec.  
226.7(b)(2), as applicable; Sec.  226.7(a)(9) or Sec.  226.7(b)(9), 
as applicable[ltrif] [226.7(b) and 226.7(k)]. Creditors may comply 
by placing the required disclosures on the invoice or statement sent 
to the consumer for each transaction.
    [rtrif]3.[ltrif] Section 226.9(a). Creditors may comply by 
mailing or delivering the statement required by [rtrif]Sec.  
226.6(c)(2)[ltrif] [section 226.6(d)] (see appendix G-3) 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 [rtrif]Sec.  226.6(c)(2)[ltrif] [section 226.6(d)] or 
an alternative billing error rights statement substantially similar 
to that in appendix G-4, with each invoice sent to a consumer.
    [rtrif]4.[ltrif] Section 226.9(c). [rtrif]A tabular format is 
not required.[ltrif]
    [rtrif]5.[ltrif] Section 226.10.
    [rtrif]6.[ltrif] Section 226.11 [rtrif](a)[ltrif]. 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.
    [rtrif]7.[ltrif] Section 226.12 including [rtrif]Sec. [ltrif] 
[section] 226.12(c) and (d), as applicable. Section 226.12(e) is 
inapplicable.
    [rtrif]8.[ltrif] Section 226.13, as applicable. All references 
to periodic statement shall be read to indicate the invoice or other 
statement for the relevant transaction. All actions with regard to 
correcting and adjusting a consumer's account may be taken by 
issuing a refund or a new invoice, or by other appropriate means 
consistent with the purposes of the section.
    [rtrif]9.[ltrif] Section 226.15, as applicable.

    19. In Part 226, Appendix F is revised to read as follows:

Appendix F to Part 226--Annual Percentage Rate Computations for Certain 
Open-End Credit Plans

    In determining the denominator of the fraction under Sec.  
226.14(c)(3), no amount will be used more than once when adding the 
sum of the balances \32\ subject to periodic rates to the sum of the 
amounts subject to specific transaction charges. [rtrif](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.'')[ltrif] 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:
---------------------------------------------------------------------------

    \32\ [rtrif][Reserved][ltrif] [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.'']
---------------------------------------------------------------------------

    1. Previous balance--none.
    A specific transaction of $100 occurs on the first day of the 
billing cycle. The average daily balance is $100. A specific 
transaction charge of 3 percent is applicable to the specific 
transaction. The periodic rate is 1\1/2\ percent applicable to the 
average daily balance. The numerator is the amount of the finance 
charge, which is $4.50. The denominator is the amount of the 
transaction (which is $100), plus the amount by which the balance 
subject to the periodic rate exceeds the amount of the specific 
transactions (such excess in this case is 0), totaling $100.
    The annual percentage rate is the quotient (which is 4\1/2\ 
percent) multiplied by 12 (the number of months in a year), i.e., 54 
percent.
    2. Previous balance--$100.
    A specific transaction of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $150. A specific 
transaction charge of 3 percent is applicable to the specific 
transaction. The periodic rate is 1\1/2\ percent applicable to the 
average daily balance. The numerator is the amount of the finance 
charge which is $5.25. The denominator is the amount of the 
transaction (which is $100), plus the amount by which the balance 
subject to the periodic rate exceeds the amount of the specific 
transaction (such excess in this case is $50), totaling $150. As 
explained in example 1, the annual percentage rate is 3\1/2\ percent 
x 12 = 42 percent.
    3. If, in example 2, the periodic rate applies only to the 
previous balance, the numerator is $4.50 and the denominator is $200 
(the amount of the transaction, $100, plus the balance subject only 
to the periodic rate, the $100 previous balance). As explained in 
example 1, the annual percentage rate is 2\1/4\ percent x 12 = 27 
percent.
    4. If, in example 2, the periodic rate applies only to an 
adjusted balance (previous balance less payments and credits) and 
the consumer made a payment of $50 at the midpoint of the billing 
cycle, the numerator is $3.75 and the denominator is $150 (the 
amount of the transaction, $100, plus the balance subject to the 
periodic rate, the $50 adjusted balance). As explained in example 1, 
the annual percentage rate is 2\1/2\ percent x 12 = 30 percent.
    5. Previous balance--$100.
    A specific transaction (check) of $100 occurs at the midpoint of 
the billing cycle. The average daily balance is $150. The specific 
transaction charge is $.25 per check. The periodic rate is 1\1/2\ 
percent applied to the average daily balance. The numerator is the 
amount of the finance charge, which is $2.50 and includes the $.25 
check charge and the $2.25 resulting from the application of the 
periodic rate. The denominator is the full amount of the specific 
transaction (which is $100) plus the amount by which the average 
daily balance exceeds the amount of the specific transaction (which 
in this case is $50), totaling $150. As explained in example 1, the 
annual percentage rate would be 1\2/3\ percent x 12 = 20 percent.
    6. Previous balance--none.
    A specific transaction of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $50. The specific 
transaction charge is 3 percent of the transaction amount or $3.00. 
The periodic rate is 1\1/2\ percent per month applied to the average 
daily balance. The numerator is the amount of the finance charge, 
which is $3.75, including the $3.00 transaction charge and $.75 
resulting from application of the periodic rate. The denominator is 
the full amount of the specific transaction ($100) plus the amount 
by which the balance subject to the periodic rate exceeds the amount 
of the transaction ($0). Where the specific transaction amount 
exceeds the balance subject to the periodic rate, the resulting 
number is considered to be zero rather than a negative number ($50- 
$100 =-$50). The denominator, in this case, is $100. As explained in 
example 1, the annual percentage rate is 3\3/4\ percent x 12 = 45 
percent.

    20. In Part 226, Appendix G is amended by:
    A. Revising the table of contents at the beginning of the appendix;
    B. Revising Forms G-1, G-2, G-10(A), G-10(B), G-11, and G-13(A) and 
(B);
    C. Revising the headings of Forms G-3, G-4, and G-10(C);
    D. Adding new Forms G-2(A), G-3(A), G-4(A), G-10(D) and (E), G-
16(A) and (B), G-17(A) through (C), G-18(A)

[[Page 33066]]

through (H), G-19, G-20, and G-21 in numerical order; and
    E. Removing and removing and reserving Form G-12.

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

G-1 Balance Computation Methods Model Clauses (Sec. Sec.  226.6 and 
226.7)
G-2 Liability for Unauthorized Use Model Clause [rtrif](Home equity 
Plans)[ltrif] (Sec.  226.12)
[rtrif]G-2(A) Liability for Unauthorized Use Model Clause 
[rtrif](Plans Other Than Home equity Plans) (Sec.  226.12)[ltrif]
G-3 Long-Form Billing-Error Rights Model Form [rtrif](Home equity 
Plans)[ltrif] (Sec. Sec.  226.6 and 226.9)
[rtrif]G-3(A) Long-Form Billing-Error Rights Model Form 
[rtrif](Plans Other Than Home equity Plans) [ltrif](Sec. Sec.  226.6 
and 226.9)[ltrif]
G-4 Alternative Billing-Error Rights Model Form [rtrif] (Home equity 
Plans)[ltrif] (Sec.  226.9)
[rtrif]G-4(A) Alternative Billing-Error Rights Model Form (Plans 
Other Than Home equity Plans) (Sec.  226.9)[ltrif]
G-5 Rescission Model Form (When Opening an Account) (Sec.  226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec.  226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.  
226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.  
226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.  
226.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards) 
(Sec.  226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.  
226.5a(b))
G-10(C) Applications and Solicitations [rtrif]Sample (Credit 
Cards)[ltrif] [Model Form (Charge Cards)] (Sec.  226.5a(b))
[rtrif]G-10(D) Applications and Solicitations Model Form (Charge 
Cards) (Sec.  226.5a(b))[ltrif]
[rtrif]G-10(E) Applications and Solicitations Sample (Charge Cards) 
(Sec.  226.5a(b))[ltrif]
G-11 Applications and Solicitations Made Available to General Public 
Model Clauses (Sec.  226.5a(e))
G-12 [rtrif]Reserved[ltrif] [Charge Card Model Clause (When Access 
to Plan Offered by Another) (Sec.  226.5a(f))]
G-13(A) Change in Insurance Provider Model Form (Combined Notice) 
(Sec.  226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec.  226.9(f)(2))
G-14A Home Equity Sample
G-14B Home Equity Sample
G-15 Home Equity Model Clauses
[rtrif]G-16(A) Debt Suspension Model Clause (Sec.  
226.4(d)(3))[ltrif]
[rtrif]G-16(B) Debt Suspension Sample (Sec.  226.4(d)(3))[ltrif]
[rtrif]G-17(A) Account-opening Model Form (Sec.  226.6(b)(4))[ltrif]
[rtrif]G-17(B) Account-opening Sample (Sec.  226.6(b)(4))[ltrif]
[rtrif]G-17(C) Account-opening Sample (Sec.  226.6(b)(4))[ltrif]
[rtrif]G-18(A) Transactions; Interest Charges; Fees Sample (Sec.  
226.7(b))[ltrif]
[rtrif]G-18(B) Fee-inclusive APR Sample (Sec.  226.7(b))[ltrif]
[rtrif]G-18(C) Late Payment Fee Sample (Sec.  226.7(b))[ltrif]
[rtrif]G-18(D) Actual Repayment Period Sample Disclosure on Periodic 
Statement (Sec.  226.7(b))[ltrif]
[rtrif]G-18(E) New Balance, Due Date, Late Payment and Minimum 
Payment Sample (Credit cards) (Sec.  226.7(b))[ltrif]
[rtrif]G-18(F) New Balance, Due Date, and Late Payment Sample (Open-
end Plans (Non-credit-card Accounts)) (Sec.  226.7(b))[ltrif]
[rtrif]G-18(G) Periodic Statement Form[ltrif]
[rtrif]G-18(H) Periodic Statement Form[ltrif]
[rtrif]G-19 Checks Accessing a Credit Card Account Sample (Sec.  
226.9(b)(3))[ltrif]
[rtrif]G-20 Change-in-Terms Sample (Sec.  226.9(c)(2))[ltrif]
[rtrif]G-21 Penalty Rate Increase Sample (Sec.  226.9(g)(3))[ltrif]
G-1--Balance Computation Methods Model Clauses

    (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).

G-2--Liability for Unauthorized Use Model Clause [rtrif](Home equity 
Plans)[ltrif]

    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. In any case, your 
liability will not exceed [insert $50 or any lesser amount under 
agreement with the cardholder].

[rtrif]G-2A--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 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].[ltrif]

G-3--Long-Form Billing-Error Rights Model Form [rtrif](Home equity 
Plans)[ltrif]

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 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

[[Page 33067]]

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.

[rtrif]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]

    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. 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.
     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 use your credit card to make a purchase and you are 
dissatisfied with the goods or services that you receive, you may 
have the right not to pay the remaining amount due on the purchase.
    To use this right, all of the following must be true:
    1. The purchase must have been made in your home state or within 
100 miles of your current mailing address, and the purchase price 
must have been more than $50. (Note: Neither of these are necessary 
if your purchase was based on an advertisement we mailed to you, or 
if we own the company that sold you the goods or services.)
    2. You must have used your credit card for the purchase. 
Purchases made with cash advances from an ATM or with a check that 
accesses your credit card account do not qualify.
    3. You must have tried in good faith to correct the problem with 
the merchant.
    4. You must not yet have fully paid for the purchase.
    If you are dissatisfied with a purchase that conforms to the 
four criteria above, contact us in writing at:

[Creditor Name]
[Creditor 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.[ltrif]
G-4--Alternative Billing-Error Rights Model Form [rtrif](Home equity 
Plans)[ltrif]

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. 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.

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

[[Page 33068]]

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]
    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. 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.
     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.

Your Rights If You Are Dissatisfied With Your Credit Card Purchases

    If you use your credit card to make a purchase and you are 
dissatisfied with the goods or services that you receive, you may 
have the right not to pay the remaining amount due on the purchase.
    To use this right, all of the following must be true:
    1. The purchase must have been made in your home state or within 
100 miles of your current mailing address, and the purchase price 
must have been more than $50. (Note: Neither of these are necessary 
if your purchase was based on an advertisement we mailed to you, or 
if we own the company that sold you the goods or services.)
    2. You must have used your credit card for the purchase. 
Purchases made with cash advances from an ATM or with a check that 
accesses your credit card account do not qualify.
    3. You must have tried in good faith to correct the problem with 
the merchant.
    4. You must not yet have fully paid for the purchase.
    If you are dissatisfied with a purchase that conforms to the 
four criteria above, contact us in writing at:

[Creditor Name]
[Creditor 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.[ltrif]
* * * * *
BILLING CODE 6210-01-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) Disclosure With Account Opening Statement

    To find out about changes in the information in this 
[application]/[solicitation], [call us at (telephone number)] [write 
to us at (address)].
[rtrif](b)[ltrif] [(c)] 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 [rtrif] [Reserved] [ltrif] [--Charge Card Model Clause (When 
Access to Plan Offered by Another)

    This charge card may allow you to access credit offered by 
another creditor. Our decision about issuing you a charge card will 
be independent of the other creditor's decision about allowing you 
access to a line of credit. Therefore, approval by us to issue you a 
card does not constitute approval by the other creditor to grant you 
credit privileges. If we issue you a charge card, you may receive it 
before the other creditor decides whether or not to grant you credit 
privileges.]

G-13(A)--Change in Insurance Provider Model Form (Combined Notice)

    The credit card account you have with us is insured. This is to 
notify you that we plan to replace your current coverage with 
insurance coverage from a different insurer.
    If we obtain insurance for your account from a different 
insurer, you may cancel the insurance.
    [Your premium rate will increase to $----per----.]
    [Your coverage will be affected by the following:
    [ ] The elimination of a type of coverage previously provided to 
you. [(explanation)] [See----of the attached policy for details.]

[[Page 33073]]

    [ ] 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.
* * * * *
[rtrif]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 -------- 
[ltrif]

[rtrif]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 -------- [ltrif]

BILLING CODE 6210-01-P

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[rtrif]G-18(C) 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%.[ltrif]
[rtrif]G-18(D) Actual Repayment Period Sample Disclosure on Periodic 
Statement

    (a) When Negative Amortization Does Not Occur.
    Notice about Minimum Payments: If you make only the minimum 
payment each month, it will take you about 13 months to repay the 
balance shown on this statement.
    (b) When Negative Amortization Occurs.
    Notice about Minimum Payments: You will never repay the 
outstanding balance shown on this statement if you only pay the 
minimum payment.[ltrif]

BILLING CODE 6210-01-P
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    21. Under Part 226, Appendix H is amended by revising the table of 
contents, and adding new forms H-17(A) and H-17(B) to read as follows:

Appendix H to Part 226--Closed-End Model Forms and Clauses

H-1 Credit Sale Model Form (Sec.  226.18)
H-2 Loan Model Form (Sec.  226.18)
H-3 Amount Financed Itemization Model Form (Sec.  226.18(c))
H-4(A) Variable-Rate Model Clauses (Sec.  226.18(f)(1))
H-4(B) Variable-Rate Model Clauses (Sec.  226.18(f)(2))
H-4(C) Variable-Rate Model Clauses (Sec.  226.19(b))
H-4(D) Variable-Rate Model Clauses (Sec.  226.20(c))
H-5 Demand Feature Model Clauses (Sec.  226.18(i))
H-6 Assumption Policy Model Clause (Sec.  226.18(q))
H-7 Required Deposit Model Clause (Sec.  226.18(r))
H-8 Rescission Model Form (General) (Sec.  226.23)
H-9 Rescission Model Form (Refinancing (with Original Creditor)) 
(Sec.  226.23)
H-10 Credit Sale Sample
H-11 Installment Loan Sample
H-12 Refinancing Sample
H-13 Mortgage with Demand Feature Sample
H-14 Variable-Rate Mortgage Sample (Sec.  226.19(b))
H-15 Graduated-Payment Mortgage Sample
H-16 Mortgage Sample
[rtrif]H-17(A) Debt Suspension Model Clause[ltrif]
[rtrif]H-17(B) Debt Suspension Sample[ltrif]
* * * * *
    [rtrif]H-17(A) Debt Suspension Model Clause[ltrif]

    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 --------
[ltrif]

H-17(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 --------[ltrif]

    22. Under Part 226, a new Appendix M1, Appendix M2, and Appendix M3 
are added to read as follows:

[rtrif]Appendix M1 to Part 226--Generic Repayment Estimates

    (a) Calculating generic repayment estimates.
    (1) Definitions. (i) Retail credit card means a credit card that 
is issued by a retailer that can be used only in transactions with 
the retailer or a group of retailers that are related by common 
ownership or control, or a credit card where a retailer arranges for 
a creditor to offer open-end credit under a plan that allows the 
consumer to use the credit only in transactions with the retailer or 
a group of retailers that are related by common ownership or 
control.
    (ii) ``General-purpose credit card'' means a credit card other 
than a retail credit card.
    (2) Minimum payment formula.
    (i) Issuer-operated toll-free telephone number.
    (A) General-purpose credit cards. When calculating the generic 
repayment estimate for general-purpose credit cards, card issuers 
must use the minimum payment formula that applies to most of its 
general-purpose credit card accounts. The issuer must use this 
``most common'' formula to calculate the generic repayment estimate 
for all of its general-purpose credit card accounts, regardless of 
whether this formula applies to a particular account. To calculate 
which minimum payment formula is most common, card issuers must 
choose a day in the last six months, consider all general-purpose 
card accounts held by the issuer on that day, and determine which 
formula applies to the most accounts. If more than one minimum 
payment formula applies to an account, the card issuer must use the 
formula applicable to the general-revolving feature to determine 
which formula is most common. Card issuers must re-evaluate which 
minimum payment formula is most common every 12 months. For example, 
assume a card issuer is required to comply with the requirements in 
Sec.  226.7(b)(12) and this appendix by July 5 of

[[Page 33084]]

a particular year. The issuer may choose any day between January 5 
and July 4 of that year to use in deciding the minimum payment 
formula that is most common. For the following and each subsequent 
year, the issuer must again choose a day between January 5 and July 
4 to use in deciding the minimum payment formula that is most 
common, but the day that is chosen need not be the same day chosen 
the previous year.
    (B) Retail credit cards. When calculating the generic repayment 
estimate for retail credit cards, card issuers must use the minimum 
payment formula that applies to most of their retail credit card 
accounts. If an issuer offers credit card accounts on behalf of more 
than one retailer, the card issuer must group credit card accounts 
for each retailer separately, and determine the minimum payment 
formula that is most common to each retailer. The issuer must use 
the ``most common'' formula for each retailer, regardless of whether 
this formula applies to a particular account for that retailer. To 
calculate which minimum payment formula is most common, card issuers 
must choose a day in the last six months, consider all retail card 
accounts for each retailer held by the issuer on that day, and 
determine which formula applies to the most accounts for that 
retailer. If more than one minimum payment formula applies to an 
account, the card issuer must use the formula applicable to the 
general revolving feature to determine which formula is most common 
for each retailer. Card issuers must re-evaluate which minimum 
payment formula is most common for retail credit card accounts with 
respect to each retailer every 12 months. For example, assume a card 
issuer is required to comply with the requirements in Sec.  
226.7(b)(12) and this appendix by July 5 of a particular year. The 
issuer may choose any day between January 5 and July 4 of that year 
to use in deciding the minimum payment formula that is most common. 
For the following year, the issuer must again choose a day between 
January 5 and July 4 to use in deciding the minimum payment formula 
that is most common, but the day that is chosen need not be the same 
day the previous year.
    (ii) FTC-operated toll-free telephone number. When calculating 
the generic repayment estimate, the FTC must use the following 
minimum payment formula: 5 percent of the outstanding balance, or 
$15, whichever is greater.
    (3) Annual percentage rate. When calculating the generic 
repayment estimate, credit card issuers and the FTC must use the 
highest annual percentage rate on which the consumer has outstanding 
balances. An issuer and the FTC may use an automated system to 
prompt the consumer to enter the highest annual percentage rate on 
which the consumer has an outstanding balance, and calculate the 
generic repayment estimate based on the consumer's response.
    (4) Beginning balance. When calculating the generic repayment 
estimate, credit card issuers and the FTC must use as the beginning 
balance the outstanding balance on a consumer's account as of the 
closing date of the last billing cycle. An issuer and the FTC may 
use an automated system to prompt the consumer to enter the 
outstanding balance included on the last periodic statement received 
by the consumer, and calculate the generic repayment estimate based 
on the consumer's response.
    (5) Assumptions. When calculating the generic repayment 
estimate, credit card issuers and the FTC must make the following 
assumptions. Card issuers and the FTC must make these assumptions 
regardless of whether they match the actual terms of the consumer's 
account.
    (i) Only minimum monthly payments are made each month.
    (ii) No additional extensions of credit are obtained.
    (iii) There is no grace period.
    (iv) The final payment pays the account in full (i.e., there is 
no residual interest after the final month in a series of payments).
    (v) The average daily balance method is used to calculate the 
balance.
    (vi) All months are the same length (i.e., 30.41667 days long). 
Leap year is ignored.
    (vii) Payments are credited on the last day of the month.
    (b) Disclosing the generic repayment estimate to consumers.
    (1) Required disclosures. Except as provided in paragraph (b)(3) 
of this section, when responding to a request for generic repayment 
estimates through a toll-free telephone number, credit card issuers 
and the FTC must make the following disclosures:
    (i) The generic repayment estimate. If the generic repayment 
estimate calculated above is less than 2 years, credit card issuers 
and the FTC must disclose the estimate in months. Otherwise, the 
estimate must be disclosed in years. The estimate must be rounded 
down to the nearest whole year if the estimate contains a fractional 
year less than 0.5, and rounded up to the nearest whole year if the 
estimate contains a fractional year equal to or greater than 0.5.
    (ii) The beginning balance on which the generic repayment 
estimate is calculated.
    (iii) The APR on which the generic repayment estimate is 
calculated.
    (iv) The assumption that only minimum payments are made and no 
other amounts are added to the balance.
    (v) The fact that the repayment period is an estimate, and the 
actual time it may take to pay off the balance by only making 
minimum payments will differ based on the consumer's account terms 
and future account activity.
    (2) Model form. Credit card issuers and the FTC may use the 
following disclosure to meet the requirements set forth in paragraph 
(b)(1) of this section:
    It will take approximately ---- [months/years] to pay off a ---- 
balance at ----% APR, assuming that you only make minimum payments 
and no other amounts are added to the balance. This repayment period 
is only an estimate. The actual time it may take you to pay off this 
balance by only making minimum payments will differ based on your 
account terms and future account activity.
    (3) Negative amortization. If negative amortization occurs when 
calculating the repayment estimate, credit card issuers and the FTC 
must disclose to the consumer that based on the assumptions used to 
calculate the repayment estimate, the consumer will not pay off the 
balance by paying only the minimum payment. Card issuers and the FTC 
may use the following disclosure to meet the requirements set forth 
in this paragraph: ``Based on the assumptions that we used to 
calculate the time to repay your balance, you will never repay the 
balance if you only make the minimum payment.''
    (4) Permissible disclosures. Credit card issuers and the FTC may 
provide the following information when responding to a request for 
the generic repayment estimate through a toll-free telephone number, 
so long as the following information is provided after the 
disclosures in paragraph (b)(1) of this section are given:
    (i) A description of the assumptions used to calculate the 
generic repayment estimate as described in paragraph (a)(5) of this 
section.
    (ii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this section if an 
additional amount was paid each month in addition to the minimum 
payment amount, allowing the consumer to select the additional 
amount. In calculating this estimate, card issuers and the FTC must 
use the same terms described in paragraph (a) of this section, 
except they also must assume the additional amount was paid each 
month in addition to the minimum payment amount.
    (iii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this section if the 
consumer made a fixed payment amount each month, allowing the 
consumer to select the amount of the fixed payment. In calculating 
this estimate, card issuers and the FTC must use the same terms 
described in paragraph (a) of this section, except they also must 
assume the consumer made a fixed payment amount each month.
    (iv) The monthly payment amount that would be required to pay 
off the outstanding balance within a specific number of months, 
allowing the consumer to select the payoff period. In calculating 
the monthly payment amount, card issuers and the FTC must use the 
same terms described in paragraph (a) of this section, as 
appropriate.
    (v) Reference to web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (vi) The total interest that a consumer may pay if the consumer 
makes minimum payments for the length of time disclosed in the 
generic repayment estimate.

Appendix M2 to Part 226--Actual Repayment Disclosures

    (a) Calculating actual repayment disclosures.
    (1) Definitions. (i) ``Retail credit card'' means a credit card 
that is issued by a retailer that can be used only in transactions 
with the retailer or a group of retailers that are related by common 
ownership or control, or a credit card where a retailer arranges for 
a creditor to offer open-end credit under a plan that allows the 
consumer to use the credit only in transactions with the retailer or 
a group of retailers.
    (ii) ``General purpose credit card'' means a credit card other 
than a retail credit card.

[[Page 33085]]

    (iii) ``Promotional terms'' means terms of a cardholder's 
account that will expire in a fixed period of time, as set forth by 
the card issuer.
    (2) Minimum payment formulas. When calculating actual repayment 
disclosures, credit card issuers must use the minimum payment 
formula(s) that apply to a cardholder's account. If any promotional 
terms related to payments currently apply to a cardholder's account, 
such as a ``deferred payment plan,'' credit card issuers may assume 
no promotional terms apply to the account.
    (3) Annual percentage rate. When calculating annual repayment 
estimates, a credit card issuer must use the annual percentage rates 
that apply to a cardholder's account, based on the portion of the 
balance to which the rate applies. If any promotional terms related 
to annual percentage rates currently apply to a cardholder's 
account, such as introductory rates or deferred interest plans, 
credit card issuers may assume no promotional terms apply to the 
account.
    (4) Beginning balance. When calculating the actual repayment 
disclosure, credit card issuers must use as the beginning balance 
the outstanding balance on a consumer's account as of the closing 
date of the last billing cycle.
    (5) Assumptions. When calculating the actual repayment 
disclosure, credit card issuers may make the following assumptions 
regardless of whether they are the same as the actual terms of the 
consumer's account.
    (i) Only minimum monthly payments are made each month.
    (ii) No additional extensions of credit are obtained, including 
new purchases, transactions, fees, rebates, charges or other 
activity.
    (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.
    (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 (i.e., 30.41667 days long). 
Leap year is ignored.
    (viii) Payments are credited on the last day of the month.
    (ix) Payments are allocated to lower APR balances before higher 
APR balances.
    (b) Disclosing the actual repayment disclosure to consumers 
through a toll-free telephone number.
    (1) Required disclosures. Except as provided in paragraph (b)(3) 
of this section, when responding to a request for actual repayment 
disclosures through a toll-free telephone number, credit card 
issuers must make the following disclosures:
    (i) The actual repayment disclosure. If the actual repayment 
disclosure is less than 2 years, credit card issuers must disclose 
the estimate in months. Otherwise, the estimate must be disclosed in 
years. The estimate must be rounded down to the nearest whole year 
if the estimate contains a fractional year less than 0.5, and 
rounded up to the nearest whole year if the estimate contains a 
fractional year equal or greater than 0.5.
    (ii) The outstanding balance on which the actual repayment 
disclosure is calculated.
    (iii) The assumption that only minimum payments are made.
    (iv) The fact that the repayment period is an estimate, and is 
based on several assumptions about the consumer's account terms and 
future activity.
    (2) Model form. Credit card issuers may use the following 
disclosure to meet the requirements set forth in paragraph (b)(1) of 
this section:
    Your outstanding balance as of the last billing statement was 
$------. If you make only the minimum payment each month it would 
take you about ------ [months/years] to repay this outstanding 
balance. This repayment period is only an estimate and is based on 
several assumptions about your account terms and future activity on 
the account.
    (3) Negative amortization. If negative amortization occurs when 
calculating the repayment estimate, credit card issuers must 
disclose to the consumer that based on the current terms applicable 
to the consumer's account, the consumer will not pay off the balance 
by paying only the minimum payment. Card issuers may use the 
following disclosure to meet the requirements set forth in this 
paragraph: ``Your outstanding balance as of the last billing 
statement was $------. You will never repay the balance if you only 
make the minimum payment.''
    (4) Permissible disclosures. Credit card issuers may provide the 
following information when responding to a request for the actual 
repayment disclosure through a toll-free telephone number, so long 
as the following information is provided after the disclosures in 
paragraph (b)(1) of this section are given:
    (i) A description of the assumptions used to calculate the 
actual repayment disclosure as described in paragraph (a)(5) of this 
section.
    (ii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this section if an 
additional amount was paid each month in addition to the minimum 
payment amount, allowing the consumer to select the additional 
amount. In calculating this estimate, credit card issuers must use 
the same terms described in paragraph (a) of this section used to 
calculate the actual repayment disclosure, except they also must 
assume the additional amount was paid each month in addition to the 
minimum payment amount.
    (iii) The length of time it would take to repay the beginning 
balance described in paragraph (b)(1)(ii) of this section if the 
consumer made a fixed payment amount each month, allowing the 
consumer to select the amount of the fixed payment. In calculating 
this estimate, card issuers must use the same terms described in 
paragraph (a) of this section to calculate the actual repayment 
disclosure, except they also must assume the consumer made a fixed 
payment amount each month.
    (iv) The monthly payment amount that would be required to pay 
off the outstanding balance within a specific number of months, 
allowing the consumer to select the payoff period. In calculating 
the monthly payment amount, card issuers must use the same terms 
described in paragraph (a) of this section, as appropriate.
    (v) Reference to web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (vi) The total interest that a consumer may pay if the consumer 
makes minimum payments for the length of time disclosed in the 
actual repayment disclosure.
    (c) Disclosing the actual repayment disclosures on periodic 
statements.
    (1) Required disclosures. Except as provided in paragraph (c)(3) 
of this section, when providing the actual repayment disclosure on 
the periodic statement, credit card issuers must make the following 
disclosures:
    (i) The actual repayment disclosure. If the actual repayment 
disclosure is less than 2 years, credit card issuers must disclose 
the estimate in months. Otherwise, the estimate must be disclosed in 
years. The estimate must be rounded down to the nearest whole year 
if the estimate contains a fractional year less than 0.5, and 
rounded up to the nearest whole year if the estimate contains a 
fractional year equal to or greater than 0.5.
    (ii) The fact that the repayment period is based on the current 
outstanding balance shown on the account.
    (iii) The assumption that only minimum payments are made.
    (2) Model form. Credit card issuers may use the disclosure in 
appendix G-18(D) to meet the requirements set forth in paragraph 
(c)(1) of this section.
    (3) Negative amortization. If negative amortization occurs when 
calculating the actual repayment disclosure, credit card issuers 
must disclose to the consumer that based on the current terms 
applicable to the consumer's account, the consumer will not pay off 
the balance by making only the minimum payment. Card issuers may use 
the disclosure in appendix G-18(D) to meet the requirements set 
forth in this paragraph.
    (4) Permissible disclosures. Card issuers may provide the 
following information on the periodic statement, so long as the 
following information is provided after the disclosures in paragraph 
(c)(1) are given:
    (i) The fact that the repayment period is an estimate, and is 
based on several assumptions about the consumer's account terms and 
future activity.
    (ii) A reference to another location on the statement where the 
consumer may find additional information about the repayment 
estimate.
    (iii) A description of the assumptions used to calculate the 
actual repayment disclosure as described in paragraph (a)(5) of this 
section.
    (iv) The length of time it would take to repay the outstanding 
balance shown on the statement if an additional amount was paid each 
month in addition to the minimum payment amount. Card issuers may 
choose the additional amount. In calculating this estimate, card 
issuers must use the same terms described in paragraph (a) of this 
section used to calculate the actual repayment period, except they 
also must assume the additional amount was paid each

[[Page 33086]]

month in addition to the minimum payment amount.
    (v) The length of time it would take to repay the outstanding 
balance shown on the statement if the consumer made a fixed payment 
amount each month. Card issuers may choose the amount of the fixed 
payment. In calculating this estimate, card issuers must use the 
same terms described in (a) of this section used to calculate the 
actual repayment disclosure, except they also must assume the 
consumer made a fixed payment amount each month.
    (vi) The monthly payment amount that would be required to pay 
off the outstanding balance within a specific number of months. Card 
issuers may choose the specific number of months used in the 
calculation. In calculating the monthly payment amount, card issuers 
must use the same terms described in paragraph (a) of this section, 
as appropriate.
    (vii) Reference to web-based calculation tools that permit 
consumers to obtain additional estimates of repayment periods.
    (viii) The total interest that a consumer may pay if the 
consumer makes minimum payments for the length of time disclosed in 
the actual repayment disclosure.

Appendix M3 to Part 226--Sample Calculations of Generic Repayment 
Estimates and Actual Repayment Disclosures

    (a) Generic repayment estimates. The following is an example of 
how to calculate the generic repayment estimates using the guidance 
in appendix M1 where the APR is 17 percent, the outstanding balance 
is $1,000, 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;
RATE1=0.17; *APR;
TBAL=1000; *OUTSTANDING BALANCE;
*INITIALIZE COUNTER OF MONTHS, PERIODIC RATE AND FINANCE CHARGES;
MONTHS=0;
PERRATE1=0;
FC1=0;
*ABSOLUTE MINIMUM PAYMENT RULE USED;
MINPMT=20;
*CALCULATE PERIODIC RATE;
PERRATE1=((1+(RATE1/365))**30.41667)-1; *ADB METHOD;
*CALCULATE MONTHS TO PAYOFF;
DO WHILE (TBAL GT 0);
    MONTHS=MONTHS+1;
    PMT=0.02*TBAL; *TWO PERCENT MIN PAYMENT RULE;
    FC1=TBAL*PERRATE1; *CALCULATE FINANCE CHARGE;
    TBAL=TBAL+FC1; *ADD FINANCE CHARGE TO BALANCE;
    IF PMT LT MINPMT THEN PMT=MINPMT;
    TBAL = TBAL-PMT;
END;
*RESULTS;
PROC PRINT DATA=ONE;
VAR MONTHS;
PROC PRINT DATA=ONE;
VAR PMT FC1 TBAL PERRATE1;

    (b) Actual Repayment Disclosures. The following is an example of 
how to calculate the actual repayment disclosures using the guidance 
in M2 where three APRs apply, 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;
*INITIALIZE NUMBERS OF APRS, PERIODIC RATES, BALANCES, AND PERIODIC 
FINANCE CHARGES;
ARRAY RATE(3);
ARRAY PERRATE(3);
ARRAY BAL(3);
ARRAY FC(3);
*INITIALIZE APRS AND BALANCES, PLACING RATES FROM LOWEST TO HIGHEST;
RATE1=0.019; *APR 1;
RATE2=0.17; *APR 2;
RATE3=0.21; *APR 3;
BAL1=500; *BALANCE ASSOCIATED WITH APR 1;
BAL2=250; *BALANCE ASSOCIATED WITH APR 2;
BAL3=250; *BALANCE ASSOCIATED WITH APR 3;
*INITIALIZE TOTAL BALANCE AND COUNTER OF MONTHS;
TBAL=0;
MONTHS=0;
*ABSOLUTE MINIMUM PAYMENT RULE USED;
MINPMT=20;
*CALCULATE PERIODIC RATES AND INITIAL TOTAL BALANCE;
DO I=1 TO 3;
PERRATE(I)=((1+(RATE(I)/365))**30.41667)-1; *ADB METHOD;
TBAL=TBAL+BAL(I);
END;
*CALCULATE MONTHS TO PAYOFF FOR LOWEST RATE BALANCE;
DO WHILE (BAL(1) GT 0);
    MONTHS=MONTHS+1;
    PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
    DO I=1 TO 3; FC(I)=BAL(I)*PERRATE(I); *CALCULATE FINANCE 
CHARGES;
    END;
    DO I=1 TO 3; BAL(I)=BAL(I)+FC(I); TBAL=TBAL+FC(I); *ADD FINANCE 
CHARGES TO BALANCES;
    END;
    IF PMT LT MINPMT THEN PMT=MINPMT;
    BAL(1)=BAL(1)-PMT; *APPLYING PAYMENT TO LOWEST APR BALANCE;
    TBAL=TBAL-PMT;
END;
*CALCULATE MONTHS TO PAYOFF FOR NEXT LOWEST RATE BALANCE, IF ANY, 
CARRYING OVER NUMBER FROM LOWER RATE BALANCE;
BAL(2)=BAL(2)+BAL(1);
DO WHILE (BAL(2) GT 0);
    MONTHS=MONTHS+1;
    PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
    DO I=2 TO 3; FC(I)=BAL(I)*PERRATE(I); *CALCULATE FINANCE 
CHARGES;
    END;
    DO I=2 TO 3; BAL(I)=BAL(I)+FC(I); TBAL=TBAL+FC(I); *ADD FINANCE 
CHARGES TO BALANCES;
    END;
    IF PMT LT MINPMT THEN PMT=MINPMT;
    BAL(2)=BAL(2)-PMT; *APPLYING PAYMENT TO SECOND LOWEST APR 
BALANCE;
    TBAL=TBAL-PMT;
END;
*CALCULATE MONTHS TO PAYOFF FOR NEXT LOWEST RATE BALANCE, IF ANY, 
CARRYING OVER NUMBER FROM LOWER RATE BALANCES;
BAL(3)=BAL(3)+BAL(2);
DO WHILE (BAL(3) GT 0);
    MONTHS=MONTHS+1;
    PMT=0.02*TBAL; *TWO PERCENT MIN PMT RULE;
    FC(3)=BAL(3)*PERRATE(3); *CALCULATE FINANCE CHARGE;
    BAL(3)=BAL(3)+FC(3); *ADD FINANCE CHARGES TO BALANCE;
    TBAL=TBAL+FC(3);
    IF PMT LT MINPMT THEN PMT=MINPMT;
    BAL(3)=BAL(3)-PMT; *APPLYING PAYMENT TO REMAINING BALANCE;
    TBAL=TBAL-PMT;
END;
*RESULTS;
PROC PRINT DATA=ONE;
VAR MONTHS;
PROC PRINT DATA=ONE;
VAR PMT FC1 BAL1 FC2 BAL2 FC3 BAL3 TBAL; [ltrif]

    23. In Supplement I to Part 226:
    A. Revise the Introduction.
    B. Revise subpart A.
    C. In Subpart B, revise sections 226.5 through 226.14 and 226.16.
    D. Revise Appendix F, and Appendixes G and H.
    E. Amend Appendix G by revising paragraphs 1. through 3. and 5. 
through 6., republishing paragraph 7., and adding paragraph 8.
    F. Remove the References paragraph at the end of sections 226.1, 
226.2, 226.3, 226.4, 226.5, 226.6, 226.7, 226.8, 226.9, 226.10, 226.11, 
226.12, 226.13, 226.14, 226.16, Appendix E and Appendix F.

Supplement I to Part 226--Official Staff Interpretations

Introduction

    1. Official status. This commentary is the vehicle by which the 
staff of the Division of Consumer and Community Affairs of the Federal 
Reserve Board issues official staff interpretations of Regulation Z. 
Good faith compliance with this commentary affords protection from 
liability under 130(f) of the Truth in Lending Act. Section 130(f) (15 
U.S.C. 1640) protects creditors from civil liability for any act done 
or omitted in good faith in conformity with any interpretation issued 
by a duly

[[Page 33087]]

authorized official or employee of the Federal Reserve System.
    2. Procedure for requesting interpretations. Under appendix C of 
the regulation, anyone may request an official staff interpretation. 
Interpretations that are adopted will be incorporated in this 
commentary following publication in the Federal Register. No official 
staff interpretations are expected to be issued other than by means of 
this commentary.
    [3. Status of previous interpretations. All statements and opinions 
issued by the Federal Reserve Board and its staff interpreting previous 
Regulation Z remain effective until October 1, 1982 only insofar as 
they interpret that regulation. When compliance with revised Regulation 
Z becomes mandatory on October 1, 1982, the Board and staff 
interpretations of the previous regulation will be entirely superseded 
by the revised regulation and this commentary except with regard to 
liability under the previous regulation.]
    [rtrif]3.[ltrif] [4.] 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 and regulation, reference to the 
regulation should be construed to refer to revised Regulation Z, unless 
the context indicates that a reference to previous Regulation Z is also 
intended.
    (c)] 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.
    [rtrif]4. [5]. Comment designations. Each comment in the commentary 
is identified by a number and the regulatory section or paragraph which 
it interprets. The comments are designated with as much specificity as 
possible according to the particular regulatory provision addressed. 
For example, some of the comments to Sec.  226.18(b) are further 
divided by subparagraph, such as comment 18(b)(1)-1 and comment 
18(b)(2)-1. In other cases, comments have more general application and 
are designated, for example, as comment 18-1 or comment 18(b)-1. This 
introduction may be cited as comments I-1 through [rtrif]I-4[ltrif] [I-
7]. Comments to the appendixes may be cited, for example, as comment 
app. A-1.
    [6. Cross-references. The following cross-references to related 
material appear at the end of each section of the commentary: (a) 
``Statute''--those sections of the Truth in Lending Act on which the 
regulatory provision is based (and any other relevant statutes); (b) 
``Other sections''--other provisions in the regulation necessary to 
understand that section; (c) ``Previous regulation''--parallel 
provisions in previous Regulation Z; and (d) ``1981 changes''--a brief 
description of the major changes made by the 1981 revisions to 
Regulation Z. Where appropriate, a fifth category (``Other 
regulations'') provides cross-references to other regulations.
    7. Transition rules. (a) Though compliance with the revised 
regulation is not mandatory until April 1, 1982, creditors may begin 
complying as of April 1, 1981. During the intervening year, a creditor 
may convert its entire operation to the new requirements at one time, 
or it may convert to the new requirements in stages. In general, 
however, a creditor may not mix the regulatory requirements when making 
disclosures for a particular closed-end transaction or open-end 
account; all the disclosures for a single closed-end transaction (or 
open-end account) must be made in accordance with the previous 
regulation, or all the disclosures must be made in accordance with the 
revised regulation. As an exception to the general rule, the revised 
rescission rules and the revised advertising rules may be followed even 
if the disclosures are based on the previous regulation. For purposes 
of this regulation, the creditor is not required to take any particular 
action beyond the requirements of the revised regulation to indicate 
its conversion to the revised regulation.
    (b) The revised regulation may be relied on to determine if any 
disclosures are required for a particular transaction or to determine 
if a person is a ``creditor'' subject to Truth in Lending requirements, 
whether or not other operations have been converted to the revised 
regulation. For example, layaway plans are not subject to the revised 
regulation, nor are oral agreements to lend money if there is no 
finance charge. These provisions may be relied on even if the creditor 
is making other disclosures under the previous regulation. The new 
rules governing whether or not disclosures must be made for 
refinancings and assumptions are also available to a creditor that has 
not yet converted its operations to the revised regulation.
    (c) In addition to the above rules, applicable to both open-end and 
closed-end credit, the following guidelines are relevant to open-end 
credit:
     The creditor need not remake initial disclosures that were 
made under the previous regulation, even if the revised periodic 
statements contain terminology that is inconsistent with those initial 
disclosures.
     A creditor may add inserts to its old open-end forms in 
order to convert them to the revised rules until such time as the old 
forms are used up.
     No change-in-terms notice is required for changes 
resulting from the conversion to the revised regulation.
     The previous billing rights statements are substantially 
similar to the revised billing rights statements and may continue to be 
used, except that, if the creditor has an automatic debit program, it 
must use the revised automatic debit provision.
     For those creditors wishing to use the annual billing 
rights statement, the creditor may count from the date on which it sent 
its last statement under the previous regulation in determining when to 
give the first statement under the new regulation. For example, if the 
creditor sent a semiannual statement in June 1981 and converts to the 
new regulation in October 1981, the creditor must give the billing 
rights statement sometime in 1982, and it must not be fewer than 6 nor 
more than 18 months after the June statement.
     Section 226.11 of the revised regulation affects only 
credit balances that are created on or after the date the creditor 
converts the account to the revised regulation.]

Subpart A--General

Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement 
and Liability

    1(c) Coverage.
    1. Foreign applicability. Regulation Z applies to all persons 
(including branches of foreign banks and sellers located in the United 
States) that extend consumer credit to residents (including resident 
aliens) of any state as defined in Sec.  226.2. If an account is 
located in the United States and credit is extended to a U.S. resident, 
the transaction is subject to the regulation. This will be the case 
whether or not a particular advance or purchase on the account takes 
place in the United States and whether or not the extender of credit is 
chartered or based in the United States or a foreign country. 
[rtrif]For example, if a U.S. resident has a credit card account issued 
by a bank (whether U.S.- or foreign-based) located in the consumer's 
state, 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

[[Page 33088]]

account issued by a foreign branch of a U.S. bank, the account is not 
covered by the regulation.[ltrif] [Thus, a U.S. resident's use in 
Europe of a credit card issued by a bank in the consumer's home town is 
covered by the regulation. The regulation does not apply to a foreign 
branch of a U.S. bank when the foreign branch extends credit to a U.S. 
citizen residing or visiting abroad or to a foreign national abroad.]

Section 226.2--Definitions and Rules of Construction

    2(a)(2) Advertisement.
    1. Coverage. Only commercial messages that promote consumer credit 
transactions requiring disclosures are advertisements. Messages 
inviting, offering, or otherwise announcing generally to prospective 
customers the availability of credit transactions, whether in visual, 
oral, or print media, are covered by Regulation Z (12 CFR part 226).
    i. Examples include:
    A. Messages in a newspaper, magazine, leaflet, promotional flyer, 
or catalog.
    B. Announcements on radio, television, or public address system.
    C. [rtrif]Electronic advertisements[ltrif] [On-line messages], 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 [rtrif]or potential customers[ltrif] 
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.  226.16 and 226.24, not just those that meet 
the definition of creditor in Sec.  226.2(a)(17). Thus, home builders, 
merchants, and others who are not themselves creditors must comply with 
the advertising provisions of the regulation if they advertise consumer 
credit transactions. However, under section 145 of the act, the owner 
and the personnel of the medium in which an advertisement appears, or 
through which it is disseminated, are not subject to civil liability 
for violations.
    2(a)(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 [rtrif]first billing cycle on an open-end account or to 
a[ltrif] transitional billing cycle that can occur [rtrif]if[ltrif] 
[when] 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[the commentary to Sec.  226.9(c)].)
    4. Payment reminder. The sending of a regular payment reminder 
(rather than a late payment notice) establishes a cycle for which the 
creditor must send periodic statements.
    2(a)(6) Business day.
    1. Business function test. Activities that indicate that the 
creditor is open for substantially all of its business functions 
include the availability of personnel to make loan disbursements, to 
open new accounts, and to handle credit transaction inquiries. 
Activities that indicate that the creditor is not open for 
substantially all of its business functions include a retailer's merely 
accepting credit cards for purchases or a bank's having its customer-
service windows open only for limited purposes such as deposits and 
withdrawals, bill paying, and related services.
    2. Rescission rule. A more precise rule for what is a business day 
(all calendar days except Sundays and the federal legal holidays listed 
in 5 U.S.C. 6103(a)) applies when the right of rescission or mortgages 
subject to Sec.  226.32 are involved. (See also comment 31(c)(1)-1.) 
Four federal legal holidays are identified in 5 U.S.C. 6103(a) by a 
specific date: New Year's Day, January 1; Independence Day, July 4; 
Veterans Day, November 11; and Christmas Day, December 25. When one of 
these holidays (July 4, for example) falls on a Saturday, federal 
offices and other entities might observe the holiday on the preceding 
Friday (July 3). The observed holiday (in the example, July 3) is a 
business day for purposes of rescission or the delivery of disclosures 
for certain high-cost mortgages covered by Sec.  226.32.
    2(a)(7) Card issuer.
    1. Agent. An agent of a card issuer is considered a card issuer. 
Because agency relationships are traditionally defined by contract and 
by state or other applicable law, the regulation does not define agent. 
Merely providing services relating to the production of credit cards or 
data processing for others, however, does not make one the agent of the 
card issuer. In contrast, a financial institution may become the agent 
of the card issuer if an agreement between the institution and the card 
issuer provides that the cardholder may use a line of credit with the 
financial institution to pay obligations incurred by use of the credit 
card.
    2(a)(8) Cardholder.
    1. General rule. A cardholder is a natural person at whose request 
a card is issued for consumer credit purposes or who is a co-obligor or 
guarantor for such a card issued to another. The second category does 
not include an employee who is a co-obligor or guarantor on a card 
issued to the employer for business purposes, nor

[[Page 33089]]

does it include a person who is merely the authorized user of a card 
issued to another.
    2. Limited application of regulation. For the limited purposes of 
the rules on issuance of credit cards and liability for unauthorized 
use, a cardholder includes any person, including an organization, to 
whom a card is issued for any purpose--including a business, 
agricultural, or commercial purpose.
    3. Issuance. See the commentary to Sec.  226.12(a).
    4. Dual-purpose cards and dual-card systems. Some card issuers 
offer dual-purpose cards that are for business as well as consumer 
purposes. If a card is issued to an individual for consumer purposes, 
the fact that an organization has guaranteed to pay the debt does not 
make it business credit. On the other hand, if a card is issued for 
business purposes, the fact that an individual sometimes uses it for 
consumer purchases does not subject the card issuer to the provisions 
on periodic statements, billing-error resolution, and other protections 
afforded to consumer credit. Some card issuers offer dual-card 
systems--that is, they issue two cards to the same individual, one 
intended for business use, the other for consumer or personal use. With 
such a system, the same person may be a cardholder for general purposes 
when using the card issued for consumer use, and a cardholder only for 
the limited purposes of the restrictions on issuance and liability when 
using the card issued for business purposes.
    2(a)(9) Cash price.
    1. Components. This amount is a starting point in computing the 
amount financed and the total sale price under Sec.  226.18 for credit 
sales. Any charges imposed equally in cash and credit transactions may 
be included in the cash price, or they may be treated as other amounts 
financed under Sec.  226.18(b)(2).
    2. Service contracts. Service contracts include contracts for the 
repair or the servicing of goods, such as mechanical breakdown 
coverage, even if such a contract is characterized as insurance under 
state law.
    3. Rebates. The creditor has complete flexibility in the way it 
treats rebates for purposes of disclosure and calculation. See the 
commentary to Sec.  226.18(b).
    2(a)(10) Closed-end credit.
    1. General. The coverage of this term is defined by exclusion. That 
is, it includes any credit arrangement that does not fall within the 
definition of open-end credit. Subpart C contains the disclosure rules 
for closed-end credit when the obligation is subject to a finance 
charge or is payable by written agreement in more than four 
installments.
    2(a)(11) Consumer.
    1. Scope. Guarantors, endorsers, and sureties are not generally 
consumers for purposes of the regulation, but they may be entitled to 
rescind under certain circumstances and they may have certain rights if 
they are obligated on credit card plans.
    2. Rescission rules. For purposes of rescission under Sec.  226.15 
and Sec.  226.23, a consumer includes any natural person whose 
ownership interest in his or her principal dwelling is subject to the 
risk of loss. Thus, if a security interest is taken in A's ownership 
interest in a house and that house is A's principal dwelling, A is a 
consumer for purposes of rescission, even if A is not liable, either 
primarily or secondarily, on the underlying consumer credit 
transaction. An ownership interest does not include, for example, 
leaseholds or inchoate rights, such as dower.
    3. Land trusts. Credit extended to land trusts, as described in the 
commentary to Sec.  226.3(a), is considered to be extended to a natural 
person for purposes of the definition of consumer.
    2(a)(12) Consumer credit.
    1. Primary purpose. There is no precise test for what constitutes 
credit offered or extended for personal, family, or household purposes, 
nor for what constitutes the primary purpose. See, however, the 
discussion of business purposes in the commentary to Sec.  226.3(a).
    2(a)(13) Consummation.
    1. State law governs. When a contractual obligation on the 
consumer's part is created is a matter to be determined under 
applicable law; Regulation Z does not make this determination. A 
contractual commitment agreement, for example, that under applicable 
law binds the consumer to the credit terms would be consummation. 
Consummation, however, does not occur merely because the consumer has 
made some financial investment in the transaction (for example, by 
paying a nonrefundable fee) unless, of course, applicable law holds 
otherwise.
    2. Credit v. sale. Consummation does not occur when the consumer 
becomes contractually committed to a sale transaction, unless the 
consumer also becomes legally obligated to accept a particular credit 
arrangement. For example, when a consumer pays a nonrefundable deposit 
to purchase an automobile, a purchase contract may be created, but 
consummation for purposes of the regulation does not occur unless the 
consumer also contracts for financing at that time.
    2(a)(14) Credit.
    1. Exclusions. The following situations are not considered credit 
for purposes of the regulation:
    i. Layaway plans, unless the consumer is contractually obligated to 
continue making payments. Whether the consumer is so obligated is a 
matter to be determined under applicable law. The fact that the 
consumer is not entitled to a refund of any amounts paid towards the 
cash price of the merchandise does not bring layaways within the 
definition of credit.
    ii. Tax liens, tax assessments, court judgments, and court 
approvals of reaffirmation of debts in bankruptcy. However, third-party 
financing of such obligations (for example, a bank loan obtained to pay 
off a tax lien) is credit for purposes of the regulation.
    iii. Insurance premium plans that involve payment in installments 
with each installment representing the payment for insurance coverage 
for a certain future period of time, unless the consumer is 
contractually obligated to continue making payments.
    iv. Home improvement transactions that involve progress payments, 
if the consumer pays, as the work progresses, only for work completed 
and has no contractual obligation to continue making payments
    v. Borrowing against the accrued cash value of an insurance policy 
or a pension account, if there is no independent obligation to repay.
    vi. Letters of credit.
    vii. The execution of option contracts. However, there may be an 
extension of credit when the option is exercised, if there is an 
agreement at that time to defer payment of a debt.
    viii. Investment plans in which the party extending capital to the 
consumer risks the loss of the capital advanced. This includes, for 
example, an arrangement with a home purchaser in which the investor 
pays a portion of the downpayment and of the periodic mortgage payments 
in return for an ownership interest in the property, and shares in any 
gain or loss of property value.
    ix. Mortgage assistance plans administered by a government agency 
in which a portion of the consumer's monthly payment amount is paid by 
the agency. No finance charge is imposed on the subsidy amount, and 
that amount is due in a lump-sum payment on a set date or upon the 
occurrence of certain events. (If payment is not made when due, a new 
note imposing a finance charge may be written, which may then be 
subject to the regulation.)
    2. Payday loans; deferred presentment. Credit includes a

[[Page 33090]]

transaction in which a cash advance is made to a consumer in exchange 
for the consumer's personal check, or in exchange for the consumer's 
authorization to debit the consumer's deposit account, and where the 
parties agree either that the check will not be cashed or deposited, or 
that the consumer's deposit account will not be debited, until a 
designated future date. This type of transaction is often referred to 
as a ``payday loan'' or ``payday advance'' or ``deferred-presentment 
loan.'' A fee charged in connection with such a transaction may be a 
finance charge for purposes of Sec.  226.4, regardless of how the fee 
is characterized under state law. Where the fee charged constitutes a 
finance charge under Sec.  226.4 and the person advancing funds 
regularly extends consumer credit, that person is a creditor and is 
required to provide disclosures consistent with the requirements of 
Regulation Z. See Sec.  226.2(a)(17).
    2(a)(15) Credit card.
    1. Usable from time to time. A credit card must be usable from time 
to time. Since this involves the possibility of repeated use of a 
single device, checks and similar instruments that can be used only 
once to obtain a single credit extension are not credit cards.
    2. Examples. i. Examples of credit cards include:
    A. A card that guarantees checks or similar instruments, if the 
asset account is also tied to an overdraft line or if the instrument 
directly accesses a line of credit.
    B. A card that accesses both a credit and an asset account (that 
is, a debit-credit card).
    C. An identification card that permits the consumer to defer 
payment on a purchase.
    D. An identification card indicating loan approval that is 
presented to a merchant or to a lender, whether or not the consumer 
signs a separate promissory note for each credit extension.
    E. A card or device that can be activated upon receipt to access 
credit, even if the card has a substantive use other than credit, such 
as a purchase-price discount card. Such a card or device is a credit 
card notwithstanding the fact that the recipient must first contact the 
card issuer to access or activate the credit feature.
    ii. In contrast, credit card does not include, for example:
    A. A check-guarantee or debit card with no credit feature or 
agreement, even if the creditor occasionally honors an inadvertent 
overdraft.
    B. Any card, key, plate, or other device that is used in order to 
obtain petroleum products for business purposes from a wholesale 
distribution facility or to gain access to that facility, and that is 
required to be used without regard to payment terms.
    3. Charge card. Generally, charge cards are cards used in 
connection with an account on which outstanding balances cannot be 
carried from one billing cycle to another and are payable when a 
periodic statement is received. Under the regulation, a reference to 
credit cards generally includes charge cards. The term charge card is, 
however, distinguished from credit card in Sec. Sec.  226.5a, 
[rtrif]226.7(b)(11), 226.7(b)(12)[ltrif] 226.9(e), 226.9(f) and 
226.28(d), and appendixes G-10 through G-13. When the term credit card 
is used in those provisions, it refers to credit cards other than 
charge cards.
    2(a)(16) Credit sale.
    1. Special disclosure. If the seller is a creditor in the 
transaction, the transaction is a credit sale and the special credit 
sale disclosures (that is, the disclosures under Sec.  226.18(j)) must 
be given. This applies even if there is more than one creditor in the 
transaction and the creditor making the disclosures is not the seller. 
See the commentary to Sec.  226.17(d).
    2. Sellers who arrange credit. If the seller of the property or 
services involved arranged for financing but is not a creditor as to 
that sale, the transaction is not a credit sale. Thus, if a seller 
assists the consumer in obtaining a direct loan from a financial 
institution and the consumer's note is payable to the financial 
institution, the transaction is a loan and only the financial 
institution is a creditor.
    3. Refinancings. Generally, when a credit sale is refinanced within 
the meaning of Sec.  226.20(a), loan disclosures should be made. 
However, if a new sale of goods or services is also involved, the 
transaction is a credit sale.
    4. Incidental sales. Some lenders sell a product or service--such 
as credit, property, or health insurance--as part of a loan 
transaction. Section 226.4 contains the rules on whether the cost of 
credit life, disability or property insurance is part of the finance 
charge. If the insurance is financed, it may be disclosed as a separate 
credit-sale transaction or disclosed as part of the primary 
transaction; if the latter approach is taken, either loan or credit-
sale disclosures may be made. See the commentary to Sec.  226.17(c)(1) 
for further discussion of this point.
    5. Credit extensions for educational purposes. A credit extension 
for educational purposes in which an educational institution is the 
creditor may be treated as either a credit sale or a loan, regardless 
of whether the funds are given directly to the student, credited to the 
student's account, or disbursed to other persons on the student's 
behalf. The disclosure of the total sale price need not be given if the 
transaction is treated as a loan.
    2(a)(17) Creditor.
    1. General. The definition contains four independent tests. If any 
one of the tests is met, the person is a creditor for purposes of that 
particular test.
    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 [rtrif]Sec.  
226.2(a)(17)(v)[ltrif] [footnote 3 to Sec.  226.2(a)(17)].
    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 [rtrif]Sec.  226.2(a)(17)(v)[ltrif] [footnote 3] are applied. 
The examples assume that consumer credit with a finance charge or 
written agreement for more than 4 installments was extended in the 
years in question and that the person did not extend such credit in 
[rtrif]2006[ltrif] [1982].

[[Page 33091]]

    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 [rtrif]2007[ltrif] [1983], it is a creditor 
for purposes of the regulation for the last extension of credit in 
[rtrif]2007[ltrif] [1983] and for all extensions of consumer credit in 
[rtrif]2008[ltrif] [1984]. On the other hand, if a business begins in 
[rtrif]2007[ltrif] [1983] and extends consumer credit 20 times, it is 
not a creditor for purposes of the regulation in [rtrif]2007[ltrif] 
[1983]. If it extends consumer credit 75 times in [rtrif]2008[ltrif] 
[1984], 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 
[rtrif]2009[ltrif] [1985].
    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 
[rtrif]2007[ltrif] [1983] 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 
[rtrif]2007[ltrif] [1983] 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 [rtrif]2007[ltrif] [1983] 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.
    [8. Loans from employee savings plans. Some employee savings plans 
permit participants to borrow money up to a certain percentage of their 
account balances, and use a trust to administer the receipt and 
disbursement of funds. Unless each participant's account is an 
individual plan and trust, the creditor should apply the numerical 
tests to the plan as a whole rather than to the individual account, 
even if the loan amount is determined by reference to the balance in 
the individual account and the repayments are credited to the 
individual account. The person to whom the obligation is originally 
made payable (whether the plan, the trust, or the trustee) is the 
creditor for purposes of the act and regulation.]
    Paragraph 2(a)(17)(ii). [Reserved]
    Paragraph 2(a)(17)(iii).
    1. Card issuers subject to Subpart B. Section 226.2(a)(17)(iii) 
makes certain card issuers creditors for purposes of the open-end 
credit provisions of the regulation. This includes, for example, the 
issuers of so-called travel and entertainment cards that expect 
repayment at the first billing and do not impose a finance charge. 
Since all disclosures are to be made only as applicable, such card 
issuers would omit finance charge disclosures. Other provisions of the 
regulation regarding such areas as scope, definitions, determination of 
which charges are finance charges, Spanish language disclosures, record 
retention, and use of model forms, also apply to such card issuers.
    Paragraph 2(a)(17)(iv).
    1. Card issuers subject to Subparts B and C. Section 
226.2(a)(17)(iv) includes as creditors card issuers extending closed-
end credit in which there is a finance charge or an agreement to pay in 
more than four installments. These card issuers are subject to the 
appropriate provisions of Subparts B and C, as well as to the general 
provisions.
    2(a)(18) Downpayment.
    1. Allocation. If a consumer makes a lump-sum payment, partially to 
reduce the cash price and partially to pay prepaid finance charges, 
only the portion attributable to reducing the cash price is part of the 
downpayment. (See the commentary to Sec.  226.2(a)(23).)
    2. Pick-up payments. i. Creditors may treat the deferred portion of 
the downpayment, often referred to as pick-up payments, in a number of 
ways. If the pick-up payment is treated as part of the downpayment:
    A. It is subtracted in arriving at the amount financed under Sec.  
226.18(b).
    B. It may, but need not, be reflected in the payment schedule under 
Sec.  226.18(g).
    ii. If the pick-up payment does not meet the definition (for 
example, if it is payable after the second regularly scheduled payment) 
or if the creditor chooses not to treat it as part of the downpayment:
    A. It must be included in the amount financed.
    B. It must be shown in the payment schedule. iii. Whichever way the 
pick-up payment is treated, the total of payments under Sec.  226.18(h) 
must equal the sum of the payments disclosed under Sec.  226.18(g).
    3. Effect of existing liens.
    i. No cash payment. In a credit sale, the ``downpayment'' may only 
be used to reduce the cash price. For example, when a trade-in is used 
as the downpayment and the existing lien on an automobile to be traded 
in exceeds the value of the automobile, creditors must disclose a zero 
on the downpayment line rather than a negative number. To illustrate, 
assume a consumer owes $10,000 on an existing automobile loan and that 
the trade-in value of the automobile is only $8,000, leaving a $2,000 
deficit. The creditor should disclose a downpayment of $0, not -$2,000.
    ii. Cash payment. If the consumer makes a cash payment, creditors 
may, at their option, disclose the entire cash payment as the 
downpayment, or apply the cash payment first to any excess lien amount 
and disclose any remaining cash as the downpayment. In the above 
example:
    A. If the downpayment disclosed is equal to the cash payment, the 
$2,000 deficit must be reflected as an additional amount financed under 
Sec.  226.18(b)(2).
    B. If the consumer provides $1,500 in cash (which does not 
extinguish the $2,000 deficit), the creditor may disclose a downpayment 
of $1,500 or of $0.
    C. If the consumer provides $3,000 in cash, the creditor may 
disclose a downpayment of $3,000 or of $1,000.
    2(a)(19) Dwelling.
    1. Scope. A dwelling need not be the consumer's principal residence 
to fit the definition, and thus a vacation or second home could be a 
dwelling. However, for purposes of the definition of residential 
mortgage transaction and the right to rescind, a dwelling must be the 
principal residence of the consumer.

[[Page 33092]]

See the commentary to Sec. Sec.  226.2(a)(24), 226.15, and 226.23.
    2. Use as a residence. Mobile homes, boats, and trailers are 
dwellings if they are in fact used as residences, just as are 
condominium and cooperative units. Recreational vehicles, campers, and 
the like not used as residences are not dwellings.
    3. Relation to exemptions. Any transaction involving a security 
interest in a consumer's principal dwelling (as well as in any real 
property) remains subject to the regulation despite the general 
exemption in Sec.  226.3(b) for credit extensions over $25,000.
    2(a)(20) Open-end credit.
    1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are 
contained in Subpart B), as distinct from closed-end credit. Open-end 
credit is 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. [rtrif]The consumer has a single account with the 
creditor, although there may be separate sub-accounts maintained under 
that single account. Advances and payments may be allocated to 
different sub-accounts for the purpose of prescribing different terms 
(such as different periodic rates or other payment options) for those 
advances. Repayments of an advance for any sub-account must generally 
replenish the credit line for that sub-account so that a consumer may 
continue to borrow and take advances under the plan to the extent that 
he or she repays outstanding balances without having to obtain separate 
approval for each subsequent advance. For example, a credit card 
account may permit cash advances and purchase transactions with 
different periodic rates and payment terms. Repayments allocated to the 
cash advance sub-accounts must generally replenish the consumer's cash 
advance credit line and repayment allocated to the purchase transaction 
sub-account must generally replenish the consumer's purchase 
transaction credit line, so that the consumer may continue to take 
advances under each sub-account to the extent that its outstanding 
balance is repaid.[ltrif] [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, multi-featured plan.]
    3. Repeated transactions. Under this criterion, the creditor must 
reasonably contemplate repeated transactions. This means that the 
credit plan must be usable from time to time and the creditor must 
legitimately expect that there will be repeat business rather than a 
one-time credit extension. The creditor must expect repeated dealings 
with consumers under the credit plan as a whole and need not believe a 
consumer will reuse a particular feature of the plan. The determination 
of whether a creditor can reasonably contemplate repeated transactions 
requires an objective analysis. Information that much of the creditor's 
customer base with accounts under the plan make repeated transactions 
over some period of time is relevant to the determination, particularly 
when the plan is opened primarily for the financing of infrequently 
purchased products or services. A standard based on reasonable belief 
by a creditor necessarily includes some margin for judgmental error. 
The fact that particular consumers do not return for further credit 
extensions does not prevent a plan from having been properly 
characterized as open-end. For example, if much of the customer base of 
a clothing store makes repeat purchases, the fact that some consumers 
use the plan only once would not affect the characterization of the 
store's plan as open-end credit. The criterion regarding repeated 
transactions is a question of fact to be decided in the context of the 
creditor's type of business and the creditor's relationship with its 
customers. [For example: i. It] [rtrif]For example, it[ltrif] would be 
more reasonable for a [rtrif]bank or depository institution[ltrif] 
[thrift institution chartered for the benefit of its members] to 
contemplate repeated transactions with a [member] 
[rtrif]customer[ltrif] than for a seller of aluminum siding to make the 
same assumption about its customers.
    [ii. It would be more reasonable for a financial institution to 
make advances from a line of credit for the purchase of an automobile 
than for an automobile dealer to sell a car under an open-end plan.]
    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, [such as certain china club 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 
[rtrif]occasionally or routinely[ltrif] verify credit information such 
as the consumer's continued income and employment status or information 
for security purposes [rtrif]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.[ltrif]. 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.
    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

[[Page 33093]]

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 economy, ] the creditor's financial condition[,] or the 
consumer's creditworthiness. (The rules in Sec.  226.5b(f), however, 
limit the ability of a creditor to suspend credit advances for home 
equity plans.) While consumers should have a reasonable expectation of 
obtaining credit as long as they remain current and within any preset 
credit limits, further extensions of credit need not be an absolute 
right in order for the plan to meet the self-replenishing criterion.
    6. Open-end real estate mortgages. Some credit plans call for 
negotiated advances under so-called open-end real estate mortgages. 
Each such plan must be independently measured against the definition of 
open-end credit, regardless of the terminology used in the industry to 
describe the plan. The fact that a particular plan is called an open-
end real estate mortgage, for example, does not, by itself, mean that 
it is open-end credit under the regulation.
    2(a)(21) Periodic rate.
    1. Basis. The periodic rate may be stated as a percentage (for 
example, 1 \1/2\ percent per month) or as a decimal equivalent (for 
example, .015 monthly). It may be based on any portion of a year the 
creditor chooses. Some creditors use 1/360 of an annual rate as their 
periodic rate. These creditors:
    i. May disclose a 1/360 rate as a daily periodic rate, without 
further explanation, if it is in fact only applied 360 days per year. 
But if the creditor applies that rate for 365 days, the creditor must 
note that fact and, of course, disclose the true annual percentage 
rate.
    ii. Would have to apply the rate to the balance to disclose the 
annual percentage rate with the degree of accuracy required in the 
regulation (that is, within \1/8\ of 1 percentage point of the rate 
based on the actual 365 days in the year).
    2. Transaction charges. Periodic rate does not include initial one-
time transaction charges, even if the charge is computed as a 
percentage of the transaction amount.
    2(a)(22) Person.
    1. Joint ventures. A joint venture is an organization and is 
therefore a person.
    2. Attorneys. An attorney and his or her client are considered to 
be the same person for purposes of this regulation when the attorney is 
acting within the scope of the attorney-client relationship with regard 
to a particular transaction.
    3. Trusts. A trust and its trustee are considered to be the same 
person for purposes of this regulation.
    2(a)(23) Prepaid finance charge.
    1. General. Prepaid finance charges must be taken into account 
under Sec.  226.18(b) in computing the disclosed amount financed, and 
must be disclosed if the creditor provides an itemization of the amount 
financed under Sec.  226.18(c).
    2. Examples. i. Common examples of prepaid finance charges include:
    A. Buyer's points.
    B. Service fees.
    C. Loan fees.
    D. Finder's fees.
    E. Loan-guarantee insurance.
    F. Credit-investigation fees.
    ii. However, in order for these or any other finance charges to be 
considered prepaid, they must be either paid separately in cash or 
check or withheld from the proceeds. Prepaid finance charges include 
any portion of the finance charge paid prior to or at closing or 
settlement.
    3. Exclusions. Add-on and discount finance charges are not prepaid 
finance charges for purposes of this regulation. Finance charges are 
not prepaid merely because they are precomputed, whether or not a 
portion of the charge will be rebated to the consumer upon prepayment. 
See the commentary to Sec.  226.18(b).
    4. Allocation of lump-sum payments. In a credit sale transaction 
involving a lump-sum payment by the consumer and a discount or other 
item that is a finance charge under Sec.  226.4, the discount or other 
item is a prepaid finance charge to the extent the lump-sum payment is 
not applied to the cash price. For example, a seller sells property to 
a consumer for $10,000, requires the consumer to pay $3,000 at the time 
of the purchase, and finances the remainder as a closed-end credit 
transaction. The cash price of the property is $9,000. The seller is 
the creditor in the transaction and therefore the $1,000 difference 
between the credit and cash prices (the discount) is a finance charge. 
(See the commentary to Sec. Sec.  226.4(b)(9) and 226.4(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 
[rtrif]seven[ltrif] [six] provisions in the regulation:
    i. Section 226.4(c)(7)--exclusions from the finance charge.
    ii. Section 226.15(f)--exemption from the right of rescission.
    iii. Section 226.18(q)--whether or not the obligation is assumable.
    iv. Section 226.19--special timing rules.
    v. Section 226.20(b)--disclosure requirements for assumptions.
    vi. Section 226.23(f)--exemption from the right of rescission.
    [rtrif]vii. Section 226.32(a)--exemption from rules for certain 
mortgages.[ltrif]
    2. Lien status. The definition is not limited to first lien 
transactions. For example, a consumer might assume a paid-down first 
mortgage (or borrow part of the purchase price) and borrow the balance 
of the purchase price from a creditor who takes a second mortgage. The 
second mortgage transaction is a residential mortgage transaction if 
the dwelling purchased is the consumer's principal residence.
    3. Principal dwelling. A consumer can have only one principal 
dwelling at a time. Thus, a vacation or other second home would not be 
a principal dwelling. However, if a consumer buys or builds a new 
dwelling that will become the consumer's principal dwelling within a 
year or upon the completion of construction, the new dwelling is 
considered the principal dwelling for purposes of applying this 
definition to a particular transaction. See the commentary to 
Sec. Sec.  226.15(a) and 226.23(a).
    4. Construction financing. If a transaction meets the definition of 
a residential mortgage transaction and the creditor chooses to disclose 
it as several transactions under Sec.  226.17(c)(6), each one is 
considered to be a residential mortgage transaction, even if different 
creditors are involved. For example:
    i. The creditor makes a construction loan to finance the initial 
construction of the consumer's principal dwelling, and the loan will be 
disbursed in five advances. The creditor gives six sets of disclosures 
(five for the construction phase and one for the permanent phase). Each 
one is a residential mortgage transaction.
     ii. One creditor finances the initial construction of the 
consumer's principal dwelling and another creditor makes a loan to 
satisfy the construction loan and provide permanent financing. Both 
transactions are residential mortgage transactions.
    5. Acquisition. i. A residential mortgage transaction finances the 
acquisition of a consumer's principal

[[Page 33094]]

dwelling. The term does not include a transaction involving a 
consumer's principal dwelling if the consumer had previously purchased 
and acquired some interest to the dwelling, even though the consumer 
had not acquired full legal title.
    ii. Examples of new transactions involving a previously acquired 
dwelling include the financing of a balloon payment due under a land 
sale contract and an extension of credit made to a joint owner of 
property to buy out the other joint owner's interest. In these 
instances, disclosures are not required under Sec.  226.18(q) or Sec.  
226.19(a) (assumability policies and early disclosures for residential 
mortgage transactions). However, the rescission rules of Sec. Sec.  
226.15 and 226.23 do apply to these new transactions.
    iii. In other cases, the disclosure and rescission rules do not 
apply. For example, where a buyer enters into a written agreement with 
the creditor holding the seller's mortgage, allowing the buyer to 
assume the mortgage, if the buyer had previously purchased the property 
and agreed with the seller to make the mortgage payments, Sec.  
226.20(b) does not apply (assumptions involving residential mortgages).
    6. Multiple purpose transactions. A transaction meets the 
definition of this section if any part of the loan proceeds will be 
used to finance the acquisition or initial construction of the 
consumer's principal dwelling. For example, a transaction to finance 
the initial construction of the consumer's principal dwelling is a 
residential mortgage transaction even if a portion of the funds will be 
disbursed directly to the consumer or used to satisfy a loan for the 
purchase of the land on which the dwelling will be built.
    7. Construction on previously acquired vacant land. A residential 
mortgage transaction includes a loan to finance the construction of a 
consumer's principal dwelling on a vacant lot previously acquired by 
the consumer.
    2(a)(25) Security interest.
    1. Threshold test. The threshold test is whether a particular 
interest in property is recognized as a security interest under 
applicable law. The regulation does not determine whether a particular 
interest is a security interest under applicable law. If the creditor 
is unsure whether a particular interest is a security interest under 
applicable law (for example, if statutes and case law are either silent 
or inconclusive on the issue), the creditor may at its option consider 
such interests as security interests for Truth in Lending purposes. 
However, the regulation and the commentary do exclude specific 
interests, such as after-acquired property and accessories, from the 
scope of the definition regardless of their categorization under 
applicable law, and these named exclusions may not be disclosed as 
security interests under the regulation. (But see the discussion of 
exclusions elsewhere in the commentary to Sec.  226.2(a)(25).)
    2. Exclusions. The general definition of security interest excludes 
three groups of interests: incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law. 
These interests may not be disclosed with the disclosures required 
under Sec.  226.18, but the creditor is not precluded from preserving 
these rights elsewhere in the contract documents, or invoking and 
enforcing such rights, if it is otherwise lawful to do so. If the 
creditor is unsure whether a particular interest is one of the excluded 
interests, the creditor may, at its option, consider such interests as 
security interests for Truth in Lending purposes.
    3. Incidental interests. i. Incidental interests in property that 
are not security interests include, among other things:
    A. Assignment of rents.
    B. Right to condemnation proceeds.
    C. Interests in accessories and replacements.
    D. Interests in escrow accounts, such as for taxes and insurance.
    E. Waiver of homestead or personal property rights.
    ii. The notion of an incidental interest does not encompass an 
explicit security interest in an insurance policy if that policy is the 
primary collateral for the transaction--for example, in an insurance 
premium financing transaction.
    4. Operation of law. Interests that arise solely by operation of 
law are excluded from the general definition. Also excluded are 
interests arising by operation of law that are merely repeated or 
referred to in the contract. However, if the creditor has an interest 
that arises by operation of law, such as a vendor's lien, and takes an 
independent security interest in the same property, such as a UCC 
security interest, the latter interest is a disclosable security 
interest unless otherwise provided.
    5. Rescission rules. Security interests that arise solely by 
operation of law are security interests for purposes of rescission. 
Examples of such interests are mechanics' and materialmen's liens.
    6. Specificity of disclosure. A creditor need not separately 
disclose multiple security interests that it may hold in the same 
collateral. The creditor need only disclose that the transaction is 
secured by the collateral, even when security interests from prior 
transactions remain of record and a new security interest is taken in 
connection with the transaction. In disclosing the fact that the 
transaction is secured by the collateral, the creditor also need not 
disclose how the security interest arose. For example, in a closed-end 
credit transaction, a rescission notice need not specifically state 
that a new security interest is ``acquired'' or an existing security 
interest is ``retained'' in the transaction. The acquisition or 
retention of a security interest in the consumer's principal dwelling 
instead may be disclosed in a rescission notice with a general 
statement such as the following: ``Your home is the security for the 
new transaction.''
    2(b) Rules of construction.
    1. Footnotes. Footnotes are used extensively in the regulation to 
provide special exceptions and more detailed explanations and examples. 
Material that appears in a footnote has the same legal weight as 
material in the body of the regulation.
    2. Amount. The numerical amount must be a dollar amount unless 
otherwise indicated. For example, in a closed-end transaction (Subpart 
C), the amount financed and the amount of any payment must be expressed 
as a dollar amount. In some cases, an amount should be expressed as a 
percentage. For example, in disclosures provided before the first 
transaction under an open-end plan (Subpart B), creditors are permitted 
to explain how the amount of any finance charge will be determined; 
where a cash-advance fee (which is a finance charge) is a percentage of 
each cash advance, the amount of the finance charge for that fee is 
expressed as a percentage.

Section 226.3--Exempt Transactions

    [rtrif]1. Relationship to Sec.  226.12. The provisions in Sec.  
226.12(a) and (b) governing the issuance of credit cards and the 
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.[ltrif]
    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.

[[Page 33095]]

    [rtrif]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, 
other than as provided in Sec. Sec.  226.12(a) and 226.12(b), the 
provisions of the regulation do not apply, even if extensions of credit 
for consumer purposes are made using that business-purpose credit card. 
For example, the billing error provisions set forth in Sec.  226.13 do 
not apply to consumer-purpose extensions of credit using a business-
purpose credit card or a business-purpose open-end credit plan.
    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 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 or a 
consumer-purpose open-end credit plan, 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.[ltrif]
    [2][rtrif]3[ltrif]. 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:
    [rtrif]i. General[ltrif]
    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.
    [rtrif]ii. Business-purpose examples.[ltrif] 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.
    [rtrif] iii. Consumer-purpose examples.[ltrif] 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.
    [3] [rtrif]4[ltrif]. 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)-[4] 
[rtrif]5[ltrif], however, for rules relating to owner-occupied rental 
property.
    [4] [rtrif]5[ltrif]. 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)-
''[rtrif]3[ltrif] [2].
    [5] [rtrif]6[ltrif]. 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.
    [rtrif]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.[ltrif]
    [6] [rtrif]8[ltrif]. 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.
    [7] [rtrif]9[ltrif]. 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.
    [8] [rtrif]10[ltrif]. 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

[[Page 33096]]

purposes, these transactions are subject to the regulation since in 
substance (if not form) consumer credit is being extended.
    3(b) Credit over $25,000 not secured by real property or a 
dwelling.
    1. Coverage. Since a mobile home can be a dwelling under Sec.  
226.2(a)(19), this exemption does not apply to a credit extension 
secured by a mobile home used or expected to be used as the principal 
dwelling of the consumer, even if the credit exceeds $25,000. A loan 
commitment for closed-end credit in excess of $25,000 is exempt even 
though the amounts actually drawn never actually reach $25,000.
    2. Open-end credit. i. An open-end credit plan is exempt under 
Sec.  226.3(b) (unless secured by real property or personal property 
used or expected to be used as the consumer's principal dwelling) if 
either of the following conditions is met:
    A. The creditor makes a firm commitment to lend over $25,000 with 
no requirement of additional credit information for any advances 
[rtrif](except as permitted from time to time pursuant to Sec.  
226.2(a)(20))[ltrif].
    B. The initial extension of credit on the line exceeds $25,000.
    ii. If a security interest is taken at a later time in any real 
property, or in personal property used or expected to be used as the 
consumer's principal dwelling, the plan would no longer be exempt. The 
creditor must comply with all of the requirements of the regulation 
including, for example, providing the consumer with an initial 
disclosure statement. If the security interest being added is in the 
consumer's principal dwelling, the creditor must also give the consumer 
the right to rescind the security interest. (See the commentary to 
Sec.  226.15 concerning the right of rescission.)
    3. Closed-end credit--subsequent changes. A closed-end loan for 
over $25,000 may later be rewritten for $25,000 or less, or a security 
interest in real property or in personal property used or expected to 
be used as the consumer's principal dwelling may be added to an 
extension of credit for over $25,000. Such a transaction is consumer 
credit requiring disclosures only if the existing obligation is 
satisfied and replaced by a new obligation made for consumer purposes 
undertaken by the same obligor. (See the commentary to Sec.  
226.23(a)(1) regarding the right of rescission when a security interest 
in a consumer's principal dwelling is added to a previously exempt 
transaction.)
    3(c) Public utility credit.
    1. Examples. Examples of public utility services include:
    i. General.
    A. Gas, water, or electrical services.
    B. Cable television services.
    C. Installation of new sewer lines, water lines, conduits, 
telephone poles, or metering equipment in an area not already serviced 
by the utility.
    [rtrif]ii. Extensions of credit not covered.[ltrif] The exemption 
does not apply to extensions of credit, for example:
    A. To purchase appliances such as gas or electric ranges, grills, 
or telephones.
    B. To finance home improvements such as new heating or air 
conditioning systems.
    3(d) Securities or commodities accounts.
    1. Coverage. This exemption does not apply to a transaction with a 
broker registered solely with the state, or to a separate credit 
extension in which the proceeds are used to purchase securities.
    3(e) Home fuel budget plans.
    1. Definition. Under a typical home fuel budget plan, the fuel 
dealer estimates the total cost of fuel for the season, bills the 
customer for an average monthly payment, and makes an adjustment in the 
final payment for any difference between the estimated and the actual 
cost of the fuel. Fuel is delivered as needed, no finance charge is 
assessed, and the customer may withdraw from the plan at any time. 
Under these circumstances, the arrangement is exempt from the 
regulation, even if a charge to cover the billing costs is imposed.
    3(f) Student loan programs.
    1. Coverage. This exemption applies to the Guaranteed Student Loan 
program (administered by the Federal government, State, and private 
non-profit agencies), the Auxiliary Loans to Assist Students (also 
known as PLUS) program, and the National Direct Student Loan program.

Section 226.4--Finance Charge

    4(a) Definition.
    1. Charges in comparable cash transactions. Charges imposed 
uniformly in cash and credit transactions are not finance charges. In 
determining whether an item is a finance charge, the creditor should 
compare the credit transaction in question with a similar cash 
transaction. A creditor financing the sale of property or services may 
compare charges with those payable in a similar cash transaction by the 
seller of the property or service.
    i. For example, the following items are not finance charges:
    A. Taxes, license fees, or registration fees paid by both cash and 
credit customers.
    B. Discounts that are available to cash and credit customers, such 
as quantity discounts.
    C. Discounts available to a particular group of consumers because 
they meet certain criteria, such as being members of an organization or 
having accounts at a particular financial institution. This is the case 
even if an individual must pay cash to obtain the discount, provided 
that credit customers who are members of the group and do not qualify 
for the discount pay no more than the nonmember cash customers.
    D. Charges for a service policy, auto club membership, or policy of 
insurance against latent defects offered to or required of both cash 
and credit customers for the same price.
    ii. In contrast, the following items are finance charges:
    A. Inspection and handling fees for the staged disbursement of 
construction-loan proceeds.
    B. Fees for preparing a Truth in Lending disclosure statement, if 
permitted by law (for example, the Real Estate Settlement Procedures 
Act prohibits such charges in certain transactions secured by real 
property).
    C. Charges for a required maintenance or service contract imposed 
only in a credit transaction.
    iii. If the charge in a credit transaction exceeds the charge 
imposed in a comparable cash transaction, only the difference is a 
finance charge. For example:
    A. If an escrow agent is used in both cash and credit sales of real 
estate and the agent's charge is $100 in a cash transaction and $150 in 
a credit transaction, only $50 is a finance charge.
    2. Costs of doing business. Charges absorbed by the creditor as a 
cost of doing business are not finance charges, even though the 
creditor may take such costs into consideration in determining the 
interest rate to be charged or the cash price of the property or 
service sold. However, if the creditor separately imposes a charge on 
the consumer to cover certain costs, the charge is a finance charge if 
it otherwise meets the definition. For example:
     i. A discount imposed on a credit obligation when it is assigned 
by a seller-creditor to another party is not a finance charge as long 
as the discount is not separately imposed on the consumer. (See Sec.  
226.4(b)(6).)
    ii. A tax imposed by a state or other governmental body on a 
creditor is not a finance charge if the creditor absorbs the tax as a 
cost of doing business and does not separately impose the tax on the 
consumer. (For additional

[[Page 33097]]

discussion of the treatment of taxes, see other commentary to Sec.  
226.4(a).)
    3. Forfeitures of interest. If the creditor reduces the interest 
rate it pays or stops paying interest on the consumer's deposit account 
or any portion of it for the term of a credit transaction (including, 
for example, an overdraft on a checking account or a loan secured by a 
certificate of deposit), the interest lost is a finance charge. (See 
the commentary to Sec.  226.4(c)(6).) For example:
    i. A consumer borrows $5,000 for 90 days and secures it with a 
$10,000 certificate of deposit paying 15% interest. The creditor 
charges the consumer an interest rate of 6% on the loan and stops 
paying interest on $5,000 of the $10,000 certificate for the term of 
the loan. The interest lost is a finance charge and must be reflected 
in the annual percentage rate on the loan.
    ii. However, the consumer must be entitled to the interest that is 
not paid in order for the lost interest to be a finance charge. For 
example:
    iii. 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.
    iv. 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. [rtrif]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, 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. Similarly, any charge 
imposed on a credit cardholder by a card issuer for making a purchase 
outside the United States or in a foreign currency is a finance charge 
regardless of whether the card issuer imposes a charge on its debit 
cardholders for such transactions.[ltrif] [Treatment of fees for use of 
automated teller machines. Any charge imposed on a 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 not a finance charge to the extent that it does not exceed 
the charge imposed by the card issuer on its cardholders for using the 
ATM to withdraw cash from a consumer asset account, such as a checking 
or savings account. (See the commentary to Sec.  226.6(b).)]
    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; or
    C. On the credit transaction, without indicating which party is 
liable for the tax; or
    D. On the creditor, if applicable law directs or authorizes the 
creditor to pass the tax on to the consumer. (For purposes of this 
section, if applicable law is silent as to passing on the tax, the law 
is deemed not to authorize passing it on.)
    iii. For example, a stamp tax, property tax, intangible tax, or any 
other state or local tax imposed on the consumer, or on the credit 
transaction, is not a finance charge even if the tax is collected by 
the creditor.
    iv. In addition, a tax is not a finance charge if it is excluded 
from the finance charge by another provision of the regulation or 
commentary (for example, if the tax is imposed uniformly in cash and 
credit transactions).
    4(a)(1) Charges by third parties.
    1. Choosing the provider of a required service. An example of a 
third-party charge included in the finance charge is the cost of 
required mortgage insurance, even if the consumer is allowed to choose 
the insurer.
    2. Annuities associated with reverse mortgages. Some creditors 
offer annuities in connection with a reverse-mortgage transaction. The 
amount of the premium is a finance charge if the creditor requires the 
purchase of the annuity incident to the credit. Examples include the 
following:
    i. The credit documents reflect the purchase of an annuity from a 
specific provider or providers.
    ii. The creditor assesses an additional charge on consumers who do 
not purchase an annuity from a specific provider.
    iii. The annuity is intended to replace in whole or in part the 
creditor's payments to the consumer either immediately or at some 
future date.
    4(a)(2) Special rule; closing agent charges.
    1. General. This rule applies to charges by a third party serving 
as the closing agent for the particular loan. An example of a closing 
agent charge included in the finance charge is a courier fee where the 
creditor requires the use of a courier.
    2. Required closing agent. If the creditor requires the use of a 
closing agent, fees charged by the closing agent are included in the 
finance charge only if the creditor requires the particular service, 
requires the imposition of the charge, or retains a portion of the 
charge. Fees charged by a third-party closing agent may be otherwise 
excluded from the finance charge under Sec.  226.4. For example, a fee 
that would be paid in a comparable cash transaction may be excluded 
under Sec.  226.4(a). A charge for conducting